Mass instead of class: How an ex-Netflix executive wants to save Barry McCarthy Peloton

Zoom Image

Focus on software instead of hardware: More than half of Peloton's workouts are not done on the bike

Photo: PR

When Barry McCarthy (69) replaced long-time Peloton boss and company founder John Foley (2022) as CEO in February 52, his mission was clear: to save the fitness equipment manufacturer from collapse. One of McCarthy's first remedial measures was therefore to save.

In October, he announced the fourth round of layoffs of the year. Almost half of the workforce had to leave. This left 3800 employees. "This is a necessary step if we want to save Peloton, and we will," McCarthy said at the time. At the same time, he set a deadline: If there is no turnaround in the next six months, Peloton will probably not be able to continue as an independent company. There has been speculation that tech giant Amazon and sporting goods manufacturer Nike could possibly take over Peloton.

The deadline has now expired. McCarthy was able to avert an emergency takeover thanks to job cuts, numerous store closures and other austerity measures. It is nice to have left this "near-death experience" behind him, said the company boss in an interview in February. But the question now is whether he can get the company back on track. And whether Peloton can become profitable.

It would be the revival of a superstar. Hardly any other company experienced such a massive boost in demand, sales and stock market value during the Corona pandemic - and crashed as spectacularly as Peloton just a few months later in the wake of the reopening of gyms. Between March 2020 and January 2021, the value of the stock on the New York Nasdaq Stock Exchange had increased sevenfold, rising above $150 at times. The company was valued at more than $47 billion at its peak.

But Foley had overestimated the demand. Since the beginning of 2021, the price has crashed and is now reaching a new all-time low almost daily, with the stock market value bobbing at less than $3 billion.

The business model of marketing high-end fitness equipment to a wealthy clientele has proven to be unsustainable. The company is still sitting on a gigantic mountain of unsold fitness bikes and treadmills that has plunged Peloton into a series of quarterly losses. The last quarter ended with a net loss of $276 million, the first three quarters of fiscal 2022/23 with a loss of $1020 billion. It is hardly comforting that it was significantly more in the same period last year.

The fact that McCarthy, the former chief financial officer of streaming giants Netflix and Spotify, has been appointed CEO of the fitness equipment manufacturer, which was founded in New York in 2012, is not surprising given the new strategy with which Peloton is trying to make a comeback: The company wants to focus more on subscription revenues instead of selling expensive hardware for the home. McCarthy was already involved in building a subscription business model at Netflix when he helped develop a streaming service from the DVD mail-order company.

From luxury exercise bikes to fitness classes for free

In any case, Peloton is considered a pioneer of networked, technology-supported fitness services. In addition to the equipment, it always offered online workouts with human trainers. McCarthy now wants to expand this and appeal to the masses, even if they don't buy any of the expensive devices from him. He sees all those interested in sports as a potential target group, regardless of their fitness level, age or time for a workout, and wants to turn them into subscribers.

At the beginning of the year, he also brought in a new head of marketing for the necessary repositioning. Since mid-January 2023, ex-Twitter top manager Lesli Berland has been responsible for brand and product marketing, membership and global communications, among other things. In the course of a major relaunch, she is now giving the brand a new start. At the same time, McCarthy is introducing a new subscription model, focusing more on the app and partnerships.

In order to appeal to a larger audience in the future, the company introduced three new subscription models at the end of May. For the first time since its launch in 2018, Peloton now also offers free fitness content. With an extended range of software from the free tariff for beginners to the premium model, the company decouples training from hardware with yoga, strength training or outdoor walking, among other things. So you can train with or without equipment, outdoors, at home or in the gym, under guidance or without a trainer. The tariff with unlimited access will be more expensive at the same time.

Also new is an offer in the area of strength training, with which the company is pushing into the gyms. Via Peloton Gym, exercises are explained to users in writing in the app and demonstrated in accompanying videos for training in the studio. Peloton has not yet entered into partnerships with gym chains, but it has with the Hilton hotel chain.

Only a minority still use the bike for workouts

The reason for the strategic shift was the realization from user data: More than half of all workouts are not completed on the bike at all. And: Strength training is the most popular form of training among Peloton subscribers. "Ten years ago, we invented the connected fitness category with the introduction of the original Peloton bike," McCarthy told shareholders in early May as he presented the latest quarterly figures. "But that's not how today's members experience Peloton." In the third quarter of the fiscal year, which has just ended, 57 percent of all training sessions had nothing to do with cycling, according to McCarthy. 38 percent of all workouts did not involve any Peloton hardware.

The share of the subscription business already accounts for today becomes clear in the breakdown of sales. With the pure subscription models, Peloton turned over 425 million dollars; with the devices around 100 million dollars less. As a result, the subscription business was able to grow by a sixth – while the rest slumped by a catastrophic 45 percent compared to the previous year. McCarthy praises the gross profit margin in the subscription business to his investors at a good 67 percent – that sounds lucrative at first, but it doesn't even include the largest block of operating costs.

It won't work without growth. McCarthy cites the brand relaunch and the relaunch of the Peloton app as his two most important growth initiatives. Nevertheless, the Peloton boss expects a decline in membership growth for the current quarter. Historically, growth rates decline at this time of year.

The new bike rental program that the company introduced last year is also expected to contribute to the growth of the business. In the U.S. and Canada, users can lease the bikes for a monthly fee. But whether all this is really enough is questionable. In any case, McCarthy has not yet been able to convince investors on the stock market.

He himself, however, is satisfied with the progress of his restructuring plan. The past quarter was the best result in his time at Peloton. But he also knows: "We still have more work to do to achieve international growth and profit."