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Peloton Won the Pandemic. Can It Survive the Reopening of Gyms?

Glowing neon outline of an exercise bike
Illustration by Slate. Image by Getty Images Plus.

Comebacks is a series about businesses that have made dramatic turnarounds during the pandemic, in partnership with Slate’s Thrilling Tales of Modern Capitalism podcast. The following article is a written adaptation of an episode of Thrilling Tales.

Remember the Peloton wife ad? The one with the wide-eyed woman whose husband gives her a Peloton for Christmas, perhaps not so subtly demanding she get in better shape? The commercial earned Peloton a lot of attention, and not in a good way. But that was 2019. 2020 brought with it a whole different way of life and a dramatic comeback for Peloton, as gyms closed and people looked for ways to exercise at home. Peloton’s fortunes have lately climbed faster than a Tour de France cycliste.

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It all started with John Foley, who founded the company in 2012. “He had young kids, and he and his wife were really into fitness, and they lived in New York City, so they really liked the wave of boutique fitness classes that were happening,” says Amy Larocca, a writer with New York magazine who’s working on a book about the wellness movement. “But once they had kids, it’s very hard to get out of the house for those things and to keep those appointments. And they came up with an idea—what if we could bring exercise of that level into the house?”

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The product was an exercise bike with a big touch screen connected to the internet. You’d buy the bike for a flat fee and then take classes by paying for a monthly subscription. You’d get instructors as good as the fanciest New York City gym could offer, but you wouldn’t need to live in New York or even leave your house. And you could do it on your schedule, not theirs. This seemed like a winning idea, but at first John Foley struggled to raise money from investors. He had trouble convincing them that the big upfront price of the bike—a couple of thousand dollars—wouldn’t be a problem.

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“What he understood, because he was in the world of boutique fitness as a consumer, was that people who do that kind of thing spend an incredible amount of money on it,” Larocca says. “One SoulCycle class is $36 or something like that. And your monthly at Peloton is $40. So the bike can amortize out pretty quickly.”

Foley ended up going to Kickstarter instead of to venture capitalists for his early funding. He began selling his first Peloton bikes in 2014—and something interesting happened. People pretty quickly began to develop communities around this piece of exercise equipment. According to Larocca, “investors became more interested when they started seeing the devotion of the riders.”

Part of the appeal of Peloton’s community dynamic was the competitive aspect, with multithousand-person leaderboards updating on your screen in real time so you can see who’s ahead of you and behind you as you take a class. But there was a social dimension, too. Facebook groups for Peloton riders started appearing, and they subdivided into different themes, like Pelo Moms and Pelo Wine Moms.

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Peloton’s early, rapid success turned it into the first fitness unicorn, a startup company valued at over a billion dollars. It was becoming apparent that customers just loved their Pelotons. Larocca talked to someone who said she knew eight people with Peloton tattoos.

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The two most crucial elements to staging a successful exercise class are probably the instructor and the music. Peloton could hire the very best instructors because it only needed to hire a few of them, compared with a fitness chain with in-person classes all over the country. As Larocca put it, “You can only get 60 people in a SoulCycle room at once, so the SoulCycle celebrity teachers have pretty modest followings. But Peloton teachers have thousands of people logging on.” Peloton instructors like Alex Toussaint and Cody Rigsby managed to become household names among a certain slice of fitness-obsessed Americans. “Their level of fame is above reality show contestant. Like, are they as famous as someone who got eliminated quickly from The Bachelor? Yeah.”

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As for the music played during classes, that became a bit of an issue for Peloton. Larocca explains: “If you’ve got a little spin studio in Park Slope and you want to play Beyoncé all day, no one cares. But if you’ve got 30,000 people doing your ride, you can’t just play Beyoncé. So they’ve had a lot of licensing problems with music, and it ended up being much more expensive than I think they wanted it to be.”

Peloton’s been working out deals to pay royalties to music license holders, to make sure that instructors can play the hits that people want to work out to. Among Peloton’s recent music partners: Beyoncé herself. The brand announced a deal with her that has resulted in several Beyoncé-themed classes. By 2018, Peloton, still a privately held company at that time, was being valued at $4 billion.

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But then Peloton hit a couple of snags. It went public in the fall of 2019, and that didn’t go perfectly. The stock quickly dipped below its IPO price, raising some concerns that the company was overvalued—maybe a competitor could swoop in and do something similar, stealing away business.

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Peloton also had a little trouble getting its marketing pitch just right. One run of TV ads drew some eye rolls because, according to Larocca, they made Peloton customers all seem ludicrously rich: “The Peloton ads always had the bike in some sort of gorgeous setting, like you had this timber addition put on your house looking out over the Rockies or Hong Kong in order to ride your Peloton. That was the first thing of making fun of people putting their bikes in these really expensive places and just talking about what sort of jerks people who could have this must be. So there was already a Peloton-hating universe out there. And then there was the horrible Christmas ad.”

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People described the woman’s facial expressions in that ad as looking like she’s in a hostage video. “It’s a whole culture and an idea that is just so ripe to make fun of,” Larocca says. “And then they show a montage of her riding the bike all year, and it’s really hard, but she looks great and she’s thin, and she stays thin. I mean, it looks just like rich people being rich.”

It can be hard to know exactly why a stock price does what it does. But at the height of the backlash to this TV ad, Peloton stock nosedived. The company lost nearly a billion dollars in value in a single day. But 2019 was about to end. And a whole new kind of world was around the corner.

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When COVID happened, it was not immediately apparent that Peloton was going to benefit from it. “The concern right off the bat was they’d have to close some of their studios,” says Justin Post, who analyzes internet companies for Bank of America. “The production value of some of their classes was actually in question. Do people want to keep watching reruns of old workouts? Would that affect usage?”

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Peloton filled the gap at first by having its instructors stream from their homes before they were able to get back into the company studios with better lighting and sound. Meanwhile, news of a deadly pandemic crowded out any lingering talk about Peloton’s yucky holiday ad. And as it became clear that Americans might be stuck at home for quite some time, sales of home exercise equipment began to soar. A bike that lets you work out in your garage, but feel connected to other people, seemed perfectly suited to the times.

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Peloton’s 2020 revenue was $1.8 billion, about double what it had done the year before, and it recorded its first profitable quarter. Peloton orders ramped up so fast the company failed to keep pace. Delivery delays got bad enough that the company eventually started flying its bikes over from factories in China, instead of floating them on ships, a move that Peloton says temporarily boosted its transport costs tenfold. Peloton has recently tried to develop some more domestic manufacturing, in part by acquiring another exercise equipment company for $400 million to prevent issues like this in the future.

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The thing that maybe excites Wall Street most about Peloton is its hybrid business model: a combination of a hardware business with a subscription business. Post says that when Peloton sells a bike at a price of around $2,000 to $2,500, depending on options, it basically just breaks even, once you figure in the cost to manufacture the bike and market it. But that’s only the starting point for Peloton’s relationship with its customers.

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Recurring subscription payments are the dream for lots of companies. Peloton hits up a bunch of people’s credit cards for about $40 each month automatically. The subscription part of the business is so important that the company doesn’t even really mind if you buy a used Peloton bike at a discount, because that means you’ll become another subscriber. Right now, Peloton has fewer than 2 million paid subscriptions in just a handful of countries, but its target is significantly higher than that, which will require all kinds of expansion.

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Post says the No. 1 obstacle to bringing in new customers is the cost of a bike. Peloton has offered zero percent financing, a layaway plan where you pay for the bike in chunks each month on top of your subscription fee. When you look at it as no cost upfront and a hundred dollars a month for bike and subscription, it’s not dramatically different from the monthly cost of membership at a high-end gym.

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There are lots of threats on the horizon for Peloton, though. One is the end of the pandemic and a return to normalcy. Consider that Peloton’s stock price went down 25 percent when news of a vaccine came out. The big worry, of course, is that when gyms reopen, people won’t want to exercise in their basements and spare rooms anymore. But Post thinks the homebody culture we associate with the pandemic was actually an acceleration of existing trends, which won’t go away. “In a lot of categories, there’s been a shift in home,” he says. “You can think about watching movies in home, getting restaurant delivery in home.”

Another threat to Peloton is the competition, particularly future competition, because fitness is fickle. Remember Tae Bo or CrossFit? Lots of people bounce around and do whatever workout is trendy at a given moment. Peloton has branched out with a treadmill line in addition to its bikes, and it’s trying to offer more at-home strength, cardio, and yoga classes on its touch screens to appeal to a wider audience, even people who don’t want to buy bikes and treadmills. It’s also acquired some companies making other kinds of hardware and software, like wearable devices and interactive yoga mats. But what if somebody else just builds a better mousetrap?

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“One company that people do think a lot about is Apple,” Post says. “If they would ever make hardware equipment, obviously they have quite an installed base of devices out there and a very big user base, and fitness has been a target for the company and they’ve talked about it and they have apps for it. So could they come up with hardware—definitely something people have asked about.”

If Peloton continues to thrive and survive a battle with a better-funded competitor, it might be because of the community it’s built up during the pandemic: all these people stuck at home looking for ways to stay active but, maybe more important, looking for a connection. Amy Larocca says this might be the real appeal of Peloton: It’s a sort of church of self-improvement. “When you start looking at what people don’t get from organized religion and what people do get from these new types of exercise classes, it’s kind of alarmingly similar. A shared place, a shared community that meets regularly. Catharsis. Singing, music. Movement is a huge part of a lot of religious ritual. So the similarities are greater than you might want to think at first.”

Listen to the full episode using the player below, or subscribe to Thrilling Tales of Modern Capitalism on Apple Podcasts, Overcast, Spotify, Stitcher, or wherever you get your podcasts.

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