The Fall of Peloton

Source: NPR

The Wall Street Journal reports today that Peloton CEO and co-founder John Foley is stepping down from the company.  The firm also announced 2,800 layoffs.  The newspaper reports on the precipitous decline in the company's fortunes over the past few months:

For a while Peloton enjoyed high times as a pandemic darling, with homebound customers ordering its exercise equipment and streaming its virtual classes. Its valuation soared. But its fortunes sagged as lockdowns eased and gyms started to fill up again. The company’s value had fallen from a high of around $50 billion roughly a year ago to around $8 billion last week.

I've watched the fitness industry closely over the past few years, ever since I wrote a strategic management case study about Planet Fitness.  As I have observed Peloton's struggles, I'm struck by three important themes.  

1. When I wrote the Planet Fitness case, I observed that fads have dominated the gym industry for years.  As a result, customers are quite fickle.  They become attracted to a new fitness concept, with high hopes of achieving various personal goals: stronger body, better cardio fitness, weight loss, etc.  Inevitably, many customers do not achieve their goals.  When that happens, what do they do?  Do customers blame themselves or the gym?  Of course, they tend to find fault with the gym, or the method, that they have been pursuing.  They seek a "better" alternative.  As a result, customers seem to migrate from fad to fad over the years.  Companies in industries with similar "fad-driven" demand need to stay carefully attuned to sudden shifts in consumer demand.  

2.  One of the most challenging elements of the fitness center industry structure is the highly attractive and plentiful substitutes.  What is the alternative to going to the gym?  Everything from working out at home or at the corporate/university gym to running outside to signing up for Jenny Craig or Weight Watchers.  Peloton, of course, is a substitute for going to the gym.  The threat of substitutes is high for firms in the  gym business.  Of course, the same goes for Peloton!  They face the same substitutes.  People can exercise outside, go to the gym, etc.  They have attractive, and in many cases, cheaper alternatives available.  Firms in all industries need to be attuned to the threat from substitutes.  Often, this threat is much more serious than the threat from direct competitors.  

3. Finally, Peloton is an example of a firm that may simply not be able to sustain the pandemic-driven demand surge as we move (hopefully) beyond the pandemic.  For all firms, the lesson is that they will have to closely monitor consumer behavior as we move beyond the omicron wave of the pandemic and toward more normalcy. If we move toward COVID being endemic, then consumer behavior may start to change in unpredictable ways. What has worked during the pandemic may no longer work as well in terms of attracting and serving and retaining customers. Companies will need to keep a close eye on changing patterns of consumer behavior as we move through these next phases of the pandemic. The key will be to not just survey customers, but to observe them and to empathize with them so as to understand their changing pain points and needs.