The Rise and Fall of Peloton | Maximum Effort | 2

0:08It's summer 2020 in New York City. A Peloton employee types a new set of numbers into a spreadsheet, then sighs, frustrated. He's been tasked with trying to improve Peloton's so-called final mile of delivery. In other words, getting Peloton's equipment from their distribution hubs to the customer's house. This is always the most logistically complicated and expensive part of shipping products. There's no way to make it efficient, since each individual piece of equipment has to go to a different home. But it's even worse during a worldwide pandemic, when there's a shortage of drivers. Although the pandemic has wrought tragedy, it's been a boon for Peloton.

0:52As gyms around the world closed, customers flocked to Peloton to buy their internet-connected stationary bikes and treadmills. Peloton had unwittingly developed the perfect product for a quarantining public. a platform that allows people to remain isolated but still have a communal workout experience. And the numbers speak volumes. Peloton sales increased by over 170 % in the first six months of the pandemic. But that increase in sales has been a double-edged sword. There's been so much demand. Peloton's been struggling to fulfill orders, frustrating customers. CEO John Foley and other executives are desperate to get their equipment into buyers' hands.

1:38Foley has tasked this employee with improving final mile delivery times, but the only solutions the employee has come up with involve spending twice as much as usual, and he's not sure how Foley's going to react.

1:55A calendar reminder pops up on his monitor. The employee clicks the link. Foley has already logged on. Hey, how you doing? You know, hanging in there. I hear you. Well, should we jump right in? How's it going, improving final mile delivery time? Well, I've been crunching the numbers. And the only way I think we can really end the logjam would cost something like$500 per bike delivery. That's fine. The employee's mouth drops, but he quickly recovers. To be clear, I mean$500 just for the final mile. That's not counting the cost of shipping the bikes in from overseas. Okay, I understand. So you're okay with spending that much money?

2:41Because we had set a budget of$250 per bike. Yeah, I know, but people want the bikes and they want bikes now. And if they can't get them from us, they'll get them from our competitors. Okay, but I just want to point out that even if we improve our final mile delivery times, we'll still have a backlog of orders since production at our factory in Taiwan has slowed down. I'm working on a solution for that problem. But for the moment, it's out of our control. The final mile problem, that's in our control. We just have to spend more money. It's just a lot more money. Foley looks directly into his camera, so it feels like he's looking directly at the employee.

3:21This is our moment. We handled this right, mark my words. Peloton will hit$1 ,000 per share. The employee nods. This is a common refrain of Foley's, and the stock price has been going up. It's ultimately Foley's call, not his. But the employee can't shake the tiny shimmer of doubt creeping into his brain. Is spending this much money on final mile delivery a good business decision?

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6:24In 2012, John Foley and four other co-founders launched Peloton, reinventing the industry's understanding of connected fitness. Their stationary bike allowed users to participate in live-streamed fitness classes, combining the camaraderie of a spin class with the convenience of an at-home workout. Foley and his team had grand ambitions for Peloton. They thought they were going to completely upend the fitness industry. Gyms would be passe, the way home video game consoles pushed out arcades. For the first eight years, Peloton cultivated a niche but loyal customer base. But they were still a relatively small player in the home fitness industry, and they were far from putting gyms out of business.

7:07But in 2020, with the spread of COVID-19, Peloton was the right company at the right time. Gyms were closed, and demand for at-home fitness equipment spiked. Peloton's share price soared. I want to pause for just a moment here. Let's say you're running Peloton. How would you judge your success so far? It's tempting to believe a surge in demand means you've reinvented the world. But sometimes you're just surfing a wave. You know what happens with waves, right? They always crash. Smart companies separate structural growth from situational spikes. Peloton? This was their dream. Peloton bet gems were dead forever.

7:52There's a lesson here. Temporary market distortions don't always equal permanent revolutions. Peloton CEO John Foley saw the soaring share price as the beginning of the fitness revolution he had always predicted. But capitalizing on Peloton's situational success to create sustained success was more challenging than Foley expected, and Peloton was in for a bumpy ride. This is Episode 2, Maximum Effort.

8:31As the COVID pandemic drags on through the second half of 2020 and into 2021, John Foley and the team at Peloton are laser-focused on one issue, getting equipment into the hands of customers. The pandemic has created a huge demand for their product. By the end of 2020, their revenue is on pace to double from the previous year, bringing in$1.1 billion. There's only one problem. They don't have enough bikes to meet the demand. The company's manufacturing facility is in Taiwan, and lockdowns there mean their factory isn't working at full capacity. Plus, there are backlogs at the ports. The pace of getting equipment off boats and into Peloton's U.S.

9:14warehouses? Painfully slow. As a result, customers are on waiting lists. Some have to wait over six months to get the equipment they ordered. It's a bitter pill for customers to swallow, especially after they've shelled out over$2 ,000 for a bike or$4 ,000 for a treadmill. Soon, customers become vocal with their frustration. A Facebook group dedicated to complaining about issues with Peloton deliveries boasts 10 ,000 members, and angry customers comment on the company's social media pages. Having been in the connected fitness business since 2012, Peloton came into the pandemic with a market edge.

9:57But in the years since Peloton launched, a number of competitors have moved into the market. Several offer cheaper options. Fortunately for Peloton, almost every competitor is also facing supply chain issues thanks to the pandemic. But if one of its competitors figures out how to get their equipment to customers faster and cheaper, Peloton could be in big trouble. So Foley is determined to do whatever it takes to solve Peloton's supply issues. One of the biggest holdups is getting the equipment from Taiwan to the United States. So Peloton executives start looking into how they can manufacture at least some of their equipment inside the United States.

10:40In late 2020, Peloton buys Precor, a U.S.-based fitness equipment manufacturing company, for$420 million. It's a big investment. But Precor owns factories in North Carolina and Washington State, which Peloton executives hope will help cut down on the wait times to receive equipment. Through the acquisition, Peloton increases its manufacturing capabilities six-fold by the start of 2021. They also start shipping bikes from their Taiwan factory by airplane rather than by boat to avoid the ports. All this helps get bikes to customers faster. But just as Peloton is investing massive amounts of its resources into boosting manufacturing capabilities, tragedy strikes.

11:29In February 2021, a six-year-old child gets trapped under the rear roller of the Peloton Tread Plus and dies from a brain injury. The death becomes public in March, and the company puts out a statement. Peloton CEO John Foley sending an email to members saying in part, I can't tell you how much this news and horrible reality has hit me personally and our entire team at Peloton. The company warns users that the Tread Pluses are designed for users aged 16 and over. They remind parents to keep younger children and pets away from the machines. But reports of at least 39 other people suffering injuries, including other children, come out.

12:12One user uploads a video to TikTok of a large exercise ball being sucked under the heavy treadmill and bursting while her toddler walks just a few feet away. It's picked up by the media. One month later, in April 2021, the U.S. Consumer Protection Bureau tells people with small children and pets to stop using their Peloton Tread Plus immediately. They cite several design decisions that increase the chance of injury, including that there's no guard on the back of the treadmill, which allows for small children or pets to get sucked under more easily. A lot of injuries happen with treadmills, but not like this being sucked underneath the treadmill.

12:53Peloton initially pushes back against the warning, reiterating that the treadmills are safe if they are used properly. There's no reason, they say, to stop using the TRED Plus. But there's quick backlash to Peloton's statements, accusing the company of blaming parents for a design flaw in their treadmill. And over the next two and a half weeks, more injuries are reported, bringing the total number of people hurt to over 70. And some of the reported injuries are quite serious. In those 70 are 29 reports of children having injuries that range from second and third degree abrasions to broken bones, some multiple fractures, lacerations, and brain injury.

13:35So in early May, Peloton issues a recall of the Tread Plus and ceases selling it. Approximately 125 ,000 of the products are subject to the recall, and Peloton is issuing a full refund for those who return the treadmill within 18 months. You know, product recalls aren't just about refunds. They're about trust, too. Once customers think your product might hurt them or their kids, no amount of marketing spin will fix that. This is why smart startups get safety right on day one. Sure, it's slower and costlier up front, but infinitely cheaper than trying to repair a brand after tragedy. Just ask Toyota, Boeing, or Peloton.

14:21The recall is a blow to Peloton's bottom line. The company estimates that they'll lose roughly$165 million over the next quarter between issuing refunds, loss of future sales, and subscription cancellations. But even with this setback and all the bad press, Foley still believes that Peloton's future is bright, and he is still determined to build more U.S.-based manufacturing plants. He sees it as the key to the company's success. Three weeks after the recall is announced, Peloton makes another announcement. They're investing$400 million to build a factory in Ohio. It's slated to open in 2023 and will have a footprint of over 1 million square feet, making it one of the largest fitness manufacturing facilities in the entire world.

15:13In the press release, Foley promises that this investment will help ensure that Peloton continues to grow for years to come. But just three months later, in August of 2021, Peloton is once again showing signs of trouble. As vaccines have rolled out and COVID restrictions are lifting, more gyms are able to reopen. Foley had predicted that the pandemic would change how people work out and that traditional gyms would become obsolete. But by the end of 2021, gym memberships at several chains are close to or exceeding pre-COVID levels, and Peloton's fourth-quarter earnings report reflects this shift.

15:58Although their revenue is up, the company falls short of its target for paid subscribers, and the company lowers its forecast for the number of subscribers going forward into Q1. That's even after they announce that they're cutting the cost of their entry-level bike by$400. The stock market reacts quickly, and it's not good. All right, we're watching shares of Peloton sell off after hours. We've got the latest on their earnings report, and it has to do with the guidance and much more. And the grim news continues. Three months later, in November 2021, Peloton posts another disappointing quarter, and the stock price plunges by 34%.

16:48In New York City, a Peloton employee is watching the news coverage of Peloton's latest earnings report and the subsequent drop in its stock price. In a few minutes, an all-hand Zoom meeting is about to start, and CEO John Foley is going to address employees in the wake of the latest round of bad news. Foley has a reputation for staying positive no matter what. But this employee doesn't see how that's going to be possible today.

17:19The meeting begins. Foley appears solemn in his box on the upper right of the employee's screen. Well, I'm sure you've all seen the news, and I'm not going to lie. Our boat of a company is in some stormy waters, and we have a tough course to navigate. We're facing what I like to think of as twin storms, the end of the pandemic and the reopening of gyms on one side and continued difficulties with getting our equipment in from Taiwan on the other. The employee sees some of her co-workers nodding along, but the employee crosses her arms. All through the pandemic, Foley was adamant that the spike in sales Peloton experienced during the lockdown wasn't a blip.

17:59Instead, it signified a new era in how Americans worked out. But now, he seems to be singing a different tune. Foley continues. I want to be clear. I still believe in our boat. We're going to win. But we're going to have to get tighter, leaner, better. The employee groans. She's worked in enough corporations to know that tighter and leaner are code for laying people off. It's not entirely unexpected. Peloton rapidly hired people during the pandemic. There were so many people that at times there wasn't enough work for the employee to do. But Foley and the other executives in the C-suite are the ones who overhired, and now it's the employees who will have to pay the price.

18:44It seems like more proof that Peloton's leadership misread the company's long-term prospects. In his Zoom corner, Foley smiles. But we're going to have fun. We're in a fun boat. The employee's glad her camera's off so no one can see how hard she's rolling her eyes. and as she watches Foley grinning and beaming, the employee comes to a realization. She no longer trusts Foley's judgment. It seems to her that he's made one mistake after another over the past two years. In her view, Peloton needs a new CEO and there are some powerful shareholders who agree with her.

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22:23Early 2022 in San Francisco, California, Barry McCarthy calls his friend who works at the investment firm TCV. As McCarthy waits for his call to be answered, he flips through a PowerPoint deck on his computer, reviewing what he's going to say. McCarthy is 68 years old with short gray hair and round glasses. He previously served as the CFO of both Netflix and Spotify, but retired almost two years ago. Ever since then, he's been managing some private investments and playing a lot of golf. But the truth is, he's bored. He wants to get back into the game. And he sees an opportunity. After a few rings, McCarthy's friend answers the phone.

23:07Barry, good to hear from you. How's the golf game? What's your handicap these days? Not as good as you'd think, given how much I play. I'm starting to think maybe golf isn't my calling. Oh, yeah, well, I hear tennis is fun. Well, hey, listen, a little bird sent me this PowerPoint presentation about Peloton. Yeah, that thing's pretty brutal, huh? Peloton's performance has continued to suffer through the end of 2021 and into 2022. Its digital subscriber growth continues to fall short of predictions, and the stock price remains low. Frustrated by the lack of growth, someone at Blackwell's capital, one of Peloton's biggest investors, made a PowerPoint to convince the board that change is needed at the top.

23:50The PowerPoint deck harshly criticizes CEO John Foley's leadership and lays Peloton's poor performance over the past year squarely at his feet. It argues that Foley has made bad decisions, mismanaged the company's resources, and lost the trust of employees and stockholders. McCarthy nods. Well, the DAX certainly doesn't mince words, like the slide that just says directly that Peloton has been grossly mismanaged. Yeah, my favorite touch was when they included Foley's own words, like when he said he wasn't a good manager. Or that he goes months without talking to his chief technology officer. Yeah, right.

24:29I mean, why would you ever admit that? Well, the thing is, they're not wrong that there's a leadership problem. This company has a lot going for them. They've made a good product, both on the equipment side and on the media side. I mean, customers are very loyal to this. Yeah, the customer loyalty is off the charts. It's practically a cult. All you need is someone who can take that energy and scale it. Well, I guess that's why I'm calling. I'm thinking I may be the guy who can do that. Hmm. That's an interesting idea. Look, I mean, Peloton is essentially two companies in one. It's an equipment manufacturer and a fitness content company, right?

25:08True enough. Well, now, looking at all the choices Foley made over the past year, buying Precor, committing to build a factory in Ohio, all this shows that Foley's been prioritizing the equipment side of the company. But you and I both know that for most companies, hit subscriptions that bring the real return on investment, the margins there are just so much better. And between my time at Netflix and Spotify, I understand media subscription companies. Yeah, well, you make some good points. Hey, let me float this with some people I know. All right. Well, thanks a lot. McCarthy hangs up. Excited energy flows through him.

25:48That went as well as he could have expected. Fingers crossed, he'll be hanging up his golf club sooner rather than later. And in February 2022, the board has had enough of Peloton's sliding stock price. Peloton making some major moves. Co-founder John Foley out as CEO and Barry McCarthy, former Netflix and Spotify CFO, stepping in. Foley is made chair of the board, and he gives a statement that one of the reasons he agreed to the change is McCarthy's history of partnering with founders at both Netflix and Spotify. But McCarthy has his own ideas. He immediately announces major changes, undoing much of what Foley did the previous two years.

26:32McCarthy lays off approximately 2 ,800 people, 20 % of the corporate staff. He halts the development of the Ohio factory, saving roughly$60 million. He also closes down several Peloton storefronts. And when these changes don't deliver enough cost savings, he shuts down the two U.S. factories Peloton acquired when they bought Precor in 2020. He even closes the Taiwan factory. Peloton will be outsourcing all manufacturing to third parties from here on out. You know, founders love to build shiny new factories, but investors, they love recurring revenue streams. Here's the difference. Equipment sales are a one-time bump.