Peloton (Part 2): Market, Acquisitions, Supply Chain
Episode 19: The second part in a series on Peloton Interactive
This is part 2 of a 3 part series on Peloton, maker of connected fitness equipment.
Part 1: In the first part of this series on Peloton I covered it’s products, content, community and the competitive landscape for at-home fitness.
Part 2: This part mostly focuses on how Peloton beefs up its supply chain to reduce delays, and then how it will subsequently attract new customers once demand dies down. It covers three pieces: Supply Chain, Marketing, Market Size (new geos, products, and channels).
Part 3: The third part finishes with Peloton’s business model as well as upcoming challenges/opportunities.
Much of the focus for this part will be on how Peloton’s recent big acquisition of Precor solves many of its supply and demand issues. Precor is a US-based manufacturer of fitness equipment (bikes, ellipticals, climbers, etc) mostly for other businesses (gyms, hospitals, corporate offices, etc.)
Supply Chain
If customers are willing to pay close to 2x competitors and wait 2-3 months, then Peloton has you've got a great product. But sooner or later if Peloton can't get the product into customers' hands fast enough they're going to look elsewhere.
Within the next 1-2 years, Peloton expects to have the ability to service ~95% of the US population within 24-48 hours. (THIS MEANS THAT YOU COULD ORDER A BIKE AND IT ARRIVES IN LESS THAN 2 DAYS.) It also expects to have multiple fully operational hubs in Europe.
This is what it anticipated before the Precor acquisition!
Precor adds 625,000 square feet of U.S. manufacturing capacity with in-house tooling and fabrication, product development, and quality assurance capabilities in Whitsett, North Carolina and Woodinville, Washington.
As of today all Peloton products are made in Taiwan (but in Peloton-owned factories). Peloton plans to produce connected fitness products in the U.S. before the end of the calendar year 2021.
With this investment Peloton is expecting not to have to worry about its supply. It will design and produce all its products in-house and in multiple locations reducing quality and supply chain risks.
The quarantine meant Peloton didn't have to worry about creating demand. But will users continue to average 20+ workouts per month once their favorite gym re-opens?
Peloton is hoping that not only will engagement stay high but that they’ll be able to add new customers through new geographies, products and channels.
Before looking at geographical, product and channel expansion, let’s take a look at how it’s using marketing to reach customers in existing geographies with its current products.
Marketing
“Given the robust organic demand due to COVID-19 and strong brand awareness, we continued to pause the majority of our media spend through the end of the quarter.” — Peleton CEO John Foley
Peloton had actually paused most marketing spend (TV, Google search, Facebook display ads, etc.) as of October because organic demand is so strong.
It seems like they’ve started it up again because I now get an ad every time I've opened up YouTube since visiting their site. I also get Echelon Fit ads, which are almost identical.
Pretty hard to tell the difference...
It has excelled at organic, word of mouth driven growth due to it's product, instructors, and users. As long as it continues down this path it can dabble in TV, search and social ads.
As the above ad shows, however, anyone can mirror Peloton’s ‘luxury’ advertising. But here are a couple ways Peloton separates itself from the competition:
Awareness: Partnerships with big names (Beyonce, ESPN, etc.) to reach new audiences; memorable TV and Out-Of-Home ads to create brand awareness (memorable in that many people still remember the two ads seen as sexist and elitist — but there’s no such thing as bad publicity)
Consideration: rely on power of it’s large and passionate community as well as somewhat famous instructors to spread the word on social media
Conversion: dominate search ads for fitness equipment and experiences; easy to navigate web pages
Rumor is that Peloton is launching a big campaign during the upcoming Summer Olympics. This sounds like a great way to drive broader awareness right at a time when demand might slow due gyms fully re-opening.
However, even though Peloton can afford to spend on TV, search and social, especially once organic growth slows, you know they will have lost their way when this type of marketing spend starts making up a big chunk of their costs.
Their organic community and unique partnerships are huge differentiators, they should rely on them instead of paying ad agencies, Google, Facebook, etc.
Peloton is in an envious position, like Netflix, where even average content gets shared widely because of the prominence of its brand. It should capitalize on this without becoming reliant on big ad campaigns.
Market Size
Marketing helps drive interested consumers to purchase. But that’s only one way to think about Peloton’s market size. Here are two ways to think of Peloton's market size:
The estimated number of people likely to purchase a Peloton product in its current addressable market.
Expanding the addressable market through new products, new geographies or new channels.
Marketing helps with the first point below by pushing interested people to purchase.
To get an estimate on #1 Peloton has estimated that total “households interested in purchasing one or more current [Connected Fitness] Peloton products at current price” is 20 million. With 1 million current members it has a ways to go.
There are two challenges for that:
If these customers are interested in Peloton they are likely also interested in SoulCycle, Apple Fitness, Echelon Fit, etc.
Getting to 100% of the 20 million is likely unrealistic (20 million is likely extrapolated from surveys which don’t perfectly reflect purchase intent)
Even assuming those challenges, getting to 20-30% of that number allows for a couple years of growth. Especially with the marketing tactics discussed above.
On top of this Peloton can expand the addressable market by launching new geographies, new products, or new channels, which would greatly expand the 20 million.
The Precor acquisition makes this possible. Peloton is weakest where Precor is strongest and vice versa. A match made in business heaven.
New Geographies
Peloton launched operations in US in 2014, Canada and UK in late 2018 and Germany in mid 2019. As shown below, it has huge opportunities for international expansion.
This expansion has come with significant costs. To expand to UK and Germany it needed to build out a London HQ and hire German language instructors. However, if it sees strong growth in UK and Germany, it could easily expand to other European countries.
Precor serves more than 100 countries worldwide with offices in the Americas, EMEA, and APAC. It becomes much easier for Peloton to expand geographically when you have offices, employees and relationships already in those countries.
New Products
Peloton really makes just two products right now - the Bike and Tread. Precor already makes a wide range of fitness equipment — bikes, ellipticals, climbers, etc.
Precor brings a range of benefits related to new products:
Precor has been designing fitness equipment for more than a decade now, with experience (and patents) in hundreds of products like bikes, ellipticals, climbers, and various strength-based products.
Precor’s addition expands its R&D budget and adds 100 R&D employees.
As an example, Precor sells 7 different types of non-connected treadmills all priced above $6,000. Peloton can combine it’s design and software knowledge with Precor’s patents and engineering expertise to create a connected version that is both cheaper and more functional.
Everyone loves business synergies…
New Channels
Peloton sells entirely digitally (website) or retail (it’s own stores). Precor sells some digitally, but mostly commercially (to other businesses). If that isn’t a business synergy I don’t know what is.
Precor has 140,000 connected products in over 13,000 facilities across the world. Those sales are to other businesses like gyms, hospitals, and other corporate offices. Not only can Peloton sell their Bike and Tread through these channels, but they become free marketing for potential customers. Peloton can introduce its hardware, content, and brand experiences to the otherwise uninitiated.
If Peloton plays it right there’s an opportunity for an omni-channel strategy to compete with Equinox/Soulcycle. Customers can use the Bike/Tread at home or their gym/office, and sync their workouts. Soulcycle will still have them beat on their in-class experience, but this omni-channel strategy will be enough to entice some customers.
As a reminder, the third part finishes with Peloton’s business model as well as upcoming challenges/opportunities.
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