This is a tough time for many businesses that benefited from a pandemic-driven surge in business. Transitioning from predictable growth, to uncertainty, to explosive growth, back to a steady state leaves supply chains in flux and a high risk of excess inventory.

Peloton is one company that has been all over the map with regard to their stock price, sales, and customer volume. The latest signs point to a challenging environment for them to operate independently — by their own admission, they have a ~6-month window to prove their viability as a company, and otherwise they’ll be forced to seek “strategic alternatives” for their business.

Where could Peloton go from here? What organic growth options exist? Where does Peloton’s value lie? Who are potential strategic acquirers for their business?

Peloton Today: Hardware, Software, Content, and Stores

Peloton primarily makes money on the sale of its fitness products (treadmill, bikes, rowing machines, and more to come) and ongoing subscription revenue for access to its content.

There were few companies better positioned than Peloton to benefit from the shift to digital everything. People sought in-home exercise equipment and digital exercise content. Peloton already had the infrastructure, content, and brand name to meet that demand.

Peloton’s core customers are those that buy their premium-priced equipment and generate recurring revenue with a content subscription. No doubt Peloton has done significant market research to define their target customer, but we can generate insights as well by analyzing the area around their physical store showrooms.

It stands to reason that a company locates their stores near their target customer, and we can use this assumption to help us better understand this target customer. Peloton has 77 stores open across the US, as seen in the map below.

Based on its location profile, Peloton’s target customer is a college-educated, high-income, middle-aged professional in and around urban areas. About 60% of adults 25+ within a 10-minute drive of their current locations have a Bachelors degree or higher, compared to 33% of the general population, and about 47% of households earn $100K or more compared to 31% of all households.

Based on this information and analysis, we can ask — How can Peloton increase the number of customers, grow revenue per customer, or which acquirers could benefit from access to this customer base?

The Path Forward: Organic Growth

Recent developments for the company suggest that one avenue of growth has been introducing new product lines to increase its potential base. Once a cycling-driven company, customers now have the option to buy a treadmill, rowing machine, or personal training “guide” camera. Each new product line brings in a new type of fitness enthusiast and increases their addressable market. Those that don’t bike might run or row, and those people are now potential customers with new product options.

That said, the market is only so big for customers willing to buy a $3,000+ rowing machine or $3,500+ treadmill and its usually a one-time purchase (how often will you replace a treadmill?). Even if they sell in “bulk” to a luxury apartment complex or Class A office space, this averages just over 2 pieces of equipment per location (source).

Even if the path forward were product line expansion, the 6-month runway makes this option infeasible as a near-term growth strategy. Additionally, the company doesn’t actually make a profit right now on its products. Their cost of revenue exceeds revenue for the connected fitness products segment, and doubling down on an unprofitable segment doesn’t make sense right now.

Another option could be standing up a series of gyms, possibly even leveraging their store footprint today depending on store size and setup. This could generate recurring revenue from subscriptions (and a bundled digital + physical option), serve as a product showcase, and get people in the door for upsell opportunity on apparel and accessories.

Gyms are risky, but the brand’s credibility in the fitness space gives it a significant advantage over an average gym opening. Again, though, this isn’t a viable near-term strategy. The time and capital expense to get equipment, locations, and supporting infrastructure off the ground is longer than the available time.

The strongest opportunity in the short-term is finding a way to move down-market to expand their potential customer base. Given their price points and location profile, its clear that households making $100K or more are their sweet spot. This accounts for ~31% of households nationally. If they can generate momentum in households earning $75K-$100K, this unlocks another 13% of households, increasing their core addressable market by ~40%.

Recent avenues to do this have included introducing an equipment “rental” starting at $89 per month for their standard bike or $119 per month for the Bike+, subscription included. This is closer to the cost of signing up for a monthly gym membership and anchors the customer to a comparison against a monthly gym rather than an expensive $1,500+ purchase.

Their other mass audience product is a digital subscription to their app. At just $12.99 per month for people without a product, the membership is quite inexpensive. Competition for digital fitness subscriptions are fierce, which likely keeps the price down. Given that digital content is a much more profitable segment, this seems like the area to focus on short-term growth.

The company had ~3M subscribers as of the end of FY22 and a churn rate of just ~1% per month, far lower than content providers in other areas (Netflix is estimated to be ~2.4% and Hulu 4.9%). Peloton operates globally, with store locations in the U.K., Australia, and Germany, in addition to the US. This subscriber number represents a very small sliver of their market opportunity with ample growth opportunity.

Improving awareness of commercial partners could be one fast way to ramp up subscriptions. In a past health plan, I had a free year of Peloton available, but never knew about it until I stumbled on it while logged into the insurer portal. Past employee benefits I’ve had included access to a free Spotify premium plan — why not Peloton too? Increasing partnerships and awareness through large commercial distributors is likely the fastest and least capital-intensive approach to growing the subscriber base in the short-term.

The Path Forward: Acquisition

If an organic growth path proves to be insufficient, Peloton has several attractive characteristics as an acquisition target depending on the nature of the acquiring business. I see the most valuable characteristics as content, attention, and customers.

Content and attention refer to the idea that subscribers are working out, on average, 16 times per month (source), likely for 30–60 minutes per session to a library of content with thousands of already-available options. Content and attention have become valuable assets in the age of digital streaming, and Peloton offers 8–16 hours of attention per month to an acquirer.

We’ve seen streaming companies push into TV shows, movies, and recently live sports (Amazon Thursday Night Football and Apple’s MLB streams). Why not fitness? How valuable is a highly engaged, younger, higher income audience of recurring users to Amazon Prime? On top of that, can Amazon’s longstanding strength in logistics improve operating margins on shipping heavy, bulky, difficult-to-transport equipment? What else can Amazon recommend from their infinite set of products that a fitness enthusiast could benefit from — bike shoes, stretching accessories, workout clothes?

If not Amazon, does Netflix or Hulu benefit from a fitness content library? Is there value in combining Peloton with Apple Fitness to have an integrated hardware (exercise equipment, Apple Watch, iPhone/iPad) and software experience? Content providers, especially those that also deal in the physical world, may have tremendous upside potential from combining Peloton’s products with access to high-value customers.

Moving away from the large tech companies, there could be value in a fitness company better combining online and offline footprint. Equinox is one brand that comes to mind. They offer a premium fitness experience primarily in dense, high income urban areas that overlap with Peloton showrooms. Subscriber figures for Equinox+, their digital subscription, aren’t publicly available, but I’d think it’s safe to say Peloton’s subscriber base could accelerate and dramatically lift those numbers.

A distant possibility is a competitor in the hardware space taking Peloton off the market — someone like Schwinn or Echelon. This seems unlikely since there doesn’t appear to be significant economies of scale in this industry and there doesn’t seem to be strategic value to maintaining multiple brand lines or eliminating the Peloton brand, which does have value to its core customer despite the company’s financial struggles. There’s also the consideration that the product line is the least profitable part of the business; someone doubling down on that strategy doesn’t seem wise.

Our Perspective

Peloton’s choice of Barry McCarthy as CEO — who formerly held roles at Spotify and Netflix — shows that they see subscription as the strongest growth avenue. He has stated his belief that subscriptions and content are the future for the company over a hardware-centric approach. If the company can’t achieve “significant” subscription growth — however they choose to define that — then an acquisition seems likely. The market opportunity and brand strength to grow subscriptions is there, but the time to execute might not be.

The self-imposed deadline of a 6-month turnaround is a sticking point in any strategic plan, especially for a company the size of Peloton. Defining the direction, setting the plan, and executing on the vision is challenging for small startups, never mind larger companies that can be held back by layers of bureaucracy and lack of urgency.

I see strong opportunity in their combination with an adjacent content provider. No major player has ventured into fitness (perhaps this is for a specific reason) but it could help grow subscriber value and long-term retention. Amazon in particular has been making major moves into healthcare, like its OneMedical acquisition, and a connected wellness offering (insurance, primary care, ongoing health & wellness products) could be a compelling value proposition.

Peloton has built a strong brand with a loyal and valuable customer base. If it can’t exist independently, it may call into question the viability of other similar providers, creating long-term consolidation and acquisition in the market. The months between now and April should be an interesting time to see what unfolds for the industry next.

Interested in this topic? Get in touch with me here or by email at jordan@jordanbean.com.