Peloton told employees Friday that it is slashing roughly 780 jobs, closing a significant number of its retail stores and hiking prices on some equipment in a bid to cut costs and become profitable.
The company did not specify how many of its 86 retail locations it plans to shutter, but said an “aggressive” reduction will begin in 2023. The pace of closures will depend on how quickly Peloton can negotiate getting out of leases.
Peloton said it will exit last-mile logistics by closing its remaining warehouses and shift delivery work to third-party providers, resulting in a portion of the job cuts. It is also cutting a number of positions in its in-house support team, which are mainly located in Tempe, Arizona, and Plano, Texas, and instead will rely on third parties.
The sweeping changes are part of recently installed Chief Executive Officer Barry McCarthy’s plan to steer the connected fitness equipment maker in a new direction. Peloton’s business boomed to unthinkable highs after the onset of the Covid pandemic, sending shares surging alongside other so-called stay-at-home stocks like Zoom. But under then-CEO and Peloton founder John Foley, demand began to slow almost as quickly as it shot up, as people started going out again.
McCarthy’s biggest tasks now include getting rid of fixed costs and finding more ways to cash in on its loyal base of customers.
“The shift of our final mile delivery to 3PLs will reduce our per-product delivery costs by up to 50% and will enable us to meet our delivery commitments in the most cost-efficient way possible,” McCarthy wrote in a memo to employees seen by CNBC.
“These expanded partnerships mean we can ensure we have the ability to scale up and down as volume fluctuates,” he added.
Peloton, which had just lowered the prices for its products earlier this year, is raising the price of its Bike+ by $500 to $2,495 in the United States. The price of its Tread machine is going up by $800 to $3,495. The price of Peloton’s original Bike and its strength-training product known as Guide will remain unchanged.
McCarthy acknowledged the about-face on pricing, saying that the equipment price reductions made sense for the company back in April, as Peloton tried to get rid of inventory quickly.
Investors sent Peloton shares up 13.6% on Friday.
The stock has tumbled more than 60% so far this year, with the company’s share price hitting an all-time low of $8.22 in mid-July. Shares had traded as high as $120.62 apiece roughly a year ago.
Under McCarthy, who took the reins from Foley in February, the business has focused on ways to grow subscription revenue over hardware sales. Earlier this year, for example, Peloton raised the price of its all-access subscription plan in the United States to $44 per month from $39.
In July, Peloton had also announced it would stop all its in-house manufacturing and instead expand its relationship with Taiwanese manufacturer Rexon Industrial. That resulted in about 570 job cuts. The company also suspended operations at its Tonic Fitness facility, which it acquired in 2019, through the remainder of the year.
When McCarthy became CEO, Peloton announced it was slashing roughly $800 million in annual costs. That included cutting 2,800 jobs, or about 20% of corporate positions. The company also said it would be walking away from plans to build a sprawling production facility in Ohio.
CNBC reported in January, ahead of Foley stepping down, that Peloton planned to temporarily halt production of its equipment, according to internal documents detailing those plans, as a way to control costs with demand dropping.
Foley’s missteps included making long-term bets on Peloton’s supply chain during the peak of the coronavirus pandemic that would later prove to be a drag on its business as sales of its Bikes and Tread machines slowed.
Peloton’s losses in the three-month period ended March 31 widened to $757.1 million from $8.6 million a year earlier. Revenue dropped to $964.3 million from $1.26 billion.
The company ended the quarter with 2.96 million connected fitness subscribers, which are people who own one of the company’s products and pay for a membership to its live and on-demand workout classes.
“We have to make our revenues stop shrinking and start growing again,” McCarthy, a former Spotify and Netflix executive, said in Friday’s memo. “Cash is oxygen. Oxygen is life.”
McCarthy said the company is continuing to hire in certain areas, including software and engineering. “I share this so you won’t think we’re driving with our foot on the gas and the brake at the same time,” he said.
McCarthy is also asking all of Peloton’s office-based employees to return to the office three days per week starting on Sept. 6. As of Nov. 14, that will be considered mandatory, he said.
Peloton is expected to report its fiscal fourth-quarter results on August 25.
Read the full memo that Peloton CEO Barry McCarthy sent to employees on Friday:
I’m writing to update all of you on Peloton’s ongoing transformation. The past few months we’ve made considerable progress on our journey. We continue to define and lead the global Connected Fitness category, even as we work to make Peloton more efficient, cost effective, innovative, and to best position ourselves for the future. Thank you for your hard work.
We have a clear strategy to drive the long-term, sustainable future of this company. Job one is generating free cash flow by right-sizing our inventory commitments and converting many of our fixed costs to variable costs because that cost structure better aligns with the seasonal revenue of the business. Second, we are also focused on innovation across our hardware and software to strengthen our Member experience. And, finally, we’re focused on growth and expanding the ways consumers can experience the magic of Peloton.
We are making several additional changes to the business to improve our performance.
Maintaining Our Premium Brand Positioning
For several months we’ve been running the business to maximize cash flow. In April, we lowered prices on our original Bike, Bike+ and Tread to make the entry point for new Members more accessible and to accelerate the sale of inventory to generate much needed cash flow. At the time, we were still in the early days of our $800 million restructuring plan. We were under considerable cash flow pressure, and we were in the process of (but had not yet completed) securing a $750 million bank loan.
Because of our success managing our inventory and supply chain issues, and because of the bank financing, we have the opportunity to adopt a more nuanced pricing strategy targeting “value” and Premium Members alike by increasing prices on our Bike+ and Tread models – which contain distinctive, superior design elements, while keeping the price of Bike v1 and Guide the same.
Specifically, in the U.S., our new price structure will be as follows:
- Bike+ will increase by $500 to $2,495
- Tread will increase by $800 to $3,495
This pricing change achieves three objectives – we maintain an attractive entry point for new Members; we continue to sell down excess Bike v1 inventory, creating a financial tailwind on investments already made; and we maintain our position as the undisputed premium brand in the Connected Fitness category.
Optimizing our Operations and Workforce
We continue to make strategic changes to our operations and workforce. Following last month’s exit from owned-manufacturing in Taiwan, we are now restructuring our final mile delivery capabilities by expanding our work with our third party logistics (3PLs) providers. As a result, we are eliminating our North American Field Ops warehouses, resulting in a significant reduction in our delivery workforce teams.
Unfortunately, this means a number of team members will be departing the company. We know changes of this nature are never easy.
The shift of our final mile delivery to 3PLs will reduce our per-product delivery costs by up to 50% and will enable us to meet our delivery commitments in the most cost-efficient way possible. I also want to highlight that we have been actively working with our 3PLs to dramatically improve the Member experience, and we are seeing positive momentum in those CSAT scores. This has been a challenge. We won’t fix it overnight, but we have no choice but to make it work, so we’re leaning into it and proactively managing our 3PL relationships. We are confident in the plan we’ve put in place and we’re encouraged by the progress we’re making.
After re-examining the resources required to provide our Members best-in-class support, we have also decided to reduce fixed costs by eliminating a significant number of roles on the in-house North America Member Support Team. In-bound Member support volume has been lower than forecasted, and like other parts of the business, we are going to expand our work with our third party partners. These expanded partnerships mean we can ensure we have the ability to scale up and down as volume fluctuates while still continuing to provide the level of service our Members have come to expect.
These are hard choices because we are impacting people’s lives. These changes are essential if Peloton is ever going to become cash flow positive. Cash is oxygen. Oxygen is life. We simply must become self-sustaining on a cash flow basis.
I want to take this opportunity to express my gratitude to those delivery team and Member Support colleagues who have been impacted by this decision.
Investing in Talent to Innovate and Grow
In the past you have heard me say we cannot cost cut our way to success. We have to make our revenues stop shrinking and start growing again. We do that with investments in marketing and R&D to drive innovative products. We must also develop new features and functionality for existing CF platforms that delight Members and drive word-of-mouth which drives organic growth. And, we double-down on our existing strengths, particularly our world-class, Instructor-led content that motivates and inspires Members daily.
While we’re reducing our workforce in certain areas of the business, we continue to fill roles on key teams to drive the business forward. This includes further commitment to recruiting top talent in key areas of need such as our software engineering team. I share this so you won’t think we’re driving with our foot on the gas and the brake at the same time. Success is about making the right investments to drive growth while managing to a cost structure the business can afford.
I’ve also long-believed hands-on, shoulder-to-shoulder collaboration is essential for fast, efficient teamwork and innovation. To that end, we’ll be asking all office-based employees to return to their office three days per week starting on Tuesday, September 6th. We know some of you will need more time to sort out related details, and we are asking that you do so, working with your manager, with a deadline of Monday, November 14th for all of us to be back in the office (if your PeloTeam designation is office-based) every Tuesday, Wednesday and Thursday. You also are welcome to come in more often, if you’d like, and take full advantage of the office amenities and gym.
As of November 14th, return to office for office-based workers (not you if you were hired to be remote) will be mandatory. There are many successful businesses, like Airbnb and Spotify, who have chosen to operate remotely. There are also many successful companies who have opted to collaborate in the office in person, like Nike and Google. The culture you choose to work in should be compatible with your personal preference. For those of you who don’t want to return to the office, we respect your choice. We hope you choose to stay, but we understand not everyone will.
Balancing e-Commerce and Retail
Lastly, we need to rebalance our e-Commerce and retail mix to drive efficiencies, which means we will reduce our retail presence across North America. This decision will result in a significant and aggressive reduction of Peloton’s retail footprint.
Data tells us that in the post-COVID economy, consumers want a mix of virtual and in-person engagement with the brands they love, meaning a hybrid model of e-commerce as well as limited physical retail touchpoints. We have to meet our prospective Members where they are.
We will provide future updates on which retail operations will be impacted by this decision in the coming months. We do not anticipate closing retail locations in calendar 2022, but the timing is uncertain as we begin negotiations to exit our store leases.
In closing, I want to reiterate that I know some of this news is difficult to hear as it has a real impact on people’s lives who believe in the mission and our ability to manage the business for success.
Today’s news reminds us it was never more important that we be successful in managing our turnaround. That’s the reason we’re making the hard choices to shift our cost structure from fixed to variable and to right size our spending in retail stores. As we face economic uncertainty in the global macroeconomic outlook, we will continue to analyze our workforce and expenditures. Change is constant, and we need to embrace it and make it one of our super powers.
Overall, I continue to be optimistic about the future of Peloton. That doesn’t mean there won’t be challenges ahead. There will be, and there will be unforeseen setbacks. That’s the nature of turnarounds. But I’m confident we can overcome the challenges because we’ve come so far in just the last four months, which feeds my optimism about our ability to engineer our long-term success. No one’s gonna give it to us, least of all our competitors. We’re going to have to step up and make it happen. The future of connected fitness is Peloton’s to own.
Me to you. You to me. You to each other. And all of us to our Members.