Transcription
So, connected fitness device company Pelaton was once at the top of the world. Back in 2020, their company was valued at $50 billion, and they had over a million paying subscribers. Just a few years later, they've got a new CEO who's worried if the business is even long-term viable, and the stock market agrees with them. Their stock is down 97% from its peak.
So, this video is about the rise and the fall of Pelaton and what we as small business owners and entrepreneurs can learn from this story. So, if you're interested in this kind of stuff, I'm your guy. My name is Michael. Lately, I've been recording a lot of videos about what goes right and what goes wrong in businesses and what we can learn about them. So, if you're interested in that kind of stuff, I actually put together the most common lessons that I see and all these stories and I put them in a guide that you can click on and download in the comments below. So, it'll be the first comment below.
So the story of Pelaton actually starts in 2012 with a guy named John Foley. He was an entrepreneur, big hustler achiever. And the downside of being a person like that is you don't have a lot of time. And he loved going to spin classes and loved the kind of feel and vibe he got from going to those kind of exercise classes, but he just didn't have the time for it. So he said to himself, how can I basically bring that kind of experience to my home? and he went and spent the next couple years with himself and other folks to try to build kind of the perfect replica of your high-intensity, super fun, engaging spin class, but in the comfort of his own home. And we ended up building was basically a $2,000 bicycle that was connected to an iPad. And kind of the idea was to be the Netflix for spin class, right? You could bring the exercise class back to your home. And it was an instant hit, right? people liked John who wanted to have that kind of high intensity, get it done, but have time for everything else and look for a status symbol of having a connected bike like that that cost 2,000 bucks in your house. Like, it was perfect. And his people, like, they loved it. They started to buy these bikes a lot. So much so that the community named themselves pillow people, like a Pelaton person. I I don't understand these people, but they did it. And VCs loved it as well. Subscribers by 2017 grew to 100,000 people and the VCs invested in it and valued the business at over $4 billion dollars. Pretty crazy. And other investors loved it as well. By 2019, the company went public. It raised $1.1 billion in the IPO. And that was built off the back of some incredible growth. The difference between 2018 and 2019 is the subscriber and revenue count basically doubled year-over-year. Just incredible levels of growth.
And by 2020, it seemed like everything was going great. And then something came along that was a huge shift, a huge change in the world. And at first glance, it seemed like something that was going to be an amazing benefit for Pelaton. But in retrospect, it was actually one of the things that led to the demise of the company. And that thing, of course, was the COVID pandemic. And if you remember co, we were all generally trapped in our house. Well, the people who were typical and potential Pelaton customers, they were stuck in their house. They were the type of people who couldn't get out, couldn't go to their gyms, couldn't do anything, and they wanted a place to exercise and feel connected. So, what did they do? Well, this is a perfect buying opportunity for them to trade down from their going to a regular gym or their athletic club and buying a Pelaton. And boy, did they. And in spring 2020, revenue doubled for the company. And by the summer, they had cracked 1.1 million subscribers. Just an incredible boon for the business. These people were trapped at home. So, they were gladly willing to drop $2,000 for a Pelaton cycle or $4,000 for a Pelaton treadmill. Uh, I don't understand that. Never done these things. But all this demand, it created a problem. And the problem was it was taking people 8 to 10 weeks or more to get a bike delivered to their home. And they were pissed about it. They were angry and they were looking for other alternatives. And they were demanding Pelaton to ship them one.
So, what did Pelaton do when a bunch of people were screaming for their product? Well, it went all in on trying to produce bikes and treadmills as quickly as possible. And Pelaton put its money where its mouth was. It went all in on this accelerating into the growth of demand they saw during CO. They bought basically exercise equipment maker Precore for $420 million. And then they decided that wasn't enough. We need to build a factory to build bikes as quickly as possible. So, they dumped $400 million into an Ohio factory that was going to build bikes and treadmills for the company. And I can't necessarily blame Pelaton and its leadership for going in all in on building these bikes and wanting to invest in it. I mean, being around during those times during CO, it kind of did seem like you didn't know when it was all going to end. And even if CO was going to end, would the world go back to kind of normal, which it has. It was easy to think that the good times would keep going on forever. And in 2020, Foley and his leadership team really adopted this idea that the good times would keep going and never stop. And Foley famously predicted that Pelaton could eventually have a couple hundred million households with Pelaton bikes in them and devices. But at the time, the stock market in 2020 when the government was pumping money into the system was hungry for good stories. And Pelaton had a great story. And so the stock market bit up its price to a point where it had a crazy valuation, $50 billion. And to put that in perspective, that puts the valuation higher than stalwarts like Ford, who makes millions of cars and trucks a year, and Craft Hines, who well makes your ketchup and and mayonnaise. Like these are legit big businesses. And guess what? Pelaton was valued at a higher value than all of them.
One of the things that had made Pelaton so successful is it it had basically become a status item, a status symbol. And if you were a hard charging, dedicated person who was making money, like if you didn't have a Pelaton in your house and you weren't on the leaderboard and talking to your friends about at the country club, you were missing out. And this is where the first kind of body blow to the Pelaton business started to happen around 2021, which was they had a massive recall. A young kid got killed using one of the Pelaton treadmills. In an embarrassing fashion, Pelaton had to recall 125,000 of these treadmills. And that would be okay for a normal product, but if you're supposed to be a luxury status simple product like Pelaton was, the last thing you want to have is elite people who are your target market thinking your product isn't safe. And the second strike against the company was supply chain. So, we talked about how they dumped nearly a billion dollars into a new factory and acquisition of Precore. Well, they also bought a ton of inventory and suddenly their warehouses were overflowing as demand started to slow once people got their bikes and got their treadmills during co. Well, they didn't need a second one and they didn't have this growth that more people were adopting them over time as things went back to normal. And so suddenly you have a situation where basically Pelaton is just drowning in supply and in inventory in their warehouses.
And something that's a bad thing for luxury brands and especially status brands like Pelaton is they really stumbled with marketing. They just weren't doing a very good job of it. In 2019, you may recall the famous kind of Pelaton wife ad where the lady had this kind of look on her face when her husband said, "Hey, here's a workout thing for Christmas." Which, by the way, unless your wife asked for it, never ever ever give your wife a weight loss tool for Christmas so she can get fitter. like just don't do it. But then secondarily, like part of marketing is the PR machine and horrible thing happened which was in the 2021 episode of Sex in the City, one of the most central characters of the whole thing, this character named Big, well, he went on a Pelaton bike in an episode and then he died in the episode after being on a Pelaton bike. That's not good. And these missteps in the world of marketing and PR suddenly made Pelaton the opposite of what had made it successful, which was it's no longer safe and it's no longer cool. Like why do I want a healthy like exercise bike if it's not going to make me healthier? Not good. And competitors for Pelaton, they were not like sitting on the sideline. SoulCycle, Echelon, all these different folks were putting together their own version and copycats of what Pelaton offered. Pelaton actually went and made that whole process worse because they went and allowed those customers, right, to take and subscribe to Pelaton for $12.99 a month, basically like what it costs for Netflix, and use the Pelaton environment and community and all that kind of stuff on a cheaper $300 or $500 bike. Just a horrible misstep.
And by 2022, because of all these missteps, Pelaton was sitting on 120,000 unsold bicycles in their warehouses. Uh demand had plummeted and people were just going back to their normal lives post pandemic. We all got sick of it. It's it was fun for a while, but it sucked for sucked after a while. And so by the numbers, revenue for Pelaton in 2021 was $4 billion for that year. In 2023, it was $2.8 billion. It had shrunk significantly. and that uh Ohio factory we talked about where they put in $400 million to build Pelaton bikes and devices in the US, they shuttered it without ever making a single piece of equipment for Pelaton. And so the hype was over, these missteps and bad luck to some extent had caused all of this and the stock went down nearly 98% from 50 billion to three billion. Though I do have to say three billion is still a lot of money. You should be real. This is some like bike with an iPad on it that some guy invented in his garage. So, I'm going to I'm going to give him a little bit of credit, but still it's a far cry from the heights that the company had reached and a real galaxy away from the vision that Foley had for the business in the long term.
So seeing all this, the board worked with John Foley, the original founder and inventor of the product to step down in 2022. And uh they brought in a new guy, Barry McCarthy, who is a former Netflix and Spotify executive with the hopes of turning the business around in a post-pandemic world. So far, Barry, I got to give him credit, has been off to a pretty good start. He's come in and uh started to cut costs. uh he has really reduced the size and scale of the business. He started to focus more on what makes them truly unique, which frankly is not hardware, it's the software. Those kind of activities have helped. As of recently this year, they had their first cash flow positive quarter in a while. And that's pretty good considering the state of the business and how it was when he came in a couple of years ago. The good news is he'll keep working on it. As far as I can tell, he has a dedicated, loyal fan base, and that's the biggest asset for this business. The people that I know that use the Pelaton a lot, they love it. They absolutely love it.
And where Pelaton went wrong was thinking that a product that was a niche product was suddenly be going to become a like globally accessible and everybody was going to have a Pelaton in their home like they were going to have a mobile phone. And the reality was that was just a bad belief. I think there's a lot of lessons from the story of Pelaton, but to me the biggest one was that one, which is, you know, when you have kind of a niche product like they did and something that appeals really well to a small group of people, you can't let an external event or a one-time thing suddenly make you believe that this is suddenly a mass market product that everybody in the world is going to have. I think that was, as I look back on the story, kind of the fundamental mistake of where things went wrong.
So, that's the story of Pelaton. Let me know what you think. What did you learn from this? And where do you think they go from here? Curious your thoughts. Uh I do tend to read almost every single comment except when a video goes viral. So let me know in your thoughts below. Let me know what you think and where it's going from here. See you. Fight.