Text | Value Institute
On February 7, Beijing time, Bloomberg, ABC News and other foreign media reported that due to the stock price falling to the bottom and there is an obvious opportunity to bottom out, the US sports and fitness platform Peloton has become the acquisition target of a number of sports and technology companies, including Amazon and Nike, the two giants.
Over the past year, Peloton's stock price and market value have been like a roller coaster. At the beginning of the year, when the epidemic was raging, its market value once soared to a peak of nearly $50 billion, but now it has fallen to less than $10 billion, shrinking by nearly 80%. At the same time, its stock price also fell below $25 at one point, falling below the issue price. However, after the news of Amazon and Nike's intention to acquire, Peloton's stock price rose by more than 40% during the US session on Monday, and finally closed up 20.95%, ushering in a big rebound.
(Image from Futu Cattle)
Although these three companies have not yet made an official response, Peloton, whose stock price and market value are both Waterloo, will definitely bring a turnaround if it can be put into the arms of the two giants of Amazon and Nike. From the perspective of Nike and Amazon, in addition to the low price to the bottom, Peloton must also have other characteristics that attract their attention.
And these qualities may be the advantages that other peers need to learn from and learn.
In the battle for Peloton, Amazon and Nike have their own plans
Founded in 2012 as a home fitness technology company, Peloton's current revenue comes mainly from two segments: hardware products such as fitness equipment, and paid subscription content. At present, Peloton's main hardware products are treadmills, networked bicycles and so on.
At the beginning of the IPO, Peloton had unlimited scenery: with more than 3.6 million registered members, it was known as the world's largest interactive fitness platform; the paid user base reached more than 510,000, and the hardware and subscription service revenue maintained a rapid growth rate of more than 200%.
However, as mentioned earlier, Peloton's current market value and stock price have shrunk by nearly 80% compared with their peak, and the situation has become quite grim.
From this point of view, Peloton's search for a giant takeover is actually not surprising.
First, there is the decline in performance and the widening amount of losses.
According to the first quarter of fiscal 2022 released in November last year, Peloton's total revenue was $805 million, which recorded a 6% year-on-year increase, but it did not perform as well as the market expected $809 million. In addition, its sales in the first quarter increased by 6% year-on-year, much lower than 230% in the same period last fiscal year, and the gross margin of 32% was also lower than the market expectation of 34%.
From the growth curve, Peloton's revenue growth rate has slowed down for many consecutive quarters, seriously dampening investor confidence. Peloton's total quarterly revenue fell for three consecutive quarters and fell to the lowest point in the past four quarters, following revenue of $1.065 billion, $1.262 billion and $937 million, respectively. At the same time, its net loss further amplified to $376 million and operating cash flow fell to -$561 million, making its financial position worrying.
Secondly, due to the decline in the reputation of core products such as treadmills, Peloton's user growth has become more and more difficult, which has brought a severe test to its long-term development.
In March last year, Peloton's Tread tread machine was killed when an 8-year-old child was in use due to design flaws such as the height of the treadmill and the excessive gap between the running belt and the ground. Subsequently, the U.S. Consumer Product Safety Commission issued a statement saying that the product would cause serious abrasions, fractures and other risks to children, requiring child consumers to stop using the product immediately.
In the face of this emergency, Peloton crisis public relations response is unfavorable, after being criticized by many media and consumer protection organizations, it announced the recall of 125,000 treadmills, which can no longer save the collapsed reputation. According to the financial report data, hardware products have contributed nearly 80% of revenue in the past few quarters. It can be imagined how serious the impact of the treadmill as the main product will have on Peloton due to the word-of-mouth crisis.
(Image from Peloton earnings report)
Back to the question we asked at the beginning: from Peloton's point of view, its own business is at a low ebb, and seeking to take over from the giants is certainly a way to look forward to; but for Nike and Amazon, where exactly is Peloton attracting them?
The Institute of Values believes that it can be understood from two perspectives.
On the one hand, Peloton's main business occupies a place in the development planning of Amazon and Nike, and the inclusion of the former is an important way to enhance its own strength and weaken its opponents.
Nike's interest in Peloton is easy to understand: as a sports brand, there is a certain overlap in the target customer base of the two sides, and the purchase of Peloton can also strengthen Nike's technology attributes and provide support for its transformation plan from mass consumption to technology consumption.
More importantly, Peloton is deeply loved by Generation Z, and this group of young people is also the most needed gold lords for Nike. According to a survey conducted last year by data agency Evercore ISI, Peloton is the most popular sports and fitness brand among 24- and 36-year-olds in the United States, and it is popular among younger consumers.
As for Amazon, according to the Wall Street Journal, it is also looking at the user resources behind Peloton. Peloton has nearly 6 million member users, and the relevant user data is a valuable asset for Amazon that wants to enter the health/fitness industry. Previously, Amazon has launched its own fitness tracking device, the Amazon Halo, showing ambition for the market.
On the other hand, despite the current low tide, Peloton's prospects are still worth looking forward to: the combination of software and hardware ecology is the biggest feature of Peloton, and it is also the secret to support its rapid rise in a short period of time. And this is also an advantage that is worth learning from peers.
What does "Netflix in fitness" teach us?
From its inception to the IPO in just seven years, Peloton has many outstanding points, the most important point is to adhere to the software and hardware integration development model. In terms of specific business, the Value Institute believes that rising stars such as Keep, Gollum, and Yue Run Circle should learn two things from Peloto: increasing the added value of hardware products through content subscription services, and maximizing user retention.
First of all, Peloton attaches great importance to the integration and development of hardware and software business, creating its own fitness closed loop: that is, using hardware such as treadmills and fitness bicycles as the carrier, by providing content subscription services to users while expanding revenue sources and improving user stickiness.
Friends familiar with Peloton should know that in the mouths of social platforms and departmental media, the platform has a resounding nickname: Netflix in the fitness world.
For the origin of this title and Peloton's business model, its founder John Foley once made a detailed interpretation:
"Peloton's ultimate positioning is to create a digital interactive fitness platform, so that hardware and software can develop together, provide users with fitness consumption content, so that users can experience the joy of fitness without time and space restrictions."
For the streaming giant Netflix, which has launched hit series and movies such as "Squid Games", "The Crown", "Love, Death and Robots", "The Irishman", I believe that everyone will not be unfamiliar with it - insisting on high-quality content-based and driving user growth is the magic weapon for its rapid rise in recent years.
The data shows that since 2011, Netflix has invested more in content creation than the technical side, and it has been out of control ever since. Between 2017 and 2018, Netflix spent far more on movies and TV shows than revenue, spending nearly $13 billion on original content alone in 2018, producing 82 home-made movies, and its biggest competitor, HBO, spent just $2.5 billion over the same period. Wall Street investment bank Goldman Sachs expects Netflix to spend more than $22.5 billion on content production in 2022 — a figure that exceeds the combined investment in the United States for networking and cable television.
Similar to Netflix, Peloton is also taking the path of content as king; but according to the Value Institute, unlike Netflix's content production strategy at any cost, Peloton is more rational and targeted in content development, mainly following two key words: richness and interactivity.
On the one hand, since its launch, Peloton has been expanding its course library to reach more user groups and increase the proportion of subscriptions. Especially since the IPO in 2019, more than 10 categories of courses, including cycling, running, yoga and aerobics, have brought gratifying revenue increases.
On the other hand, Peloton is also very interactive and interesting in curriculum development:
For example, it cost a lot of money to buy the music copyright of British, Lil Wayne and other people in the European and American music scene as a course BGM, and also reached a content cooperation agreement with Sony, Universal, and Warner; for example, to create a personal IP of fitness course instructors, recruit high-quality fitness bloggers around the world to join the creative team, and even provide users with personalized subscription services.
A sufficiently rich and interesting curriculum will naturally attract more attention than boring training videos.
(Image from Peloton's official website)
Second, high user retention and user stickiness are also the keys to Peloton's success.
Previously, industry insiders, including JPMorgan Chase, Blackstone and other institutional analysts, believed that the reason why Peloton's stock price and market value collapsed in 2021, in addition to the aforementioned treadmill word-of-mouth crisis, the influx of new users after the outbreak of the epidemic pulled down the overall user stickiness, and the surge in content subscription service revenue brought by new users could not be continued, resulting in a large gap between the company's financial performance and market expectations, which was also an important factor inducing selling.
But aside from the early adopters brought about by the epidemic, Peloton's core user base is actually quite loyal and can also bring stable income to the platform. According to Peloton's historical financial reports, before the outbreak of the epidemic in 2019, its user retention rate remained above 95% for a long time, and this part of the users was also peloton's core user group.
In the view of the Value Institute, the reason why Peloton can harvest a large number of loyal users in the early stage has a lot to do with its own "addictive" service system.
For example, the badge system and achievement system, which are currently widely used by fitness apps such as Huawei Sports health, were first carried forward by Peloton.
To achieve a certain fitness effect and accumulate a certain amount of fitness time, you can get the corresponding badge and unlock related achievements, which not only enhances the interaction effect, but also improves the user's sense of achievement. In a way, collecting badges on the Peloton platform, like competing for bubble mart blind boxes, Lego bricks and other trendy play, all have their own addictive attributes, making Generation Z very popular.
In addition, the high price of fitness hardware, and the high sunk costs that come with it, are also important weapons for retaining customers.
When Internet fitness platforms such as Keep develop content subscription business, the biggest problem encountered is that the "cost of breaking contracts" for online users is too low.
Offline gyms all adopt the membership annual fee recharge model, and the number of annual fees is a big number for most users. Ideas such as "go a few more times to get back to the cost" and "not doing a card is equivalent to being cut leeks" are important factors that support many users with insufficient self-control to run to the gym. According to the information on the official website, the average price of Peloton's two main products, treadmill and spinning bike, is $4,000 and $2,000 respectively, and the price is definitely not low, which brings users similar to the "return pressure" of the gym annual card.
We can compare a set of data: according to the statistics of the Three-Body Cloud Data Center, the average price of the national fitness membership card in 2020 is 1258.6 yuan, and the annual price of the annual card in first-tier cities such as Beijing, Shanghai, Guangzhou, and Shenzhen can reach more than 2100 yuan. But compared to Peloton's thousands of dollars of treadmills and spinning bikes, that number is a no-brainer.
(Image from Trisomy Cloud Data Center)
However, the bitter lessons of the past year tell us that while the Peloton model has its merits, it also has its shortcomings.
Peloton's Waterloo reflects the dilemma of Internet fitness
In the view of the Value Institute, the quality control of fitness hardware products, supply chain management, excessive marketing and sales expenditure, and bottlenecks encountered in user growth are all problems that Peloton and other online fitness platforms cannot avoid.
For Keep, which was rumored to be in Hong Kong in November last year, as well as emerging fitness platforms such as FITURE and BalanX, which are constantly seeking financing, it is necessary to learn from Peloton's successful experience and learn from its current predicament.
Take the combination of software and hardware development model as an example: If platforms such as Keep and FITURE want to stand on the shoulders of Peloton and achieve greater success, they must at least solve the two major problems of supply chain and quality control.
Especially in the management of the supply chain, Peloton felt heavy pressure as early as the beginning of last year.
John Foley mentioned the issue of product delays in delivery on both the first and second quarter of fiscal 2021 earnings calls. At the end of the day, the core of the problem is a lack of control over the supply chain: the extended navigation period at the port of Los Angeles and the decline in the production efficiency of the foundry caused by the epidemic have had a great impact on Peroton's production line.
It's worth noting that in addition to delayed deliveries, tighter supply chains can lead to another terrible outcome: price increases. Since entering 2022, Peloton has announced that it has raised the price of some fitness products in the United States, The United Kingdom, Germany and Australia. Among them, the latest Bike+ will charge an additional shipping and installation fee of $250 in the United States, while the content subscription fee will remain at $39.99/ month.
As for quality control, before the outbreak of the treadmill reputation crisis mentioned above, Peloton was already a leader in the industry, compared with keep and other peers.
The Institute of Value said in the previous article "300 million young people who "pick up iron" can afford to support the $2 billion Keep", although Keep also intends to increase the development of hardware products, but whether it is the richness of product categories, market share or product quality, there is still a lot of room for improvement.
As long as you look at social platforms such as Zhihu, Little Red Book or Weibo, you will see more bad reviews about keep mall products: in the problem of keep mall product quality, some users complain that the quality control of the foam shaft is too poor, the packaging box is seriously damaged, and the scraps are not cleaned; some users think that although the quality of Keep's explosive yoga mat is not bad, but the supporting services are not complete enough, and even there is no packaging bag; of course, many users are dissatisfied with Keep's poor after-sales service.
You know, Keep's current main production and sales are only yoga mats, training clothes and other lightweight products. If you want to think of Peloton and cut into the high-end product market such as treadmills, spinning bikes, and fitness mirrors, the pressure on quality control and supply chain management will be further enhanced.
(Image from Zhihu)
So how do you break through these dilemmas?
Peloton has tried quite a bit. In the past year, Peloton has invested more than $100 million in the upstream and downstream supply chains, trying to build a supply + production system with a higher degree of autonomy and stronger quality control; in addition, Peloton has also strengthened the construction of warehousing, distribution, after-sales and other teams, and its distribution staff has exceeded 2,000, and the number of warehouses in the United States has reached nearly 50, nearly double that of a year ago.
The construction of the production chain is a long process, and we may need to have more patience with Peloton, and the same is true for peers such as Keep. After all, the penetration rate of online fitness is not high, and there is still a lot of room for growth in the future.
According to GWI statistics, the size of the fitness industry will maintain a growth rate of 6.6% during 2018-2022, and the US, China and European markets will be the main growth engines. And since the outbreak of the epidemic in 2019, the number of active users and penetration rates of sports and fitness APP have accelerated. According to the statistics of Ai Media Consulting, the penetration rate of China's fitness population in 2020 is only 5.02%, which is higher than the level of more than 14% in the United States, britain, Germany and other countries, and there is still a lot of potential.
All in all, the Growth Space of the Internet Fitness Market is still there, and Peloton and Keep still have time to make up for their own shortcomings and catch up with the pace of market development.
Write at the end
John Foley, who may not know it, was the head of digital marketing at Barnes & Noble, an American bookstore chain, before starting his business, promoting the company's e-book reader, The Nook, whose biggest competitor was Amazon's Kindle.
Although John Foley and his team quickly lost under Amazon's strong branding and marketing offensive, this experience has inspired the latter. When talking about his entrepreneurial experience a few years later, John Foley once described the impact of this work experience on himself:
"The business model of e-books is ostensibly to sell hardware, but in fact, it wants consumers to consume content at any time, so can this model also be used in the fitness field?"
At that time, John Foley, who did not understand fitness or technology, successfully created Peloton, a popular super Internet celebrity platform, with his excellent sense of business smell.
Now, the red line of fate may once again tie John Foley to Amazon.
Although we don't know who Amazon and Nike will spend a lot of money to win Peloton, and it is difficult to determine the impact of this potential acquisition on these companies, it is certain that Peloton has many advantages that are worth learning from peers, and there are also characteristics that attract the attention of giants, and we can definitely expect its prospects.