"Fitness world Netflix" life and death

Economic Observer reporter Huang Yifan, known as the star company Peloton of the "fitness industry Netflix", once earned enough eyeballs in the capital market.

Shortly after its listing in 2019, it experienced a break, but under the wave of home caused by the epidemic in 2020, the stock price of the American company that focuses on home fitness soared. In a year, the price per share soared from $17.70 to a maximum of $167.37, an annual increase of more than 4 times. Peloton's market performance has also spurred the growth of the domestic home fitness track.

However, in 2021, Peloton's stock price has experienced a roller coaster, and its market value has fallen from a peak of $56.7 billion at the beginning of the year to the current $10.1 billion, a decline of more than 80%. Compared with the peak, Peloton's market value will evaporate by nearly $45 billion (a total of about 290 billion yuan) in 2021.

Today's Peloton is living and dying: poor performance, stock prices plummeting, layoffs, top executive resignations, and rumors of selling themselves.

On February 17, Peloton's directors and executives bought a net of 29,400 shares of the company's stock, but they still failed to save the day's stock price.

The spate of bearish news has led to a gradual loss of confidence in the sustainability of the Pelo-ton business model, and this concern has also spread to domestic institutional investors. In the past two years, many "rookies" such as KEEP have also emerged in the domestic home fitness track.

Some market views believe that Peloton hardware, content, services have done very well, the United States is also the most developed country in the global sports and fitness industry, but when the epidemic dividend disappears, the slowdown in user growth is inevitable, Peloton is in trouble to prove that there is a logical problem in the home fitness track.

But an interesting phenomenon is that in the past two weeks, two home fitness U.S. companies have completed tens of millions of dollars in financing. That means U.S. investors remain confident about the new fitness track. "The reason for Peloton's current failure is more due to the previous lap-breaking failure, and the management's misjudgment of the situation is not a problem of the track." A person in charge of a domestic VC agency told reporters.

Due to the abnormal growth of the epidemic, challenges continue to exist

According to media reports, Peloton co-founder John Foley was the head of digital marketing at Barnes & Noble, a U.S. bookstore chain, before starting its own business, when their competitor was Amazon. Their e-book reader, Nook, quickly lost the battle against Amazon's Kindle.

But this failed experience inspired John Foley, the business model of e-books is to sell hardware, but in fact, consumers can consume content at any time, whether this model can also be applied to the fitness field.

Thus, Peloton was born.

From the perspective of business model, Peloton is "content + intelligent hardware". In terms of hardware, it is mainly designed, manufactured and sold bicycles and treadmills. In terms of content, Peloton has developed an app to introduce users with a fitness class subscription service, which members need to spend $39 per month with a bicycle or treadmill.

Zhu Haibin, an analyst at Essence Securities, believes that Peloton's rapid development is inseparable from the characteristic business model it has established.

In September 2019, Peloton was officially listed on the NASDAQ with an issue price of $29, which is regarded as the "first stock listed on smart fitness". But within a week of going public, Peloton's market value evaporated by nearly $1.8 billion.

The COVID-19 pandemic in 2020 and the closure of a large number of gyms have brought Peloton to life, and Pelo-ton's products allow consumers to enjoy sports at home without leaving their homes.

Peloton's fourth-quarter 2020 earnings report showed revenue of $607.1 million, up 172% year-over-year and 24% higher than expected after the company's IPO. It was the first profitable quarter in Peloton's history. Still, Peloton's stock price has now evaporated nearly $45 billion. "The situation in Peloton is very serious at the moment." An investor in Peloton told reporters. Judging from the single-quarter performance, Peloton's revenue growth rate has declined significantly year-on-year.

Wind shows that in 2021, Peloton's first quarter financial revenue growth rate was 232% year-on-year, and in the following quarters, it declined all the way, 128%, 141%, 54%, and 6%, respectively. In the latest second quarter 2022 report, the company's net loss was $439 million.

The roof leaked during the overnight rain. On February 8 this year, Peloton announced that the company will reduce about 2,800 jobs worldwide, with a layoff ratio of about 20%. There are also rumors that Pelo-ton's flagship treadmill "Tread" will be discontinued for a period of time and will not produce more expensive "Tread+" in fiscal 2022 (as of the first half of 2022).

Peloton's fiscal 2022 second-quarter earnings report coincided with an official announcement of a personnel change in which former CEO John Foley resigned as executive chairman; successor CEO and president Barry McCarthy was the CFO of music software Spotify and video brand Netflix.

Strategic mistakes are frequent

Shortly before Peloton announced the personnel changes, activist investor Blackwells suggested that the company fire its CEO and CFO.

In its report, Blackwells acknowledged that Peloton's high-quality, smartly designed products were at the heart of the home gym. Peloton's current underperformance stems from mismanagement.

Blackwells argued that CEO John Fo-ley lacked competence and qualifications; in addition, the company lacked financial discipline and ineffective internal controls. A significant reason why Blackwells asked for a change of management was also that it believed Thatley's interests and incentives were misplaced with employees and shareholders. "Peloton's market space is very large, and its own problems have also been stimulated by the epidemic, resulting in the current crisis." Le Bing, CEO of a domestic home fitness track company, told reporters that the epidemic has stimulated peloton's growth and reached the penetration rate target ahead of schedule, and the problem is that the management and capital market mistakenly believe that peloton's penetration rate in the field of spinning bicycles means that the time has come to break the circle and can continue to penetrate the remaining 80% of the home fitness market.

"In fact, Peloton reached its penetration target ahead of schedule in the segment, and it cannot be expected that the company's number of customers in other segments will continue to grow in the future." But management is clearly optimistic about the phenomenon. Le Bing said.

According to the data, Peloton currently has two product lines in terms of smart fitness equipment. Among them, the BIKE line is a smart spinning bike, and the Tread line is a smart treadmill.

In 2020, Peloton mainly updated and upgraded two smart fitness devices in terms of products. However, Peloton's Tread tread machine suffered a risk event.

In March 2021, the Tread treadmill was tragically killed while 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.

Peloton was overwhelmed by the emergency and announced a recall of 125,000 treadmills worldwide only months later.

In addition to Tread, compared to the BIKE product launched in 2014, THE BIKE+ launched in 2020 mainly supplements aerobic exercise with strength, yoga and other means through a dynamic rotating screen to allow buyers to enter the sports world outside the bicycle. But its sales are not ideal. Peloton's later treadmills were unsuccessful and wanted to break the circle with a bicycle. But the updated product is only the screen can be turned around, this product form does not make much sense. Can't interact, product power has a core problem. This means that there is no difference between the product and the iPad movement. The above-mentioned investor told reporters, "There is a problem with the idea of obtaining non-bicycle users through the screen." Users who run don't watch videos while exercising, but instead enjoy the process with hearing rather than vision. In addition, running is generally one person, cycling is a team, there is competition with each other. That makes Peloton's model of getting a monthly subscription fee through a treadmill untenable. There are no running venues offline, and no one will pay for running. ”

However, after Peloton changed management, the capital market responded positively to the company, and in addition to the recovery in stock prices, several well-known investment companies also opened positions in the stock or increased their existing positions.

Analysts point out that new CEO Barry McCarthy, whose resume includes CFO of Netflix and Spoti-fy, has successfully helped the two companies go public. Finance is his specialty, which is very important for Peloton, who has been unprofitable and has a huge cash flow consumption.

Le Bing also believes that the most urgent thing in front of Barry McCarthy is financial grooming. "Peloton's inventory turnover days have increased significantly, from 87 days before the epidemic to 172 days after the epidemic, which means that the company's product turnover has a very serious problem. In addition, the company employed 2,700 people before the epidemic, rose to 14,000 after the epidemic, which had a great impact on cash flow, and then spent $400 million to acquire fitness equipment manufacturer Precor. A lot of money has been lost, resulting in the current cash flow pressure on Peloton is very large, and what needs to be done now is to bring down the inventory. ”

Whether the track logic is falsified or not

Many people conclude from the peoton model's woes that there is a problem with the logic of the home fitness track. However, the reporter flipped through the information and found that in the past two weeks, 2 companies have completed tens of millions of dollars in financing.

On Feb. 7, Fitt and GQ reported that Future, a San Francisco-based digital fitness coaching service company, received $75 million in Series C funding. On Feb. 16, digital fitness and wellness company FitOn announced that it had raised $40 million in Series C funding, led by Delta-vCapital, according to Techcrunch.

This means that, in reality, the US capital circle has not formed a consensus view on the home fitness track. "Numerically, the structure of the fitness market in China and the United States is similar and very different." A domestic institutional investor said.

According to the three types of market segments of the fitness population, the data shows that the number of people in the entire U.S. fitness market is about 150 million people. The number of fitness app users in the United States is 80 million, accounting for 1% of the market value. This type of people uses fitness videos such as video websites to work out; the second type of gym users is 50 million people, providing about 40% of the value of the entire fitness market; the third type of users in the gym for additional fees, that is, the number of people participating in personal training and group classes is 30 million, and this part of the population has obtained 60% of the entire market value.

Correspondingly, the data shows that China's app fitness users are about 300 million people, accounting for 10% of the market value. The gym has about 30 million users, accounting for about 20% of the market value. There are about 40 million people at the additional cost, accounting for nearly 80% of the entire market value. "The entire fitness group is the head market, a small number of people provide most of the value, so fitness users pay great attention to the experience, highly customized, accompanied, real-time interaction, high value of the customer list, customers want to get a better experience to spend more money." Said the above investor.

It is worth noting that "what Peloton does is to bring the offline fitness experience to the home in the form of network and data." There are many fitness categories, such as yoga, running, etc., and the fitness volume of cycling is about 20% of the total gym's additional user, that is, about 5 million people. The above-mentioned investors said that Peloton is targeting this part of the group. The current result is that Peloton has been very successful in doing this, with about 5 million paid users riding bicycles in the entire United States, while the company's users have reached nearly 3 million, with a penetration rate of 60%, which proves the success of the business model. "But the problem with Peloton is that the pandemic has allowed the company to reach the penetration rate of U.S. bicycle users, and it is very difficult to grow again." The person pointed out that there is a difference between the domestic market itself and the US market, "the bicycle market accounts for only 1% of the Chinese market, Chinese does not use the bicycle as a fitness tool, but a means of transportation." Most Chinese people prefer group exercises, yoga, Pilates, and the fitness scenes and needs are more diverse and complex. ”

He said that the new fitness track belonging to China still has optimistic prospects, and the development space left for the companies on the track is still worth looking forward to.

(Notary of the Lebing Department)