1. Read the case.
2. Identify the problem that management needs to solve.
   1. What priority decision needs to be made?
   2. Make sure you describe the nature of the problem and why it is important.
   3. What impact will this decision have on the organization and other stakeholders?

PELETON CASE STUDY

PelotoninteractiveInc.:connectingtofitnessathome

Following the May 24, 2021, announcement that Peloton Interactive, Inc. (Peloton) intended to build its first US factory, investors were analyzing the long-term implications for Peloton's financial performance.2 The new factory in Ohio would be in addition to the company's investments in its manufacturing facility in Taiwan and the purchase of fitness equipment manufacturer Precor Incorporated (Precor).3

At the time of the announcement of the new factory in Ohio, also referred to as Peloton Output Park, Peloton's chief executive officer and co-founder, John Foley, said, "While we will continue to invest in our Asian manufacturing footprint as well as our existing facilities in the U.S. via our Precor sites, the new Peloton Output Park gives us a massive strategic lever to make sure we have capacity, quality, and economies of scale in our bike and tread product lines, to support our continued growth for years and years to come."4

Peloton had experienced impressive growth in the last few years, but investors had been left to determine whether vertical integration would limit or enhance the company's future success. Would Peloton's plans to build its own fitness equipment in Ohio help or hinder its ability to fulfill its goal of market leadership?

FITNESSREVOLUTION/INDUSTRY

Spurred by public health initiatives that highlighted the role of exercise in preventing diabetes, obesity, and other health issues, the US fitness market prospered from 2016 to 2021.5 Increasingly active baby boomers and a bump in per capita disposable income during that time also contributed to the industry's growth. Easy access to smaller gyms with fewer amenities bolstered niche establishments and attracted budget-conscious consumers.6 The number of people who purchased gym memberships had increased to 64.2 million by 2019.7

Despite the industry's success, the COVID-19 pandemic hit the fitness industry hard. Some gyms were forced into bankruptcy: Gold's Gym International Inc. filed for bankruptcy in May 2020; 24 Hour Fitness USA Inc., in June 2020; and Town Sports International Holdings Inc., in September 2020.8 Despite the bankruptcies and a decline in revenues of 13.2 per cent in 2020 alone, industry revenue grew to $32.5 billion9 over the five years to 2020.10 The number of fitness establishments stood at 106,213 locations by 2020.11 While US states had eased pandemic-related restrictions by the summer of 2020, the industry was uncertain about whether gym members would return.12

The United States dominated the global fitness markets in 2018. The US market stood at $37 billion, the United Kingdom at $6.3 billion, Germany at $6.1 billion, and Canada at $3.5 billion (see Exhibit 1).13

Globally, the physical activity market, which included mindful movement (focusing attention on the body and breathing during exercise), sports and active recreation, technology, equipment and supplies, apparel, and footwear, was forecasted to achieve at least a 5 per cent annual growth from $828 billion in 2019 to

$1.1 trillion by 2023 (see Exhibit 2).14

INTERACTIVEFITNESSMARKET

A focus on fitness and healthy lifestyles, combined with the global pandemic and work-from-home requirements, sparked the growth of at-home workouts and the evolution of interactive devices that replicated the gym experience.15 The traditional gym was facing a host of new competitors offering interactive, at-home fitness options, as well as the revival of some more established brands.16

The size of the global online/virtual fitness market was estimated at nearly $6 billion in 2019; this grew to approximately $8 billion in 2020.17

NEWCOMPETITORS

Echelon Fitness Multimedia LLC

The privately owned Echelon Fitness Multimedia LLC (Echelon) offered a range of connected exercise platforms, including bikes.18 The company provided live-streamed and on-demand fitness classes through its FitPass program.19 Priced lower than Peloton, Echelon products were carried by retailers such as Walmart, Best Buy, Amazon, Target, and Costco.20

Tonal

Also privately owned, Tonal combined digital weight with artificial intelligence to replicate the weight- training experience. In March 2021, Tonal received $250 million in new funding, bringing the value of the business to $1.6 billion. Tonal also announced a nationwide partnership with Nordstrom, Inc. across 40 locations 21 and saw a 700 per cent year-over-year increase in sales in 2020.22 However, its popularity brought supply chain and logistics issues, prompting its chief executive officer, Aly Orady, to announce in a video interview that Tonal had make a redundant supply system to meet delivery goals.23

OTHERCOMPETITORS

Mirror Fitness

Mirror Fitness (Mirror) launched its interactive reflective display in 2016 24 and was purchased by Lululemon Athletica Inc. in 2020.25 Mirror's full-length reflective display was chosen as one of the best inventions of 2018 by Time magazine.26 The platform streamed live and on-demand workout classes costing $39 a month (customers had to purchase twelve-month subscriptions). A more personalized training session cost $40.27

Tempo Interactive Inc.,

Tempo Interactive Inc., (Tempo) was a connected home gym that provided instant feedback on a user's form.28 For $39 a month, Tempo subscribers had access to live and on-demand strength training, including high intensity interval training (HIIT),29 mobility, cardio, and recovery classes.30

OLDCONVERTS

NordicTrack

NordicTrack began in 1975 with the NordicTrack skier and quickly grew to encompass dozens of models. In the late 1990s, NordicTrack expanded its fitness brand to include treadmills, incline trainers, strength machines, stationary bikes, steppers, and apparel. NordicTrack was purchased in 1998 by iFIT Health & Fitness Inc., formerly known as ICON Health & Fitness, the world's largest manufacturer of exercise equipment.31 Its interactive fitness streaming platform, iFIT, was available on NordicTrack treadmills, incline trainers, rowers, cycles, and strength products. iFIT Health & Fitness Inc. was valued at $7 billion and planned an initial public offering for fall 2021.32

Bowflex

Popular in the 1990s, Bowflex, owned by publicly traded Nautilus, Inc., introduced an indoor cycling bike in October 2019.33 The model featured a low-cost connected experience with trainer-led workouts and entertainment options.34 Membership was $199.99 annually or $29.99 monthly.35 All Nautilus, Inc. products were produced by third-party manufacturers located primarily in Asia (see Exhibit 3).36

(A summary of the various connected fitness products offered by Peloton's competition can be found in Exhibit 4.)).

PELOTON:GROWTH

Peloton essentially created a new category of fitness in 2014 when it combined exercise, fitness tracking, and entertainment on its new bike,37 and its popularity was overwhelming. In 2017, Noah Wintroub, a vice- chair at JPMorgan Chase & Co., described Peloton as "the Apple of fitness."38 Bloomberg columnist Kyle Stock described Peloton as follows: "Peloton is as much a media company or a software play as it is a gym or equipment maker."39

Peloton's sales growth during the pandemic in 2020 and early 2021 led to greater success and a loyal following. The company reported revenue of $758 million at the end of 2020, a 232 per cent increase from the same period the previous year (see Exhibit 5). Peloton's stock also increased during that time by more than 400 per cent. Annual revenue had increased 100 per cent each year from 2015 to 2020.40

The company's expansion continued into the third quarter of fiscal year (FY) 2021. Total revenue increased 141 per cent, from $524.6 million to more than $1.26 billion, with revenue from connected fitness products accounting for more than $1.02 billion. Revenue from subscriptions increased to $239 million from $98.2 million.41

Total fitness subscriptions reached 2.08 million with an average net monthly connected fitness churn of 0.31 per cent. In the third quarter of FY 2021, connected fitness subscription workouts grew 239 per cent to more than 149.5 million, with an average of twenty-six monthly workouts per subscription (see Exhibit 6).42

Brad Olson, chief membership officer, commented on the benefit brought about for Peloton from the pandemic: "We certainly want the world to get back to normal, just like everyone else," he said. "We do believe that the pandemic has compelled consumers to re-evaluate their fitness routines, and many have discovered that the best, most connected workout can actually be experienced at home."43

July 2020 data from Peloton showed its US total addressable market continuing to expand. Peloton's total addressable market was described as households "that may or may not be interested in purchasing a Peloton product today but could be interested in the future." The market comprised an estimated seventy-five million of a total demographic of ninety-five million households aged eighteen to seventy with $50,000 or more in household income (see Exhibit 7).44 The twenty-five to thirty-four age group was the company's fastest growing market (see Exhibit 8).

Peloton had also solved one of the biggest downsides of working out at home by creating a deep and loyal community. In an interview with Business Insider, Jason Kelly, the author of Sweat Equity, explained, "They [Peloton] have managed to use technology to create a sense of community, so people feel like they are part of something. They get both the convenience and the social aspect."45

VERTICALINTEGRATION

Though Peloton sales soared during the pandemic and market demographics looked solid for its future, the company could not keep up with demand and experienced long delays in delivery and frustrated customers. As a result, Peloton made a series of strategic moves to shorten delays and to achieve its goal of being the scale, cost, quality, and speed-to-market leader in the connected fitness market.46 Peloton viewed its vertical integration and direct-to-consumer capabilities as a competitive advantage.47

In September 2020, Peloton invested in automation and added capacity to its Shin Ji production factory in Taiwan, expanding to 1.5 million units per year.48

In December 2020, Peloton announced a plan to increase its two-year old Plano, Texas, campus by more than 9,000 square metres (100,000 square feet), to allow an expansion to member support, sales, field operations, and corporate functions.49

In its December 2020 quarterly report, Peloton announced "significant additional investments in the near term" to shorten delays, despite the repercussions of this for its near-term profitability.50

In a February 2021 blog post, Foley wrote, "Effective immediately, we are investing over $100 million to help expedite the movement of Bikes and Treads globally, in order to meet our delivery commitments. On average, in the coming months, we will be incurring a transportation and delivery costthat is over ten times our usual cost per Bike and Tread, including, in many cases, shipping them by air instead of by sea."51

Peloton continued to build its US manufacturing base, announcing in December 2020 that it was to acquire US-based Precor, one of the largest global commercial fitness equipment providers, in a transaction valued at $420 million.52 Precor markets included commercial clubs and facilities, and the verticals of hospitality, multi-family housing, corporate, and education. The deal was completed in April 2021 and enabled Peloton to establish its US manufacturing capacity, boost research and development capabilities, and accelerate its penetration of the commercial market.53

With Precor's added manufacturing capacity of approximately 58,000 square metres (625,000 square feet), Peloton planned to produce connected fitness products in the United States by year-end 2021.54 Peloton's supply issues, however, would be addressed in the short term by supply chain investments with its third- party manufacturers and Taiwan facilities.55

Finally, in May 2021, Peloton announced its plans to build its first US factory, in Ohio, at an estimated cost of $400 million. Production of the Peloton Bike, Bike+, and Peloton Tread were planned for the facility, starting in 2023. With the addition of the Ohio factory, Peloton would own or lease more than 139,000 square metres (1.5 million square feet) of manufacturing space in the United States, including the Precor facilities in North Carolina and Washington state.56

CONCLUSION

Peloton's goal of becoming the scale, cost, quality, and speed-to-market leader in the connected fitness market drove its supply chain decisions.57 But could it maintain a leadership position on multiple fronts, or was the organization vulnerable in a highly competitive market? And would Peloton's plans to build its own fitness equipment in Ohio help or hinder its ability to fulfill its goal of market leadership?