This is an excerpt from Thursday’s Point of Sale retail supply chain newsletter.
In early November, mounting delays for Peloton exercise equipment led me to title the second Point of Sale edition ‘Can Peloton avoid disaster this season?’. At that time, there were rumblings from restless customers and estimated shipping times of four to six weeks, more than double PTON’s “normal” (pre-COVID) window of two weeks. Now, it’s no longer rumblings but rampage and not four weeks, but 10. The answer to ‘Can Peloton avoid disaster?’ is a resounding NO.
The past 12 to 18 months have been nothing short of spectacular for Peloton. It has cemented itself as a prominent fitness brand with a base of fiercely loyal customers while growing revenues 233% yoy in Q3. But the company has outkicked its coverage and capped potential growth due to its supply chain constraints and lack of visibility.
Over the summer, even as wait times ballooned, Peloton continued marketing and taking orders. When the colder weather of Autumn arrived and COVID infections picked up, orders for Peloton bikes soared, but the company couldn’t keep up. Management placed blame for the delays on congestion at the Port of Los Angeles (Peloton must not be on Gene Seroka’s nice list).
It is warranted blame though. The Port of Los Angeles is nothing short of epic chaos. There are 45 vessels awaiting berth in the San Pedro Bay. Every single port and anchorage space in both LA and Long Beach are currently occupied and 6 of the 10 contingency anchorages in Huntington Beach are being utilized by ships calling LA. And demand isn’t even the biggest problem. The port is down approximately 1,800 workers due to COVID.
More recently, Peloton has shifted its blame to its transportation providers, namely final mile partners XPO and JB Hunt, which deliver and set up the vast majority of Peloton bikes. The recent customer complaints have followed a similar pattern: customers make an order and are given an accommodating delivery window of 3 – 10 weeks. But on delivery day, Peloton either suddenly reschedules or never shows. And the eleventh-hour delays are typically a matter of weeks, not days.
What’s worse still is that many customers have reported they began making payments during the time between purchase and delivery. It’s not like Americans haven’t gotten accustomed to shortages at stores, or haven’t had packages delayed this year. It’s that these bikes cost $2,500+, the company continues to take orders and present delivery dates it knows it can’t meet, plays the blame game when the inevitable occurs, and is taking payments before delivery!
Recent survey data from Convey suggests 1-in-5 customers do not trust estimated delivery times from retailers, but 80% said they were willing to give retailers more time to deliver items due to COVID.
“Consumers don’t want speed, they want certainty,” Satish Jindel, President of ShipMatrix told me in a recent interview regarding rapid delivery times for online purchases. Customers aren’t upset about the long delivery times. If that was the case, Peloton would have met its demise months ago. Customers are upset because they feel they are being deceived by unattainable delivery dates and last-minute delays.
This is much bigger than a P.R. problem. Peloton customer service representatives have pointed to its transportation providers to escape the wrath of angry purchasers, but the average customer is not in the freight industry. The average customer associates transportation with the retailer, not the logistics provider. Remember, it’s an Amazon package, not a UPS package. The residential customer can’t fire XPO over a bad delivery experience, but they can easily fire Peloton.
Although Peloton has grown faster than Amanda Gorman’s Twitter following, it has no time to waste and little room for error.
“We are in that home fitness race to grab member base,” Simeon Siegel, a retail analyst at BMO Capital Markets, told the New York Times. “That’s versus competition, that’s versus the weather, that’s versus the vaccine, and there’s absolutely a push to lock in members at all costs.”
Peloton has been one of the biggest beneficiaries of COVID-induced lockdowns and social distancing. Gyms remained closed in many states for much of 2020, and those that are open are subject to strict social distancing and mask guidelines.
But it’s a matter of time. The vaccine rollout has not met the ambitious goals set at the beginning of December, but most stakeholders believe the pace is beginning to accelerate. Vaccines are coming and with them they bring the possibility of normalcy. For millions of Americans, that means weekly dedicated gym time. Peloton is fighting like hell to secure a spot in people’s everyday lives before that return occurs. And that spot is VERY lucrative.
Peloton estimates its lifetime value (LTV) per connected fitness subscriber to be north of $3,500. But that number may be understated because it does not account for hardware upgrades.
In the Q3 earnings call, management detailed how current customers are treating the company’s newest product, Bike+. Peloton offers a trade-in program for customers who want to upgrade their offering, with the idea being you only need one bike per household. However, Peloton has found that a “disproportionate number” of existing customers who upgraded to the Bike+ have kept their old hardware. Peloton’s $39/month membership allows unlimited content
across 1 Bike and 1 Tread per household. Therefore, two of the same products in a household (i.e. two Bikes or two Treads) would require two separate memberships for content access on both devices. CHA-CHING.
So it’s fair to say that each customer that cancels due to last minute delays or decides to go with a (typically much cheaper) competitor, is ridiculously costly to Peloton. CEO John Foley wrote a blog post in November thanking fans and apologizing for delays. “It pains us that we have fallen short,” Mr. Foley wrote (yeah, no kidding). “We can and will do better.”
What is Peloton doing to be better? Foley noted they’ve been leveraging and will continue to leverage other modes of transportation, including air freight, to alleviate some of the delays. This expedited service didn’t come without incremental costs – CFO, Jill Woodworth cited air freight costs as the main gross margin compressor in Q3. Inbound air freight capacity to the US is only 80% of its pre-COVID level, and air freight rates from Shanghai to North America are nearly double this time last year. Air freight is not a long-term solution for moving 140 lb bikes, and Peloton’s switch to air freight should be a signal of just how difficult the environment is on the West Coast.
In late December Peloton paid $420 million to acquire Precor, a fitness manufacturer based in the United States, which will allow Peloton to begin producing bikes stateside in the second half of the year. The acquisition adds 625,000 square feet of U.S. manufacturing capacity with in-house tooling and fabrication, product development, and quality assurance capabilities in Whitsett, North Carolina and Woodinville, Washington.
Final Thoughts. Peloton is the poster child of Containergeddon, the term coined by Ocean Audit CEO Steve Ferreria to describe the combined effect of extraordinarily high import volumes, tight capacity and elevated ocean freight rates. Sure, many brands, especially digitally-native brands have suffered from shipping delays this year, but none as publicly as Peloton. For a company that relies so heavily on its brand, it needs to realize transportation and delivery are a huge part of burnishing the image of a customer-obsessed company.
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