How a series of unforced errors felled one of the emerging stars of the pandemic — and what CEOs can learn from their example
It was Christmas 2020, and John Foley’s world could scarcely have looked brighter.
Mr. Foley wasn’t immune to what was going on around him, of course. The COVID pandemic remained in full force, and with vaccines having only been authorized a couple of weeks prior, much of the world remained in lockdown. The efficacy of the vaccines remained unclear, travel was virtually nonexistent, and most people remained reluctant to leave their homes except for emergencies. Luxuries that many had taken for granted were now all but gone, including trips to the hair salon, restaurants, bars — and gyms.
The sudden unavailability of gyms—all of which had closed by the summer of 2020, and many of which would never reopen—was of particular interest to Mr. Foley. The fact that most folks were confined, willingly or otherwise, to their homes was devastating to many American businesses. But Peloton, the company he co-founded in 2012 and currently served as CEO, had been one of a few companies that had seen their sales skyrocket in 2020. Christmas marked the pinnacle for Peloton, whose flagship bike was the in-demand gift that year, as it enabled fitness enthusiasts to not only maintain their workouts but connect virtually with people and trainers across the world. Peloton’s stock price soared to over $160 a share, and the company’s market cap approached $50 billion, a new high for the company.
It was a high that would not be seen again.
Fast forward a couple of years, and both Peloton and Mr. Foley found themselves in strikingly different situations. While Peloton had appeared to be a company with a rabidly loyal fanbase by the end of 2020, the company’s support drastically started to decline. As American society reopened, the costly Peloton bikes went the way of most exercise equipment, as its customers found the monthly costs of remaining connected to its online spin classes to be onerous. These costs were optional, of course, but without the virtual classes, the Peloton bike was merely a much more expensive version of cheaper and more reliable models that were readily available from other companies.
By early 2022, Peloton’s costs were rising as its sales were falling, the stock price and market cap were in free-fall (both ultimately shedding a staggering 90%+ of value from their peaks), and John Foley was an ex-CEO.
Hubris, and misinterpreting the trend
John Foley was guilty of one of the more common acts of CEO hubris: mistaking a temporary trend for a permanent societal shift, and committing funds accordingly. In a 2020 interview, he remarked that Peloton’s extraordinary growth had made his company “the category leader for connected fitness.” The pandemic had indeed presented Peloton (and other companies that were well-positioned for the challenging circumstances, such as Zoom Communications and DocuSign, as well as traditional consumer companies like Clorox, 3M, and Procter & Gamble) with a timely opportunity for growth, following its lackluster 2019 IPO. But at the end of the day, Peloton was no more than a powerhouse in a niche industry (“connected fitness”).
Foley’s gamble, and therefore Peloton’s, was that when the pandemic ended, the “new normal” would involve gyms and fitness centers that remained closed, or that were the second choice of a customer base that would remain hooked on at-home workouts that were virtually linked to trainers and other workout fanatics worldwide. As “connected fitness” receded in the minds of most people who enjoyed working out as a social activity in addition to a physical one, Peloton found it difficult to maintain its popularity.
By then, however, Foley had already miscalculated badly on Peloton’s growth trajectory, opening a new factory in Taiwan at the end of 2020. When supply chain issues crippled worldwide shipping, Foley responded by announcing the construction of another factory, this one in Ohio, to enable the company to meet what they continued to assume would be booming demand for its products.
By the time construction was underway in Ohio, though, the vaccination program was also well underway. More than half of the adults in the U.S. were vaccinated by then, and while work-at-home was rapidly becoming the new normal, workout-at-home was becoming less and less popular. Less than a year removed from demand outstripping supply, Peloton found itself awash in bikes and treadmills they couldn’t sell fast enough, with the supply-and-demand imbalance swinging hard in the other direction. The Ohio factory never opened and was sold before it could produce a single bike.
Notably, these were not unforeseeable circumstances. During Peloton’s September 2020 earnings call, CEO Foley was directly asked by analysts how Peloton was managing the risk of overproduction ahead of the inevitable normalization of demand. Foley’s answer was prescient, though not in the way he would have liked: “[Senior leaders at Peloton] feel like there’s such a massive opportunity that we need to invest heavily in the supply chain for years and years to maintain it. When you say ‘normalize coming out of covid,’ we don’t see that.” Meanwhile, more seasoned leadership teams at companies like Clorox saw demands for their products spike during the worst of the pandemic, but contextualized the demand correctly, increasing production but not committing hundreds of millions of dollars to new facilities.
Peloton’s marketing team has always had a fine line to walk, positioning their product as a luxury good, while trying to broaden its appeal to include mainstream consumers as well. These two contradictory approaches often provided fodder for social media, but never more so than the infamous 2019 “Peloton Wife” holiday ad, which featured a wife receiving a gift of a Peloton bike from her husband, then vlogging about it in the ensuing weeks with something less than joy or enthusiasm.
While some of the complaints about the company appealing primarily to the wealthy were curious (we are, after all, talking about a company that is selling $2,500 bikes and $4,300 treadmills!), Peloton found itself equally attacked by some for the ad’s apparent sexism and depiction of outdated marital dynamics.
More recently, the company made the puzzling decision to allow the HBO series And Just Like That… to feature a Peloton bike in its inaugural December 2021 episode. There is nothing wrong with a prominent product placement in a long-awaited series debut, except when the product is interpreted, rightly or wrongly, as the cause of death of a beloved character from a heart attack. (Showtime’s Billions compounded the problem a few months later by also featuring a Peloton-induced heart attack for a main character, though at least this time the company had the defense of not having endorsed or encouraged its product to be included in the episode.)
Safety and quality issues
With any manufactured product, concerns regarding safety and quality should be addressed immediately and forcefully; to do otherwise is public relations malpractice. When a child was tragically killed in March 2021 in an accident involving the company’s treadmill, CEO Foley’s response was initially limited to public comments expressing sympathy, but also urging consumers to heed the safety precautions including limiting use to those at least 16 years of age. It wasn’t until two months later that Peloton finally relented and issued a recall for its Tread+, noting not only that a child had died, but that the company was aware of more than 70 other complaints from consumers who had been injured after being pulled under the rear of the treadmill.
The high-profile recall was issued in conjunction with a separate recall of a second model of the treadmill, this one because the touchscreen on the treadmill was susceptible to detaching and falling, posing a risk of injury. More recently, Peloton issued a voluntary recall of some 2.2 million original Peloton bikes sold over a five-year period from 2018-23, stemming from concerns surrounding a seat post that could break during use. The company acknowledged at least 35 cases of such incidents and injuries that included fractures, lacerations, and bruises.
It is almost inevitable that a company manufacturing a sophisticated product line such as Peloton’s will encounter a failing of workmanship, at some point, that necessitates a recall or the offering of a refund. The impact on consumer confidence is minimized, however, when the company involved acknowledges the issue quickly and publicly, and takes whatever steps are necessary to restore confidence in its products.
Peloton is struggling to rebuild its reputation in the public eye, a necessary precursor to the righting of its financial ship. To the extent that many of its issues are unforced errors, the company currently serves as a cautionary tale to firms that face similar challenges.
What we can learn from Peloton’s cautionary tale
When you make major missteps and bad judgments, it’s difficult to right the ship and very easy for things to further spiral out of control. This is why we’re sharing Peloton’s cautionary tale and will be sharing others in the coming weeks. Let’s face it, CEOs have a difficult job. It’s easy to be the backseat quarterback and give advice after the fact. It’s much harder to find the correct answer to the right problem at the right time.
As experts in corporate law, we have witnessed companies both succeed and fail. We have worked with successful startups and fledgling Fortune 500 companies. We have seen brilliant CEOs sink their own companies due to a lack of wisdom and counsel, while unlikely CEOs have achieved steady growth through smart strategic planning, humility, and the ability to delegate to the right people.
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The future of Peloton is uncertain. Looking back, many of its mistakes could have been prevented. Learn from Peloton’s example and be proactive about your business’s present and future by surrounding yourself with solution-finders who are uniquely prepared to help with answers to the right problems at the right time.