(Bloomberg) — Peloton Interactive Inc. will embark on a sweeping overhaul that includes cutting nearly 800 jobs, raising prices for its Bike+ and Tread machines, and outsourcing functions such as equipment deliveries and customer service to outside companies.
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The changes, which the company disclosed Friday in a memo to employees, also include gradually closing many of its retail Showrooms — a process that will get underway next year. It’s the widest-ranging shake-up yet under Chief Executive Officer Barry McCarthy, a tech veteran who took the helm in February.
Peloton is hoping to turn around a business that thrived during the early days of the Pandemic but suffered a punishing slowdown in the past year. Revenue is declining, losses are mounting, and the company’s stock price was down nearly 90% over the past 12 months. The latest moves are an attempt to reinvigorate sales, boost efficiency and restore some of Peloton’s former cachet.
“We have to make our revenues stop shrinking and start growing again,” McCarthy said in the memo provided to Bloomberg, adding that the changes are essential to making Peloto cash-flow positive again. “Cash is oxygen. Oxygen is life.”
Read the Peloton CEO’s full memo here. Investors applauded the moves, sending the shares up as much as 11% to $13.18 in New York trading.
In its third known set of layoffs this year, the company will fire 784 employees across its distribution and customer service teams. Peloton will stop using in-house employees and Vans to deliver equipment and shutter 16 warehouses across North America. Instead, it will rely on providers of third-party logistics, or 3PL, to set up bikes and treadmills at customer homes.
Peloton already uses third-party shipping companies JB Hunt Transport Services Inc. and XPO Logistics Inc. for some deliveries and will offload its remaining in-house distribution to those firms. The company acknowledged that such a change might not be loved by all buyers, as some have complained that the third-party delivery services aren’t on par with Peloton’s own efforts.
“This has been a challenge,” McCarthy told staff. “We won’t fix it overnight, but we have no choice but to make it work, so we’re leaning into it and proactively managing our 3PL relationships. We are confident in the plan we’ve put in place and we’re encouraged by the progress we’re making.”
Peloton is also cutting about half of its customer support team, which is mainly located in Tempe, Arizona, and Plano, Texas. The company will use third-party firms to handle support requests as needed to augment the staff it is keeping. “These expanded partnerships mean we can ensure we have the ability to scale up and down as volume fluctuates while still continuing to provide the level of service our members have come to expect,” McCarthy wrote.
The winding down of in-house deliveries, distribution and warehouses will eliminate 532 jobs, while another 252 will be culled from support teams. Peloton said last month it would cut about 570 employees in Taiwan as part of a move away from in-house equipment manufacturing. In February, it fired nearly 3,000 employees across the company.
Still, McCarthy said the company will continue to hire in key areas, including its software engineering group. “I share this so you won’t think we’re driving with our foot on the gas and the brake at the same time,” he said.
The company is raising the price of its Flagship Bike+ by $500 to $2,495 and its Tread treadmill by $800 to $3,495. The increases are a reversal as the Bike+ was priced at $2,495 prior to cuts in April. The new Tread price is higher than it was four months ago.
McCarthy acknowledged the about-face, saying that the April price cuts were necessary to more quickly move units and generate cash flow. “I probably wouldn’t have messed with the prices at all if I had been confronted with different inventory states back when we lowered the pricing,” he said in an interview.
At the time, Peloton was in the early days of an $800 million restructuring plan and was still in the process of securing a $750 million bank loan.
The price cuts “cheapened at least the perception of the brand,” he said. “So this is a return to historical positioning.”
Peloton is betting that the price increases will help juice sales. During its fiscal third quarter, the New York-based company missed Analyst estimates — with revenue declining 24% and losses coming in far wider than expected.
Peloton also said it intends to undergo a “significant and aggressive reduction” of its retail footprint in North America beginning in 2023. The company currently operates 86 stores across the US and Canada. McCarthy said in the interview that the number of locations shuttered will be determined by negotiations with landlords. They said that the savings from store closures will be reallocated towards marketing and selling its products in other ways.
“We need to be where our customers are when they make purchasing decisions,” McCarthy said in the interview. “Increasingly they do that online,” he said, and that’s reflected in the foot traffic.
The announcements come six months after McCarthy was appointed CEO in a broader management reshuffling. The former Spotify Technology SA and Netflix Inc. executive vowed to cut costs, improve Peloton’s products and move increasingly to a subscription-based model.
The Pandemic had been a boon to Peloton’s business, with lockdowns sending consumers scrambling to buy its bikes and sign up for online fitness classes. But the company overestimated demand, produced too much equipment and mistakenly believed the surge in demand would continue after economies reopened. After Peloton began struggling, the board replaced co-founder John Foley with McCarthy — although Foley remains chairman.
Before the latest moves, Peloton already moved away from in-house device manufacturing, shifting the production of its bikes to partners in Asia. The company also implemented a leasing program that could lower the cost of equipment ownership and hiked the price of its content subscription service by $5 to $44 per month.
Peloton is making other changes, including a return to in-person work. Office employees will have to come in at least three days a week starting Sept. 6, McCarthy said Friday. That’s in line with the approach used by other tech firms, such as Apple Inc., but marks a twist for a company that benefited from the work-from-home lifestyle.
So far, Wall Street has been skeptical of Peloton’s comeback. The shares continued to slide after McCarthy took the job and remain down about two-thirds in 2022. Management is betting that improving Peloton’s fixed costs and raising prices will boost Investor sentiment.
“I continue to be optimistic about the future of Peloton,” McCarthy said in the memo. “That doesn’t mean there won’t be challenges ahead. There will be, and there will be unforeseen setbacks. That’s the nature of turnarounds. But I’m confident we can overcome the challenges because we’ve come so far in just the last four months, which feeds my optimism about our ability to engineer our long-term success.”
(Updates share reaction in sixth paragraph.)
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