Image Credit: Phillip Pessar
How great would it be to be a product manager who was responsible for a very popular high priced exercise bike? This is the position that the Peloton product managers found themselves in just before the pandemic hit. I’m pretty sure that they must have had many meetings where they were trying to find ways to get people to quit gyms and instead buy a Peloton exercise bike to use at home. Then the pandemic hit and that is exactly what happened! The Peloton product managers were beside themselves – this was fantastic and it was going to go on forever. However, it didn’t.
Going From Hot To Not
The Peloton product managers have a problem on their hands right now. They are in the process of building a million-square-foot factory that it they will never use. The once-hot stationary bike maker is in the process of selling the facility, which was initially set to cost $400 million, as it races to downsize a manufacturing operation expanded by product managers who believed Covid-driven demand would outlive the pandemic. These miscalculation about demand and the shift in the market have been so costly that Peloton which was a company worth nearly $50 billion about a year ago has laid off thousands of people, had to borrow $750 million to head off a cash crunch and is exploring a sale of a minority stake of the firm.
Back in late 2020 with homebound consumers clamoring for its bikes Peloton’s product managers dismissed the idea that the company was growing too much based on a demand spike that could prove temporary. Overbuilding its supply-chain capacity was a term that never came up. The Peloton product managers felt like there was such a massive opportunity that they needed to invest heavily in the supply chain for years and years to maintain it. What they didn’t see was the market “normalizing” as the nation came out of Covid. This is not just a Peloton problem. Many companies faced the same question during the recent pandemic: how best to handle a surge in demand for their products? Procter & Gamble Co. decided to not to permanently expand its toilet-paper factories. This is something that would have taken years to come online. Clorox Co. added to its capacity through contract manufacturers. To fill government orders for Covid-19 masks, Honeywell International Inc. and 3M Co. added shifts to existing factories or retrofitted their facilities.
Most of the leaders of those businesses realized that the sudden demand could be something that was short-lived and they hedged their manufacturing investments. However, the product managers at Peloton chose to build permanent production capacity, believing that demand for its products would remain elevated for years. They also believed that they could avoid ocean shipping logjams by operating U.S. sites. They struck a US$420 million deal to buy Precor, a manufacturer of commercial exercise equipment who had two U.S. factories. They then announced plans for the creation of an Ohio factory. Both of these actions were a major strategy shift for a brand that until then had largely relied on third-party manufacturers in Asia.
Bad Assumptions
Though millions more customers now subscribe to Peloton’s online workout classes than before the pandemic, sales of their equipment have fallen 40% from a year ago. Even without the still-being-built Ohio factory, Peloton is in the process of laying off hundreds of workers and is saddled with a glut of unsold inventory. Peloton sales surged in the early months of the Covid-19 pandemic, then fell back to earth as consumers returned to gyms. The falloff in demand was foreseeable. Peloton’s original bike, which initially sold for $2,245, now costs $1,445 after price cuts. The company raised the price of its connected workout subscription, which syncs with Peloton classes, to $44 a month, from $39 a month. Home stationary bikes from other manufacturers can cost anywhere from less than $1,000 to several thousand dollars.
Headed into the pandemic, Peloton was a company that was losing money but notching steady growth. The U.S. outbreak of Covid-19 back in early 2020 sent Peloton’s sales surging almost instantly. Initially subscriber growth more than doubled from the previous quarter and revenue for the company’s bikes and treadmills nearly tripled from the year before. Peloton was profitable for the first time. What the Peloton product managers didn’t realize is that the good times were to be short-lived. As demand soared throughout the year and a second Covid wave arrived and derailed Americans’ hopes of a quick return to normalcy, Peloton quickly became overwhelmed by a crush of orders for its bikes, which was exacerbated by massive port delays in Asia, where Peloton machines were being built. Behind the scenes, Peloton was in chaos. Customer-service operations were overwhelmed as people who were paying thousands for their machines and then faced monthslong waits and repeated, last-minute delays.
That summer, with Covid vaccines widely available and gyms starting to reopen, Peloton lowered the price of its bike by about 20%, though the product managers said the cut didn’t reflect weaker sales. The experts say that routinely companies get caught in this, building too much and then having to write off inventory and do fire sales. The pandemic, with its drastic demand spikes, exacerbated that phenomenon. Product managers see an increase in demand and become overly enthusiastic, and that’s the critical mistake.
What All Of This Means For You
The Peloton product managers were flying high. Their company which sells expensive exercise bikes and subscriptions to online exercise programs had been steadily growing when the pandemic hit. All of a sudden, with gyms being closed, their sales took off like a rocket. The product managers believed that they would be selling large quantities of their bikes forever. It turns out that they were wrong.
The Peloton product managers were building a bike production facility in Ohio; however, when their market slowed down they decided to sell the facility and lay off workers. The Peloton product managers believed that the buying behavior that they were seeing during the pandemic would continue long after the pandemic was over. The product managers chose to build U.S. manufacturing facilities in order to avoid delays associated with shipping bikes from overseas. As the pandemic eased, Peloton sales slipped. The product managers ended up having to reduce the price of their bikes. The pandemic had caused sales to surge and product backlogs to occur. However, after the pandemic eased gyms reopened and sales slipped.
The Peloton product managers got caught up in the excitement of the pandemic. The pandemic caused customers to change their buying behavior while everyone was locked in their homes. The Peloton product managers incorrectly assumed that everyone’s behavior during the pandemic was the way that things were going to be going forward. When the pandemic eased up, people went back to the gyms and stopped buying expensive exercise bikes. The lesson here for all of us is to be careful when we try to predict the future. We need to make sure that we can handle things no matter which way they turn out.
– Dr. Jim Anderson
Blue Elephant Consulting –
Your Source For Real World Product Management Skills™
Question For You: How could the Peloton product managers prepared for the end of the pandemic better?
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What We’ll Be Talking About Next Time
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