(Bloomberg) — Peloton Interactive Inc. will legalize In an overhaul that includes eliminating nearly 800 jobs, raising prices for Bike+ and Tread machines, and outsourcing jobs such as equipment delivery and customer service to third-party companies.
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The changes, which the company revealed Friday in a memo to employees, also include the gradual closure of several retail showrooms — a process that will begin next year. It’s the widest change to date under CEO Barry McCarthy, a veteran technologist who took over in February.
Peloton is hoping to turn around a business that thrived during the early days of the pandemic but suffered a severe slowdown in the past year. Revenues are falling, losses are increasing, and the company’s stock price is down nearly 90% in the past 12 months. The last steps are an effort to stimulate sales, boost efficiency and restore some of the former Peloton traits.
“We have to get our revenue to stop shrinking and start growing again,” McCarthy said in the note to Bloomberg, adding that the changes are necessary to make Peloton’s cash flow positive again. “Cash is oxygen. Oxygen is life.”
Read Peloton’s full CEO note here, as investors applauded the moves, sending shares up 11% to $13.18 in New York trading.
In the third known batch of layoffs this year, the company will lay off 784 employees across its distribution and customer service teams. Peloton will stop using employees and internal trucks to deliver equipment and close 16 warehouses across North America. Instead, it will rely on third-party logistics providers, or 3PL, to set up bikes and treadmills in customers’ homes.
Peloton is already using third-party freight carriers JB Hunt Transport Services Inc. and XPO Logistics Inc. for some deliveries and will offload the remaining internal distribution to those companies. The company acknowledged that such a change may not be liked by all buyers, with some complaining that third-party delivery services don’t stand up to Peloton’s own efforts.
“This has been a challenge,” McCarthy told the staff. “We won’t fix it overnight, but we have no choice but to make it work, so we tend to it and proactively manage our 3PL relationships. We are confident in the plan we have laid out and are encouraged by the progress we are making.”
Peloton is also cutting about half of its customer support team, which is primarily located in Tempe, Arizona, and Plano, Texas. The Company will use external companies to handle support requests as needed to increase the staff it retains. “These expanded partnerships mean we can ensure we have the ability to expand and reduce as volume fluctuates while still providing the level of service our members expect,” McCarthy wrote.
Ending deliveries, distribution and in-house warehousing will eliminate 532 jobs, while another 252 jobs will be eliminated from support teams. Peloton said last month that 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.
However, McCarthy said the company will continue to hire in key areas, including the software engineering group. “I’m sharing this so you don’t think we’re going with our feet on gasoline and brakes at the same time,” he said.
The company raises the price of its flagship bike+ by $500 to $2,495 and the Treadmill motion treadmill by $800 to $3,495. The increases are a reflection as the bike+ was priced at $2,495 before the April cuts. The price of the new tread is higher than it was four months ago.
McCarthy acknowledged the change, saying the April price cuts were necessary to move units more quickly and generate cash flow. “I might not have messed with prices at all if I had run into different inventory situations when we lowered prices,” he said in an interview.
At the time, Peloton was in the early days of a $800 million restructuring plan and was still in the process of securing a $750 million bank loan.
The price cuts, he said, “at least reduced the perception of the brand”. “So this is a return to historical sites.”
Peloton is betting that the price increase will help juice sales. During the company’s fiscal third quarter, the New York-based company missed analyst estimates — revenue fell 24% and losses came in much larger than expected.
Peloton also said it intends to undergo a “significant and severe reduction” of its North American retail footprint starting in 2023. The company currently operates 86 stores across the United States and Canada. McCarthy said in the interview that the number of closed sites will be determined through negotiations with the owners. The savings from closing stores will be reallocated to marketing and selling their products in other ways, he said.
“We need to be where our customers are when they make purchasing decisions,” McCarthy said in the interview. “They’re increasingly doing it 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 reshuffle. The former CEO of Spotify Technology SA and Netflix Inc. By cutting costs, improving Peloton products, and increasingly moving to a subscription-based model.
The pandemic has been a boon to Peloton’s business, as lockdowns have prompted consumers to buy their bikes and sign up for online fitness classes. But the company overestimated demand, produced too much equipment, and mistakenly believed that the increase in demand would continue after economies reopen. After Peloton began struggling, the board replaced co-founder John Foley with McCarthy – although Foley remains chairman.
Before the recent moves, Peloton had already moved away from in-house hardware manufacturing, shifting production of its bikes to partners in Asia. The company has also implemented a leasing program that can lower the cost of equipment ownership and raise the price of a content subscription service by $5 to $44 per month.
Peloton is making other changes, including a return to personal work. McCarthy said Friday that office staff will have to show up at least three days a week starting September 6. This is in line with the approach taken by other technology companies, such as Apple Inc. But it represents an evolution for a company that has taken advantage of the home-working style.
So far, Wall Street has been skeptical about Peloton’s return. Shares continued to slide after McCarthy took office and remained down about two-thirds in 2022. Management is betting that improving Peloton fixed costs and raising prices will boost investor sentiment.
“I remain optimistic about the future of Peloton,” McCarthy said in the memo. “This does not mean that there will not be challenges in the future. There will be, and there will be, unexpected setbacks. This is the nature of transitions. But I am confident in our ability to overcome challenges because we have come so far in just the past four months, which fuels my optimism about our ability to Engineering our long-term success.”
(Updates last reaction in sixth paragraph.)
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