Peloton’s new CEO Barry McCarthy, who’s trying to turn a great big bulky barge around with pep talks and a puny paddle, is in a whole lot of hurt right now. He’s short on cash and trying to borrow a bundle from big banks with their own problems and he’s stuck with a ton of excess inventory and a treadmill that’s still seen as a threat to toddlers. Even worse, the world is returning to health clubs and to office buildings newly stuffed with workout spaces and other amenities offered by desperate landlords trying to pull tenants back to their properties. (Even if they buy some Pelotons, people will share them, not own them.) But honestly, those concerns aren’t even his biggest problem. He’s on the cusp of becoming just another dinosaur in a digital world. Just like the folks hawking physical point of sale credit card readers.
Barry needs to bite the biggest bullet bearing down on him and bag the manufacturing part of his business before it drags the whole enterprise down with it. The rule per Rahm Emanuel is very simple: “if you have to eat a shit sandwich, don’t nibble.” These days, no one here really wants to be in the hardware business. Because hardware is hard. Hardware is a dirty and already over-regulated segment, as well as fiercely competitive with few barriers to fast followers and cheap knockoffs. And the next generation or two of consumers could really care less about owning “stuff.” We’re moving rapidly to a digital future where everything is about utility and easy access rather than possession and ownership. Kids already see Pelotons as their parents’ clothing racks. If they’re riding at all, it’s for the shared online experience of taking classes with their friends. As soon as those social connections are again available in real life, no kid I know is gonna be sitting all by themselves on a sweaty bike in their basement.
But for the moment, if there’s a short-term, silver lining for Peloton, it’s the high-value, clearly affluent subscriber base of around three million adults (estimated at its pandemic height). These are active customers albeit at varying price points and accessing Peloton services through various channels that don’t necessarily require owning a bike - much less one made by the company. McCarthy talks about growing the subscriber base to 100 million, which sounds laughable for a company without the cash reserves to attract and acquire new customers in an increasingly noisy, costly, and competitive marketplace.
As his market cap continues to shrink, the best bet for the business and the smart money says that he should dump the durables and get as virtual as possible as soon as possible and then sell his subscribers in bulk to a better-financed and bigger buyer such as Apple, whose watches are likely already strapped on most of the Peloton subscribers’ wrists. Every day McCarthy waits to sell his wasting asset means less money for his shareholders on the inevitable day that the business is bought. Smart businesses get sold when the time is right; broken businesses get bought when their moment has passed.
The even broader message for many other companies who are slow to pull the trigger because they’re not taking a tough enough look at where their core business is ultimately headed, or because the current profits are just too good to give up, is that it’s never smart to be so greedy that you stay too long at the fair. Or take too long to react to serious changes, shifts in consumer behavior or preferences, and new competitive offerings in your marketplace. You never want to try to take the very last dollar off the table or to precisely time the market.
That said, timing is everything. And if you aren’t willing to make the hard choices, kill even a golden goose occasionally, and cannibalize yourself when necessary (before someone else does it to you), you’re going to be left behind. You need to know when to go - even if it’s not abundantly clear at the moment you decide - because 100% certain is almost always too late. You need to change before you have to or have no choice. A year from now, you’ll wish you made the necessary changes today.
Change is always expensive. It’s just a matter of when, what, and how much you pay: you can pay early to make the required changes or pay later-- and typically a lot more-- for not having made them. Making even costly changes at the right time is infinitely preferable to being forced to make them at a time that’s inconvenient, abrupt, and even embarrassing. Netflix waited way too long to ‘fess up to the millions of its users who weren’t paying for subscriptions and continues to pay every day.
The fat cat national automobile insurers soaked their low-mileage, limited-use consumers for decades by charging them the same standardized premium rates as they charged heavy, daily users and regular commuters. They continued this practice through much of the pandemic even as their insureds woke up to the obvious fact that they weren’t doing any driving or getting into accidents with their cars sitting unused in their garages.
Companies like Mile Auto, which charges its customers on a per-mile used basis, stepped up and seized the opportunity to offer a better, fairer and less costly alternative. Now the big guys are not only playing catch-up, but they’re also crushing their own existing books of business as each current insured they convert from a full pay prior policy to their new pay-by-the-mile services costs them serious premium dollars.
Waiting for the exact right time to move rarely works today. It may bolster short term results, but in the long run, the more likely result is lost opportunities, customers, and market share. Someone’s always waiting just around the corner to eat your lunch. If you’re smart, you’ll be the first in line for a bite.