In Class Book

In late October 2020, Peloton chief executive John Foley sat down in front of his bookshelves, popped in his AirPods and logged on to a video conference with a top Goldman Sachs investment banker. Goldman had taken his connected fitness company public the year before and was hosting a virtual event so clients could learn from “builders and innovators”.

Foley, a clean-cut fiftysomething who looks like he could have been born in a Patagonia gilet, retold the tale of what inspired him a decade ago to bring static bicycles and high-energy spin classes into people’s homes. He recounted the story of turning Peloton into a cultural phenomenon and himself into a billionaire in measured, practised tones.

Yet Foley seemed irked when the pandemic’s impact on Peloton’s fortunes came up. Covid was not, he argued, a one-time booster shot of demand. “When I hear Peloton being a Covid story,” he continued, making air quotes around “Covid story”, “it annoys the crap out of me because what we are building is here to stay.”

This may have been trademark founder optimism, but even Foley’s board of directors thought he should tone down the hype. “Last year, I was talking to our board and I was like, I see this as clear as day: this thing is going to be one of the few $1tn companies in 15 years,” he recalled. “And they said, ‘Don’t say that again. It makes you sound like an idiot.’”

At that point, Wall Street was lapping up Foley’s vision. As investors punished other companies struggling to adjust to economic and supply chain shocks, “Covid-proof” Peloton — as Foley called it in an earnings call — was prospering. The company’s shares soared by more than 400 per cent that year, making it 2020’s second-best performing Nasdaq stock. The number of people paying its $39 monthly subscriptions more than doubled to 1.7mn, and sign-ups for its cheaper digital fitness pass jumped 10-fold during the ­pandemic’s early weeks.

Numbers couldn’t capture its customers’ devotion. As Foley and his team built Peloton from a single, wobbly prototype into a global community urged on by inspirational instructors, they would describe users’ remarkable levels of engagement in terms of “customer love”. Others just called it the Church of Peloton.

We now know that even as the company was soaring to a peak valuation of nearly $50bn in late 2020, it was about to endure a series of tribulations that would culminate in Foley ceding the chief executive position and laying off three in 10 employees. Over the next 16 months, it would be forced to recall products under tragic circumstances, face an activist investor’s ire over profligate spending and fumble to respond as Wall Street turned on it for missing forecast after forecast.

Not to mention the repeated beatings on social media, revealing the downside of being a zeitgeist-defining brand. The parable of Peloton is a business school case study in the making. But first, as the new chief executive put it, the company has to “get real”.

---

Foley, who declined to comment for this story, always loomed largest among Peloton’s five co-founders. He paid his way through college by working shifts at a Mars confectionery factory and, at 22, was overseeing the North American manufacturing of Skittles and Starburst. In the mid-1990s, he joined the nascent Citysearch.com before moving to IAC to run the invitations website Evite.com. But the media group was Barry Diller’s empire, not Foley’s. As he later told National Public Radio, by the age of 40, he “wanted to be big”.

That didn’t happen at his next job, running Barnes & Noble’s ereader business. By then, though, Foley and his wife Jill had become hooked on the boutique fitness classes that were exploding in America’s coastal cities. There was SoulCycle, with its sweat-soaked mantras, and Flywheel, which used leader boards to drive competition among riders, among others. But their popularity meant that places in top instructors’ classes could sell out in minutes.

Foley’s idea looks obvious in retrospect: beam classes straight into homes via a slick bike equipped with a giant flat screen that resembles a Bloom­berg terminal. Just as gaming consoles and PCs killed arcades, gyms and studios would never be able to compete.

From the start, Foley’s enthusiasm met with indifference, a pattern that would harden his conviction that scepticism should be tuned out. “John is the kind of person who, when you say no, is more determined to prove you wrong,” says Dara Khosrowshahi, the Uber chief executive who was a protégé of Diller at the same time as Foley.

Foley had wanted to stream SoulCycle and Flywheel classes, but neither studio was interested. Nor were the 400 institutional investors he toured during Peloton’s first three years. When he finally hacked together a bike for a crowdfunding campaign on Kickstarter in 2013, just 178 people backed the project. Most of them were friends.

It took thousands of pitches to angel investors to raise the $10mn needed to produce Peloton’s first bikes and demonstrate them in an upscale New Jersey mall. But once people could experience Foley’s vision, Peloton took off. By late 2019, it was making nearly $1bn of annual revenue, with more than half a million of the bikes — then priced at $2,245 — sold and as many buyers paying to stream classes that were turning instructors into celebrities. It still lost money, but it listed at an $8.2bn valuation, with Foley claiming that Peloton was doing nothing short of “selling happiness”.

As that Christmas approached, Peloton hit a crisis that foreshadowed others to come. The company’s holiday advert seemed to show a woman pedalling furiously on her new bike to please her husband. On social media, where the brand loomed large, it was shredded for looking like a hostage video. The advertisement had been misinterpreted, Peloton insisted, but its market value dropped by $1bn. “Peloton was propelled to a much larger stage than it was ready for,” says Simeon Siegel, an analyst at BMO Capital Markets. “Companies and people make mistakes. The ­problem is, this company made its mistakes in front of everyone.”

By the time the pandemic had taken hold in 2020, it looked like Foley had successfully silenced doubters. For the three months to June that year, when lockdowns were most widespread in Peloton’s markets, revenues almost tripled and the average bike was being used at twice the pre-pandemic rate.

At first, Peloton’s only problem was keeping up with demand. Soon, though, it was struggling to keep pace with investors’ expectations. “To feed the beast, the company needed to continue showing growth,” Siegel says, “but because of the growth the company began to drink its own Kool-Aid and believed it would last for ever.” Covid, he says, went from being the best thing that happened to Peloton to the worst.

---

Lee Baker was one of Peloton’s pandemic converts. A cultural anthropologist at Duke University in North Carolina, the 55-year-old grew up cycling from Oregon to California on camping trips. When his gym closed during the pandemic, he ordered a Peloton.

Decades after academics started worrying about Americans bowling alone, Baker found that Peloton had created a more intense community experience in the digital realm than real-life workouts ever had. “I’ve never high-fived people in the gym,” he says. But on the Peloton, “there’s ‘us’ and then there’s ‘them’, the non-Peloton people. We are something special because we are together, pushing each other and co-operating.”

Like most Peloton enthusiasts, Baker has a favourite instructor: Ally Love, an Oprah-like figure for a generation that never watched daytime television. She has 830,000 Instagram followers, a modelling career and a business that “emboldens women to unleash their inner boss” while selling $25 pairs of socks. Vogue covered Love’s wedding and her classes attract thousands, yet they still seem “wildly intimate”, Baker says. “They’re totally manufacturing this experience. She’s not talking to me, but you can fake yourself into thinking the instructor’s totally motivating you.”

This is what behavioural economists call “temptation bundling”, explains Katy Milkman, a professor at the University of Pennsylvania’s Wharton business school. Attractions such as charismatic instructors make us more likely to exercise. The bikes are “commitment devices”, Milkman adds, their high upfront cost inducing guilt about skipping workouts. There is little doubt that users love what Peloton is selling, says Daniel McCarthy, a marketing professor at Atlanta’s Emory University who counts his wife among those with “a semi-religious devotion to the product”. The question is, how many more potential converts are out there?

Pulling people into the Church of Peloton has been getting more expensive. The company spent almost one-third of its revenue on sales and marketing in the last quarter of 2021. Revenues shot up from $1.2bn to $4.4bn between 2019 and 2021, but undisciplined spending meant net losses also ballooned, from $191mn to more than $1.1bn. “They got too big, too fast and they believed too much, too fast,” says Nate Pund, a managing director at the investment bank Houlihan Lokey. “It’s really hard to see a profitable future for Peloton,” echoes his colleague Jeremy Hirsch, who leads the bank’s fitness advisory group.

As such criticism grew, Foley spoke of building a Netflix-like media company as he struck a content deal with Beyoncé and spent a reported $50mn each on studios in New York and London. Last August, he broke ground on a $400mn factory in Ohio designed to augment the company’s imports from Taiwan. Posing with a shovel beside the state’s governor, he pledged to create 2,100 jobs in the heartland.

Some of Foley’s personal spending raised eyebrows, too. Tabloids gossiped when he and Jill, then head of Peloton’s apparel business, bought a $55mn Hamptons house, or when they threw a lavish black-tie celebration at New York’s Plaza Hotel last December. The Peloton instructors they invited to the event posted glamorous snaps on Insta­gram. Those they didn’t fumed like movie stars left off a Hollywood mogul’s guest list.

Meanwhile, Peloton was recruiting at a breakneck pace. In the two years to last June, its headcount grew from less than 2,000 to 8,662. Some of the hiring suggested Peloton could not decide whether it wanted to be a mass-market company or something more aspirational, insiders complained. In New York, it hired producers to make streaming content “for every Jim and Jane”, one former employee says. “They were trying to do 94 different things.”

Outsiders also saw risks in chasing a wider audience. “They are trying to be both Toyota and Lexus,” says Reid Hoffman, the LinkedIn co-founder and an investor who has met Foley but owns no stake in Peloton. “The question is whether that’s possible.” Hoffman adds that he only invests in entrepreneurs who have the courage of their convictions, explaining that the great ones make decisions on vision alone because there are no data on new markets. But the risk is that “you can drive the bus over the cliff”.

---

Some people lower down Foley’s org chart worried about the looming cliff. Gregory Rios joined in 2020 as the stock was climbing and found he loved his job delivering bikes. The brand’s cachet made interactions with customers something to look forward to. Not only were the wages and benefits generous, but if inventories were scarce Rios would get the day off — with a full 10 hours’ pay.

Rios, not his real name, is one of 17 current and former employees the Financial Times spoke to in order to understand Peloton’s wild Covid ride. Nearly all described it as a great employer but offered myriad examples of lavish spending.

By early 2021, Rios was thinking it couldn’t last. Customers were waiting four months for deliveries, shift cancellations suggested an inability to manage inventories, and expenses seemed out of control. He could not understand why the company’s leaders remained relentlessly upbeat. They saw Covid-19 as a one-off headache for supply but would not countenance that it might be a similarly singular catalyst for demand. “I’m just a regular guy and I could see it wasn’t sustainable,” Rios says. “All you had to do is watch CNBC. All day long it tells you, this is a pandemic stock…”

Two events left Rios questioning management’s thinking. In February, Foley said the company would spend $100mn on air freight to overcome shipping delays. And that May, after initially pushing back against a consumer safety body, the CEO recalled Peloton’s $4,300 treadmills after one was involved in a child’s death.

Before the Covid supply chain crisis, a bike would be replaced if it had the “slightest scratch on it”, a van driver tells the FT. Another says they would be sent to fetch a whole new bike “if the seat did not fit correctly”. Returned bike frames would often be junked if a simple fix was not possible, former warehouse workers say. Many employees considered such waste “insane” but warehouses were going through inventories at a rapid clip, and some had no space for returned bikes. Peloton prioritised perfection, workers claim, so customers would never be sent a “refurb”.

The waste was accepted as a byproduct of blitz­scaling, or pursuing speed over efficiency. In the six years before Covid hit, Peloton’s revenues had more than doubled annually. During the pandemic, blitzscaling’s inefficiencies became more ingrained in operations until, eventually, unchecked costs outstripped slowing demand, and escalating losses triggered a crisis. “They didn’t really think financially during the worst part of the pandemic,” says one warehouse supervisor. “They were just spending, spending, spending.”

The culture of perfection began to deteriorate, as did company generosity. When warehouses spotted that many bike frames arriving from Taiwan were corroding, internal documents reviewed by the FT show Peloton responded with Project Tinman, a series of protocols on how to spot and remove rust while defining what levels were “acceptable”.

Instead of bikes being thrown out or sent back, the pendulum swung the other way. Many were fixed, but seven employees in three states say plenty of bikes rusting from the inside were knowingly sent to customers because of “unrealistic” quotas and a deterioration in quality controls amid low inventories. Higher-ups responded by throwing money at the problem, sending hundreds of gallons of rust sealant to one warehouse. “We didn’t even go through a five-gallon bucket,” the supervisor said. “They would spend insane amounts of money on things we would never use.”

Peloton says it immediately responded to the “isolated issue”, emphasising that the “abnormal” oxidation was limited to non-structural areas of the bikes which had no effect on their quality, durability and reliability. “If we become aware that this specific issue has caused a problem for any member,” a company spokesperson says, “we will replace the bike.”

Rios’s premonition proved correct in late summer as his guaranteed weekly hours were cut from 40 to 30, then to zero. On some days, he would set off for work having paid for childcare, only to find there were no bikes to ship, or pay for the day.

---

Wall Street sentiment had also been turning against Peloton, and soon the bears had numbers to support their suspicion that pandemic demand would subside as gyms reopened. In August 2021, earnings fell short and the company flagged slowing subscriber growth. By November, Peloton was cutting its full-year sales outlook by as much as $1bn. Foley told analysts he had never been more excited about the future, but this time they weren’t buying it. The stock crashed 40 per cent.

That hit some Peloton executives hard, according to one person familiar with the matter. Several had borrowed against their shares, allowing them to cash in some of 2020’s stock price gains without incurring a steep tax bill. Within days they faced margin calls to post more collateral, this person says, with one executive seeing their net worth fall from $35mn to $7mn.

Unknown to Foley, another threat was emerging. Jason Aintabi’s Blackwells Capital had been a Peloton shareholder on and off since the initial public offering, and bike rides had helped him get through the pandemic’s early months. But November’s news enraged him.

Executives had assured analysts at the company’s earnings announcement they saw no need to raise more capital, even though it had burnt through $561mn of cash that quarter. Yet, 12 days later, they did exactly that, diluting owners such as Blackwells with a $1.1bn stock offering. Aintabi felt misled and began plotting to unseat Foley.

The chief executive had other fires to fight. The December 2021 reboot of Sex and the City featured a storyline in which the show’s Mr Big died from a heart attack after exercising on a Peloton bike. Social media exploded with jokes about the company killing a beloved character. Peloton, seeming to have learnt from its previous viral debacles, responded within 48 hours with a humorous commercial starring the same actor, Chris Noth. But before it could blunt the damage, Noth faced accusations of sexual assault by ­multiple women. He denied them and Peloton pulled the ad but the episode cost it $1.8bn in market value.

Then, a month later, Peloton’s shares plummeted further when a leak suggested it was halting production amid collapsing demand. Foley denied some of the claims but confirmed lay-offs were possible, even if they would be done “with the utmost care and compassion”.

What had infuriated Aintabi is that supervoting shares gave Foley and seven other insiders effective control of Peloton. No matter what happened to demand, production or the stock, Foley’s position seemed secure. Aintabi set out to change that, publicly urging the board on January 24 to fire Foley and put Peloton up for sale. “Remarkably, the company is on a worse footing today than it was prior to the pandemic,” Aintabi charged, as he criticised its spending and asked why Jill Foley was running its apparel arm. The market pressure Peloton had evaded for a year suddenly had a face. What Aintabi did not know was that the board had already engaged headhunters Spencer Stuart to find a successor.

---

Peloton unveiled its new chief executive, Barry McCarthy, on February 8, while also further slashing sales forecasts, axing the Ohio plant and announcing $800mn of cost cuts — almost equal to 2020’s total operating expenses. Foley stayed on as executive chair.

McCarthy jumped to the top of the headhunters’ list when he was introduced to the board a few weeks earlier by TCV, one of the company’s earliest investors. He had earned the venture capital firm a fortune as chief financial officer of Netflix and then Spotify. McCarthy, a forthright, somewhat professorial 68-year-old, makes for a stark contrast with Foley. He insists he is not erasing the founder from the picture.

McCarthy describes Foley as a visionary like Reed Hastings at Netflix and Spotify’s Daniel Ek. He traces Peloton’s wild cost overruns to entrepreneurial optimism that can run ahead of itself, but which was also responsible for the company’s very existence. “Founders walk this fine line between reality distortion — which is the vision of the thing they’re trying to build — and the capacity to see the world as it is,” he tells the FT. “Did they scale their fixed cost structure proportional to the growth in revenue? No. Why? Because they assumed Covid was the new normal. And it wasn’t.”

“It is undeniable our leadership team made certain decisions during Covid regarding the supply chain and operations that did not work,” a Peloton spokesperson says. New management has “hit the reset button” but its commitment to excellence in customer service is unwavering.

The new chief’s first staff meeting misfired: his introduction to the bark-laden strains of “Who Let the Dogs Out?” prompted disbelieving comments on employee chats seen by the FT. The meeting ended early. But what really matters is yet to come. Within days of telling staff to “get real”, McCarthy was quelling speculation of a bid by Nike or Amazon, telling the FT he would lead for the long term. “If you follow what [investors] do instead of say, more often than not they invest in growth over profit,” he says.

That growth will come from new content, countries and products, he believes, and some of those products are close to launching. Insiders shared images of a rowing machine and details of a strength-training device with which Peloton could seize more of the connected fitness market.

How these products fare and whether ­McCarthy’s plans work will determine whether Peloton is remembered as a comeback story or a cautionary tale. Barclays analysts warn that Peloton may become “ordinary”, with a valuation to match. McCarthy disagrees, arguing it is not uncommon for extraordinary companies to find themselves “staring down the barrel of darkness and despair” before rebounding. “There was a period of time at Net­flix when the performance was so bad some board members stopped coming to meetings,” he says. “Reed and I were literally talking about who’s going to turn out the lights in the event that we had to shut it down.” What convinces Mc­Carthy is “the customer love” Peloton commands, he says, noting that 99 per cent of its customers renew their subscriptions each month. “It is a religion,” he says. “If we can’t figure out what to do with that, then shame on us.”

Andrew Edgecliffe-Johnson is the FT’s US business editor. Patrick McGee is the FT’s San Francisco correspondent. Additional reporting by Joshua Franklin

Follow @FTMag on Twitter to find out about our latest stories first