Peloton Business Overview

In strategic management of sport organizations, students have been working on examining the competitive environment of fitness and Peloton, specifically. Using Peloton’s most recent annual report, a few interesting findings jump out:
 
“We believe that our first-mover advantage, leading market position, brand recognition, and integrated platform set us apart in the market for connected, technology-enabled fitness. We provide a superior value proposition and benefit from the clear endorsement of our Connected Fitness Subscription and mobile app solutions, giving us a competitive advantage versus traditional fitness and wellness products and services, and future potential entrants.” (pg. 10)
“While we believe we are changing the consumption patterns for fitness and growing the market, our main sources of competition include in-studio fitness classes, fitness clubs, at-home fitness equipment and content, and health and wellness apps.” (pg. 10)
“Our Connected Fitness Products are sold in highly competitive markets with limited barriers to entry.” (pg 19)

Peloton has 6.9 million members, a one million increase from the 5.9 million members the previous year.
There are 2.1 members per paid subscription, resulting in approximately 3.5 million paid subscriptions.
Revenue is comprised of connected fitness (selling hardware and the subsequent $44 monthly subscription) and subscriptions, which is a digital fitness membership costing $13 a month.
There was $637.3 million in advertising costs 2022. This would make the cost of incremental acquisition $637 per member, and even higher per subscription. They have also built up $1.3B in finished product inventory.
 
While the company stated that the connected fitness devices, and the sale of the bike, are vital to the company, and that it increased 27% from 2021, the revenue generated decreased 30%. This discrepancy in subscriptions is attributed to selling the product at a loss, as seen by the gross margins. Digital fitness subscriptions saw a 60% increase in revenue with a gross margin of 67%. While connected fitness costs are substantial, the margin of subscriptions is much more attractive, and growing, and would appear to be worthy of additional consideration.
In fairness to Peloton, digital fitness competitor Beachbody is also not profitable or cash flow positive and Amazon discontinued their fitness platform, Halo.
As stated in their report, the fitness industry has highly competitive industry, with low barriers to entry, high substitutes and strong buyer power, making it an unattractive industry segment.

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The gross margin of digital fitness make that revenue segment a potential opportunity for growth. Since Peloton already has fixed costs associated with content creation, variable costs to increasing the number of digital fitness members would be small. Growing this sector of the business by positioning the organization as content creation and distribution and working to increase the digital membership base may provide an avenue to future profitability. Although, future management would also benefit from reducing operational costs.