(Bloomberg) — Peloton Interactive Inc . will begin a major overhaul that includes cutting nearly 800 jobs, raising prices for its Bike+ and Tread machines, and outsourcing functions such as equipment delivery and customer service.
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The changes, which the company revealed Friday in a memo to employees, also include phasing out many of its retail showrooms, a process that will begin next year. It’s the biggest shakeup yet under CEO Barry McCarthy, a tech veteran who took the helm in February.
Peloton is hoping to turn around a business that thrived in the early days of the pandemic but has suffered punishing delays over the past year. Revenues are falling, losses are mounting, and the company’s stock price has fallen nearly 90% in the past 12 months. The latest moves are an attempt to revive sales, increase efficiency and restore some of Peloton’s former quality.
“We need to get our revenue to stop shrinking and start growing again,” McCarthy said in a note provided to Bloomberg, adding that the changes were essential to make Peloton cash flow positive again. “Money is oxygen. Oxygen is life.”
Read Peloton’s full CEO memo here. Investors cheered the moves, sending shares up as much as 11 percent to $13.18 in New York trading.
In its third known set of layoffs this year, the company will lay off 784 employees in its distribution and customer service teams. Peloton will stop using in-house employees and vans to deliver equipment and close 16 North American warehouses. Instead, it will rely on third-party logistics providers, or 3PLs, to set up bikes and treadmills at customers’ homes.
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Peloton already uses third party shipping companies JB Hunt Transport Services Inc. and XPO Logistics Inc. for some supplies and will transfer its remaining domestic distribution to these firms. The company acknowledged that such a change might not sit well with all shoppers, as some complained that third-party delivery services were not equal to Peloton’s efforts.
“It’s been a challenge,” McCarthy told the staff. “We’re not going to fix it overnight, but we have no choice but to make it work, so we’re leaning on it and proactively managing our 3PL relationships.” We are confident in the plan we have put in place and are encouraged by the progress we are making.”
Peloton is also laying off about half of its customer support team, which is located primarily in Tempe, Arizona and Plano, Texas. The Company will use third-party firms to process support requests as needed to augment the staff it supports. “These expanded partnerships mean we can ensure we have the ability to scale up and down when volume fluctuates, while continuing to provide the level of service our members expect,” McCarthy wrote.
Ending domestic supply, distribution and warehouse operations will eliminate 532 jobs, while another 252 will be cut from support teams. Peloton said last month it would cut about 570 jobs in Taiwan as part of a shift away from domestic equipment production. In February, it laid off nearly 3,000 employees across the company.
Still, McCarthy said the company will continue to hire in key areas, including its software engineering group. “I’m sharing this so you don’t think we’re driving with our foot on the gas and the brake at the same time,” he said.
The company is raising the price of its flagship Bike+ by $500 to $2,495 and its Tread treadmill by $800 to $3,495. The increases are a reversal since the Bike+ was priced at $2,495 before the cuts in April. The new tread price is higher than four months ago.
McCarthy conceded otherwise, saying the price cuts in April were necessary to move units faster and generate cash flow. “I probably wouldn’t have messed with pricing at all if I was faced with different inventory states when we cut prices,” he said in an interview.
At the time, Peloton was in the early days of an $800 million restructuring plan and was still in the process of securing a $750 million bank loan.
The price cuts “have lowered brand perception to say the least,” he said. “So it’s a return to historical positioning.”
Peloton is betting that the price hike will help juice sales. During the fiscal third quarter, the New York-based company missed analysts’ estimates, with revenue down 24% and losses far larger than expected.
Peloton also said it intends to undergo a “significant and aggressive reduction” in its North American retail footprint in early 2023. The company currently operates 86 stores in the US and Canada. McCarthy said in the interview that the number of closed spaces would be determined through negotiations with landlords. He said savings from the store closures would be reallocated to marketing and selling his products in other ways.
“We need to be where our customers are when they make purchasing decisions,” McCarthy said in the interview. “Increasingly, they’re doing that online,” he said, and that’s reflected in traffic.
The announcements come six months after McCarthy was appointed chief executive in a wider management shake-up. The former CEO of Spotify Technology SA and Netflix Inc. promised to cut costs, improve Peloton’s products and move increasingly to a subscription-based model.
The pandemic has been a boon for Peloton’s business, with lockdowns leaving consumers scrambling to buy its bikes and sign up for online fitness classes. But the company overestimated demand, produced too much equipment and mistakenly believed the surge in demand would continue after economies reopened. After Peloton began to struggle, the board replaced co-founder John Foley with McCarthy — though Foley remains chairman.
Before the latest moves, Peloton had already moved away from in-house device manufacturing, outsourcing production of its bikes to partners in Asia. The company has also implemented a leasing program that can reduce equipment ownership costs and raised the price of its content subscription service by $5 to $44 per month.
Peloton is making other changes, including a return to in-person work. Office workers will have to come in at least three days a week starting Sept. 6, McCarthy said Friday. That’s in line with the approach taken by other tech firms, such as Apple Inc., but it marks a turnaround for a company that capitalizes on the work-from-home lifestyle.
So far, Wall Street has been skeptical of Peloton’s return. Shares have continued to fall since McCarthy took over and remain down by about two-thirds in 2022. Management is betting that Peloton’s improving fixed costs and price increases will boost investor sentiment.
“I remain optimistic about the future of Peloton,” McCarthy said in the note. “That doesn’t mean there won’t be challenges ahead of us. There will be and will be unforeseen setbacks. That’s the nature of twists. But I’m confident we can overcome the challenges because we’ve come so far in just the last four months, which fuels my optimism about our ability to create our long-term success.”
(Reaction to sharing updates in paragraph six.)
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