Peloton invests $400m in US factory
Peloton is set to build its first US factory after demand for its at-home exercise equipment has continued to outstrip supply. How does this help Peloton achieve its ambitious goals?
Delivery times are still a major frustration for members
Peloton has been a victim of its own success due to the Covid-19 pandemic. Supply continues to outstrip demand and whilst lead times have significantly reduced, delivery has been a source of frustration for Peloton and its members. The $400 million investment in a new factory will boost production and decrease delivery times, but this won’t be online until 2023. Verbatim feedback also points to poor quality within existing manufacturing:
“the delivery time and experience with how badly customer service was during it all has soured me on Peloton as a whole. Honestly I regret the purchase because of it. I also make every attempt possible to steer friends to other devices and at some point I will likely sell this and get something else.” Peloton member, Jan 2021
There are numerous reports on Peloton members forums of the Bike and Tread products reaching customers with defects. I’m sure Peloton is rushing to get bikes to customers and as a result this is leading to poor quality. Local manufacture should ensure better quality control and manufacturing expertise in-house will further improve this.
“Concerned with the long wait times for servicing the bike. It’s been clicking but I had to wait 2 months and still am waiting for the service appointment for the pedals.” Peloton member, Jan 2021
In my survey of Peloton members, respondents wanted to express that Peloton wasn’t living up to their high expectations. Peloton bringing manufacture to the US will likely reduce the demand on repairs due to improved focus on design and product quality.
How does local manufacture help with profitability?
Despite labour being more expensive in the US, let’s not forget just how heavy fitness equipment is. For example, Precor shipped 53 million pounds or 24 million tons of equipment in 2019. Whilst Peloton has invested $100 million in improved logistics, securing air and express sea freight, the global cost of freight has increased exponentially during the pandemic (see below).
The blockage of the Suez Canal by the Ever Given only made things worse. Twelve percent of global shipping passes through the Suez Canal; marine shipping, in turn, accounts for 80 percent of the world’s trade in goods. So despite all the talk of securing air freight, by removing Peloton’s dependency on sea freight it will significantly reduce costs whilst reducing lead times. That’s important when shipments from Taiwan to the US via sea freight can take 24-28 days.
Based on my data, 67% of Peloton’s customers are in the US. Manufacturing domestically will reduce the need for expensive and uncontrollable air and sea freight. It will also reduce the painful wait times experienced by customers whilst potentially reducing cost. A win win for Peloton.
Improvements to product quality
From its acquisition of Precor, Peloton secured a 4,000 sq ft hardware testing facility. It has stringent processes for tooling and final assembly. All critical motion parts must meet Precor’s stringent design specifications which have been honed from decades of manufacturing high-end gym equipment.
Local manufacture will improve the design of the existing products, reducing failures. During the pandemic, any defects have been difficult to fix. This is a major frustration for existing customers and whilst the problems won’t be fixed overnight, in the long-term Precor engineers will redesign key components to make improvements that will pay off for customer experience and the bottom line.
New product lines
Despite the safety concerns on the Tread and Tread+, Peloton remains committed to bringing new product lines, with a rower and resistance machines highly anticipated. Local manufacture within its biggest domestic market improves the speed of bringing news product to market whilst ensuring product quality for the outset.
New product lines are extremely important to realising Peloton’s long-term ambition of 100 million members.
New market entries
In its latest quarterly earnings, CEO John Foley made it clear expansion into Spanish speaking markets was an opportunity.
Question: Which countries are you rolling out to next? Noting you now have a dedicated Spanish speaking instructor (Mariana Fernandez).
Answer: Mexico, Spain are big market opportunities. Spanish language support is exciting and expected soon. But no timelines to share. Note: Peloton added Mariana Fernandez to its instructor line-up. She will predominantly teach classes in Spanish, starting with yoga.
Mexico has 122 million population and 22 million households that have broadband. It’s close proximity to the US and favourable trade agreements make it an obvious choice to go after with its US manufacturing hub in place.
Summary
Peloton will cement its leadership position further by bolstering its manufacturing capabilities
Delivery times have proved frustrating for Peloton leadership and members as demand has outstripped supply
Local manufacture will reduce the reliance on expensive shipping and impact the bottom line
New product lines will arrive quicker with local manufacture
New market entries such as Mexico become more likely