Peloton’s new CEO, Barry McCarthy, recently reported to analysts on his turnaround plan. He stated that a turnaround plan is hard work. He said that in turnaround situations there are always a lot of surprises. He said the turnaround would take a lot of time. If he was looking for support, he did not receive any kudos. Analysts and investors were not impressed. Maybe this is because most of what Mr. McCarthy said were not elements for a turnaround plan but elements for a conventional growth plan. There is a big difference.
A conventional growth strategy is not appropriate for a brand in urgent need of a turnaround. A growth strategy is very different than a survival and revival strategy. A conventional growth strategy is for a brand that is on a sustainable upswing. A conventional growth strategy is a longer term outlook. Typical growth plans are either a 3-5 year mid-term plan or a 5-10 year long-term plan. A conventional growth strategy is for going forward, full speed ahead. It is designed to accelerate quality revenue growth.
The principal components of a conventional growth plan are to:
- Broaden the brand’s appeal to build a bigger customer base.
- Focus on changing people’s attitudes in order to change their behavior – you have time to spend on slowly changing the way people think in order to make them use the brand.
- Expand to new geographies.
- More customers (new customers, new segments of people).
- More occasions (new occasions).
- Extend the brand offers – new products that appeal to new customers and/or satisfy new occasions.
Implementing a conventional growth strategy for a brand that is in need of a turnaround will only accelerate brand decline.
A turnaround plan is a business approach for a business that is going in the wrong direction at an accelerating pace. For a troubled business like Peloton, an aggressive turnaround plan is not an option. It is an imperative. It is not a long-term plan as Mr. McCarthy insists. It is an immediate short-term plan for business survival and brand revival.
In his report, Mr. McCarthy mentioned many tactics such as rethinking Peloton’s capital structure; growing international users (Peloton’s goal is to hit 100 million subscribers globally, up from the 2.9 million it had at the end of March 2022); focusing on the digital app; shifting to a broader base of users by lowering prices on hardware; attracting more men to Peloton; and using third party retailers. Additionally, there is the discussion of a flat fee for hardware rental plus all-access to classes. Peloton has already contacted current customers alerting them to a monthly increase in access charges. These are tactics out of a conventional growth strategy. These are not tactics for a brand that finds itself in a doom-loop.
A turnaround plan has specific short-term objectives. It has specific actions designed to achieve those specific objectives. It has a specific timeline. At Peloton, the short-term objective must be to focus on achieving specified, measurable turnaround objectives in 24 months or less. With losses mounting and slowing customer acquisitions, Peloton does not have time. The marketplace is already questioning whether Peloton’s much discounted stock price is a reason to buy or a reflection of something incredibly wrong with the brand.
A turnaround strategy is a plan of thinking and action that immediately moves to stop a deteriorating situation. A turnaround strategy jettisons all non-core activities until the brand or business is stabilized in a sustainable manner. A turnaround strategy is all about earning the right to grow again. Wall Street did not hear a definitive short-term plan except for a binding commitment with JP Morgan and Goldman Sachs for a $750 million loan.
All turnaround experts agree that the most immediate “must-do” action when a brand is in trouble is to “Stop the bleeding.” Stop the financial bleeding and stop the bleeding of the customer base. Stopping the bleeding requires a set of quick, decisive decisions. As Mr. McCarthy pointed out in the earnings call, Peloton is “thinly capitalized” burning $747 million in the most recent quarter. This left Peloton with $879 million in cash.
Some analysts worry that focusing now on expanding the customer base will cost a great deal of money that the brand does not have. Going after new customers is expensive. It costs at least 4 times as much to attract a new customer than it does to maintain a current customer. And, using cheaper fees to attract new customers will attract the wrong kind of customers. These will be customers who love the deal rather than the brand. By attracting deal-focused customers, Peloton’s churn rate may rise. Mr. McCarthy has been extremely impressed by the low churn rate at Peloton. His possible actions may reverse this bit of good news. The short-term turnaround goal should be to reduce capital expenditures by stopping the shrinking of the current base and restoring profitability. As one managing director at an equity firm told Barron’s, the weekly financial newspaper, Peloton should be focusing “…on its loyal customers, rather than chasing growth.”
This leads is the second critical element of a turnaround plan: reinforcing the brand’s core business. The core business must always be protected. The core business is what will finance the turnaround profitability and finance the platform for the future. The main business must always be protected before moving on to a new approach. Moving to a more digital, less hardware, services brand may be a good call once the brand is stabilized. But, for now, the core business needs to be strengthened. The potential introduction of a rowing machine may be a core-strengthening move.
Peloton has a devoted customer base. Mr. McCarthy should be looking at increasing the frequency of usage and the loyalty of current customers. Core Peloton customers already love the brand. The plan should be to focus on Peloton strengths and reinforce these effectively to Peloton core customers. Rather than penalizing core customers with higher fees, Peloton should be creating ways to reward its core customer base. One analyst remarked that with people returning to gyms, you see the draw of the social aspect of working out. Peloton actually has a huge social component. Connections are part of its mission. But, this has never been a part of its advertising strategy.
Peloton is not ready for a growth plan. Yet, the tactics from Mr. McCarthy focus on growth. This is a mistake. The core business needs shoring up not ignoring. Peloton needs to earn the right to grow.