Peloton And The Amazon Effect On Fitness (PTON)

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Last Friday’s news that Amazon (AMZN) could be one of the suitors interested in buying Peloton (PTON) caused that stock to jump 30 percent in after-hours trading.

The collective pressures of the economy’s reopening, a leaked report last month that it was slashing production of its bikes and treadmills due to a lack of demand and the unfortunate series of PR issues arising from the Sex and the City sequel have battered investor confidence in Peloton’s management and the value of the brand over the last year.

At $8 billion, give or take, Peloton’s market cap today is roughly what it was when it went public in 2019. That makes it a relative bargain for Amazon, whose own stock market performance on the heels of its Q4 2021 earnings broke the record for largest single-day gain in market cap ($190 billion) last Friday.

Media reports focus on the possible synergies from Amazon’s healthcare ambitions and the access to Peloton’s user base, largely affluent consumers with a couple of thousand bucks to drop on a connected bike or treadmill and the monthly connected fitness subscription fee to access on-demand and livestreamed classes.

I think it’s the other way around.

According to financials that Peloton CEO John Foley released in late January, connected fitness subscribers stand at 2.77 million, up from 2.4 million the quarter before. He reports attrition at less than a percent (0.79 percent, to be precise).

Peloton doesn’t seem to have a user engagement problem. It has a scale and a diversity of revenue problem.

Those are two problems that a commerce engine like Amazon — with its own highly-engaged user base of 200 million Prime consumers — may be uniquely suited to fix.

Especially since most of those Peloton users are almost certainly already Prime members.

The Consumer’s Digital Shift to Fitness

The personal fitness industry and retail have a lot in common: connected devices, the cloud and payments have disrupted the status quo.

A couple of years ago, working out was largely done in a designated physical location — a gym or a fitness studio — and workouts were often synched with the consumer’s work/commuting routine. Consumers might have had stationary bikes or treadmills or free weights at home, but going to the gym or a studio was how many consumers worked out, and they organized their schedules accordingly.

For many, going to the gym was part working out, part social — and importantly, an opportunity to introduce variety into their daily, weekly or otherwise occasional fitness routines. Fifty bucks a month was what most people spent on those memberships.

It was also a routine that a lot of consumers found easy to break, even before COVID.

Sources that track gym memberships report that only 18 percent of gym members use the gym regularly (more than once a week). Gym membership churn rates average anywhere between 30 and 50 percent every year, depending on the source. Gyms build their business models, in part, on counting that most people won’t show up, so they don’t really need much space or help.

The pandemic forced a change in how consumers worked out when gyms and studios shut down in March of 2020. In the early days of the lockdowns, diehard fitness enthusiasts invested in bringing a connected fitness experience into their own homes to keep their workout routine intact.

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Those whose workout routines were connected to their commuting routine pivoted to at-home alternatives, too. Many people whose daily commutes previously made it hard to find time to work out found that they could now fit in a workout and followed suit.

Peloton was a big winner. The company sold its first bike in 2014, but saw demand soar in 2020 when waitlists for them extended into months in the early days of the pandemic.

Other connected fitness players also benefitted from those tailwinds. Peloton competitors — along with connected devices like Tonal, Mirror, Liteboxer and Hydrow — used the power of connected devices, software and instructors to attract users and keep them engaged. Apps with a variety of on-demand and livestreamed classes proliferated in Apple (AAPL) and Google’s (GOOG) (GOOGL) app stores.

The pandemic pushed fitness into a digital shift. Consumers didn’t stop working out in March and April of 2020 — they just changed where they did it (at home) and how they did it (with connected devices and apps).

They used both to establish a whole new fitness routine — one independent from being at a desk in an office at 8:30 AM or having to be home at 5:30 or 6 to feed the kids and do homework.

As we start 2022, that routine hasn’t changed that much for many consumers. Working from home, at least some of the time, is now part of the daily routine for many.

Consumers are going into their third year of integrating their workouts with this new routine, but now they have connected fitness options that are better and more diverse: more livestreamed choices, more on-demand options, better playlists.

I am one of those people. Maybe you are too.

Every day that I was in town, I organized my morning routine around running to a fitness studio to do a workout, then running back. I liked the studio, the workout, the instructors and the friends who also made a 6AM workout part of their daily routine.

That all changed in mid-March 2020 when Boston shut down. I lucked out and ordered a Peloton bike when there was only a two-week wait, so I had one in my home before the end of March. I now have a new morning routine and a workout regime to match: a variety of on-demand workouts, classes on the bike and runs on the treadmill.

My favorite fitness studio has reopened. But I haven’t been back, even though I live in Boston and could go. The friends who used to work out with me at 6AM no longer go to an office downtown, so they don’t make the trip in. Without them, running over and back isn’t worth the time — I can get as good a livestreamed and/or on-demand workout at home at a time that works best for me.

Going back to those 2019 habits is now a friction for me and probably many like me. It’s not because I didn’t like that routine, but because it doesn’t fit my schedule anymore. Connected fitness experiences mean that consumers don’t have to sacrifice convenience, or even the diversity of a workout experience, to get a great workout, stay fit and satisfy their health and fitness goals.

It’s Now Just Fitness

The American College of Sports Medicine has done a study annually for the last 16 years about fitness trends. The study is fielded to a cross-section of professionals in and around the fitness space: personal trainers, fitness club owners and operators, sports medicine specialists, physicians, corporate wellness directors and insurance executives.

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More than 4,500 respondents this year rank-ordered more than 43 different trends. This year as last, wearables top the list as more consumers seek real-time data about their physical fitness — and a variety of connected devices at different price points have come to market to meet that demand.

Analysts estimate that the global market for health and fitness wearables will reach nearly $10 billion by 2027, with the U.S. leading that consumption. Advances in 5G will only accelerate the growth of this category and the types of connected devices that consumers will own.

The second-ranked trend is the rise of the at-home gym — the first time, the study sponsors say, the trend has appeared on their list. They cite concerns over COVID, along with the vast array of options now available for consumers to buy, as forces driving that trend.

Key to this expansion, they report, are manufacturers that give consumers a choice about what to buy and how much to spend. And, no doubt, the fact that consumers have a new work/life routine that delivers a suitable ROI on an at-home gym investment.

Trends three through eight are variations on the types of workouts that fitness professionals say consumers want, including more organized outdoor routines. Ninth on the list is livestreamed, on-demand fitness platforms, a trend that reflects the way that many consumers want their fitness experiences delivered.

When the news broke last Friday about suitors reportedly lining up for Peloton, there were others named and unnamed in the mix. Nike, for one, was named publicly — the purchase would constitute a rather big strategic shift, even though they could likely make the numbers work.

There’s Google, whose Fitbit acquisition signals its interest in the connected fitness/health space. And Apple, whose launch of Fitness+ is said to rival Peloton’s connected fitness offer. If those companies have any interest in the acquisition, neither have made it public.

For any of them, and probably others I’ve not named, the acquisition of Peloton would be just that — an acquisition of hardware, software and 2.7 million active fitness enthusiasts.

In each case, consumers probably won’t view the purchase as an important step forward to a connected fitness experience and cornerstone to a richer and more expansive connected health and wellness ecosystem.

At least, no more than they viewed Google’s acquisition of Fitbit that way, or Apple’s Fitness+ and Watch as anything more than a feature (app) that they can stream on their phone or iPad and track results on their wrist.

An Amazon acquisition could mean more, potentially delivering the “Amazon Effect” to fitness. It could fully integrate the digital experience with the physical fitness experience for its 200 Prime million customers.

It could use its commerce engine as the core to igniting a new connected health and wellness ecosystem that positions the bike and the treadmill as just another connected device consumers get to use as part of that experience. It could use its Prime membership as the platform to engage consumers beyond the transactional utility of just buying stuff.

If successful, a Peloton acquisition by Amazon could check the obvious boxes.

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It could add, even subsidize, a connected fitness subscription as part of the content available on Amazon Prime, integrating it even more fully than it is today into Fire TVs and Alexa devices.

It could sell its bikes and treadmills and gear on the Amazon marketplace.

It could integrate workouts with the Halo fitness bands, boosting those sales and creating more of an incentive for users to track their workouts, even enabling a permission-based sharing of that information with medical professionals to monitor a consumer’s health — and with insurance companies to offer data-driven incentives to reduce healthcare premiums.

But it could do much more.

Amazon’s health and wellness ecosystem could recommend pairings of workout gear or food choices and menu recommendations for consumers to stay healthy. It could do that by integrating Whole Foods and Amazon Fresh into the experience and opening up new categories for third-party sellers to introduce new products and reach those consumers.

Amazon could use the opt-in data provided by the consumer to recommend integrated personalized workouts, including the variety of workout formats that consumers now say they want.

Different from the weekly emails that recommend classes to take with favorite instructors, Peloton instructors could become digital “fitness partners” for consumers, creating weekly workout programs that provide diversity and keep users engaged.

Doing that would leverage one of Peloton’s greatest assets: instructors who’ve become a different type of influencer and who play a big part in driving user affinity with the Peloton brand.

Peloton instructors could become their own platforms for merchandising and selling content on the Amazon Prime platform and through the marketplace before during and after the workout.

Like what that instructor is wearing? Tell Alexa to put in the cart and ship it to you.

Want the recipe for salsa that the instructor just said they loved to make and eat? Tell Alexa to send it to your email.

Want to sign up for a three-day fitness retreat with your favorite instructor? Just tell Alexa to make the reservation.

What’s Next

Just like many other aspects of the digital transformation, consumer convenience will be the key driver of decisions about how and where to work out and where a connected health, wellness and fitness experience fits.

And just like the digital transformation of retail, “working out” will be an experience in which digital becomes a big part of the consumer’s physical experience and where a more connected ecosystem of products, services and activities is valuable.

And just like the digital transformation of retail, it will likely be a player outside of the traditional fitness sector that will be successful.

Will it be Amazon? Time – and probably the regulators – will tell. Remember, these are the same regulators who gave Google such a hard time with the tiny teeny acquisition of Fitbit but finally relented.

So, who’s to know how an Amazon bid for Peloton might go? There’s been recent bipartisan support to make Big Tech smaller — in this case that could shrink a connected fitness player that’s already getting smaller.

Or Peloton, sometime soon. At least right now, they’re expected to report earnings tomorrow after the market close.

Original Post

Editor’s Note: The summary bullets for this article were chosen by Seeking Alpha editors.

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