Peloton’s soaring marketing costs raise a red flag as it preps for IPO
Peloton's filing of its preliminary IPO paperwork on Tuesday (27 August) revealed a massive uptick in marketing spend in the face of spiralling losses.
Peloton has filed for its IPO
The brand behind internet-connected exercise bikes, which come with a healthy starting price of $2,000, claims it is more than just an exercise equipment manufacturer.
In a letter to potential investors, founder John Foley described Peloton as “an interactive media company” that “inspires [and] unites” and “a global technology platform” that “sells happiness”.
Since it was founded in 2012, the company has raised nearly $1bn in venture capital, while its user growth has been equally impressive. It now counts more than 1.4 million users who have completed nearly 60m workouts in 2019.
Revenue for was up 110% to $915m for the year ending 30 June 2019, compared to $435m the year prior.
But Peloton is also haemorrhaging cash.
“We have incurred operating losses each year since our inception in 2012,” the filing read, “and expect to continue to incur net losses for the foreseeable future.”
Losses increased to $195.6m in 2019, up from $47.9m in 2018 and $71m in 2017. As a result, it has a total deficit of $538.6m.
It's perhaps a surprise for those who've watched the brand closely. In an interview with CNBC in May 2018, Foley boldly claimed that the company was "weirdly profitable".
"It's a beautiful business model," he said at the time. "Our investors are happy."
The company has been privately valued at more than $4bn.
Massive marketing costs lie at the root of Peloton's financial challenge . Since 2017 the company has doubled its annual marketing spend, which now stands at a colossal $324m for the past year compared with $151.4m the year prior and just £86m in 2017.
Peloton's business model depends on sales of its pricey fitness equipment. It then courts recurring revenue from its $39 monthly memberships, which give users access to fitness classes they can follow from home.
So, to get more poeple to buy into the concept, it has launched several campaigns in its US heartland. In the UK it recently pumped £7m into a multi-pronged push that aimed to build the brand in a relatively new market.
Video is the “strongest medium” to communicate the features of the Peloton platform, it said, with the bulk of budgets go to broadcast and cable television, social media and over-the-top providers such as Hulu and YouTube.
It’s increasingly testing “alternative marketing channels”, such as podcasts and other forms of audio advertising, as well as direct mailing.
But not all of its marketing has landed. It was heavily mocked earlier for its ads ,which many felt were clearly aimed at wealthy individuals. Despite its top marketer shugging off the complaints, as it looks for the next phase of growth it will need to consider how it appeals to a more diverse consumer base.
Its 'showrooms' are one way it's been trying to achieve this. The company now has a growing number of retail outposts across the US, UK, Canada, and, starting later this year, Germany, which allow people to use the equipment without buying.
And it has no plans to curb its hefty advertising outgoings in the near future. “We expect our operating expenses to increase in the future as we increase our sales and marketing efforts,” said the filing.
“Our goal is to increase brand awareness and purchase intent for our connected fitness products and subscriptions. We use a unique combination of brand and product-specific performance marketing to build brand awareness and generate predictable sales of our connected fitness products.
"In just a few years, Peloton’s aided brand awareness has grown significantly, and as of 3 April 2019, our aided brand awareness in the United States was 67%.”
What is will likely focus more on is how to improve word of mouth marketing. In the filing it cited the impact that “loyal members” have on convincing others to join the scheme.
“Our marketing strategies have focused on product education and broadening our demographic reach. Our fastest growing demographic segments included members under the age of 35 and members making under $75,000 in annual household income,” it said.
These loyal members are dubbed its "connected fitness subscribers" – the people who pay $39 a month. Peloton has grown this group from 35,135 to 511,202 in just three years, and estimates their current lifetime value to be worth $267.1m.
The resulting "word-of-mouth" effect has become one of Peloton’s “largest sales channels”, which has helped it offset other marketing investments.
A key communications asset moving forward will be Howard Draft, the former executive chairman at ad agency DraftFCB. He has sat on its board since 2015 and will offer guidance as the company tries to work out the right marketing mix post-IPO.
It will also be relying on the counsel of its agencies, which include Essence, the WPP media shop it began to work with in EMEA in 2018, and Dark Horses, the sports marketing arm of creative agency Lucky Generals.
In the US, Mekanism remains its creative agency of record while Horizon has managed its media spend for the past two years. It began a hunt for a digital agency in April, although reports suggested it ran into troubles with some pitching agencies describing the company as “unorganized”,which ultimately delayed an appointment.
It's not the only company to push forward with an IPO, despite a failure to turn a profit. The We Company behind the WeWork brand recorded revenues of $1.54bn in the first half of 2019. However, its net loss for the same period was measured at $690m.
Little has been said by industry commenters on Peloton's expensive marketing tactics. But the comparisons to WeWork are easy to draw.
WeWork too has spent heavily on advertising in the face of losses. Marketing budgets exceeded $375m alone in 2018 – a figure that grew by 164% in just one year. Like Peloton, it also plans to spend more despite the all-too-familiar warning that it's unlikely to "achieve profitability at a company level ... for the foreseeable future”.
Online commentators were quick to scoff at WeWork. The Register accused it of having “polished off its own marketing Kool-Aid” while Bloomberg’s Shira Ovide called the filing "the most bananas thing I have ever read".