Peloton to outsource all production as part of its refurbishment effort

Peloton Interactive Inc. logo. on an exercise bike at the company’s showroom in Dedham, Massachusetts, USA on Wednesday, February 3, 2021.

Adam Glanzman | Bloomberg | Getty Images

On Tuesday, Peloton said it plans to shut down all of its own production and will instead expand its current relationship with Taiwanese manufacturer Rexon Industrial to turn around a money-losing business.

Peloton CEO Barry McCarthy said it was a move for the company to simplify the supply chain and fix the cost structure, a top priority.

“We believe this, along with other initiatives, will allow us to continue to reduce the cash burden on the business and increase our flexibility,” McCarthy said in a statement.

Peloton shares fell less than 1% in premarket news.

Peloton has stated that Rexon is now set to become Peloton’s primary manufacturer. Bicycle and tracked vehicles. The company is also set to suspend operations at its Tonic fitness center until the end of 2022. Peloton acquired Tonic in October 2019.

The company did not disclose financial implications in its press release. It also wasn’t immediately clear what this meant for the Peloton Precor business, which Peloton bought for $420 million to expand its manufacturing facilities in the United States.

McCarthy, a former head of Spotify and Netflix, was named CEO of Peloton in early February, replacing founder John Foley. He took over as the company’s costs spiraled out of control and demand for connected fitness equipment plummeted.

During a senior management reshuffle, Peloton announced about $800 million in annual spending cuts. This included cutting 2,800 jobs, or about 20% of corporate positions. Peloton also said it was abandoning plans to build a sprawling manufacturing facility in Ohio.

In January, CNBC reported that Peloton planned to temporarily halt production of its equipment, according to internal documents detailing those plans, to control costs as demand falls.

One of Foley’s biggest mistakes was a long-term bet on Peloton’s supply chain during the peak of the pandemic, when consumers stuck at home were eager to shell out hundreds of dollars for ways to sweat in their living room or garage.

However, the dynamics quickly changed as Covid vaccines became widely available and indoor gyms and fitness studios were able to reopen without as many restrictions.

From the beginning of his administration, McCarthy made it clear that he was more interested in Peloton as a subscription business than as a manufacturer.

It has already raised membership prices for an all-access Peloton fitness center and is testing a new model where customers can pay a flat rate for equipment rentals and on-demand sessions.

He was also tasked with trying to boost employee morale, especially with the company’s share price under such intense pressure. Peloton shares are down more than 75% this year as of Monday’s market close.

Employees learned last week that Peloton is offering one-time cash bonuses to hourly workers who stay at work until early next year and is making changes to its stock compensation plans to reflect the share price.

“Getting out of in-house production is probably the right move,” BMO Capital Markets analyst Simeon Siegel said, adding that McCarthy appears to be trying to “reverse past mistakes” of the Foley era.

“Obviously there will be savings,” Siegel said. “But given the state of Peloton’s balance sheet, it’s worth wondering how much the spin-up costs and what else needs to be done.”

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