The management report focuses on the fitness industry, specifically analyzing the impact of the COVID-19 pandemic on the industry's profitability and identifying trends and opportunities for future growth. The report is divided into two parts, with the first part exploring the fitness market in general by examining the overall market composition and identifying trends and impacts on profitability using the STEP framework and Porter's 5 forces. The report identifies the rise in health awareness among the population and the upsurge in the popularity of exercising at home during the pandemic as opportunities for the industry's future growth.
The second part of the report focuses on Peloton, a brand in the fitness industry that has gained significant market power. The report provides an introduction to the company, defines its business model, and analyzes its strengths and weaknesses. Peloton is the world's largest interactive exercise platform, with more than 3 million active users. The company was the first to provide linked, technology-enabled fitness programs as well as the live streaming of immersive, instructor-led boutique courses that could be viewed from anywhere at any time.
The report also examines the resources and capabilities that have enabled Peloton's growth in the fitness market. Despite the COVID-19 pandemic causing a decline in the fitness market, the report highlights that the trend towards home workouts with on-demand content has ensured Peloton's position in the highly competitive market. However, the lifting of COVID-19 restrictions and the return to in-person gyms and training programs have caused Peloton's demand to decrease. As a result, the brand's stock price has decreased by x% within the last year, and it has momentarily paused manufacturing.
The report suggests that Peloton needs to implement strong strategies to stay competitive and build resilience in global markets. These strategies have been applied on the Blue Ocean Strategy Model and consist of changing the pricing model of Peloton, creating a new product called the Peloton Watch to train independent of time, location, and equipment, and aiming for geographic expansion in countries with a similar demographic target group.
Overall, the report highlights the challenges and opportunities facing the fitness industry and provides recommendations for Peloton to remain competitive and sustain its market position in the future.
Management Report: Peloton
Introduction
Following the fitness market's generally good developments in recent years, the COVID 19 pandemic has resulted in a fall in the market's core indicators. Despite the downturn of the last two years, many market players are optimistic about the future. This is due to a rise in health awareness among the population, as well as an upsurge in the popularity of exercising at home during the epidemic.
This paper is divided into two parts; the first one will analyse the fitness market in general by giving an overall market composition, defining trends and identifying impacts on profitability in the fitness industry by studying the STEP framework, as well as Porter's 5 forces. The second part focuses on the brand Peloton. The author will give a brief introduction to the company and define the business model. After discussing Peloton's weaknesses and strengths, that gave Peloton market power, the resources and capabilities in the fitness market, that have enabled Peloton's growth, will be analysed.
Part A: Fitness Industry Analysis
Please see the definition of the fitness industry in the appendix 1.
Overall market composition: worldwide
Covid-19 impacted most industries, however, the pandemic hit the fitness industry particularly hard: due to gym closures worldwide, the industry's expected revenue of more than $100 billion for 2022 was revised downward. Accordingly, the fitness industry's annual revenue recorded $54.2 billion in 2021, down from $96.7 billion in 2019 (Wellness Creative Co, 2022). For a more detailed analysis of the fitness market, as well as the German one, please see Appendix 2, for an analysis about the trends in the fitness industry see appendix 3.
Identifying impacts on profitability in the fitness industry
The STEP analysis is a macroeconomics approach for analysing the external environment and stands for political, economic, socio-cultural and technical change. STEP analysis lists the factors of each category that can have an impact on the unit under study.
Due to the official closures, some of which lasted until the summer months of 2021, the providers lacked the traditionally high number of new registrations at the beginning of the year. Admission restrictions and the general concern about infection also have a negative effect on new registrations and re-registrations.
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Figure 1: Own representation ofthe STEP-framework
Porter’s Five Forces
The Porter’s 5 forces have been developed by Michael Porter, who analysed the competitive environment of a company (Harvard Business Review, 2022).
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Figure 2: Own representation ofPorter's 5 Forces
Part B: Peloton Analysis
Peloton, an American start-up, started making bikes in 2012 with the goal of bringing the camaraderie and excitement ofboutique workout to the home.
Peloton is a company that develops at-home gym equipment, has an exercise app, and creates training videos that users may live-stream using Peloton goods. Peloton's indoor training cycles are a stationary piece of at-home exercise equipment with a large touchscreen. There are two exercise bikes available - Bike and Bike+ - and there are also two treadmill options. Hundreds of video sessions are included in the Peloton All-Access Membership. There are several fitness instructors to choose from for courses, recorded programmes, and music. Other social features include the option to ride with friends digitally, high five other users, and compete on leaderboards (Baker, 2022).
Due to Peloton's home-based workout offering, the company has seen exponentially high sales, especially because of the pandemic (Statista, 2022b). The pandemic end has also not given a halt to the use of those who already are using Peloton (Peloton, 2022).
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Figure 3: Own illustration based on Statista, 2022b
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Figure 4: Own illustration based on Peloton, 2022
Intentions of global users to use Peloton after the pandemic (as of 2020)
Peloton’s Business Model
Peloton is generating revenue through three revenue streams: Sales of Exercise Equipment, Sales of Fitness Apparel and Accessories and a monthly subscription. The company's most important income source is the selling of various types of high- and mid-range indoor exercise equipment, such as bikes and treadmills. The home gym equipment can be used with instructorbased on-demand and pre-recorded classes, which can be watched by a monthly subscription fee. Additionally, Peloton sells a variety of fitness clothing and accessories such as mats, bottles, or spinning shoes. Please see Appendix 4 for customer segment and value proposition.
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Figure 5: Own illustration
Peloton’s strength and weaknesses
Peloton’s strength can be summarized into: the experience they provide, the community feeling they can give users, its instructors, the marketing activities, as well as their shops and studios, in addition to extending their class offerings, a low churn rate and finally the symbiosis of music and fitness. Since it is out of scope for this paper to explain all of the strength, the three most important ones are explained below, and the analysis of the rest can be found in Appendix 5.
Given Peloton’s market position and hype from its users (Funke, 2021), Peloton is doing something right. The quote by John Foley, Founder and Executive Chairman of Founder summarises it all as “a portal for experiences” (Rubin, 2021). The company’s brand went from being known for its bikes to being known for its content. Using Peloton is not only a fitness engagement, it is an all-around experience with a strong community, where convenience is at the centre point. Members worldwide utilise the system to engage, unite, motivate, and become stronger as a community. Peloton has presented an opportunity for individuals to find the greatest versions of their-self s via engaging technology such as the real-time Leaderboard, captivating classes, empowering instructors and thrilling community events (Peloton, 2021).
One of Peloton's biggest strengths is also its instructors. The classes are designed as “as mini-shows, that got more and more branded to who the instructor is” (Rubin, 2021). The classes are set to be not only physically motivating but also psychological positively stimulating, hence classes have specific topics like being authentical or believing in yourself. Therefore, the instructors get hyped as “celebrities” with individual rides being able to attract 20,000+ riders- or approximately the capacity of Madison Square Garden. Also, stars like Beyoncé, Miley Cyrus or
Shonda Rhimes have signed deals with Peloton where the celebrities teach a class, their music is showcased and an associated theme is addressed by each person (e.g. Beyoncé and building up self-confidence).
However, there is one aspect of the Peloton world over which the firm has no control: music. The intricacies of music licencing represent a significant risk to Peloton's company, according to its pre-IPO papers and following quarterly financial reports. “Peloton reported its music royalty and streaming delivery fees rose by $81.5 million for the nine months ending March 31, 2021, compared to the nine months ending March 31, 2020” (Rubin, 2021). Additionally, when looking at Peloton's weaknesses, the brand only produces as many as 19 new classes a day, offered in only four countries (U.K., Germany, U.S. and Canada). Unfortunately, Peloton is experiencing some drawbacks which will be discussed at the start of the recommendations.
Resources and capabilities that give Peloton market power
Having discussed Pelotons strength, that give Peloton market power, the following will analyse resources and capabilities in the fitness market that have enabled Pelotons growth.
Lockdowns
Covid-19 and Lockdowns have played into Peloton’s hand since everyone had to stay at home. Fitness enthusiasts, who wanted to work out had to do this on their own four walls or outside. Hence, Peloton's business model fit perfectly well into the circumstances at that time. In particular, the social aspect that Peloton enables through its workouts has seen major acceptance, as physical interactions were limited while the pandemic.
Trend towards home/or hybrid workouts with on-demand content:
Thus, On-demand fitness services became a major trend in the fitness industry.
Looking at the ecosystem of the fitness industry (see Appendix 2): Around half of the sports enthusiasts in Europe combine at least two different fitness environments, they started especially during the pandemic and use a number of stationary gym equipment providers, such as Peloton. Often, when content assistance is used, it is usually in the form of on-demand content such as app- based exercise instructions. According to a survey, Peloton's networked spinning bikes and treadmills are now as common in Germany as their analogue counterparts. These findings demonstrate that exercising within one's own four walls provide a high level of independence. For most the attractiveness of time flexibility is at the top of the list. This appeals in particular to Millennials' (Peloton’s customer target group, see business model canvas) (Nielsen survey, 2021). Millennials preferences for personalisation, freedom, and experiences over material possessions, is exactly what Peloton is targeting with this customer group.
Recommended course of action
For the recommendations the author wrote a short background-story and made a list of current drawbacks Peloton is facing right now to understand where the 1-year ago successful company failed and thus, create sustainable solutions for the competitive fitness market. This can be found in Appendix 6.
Recommendations
Using the Blue Ocean Strategy, I would like to propose to you, the board members of Peloton, a set of strategic recommendations for short, medium and long term. Blue Ocean Strategy “is the simultaneous pursuit of differentiation and low cost to open up a new market space and create new demand. It is about creating and capturing uncontested market space, thereby making the competition irrelevant.” (Blue Ocean Strategy, 2022). For the proposals for action based on the Blue Ocean Strategy, I will use the ERRC GRID. “The Eliminate-Reduce-Raise-Create” Grid is an essential tool of blue ocean strategy. It is a simple matrix-like tool that drives companies to focus simultaneously on eliminating and reducing, as well as raising and creating while unlocking a new blue ocean.” This model is looking at the market in general. However, since Peloton has already been created as a "blue ocean", the author is now using this model not on the basis of the market but on the basis of Peloton that will enable the firm to build resilience and a sustainable competitive position in global markets.
Eliminate
The metrics Eliminate and Reduce go hand in hand. Either one or the other strategy should be implemented to restore and stabilise the fallen demand and secure long-term revenue accordingly. When looking at the obstacles Peloton is currently facing, one thing definitelyjumps out at you: demand of the products are decreasing. This is due to fitness enthusiasts' return to inperson gyms and training programmes and probably also due to the high price point of the equipment. Hence, I propose to eliminate the costs of the equipment and therefore eliminate barriers to the initial purchase. The cost of the bike is then converted by the membership fee. So if a customer decides to buy the Basic Bike for 1495$, he pays 60$ per month over a period of 2 years for the bike + the membership fee of 39$ per month. This means that the customer no longer has a one-off purchase fee and pays his membership fee monthly - just as if he was going to the gym.
Raise
In the course of the Peloton analysis, it quickly became clear that the brand is only available in the USA, Canada, UK and Germany. Based on the consumer demographics in these countries, the four markets seem understandable. Nevertheless, Peloton should aim for geographic expansion into markets that are similar to its home markets. For example, expansion into the DACH-region (Austria and Switzerland) and Australia would be easy, as there are no language barriers and the demographics of the target customers are similar.
Reduce
As previously stated, Peloton is struggling with decreased demand for its products. Since the brand is pursuing a price leadership strategy, Peloton should consider changing its price structure for equipment and subscription programs. The firm should raise the cost of memberships for its Peloton platform. The price cut for Peloton's bike and treadmill equipment should coincide with the increase in the connected fitness app. Peloton might decrease the barrier to entry for equipment with these pricing modifications, stabilising the company's profitability in the long run. Create
For “create” factors are being created that the industry has not offered before. In Peloton’s case this could be a new line of products which are less expensive. Due to consumer concerns about the size of Pelotons equipment in their living area and the necessity for a specialist installation, it is critical that the design of a new product line incorporates these concerns to solve these problems to avoid losing market share. Additionally, Peloton should address another huge market: the whole middleclass. With comparatively inexpensive items, with comparatively inexpensive items, Peloton creates products that can be seen as entry-level products for the brand and still allow its users to be part of the brand and the community. Lowering the price point for a new product line not only stimulates demand for the brand again, but also makes the brand more accessible, even if only in a certain area. This is why I propose a new invention for Peloton: the Peloton Watch. The watch is part of wearable technology, the current number one trend in the fitness industry. With this new product launch, Peloton can once again position itself as a pioneer of innovation, convenience, and community. For Peloton, this only means the need to create the actual device, while the content of the wearable technology device is the already recorded content, such as Bare classes. Thanks to Peloton's recently expanded range of courses, which do not require any equipment, users can exercise for an affordable entry price, independent of time, location, and equipment. This in turn incorporates the trend of being able to exercise outdoors. The revenue model is accordingly composed of an affordable entry price to appeal to a broad mass and increase demand, as well as a monthly membership like Peloton already has. In this way, revenues can be secured over the long term.
Conclusion
Peloton is the world's largest interactive exercise platform, with more than 3 million active users. The firm was the first to provide linked, technology-enabled fitness programmes as well as the live streaming of immersive, instructor-led boutique courses that could be viewed from anywhere at any time. Lockdown and the trend towards home/or hybrid workouts with on-demand content has assured Peloton a safe place in the highly competitive market. The lifting of the Covid restrictions and therefore the return to in-person gyms and training programmes, however, have caused Pelotons backlashes; demand has increased, the brands stock price has decreased by x% within the last year, more competition coming to the market and finally its momentarily pausing of manufacture. Hence, Peloton needs to implement strong strategies to stay competitive and enable Peloton to build resilience and a sustainable competitive position in global markets. These strategies have been applied on the Blue Ocean Strategy Modell and consist of changing the pricing model of Peloton, creating a new product: the Peloton Watch to train independent of time, location and equipment and aiming for geographic expansion in countries with a similar demographic target group.
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