The Upstarts

How Peloton exercise bikes became a $4 billion fitness start-up with a cult following

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How an exercise bike grew into a $4.15 billion company with a cult...

Peloton is a bonafide fitness phenomenon — it has a million impassioned users to whom its bikes and original streaming workouts are a way of life, making it much more than a company that sells exercise equipment, though it does that too. In fact, Peloton has sold over 400,000 bikes so far and started delivering its first treadmills in late 2018, the company tells CNBC Make It. Peloton is changing the way America works out.

"People are pretty obsessed with Peloton — myself included," Robin Arzon, Peloton's head instructor and vice president of fitness programming, tells CNBC Make It. Arzon joined in 2014 after reading an article about Peloton that made her feel like she was seeing the future of fitness.

"From the beginning, I drank the Kool-Aid," she says.

She's not alone. The convenience of being able to take a top-notch studio cycling class on a high tech bike at home any time you want, combined with motivational instructors and a supportive but competitive community of users has created a devoted following willing to pay $1,995 for an exercise bike, not including the $250 delivery fee or the $39-per-month subscription to stream the company's live and on-demand classes.

Over 440,000 people follow Peloton's official Facebook page, where users connect, posting photos of themselves and their bikes along with updates on their workout regimens, and superfans have even gotten tattoos of the company's logo. You can even count more than a few famous faces among the Peloton community, including actor Hugh Jackman, Olympic champion sprinter Usain Bolt and even billionaire Virgin Group founder Richard Branson.

Investors are enamored too, pouring $994 million into Peloton. In fact, the company was valued at a whopping $4.15 billion after its latest funding round of $550 million in August 2018, Peloton confirmed to CNBC Make It.

Peloton's impressive growth — the company says it's on track to reach $700 million in revenue for the fiscal year ending in February after tallying $370 million in sales the previous year — and valuation even has public investors salivating at the idea of a potential Peloton IPO, which could come as soon as this year, though the company declined to comment on that matter to CNBC Make It.

Secret sauce

If you ask Peloton's founders, it's actually a media-technology-retail-logistics company. In fact it's been dubbed the "Apple of fitness," but it could also be compared to Amazon, for the way it aims to control every aspect of your workout, from designing and building the bike or treadmill you're using to training the instructors encouraging you to pick up the pace and even the music playing in the background. Not to mention creating its own content and designing and building the hardware and software that lets you stream those fitness classes on a tablet affixed to a machine that was delivered to your home by Peloton's own "dedicated team of professionals."

"We did talk a lot about Apple early on, and we talk about Netflix and Amazon," Tom Cortese, one of Peloton's five co-founders and COO, tells CNBC Make It. "When you think about these game-changer companies who have this focus on user experience, that is where we looked for inspiration."

He says the co-founders realized "we just had to touch so many different areas."

"All of that is part of this, sort of, holistic member experience that our people have come to love, and that is such a core part of what we do and what makes Peloton special."

In particular, Peloton's instructors are part of the secret sauce.

"The way that Peloton has built their instructors into their brand, with many of their instructors achieving a sort of cult status among the Peloton following, I'd say is definitely one of their biggest advantages over alternative at-home fitness equipment and gym and cycling classes," Marisa Lifschutz, lead industry analyst at research firm IBISWorld, tells CNBC Make It.

Indeed, popular instructors like Arzon are one of the main draws, as evidenced by her the nearly 200,000 people who follow her on Instagram. Arzon is known for her high energy, motivational style and her catch phrase, "sweat with swagger," which is also the name of the tribe of Peloton users who specifically follow her classes. She calls Peloton's group of instructors "a team of superheroes" whose job it is to inspire and lead the community.

Peloton instructors Robin Arzon (L) and Rebecca Kennedy (R) on a Peloton Tread.
Source: Peloton

"We've also built a socially engaging platform in the workouts themselves," Arzon says. "So whether you're getting a high-five from a fellow rider or you're getting a shout-out on your first run ... there's an intimacy there that doesn't exist most places, certainly not in a space where you're interacting digitally, and instructors are kind of breaking that fourth wall and in people's homes. That's really powerful stuff."

The feeling seems to be mutual. Sara Richards, 44, a medical writer and mother of four who lives in Los Angeles, tells CNBC Make It that she'd tried SoulCycle a few times, but "was not very impressed with any of the instructors." After she tried Peloton last year, Richards says, she felt more of a "personal connection" with the instructors, especially Arzon. "When she is talking to that screen, she is talking to me," Richards says.

(A SoulCycle spokesperson tells CNBC Make It, "Our growth in consumers and in revenue shows nothing can replicate our immersive and category-defining experience.")

The idea of feeling connected to the Peloton community is also a big draw for Richards, she says, as it is for Crystal O'Keefe, a 40-year-old project manager at a healthcare organization in St. Louis who hosts a Peloton-themed podcast, called "The Clip Out," with her husband, Tom.

After buying her Peloton bike in 2016, O'Keefe immediately loved the competition aspect of Peloton, including watching herself rise up the leaderboard in real-time on her bike's touchscreen. And once she started posting in the Peloton Facebook group, she felt embraced by the community to the point that she's formed friendships with riders in other cities. O'Keefe, who says she's struggled with weight loss her entire adult life, has lost about 30 pounds since she started using Peloton.

"I never found time to work out consistently before, and between the community and the total availability of the classes — I mean, it is nothing for me to work out seven hours a week," O'Keefe tells CNBC Make It.

Sara Richards rides her Peloton at home.
Source: CNBC

Of course, Peloton isn't without its critics. The most frequent knock seems to be its price point, as not everyone can pay thousands of dollars along with a monthly membership fee and the cost of equipment (like Peloton cycling shoes that cost $125 a pair).

On Amazon, standard exercise bikes and treadmills can start selling for just a few hundred dollars. Meanwhile, there are also other at-home fitness apps available on the market, such as personal trainer Kayla Itsines' Sweat app, which offers streaming workouts and a robust social media community at a cost of less than $120 for a full-year membership. But there are also plenty of other high-end equipment options that cost thousands (like the $2,000 NordicTrack bike or a nearly $5,000 treadmill from Matrix), even without the option to livestream classes. Studio cycling classes can also be expensive, even without buying your own bike, with SoulCycle charging anywhere from $28 to $36 per cycling class at various locations around the country.

Still, thousands of Twitter users recently swarmed to a thread of posts mocking both Peloton's price tag and a series of advertisements that feature Peloton products being used only perfect people in their luxurious homes and apartments. The viral Twitter thread suggests the ads paint Peloton as little more than a bougie exercise bike for rich people staring out of their penthouse windows at the poor wretches trying to do yoga in a public park.

"That thread demonstrated that Peloton has officially become part of the cultural conversation," a Peloton spokesperson told CNBC Make It.

However, Cortese points out "We've strived to find different entry points into the Peloton system for different folks," noting that you can sign up for the monthly Peloton subscription and stream it on a phone or tablet without buying the Peloton bike or treadmill and, if you live in New York, you can take classes at the Peloton studios for $26 each.

Peloton also offers a 39-month financing option to buy its bike that costs $58 per month, which is also the average monthly cost of a gym membership in the US.

How it all started

It's been over seven years since current CEO and co-founder John Foley invited his former colleague Cortese over for dinner in 2011 to pitch him on the idea that technology could make it possible for time-strapped people to get the full experience of working out in a high-end studio cycling class in their homes.

At the time, Foley was in his early 40s and married with two young children and a demanding job as an executive at Barnes & Noble in New York, where he'd grown fed up with trying to fit studio cycling classes into his busy schedule. Foley also noticed that what seemed to draw people to those expensive cycling classes was usually a favorite instructor or music playlist more than the brand itself. He wondered if he could make the whole experience more accessible.

"John kept talking about this idea that it was difficult to find time to fit [fitness] in, it was difficult to find time with a great instructor at a great class, and it was incredibly expensive to pay this per-class fee," Cortese says.

Foley and Cortese agreed that an at-home exercise bike outfitted with some sort of screen could allow customers to stream their favorite cycling classes anytime, anywhere.

At the time, Cortese, who is now 39, was really getting into fitness himself, training for triathlons and cycling races, and he'd also recently become engaged and started to think about how fitness would fit continue to into his lifestyle. "it just clicked," Cortese says.

Peloton co-founder and COO Tom Cortese.
Source: Peloton

"We were going to shift this fitness industry from these commercial gym environments into the most convenient place on earth," he says.

Foley secured $400,000 in seed funding from a group of angel investors and the company was officially founded at the beginning of 2012, with Foley taking a French term for a pack of bicycle racers, "peloton," to name their new creation. From there, it took Foley, Cortese and their three fellow co-founders — Graham Stanton, Hisao Kushi and Yony Feng — nearly a year to build a test bike using off-the-shelf hardware, including an Android tablet for the bike's touchscreen.

By the end of 2012, that test bike proved to be enough to show investors that a high-tech, connected stationary bike that tracks the riders' metrics while live-streaming video could work, allowing Peloton to raise another $3.5 million. They built a real prototype Peloton bike and launched a Kickstarter campaign in the summer of 2013 to create buzz around the bike.

It only took about a month for Peloton to top its Kickstarter funding goal of $250,000, but at $1,500 apiece, Peloton had still pre-sold fewer than 200 bike, so wanting to appeal to suburban consumers who wouldn't have as much access to brands like SoulCycle and FlyWheel, Peloton set up a pop-up store in the Mall at Short Hills in Millburn, New Jersey, a luxury shopping mall roughly a 40-minute drive from Manhattan.

Cortese remembers "high-fiving that we had sold, maybe, five units in a single day," he jokes. "But it ... allowed us to be in there providing our message to every customer who walked by."

Slowly, buzz for the brand started to build. Over the next year, Peloton opened seven stores in California, New York, Massachusetts and Virginia, while sales continued to tick upward. Peloton's sales in the first two months of 2015 more than doubled the company's expectations, and that spring Foley said that he expected to have sold a total of 10,000 bikes by the end of the year.

As the company continued to grow, more investors took notice. Two separate funding rounds in 2015 raised a total of $105 million, which was roughly seven times the company's total prior fundraising.

By 2016, Peloton had booked $60 million in annual revenue, and Cortese now tells CNBC Make It that Peloton's sales "essentially double or triple every single year" going back to 2014.

"What's amazing about our growth is just this past year, 2018, we had at least one day where we sold as many units in that single day as we did in that first year of 2014," Cortese says.

Changing the industry

Peloton now has 70 brick-and-mortar Peloton locations across the US, Canada and UK and three Manhattan studios for live-streamed and on-demand classes, and the company has plans to open a new, 35,000-square-foot flagship location in Manhattan this coming fall to house several fitness studios.

A Peloton instructor leads a cycling class at the company's studio.
Source: Peloton

The company already employs 26 total instructors, streams over 20 live classes per day and offers over 10,000 classes on-demand (varying in length from 15 minute workouts to hour-long sessions) — with plans to continue expanding into new fitness areas after recently adding running, yoga and strength training classes.

The running classes started in May 2018 to complement the newly-released Peloton Tread, a $3,995 treadmill that the company started shipping to customers in the fall. The company has not released sales numbers for the Tread yet, but Cortese says the product has had an "overwhelming early reception" from customers.

Still, much like Peloton's bikes, the Tread has been criticized for its price tag, with one review calling it "prohibitively expensive." Peloton stands by the value of its product, though. "We believe our product is comparable, if not a much better value, than other high-end treadmills on the market," said the Peloton spokesperson.

Analyst Lifschutz notes that Peloton's market share in the gym and exercise equipment manufacturing industry has grown from essentially nothing when it launched in 2014 to 7.3 percent by 2019. IBISWorld forecasts for Peloton to grow its annual revenue to more than $999 million in 2019. And Lifschutz adds that "Peloton just represents the direction the industry's heading towards."

Peloton's influence on its competitors is already clear. Rivals like NordicTrack and Flywheel have launched their own subscription services to stream cycling classes at home. In the case of Flywheel's FLY Anywhere service, its 2017 arrival spurred a 2018 lawsuit from Peloton that claims the company copied its proprietary design, which Flywheel has denied.

(Peloton declined to comment on ongoing litigation. A Flywheel spokesperson said, "Flywheel firmly denies the claims raised by Peloton and strongly believes that its Anywhere product does not infringe any valid claim of Peloton's patents" and it intends to "vigorously stand up for ourselves against Peloton's claims.")

Meanwhile, multiple other at-home fitness brands have sprung up in recent years, offering a similar message of convenient workouts through technology, including Mirror, Tonal and connected rowing machine startups Hydrow and CityRow.

Looking ahead, Peloton has no plans to stop growing. In addition to expanding the number of types of fitness classes it streams to users, Peloton has also been trying to reach its users in new places. Peloton launched in the UK and Canada for the first time in the fall, and the company has even dipped its toes into the hospitality industry through a 2017 partnership with Marriott's Westin Hotels & Resorts that puts Peloton bikes into dozens of hotels throughout the US.

Say Cortese, "We think we are just at the beginning of this business."

Disclosure: CNBC parent Comcast-NBCUniversal is an investor in Peloton.

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