Peloton has had a bumper year. Over the last year they have brought in $2.35bn, a 129% increase over the previous twelve months. Their stock value has gone up 6.2X in one year, 5.5X better than the S&P average. However, some people think that Peloton’s success was only temporary, and that people will stop buying expensive home fitness equipment when gyms reopen. It’s clear that some of the stock market thinks this – when the Pfizer vaccine efficacy was announced, Peloton stock dropped 20%.
However, Peloton’s recent purchase will cement their presence as a fitness-technology giant. Even at a $420mil price tag, it might be the smartest move they ever made. In this article I will explore Peloton’s purchase of Precor, a gym equipment manufacturer, and how the two companies fit together in what might be the most strategic acquisition of the year.
Precor is an international fitness equipment manufacturer and supplier, building and selling fitness equipment to gyms around the world. The deal, to be completed in 2021, consists of $420 million in cash to the current owners of Precor, Anta Sports Products Ltd., a Chinese sportswear company. The synergies for Peloton go beyond the usual supply and sales synergies that most case studies examine. Peloton’s purchase of Precor allows them to complete the Peloton ecosystem.
Before we dig into the synergies and the ecosystem, we should appreciate the timing by Peloton. Just one month ago Precor was looking to be bought for $500 million. Peloton’s discount will be because gyms around the world have been closed, and closed gyms don’t buy new equipment, which means that Precor will probably be struggling with getting enough demand, and hence would be eager to rush a sale. On the other side, had Peloton waited any longer then Precor might have started to see signs of economic recovery, driving their asking price up.
But first, there are the supply side synergies. Peloton currently has problems – they can’t make enough bikes to keep up with demand (the wait on their Bike+ is over 10 weeks). This isn’t the worst problem to have, but it does mean that they aren’t selling as many bikes as they could, and are missing out on revenue. Precor can help with this. Precor has manufacturing facilities across the US, which would allow Peloton to expand its manufacturing capacity without the expense of building new spaces, or the lag involved in hiring and training manufacturing staff.
Another possible supply side synergy is Precor could help Peloton make their bikes cheaper to construct. This might be possible through greater scale advantages, or through having access to the large amounts of manufacturing expertise at Precor. I have doubts about whether or not the acquisition would help with gaining cost advantages, but then again, I don’t know what changes they might be able to make to the construction materials and process to bring costs down.
As mentioned above, the Precor acquisition comes with manufacturing and product design expertise, including over 100 R&D staff. As Peloton has recently released Tread, their running machine, we can tell that they are interested in spreading outside the world of bikes. Precor’s R&D facilities and experience might allow them to be able to branch into rowing machines and assault bikes too. If Peloton is able to position themselves as the premium, best in business cardio machines across disciplines, then I can see some of the wealthier rowing clubs in the world spending more to have a Peloton rowing machine.
On the other side of the business are the sales synergies. This is where Peloton might be able to gain the most over the next couple of years. First, Precor already has access to and has relationships with a large network of gyms, hotels, universities, and offices. Peloton probably expects to leverage these relationships to sell Peloton equipment into these locations. Not only does this give them access to a larger market than the personal use market, but it also means that their business model is more resilient to post-Covid demand changes if people go back to gyms for good.
Having bikes in hotel gyms and office gyms provides an additional benefit to Peloton that most people might not have considered – advertising. The narrative that I can see occurring is the following: Someone, whilst on a post-Covid business trip, visits the hotel gym. In this gym, thanks to Precor’s international sales network, is a Peloton Bike. The business traveller has heard a lot about Peloton in the news, but doesn’t know anyone with one, and hasn’t yet been convinced to part with the cash to buy one. Because they are interested, they try the bike. They like it enough that, when they get home, they look into buying one.
This process of trying and liking a Peloton bike can move preferences both ways: it is also possible that someone who has a Peloton at home might aim to pick a hotel that also has Peloton bikes, so that they are able to continue to train on the same system, logging into the bike to keep their streaks up, so that they don’t have to adapt their training, and so that they can catch their favourite trainer’s classes.
The final part of the ecosystem is the gyms near home. If you have enjoyed using a Peloton bike while travelling, you might not have room for a bike in your apartment, but you might be interested in paying a little bit more to go to a gym with Peloton bikes. Again, Precor makes this possible. Even in the intermediate world where gyms are open but classes aren’t allowed, Peloton can thrive.
“Peloton was never just to replace any other type of workout. It was to supplement it and make sure that you had no excuses, that you had the convenience in your home”
Emma Lovewell, Peloton Instructor
The overall goal for Peloton is to get as many people as possible into riding Peloton bikes, and Peloton wants to be able to profit regardless of how those people want to ride. The Peloton ecosystem is going to be key in reaching this goal, and this acquisition goes a long way to making this ecosystem a possibility.
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Callum Macdonald 