John Foley and Peloton: What Went Wrong?

[00:00:09] Morning folks and welcome to today's episode called John Foley and Peloton. What Went Wrong? Now I wanted to dig into this story purely because what I knew about Peloton and John Foley, it was just from the headlines. During the pandemic you had stock pickers and the business media, they crowned Peloton the business of the future. It was called the Apple of Fitness. You had

[00:00:33] the Obamas, Usain Bolt, Leonardo DiCaprio, dozens of high profile celebrities endorsing the product and some of Peloton's live classes. They had bigger audiences than Madison Square Garden. And then just as quickly the same press that had lauded Foley turned on him. Foley and Peloton became the poster child for pandemic era hubris, a company that had reached a $49 billion

[00:01:03] valuation is now just worth $2.6 billion. Was it all John Foley's fault? That's what we'll find out in today's episode. It is a cracking story. Enjoy. Now John Foley, born 1971, family lived in Key Largo, Florida. His father flew for Delta. His mother was a housewife and Foley was working at McDonald's from just 14 years old because he's always had a great work ethic. Here's a quote from him.

[00:01:32] I don't think I'm quite smart enough and I don't think anyone is quite smart enough to just show up and use their intelligence and win. I think you have to have some baseline of intelligence but the rest is just flat out hard work. And look, as someone who has a pretty average, I'd say low baseline in intelligence, I agree with Foley 100% here. Now in 1989 he got into Georgia Tech to study industrial

[00:02:01] engineering but to pay for it he joined Georgia Tech's co-op program. So this is where he did a semester in college and then he worked at Mars for another semester. He worked at their Skittles factory in Waco, Texas and he did that for four years graduating in 1994 and stayed with Mars where at just 23 years of age he became production shift manager. He was over 120 people. Then in 1996 you have

[00:02:27] the dot-com boom was taken off and at 25 years of age he joined a dot-com startup called CitySearch. This was an online local directory, restaurant reviews, that kind of thing. And in 1998 CitySearch went public but Foley said he didn't make a fortune from the IPO and to quote him he said, I was such a junior guy that I didn't have any real equity. But he obviously made enough to put himself

[00:02:54] to Harvard Business School because he went there in 1999 and spent two years getting his MBA. And it was around this time he also met his wife Jill, she's an attorney and they were going to have two children. Now after his MBA he rejoined CitySearch and by this time CitySearch had been merged with Ticketmaster which was owned by Barry Diller. Now I did an episode on Diller a good while ago. I really like Barry Diller

[00:03:22] and the one thing that he was so good at was nurturing talent. He had this philosophy when it came to hiring. Basically Diller believed that hiring senior level talent was a sign of failure. Instead he went out and looked for young people with fresh energy, with raw potential. Qualities that he could shape. It was a gamble

[00:03:47] but it worked mainly due to Diller's ability to read people properly and put them in positions to succeed. Young executives who worked and succeeded under Diller included Michael Eisner who would go on to run Disney for 20 years. Jeffrey Katzenberg who became chairman of Disney Studios and co-founded DreamWorks SKG. Dawn Steele, she went on to make history as the first female to head a studio when

[00:04:14] she took the top job in Columbia Pictures. Dara Khosrowshahi and I know I'm pronouncing that wrong. He's the current CEO of Uber. He worked under Diller. Strauss Zelnick, the CEO of Tutu Interactive, the company behind Grand Theft Auto. And there were loads of other junior executives who rose through the ranks and became very, very successful executives in corporate America. So when Foley joined Diller,

[00:04:40] Diller was in the process of building IAC. This was his massive media and internet empire. On the internet side they had various search and comparison websites, they had Ticketmaster, they had the biggest online dating sites including Match.com, they had travel sites like Expedia, TripAdvisor, Hotels.com. So it was a huge, very, very successful business. And while Diller nurtured talent and did give them

[00:05:07] plenty of breathing space, it wasn't easy. I mean the culture was intense. It was data heavy, demanding, real discipline around stuff like customer acquisition cost, search engine optimization, conversion rates, you know, the consumer lifetime value. But Foley obviously did very well because he rose through the ranks. He was appointed president and CEO of Evice. This was a digital party invitations website and he turned it into a profitable business unit for IAC. And as a result

[00:05:37] of this success, IAC then backed Foley to incubate and launch Pronto.com. This was a price comparison search engine. And again, while I don't have any revenue figures in IAC's quarterly earnings reports, Pronto.com was repeatedly singled out as a top performing business. But by 2010, the comparison shopping landscape, it was getting squeezed because Google was, you know, prioritizing its own shopping

[00:06:07] results at the top of the search pages. So in 2010, Foley, he left IAC and he became president of e-commerce at Barnes and Noble. Essentially, as Foley said himself, his job was to take down Amazon. I mean, that is a tough task. Amazon's revenue at that time was six times that of Barnes and Noble and growing. Its market cap was 80 times that of Barnes and Noble. And most crucially, Amazon had all

[00:06:36] of the momentum. So Barnes and Noble, with Foley in charge, they had a two pronged strategy. The first was Nuke, an e-reader to take on Amazon's Kindle. And the new product, it really wasn't bad. And it captured around quarter of the e-reader market. But then Apple launched the iPad and suddenly people weren't just choosing between e-readers anymore. They were choosing between an e-reader

[00:07:01] and a tablet that could do almost anything. Now, outside of Nuke, simply growing then the online business itself, that meant discounting. So Foley ran into constant resistance from the physical bookstore executives who saw online discounting as a threat to their own stores. So Foley was really fighting a losing battle here. So we're in 2011 and Foley and his wife at this time, they were both into

[00:07:26] their fitness. They loved going to spin classes because at this time you had the likes of SoulCycle and Flywheel. They're pioneering this new type of spin class. So they're taking the spin classes away from the big gyms and into these dark rooms lit by candles or neon lights, you know, high-end sound systems, loud, upbeat music, and these charismatic celebrity-like instructors who were hyping up the room.

[00:07:52] And the popularity of these classes led to what was called booking wars. So classes for popular instructors, they filled up in seconds. So you had to log on to the website at, you know, precisely 12pm on Mondays and fight to get the spinning classes you wanted in advance. And then at $32 per class, which was non-refundable, going three times a week for two adults, that added up to hundreds of dollars

[00:08:18] a month. And then of course, if you had a busy job as Foley and his wife had, you had this commute, you had young kids at home. So getting out of the house to make your spinning class, it was a real hassle. So Foley was saying to himself, there has to be a better way. And he realised that there was a massive business opportunity here. And his idea was simple. Take the premium instructor-led studio spin

[00:08:45] class experience and put it directly into people's homes. Instead of paying $32 plus every time you want to do a spin class and all the travelling time, the traffic, the managing your kids around your classes, take all that hassle. And instead you could buy a bike with a screen and stream top-tier instructors either live or stream thousands of classes on demand whenever it suited you. I mean,

[00:09:12] that is a pretty simple and a pretty good idea. Now Foley was also at the stage in his life where he wanted to do something. In his own words, by that time I was approaching 40 and I wanted to be my own person. I'm not that ego-driven, but at some point you want to go out on your own and have your own story. And I think most of the people listening to this podcast, you can empathise with that sentiment.

[00:09:42] Because entrepreneurs, we just have a yearning, a need to do something on our own. It might be plant your own flag, create something special, the desire to be your own boss. The motives might be different, but that need or the desire, it's just there. And I think it has to be applauded because it's risky. You're often leaving a secure, well-paying job. You need to have some sort of belief in your

[00:10:09] abilities. It's always going to be tough, a lot tougher than you expect, but it's always so much fun and so liberating. So at the start of 2012, Foley left his job, founded Peloton, raised $400,000 from friends, family, a handful of early age investors, putting the company valuation at $1.6 million. He then got some key executives who he'd worked with at IAC and poached them, and they built their

[00:10:39] first prototypes by literally taking off-the-shelf stationary bikes and zip-tying Android tablets to the handlebars just to prove that the basic idea worked. You know, that software could actually track and sync with peddling in real time. Then throughout the rest of 2012, Foley went out and pitched. He estimates that he got turned down by 400 venture capitalists. I mean, the timing, it wasn't great.

[00:11:06] You had Instagram had just sold to Facebook for $1 billion with only 13 employees. Snapchat, that was becoming the next big thing. So investors were chasing apps that could scale overnight, not some expensive hardware business that needed factories, inventory, logistics, all that kind of stuff. So Foley had to go back to individuals. And in December 2012, he raised $3.5 million,

[00:11:32] all from private age investors. And this allowed them to start designing an actual prototype. Then in 2013, they took the idea straight to customers with a Kickstarter campaign, and they raised just over $307,000 from 297 backers. But you see, the Kickstarter campaign, it wasn't really about the money. It was about answering one question. Did people actually want

[00:11:57] this? And when you get nearly 300 complete strangers willing to pre-order a very expensive product from a company that hadn't yet built a single bike, Peloton really had its answer. It had proved that there was demand. So as a result, in April 2014, they raised $10.5 million from Tiger Global Management, valuing the company at $36 million. And Tiger, they liked the model because the model was this,

[00:12:23] a bike for $2,000 and then a monthly subscription of $39. And the subscription business, it ran on much higher margins than the hardware business. So Peloton, it was pitching it as a bike plus a software business bolted onto it. Revenue was $10 million in 2014. A year later, 2015, revenue was $50 million. And growth, it came from a variety of sources. There was word of mouth. You also had the actual

[00:12:52] instructors themselves because they were starting to build strong personal brands on Instagram. And Foley also used Facebook ads at a time when it was still pretty cheap. And on top of this, Peloton opened up showrooms in high-end shopping centers or malls as they call them in America, because Foley knew that when it came to a $2,000 bike, people would actually want to try it out in person. And

[00:13:17] Foley himself, every weekend, he was in these showrooms for years, personally selling roughly a thousand bikes face-to-face. So like Foley, he is working his ass off to grow the company. Now, it is worth reminding ourselves that Foley's previous expertise when working with Barry Diller was figuring out the lifetime value of a customer, the cost per acquisition, all the good data that

[00:13:42] will get investors interested. And now, in 2015, with more than 10,000 customers, Foley could prove something investors loved. More than 90% of customers were still paying for their monthly Peloton subscription a year after buying the bike. That is a seriously high retention rate. And it proved that once someone bought into Peloton, they were kind of locked into it long-term.

[00:14:07] They loved the product. So between 2015 and 2017, there is another $400 million. Revenue was doubling every year. So by 2018, with revenues up at $435 million, with a subscriber base of $245,000, they launched a treadmill machine. They expanded into Canada and the UK. They launched a huge broadcast

[00:14:30] studio. And by 2019, revenue had more than doubled again to $915 million. And Peloton was valued at around $4 billion. Now, the business was still loss-making, but investors are almost always willing to overlook that in exchange for rapid growth. So the obvious next step was an IPO. And while the IPO valued the company at around $8 billion, the market's reaction, it was lukewarm. Because to most investors,

[00:15:00] Peloton really was, in essence, a hardware company. Because every new customer meant manufacturing, shipping, servicing an expensive exercise bike, opening showrooms, producing live content. It wasn't a business that could ever generate the kind of high margins and profitability that successful software companies enjoy. And it also wasn't helped by what became one of the most controversial

[00:15:26] adverts of the year. So Peloton's 2019 Christmas commercial was later dubbed the Peloton wife ad. And it was widely criticised as sexist and old-fashioned. Now, I watched it myself and I got to put my hands up. Initially, I didn't really see what all the fuss was about. So I showed it to my wife without telling her that there had been any controversy because I didn't want to influence her. She hated it.

[00:15:52] She described it exactly as the critics had, which just goes to show how out of touch I can be. The backlash from the ad was immediate. It dominated headlines and it wiped more than a billion dollars off Peloton's market cap within just a few days. Anyway, let's just pause and review where Foley and Peloton are at this stage because everything is about to change pretty drastically for them. But up to now,

[00:16:19] despite the hullabaloo over the Christmas ad, Foley has done really, really well up to now. He has spent eight years working like a demon. He has taken his idea and built it into a business that is generating close to a billion dollars a year. I mean, how many of us can say that? He has done a fantastic job.

[00:16:40] But then, as I said, everything changed in March 2020. The COVID pandemic hit, gyms shut down worldwide and demand for a bike that you could ride in your living room went through the roof. Suddenly, their supply chain was overwhelmed. Their factories were located in Taiwan and even when they put them running on 24-7, they still couldn't keep up with demand. And the pressure to get the bikes out

[00:17:07] would lead to corners being cut, which will come back to bite them hard, but that's for later in the episode. Normal delivery wait times of one to two weeks stretched into three to four months. Now, I don't think there was much that Foley could have done here in relation to the immediate supply chain issues. Like, no one could have foreseen the pandemic and its impact. Peloton did fly exercise bikes from Asia to North America on cargo planes at more than 10 times the normal ocean freight cost.

[00:17:37] So this is wiping out their hardware profit margins just to get the bikes into living rooms. And while a lot of investors argued that Peloton should shut down its expensive retail stores now that everyone was buying online, Foley, he took the opposite view. He saw struggling landlords and he thought this was a moment to grab premium storefronts on the cheap. And while this move appeared visionary

[00:18:03] during the lockdown, it became a massive financial liability when gyms reopened and home fitness demand kind of cooled off. But on the plus side, and for Peloton, it was one hell of a plus. The pandemic transformed the company almost overnight. Throughout 2020, Peloton became a cultural phenomenon. It was suddenly one of Wall Street's favourite stocks. One of the handful of businesses like Zoom

[00:18:33] that was perfectly positioned for a world that was stuck at home. Every quarter seemed to produce another headline about soaring demand, another analyst upgrading the stock, another magazine calling it the future of fitness. And that attention, it created this powerful flywheel. Because the more Wall Street talked about Peloton, the more the media covered it. And the more the media covered it,

[00:19:01] the more celebrities started posting about their Peloton workouts. And once people saw that the Obamas, Usain Bolt, Leonardo DiCaprio, and a host of other celebrities were riding Peloton, Peloton wasn't just selling fitness anymore. It was selling this membership to, you know, an exclusive club. And the instructors themselves became celebrities. Some live classes attracted more than 20,000 riders at once, the equivalent of

[00:19:28] filling Madison Square Garden. Riders bought Peloton branded clothing. They built online communities around their favourite instructors. And some fans even got tattoos of the company's logo. Like it was being described as the apple of fitness. Revenue surged to 1.8 billion in 2020. Its market value went up to 28 billion. But this is the moment where Foley,

[00:19:55] he got it wrong. He didn't see the pandemic boom as a temporary surge. He believed it had permanently changed how millions of people would exercise. So instead of preparing for demand to normalise, he now built Peloton's entire strategy around the assumption that riding a bike or running on a treadmill at home wasn't just a nice, sizable,

[00:20:21] niche business, but was actually going to be the future for anyone who had previously gone to the gym. And here's a quote from him. I see a couple of hundred million people on the Peloton platform in 15 years' time. Now look, it's easy with hindsight to criticise Foley. But if you go back and read the newspapers, watch the interviews, listen to the analysts from 2020, there was a broad consensus that the pandemic

[00:20:50] had permanently changed how we would live. People predicted the death of the office, the decline of business travel, the end of the daily commute, and a permanent shift towards exercising at home. And in fairness, some of these predictions turned out partly true. You know, millions of people still work from home several days a week. So yes, looking back on it, Foley called it wrong. But standing in

[00:21:15] the middle of 2020 with demand exploding quarter after quarter, it doesn't feel like an unreasonable conclusion. Especially when the company reached a billion dollars in quarterly revenue in February 2021 2021. And its valuation hit a high of 49 billion dollars. But that was the high point. Because as we move

[00:21:38] into 2021, with vaccines being rolled out, with lockdowns ending, gyms starting to open, and Peloton's own internal data like website traffic, lead conversions and orders were already showing that the extreme lockdown surge was normalizing. And this is, I think, where Foley can rightly come in for some criticism. Because he makes some very bad calls. First off, he went on business TV shows and kept

[00:22:07] predicting massive growth. Not only this, but he then announced a massive investment of almost a billion dollars to buy an equipment manufacturer, as well as commitment to build their own 1 million square foot facility. Doing this at the exact moment that consumer interest in Peloton was beginning to slow down. And he had the internal facts and figures that were telling him this. Then, in April 2021,

[00:22:32] the US Consumer Product and Safety Commissioner, the CPSC, they issued a public warning about Peloton's treadmills. The design was defective. Small children and pets who crawled near it could get dragged under the machine. There were 70 reported injury incidents, including life-changing brain injury to a three-year-old. And tragically, a six-year-old child was killed by one of the treadmills. And Foley's response was

[00:23:01] widely criticized because rather than immediately recalling the machines, Peloton dismissed the CPSC's warning as inaccurate and misleading. They insisted the treadmill was safe and that it was up to owners to follow the instructions and keep children and pets away from it. I mean, this is a machine that is sitting in your living room. That's just crazy. However, under mounting pressure, Foley reversed

[00:23:25] course, Peloton recalled around 125,000 machines, and he later admitted the company had made a mistake in its initial response and he publicly apologized. Then, in November 2021, the softening in demand was first made public when management slashed full-year revenue guidance by a full billion dollars. And they

[00:23:47] also reported a loss of $376 million. And then there was this number also. 91% of Peloton's hardware inventory was sitting completely unsold. The stock dropped 35% in a single session. And the bad news, it just kept coming. So, at this time as well, there was a reboot of HBO's Sex and the City. And one of the main characters, Mr. Big, played by Chris Noth, he has a fatal heart attack right after a Peloton

[00:24:17] session. Peloton's stock fell by another 11% the next morning. The company hired Ryan Reynolds' marketing agency, Maximum Effort, for some damage control. And I'm just going to stop there for a minute. Like, Ryan Reynolds seems to have his hands in so many different places. Like, this guy doesn't just endorse companies. He's a very active and, you know, astute investor and a businessman. He's made

[00:24:41] hundreds of millions from mobiles to gin to sports investments. I am definitely going to be doing an episode on him. Anyway, Reynolds' agency produced a parody ad within 48 hours, bringing the actor Chris Noth back to insist he's still alive. It was a very, very clever save. And it bought the company some much-needed kudos. But then, the ad was pulled after just a few days, when accusations of

[00:25:10] sexual assault were made against the actor, Chris Noth. As Foley said of that time, and I quote, The stock was getting crushed, and then the Mr. Big thing happens. It was brutal. All of a sudden, we were just being trolled. Everything was collapsing. Anyway, by this stage, Mr. Big is really the least of Peloton's problems. Because in January 2022, internal slides leaked showing that

[00:25:35] Peloton had stopped production of both the bike and the treadmill altogether because there was simply too much unsold inventory. They had $1.5 billion worth of unsold inventory. Its market cap dropped to $8 billion. That's a $40 billion fall within just 12 months. So now, activist investors, they were calling for Foley's head. And in February 2022, he agreed to step down as CEO. And Barry McCarthy,

[00:26:03] the former CFO of both Netflix and Spotify, he got the job as CEO. And he's a numbers man. He was brought in to clean up the mess. And he saw the company for what it was. You know, not a hyper-growth company, but a niche premium fitness business. So within weeks, he cut 2,800 jobs around a fifth of the workforce. He canceled the $400 million factory project. And he targeted $800 million

[00:26:28] worth in annual cost savings. But the problems kept coming. Remember I mentioned that during the pandemic, Peloton was working around the clock to get bikes out the door? Well, quality suffered. And in 2023, the company recalled around 2 million bikes after seat posts were found to be breaking during rides. But despite everything, and up to now, I just thought Peloton was this disaster.

[00:26:53] But it's not. Like, Peloton has survived. Today, it's a profitable business, generating around $2.4 billion in annual revenue. And it has almost 6 million members across its platform. Now, as for Foley, I came across a good few articles describing him as having lost everything. That's not exactly true. I mean, he did have to sell off a lot of his Peloton equity, plus his $50 million house in the Hamptons,

[00:27:20] just to meet margin calls when the stock collapsed. But it's estimated that he still walked away with tens of millions of dollars from those various sales. So yeah, a huge fall from being a paper billionaire. But he's nowhere near being broke. And while many might think that his reputation is damaged, the same people who backed Peloton in the early days still believe in Foley, because they've

[00:27:45] invested $45 million in his new venture, Ernesta. It's a direct-to-consumer custom rug company. Now, the main reason I wanted to cover the story, as I mentioned at the very start, is that Foley became something of a joke. You know, the poster boy for losing the run of yourself during the pandemic. And look, he definitely made mistakes. But, like, put yourself in his shoes for

[00:28:09] a second. A business that was growing to the extent that its revenues were doubling every year, reaching almost a billion dollars in annual sales even before the pandemic. And then, when the pandemic hits, sales go through the roof. Celebrities are endorsing our product. The financial press is agreeing with your own logic that the world has changed for good. It's understandable he got swept up in it. And it's also understandable that in the middle of all that crazy growth and those

[00:28:39] crazy times, mistakes were made. And I really like the guy on a human level. Like, I've listened to him on a few podcasts and he just comes across as a pretty decent, down-to-earth kind of guy who gave up a safe, well-paying job when he was 40 and bet on himself and built a billion-dollar business. I mean, that's not failure in my eyes. So, I think credit where it's due.

[00:29:04] What's unusual about Peloton is it's the story of what happens when a once-in-a-century pandemic collides with one of the fastest-growing companies in America? And everybody, not just John Foley, got carried away at times. And I think that's what makes it such a great business story. And that brings us to listeners' emails. And this one comes from Henrik, who would love me to do an

[00:29:28] episode on Daniel Elk, the founder of Spotify. Great suggestion, Henrik. It's already on my list. And thanks so much for listening. And remember, if you have any comments, any corrections, or any story that you'd like me to cover, email me at info at gbspod.com. All the best, folks.