Peloton: the industry keeps its reputation
Good managers in bad businesses
This Warren Buffett quote sticks with me:
“When a manager with a good reputation meets an industry with a bad reputation. It is normally the industry that leaves with its reputation intact.”
I saw this news yesterday and it exemplifies that quote.
McCarthy was Spotify’s CFO and took the company public. He was CFO at Netflix prior to that.
He’s something of a legend at Spotify; people talk about him as one of the most effective operational leaders they’ve ever seen. Many people who had worked with him viewed it as hugely bullish for Peloton when they hired him.
McCarthy took over at Peloton in February 2022, when the company was a mess. It had amassed way too much inventory after overinvesting based on pandemic-fueled demand. It clearly was not a tightly run company, and so it seemed like bringing on a seasoned financial operator like McCarthy made sense.
McCarthy immediately cut costs and tried to move the business towards higher margin subscription revenue. This made sense; he’d been successful in two big digital subscription businesses in the past. But two years later, it hasn’t worked:
It seems like this may be a bad industry, and no amount of good management could bring the reality up to the initial story. It may just be the case that the market for connected fitness is not that big, selling hardware is hard and people aren’t willing to pay a premium for digital fitness products right now.
I think it is a good lesson that the market matters more than the operators in it. And so being able to clearly see what is going on and understand whether you’re in a market that you want to be in is critical, even more important than improving your performance.
You might be right that it's a tough business. But maybe McCarthy just wasn't the right guy? It was his first CEO job--which IS a lot bigger than a CFO--and he came in with no experience in physical products. He also might have tried to copy and paste lessons from his previous subscription businesses--i.e. fighting the last war, a common mistake of previously successful leaders.
I love my Peloton bike and use the app frequently for yoga. A good number of us think it's an outstanding product, with weak competition. Seems like there's a business model that would work!
You may be right that it’s the market not the man. However PTON missed estimated EPS four straight quarters (which I assume was his guidance) and was still burning cash. Just two consecutive earnings misses is enough to fire the CEO in some cases.