Peloton focuses on where the money is: subscriptions

The exercise company seeks higher margins in monthly subs as it outsources the manufacturing of its signature equipment overseas.

Exercise company Peloton announced Tuesday that it will outsource the production of its bikes and treadmills to a partner, Rexon Industrial Corp., in Taiwan. The news comes a little more than a year after Peloton said it was going to spend $400 million to build a facility in Ohio to manufacture its products. So, why the change of heart?

Peloton’s new CEO, Barry McCarthy, said he’s focusing on the subscription model. Users pay $40 to $50 a month to get all the workouts via streaming. He’s also cutting costs by outsourcing the manufacturing of the equipment.

“You had a high-margin licensing software business with about 65% margins. And then you had an equipment sales business that had anywhere from 8% to 12%,” explained Ken Leon, director of equity research at CFRA.

As many companies learned during the pandemic, outsourcing has its own set of costs.

“The supply chain is vulnerable, there are security risks, there are economic risks, the costs are going up, energy costs are higher,” said Darrell West, a senior fellow at the Brookings Institution. 

Which, he said, has led a lot of companies to try to onshore their manufacturing. 

But building a factory here and hiring American workers is more expensive and that cost will get passed on to the consumer.

“So if we tried to onshore the components of most things, no one could afford to buy it,” said John Austin, director of the Michigan Economic Center.

The key is what he refers to as “allyshoring”: weaning ourselves off of trade with hostile nations — the Chinas and Russias of the world — and leaning into our relationships with partners like South Korea and Mexico. Because, he said, outsourcing low-paying manufacturing jobs is fine as long as the content and ideas are developed here. 

“You want to be the center of the brains of the industry that designed the product prototype, do the engineering, do the software work, do the high-value things that nobody else can do,” Austin said.

And with so many used Peloton bikes available on Craigslist and Facebook Marketplace, the exercise company’s fine with you grabbing one on the cheap as long as you pony up for the monthly subscription.