Peloton’s battle with the company over Tread + security may tarnish the model

Maggie Lu uses a peloton treadmill during CES 2018 at the Las Vegas Convention Center on January 11, 2018 in Las Vegas, Nevada.

Ethan Miller | Getty Images

A public argument with a federal agency over safety concerns and a terrifying video of a child being pulled under a treadmill threaten the community Peloton has built.

Time-pressed parents and workout addicts who own Peloton products scratch their heads and visit social media platforms and community chat rooms to discuss the fitness equipment manufacturer’s response to the US Consumer Product Safety Commission. The agency is investigating the safety of Peloton’s high-end treadmill, which has since been linked to numerous injuries and the death of a child.

Peloton has said it has no intention of recalling its $ 4,300 Tread +, despite regulators and politicians urging it to do so.

The back-and-forth jeopardizes the launch of Peloton’s lower-priced treadmill machine in the US later this year. Branding experts and attorneys warn that the longer it drags on, the longer the risk for Peloton, the more consumer setbacks it faces, requires more damage control, and costs more money.

“There’s a rule of thumb that goes back to the Tylenol case, where people were poisoned,” said Luc Wathieu, professor of marketing at Georgetown University’s McDonough School of Business.

Tylenol became a textbook crisis management case in the 1980s when someone tampered with extra strong Tylenol capsules by adding deadly potassium cyanide and killing several people. Johnson & Johnson acted quickly to devise a strategy to regain American confidence.

“If there is a threat to the customer – one that is so public – you have to overcompensate,” said Wathieu in a telephone interview. “But for some reason companies tend not to do this, even though it has been shown time and time again that you need to act quickly.”

Over the weekend, the CPSC issued a statement asking consumers to stop using the Peloton Tread + machine when small children or pets are around. The move came after the organization’s investigation into the death of a child with one of the Tread + machines, as well as dozens of other reports of injuries.

At the same time, the commission released a surveillance camera graphic video of a boy who was pulled under one of the Tread + machines and struggled to break free.

The CPSC went on to say that Peloton’s treadmills are designed differently than their counterparts. “An unusual belt design that uses individual rigid rubberized slats or treads that are connected to each other and run on a rail.” That’s instead of a thinner, continuous strap. There is also a large gap between the bottom and the belt of the Tread +, leaving room for things to move underneath.

According to Peloton, the design is supposed to make walking on knees and legs easier.

Currently, the company is refusing to withdraw the product from the market or make design changes. Peloton said it was “shocked and devastated” to learn of the death last month. However, last weekend it also issued a statement calling the CPSC press release “inaccurate and misleading”.

The CEO and co-founder of Peloton, John Foley, wrote in a separate letter to the owners of the treadmill that the company is working on a new software-enabled security code “that will provide additional protection against unwanted use of the Tread +”.

“The Tread + is safe if our warnings and precautions are followed,” Foley said in the letter.

A peloton spokesman declined to comment.

“I haven’t seen a fight like this before.”

The company is better known for its stationary bikes and didn’t launch a treadmill until 2018. Initially referred to as Tread, it is now called Tread + as the company prepares to sell a cheaper version in the US later this year. The smaller, cheaper model is already available in the UK and doesn’t include the same rigid slats as the Tread +.

The clash with the CPSC was not good for Peloton’s stock. Shares fell 7% on Monday. The stock closed at $ 106.50 on Tuesday afternoon, down another 1.2%. In the past three months, Peloton stocks have fallen more than 32% after hitting an all-time high of $ 171.09 on Jan. 14. This follows a huge spike in 2020 when investors viewed Peloton as a stay-at-at. Home game and pandemic beneficiary, which made the stock up more than 400%. But when the fitness centers reopen, some of those gains have been given up.

According to BMO analyst Simeon Siegel, Peloton’s share price was recently “detached” from underlying fundamentals and results were reported.

The stock appears “ruled by perception and hope,” he said. Siegel has an underperform rating on Peloton stock with a price target of $ 45.

“Most of Peloton’s market capitalization was created by its marketing department rather than its equipment, engineers, or instructors,” Siegel said. “They told a story … and this peloton story is so much bigger than the peloton-paying membership base.”

For the past six months, according to Siegel, Peloton’s news has stalled as business grew exponentially during the pandemic.

“Whether it is Tread + or customers who deal with the supply chain, … ultimately, companies face obstacles to growth and cannot all face violence,” said Siegel.

While Peloton doesn’t split sales of its treadmills versus bikes, Cowen & Co. has estimated that the Tread + will account for about 2.2% of sales in 2021. This equates to about 1.633 million stationary bikes and treadmills combined.

In 2020, Peloton had sales of $ 1.8 billion, up from $ 915 million in the previous year.

John Blackledge, an analyst at Cowen, said he believes the majority of Peloton treadmill opportunity in the longer term will come from its upcoming Tread model, which is priced below the $ 4,300 price of Tread +. Hopefully, he said, the newer model will avoid similar problems with the CPSC as its belt won’t wrap under the machine.

Peloton has stated it is open to working with the CPSC to further ensure the safety of its customers. Its classes are said to have safety messages from instructors to remind users to keep their children, pets, and other items off the Tread + while exercising, and to remove a safety key after exercising to prevent children from activating the machines.

However, disagreements with the federal agency responsible for protecting US consumers from dangerous products are rare. The CPSC cannot force a recall, but has sued companies in the past to get them to comply.

Peloton has stuck to the agency before. There was a recall for a version of its clip-in bicycle pedals last fall due to the risk of axle breaking and injuring users, affecting around 27,000 bikes.

“To be honest, I haven’t seen a fight like this here,” said Anthony Gair, partner at Gair, Gair, Conason, Rubinowitz, Bloom, Hershenhorn, Steigman and Mackauf, who specializes in trying personal injury cases, that are tied to defective products.

“The CPSC must have reason to believe that it was not designed appropriately,” he said. “Warnings are the last resort. And so the question arises: ‘Did you conduct a proper hazard analysis, either yes or no?’ And if you have carried out a proper hazard analysis: “Did this hazard analysis identify this hazard?”

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