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COVID broke Peloton’s supply chain – can $100M fix it?

As demand for products jumped, shrinking freight capacity slowed customer delivery, and now Peloton is playing catchup

Demand for its products skyrocketed, but port congestion and freight capacity constraints have prevented their delivery, and now Peloton is spending $100 million to try and fix its supply chain. (Photo: Peloton)

For some companies, the COVID-19 pandemic has proven a bonanza for sales and revenue. That was true for Peloton (NASDAQ: PTON), which on Thursday announced a 128% quarter-over-quarter sales growth for its fiscal Q2 2020 and earnings per share of 18 cents versus an expected 9 cents. Revenue surpassed $1 billion, reaching $1.06 billion versus $466.3 million a year before.

But port congestion and skyrocketing sales overwhelmed the company’s supply chain. Despite the record earnings results, Peloton’s stock dropped 6% in after-hours trading Thursday.

Peloton’s supply chain is broken, and its customers are angry.

CEO John Foley announced on the earnings call the company would invest $100 million to speed up delivery for its connected products, acknowledging continued problems with delivery delays that are stretching into months rather than weeks. Foley noted port congestion on the West Coast as a significant problem.

“West Coast port delays and COVID-related delivery challenges have prevented us from returning to our normal order-to-delivery wait times and unfortunately forced us to reschedule many deliveries,” Foley said on the call. “To address this issue, we will continue to invest heavily in systems, teams and manufacturing capabilities to ensure we don’t disappoint our customers going forward.”

Read: Trans-Pacific trade crashes into max-capacity ceiling

Part of the $100 million will go to expediting shipping for products from Asia. In an update to customers on the Peloton website, Foley noted the expense will include shipping products by air instead of by ocean.

“On average, in the coming months, we will be incurring a transportation and delivery cost that is over 10 times our usual cost per Bike and Tread, including, in many cases, shipping them by air instead of by sea. We are making this investment because we are as frustrated as you are that you don’t have your Peloton Bike or Tread yet. We are (and always have been) a company that is deeply committed to your happiness and we’ve fallen short of that in this regard,” Foley wrote.

The port congestion has been a major headache for companies of all shapes and sizes. At the end of January, FreightWaves’ Greg Miller wrote about the impact the West Coast port congestion was having on trans-Pacific trade.

“On average, in the coming months, we will be incurring a transportation and delivery cost that is over ten times our usual cost per Bike and Tread, including, in many cases, shipping them by air instead of by sea.”

John Foley, Peloton CEO, in note to customers

“Massive port congestion in the ports of Los Angeles and Long Beach is forcing ocean carriers to take extreme measures. Sailings are now being ‘blanked’ (canceled) not because of lack of demand, but because of lack of tonnage as ships are stuck awaiting berths,” Miller wrote.

Peloton is but one example of this, but it was not an unforeseen one. FreightWaves’ Andrew Cox, a research analyst and author of the Point of Sale newsletter, wrote about Peloton’s issues in November.

“One of the first [newsletters] I wrote was titled ‘Can Peloton avoid disaster this holiday season?’ and I was questioning that because there were already mounting delays back then and people were starting to complain, but the situation has gotten much worse since then,” Cox said on a Jan. 20 edition of Great Quarter, Guys.

Subscribe: Point of Sale retail supply chain newsletter

Joining Cox on the episode was Seth Holm, senior research analyst for FreightWaves. Holm’s comments on the situation were more pointed.

“Peloton didn’t have enough bikes and treadmills in inventory to meet demand, so they had to run factories 24/7, and a lot of this stuff is produced in Asia,” Holm explained. “It was then placed on container ships and it goes across the ocean to LA or Long Beach.”

Foley said Peloton has ramped up production 6X in the past 12 months, and it was now producing more bikes on a monthly basis than it did in all of 2018.

“They were already so backed up over the past three to six months that it was taking three months, call it 10 to 12 weeks, to get your Peloton,” Holm continued. “What’s been happening lately is capacity has gotten so tight and bottlenecks [are happening] all over the place from the ports to the rails to trucks … that people all over the place are getting notified, often on the day they were [expecting delivery], that their delivery is being delayed a month or two months.”

Watch: Containergeddon through the eyes of Peloton

Holm added that Peloton has been deflecting blame, suggesting that final-mile transportation providers like XPO (NYSE: XPO) and J.B. Hunt (NASDAQ: JBHT) are part of the problem.

“It’s likely a combination,” Holm said. “Some of the fault probably lies with the manufacturers back in China. Some of it probably lies with the ocean container lines — [there] have been labor shortages at the ports — and then it goes to Peloton for not being able to coordinate this whole process and get products delivered to their customers. And they clearly don’t have the technology on the back end to get visibility into the status of their freight.”

FreightWaves’ request for comment to Peloton had not been returned as of publishing time.

In the earnings call, Foley said Peloton will incur costs for expedited air and ocean shipments, and some products will be redirected to less congested ports.

“We will continue making significant investments to get our products to the U.S. with more certainty and with greater speed. We have also significantly lowered marketing spend even during our typical peak selling periods. We are determined to do what it takes to reduce our delivery times and get certainty for customers on the delivery dates we offer,” Foley said.

Peloton reported it added 333,000 net Connected Fitness subscriptions in its fiscal Q2 and it has over 4.4 million global members overall.

Jill Woodworth, chief financial officer, said the impact of the added cost will be mostly felt in Peloton’s Q3 earnings. Air shipping expenses are elevated, she said, and Port of Los Angeles unloading times are currently four times normal, both of which will be reflected in a compression of Q3’s margin, with a “more muted” impact in Q4.

Woodworth added that “outside shipping costs will largely abate by June as we build up significant inventory stateside in the coming months.”

Peloton reduced its full-year margin guidance to 39% from 41% due to the supply chain investments.

Click for more FreightWaves articles by Brian Straight.

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Brian Straight

Brian Straight leads FreightWaves' Modern Shipper brand as Managing Editor. A journalism graduate of the University of Rhode Island, he has covered everything from a presidential election, to professional sports and Little League baseball, and for more than 10 years has covered trucking and logistics. Before joining FreightWaves, he was previously responsible for the editorial quality and production of Fleet Owner magazine and Brian lives in Connecticut with his wife and two kids and spends his time coaching his son’s baseball team, golfing with his daughter, and pursuing his never-ending quest to become a professional bowler. You can reach him at [email protected]