Peloton's clash with agency over treadmill safety threatens to tarnish brand

  • A public dispute with a federal agency over treadmill safety concerns threatens to tarnish the community that Peloton has built.
  • The back-and-forth further jeopardizes the launch of Peloton's less expensive treadmill machine in the United States later this year.
  • Brand experts and attorneys caution that the longer this drags out, the greater risk Peloton runs of facing growing consumer backlash, requiring heftier damage control and costing more money.

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A public dispute with a federal agency over safety concerns and a chilling video of a child being dragged under a treadmill are threatening the community that Peloton has built.

Time-pressed parents and workout addicts who own Peloton products are scratching their heads and taking to social media platforms and community chat rooms to discuss the fitness equipment manufacturer's response to the U.S. Consumer Product Safety Commission. The agency is looking into the safety of Peloton's high-end treadmill, which has now been linked to numerous injuries and one child's death.

Peloton has said it has no intent to recall its $4,300 Tread+, despite calls from regulators and politicians to do so.

The back-and-forth further jeopardizes the launch of Peloton's less-expensive treadmill machine in the U.S. later this year. Brand experts and attorneys caution that the longer this drags out, the greater risk Peloton runs of facing growing consumer backlash, requiring heftier damage control and costing more money.

"There is a rule of thumb dating way back to the Tylenol case, where people were poisoned," said Luc Wathieu, a 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 capsules of Extra Strength Tylenol by adding lethal potassium cyanide, killing multiple people. Johnson & Johnson acted swiftly to develop a strategy to regain trust with Americans.

"When there is a threat on the customer — one that becomes public like this — you have to overcompensate," Wathieu said in a phone interview. "But, for some reason, companies have a tendency not to do this, even though it has been shown time and time again that you have to act quickly."

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

The commission simultaneously released a graphic video, captured by a home security camera, of a young boy being pulled under one of the Tread+ machines and struggling to free himself.

The CPSC has further said that Peloton's treadmills are designed differently than those of its peers, with "an unusual belt design that uses individual rigid rubberized slats or treads that are interlocked and ride on a rail." That's instead of a thinner, continuous belt. There is also a large gap between the floor and the belt of the Tread+, leaving room for things to wiggle their way under.

Peloton said its design is meant to make running easier on the knees and legs.

For now, the company is declining to take the product off the market or to make design changes. Peloton said it was "shocked and devastated" to learn about the fatality last month. However, it also issued a statement this past weekend that called the CPSC's press release "inaccurate and misleading."

Peloton CEO and Co-founder John Foley wrote in a separate letter to treadmill owners that the company is working on a new software-enabled backup code "that will provide an additional layer of protection against unwanted use of the Tread+."

"The Tread+ is safe when our warnings and safety instructions are followed," Foley said in the letter.

A Peloton spokesperson declined to comment further.

'I haven't seen such a fight like this'

The business is better known for its stationary bicycles and didn't launch a treadmill until 2018. First called the Tread, it is now known as the Tread+, because the company is preparing to begin selling a less-expensive version in the United States later this year. The smaller, cheaper model is already on sale in the U.K. and doesn't include the same rigid slats as the Tread+.

The clash with the CPSC hasn't been good for Peloton's stock. Shares fell 7% Monday. The stock closed Tuesday afternoon at $106.50, down another 1.2%. Over the past three months, Peloton shares have tumbled more than 32%, off an all-time intraday high of $171.09 hit on Jan. 14. It follows a huge run-up in 2020, when investors viewed Peloton as a stay-at-home play and pandemic beneficiary, sending the stock up more than 400%. But as fitness centers begin to reopen, some of those gains have been given up.

According to BMO analyst Simeon Siegel, Peloton's share price has recently been "detached" from the underlying fundamentals and reported results.

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

"Most of Peloton's market cap has been created by its marketing department, rather than its equipment, engineers, or its instructors," Siegel said. "They have been telling a story. … And that Peloton story is so much larger than the Peloton-paying member base."

Over the last six months or so, Siegel said, Peloton's messaging has started to stumble, as the business grows exponentially during the pandemic.

"Whether it's Tread+, or whether it's responding to customers about the supply chain, … at the end of the day, as companies grow, they face obstacles, and they can't all be faced with force," Siegel said.

While Peloton doesn't break out sales of its treadmills versus cycles, Cowen & Co. has estimated that the Tread+ will represent about 2.2% of unit sales in 2021. That's out of about 1.633 million stationary bikes and treadmills combined, it said.

In 2020, Peloton reported $1.8 billion in revenue, up from $915 million a year earlier.

Cowen analyst John Blackledge said he anticipates the bulk of Peloton's treadmill opportunity longer term will come from its upcoming Tread model, which is priced more affordably than the $4,300 Tread+. Hopefully, he said, the newer model will avoid similar issues with the CPSC, since its belt doesn't wrap under the machine.

Peloton has said it is open to working with the CPSC to further ensure that its customers are safe. It said its classes include safety messages from instructors to remind users to keep their children, pets and other objects clear of the Tread+ during workouts, and to remove a safety key after workouts so that children can't activate the machines.

Disagreements with the federal agency that is responsible for protecting U.S. consumers from dangerous products, though, are rare. The CPSC can't force a recall but has sued businesses in the past to get them to comply.

Peloton has complied with the agency before, too. Last fall, it issued a recall for a version of its clip-in bike pedals due to risk of the axle breaking and injuring users, affecting about 27,000 bikes. 

"To be frank with you, I haven't seen such a fight like this going on here," said Anthony Gair, a partner at  Gair, Gair, Conason, Rubinowitz, Bloom, Hershenhorn, Steigman & Mackauf, which specializes in trying personal injury cases tied to defective products.

"The CPSC must have reason to believe that it wasn't designed appropriately," he said. "Warnings are the last resort. And so, the question becomes this: 'Did they do a proper hazard analysis, either yes or no?' And if they did a proper hazard analysis, 'Did that hazard analysis identify this danger?'"

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