Past the woman on the stationary bike in the window and between more bikes parked around the room like new cars at a dealership, fans are gathering around Jenn Sherman in the little Peloton store in the Mall at Short Hills in New Jersey. Kids pose on the Peloton-branded bikes for photos, their parents trading war stories of favorite workouts with Sherman and CEO John Foley as pop music blares.
Peloton’s having a party for its die-hards, fans who will gladly give up part of their Saturday to meet their favorite spinning instructor. Sherman recognizes some from Facebook, but she really knows them by names like SpinForDonuts and Mama4. A ten-year spinning instructor, Sherman fills up Peloton’s New York studio with 60 riders every time she teaches a class. But that’s nothing compared to the 450 riders who join in live from home, their handles appearing on a leaderboard for her to watch and encourage. When the videos are posted for on-demand use, thousands more will do each workout.
“My class from Tuesday call themselves the Tuesday Tribe,” Sherman explains during a break from the group photos. “It’s so great to be able to match a name and a face to people, and even recognize them as they walk in.”
The little store tucked in near Apple and Tesla in the suburban mall feels more boutique than scaled-up operation. The store does well if it sells just four bikes each day. But it, and the growing number of Peloton stores like it, are the core of a new strategy for retail that’s helping Peloton become one of the fastest-growing fitness communities and startups today.
Selling a bike for $2,000 and charging more each month for classes might seem a tough sell, but Peloton’s built up a community of 30,000 riders in just two years of operation. The company expects to make $150 million in revenue this year, up from $50 million in 2015, and has been profitable since November. Peloton’s model of monthly subscription fees of $39 to take its home classes are cheaper than the typical spinning class, with the low-drop out rate of customers enjoyed by successful software companies. That’s helped encourage investors including Catterton, Tiger Global and True Ventures to pour in $120 million to date.
But most software companies—or fitness chains—don’t have their own stores in high-end malls. Peloton already has 13 and plans for more. The stores and events like the one at Short Hills are part of a new type of retail strategy that Peloton says is low risk and key to its success.
When Peloton launched its website in 2013, customers didn’t flock to the site in the way that cofounder Foley and his team expected. The company had spent a year building out its bike hardware and the software that would allow riders to take classes from home. But selling remotely proved harder than they thought.
The startup looked into setting up kiosks around New York City with one bike, but soon realized its target customer—affluent and in their thirties or forties, likely with a family—was easier found at suburban malls. Twenty-something employee Ryan Engel, now Peloton's director of business development and real estate, was sent to Short Hills to open a pop-up store in November 2013.
The company had taken over a Reed Krakoff location that was mostly furnished and planned to open in just eight days. Peloton’s CTO set up wiring, while Engel and executives scraped tape off the store’s glass. Engel slept in the back in the frantic first days. “If we could sell a bike a day, we knew we were going to be profitable,” he remembers. But some days early on, Peloton didn’t sell any at all. The low point was the Saturday before Christmas, when a major snowstorm kept most mall shoppers at home. Peloton does most of its retail sales on weekends, and what was supposed to be a banner day hadn’t seen a single purchase. “There was anxiety,” says Engel. Two hours before close, a seemingly random influx of shoppers appeared in the store. Peloton added four names to its wooden board in the back tracking its earliest sales. It would ultimately sell almost 250 during the four-month pop-up.
Now Peloton has its retail down to a formula, with Engel keeping a sort-of retail bible that maps the country’s malls for ideal locations. Peloton looks for co-tenants such as Bloomingdales, Lululemon and Restoration Hardware, and can build out a store with about $50,000. “We are not your typical brick and mortar retailer spending $2 million on a roll-out,” says Foley the CEO. Peloton looks for malls that are near a large population with high median home values and combined incomes of $150,000 or more. When it’s lucky, it’s part of a new murderer’s row for malls, like in its new Oakbrook Center location in the Chicago area, where Peloton’s tucked in between Apple, Warby Parker and Tesla.
Peloton’s capital-light approach to opening its stores and typical one- to two-year leases minimize its risk, says Foley. While 30% of the company’s revenue comes from store sales, the majority of its business will remain subscriptions, and investors like it that way, says Art Wrubel, one of the company’s earliest backers. “The stores are the blades to the razor,” Wrubel says.
But retail expansion is critical for Peloton to build community around a virtual product, especially in new markets, says Aarti Kapoor, an investment banker at Moelis who’s closely studied the health and wellness category. “When it’s a new category that it being created, there’s a lot of showing and telling to do,” Kapoor says.
And an increasing number of startups might find that old-school retail is the best way to get noticed as social media and digital advertising is saturated with options. Peloton opened its store in the first place because its website traffic was discouraging. Tech investor David Tisch says that’s increasingly the experience for startups looking to make a splash online. “There are no magical channels for distribution online like there were five years ago,” Tisch says. “The online distribution channels are mature, and I think that’s the holy shit thing causing all of this.”
Warby Parker’s showrooms have been joined by brands such as Bonobos, Rent The Runway and even Amazon. “If you’d told me in 2009 that we’d have 21 physical locations today, I would have told you that you were out of your mind,” says Bonobos CEO Andy Dunn. But Bonobos discovered that when customers could try on clothing in the store, they’d gladly buy it online afterward, even though they’d walk out with nothing in hand. The inventory-light approach worked so well for Bonobos that Dunn’s now chairing his brother-in-law’s effort to do the same for furniture and his sister’s startup for baby clothes.
Peloton says it’ll be cautious in its rollout all the same. The company only needs one or two stores in Los Angeles or the Bay Area, not twelve, says Foley. “I just told our investors this to lower their blood pressure a little bit. We don’t want retail to be our primary strategy,” he says. Like the other startups that have gone into retail, Peloton sees its stores as regional showrooms and community centers as much as they’re driving sales. “It could be a potentially expensive strategy if it doesn’t work, but the lifetime value of these customers is huge,” says Kapoor at Moelis.
Peloton has other priorities to focus on, too, from staying ahead of potential competition should Soul Cycle develop its own digital project to partnerships it could sign with other digital fitness companies to show yoga or Barre classes on its home screens. But as long as its stores can build community, they’ll be key to Peloton’s strategy. It’s community that gets a working mom like Cynthia Oese to drive to meet her favorite instructor, or convince realtor Ken Baris and his whole family to come take a photo with Sherman and one of the bikes, which Baris gave his wife in October for her birthday but now finds himself using, too. Peloton may not be a cult, but its positive feedback loop seems to bring its riders together, often through its Facebook page, where hundreds of owners are currently planning a meet-up for the upcoming weekend.
For Foley, who says he wrote down at least four product notes from talking to customers that Saturday in Short Hills, store interactions keep Peloton grounded in what it’s customers want. “It’s something everyone should consider,” he says. “Retail isn’t as scary as it was ten years ago.” And for instructors like Sherman, there’s opportunity to build a brand alongside the Peloton bikes. As more riders wait for Forbes to stop filming Sherman so they can take more photos, the instructor laughs. “You want to ask about my life as a D-List celebrity?”
