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Peloton Tarnishes Its Red-Hot Brand With Safety Missteps

By Timothy Green - Updated May 6, 2021 at 9:07AM

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The company finally admitted its treadmill products aren't safe.

Back in April, the U.S. Consumer Product Safety Commission issued an urgent warning related to Peloton's (PTON 11.99%) Tread+ treadmill. The CPSC was aware of 39 incidents of injuries caused by the treadmill, including one tragic incident that led to the death of a child. The CPSC told consumers to stop using the product if there were small children or pets at home.

Peloton's pricey connected fitness products have won over plenty of customers during the pandemic. Peloton has a Net Promoter Score of 94, which indicates that many of the company's customers actively advocate for the products.

One sure-fire way to hurt a brand is to put profits ahead of safety or to appear to do so. Peloton initially refuted the CPSC's claims, calling the urgent warning "inaccurate and misleading." It said there is "no reason to stop using the Tread+, as long as all warnings and safety instructions are followed." It accused the CPSC of unfairly characterizing the company's efforts to collaborate.

"Peloton knows that the Tread+ is safe for the home when used in accordance with warnings and safety instructions," read the company's statement.

The Peloton Tread+.

Image source: Peloton.

A double recall

On May 5, Peloton gave in and issued recalls for both the Tread and Tread+ treadmills. The Tread was recalled due to the risk of the touchscreen detaching, and the Tread+ was recalled due to the risk of children, pets, and objects being sucked underneath. The recalls affect over 125,000 units.

Customers were advised to stop using the products immediately and contact Peloton for a full refund. Peloton has stopped the sale and distribution of the Tread+ for the time being.

Peloton CEO John Foley admitted that the company made mistakes in a joint statement with the CPSC:

I want to be clear, Peloton made a mistake in our initial response to the Consumer Product Safety Commission's request that we recall the Tread+. We should have engaged more productively with them from the outset. For that, I apologize.

The immediate financial impact for Peloton could be significant. It's unclear how may Tread and Tread+ owners will opt for a refund, but the worst-case scenario will cost Peloton hundreds of millions of dollars. The Tread+ sold for around $4,300 before it was pulled.

Customers who return the Tread and Tread+ will likely no longer be subscribers to Peloton's membership program. The company also loses a major product until it can implement a fix. It more than doubled its revenue in its latest quarter, and most of its revenue came from sales of its connected fitness devices.

There's a lot of competition in the connected fitness space. Peloton is far from the only game in town when it comes to high-end exercise bikes and treadmills. There are also competing fitness subscription services, like Apple Fitness+.

All of this comes at a time when life is starting to return to normal as an increasing number of people are vaccinated against COVID-19. Peloton customers who feel burned by this recall may just opt to restart that gym membership.

The long-term consequences of this recall and Peloton's initial response to the CPSC are impossible to predict. Maybe people will forget about it in a year. Remember Chipotle's food-safety catastrophe a few years ago? The company has since recovered, and then some.

Peloton was always going to face growth challenges once the pandemic ended and people started to feel comfortable going back to gyms. These recalls and the missteps surrounding them will only make things harder for the connected fitness company.

Timothy Green has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Apple and Peloton Interactive. The Motley Fool recommends the following options: long March 2023 $120.0 calls on Apple and short March 2023 $130.0 calls on Apple. The Motley Fool has a disclosure policy.

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