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Peloton Is Building Its First Manufacturing Facility in the U.S.

By Evan Niu, CFA - May 25, 2021 at 8:00AM

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The connected fitness specialist wants to make its equipment closer to where customers are.

After grappling with supply chain constraints that limited sales for many quarters, Peloton (PTON -2.16%) is now preparing to construct its first manufacturing facility in the U.S. to streamline logistics and product deliveries. The connected fitness technology company announced this week that it has picked Troy Township in Ohio to be the site of a new factory called Peloton Output Park (POP), which will produce the Bike, Bike+, and Tread.

Here's what Peloton investors need to know.

Person doing a lunge while holding barbells and watching a class on a Peloton Bike+ screen.

Image source: Peloton.

Addressing supply chain constraints

The company plans to break ground on the 200-acre site this summer, and Peloton expects that POP will end up with over 1 million square feet of space for manufacturing, offices, and other amenities such as a fitness center and product showroom. Peloton anticipates investing roughly $400 million into the facility over the course of several years, and production is scheduled to start in 2023.

Peloton recalled its Tread products earlier this month following a growing number of injuries, including one death. The company said it is working with regulators on hardware modifications to address the underlying issues.

To date, Peloton's manufacturing base has been located in Asia. That includes third-party contract manufacturers, as well as Tonic, a Taiwanese manufacturing partner that it acquired in 2019. However, having its products shipped halfway across the world has presented headaches, particularly as demand for home exercise equipment surged last year due to the COVID-19 pandemic. A few months ago, the company said it was investing $100 million in supply chain logistics in an effort to ease the constraints.

The new factory will be in addition to the Precor facilities that Peloton now owns as part of its $420 million acquisition of that company, which closed last month. The Precor factories will start manufacturing low volumes of Peloton products later this year, Foley said in an interview with Bloomberg, while products made at POP may also be shipped to Europe. International expansion is one of Peloton's core growth strategies.

"We are thrilled to bring a good portion of our manufacturing to United States soil and proud that it will be in the great state of Ohio," CEO John Foley said in a statement. "While we will continue to invest in our Asian manufacturing footprint as well as our existing facilities in the U.S. via our Precor sites, the new Peloton Output Park gives us a massive strategic lever to make sure we have capacity, quality, and economies of scale in our bike and tread product lines, to support our continued growth for years and years to come."

Foley also suggested that the new factory could help bring down overall costs, which may pave the way for lower product prices eventually. Peloton is cognizant that its premium pricing strategy naturally represents a challenge, and the company has undertaken initiatives to make its equipment more affordable. It could be a few years until prices start to come down, though, according to Foley.

Evan Niu, CFA owns shares of Peloton Interactive. The Motley Fool owns shares of and recommends Peloton Interactive. The Motley Fool has a disclosure policy.

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