| What's the old saying: hardware is … difficult? Heavy? All of the above? Spurred by the pandemic, Peloton Interactive still can't keep up with the crush of orders for its stationary bikes and treadmills. In cycling terms, it has popped. On Thursday, the sweaty equipment maker said it would start shipping its machines by air to ease delivery delays. "Please know we're working hard and spending aggressively to do right by all of you," CEO John Foley wrote on the company site. The Spandex crowd was probably thrillled, the shareholders not so much. Peloton stock skidded 9% on the news. While COVID lockdowns have been great for the demand, the same forces that kicked orders into a high gear have gummed up the company's supply chain, mainly at overextended ports. Peloton expects $4.1 billion in revenue this year, even as it commits another $100 million to speed its machines on ships and planes. It's also doubling the size of its customer service squad. At the moment, the Peloton site says a bike will take eight to 10 weeks are arrive; it's aiming for four weeks or less. Air freight is a logical fix, but it costs up to 16 times more than shipping by sea and up to five times more than trucking. Foley estimates the company's shipping costs all told will rise 10-fold in the coming months. Keep in mind Peloton's margin on its bikes is a 35% or so. In short, the customers that it keeps from defecting with its shipping sprint, it may also be taking a bath on. "These extraordinary circumstances obviously require extraordinary actions and that is exactly what we're taking," Foley told analysts. Extraordinary, for sure, though another adjective comes to mind: desperate. Publicly, the company's stance on competition is all swagger. Cheaper knockoffs are just that, it claims. The shipping sprint, however, suggests otherwise. Peloton is scrambling to keep customers from dropping off its waitlist, because there is a growing crowd of Peloton wannabes that are increasingly not shabby. What's more, Foley knows there is a ceiling to the opportunity here, a limit to how many people will fork over $1,895 and up to turn their attic into a virtual spin class. Meanwhile, the pandemic tailwinds are weakening. Peloton is still in land-grab mode, as it probably should be. Foley has engineered a hybrid business model that is as much SAS as it is cycling. It is about the bike, but it's also about the 1.7 million people paying monthly subscriptions. Peloton makes most of its money from the hardware, but the memberships -- 18% of revenue -- are far more profitable and the margin is increasing with volume. More importantly, they are sticky: Peloton annual retention is 92% at the moment. Foley is smart to gear for the long road and let the economics spool up $40 at a time, even if that means renting some very expensive planes.  Featured in Bloomberg Businessweek, Feb. 8, 2021. Subscribe now. | 
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