Member Brief: The Rise of DTC 4.0

DTC 4.0 will be marked by the importance of first-party data and optimization of acquisition costs. And the physical store is once again a wise investment for both.

This content is designed exclusively for Executive Members

Memo: Peloton Report 2023

In April 2022, Bespoke Intelligence published a 98 page customer survey on the motivations to buy the product. It was commissioned while Peloton founder John Foley was still its Chief Executive. Peloton was still considered somewhat aspirational and high quality. The above snapshot of attributes of Peloton’s business is most likely different in January 2023. This report covers how the company once known for its good quality, convenience, and reliable service became something else. Within three months of this survey, the company’s media narrative centered around its hopeful return to form.

Turnarounds take time, especially when a company has lost 90% of its value in one calendar year.

As far as New Year’s resolutions go, the public perception is that Peloton is well on its way to recovery. You will hear stories of a surge in holiday season sales (the promotions maintained over November and December). As of publishing this, the stock seems to be performing like a company resurgent. “New year, new you”, as they say.

But the truth of the matter is that Peloton is operationally piecemeal. It’s a company-turned-fitness revolution that must find the fundamentals that is expected of any publicly traded hardware company. As of now, it is being propped up by its on-screen talent and the remnants of the marketing prowess that it once showed. The problem is that the company that was is still carrying the company that is. In what was my first coverage of Peloton in 2019, I raved about it in a report entitled “The Risk and Religion Of…“; in it, I explained:

[Pricing incentives] spell trouble for a company that will be largely defined by the best practices of fitness clubs and software-based network effects. Peloton will have a hard time explaining the supremacy of its product as the trial periods grow from one month to three or four. Or worse, when the $2,300 cycle that you paid for is on sale for $1,200 over the holiday season. Pricing incentives are a slippery slope.

We are now three years into those pricing incentives and well along a slippery slope that’s led to brand erosion, a 90% loss in value, countless layoffs, and the firing of its founding CEO. The Barry McCarthy era means a pivot away from the Peloton that was; the company was known for its sleek engineering, celebrity employees, and white glove delivery. Today, it’s a subscription product with hardware baggage. It owns very little of the process – from manufacturing to delivery. An August 2022 CNBC report explained:

When McCarthy took over the CEO role from the company’s founder, John Foley, he has said he didn’t realize how deep some issues ran. Now, McCarthy is slashing costs and trying to grow higher-margin subscription revenue so that it outpaces hardware sales.

For the Netflix and Spotify alum to run the company the way he wants, the core must be focused on a well-marketed subscription product. The problem is that Peloton was, once upon a time, a well-marketed subscription to a luxury product. Today, the Peloton order-to-delivery process resembles very little of what it did just two years prior. Peloton desires to be a media company but until mid-2022 it’s spent the majority of its money on manufacturing, logistics, and software development. By outsourcing every little thing it could, the company has lost its soul.

I put this theory to the test over this holiday season.

After comparing to two NordicTrack models (2450, X22i), a Sole F85, and a Horizon 7.8 AT, I surveyed the product landscape and landed on the Peloton Tread for purchase. I visited one of the remaining Peloton stores and tested it. A remarkable machine, it feels like a subscription-subsidized investment. When built, it’s sleek and durable. It almost seems too good to be true. For many consumers, this doesn’t present much of an issue. But for anyone who’s followed Peloton’s previous year, you ask yourself: “Will this company exist in 365 days?”

A hardware purchase should never feel like a risky bet but this one did. With a (perpetually available) $500 discount, I ended up ordering mine from the recently announced Dick’s Sporting Goods partnership. A September 2022 CNBC report summarized the high points of this partnership:

Dick’s will carry Peloton’s Bike, Bike+, Tread and Guide, a training system that uses a camera to track a person’s movements, as well as bike shoes and exercise mats, the companies announced Thursday. The products will be in specific Peloton displays and Dick’s employees will be trained to assist customers with them. Dick’s shoppers also will be able to order Peloton products online in stores for either delivery or pickup.

It’s also of note that Amazon carries an assortment of Peloton’s products, but not the treadmill. The idea was that Dick’s fulfillment process would be more trusted than Peloton’s. But the breakdown began with this assumption.

When you purchase a Peloton Tread, you are placed in a queue to hear from the ordering system at Peloton as if you ordered the product directly from them. There is not a separate system. Dick’s is just an acquisition channel, they are not actually carrying any of Peloton’s large products (cycles, treadmills, rowers). In previous years, a Peloton employee would be at your door within one to two weeks with your product for a professional installation process. This is the new Peloton, however, and timing is more like two to four weeks out for delivery. The Peloton professional is now a cross-trained, RXO delivery person

Upon confirming my delivery date with Peloton (purchased on December 15 and scheduled for delivery on January 6), I prepared the space for arrival and awaited that magical experience that the new CEO would love to read about – via collected customer feedback – in his monthly net promoter score (NPS) report. Instead, the slashed costs and outsourced core competencies ran rampant.

The morning of the delivery, I received this text message from an unknown number. It was an employee of RXO (formerly XPO Logistics). Confused, I called the number only to hear the gentleman explain “You don’t want this treadmill.” Confused, I agreed. So, I then called Peloton’s customer service line to relay as much. Their response: “RXO is wrong, your order is scheduled for delivery.” I’d never seen this before. A purchase from Dick’s Sporting Goods, an interfacing with the product’s company, to be constructed and third-party delivered by a fresh corporate entity that Peloton neither owns nor maintains much leverage over. The response is below:

Once I was done with this exchange, I informed the gentleman who texted me from an RXO warehouse and let him know that Peloton cited an apparent “error” and to just bring it on out. He didn’t argue one bit, but he wanted to and I now understand why. His response: “Yes sir.”

Arriving just an hour later, the RXO driver began staging the parts in the garage and – once situated – I stepped inside only to realize that the work stopped within 10 minutes. They packed up to leave with a treadmill just partially constructed. I ran out to the departing truck to question why (and how) they could leave under those circumstances.

Naturally, a discussion ensues. He’s on the phone with his manager and I am on the phone with Peloton. The two RXO delivery men want to leave the half-built Peloton Tread there (it weighs 290 lbs, to be fair) and they inform me that my best option is to “call Peloton to send someone out over the next month.” While this isn’t optimal for the customer, it is a natural consequence of Peloton’s lack of command over its business. There are no options.

But when I show the RXO contractor the email from Peloton, he’s confused. He believes that I wasted his time by having the men deliver a product that they claimed was defective. I assumed that an official email from Peloton was legitimate, so I discounted the observation of RXO’s contractors (at my own peril). Peloton’s service line and email responses were indicative of the fact that completing the sale (profitably) is the entirety of the new Peloton’s mission.

The curse of outsourcing everything is that you cede your control to every subcontractor, leaving the brand vulnerable to consumer exposure to subcontractors and partners that care much less about the outcome. Over the course of seven days, Dick’s Sporting Goods, Peloton, and RXO were a cycle of conversations. The final suggestion was from the outsourced call center who suggested a free heart rate monitor. This was the compensation for a product order that would arrive 45 days post-purchase to no fault of the consumer’s.

To better understand the frequency of this sort of issue, I dove into subreddits like “Beware of XPO delivery.” Within the damaged box was a manufacturing defect, a double-whammy of sorts. To no fault of the delivery men, they’d have to deconstruct the base of the treadmill to attempt to address the issue.

It’s unlikely that this frequency of manufacturing defect existed before the outsourced manufacturing deal with Rexon but even I was surprised to hear from the RXO contractor: “This happens all the time.” Marketing a product as premium can only do so much when every facet of the business seems less than.

Peloton is sacrificing every aspect of its business with the hope that the content business can drive loyalty despite the rest. In FY 2022, the subscription division generated $1.4 billion with a 67% gross margin. That’s $1 billion in gross profit for the group. But then there’s the cost of acquisition and the (until recently) out of control SG&A inspired by the former CEOs lavish habits.

Turnarounds take time. Peloton will likely report increased demand over its final months of 2022. Company officials will highlight cost savings and the successful streamlining of operations by way of outsourced manufacturing, outsourced acquisition, and outsourced delivery. But it was one of the call center operator, on my seventh call with Peloton, who tried to convince me that he was calling from Peloton’s New York office. I asked to speak to any call center representative who could provide any further insight on the breakdown in communication or the defective treadmill delivered to RXO’s warehouse in its partially deconstructed box. He pointed me to the customer service teams at Dick’s Sporting Goods. There’s no new delivery date for the Tread and very little recourse in the meantime.

A Peloton turnaround is possible, just not like this.

By Web Smith | Edited by Hilary Milnes with art by Alex Remy


Memo: The Step Function in Retail Media


In 2023: TikTok, Microsoft, Amazon, Pinterest, and 7-Eleven have more in common than ever.

With the continued degradation of third-party data, we’re suddenly seeing every platform moving to eat away at Meta and Google’s second wave of digital advertising. Digital is in the midst of the third wave now, one defined by first-party data. To collect that data, it helps to own the checkout process – and this is where media and commerce are converging in 2023. In many ways, it’s linear commerce 2.0.

Retail media networks are digital advertising platforms that allow retailers to monetize their online presence by selling advertising space on their websites and mobile apps to brands and manufacturers. These networks typically use data on consumer browsing and purchasing behavior to target ads to specific audiences, and they may also provide analytics and reporting tools to help retailers and advertisers track the performance of their campaigns. The main purpose of retail media networks is to bridge the gap between brands and consumers by providing retailers with a new way to monetize their digital properties, while also providing brands and manufacturers with a new way to reach consumers.

Rather than driving online transactions with media impressions, retailers are selling media impressions driven by online transactions. It’s a high stakes game; Meta and Google (the one-time duopoly) are due to innovate in one way or another. But for now, their vulnerability seems substantial.

You’re reading about it everywhere. Retail media is the new hot topic, “crashing the duopoly” is the catch phrase of the moment. Here’s how we forecasted today’s retail media ecosystem in 2018:

All roads lead to increased ad spend for retailers with Amazon at the behest of Google and Facebook. Amazon has a distinct advantage in so much that the entire commerce workflow can happen within their walls.

  • Short term: Amazon is introducing higher-potency retargeting ad
  • Long term: Amazon will benefit from the use of less intrusive data
  • Amazon will not rely upon Google’s search data
  • Amazon has access to unique editorial content
  • Amazon has an authentic reason to hit your Inbox
  • Amazon will transcend traditional digital channels

Now, other major retailers want a part of this. And one social media company is investing heavily into building its own eCommerce operation to position itself as another facilitator of third wave advertising.

TikTok is (against the backdrop of a potential ban in the US) building up its eCommerce sales with TikTok Shop, which only recently rolled out in the US but is making big headway elsewhere in the world. Meanwhile, Amazon wants greater reach and it’s doing so by expanding Buy With Prime, the fast-shipping plugin it began testing last year that lets other merchants add Amazon Prime logistics to its checkout pages. Early response has shown impressive results.

Both are exercises in amassing all-important first-party data as the third-party data era sunsets across the internet.

Amazon and TikTok are flexing their commerce muscles while beefing up their advertising operations. Meta, once at the top of the pyramid alongside Google, has seen its advertising business plummet in the wake of a series of crackdowns by Apple on its third-party data tracking, which once was powerful enough to make or break direct-to-consumer businesses. Third-party has given way to first-party, and Meta is struggling there as well. Its Instagram Shop tab shut down as the company’s goal to make Instagram the internet’s shopping mall stuttered and then collapsed.

All eyes instead have been on TikTok. Disregard the privacy concerns and potential congressional action, for now. TikTok’s 1 billion active users are an engaged audience to product reviews and recommendations from its legion of creators, some of which fall under typical influencer-levels of fame and many who don’t. Scroll the app to see just how much commerce is embedded into TikTok’s content. In the comments of a confessional-style video about how one TikToker’s marriage ended, you might find someone sheepishly asking where the person talking bought their sweater, even though it’s far from the point of the video.

The money is flowing in. The Information published new figures on TikTok’s advertising and eCommerce operations, as well as those of Douyin, China’s TikTok, both owned by ByteDance. TikTok Shop is a success in China and Southeast Asia and there are plans in place to expand it in the US. From The Information:

TikTok’s Chinese parent company, ByteDance, is making inroads in e-commerce. Consumers in China last year spent 1.41 trillion yuan, or $208 billion, buying things on ByteDance’s Douyin video app, the Chinese equivalent of TikTok, an increase of 76% from 2021, according to two people with knowledge of the internal data. Meanwhile, shoppers on TikTok in Southeast Asia more than quadrupled their spending, a metric known as gross merchandise volume, to $4.4 billion, the people said.

ByteDance generated about $60 billion in revenue in 2021, mostly from advertising, according to people with knowledge of the matter. Revenue from e-commerce is likely a fraction of ad revenue—possibly several billion dollars in 2022, as ByteDance, like other online marketplaces, gets a cut of a few percentage points of e-commerce transactions done on its apps.

These numbers show that commerce is just an engine for better advertising by way of better targeting. Even if it remains a fraction of a $60 billion advertising business, TikTok Shop is still a multibillion-dollar business. That’s valuable at a time when we’re seeing competitors falter and marketers wonder where to put their ad dollars. TikTok is still a risk in the US, but if that were to fall away, it’s the leader by far in terms of social media toolbelts. And there’s no reason to think that TikTok, with its parent company in China, would have any problems building up a significant operation in other parts of the world outside of Asia. There’s been a run of China-based eCommerce platforms that have been able to sweep other countries by offering low prices and efficient logistics operations, including Temu and Shein, and TikTok Shop is right there with them, according to SCMP.

“Good” and safe data is top of mind for all social media platforms as rules change around them.

At CES, Pinterest announced a “data clean room collaboration” with LiveRamp, a set up that’s becoming more popular for internet advertisers, reports AdAge. The partnership sees LiveRamp acting as a third-party intermediary, sharing safe, Apple-approved data on Pinterest users with external marketing partners – in the case of Pinterest, grocer Albertsons. Albertsons then uses Pinterest’s LiveRamp data to inform its marketing spend as well as its own retail media network. Similarly, Meta is working with data and insights firm IRI, which will work with brands to measure their ad performance on Facebook and Instagram.

Once powerful advertising platforms are now dealing with middlemen just to share information with their valuable advertisers. Pit that against what’s happening at TikTok and Amazon, and you see how the power dynamic has begun to shift. For Amazon, Buy With Prime is the next act to watch.

According to an article in the Seattle Times, Amazon is figuring out how to maintain dominance despite the pandemic-era boom slowing down and stagnation in Prime membership growth. The solution? Acquire more first-party data by lending out one of its most valuable properties – Prime-enabled shipping – to outside parties. It’s a win for both sides, and it seems to be working. Early adopters reported shorter shipping windows and higher checkout rates on their eCommerce sites. Amazon doesn’t have to worry about cannibalization. Now consumers can pseudo-shop with Amazon while shopping other sites; Amazon gets the transactional fees and a clean source of first-party data in response. Native transactions are now an internet-wide possibility for Amazon, giving it endless inroads to new customer acquisition and first-party data.

Where does this all lead? It’s clear who is in a better position for third wave advertising. What this means duopoly remains to be seen but it’s safe to say that the party was finally crashed. In 2018, we concluded our report on Amazon’s advertising ambitions as such:

The data derived from commerce operations is undervalued and it is our belief that data around consumer conversion will become the digital advertising standard. This will be exacerbated by the reduced efficacy of pixel and cookie tracking as privacy protections increase throughout the industry. Amazon is well positioned to disrupt the current duopoly, indirectly driving more vertical brands to do business with Amazon at multiple points of Amazon’s six point funnel.

I could not have foreseen Apple’s iOS impact on this trend, back in 2018. But it became clearer in May of 2021.

By upgrading its privacy practices, Apple will impair large ad networks that have grown with the help of those end users. This could potentially cripple Facebook’s current model with its new privacy demands. Apple has also opened the door to an unintentional adjustment to its privacy mandate. In doing so, the Mark Zuckerberg-led advertising company (and social network) will adopt a new way to accomplish its most critical objectives: revenue growth and user utility. Facebook will become an eCommerce company instead.

Except, Facebook (now Meta) focused on Web3 and the metaverse instead, starving the company of resources that it desperately needed to fortify its Instagram shopping project. Meta gave up on commerce as Amazon began to exploit its advantage in that industry. Now, every enterprise company from Microsoft to 7-Eleven wants in on retail media’s future. But it is TikTok and its linear commerce 1.0 strategy (build an audience and then establish commerce) may become the preeminent version 2.0 of linear commerce strategy (build an audience based on established commerce). It’s building its first-party data operation fast enough to establish itself as a top five advertiser. And two years ago, few of us could have imagined TikTok as an internet retailer.

The lines between media and commerce may be blurred for good. This presents a new era of arbitrage for the retailers and consumer goods willing to test the retail media waters.

By Web Smith | Edited by Hilary Milnes with art by Alex Remy