Peloton has been accused of concealing rust and corrosion on its high-end bikes with a chemical solution.
The company allegedly began using a chemical solution that disguised corrosion on the bikes by ‘reacting with the rust to form a black layer’ after staff noticed that paint was flaking off some of the machines last year, according to the Financial Times.
Executives hatched a plan, dubbed internally as ‘Project Tinman’, to conceal the corrosion before reportedly sending them to customers.
Peloton has been accused of concealing rust and corrosion on its bikes with a chemical solution that ‘forms a black layer’. (Stock image)
Leaked documents seen by the Financial Times allege that the chemical solution being used on the bike was referred to as ‘standard operating procedures’.
The allegations come just weeks after it emerged that Peloton was slashing 2,800 jobs in a desperate bid to cut costs and revive the struggling exercise company.
According to the latest allegations, staff began noticing that paint was peeling off some of the training bikes in September last year.
Bosses at the company allegedly decided to cover up the rust using the chemical solution, which formed a black layer over the corrosion, in an effort to avoid a costly recall before sending them to customers.
One current employee told The FT: ‘Even for Bike-Pluses that were rusted internally, they were still delivering them.
‘Sometimes bikes had stuff on the outside, so we couldn’t deliver them, but . . . [there were] a lot of bikes that were rusted on the inside that they still sold.’
The reports come just weeks after it was revealed Peloton was slashing 2,800 jobs in a desperate bid to cut costs and revive the struggling exercise company.
Some Peloton employees reportedly learned that they were among the 20 per cent of global staff laid off when they found their access to the company’s Slack channel switched off earlier this month.
In a memo, former CEO and co-founder John Foley, said that the axed employees would get 12 months of free fitness classes as part of their severance packages, according to the New York Post.
Bosses at the company allegedly decided to cover up the rust in an effort to avoid a costly recall before sending them to customers
Although the severance packages will also include extended health benefits and other undisclosed remuneration, the inclusion of the free class drew blowback and struck some observers at tacky.
The company expects to spend about $130 million in total cash on severance packages as part of the restructuring, as well as $80 million in non-cash charges.
Who is new Peloton CEO Barry McCarthy
McCarthy, 69, has experience as the CFO of Spotify and Netflix
Barry McCarthy will have a big job on his hands as soon as he walks into Peloton’s offices, but insiders say he could be the man to turn around the under-fire company.
The new CEO, 69, was CFO at Spotify for a number of years and was the architect of the tech firm’s innovative direct listing in 2018, before he stepped down a year later.
The direct listing, which McCarthy pioneered, means a company goes public without selling any new shares to let the market figure out the pricing for itself on the first day of training.
The move was considered revolutionary on Wall Street and is seen as a more democratic and transparent listing, even if it makes things more difficult for investors.
McCarthy also served as CFO for Netflix and has been a board member for startup Instacart for a year.
A source told Yahoo Finance McCarthy has extensive knowledge of subscription-based models like Peloton.
The layoffs are only targeted at corporate staff and will not affect Peloton fitness instructors, some of whom have become quasi-celebrities with large followings.
The layoffs came as Foley, the company’s co-founder who has led the company for nearly a decade, stepped down as CEO this month to become the executive chair.
Barry McCarthy, the former chief financial officer of Spotify and Netflix, will take the helm as Peloton’s new CEO.
Outgoing CEO Foley has drawn the ire of activist investor Blackwells Capital in recent months as the company struggled to maintain the breakneck growth that propelled its valuation to $52 billion in early 2021. Shares have since tumbled nearly 80 per cent.
The investment firm called for his removal and even urged the company to sell itself.
Jason Aintabi, Blackwells’ chief investment officer, accused Foley of ‘repeated failures’ including hiring his wife as vice president of apparel.
‘Foley has proven he is not suited to lead Peloton, whether as CEO or Executive Chair, and he should not be hand-picking directors, as he appears to have done (on Tuesday),’ said Aintabi.
This month Peloton slashed its forecast full-year revenue expectations after it reported a bigger-than-expected quarterly loss.
‘They came out this morning with lower guidance, CEO is leaving but obviously there is still a potential that we could see a deal… that is why [the stock] is not getting as hit,’ said Dennis Dick, head of markets structure, proprietary trader at Bright Trading LLC.
Peloton will wind down the development of its planned factory in Ohio, where it was set to invest about $400 million and add more than 2,000 jobs over the next few years.
Overall the company said its restructuring changes would save it about $800 million annually in reduced expenses.
In January, Peloton said it had seen a ‘significant reduction’ in demand for the products that once retailed for at least $1,900 and that it planned to pause bike production in February and March, according to a leaked confidential presentation seen by CNBC.
In 2020, the company saw a 440 per cent increase in shares, but saw it dramatically drop by 76 per cent in 2021.
Peloton has seen a slump in demand for its fitness classes and equipment as people venture out of their houses to hit gyms again.
