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How Damaging is the Peloton Recall?

There has been widespread media coverage over the last 24 hours of Peloton’s decision to recall Tread and Tread+ treadmills in response to a request from the US Consumer Product Safety Commission (CPSC).  The company’s share price fell 14% on the news, but is this just a fleeting overreaction?  At this early stage in the incident can we make any estimate of how damaging this could be to the company in the long-term?

The first thing to say is that product recalls happen all the time.  To be more precise, there were 257 CPSC recalls in the US last year, involving a total of 20 million units; and many of these have little long-term impact.  A study by Davidson and Worrell in 1992, looking at 133 product recalls across various sectors, found an average fall is share price of 0.7% around the announcement of a recall.  A more recent (2009) study by Chen, Ganesan and Liu, looking specifically at 153 CPSC recalls, found a similar sized fall following proactive recalls (ie where a firm recalls before any safety incidents have been reported).  However, interestingly, they found no significant fall in share price for reactive recalls of consumer products (ie recalls in response to reports of harm).  With one death and 72 other injuries attributed to Peloton treadmills, yesterday’s recall clearly falls in the latter category.  Against these benchmarks, the fall in Peloton’s share price looks extremely high.

However, there are some aggravating factors.  The reported number of units involved, 125 ooo, places it roughly in the top 10% of recalls by size by 2020 standards.  In addition, it is a high-value product – most large recalls involve cheaper items – so it is a massive recall by value.  The final factor that makes this case interesting, and potentially expensive, is the strength of Peloton’s brand and the fact that the company has enjoyed spectacular growth during the pandemic.

Clearly a lot will depend now on how well Peloton manages the recall, in practical terms as well as their communications strategy.  There is every reason to believe that the final cost will be well below the current 14% fall in share price, but it is impossible to say at this stage exactly how much less to expect.

Update 12th May…

As of close of trading on 11th May, Peloton’s share price had recovered to within 5% of it’s pre-recall value.  It is important to note too that over the week in question, the Nasdaq index had itself fallen by 3.8%!