I had planned a different subject for this month’s newsletter article, but after several phone and Zoom conversations over the last two days, I find myself compelled to write about a topic I haven’t visited in at least two decades — a full blown shakeout in the specialty bicycle retail channel of trade.

Shakeout is a term used in business and economics to describe the consolidation of an industry or sector, in which businesses are eliminated or acquired through competitive pressure. It may also refer to a situation in which many investors exit their positions, often at a loss, due to uncertainty in the market or recent bad news.

Shakeouts can often occur after an industry has experienced a period of rapid growth in demand followed by overexpansion by brands and retailers. Large, diversified companies are often most able to endure a weak business climate and can benefit from shakeouts.

In short, a shakeout is a business situation in which people lose their jobs, and companies go out of business, because of economic difficulties.

On June 29 a BRAIN article informed the bicycle business that “Saris Cycling Group, a victim of the ‘COVID whiplash,’ restructures for sale.” That was three months ago, almost to the day. In between we have been informed of companies laying off employees, reducing staff and cutting overhead, but nothing that could be considered extreme.

However, I believe that is about to change, and not for the better. In the last 48 hours we have heard of brands and suppliers that can’t collect past-due invoices from bike shops, and bike shops that are laying off staff and cutting expenses because they have excess inventory and are not able to pay their bills.

You probably already know this, but the specialty bicycle retail channel of trade in the U.S. is the only channel selling bicycles through two-step distribution. The brands buy bicycles from original equipment manufactures’ (OEMs) mostly located in Asia, and pay them by letter of credit or wire transfer. They then receive and warehouse the bicycles, sell them to retailers, and are paid or extend credit, and are paid according to the terms of that credit agreement.

While there are variations of the other bicycle distribution systems, they are typically some form of one-step distribution whereby the retailer purchases from the brand owner, who in turn may have the bicycles produced by a contract OEM, but the payment is generally some form of LC or wire transfer with the bicycles shipped to the retailer’s warehouse or store.

I don’t mean to bore you with these one and two-step distribution details. I only reference them because they represent the greatest financial difference between the bicycle retail channels of trade in this country. They are the economic reason a shakeout is so devastating to the bike shop channel of trade.

The mass merchant channel of trade (Walmart, Target et al), have already gone through their pain of excess inventory, and made their order adjustment upstream in the form of order delays and cancellations because they deal, for the most part, directly with the companies that own the brands, who in turn manage the OEMs.

The specialty bicycle retail channel of trade, on the other hand, has not dealt well with its excess inventory issue because the brands that deal with the OEMs have maintained their distance from the thousands of small, and for the most part, independent bike shops that sell their bicycles to consumers.

The financial wrecking ball, known as a shakeout, is between the specialty bicycle retail brands and their dealers, with the pain of laying off staff, downsizing, having to sell, liquidate or go into bankruptcy, spreading upstream to brands and downstream to bike shops.

Unfortunately, the financial winter that is coming could not be avoided once the bullwhip effect had led to hoarding up and down the specialty bicycle retail channel of trade. Some of the pain could have been ameliorated if the brands had communicated and been honest with their retailers and established plans for paying down debt and merchandising bicycles with the best possible profit margins for everyone in the supply chain.

As for the American industry association, it has in our opinion already pivoted to the mass merchant channel for financial support. This doesn’t mean walking away from the specialty bicycle retail channel and brands, but it does mean recognizing the reality of the shakeout that has just begun. If you want confirmation, check out the complete list of current sponsors of the upcoming SHIFT 22 BLC in Bentonville, Arkansas, this coming month.

Contact Jay Townley: jay@humanpoweredsolutions.com