SCORCHED EARTH AND THE FUTURE
Rick Vosper’s Op Ed in the March 13 online issue of BRAIN shined a bright light on the fact that the American bike shop channel of trade has too much bicycle inventory because, “year after year, we keep ordering too many bikes,” and then scramble to put them on clearance. “And this insanity has been business as usual for our quirky little industry ever since the end of the Great Recession in 2009,” Rick wrote.
I believe he peeled back an inconvenient truth about the bike shop channel, and the mainstream top-tier brands fighting over bike shop floor space through restrictive and one-sided authorized dealer agreements, until the Covid-19 pandemic drove seismic shifts in consumer buying habits and demand.
From 2009 until 2020, the mainstream top-tier bicycle brands were aggressive in their efforts to “lock down floor space of key dealers in each market, thereby denying their competition access to those dealers” and their floor space.
Rick is careful to acknowledge that the tactic of restricting competitors’ access to floor space, and having too much inventory that had to be put on clearance year-after-year, may not have been a purposeful strategy, but “the net effect” was the same.
“In military parlance, a scorched-earth policy is a strategy that aims to destroy anything that might be useful to the enemy,” he wrote. For seven years, from 2009 until 2015, the mainstream top-tier bicycle brands slugged it out over bike shop floor space, and lashed out at any bicycle brand that attempted to get a piece of “their” floor space.
In the fall of 2015, Trek announced a Direct to Consumer (DTC) program as a marketing tactic that we assume was intended to change the game. In the five years between 2015 and 2019, Trek was alone among the top-tier bicycle brands in facing off in the new DTC market segment with Canyon, the European DTC brand that had entered the U.S. market.
Just over four years ago, in March 2020, a black-swan event, Covid-19, locked down the U.S. market. By the end of the second quarter, the global pandemic triggered increased consumer demand for goods, served to shift buying habits, and drove a surge in demand for bicycles that included new DTC bicycle and e-bike brands.
The mainstream top-tier brands found themselves in a different and more digital competitive environment. Cannondale announced a DTC program in 2020, and Specialized in the first quarter of 2022.
Bike shop gross margins on the sale of new bicycles struggled during this whole period, and in 2015 Trek began to aggressively purchase authorized dealers.
Specialized began to acquire authorized dealers in 2021. Cannondale Sports Group was acquired by PON Holdings in 2021, followed shortly thereafter by PON acquiring Mike’s Bikes, a Northern California chain of bike shops that since has acquired an additional chain of bike shops. From this we conclude that Mike’s Bikes will be PON Holdings / Cannondale Sports Group’s entity for acquiring bike shops, although there is no announced policy or strategy, and we cannot yet define one.
It should be noted that Giant is definitely one of the top four mainstream bicycle brands in the U.S., but has not been buying its authorized dealers, and has maintained delivery of its DTC program through authorized dealers.
In his March 13 article, Rick also cites bike shop data from Georger Data Services (GDS). This Table has been constructed using the GDS data from the article.
The original purpose was to graphically show the number of bike shops in the U.S., and to also quantify the number of bike shops owned by mainstream top-tier bicycle brands, those that are independently-owned authorized dealers, and those that are independently-owned that are not authorized dealers of any of the four mainstream bicycle brands.
366, or 5.3 percent, of American bike shops are owned by one of the mainstream top-tier bicycle brands. Another 67.3 percent are independently-owned authorized dealers of one of the top-tier bicycle brands, bound by an authorized dealer agreement. This totals 72.6 percent.
1,876 American bike shops, or 27.4 percent, are independently-owned, and are not bound by authorized dealer agreements to any of the four top-tier brands, although they may have buy-sell or other types of dealer agreements with one or more of the estimated 400-plus bicycle and e-bike brands currently doing business in the U.S. market.
Before March of 2020, HPS believes that the majority of the 7,000 bike shops that GDS estimates existed in the U.S. when the pandemic was declared, were struggling to make a net-pretax profit on the sale of new bicycles.
As the 2021-2022 NBDA Cost Of Doing Business Study shows, the “typical” bike shop realized a net-pre-tax profit on the sale of new bicycles during the sales surge.
Keeping in mind that “typical” is the median, and the Cost Of Doing Business Study represents a mix of all the types of bike shops shown in the table. It is the net-pre-tax profit that bike shops will need to preserve in 2023 and going forward.
So far I have been referring to mainstream top-tier bicycle brands, including Trek, Specialized, Giant and Cannondale, as shown in the Bike Shop Count table. All four were founded between 1971 and 1975. All four became multinational pre-2000. Trek started to acquire retail stores in 2015, followed during the pandemic by Cannondale and Specialized (but not Giant). Trek led in establishing a DTC program in 2015, followed by Specialized and Cannondale during the pandemic. Giant’s DTC program only delivers through its authorized dealers.
A few of these new brands modified their distribution as the pandemic surge faded to include bike shops for delivery, service, and retail sales. Aventon and Flyer are examples. This in turn has placed the mainstream top-tier bicycle brands, and all the other brands selling through bike shops, in direct competition with each other, and created opportunities including profit and growth potential, for bike shops.
New bicycle and e-bike brands emerged between 2008 and 2016, including Rad Power Bikes, Super73 and Juiced, just to name a few. All of the “new” brands are built on complete DTC distribution that has changed the game relative to the competitive bicycle and e-bike retail landscape. This emerging new wave has also played a role in completely revising the bicycle/e-bike standards and regulatory landscape that is just getting revved up.
During the sales surge created by the pandemic, a lot of money was wasted. A lot of money was also made up and down the supply chain. BRAIN's reported bicycle import data for 2020, 2021 and 2022 in the March 2023 print issue shows the world average cost per unit at $84.31, $96.93 and $146.17 for each of the three years. Note: I acknowledge that this could be F.O.B. or C.I.F. since it is not specified.
That means that from 2020 to 2022, the world average cost per bicycle unit increased by $61.86 – a 73 percent increase in three years! Inland freight and other costs were added, plus applicable surcharges, until a suggested retail price was paid by consumers.
Keep in mind that this analysis applies only to regular, or so-called acoustic bicycles, and does not include electric bicycles, primarily because of the convoluted and confusing customs data that is currently available, and that is virtually unusable. However, the average imported electric bicycles generally have a much higher value than the average non-electric bicycles. While the increase in value may not have reached 73 percent during the pandemic, it undoubtedly showed an increase because of raw material, component, U.S. duty (when applicable), and transportation costs. These costs, like with regular bicycles, were passed along in pricing to retailers and consumers.
Experts who have followed the NBDA Cost of Doing Business Study for decades have commented on how robust and profitable the “typical” bike shop and “high-profit” bike shop KPI’s were in the 2022 study, based on 2021 data. I have already commented on bike shops having to do everything they can to preserve this level of net-pre-tax profit.
Now let’s look up-stream from bike shops to the brands. Giant is the only one of the four top-tier brands in the U.S. that is public, but its financials are aggregated world-wide so there is no visibility for U.S. operations. The bottom line – there is no transparency so we can only make assumptions.
I believe a reasonable assumption is that none of the top-tier, or Big Four as they are sometimes called, wanted to lose profitability during the pandemic despite the turmoil. While the top-tier brands paid more than they ever had for imported products, they passed the increases on in the cost to retailers and consumers.
This leads to “greedflation,” and “price-price spirals.” Keep in mind that I have worked for one of the Big Four, and have an appreciation for how hard it is to accurately forecast and maintain any kind of profitability and growth in a competitive situation where there is cyclical over-stock-discount-to-clear-inventory, and profitable years are few and far between.
Greedflation is simply raising prices as long as consumers will pay them. I think it is a safe assumption that some and perhaps most brands, including those in the top-tier, and most retailers, raised prices during the pandemic because consumers were buying everything they could get their hands on, and paying whatever the price was.
Greedflation goes hand-in-hand with kicking just-in-time inventory management to the curb, and adopting just-in-case inventory management, as well as allowing the Bullwhip Effect to control the forecasting and ordering process. It was good for about nine to 10 quarters, from Q2 2020 through Q3 2022. I don’t think it was by design as much as it was the expedient thing to do under extremely turbulent and uncertain circumstances.
Right now, the bicycle business is going through a slump driven by the continuing turbulence, and evolving uncertainties. Greedflation drove retail prices up to levels that a growing number of consumers will not pay, and this is reflected in the discounting and pricing dynamics we are experiencing as the first quarter gives way to the second quarter, and the hope that Spring will bring back consumers to ride and purchase bicycles. As you know by now, HPS does not believe in management by hope.
By now you have noticed that raw material, ocean shipping, and domestic shipping costs have all decreased and some, like ocean shipping, have dropped like a rock since the end of last year. The price-price spiral is an economic term referring to companies hiking prices beyond an increase in their costs. Some economists are predicting that some companies have pushed their margins higher, and will continue to do so even as their costs fall away. If bike shop product costs do not go down as costs up stream go down, I am sure you can figure it out from there.
The problem is the inventory that was purchased when both product costs and logistics costs were high. I have said it before – brands and retailers paid more for the landed cost of products from late 2020 to late 2022 than ever before. Some of that high cost inventory is still in warehouses waiting to be sold at discounted prices.
The recent banking failures and the Fed’s latest interest rate increase have created a new set of uncertainties about the cost of money, and whether banks will be willing and able to refinance carry-over inventory that has been devalued, and continue to provide business loans going forward.
The future is what we make of it! Peter Drucker warned, and my thanks to Joe Marcoux (www.joemarcoux.com) for reminding me: “The greatest danger in times of turbulence is not the turbulence – it is to act with yesterday’s logic.”
Part of a business plan is quantifying simple things like close rates, and educating and training staff, including the owner, about the power of greeting and increasing close rates. Experts like Joe Marcoux and the NBDA can help, as can becoming a member of an NBDA P2 Group.
Bike shops must protect and generate cash flow and positive profitability. The hard work is crafting a written business plan that is shared with family and staff, and tracked, reviewed, updated, and revised every month, and more frequently if possible.
My good friend and colleague Fred Clements also opined during our latest podcast that what bike shop owners need to do is bring the JOY! Bike shops should not be gloomy places reeking of despair. This is the time for owners and managers to lead and spread the fun, the excitement, the JOY of changing people’s lives, and providing them with a product that will make a difference to them, their families, and their communities.
Contact: jay@humanpoweredsolutions.com