ECONOMIC NEWS, SAFER BATTERIES, AND THE IMPORTANT LAST MILE

03-04-24: “U.S. lawmakers are calling for a crackdown on the special trade provisions that e-commerce juggernauts Temu and Shein are using to flood the country with cheap imports.” The Wall Street Journal Logistics Report: “The shipments using the de minimis rule are surging this year, the WSJ’s Richard Vanderford reports, with at least 485 million packages entering the U.S. so far this fiscal year after 685 million packages were counted in the entire previous fiscal year. The customs provision allows packages with contents under $800 in value to enter the country duty-free under a simplified procedure. Critics say that is helping companies sidestep tariffs and defy bans on imported goods made with forced labor. A House panel estimates that Temu and Shein alone account for about a third of all de minimis shipments. Freight industry officials say the trade has turned the two companies into major forces in trans-Pacific air freight markets. HPS Analysis: The bar chart below is from the Wall Street Journal article and it graphically shows the huge increase in de minimis shipments, including cheap, low-quality, untested and uncertified lithium-ion batteries representing an imminent hazard to U.S. consumers. HPS and the NBDA have joined PeopleForBikes in asking that lithium-Ion batteries intended for use with e-bikes and e-scooters be excepted from treatment under the de minimis rule, making shipment into the U.S. subject to import duty and inspection by U.S. Customs.

Chart from Wall Street Journal article March 4, 2024

03-05-24: “Target to open 300 stores over next decade.” Chain Store Age CSA: “Target Corp.’s new 10-year plan includes a big commitment to brick-and-mortar. The discounter said it plans to build more than 300 stores over the next decade as it looks to reach ‘new guests with a shopping experience that’s welcoming, convenient and fun, whether they’re shopping the aisles or using same-day services.’ The news followed the release of the chain’s better-than-expected fourth-quarter results. Target also plans to invest to enhance the vast majority of its nearly 2,000 stores. HPS Analysis: Target is the number two mass merchant retailer of bicycles, behind Walmart, which recently announced it would build 150 new stores over the next decade. 400 to 450 more mass merchant channel competitors selling bicycles, including e-bikes, can be viewed a number of ways that can be good for bicycling, communities, and for bike shops who reach out to make the “circular” previously-owned and after-purchase service business work for the benefit of their businesses. 

03-05-24: “Trek Bicycle plans to ‘right size’ with 10 percent cuts to spending – Company also will reduce SKUs by 40 percent, according to internal document.” Bicycle Retailer and Industry News: “Trek Bicycle president John Burke has told company leaders that he has decided to “right size” the company by 10 percent in response to slow sales and high inventory levels. But he says the company’s overall strategy remains unchanged. In an internal memo Burke sent to executives recently, he said details of the cuts would be announced Friday. He said in addition to a 10 percent cut in spending, Trek would substantially reduce its stock-keeping units (SKUs), saying Trek’s model year 2026 SKUs will be 40 percent lower than the model year 2024. ‘These are turbulent times in our business,’ Burke began in a confidential Company Update document that Burke sent internally, which BRAIN has obtained. He went on to say the global bike market is ‘in chaos,’ with high inventory levels at wholesale and retail levels leading to ‘significant and continued’ discounting. He said retail sales were below Trek forecasts, including in January and February this year. He said the company has not hit its monthly sales goals for the past 15 months. He said the situation left him with three options: simply hope for better days ahead, continue to make cuts around the edges, or ‘right-size our business to the realities of the marketplace.’ He said he decided to take the third route. He said Trek would reduce overall spending by 10 percent with cuts to programs and positions, with decisions made on or before March 8. Trek will also simplify its product lines and reduce inventory levels. He said the model year 2026 inventory will be 20 percent lower, measured in days in stock, than they were before the pandemic bike boom.” HPS Analysis: The post-pandemic economy and bicycle marketplace is impacting everyone in the business, including Trek. Having been through what is now called “right-sizing” more than once back in the day, I can tell you that you better get it right the first time. Making a second round of cuts is more traumatic for a company than the first round, and planning is everything. Plan it deep and broad enough the first time, get it done, and make it work until the core organization comes out the other side whole and is able to resume generating profit, working capital and financial growth.

03-06-24: “Congress, industry leaders launch coalition to close the de minimis loophole,” Sourcing Journal: “The issue of de minimis reform has gained palpable momentum on The Hill in recent weeks, culminating in the launch of an advocacy group pushing for decisive action against the controversial trade provision.” “The daily deluge of de minimis shipments is impossible for CBP to contend with, according to Michael Stumo, CEO of the Coalition for a Prosperous America, which represents U.S. producers across a number of sectors. ‘Customs officials want to – and know how to – protect Americans from unlawful goods imports and illicit drugs,’ but goods entering the country through direct mail can’t be searched effectively, he explained. Congress capitulated to FedEx and UPS to create high-volume lawlessness enabling Shein, Temu, and foreign criminal organizations to ship goods to U.S. customers and drug dealers. Nearly half a billion packages have entered the country under de minimis to date in 2024, with the majority hailing from China. “They are uninspected, they don’t pay any tariffs, we know for a fact that many of these products are made with forced labor and intellectual property theft, and they do not meet our consumer safety standards,” said Representative Earl Blumenaur (D-Ore.), ranking member of the House Ways and Means Trade Subcommittee who is spearheading The Coalition to Close the De Minimis Loophole. HPS Analysis: Under Section 321 of the Trade Facilitation and Trade Enforcement Act, packages valued at under $800 can enter the country duty-free, and they often make their way into the hands of shoppers without being inspected by Customs and Border Protection (CBP). Calling de minimis a “loophole” is an understatement. When a drug dealer can import fentanyl into the U.S. without fear of inspection, the so-called loophole, as members of Congress are saying, has become a dangerous threat to our society. A good friend of mine still believes that you still cannot ship lithium-ion batteries unless they meet international and U.S. Hazmat requirements. That’s only true if you follow the rules and regulations. Delivery via parcel post and parcel delivery services of hazardous lithium-ion batteries is occurring every day in the U.S. when shipped directly to the purchasing consumer under Section 321 at a value of $800 or less. They are not declared as dangerous, are not inspected, are not subject to import duty, and are delivered directly to the purchasing consumer just like fentanyl is. It needs to stop! Please contact your members of Congress and request they immediately sign on to The Coalition to Close the De Minimis Loophole.  

 03-07-24: “DHL is hunkering down for a continued decline in global shipping demand.” The Wall Street Journal Logistics Report: “DHL parent Deutsche Post says a weak market last year is extending into 2024, the WSJ’s Dominic Chopping reports, and it’s now projecting earnings to decline oi the first half before growing in the second half of the year. That suggests a gloomy outlook for global goods trade, from parcels to heavy freight, because of the extensive reach DHL has across cargo transportation markets. The company’s operating earnings tumbled 25 percent last year to about $6.9 billion. It’s projecting little if any earnings growth this year, saying ‘volatility in demand and geopolitical crises will remain with us in 2024.’“ HPS Analysis: DHL, UPS, and FedEx have all announced layoffs and trimming services including reducing air-freight flights from Asia. Small parcel delivery will cost more, and service will be subject to change going forward. Keep in contact with the parcel service you use and compare costs to make sure you receive the best deal available in uncertain times.

03-07-24: “Despite turbulent times, Haro Bikes is expanding and upgrading its model lineup.” Bicycle Retailer and Industry News: “Unlike many in the industry, Haro Bikes has been busy expanding instead of contracting. Unburdened by inventory concerns that have choked much of the industry, the longtime BMX and mountain bike brand is preparing what new Global Chief Commercial Officer Lars Hjort termed a full-line bike offering. ‘It’s a challenging but exciting time for us,’ Hjort said at Taipei Cycle on Thursday. He joined the company at the beginning of the year after stints at Specialized, Felt and Marin. In addition to Hjort, within the past year Haro hired CEO Bjarke Rasmussen, formerly vice president of global operations for Cycling Sports Group, senior engineer Ty Buckenberger, formerly with Specialized, supply chain director Graise Ooi, formerly with Blix Bicycles inc., and chief marketing officer Megan Tompkins, who worked for Crankbrothers, Specialized, Shimano and BRAIN. ‘We did a lot of hires because we are moving the brand from being solely focused on BMX and mountain bikes because we want to play I the big leagues,’ Hjort said.” “What Haro won’t be expanding is its sales channel to direct-to-consumer. Hjort said the approximate 700-retailer network will remain an integral part of the brand’s operation.” HPS Analysis: If I am correct, Haro Bicycle Corporation is currently owned by Jayu Yang, former owner of Kenstone, a Taiwan-based bicycle OEM. Jayu Yang and her cousin, Dr. Shu-Yuan Yang founded GRONBLA (www.gronbla.com), a company dedicated to developing recycling methodology for plastics. Haro is not only “unburdened by inventory concerns,” it has a vision and plan for the future supported by investment capital. This BRAIN article from March 7 also points out that Haro, in addition to investing in management talent, is “… building a U.S. assembly line in Vista, California, with bikes expected to be rolling off the lines in three to four months.” Onshoring is being considered and Haro is watching what is going to happen with duty rates on bicycles imported from China later this year. As I said, Haro has capital, experience, know-how, and a plan for the future.

03-08-24: “Taipei Cycle Show 2024: 7 takeaways from Asia’s largest bicycle trade show.” Cycling Industry News: “More than 950 exhibitors and 3,500 booths make Taipei Cycle the biggest bicycle exhibition in Asia and a prime business hub for the global bicycle industry and its supply chain. Therefore, the event offers an excellent opportunity to get an early sense of the current mood in the bicycle industry as well as the prevailing trends when it comes to product innovations. During our visits to the exhibition halls at the Nangang Exhibition Center, seven themes particularly stood out.”

1. “The long wait for the turnaround – The bicycle industry has been struggling with numerous problems for almost two years now, including high inventory levels, a challenging economic climate, and falling export values. This is also clearly noticeable at the Taipei Cycle Show. Taiwan’s e-bike exports fell by a whopping 21.9 percent year-on-year. In the components and accessories segment, the decline was even 41.4 percent. The economic situation is, therefore, one of the most discussed topics at the Taipei Cycle Show. Based on several conversations at the trade fair, it seems that the industry may not turn the corner until the end of 2024 or 2025.

HPS Analysis: We urge you to read this whole article and the other six takeaways, although the first one is the most important. The theme has been repeated for several weeks now, ever since the last day of the Taipei Cycle Show. We will explore more about the details of “the long wait” as you read through this month’s newsletter. The inventory glut also includes work-in-process (i.e. finished frames) stuck in OEMs and sub-contractors, along with all kinds of components stuffed in OEM, subcontractor, and outside warehouses. This current “inventory problem” is far different than any such problem this industry has experienced before, not just because it is global, but because it has its tentacles in every step in the supply chain.

03-08-24: Bike Europe market reports: “European e-bike imports in downward freefall; Bicycle market in the Netherlands slides down by 6 percent, Lean year for e-bike sales and production in Czech Republic, UK losing heavily in catch-up game with European bicycle market, Is Denmark’s dramatic bicycle market situation a forecast for other European countries?” HPS Analysis: Just read the descriptions posted above. There is not a positive or bright spot in the bunch, and that is the point.

03-08-24: “We need to talk about Rad Power Bikes’ new e-bike batteries.” electrek: “Electric bikes just may be the biggest transportation revolution of our generation, helping millions replace car usage with more affordable, more efficient alternatives. But there’s no denying that concerns have been swirling about the safety of e-bike batteries, even if such fire fears have primarily been overblown by much of the media. Leading electric bicycle maker Rad Power Bikes has just unveiled its new “Safe Shield Battery” in an effort to mitigate worries over e-bike battery safety. And it’s something we need to talk about. The whole underlying issue here is based on the fact that e-bike batteries are usually comprised of dozens of smaller, energy-dense lithium-ion battery cells. Those cells are similar – and sometimes identical – to the cells used in everything from electric cars to power tool battery packs. The individual battery cells store lots of energy and are generally quite safe. However, danger can occur when the cells are punctured or short-circuited, with the latter often happening when water makes its way into battery packs over time. Well-made e-bike batteries use several methods to mitigate these risks, and the result is that battery fires are exceedingly rare.” “However rare though, e-bike fires can and do occur in poorly-made batteries or in battery packs that have been abused, damaged, or otherwise misused. And that’s exactly what it looks like Rad Power Bikes set out to solve with its new Safe Shield e-bike batteries. The secret sauce in Rad’s batteries isn’t actually the battery cells themselves. Those are fairly standard cells like you’ll find in many other e-bike batteries. The major difference is how the battery packs are constructed. They use a method known as potting, which basically encapsulates electronics in a waterproof resin barrier. It’s common in electronics that will live much of their lives outdoors, as it seals the sensitive components from moisture.” HPS Analysis: The article talks about “urethane resin” that waterproofs and also acts to “thermally” insulate the cells from each other, preventing a thermal runaway from occurring. Mike Fritz, HPS Chief Technology Officer, had been looking into potting for e-bike batteries when the news about Rad Power Bikes introducing its “Safe Shield Battery” broke, so it didn’t take long for him to get up to speed and start to ask pertinent questions, including the testing that has been done to validate the thermal insulating of individual cells that “cook-off” but are isolated so a thermal runaway event doesn’t occur. Other related questions include the added weight to the battery pack, and the recyclability of the packs with the resin added. However, “potting” e-bike lithium-ion battery packs may represent an added process that will guarantee low risk and maximum safety for good quality lithium-ion battery packs manufactured using LG, Samsung or Panasonic cells by manufacturers that have their battery packs tested and certified to UL 2271 by a NRTL and assembled into systems by e-bike manufacturers, brands and importers that have their complete e-bike systems tested and certified to UL 2849 by a NRTL. HPS also notes that while potentially very good news, it is prospective. It will still require enforcement, and it will not affect the past, present or near-term future that is and will be populated with low-cost hazardous lithium-ion battery packs used and intended for use with e-bikes. The whole of the industry will need to step up and take responsibility for getting the message out and educate and advocate until these dangerous battery packs are purged from the U.S. market.

03-10-24: “Two Sessions: China touts openness while tightening control.” BBC: “The National People’s Congress is usually capped off by the premier’s press conference. But this year, and for the rest of the term, the traditional has been mysteriously nixed. Officials have said there was no need for it given there were other opportunities for journalists to ask questions. But many observers saw it as another sign of consolidation and control, in what became a running theme for the congress, even as top officials preached openness. The cancellation of the press conference also effectively diminishes Premier Li Qiang’s profile. Though the event was scripted, it was a rare chance for foreign journalists to ask questions and give the country’s second-in-command some room to flex his muscles.” “The dimming of the spotlight on the premier, along with a shorter congress this year, are all signs of ongoing structural change within the Chinese Communist Party (CCP) where President Xi Jinping is increasingly accumulating power at the expense of other individuals and institutions, noted Alfred Wu, an associate professor at the National University of Singapore who studies Chinese governance. But to the outside world, the party is keen on projecting a different kind of image as it battles dwindling foreign investor confidence and a general malaise in its economy. Addressing international journalists last week, foreign minister Wang Yi insisted China was still an attractive place to invest in and do business. This year’s economic blueprint, delivered by Mr. Li at the start of the session, laid out plans to open up more areas to foreign investment and reducing market access restrictions in sectors such as manufacturing and services. These moves come after foreign investors were spooked by recent anti-espionage and data protection laws, as well as several sudden high-profile detentions of Chinese and foreign businessmen. Foreign direct investment in China recently fell to a 30-year low. HPS Analysis: My first business trip to the PRC was in May of 1983. I flew to Shanghai for a week-long meeting of the ISO Technical Committee TC 149 and its sub-committees working on the development of what became ISO 4210, the international safety standard for bicycles. Our delegation from the UK, France, Germany, Japan, and the U.S. was one of the first to be invited to come and meet in China, which in turn was just opening up to the West. In the 41 years since, the bicycle business in China has gone from no exports to the largest exporting source country in the world. The governance by the Chinese Communist Party (CCP) has also evolved. This report gives you an idea of the conflict between what is said about wanting Western investment, and the restrictions placed on Western companies doing business in China. Western companies and investments are leaving, but the bicycle business is having great difficulty leaving in whole or part. As we contemplate an uncertain future, there is no global replacement currently capitalized and in operation that can replace the production capacity of the Chinese bicycle and e-bike export infrastructure.

03-11-24: “Vosper: E-bikes step up in a down market.” Bicycle Retailer and Industry News: “2023 was the year that everyone is trying to forget. Inventories were way up, sales were way down, and relations between suppliers and retailers were way more strained than anyone can remember. And as I pointed out last month, things aren’t likely to get much better anytime soon.” “Some have speculated that when e-bike imports reach 20 percent of pedal-only, it will mark an inflection point for e-bike sales in the U.S. and that some large increase in market share (the hockey stick curve) will happen as a result. I am skeptical of this projection. Here’s why: a large majority of e-bike sales are at the very bottom of the mass market as low-end bikes are shipped D2C from China and other Asian manufacturers. These units have no direct parallels in the pedal-only market segment, so there’s no basis for an apples-to-apples comparison, which renders that 20 percent number arbitrary. To really see the relationship, we’d have to look at dealer and mass retailer sales and filter the bottom feeders out of the equation somehow. At present I don’t believe the industry has the resources to do this. All the foregoing raises an interesting question: If we cut back our imports so much in 2022 and 2023, why do we still have so much excess inventory in 2024 and even into 2025? The answer, of course, is that we brought in enormously too much inventory during the COVID years, as far back as 2020 and 2021. And we’ve been choking on that inventory ever since. Which is to say our current inventory crisis is a long-term problem, and long-term problems tend not to have short-term solutions, however much we may want them. The only bright spot in this otherwise gloomy picture is that e-bikies, at specialty retail price points anyway, seem to be doing rather better than other product categories. In an informal poll in the Facebook group Cycling Industry Recovery, 56 percent of retailers responding reported that their sales are up relative to their pedal-only models.” HPS Analysis: There is no question that e-bikes are the new growth product category, with more styles and types than any new emerging category this business has seen in years. Not everyone believes that e-bikes will save the industry. Marc Sani writes in Through The Grapevine in the April issue of BRAIN that: “Will e-bikes save the industry? Not anytime soon.” HPS is also working on collecting data for the NBDA Summit in May and publication of the U.S. Bicycle Market Overview Study 2022-2023 Report due to be published by the NBDA the end of May or early June. While the data isn’t complete, we do know that in 2023 e-bikes were 9.5 percent of estimated total bicycle imports into the U.S. and regular bicycles, all wheel sizes, were 90.5 percent. When we look at the FOB value (cost at the factory shipping dock) of 2023, bicycle imports of e-bikes were 50.2 percent of the estimated total FOB value of total bicycle imports, and regular bicycles, of all wheel sizes, were 49.8 percent. From an FOB cost standpoint, just under 10 percent of last year’s bicycle unit imports represented half of the total FOB cost value. This brings focus to why the industry is fixated on e-bikes – the dollars. This is as it should be, but we caution that placing too much emphasis on dollars, starting with retail selling price and working down to FOB value, has to be done rationally, and logically, keeping unit market penetration and incident-rate or per-thousand population in focus. Meanwhile, relative to 2023, we agree that e-bikes stepped up in a down market! 

03-12-24: “NRF: E-commerce spurs sales growth in February.” Chain Store Age CSA: “So far, 2024 is off to a good start for retailers. Retail sales built off “solid gains from January” in February 2024, aided by exceptionally strong e-commerce performance, according to the CNBC/NRF Retail Monitor, powered by Affinity Solutions, released Tuesday by the National Retail Federation. Roughly 18 percent year-over-year growth in online and non-store sales, according to the Retail Monitor. That compared with a decrease of 0.16 percent month-over-month and an increase of 2.34 percent year-over-year in January 2024.” “February sales were up in all but one of nine retail categories on a yearly basis, led by online sales, sporting goods stores and health and personal care stores, and up across the board on a monthly basis.” HPS Analysis: E-commerce is growing, and bike shops need to continue to expand their omni-channel sales by improving and growing their website content and product sales, including service and rental bookings and appointments. Major bike brands are actively competing for online business, and bike shops have the advantage of offering mobile delivery, pick-up and service, and for those shops that do not compete with any of their bike brands, they can sell bicycles and e-bikes online.

03-12-24: “Financial and organisational problems piling up at Accell Group.” Bike europe: “The financial situation for KKR owned Accell Group is becoming increasingly challenging. A group of lenders decided to select advisers to assess options for the bicycle manufacturer amid struggles spurred by waning demand and operational hurdles. Accell is also facing an expensive recall of the Babboe cargo bike and at the same time, the union might shut down one of the Heerenveen factories later today. The group lenders who do not trust the financial position of Accell Group have asked Houlihan Lokey (HLI) and Milbank as advisers, while KKR is collaborating with Kirkland & Ellis to weigh their options, reports Bloomberg. According to the Dutch media outlet FD, Accell Group itself asked the British investment bank Rothschild and law firm Stibbe for advice. ‘That is a bad sign,’ says a restructuring expert in the FD. ‘It means that the company is assisted independently of its shareholder. When things go bad financially, the interests of the shareholder and the company run parallel.’ None of the financial institutions involved want to comment on the current situation. HPS Analysis: This article points out that last summer Fitch Ratings downgraded Accell Group and questioned the ability of the Group to meet its financial commitments. “We believe the current capital structure is unsustainable due to a material drop in profit with only a gradual recovery assumed from 2025,” said Fitch.   

03-12-24: “Shipping’s new port labor battle.” The Wall Street Journal Logistics Report: “U.S. importers are bracing for a new season of uncertainty as threats of a walkout at East Coast and Gulf Coast ports flare even before contract talks with dockworkers formally begin. The International Longshoremen’s Association is seeking to build on the strong wage gains other transportation unions have won, including the deal for a 32 percent increase at West Coast ports that was struck last year. The WSJ Logistics Report’s Paul Berger writes the union directed local chapters to resolve their work issues by May 17, and negotiations for a new coast-wide deal would get underway after that. ILA chief Harold Daggett has said that dockworkers will strike if a new agreement can’t be reached before the current contract expires on Sept. 30. Ocean carriers expect retailers to start bringing goods in early or ship more volumes out of Asia to the West Coast to avoid potential disruption.” HPS Analysis: In these uncertain times we will not enjoy a stable ocean freight shipping season for some time to come, if ever again. The reason bike shops need to watch what is happening with shipping container rates is being hit with an increase for freight or a surcharge, and the brand not reducing or eliminating the increase when rates go down. Ask your suppliers for periodic updates and make sure any surcharges or freight-related increases are justified and explained and removed when no longer applicable.

03-12-24: “Taipei Cycle 2024 confirms tough year ahead for supply chain.” Bike europe: “The 2024 Taipei International Cycle Show will go in the history books as the edition of high hopes, but low expectations. The Taiwanese component manufacturers are eagerly waiting for more order volume while the bicycle brands are confronted with a huge financial burden due to the inventory issue. As expected, the 2024 Taipei Cycle Show did not bring any relief to these challenges. The buzz on the show floor on the first day of Taipei Cycle could not conceal the issues faced by the industry. Compared to the 2019 edition, the Taipei Cycle Show which took place from March 6-9 saw a lower attendance of International buyers this year, although the number of visitors was remarkably up from last year. Bicycle sales are back to a regular pre-pandemic level, but the supply chain is so full that some component manufacturers are currently opening their production for only one or two days a week. I order to not lose out on future market positions, companies are doing their utmost to keep their R&D up and running.” “In various markets both retailers and suppliers are faced with credit rating decline by their banks. This only results in even higher inventory levels upstream in the supply as companies have to reduce their stock because of a limitation of their working capital. According to market insiders, the industry is afraid that the imbalance will not be over once companies manage to clear their warehouses. At what moment in the year will bicycle brands be convinced to increase their component order levels again? This increase needs to be taken stepwise to give the component manufacturers sufficient time to restart production. Still, it is expected that this restart of the market will bring extensive increases in lead times again.” HPS Analysis: It is no longer as simple as clearing finished goods inventory and placing orders for the supply to make bicycles so OEMs order components. As referenced in an earlier article, the inventory problem has become much more complex, involving OEMs, subcontractors, component manufacturers, and their subcontractors. The tentacles of the inventory problem are wrapped around every aspect of the multifaceted bicycle supply chain, and it will not get back to some form of normalization until the excess is flushed. Remember, the industry supply chain had run on the JIT system for decades. During the pandemic, as the Bullwhip effect forced a switch to the JIC system, JIT was tossed out. Now the brands want to go back to a JIT system to stabilize their finances, with no regard for the role they played in the cause and effect.

03-13-24: “Giant Group annual sales down 16 percent; company looks to e-bikes and performance bikes for growth.” Bicycle Retailer and Industry News: “On Wednesday, Giant Group’s board approved its full 2023 financial report, which shows consolidated sales of NT$76.95 billion ($2.44), an annual decline of 16.4 percent. The company said weak demand for entry-level and mid-level products in North America and Europe contributed to the decline, as did high inventory in the channel. On the other hand, the company said it had seen “huge” bicycle sales growth in China. Giant’s net profit before tax declined by 45.1 percent to NT$4.8 billion, net profit after tax came at NT$3.4 billion, a decrease of 41.8 percent, and earnings per share were NT$8.68. The board approved a cash dividend of NT$5. Since the start of 2024, Giant’s revenues have not improved. January revenues were down 18 percent from the year prior and February was down 27 percent. Giant said e-bikes, sold under its own brand and made for other brands, provided 30 percent of its revenue last year.” “The company said that in 2024 industry will continue to deal with the excess inventory challenge, as well as uncertainties in the economy. However, it said Europe and North America show strong demand for performance-level products while sales in China will continue to grow.” HPS Analysis: This is a relatively complete year-end financial report, although it still has a good helping of verbiage for the stock market, investors and stockholders, which we have done our best to skip. The headline is what the industry focuses on and “…annual sales down 16 percent” is probably as good a statistic as the managers and owners could make out of the financials. An after-tax profit drop of 41.8 percent is a tough nut to reduce and turn positive, and this is surely what the Giant management is setting out to do.

03-14-24: “Dick’s Sporting Goods reports record Q4 sales.” Bicycle Retailer and Industry New: “Dick’s Sporting Goods’ fourth-quarter sales were the largest in its history while its full-year net sales increased over 2022. Net sales for the fourth quarter ending Feb. 3 were $3.87 billion, compared with $3.59 billion year-over-year. For 2023, net sales were $12.98 billion, compared with $2.36 billion at the same time last year. Dick’s had comparable store sales growth of 2.4 percent that was driven by a 1.6% percent transaction increase.” “Giant Group confirmed on Feb. 12 that it will sell bikes through about 25 specialty stores owned by Dick’s, including House of Sports, Public Lands, and Moosejaw locations. Fourth-quarter net income increased 26 percent, from $236 million to $296 million year-over-year, with earnings per share rising from $2.60 to $3.57. Full-year net income was steady at $1.047 billion compared with $1.043 billion in 2022. Full-year earnings per share rose 13 percent, from $10.78 to $12.18.” HPS Analysis: This is the largest of the full-line sporting goods channel retailers and Dick’s is clearly having a good year. It is probably a decent assumption that this includes their bicycle and e-bike sales. As HPS has noted, the Giant brand will be sold by 12 of the specialty retailers owned by Dick’s, but not the Dick’s Sporting Goods stores. Dick’s plans for more stores to be added in the U.S. resulting in more mass merchant and full-line sporting goods competition for specialty bicycle retailers in the U.S. over the next decade.

03-14-24: “Giant benefits in Europe with integrated e-bike solutions and service.” Bike europe: “When e-bikes began to make a market entrance, global brand Giant determined that innovation in integrated in-house technologies would be the key to success. Since 2023 all R&D is carried out at the European headquarters in Lelystad, the Netherlands, where a new development centre has been opened. Now, in-house service is an additional benefit to boost sales in saturated and fragmented European e-bike markets. ‘Many dealers in the early days of e-bikes came to me and said why are you thinking so complicatedly, just go to Bosch and then we can sell your e-bikes easily,’ Oliver Hensche, managing director of Giant Deutschland GmbH explained at a recent media gathering. ‘This is true for the first year and the second, but in the long run, you will have no benefit. Because we understood the bicycle as an integrated product and from the business point of view we knew it made sense to develop our own system.’ Giant is aiming to strengthen its position on the European market with its own technology. The in-house motor SyncDrive was developed together with Yamaha and the brand has a long-standing relationship with Panasonic for battery development. For shifting technology, Giant has partnered with enviolo. Referred to as ‘SyncDrive powered by Yamaha,’ the technology is specified on all Giant e-bikes. Developing it’s own system technologies has allowed Giant to continue to innovate through investment in Europe-based R&D teams with the support of Taiwanese counterparts. This own system has also allowed Giant to open up new business opportunities when it comes to servicing.” HPS Analysis: HPS found this story very interesting. Giant has fully developed a proprietary electric propulsion system for its e-bikes worldwide, which means North America as well as Europe and Asia. This system, as described, seems well thought out and configured. The German electric training and service system is also well thought out and configured. SyncDrive is probably not only well know to North American Giant dealers, but has already been integrated into shop service systems and mechanics training. It seems logical that when North American e-bike sales have grown sufficiently, the Europe-integrated e-bike solutions and service concept will migrate across the Atlantic.

03-15-24: “We no longer forecast a recession in 2024.” The Conference Board Economic Forecast for the US Economy: “The U.S. economy entered 2024 on a strong footing. Various indications of business activity, labor markets, sentiment, and inflation have generally been moving in a favorable direction. However, headwinds including rising consumer debt and elevated interest rates will weigh on economic growth. While we no longer forecast a recession in 2024, we do expect consumer spending growth to cool and for overall GDP growth to slow to under 1 percent over Q2 and Q3 2024. Thereafter, inflation and interest rates should normalize and quarterly annualized GDP growth should converge toward its potential of near two percent in 2025. U.S. consumer spending held up remarkably well in 2023 despite elevated inflation and higher interest rates. However, this trend is already beginning to soften in early 2024. For instance, retail sales growth over the first two months of the year were weak. Gains in real disposable personal income growth are softening, pandemic savings are dwindling, and household debt is increasing. Consumers are spending more of their income on service debt, and delinquencies are rising. Additionally, the growth in ‘buy now, pay later’ plans may also weigh on future spending as bills come due. Thus we forecast that overall consumer spending growth will gradually slow to a standstill in Q3 2024 as households struggle to find a new equilibrium between income, debt, savings, and spending. While we anticipate labor market conditions to soften over this period, we do not expect them to deteriorate. As inflation and interest rates abate, consumption should expand once again in late 2024.” HPS Analysis: The Conference Board no longer forecasting a recession is good news. The fact that this forecast includes: “… overall consumer spending growth will gradually slow to a standstill in Q3 2024 as households struggle to find a new equilibrium between income, debt, savings, and spending” is not bad news for bike shops.

03-18-24: “Ballooning credit card balances already loom over 2024’s retail sales.” RETAIL Dive: “The level of debt may surpass the all-time record this year, even when adjusted for inflation, some analysts say. Retail sales in January and February indicate a possible pull-back in consumer spending, which some analysts warn is due at least in part to burgeoning credit card debt that could continue throughout the year. Retail sales in November and December, with some holiday sales pulled into October, beat many expectations this past season. Half of consumers planned to fund their purchases with debt. Indeed, in the fourth quarter credit card debt and delinquency rates surged, with card balances up by $50 billion over the period to reach $1.13 trillion, according to the Federal Reserve Bank of New York’s Center for Microeconomic Data. ‘Credit card and auto loan transitions into delinquency are still rising above pre-pandemic levels,’ Wilbert van der Klaauw, economic research advisor at the New York Fed, said in a statement. ‘This signals increased financial stress, especially among younger and lower-income households.’“ HPS Analysis: Consumers that are buying bicycles at discounted prices have used credit cards and buy-now-pay-later credit cards more frequently. The growing problem going forward is credit card balances and credit card defaults. The increase in interest rates doesn’t help. While some economists have noted these increases, they feel other economic factors, like high wages and low unemployment are moderating the growing credit card debt. HPS is concerned about how these problems will impact consumer purchases and how defaults may impact bike shops.

03-19-24: “Recent news of brand ‘right-sizing’ from Trek – one of the industry’s biggest bicycle and accessory multi-line product companies – confirmed that the bike market faces more upheaval before it can truly rebound from its inventory glut woes.” THE OUTER LINE: “Our friends at Wieierflits provided a broader global perspective on this crisis last week as part of its Taipei Cycle Show business news analysis and wrap-up. In assessing the situation, they cited how historically poor industry-wide forecasting techniques created a perfect storm coming out of the COVID-19 pandemic. ‘A gigantic deficit has led to a gigantic surplus. Production (capacity) has increased, but demand has decreased,’ and as a result, Wieierflits discovered that several of the most important brands have millions of mid-to-to-high-end frames ‘gathering dust’ with no buyers lined up, potentially suppressing several billion dollars of sales worldwide. And the situation unfortunately might not be resolved this year or in 2025, as export figures from the Taiwan Bicycle Association and the Bureau of Foreign Trade indicated that Taiwan’s bicycle industry fell by as much as 21.29 percent from January to August in the last year alone.” HPS Analysis: The Outer Line is a competitive racing newsletter and blog, written for enthusiasts who follow international bicycle racing. They, like other bicycling consumer publications, are very interested in the current inventory problem working it way through the global bicycle industry. The Outer Line contacted a European online bicyclist publication, Wieierflits, and mined their report from the Taiwan Cycle Show for detailed intel. The report that “several of the most important brands have millions of mid-to-to-high-end frames ‘gathering dust’ with no buyers lined up” is an important piece of the puzzle.

03-19-24: “Giant Group revenue pushed up by Chinese market.” Bike europe: “A huge increase in bicycle sales in China could not compensate for the weak demand of entry to mid-level products from both North America and Europe, reports Giant Group in its 2023 financial report. In this overview, the company reported a 16.4 percent decline in consolidated sales to TWD 76.95 billion (€ 2,23 billion). ‘We even ship bicycles that cannot be sold in Europe and North America to China. This market will maintain steady and show double-digit growth this year,’ said Giant Group CEO Young Liu at a press conference during Taipei Cycle Show. According to Giant, the start of 2023 was still relatively good, but later in the year, export to Europe and North America continued to decline. The challenging market situation resulted in a decline of its net profit before tax by 45.1 percent to TWD 4.8 billion (€ 139 million). Giant reports a decline in the e-bike sales volume, although this category still makes up 30 percent of the company’s total revenue, both on the OEM and ODM market. Still Giant expects that e-bikes will remain the main growth driver.” HPS Analysis: HPS has mentioned this before, and our concern is the importance of the Chinese bicycle market to Giant and the other Taiwanese and American bicycle brands that sell to Chinese consumers. The Chinese economy continues to be challenged, and there does not appear to be any real stimulus to consumer spending in the works. This article makes it clear that Giant Group is relying on Chinese consumer sales in 2024 and we will keep watching.

03-20-24: “Peak population: A growing challenge for the U.S. economy.” The New York Times: “Since its inception, the U.S. has relied on population growth to keep its economy pumping. New generations of native-born Americans and immigrants enter the workforce, they produce goods and services, and then spend their income in a cycle that drives supply, demand and growth. They also pay taxes that fund programs like Social Security and Medicare. Over every 50-year period in U.S. history, the population has grown at least 50 percent, sometimes by far more. But that’s about to change. Americans now have fewer children than past generations did. And depending on levels of immigration, the country’s population may plateau in the coming decades. HPS Analysis: Demographics are most often overlooked in discussing the bicycle market. Demographics is the study of the U.S. population and it really has everything to do with population and peak population. The number of American bicyclists per thousand of U.S. population is incident rate, or what percentage of Americans ride a bicycle. If we record the data and study it over time, we can see if more people per thousand or fewer people per thousand are riding bicycles. If the U.S. population continues to grow, the incident rate, as a percentage will ideally go up, but any case is a percentage of a growing population. Peak population is when the U.S. total population no longer grows and is about to decline. HPS will present U.S. bicycle riding participation 2000 to 2023 at the NBDA Summit in Bentonville, Arkansas in May.

03-20-24: “Federal Reserve holds interest rates steady, projects three rate cuts later this year.” National Public Radio npr: “The Federal Reserve held interest rates steady on Wednesday, but policymakers signaled they still expect to start cutting rates later this year. Updated forecasts from members of the Fed’s rate-setting committee show an average of three quarter-point rate cuts in 2024, similar to what policymakers were projecting in December. Investors welcomed that news. All of the major stock indexes climbed to record highs, with the Dow Jones Industrial Average jumping 401 points or 1 percent. Fed policymakers said their basic outlook hasn’t changed, even though inflation was slightly hotter than expected in January and February. ‘I don’t think we really know if this is a bump on the road or something more,’ Fed chairman Jerome Powell told reporters. ‘We’ll have to find out. In the meantime, the economy is strong. The labor market is strong. Inflation has come way down. And that gives us the ability to approach this question carefully.’ Markets see slim chance of a rate cut at the next Fed meeting in May, with a higher probability in June. Since last summer, the Fed has kept interest rates at their highest level in more than two decades, in an effort to tamp down demand and bring prices under control.” HPS Analysis: Most business owners, large and small, are aware the Federal Reserve held interest rates steady earlier last month. The only change has been in the employment figures which came out in early April and further dampened the possibility of cuts in the rate this year. This could all change again of course as each month unfolds. HPS thinks it is good to read what the Fed says as it moves along in its fight against inflation, including higher interest rates on money. Higher interest rates are showing more often as a problem for the bicycle business as pertains to getting loans and the cost of loans to finance inventory.

03-21-24: “Lululemon CEO warns of slow start to 2024.” Sourcing Journal: “Lululemon Athletica Inc. finished strong for 2023 with a fourth-quarter earnings beat, but chief executive officer Calvin McDonald warned ‘there has been a shift in the U.S. consumer behavior of late, and we’re navigating what has been a slower start to the year.’ For a perennial outperformer which continues to track ahead of its strategic goal to double sales over five years, hitting $12.5 billion by 2026, it was an unusual splash of cold water. Shares of the Vancouver-based company fell 10.6 percent to $428 in after-hours trading on Wall Street. But McDonald told analysts on a conference call that Lululemon remains both strong and flexible. ‘Consistent with what we’ve seen from others in the market, the consumer environment in the United States has been somewhat challenging,’ he said. ‘However, despite the market dynamics, we remain optimistic about our opportunities to grow our business in the U.S. in 2024 and to continue to gain market share.’“ HPS Analysis: The CEO of a well-established, $12.5 billion athletic clothing brand warns that: ‘there has been a shift in the U.S. consumer behavior of late.” The American bicycle business is well aware of a change in consumer behavior of late, but hasn’t been able to put its finger on exactly what or why. Despite being cautious and concerned, Lululemon is moving forward cautiously because they don’t know what the “shift” exactly is! HPS will keep asking questions to see if we can find out.  

03-21-24: “Package deliveries are clogging city streets.” Marketplace: “Online shopping surged in the pandemic, and retailers could be shipping out 32 billion packages in the U.S. alone by 2028, that makes the ‘last mile’ of delivery tricky to solve. It’s a rainy evening in New York City, a flash-flood-warning kind of rain. But it’s nothing Michael Singh hasn’t seen. ‘Yes, rain, snow, high winds, all of it,’ said Singh, who’s been a bike messenger for seven years and started with Amazon a few months ago. He begins his shift in a warehouse where he loads boxes onto an e-bike trailer the size of a bathtub. ‘This is a little light today. I’m guessing because of the rain.’ This cargo bike delivery program is a pilot with the city of New York. In a place as dense as Manhattan, trucks aren’t efficient. ‘You know, going stop to stop, double parking, congesting the streets,’ said Jessica Schumer, who leads New York City public policy for Amazon. It’s a problem that’s gotten worse in the last few years. Between 2019 and 2020, U.S. parcel volume grew almost 40 percent to 20 billion packages. By 2028, as many as 32 billion packages are projected to be shipped in the U.S. ‘This isn’t just an issue in New York City. Miami, Boston, Portland and other cities are running cargo bike programs to try to make more efficient the most expensive and emissions-heavy piece of the logistics chain, the last-mile delivery … It takes an ecosystem to be successful from a business perspective … In other words, companies are probably not going to come up with a whole new way of delivering packages unless it helps their bottom lines. Parcel delivery on foot or bikes can reduce costs, but the infrastructure has to be just right, with, say new bike lanes or warehouse-friendly zoning. Cities also need to take both a carrot and a stick approach.’ ‘We identified some incentives that can sweeten the pot,’ said Diniece Mendes, director of freight mobility at New York City’s Department of Transportation. Carrots include special loading zones and sticks include congestion pricing.” HPS Analysis: Delivery cycles and cargo bikes have been a slowly growing specialty segment since Arnold, Schwinn & Company sold the U.S. Post Office cycle trucks after World War II. There has been an active cargo bike business in New York City for at least a decade and Worksman Cycles has been a specialty supplier of food, delivery and industrial tri-wheelers for three generations of ownership. Other brands have moved in just prior to and during the pandemic, and this article sheds light on the latest developments, including the adaptation of electric propulsion systems.

03-22-24: “Frasers Group to relaunch Wiggle and Chain Reaction Cycles websites.” Cycling Industry News: “It had been rumored for a number of months, but it’s now confirmed: Frasers Group has announced the relaunch of Wiggle and Chain Reaction’s e-commerce sites, marking a significant step following the acquisition of the brands and intellectual property. Frasers Group, which already has a strong position in the UK cycling market through Evans Cycles, secured the rights to Wiggle and Chain Reaction in March 2024, alongside the brand rights for their in-house ranges which include Nukeproof, Vitus Bikes, and DhB. Alongside the e-commerce relaunch, which is due to take place next week, Frasers Group is looking to create commercial partnerships to enhance and expand these own-brand lines through development, sales, licensing, and international distribution opportunities.” HPS Analysis: This is worth bringing to the attention of HPS newsletter readers because it illustrates that bankrupt brands don’t necessarily go away. Wiggle and Chain Reaction have been really irritating online competition in the U.S. for about a decade. Online sellers who thought they had seen or heard the last of them need to look over their shoulders. 

03-22-24: “KKR’s $1.7 billion bike crash is a cautionary tale.” Bloomberg Opinion: “When KKR & Co. acquired Dutch manufacturer Accell Group NV in 2022, the private equity firm must have hoped to cash in on health-conscious consumers parking their cars and hopping on high-priced e-bikes. Instead, the owner of bike brands such as Lapierre, Haibike and Raleigh is burning cash and drowning in inventory, providing a lesson in understanding headwinds and overpaying in red-hot markets. While the bike industry should have a bright future once the current storm abates, KKR faces an uphill slog to earn a return on its €1.6 billion ($1.7 billion) purchase, which came at a 21 percent premium to the group’s all-time-high stock price. As with other consumer appliances and equipment, demand for bikes rocketed early in the pandemic, but this growth wasn’t sustainable: Having at first struggled to obtain enough merchandise, retailers ordered too much, leaving corporate cash tied up in inventory. Interest-rate hikes have compounded these problems by making customers think twice about bike purchases (which nowadays can easily cost four figures), and shops have been forced to offer big discounts to offload excess stock. The reverberations are still being felt. Japanese bike component giant Shimano Inc.’s bike-related sales plunged almost 30 percent last year, while UK retailer Halfords Group Plc last month warned on profits, blaming a ‘challenging and competitive’ cycling market. Several manufacturers, distributors and retailers have gone bust, including Dutch e-bike maker VanMoof BV and Signa Sports United NV, which owned various e-commerce sites (Signa Sports was part of Austrian tycoon Rene Benko’s ailing retail and property empire, and went public via a SPAC in 2021 at a more than $3 billion valuation.) The lights remain on at Accell, but the cycling group has become quite the headache for KKR: It’s one of three private investments that have seen the biggest decreases in value, according to the PE firm’s annual report, which didn’t quantify the paper loss. There are few comparable publicly traded bike manufacturers, but shares of Taiwan firms Giant Manufacturing Co. and Merida Industry Co. have each declined more than 25 percent since the Accell takeover was announced.” HPS Analysis: This Bloomberg article is the most comprehensive we have seen. It touches on issues that even Bike europe hasn’t gotten into. Despite this being a European public company and Group it is instructive for U.S. managers and analysts.

03-25-24: “Raised stakes in a firearms bidding war.” The New York Times DealBook: “A battle over Vista Outdoor, the company behind top ammunition brands like Remington and Camelbak water bottles, is escalating, and national security is becoming a bigger factor in the fight. The investment firm MNC Capital today raised its bid for the company to $3 billion, DealBook is first to report, hoping that a more generous offer, and further uncertainty that a rival bidder, the Czechoslovak Group, can pass a U.S. national security review, will win over Vista’s shareholders. MNC is offering $37.50 a share for all of Vista, up from a bid of $35 last month and 16 percent higher than where Vista’s stock closed on Friday. In a letter to Vista’s board reviewed by DealBook, the investment firm reiterated that it had lined up financing for its offer, despite questions by Vista about how solid those commitments were. Vista rejected MNC’s previous offer, saying a planned breakup of itself would be more valuable for shareholders. (Vista has agreed to sell its ammunition business to CSG for $1.9 billion, leaving its non-firearm division, Revelyst, as a stand-alone public company.) MNC argued that its new offer assigns Revelyst $1.1 billion in enterprise value, nearly double the $570 million implied by the CSG deal.” HPS Analysis: The bike business brands owned by Vista that it plans to move to Revelyst are Bell, Blackburn, CamelBak, Fox, and Giro. This gives some idea of how huge the conglomerates that are gobbling up brands have become.

03-28-24: “Dalio Says China Must Fix Debt Problems or Face ‘Lost Decade.’ “Bloomberg: “Ray Dalio warned that China should cut its debt and ease monetary policy or face ‘a lost decade.’ The billionaire founder of Bridgewater Associates said in a nearly 5,000-word post on LinkedIn that he agrees with Chinese President Xi Jinping’s warning of a 100-year period of unprecedented change and recommends the country take steps to manage its debt problem. The hedge fund titan was referring to the Chinese Communist Party’s political slogan of ‘great changes unseen in a century,’ used to describe the future trajectory of international order. While the phrase was first used by Chinese academics following the 2008 recession, it was adopted by the party in 2017 and since used in diplomatic contexts. ‘When there is a lot of debt and big wealth gaps at the same time as there are great domestic and international power conflicts, and/or great disruptive changes in nature, and great changes in technology, there is an increased likelihood of a ‘100-year big storm,’ he wrote.” HPS Analysis: HPS had not heard of Ray Dalio before reading this article. After we read his resume and learned why Bloomberg paid attention to him we decided to run this article. This is a long-time insider and business advisor to the CCP and Presidents of the PRC. He is trying his best to get an urgent message to President Xi. He will probably be heard. Whether he will be listened to, we can only hope, wait and watch.

Contact Jay Townley: jay@humanpoweredsolutions.com.