WINTER IS COMING!
If you are a fan of George Martin and his fantasy tale Game of Thrones, you’ll recognize the statement above. The line is originally spoken by Ned Stark, king of the North, but gets repeated by others through the telling. It is spoken as a warning and a call for constant vigilance as seasons change. It is a reminder that the coming winter will be extraordinarily perilous.
That may be apropos of what a bicycle retailers and/or distributors could face the next few months, too.
A lot has been written over the last year about supply chain issues. Most of those things have been rectified, meaning that when you want/need something you’ll probably get it in a reasonable amount of time.
Then there is inventory. Do you have what you need? Are your suppliers pressuring you to take more, perhaps of models/sizes/colors you don’t need? Are they offering you terms on the product to make it easier for you to take some of their inventory and make it your inventory? No doubt you’ll be told you need the extra inventory to insure you can meet the coming demand. Or, if you don’t take additional inventory now, it could have an impact on your ability to get new product when that becomes available.
With the talk about the Federal Reserve reducing the interest rate, perhaps that would make you feel better about more inventory and your carrying costs. There was a question of how big a reduction might be made. It went to the high end of the expectation with a half point reduction. Any change in interest rates by the Fed will take awhile to filter down to small businesses, so be very careful managing your inventory levels and cash flow.
Surveys show retail customers are trading down because of inflation and stagnating wages. There have been reports of significant sales declines across the spectrum. One survey done by the parent of Dollar General showed that 60 percent of the respondents said they have had to sacrifice on purchasing basic necessities because of higher prices. More troubling, roughly a quarter of those same respondents said they expected to miss a bill payment in the next six months. That sounds like it might have an impact on your sales.
Truist Securities equity analyst Scot Ciccarelli opined that even higher-income consumers appear to be gravitating to big box retailers like Walmart and Target. Both retailers have reported higher than expected comparable sales gains. Walmart has said its market share is growing among higher-income households. While those households are still buying, they are moving down-market looking for better value.
Additionally, mid-price stores like Macy’s, Kohl’s and Dillard’s all reported sales declines this last quarter compared to a year earlier. When announcing its results, Kohl’s said its shoppers are “feeling the burden of the higher cost of living,” and reported that the average transaction amount was smaller in the second quarter, year over year.
This same reality is showing up in bike shops around the country. The September edition of Bicycle Retailer and Industry News notes overall bicycle import volume is up 29 percent while the average unit cost has declined $54. The published retail survey in that same edition notes that 63 percent of the shops responding showed and average 15 percent first half 2024 sales decline compared to 2023, while 37 percent reported an average sales increase of 11 percent. Obviously, some shops are doing better than others, though that could be an increase in service and accessory sales.
One of the retailers surveyed remarked he could deal with declining sales, but said it’s the cost of doing business going up close to double digits that is difficult to manage. He also noted that Trek, which has significantly deeper pockets than most dealers, has closed three of its company-owned stores in his market, suggesting market factors and profitability are adversely affecting Trek, too.
Direct-to-consumer sales are another factor having an impact. This comes via some bike companies only selling D2C, and some of the major brands transitioning to that model as well.
In support of the statement above, and that some consumers are expecting to miss a bill payment in the next six months, executives of consumer lending companies raised warnings in early September about lower-income borrowers struggling to make payments. At a Barclays banking conference, attending executives noted that on top of soaring prices for groceries and many other items, those consumers are dealing with higher interest on their credit cards. The average rate in May, before any cut was being considered, was 21.5 percent, according to the Federal Reserve. That is up from around 15 percent in 2019.
Just over nine percent percent of credit card balances went delinquent in the past year, the highest rate in over a decade, according to an August report from the Federal Reserve Bank of New York. One credit card issuer said at the conference it expects elevated charge-off rates (balances card issuers write off because borrowers are unlikely to pay them) for the rest of 2024. “What this tells you is if people do get behind on their payments in this environment, it’s tougher to get out of them,” said Moshe Orenbuch of TYD Cowen.
Together these things suggest much remains to happen before the industry returns to what we understood to be normal. Possibly there is a new normal that will emerge ushering in paradigm shifts we’ve yet to see or imagine. Financially, your business will need to be vigilant to ensure viability which may require making some difficult and unpleasant decisions.
You may not have to deal with fire breathing dragons or undead white-walkers, but your journey will have its own perils. Be ready. Winter is coming.
Contact Steve Bina: steve@humanpoweredsolutions.com.