Comments on: Bike Industry Economics

By: Jack

Jack — Tue, 02 Dec 2008 22:58:45 +0000

I must admit that looking at the bike dealer business from the outside is really scary. Mostly because I see a lot of wringing of hands over the loss of high dollar customers in the likes of “enthusiasts” rather than much of a real attempt to provide a fun, upbeat and inviting atmosphere to the rest of the human race. If you consider how poorly run many dealer shops are (odd hours, dirty stores, outdated displays, faded merchandising, etc. not to mention a level of arrogance not found in many other retail stores) it is not a mystery why so many are seeing their business wane. Now, add the economic problems and you have a perfect storm. The up side? Maybe those of you who actually “get” retailing will survive and be even stronger.

By: Mike

Mike — Thu, 30 Oct 2008 13:14:20 +0000

Great post, it gives good insight into how the current economic crisis can impact some local businesses. Bike shops are in this postion because the market (and manufacturers) are focused on high priced road bikes instead of making affordable road bikes. The lower end of the market is ignored. A focus on this end of the market would bring in new customers and reduce the credit needs of bike shops.

By: Ron

Ron — Thu, 09 Oct 2008 21:53:07 +0000

Chris & Carlton Reid, I came and read this post of yours at a perfect time, courtesy Cyclicio.us blog. I have written a post on my blog with a very similar vibe. Click here to read it I would love to know what your thoughts/comments are to the questions I posed. See you there!

By: Carlton Reid

Carlton Reid — Wed, 08 Oct 2008 08:40:52 +0000

I’d like it to be not dying, but I look at the average age of bike shop customers and the average age of racers (of almost all cycling disciplines) and can’t but help come to conclusion that we need a fresh influx of enthusiasts.

I’ve been editing trade mags for cycling since the early days of mountain biking. The bike demographic is now more skewed to relatively affluent, middle-aged men than ever before. For sure we need to remain committed to this demographic because of the 80/20 rule but there needs to be an awful lot more outreach from the bike trade to create fresh enthusiasts. It sounds like Passion Trail Bikes is doing this, and keeping their current customers enthused, too. A bike shop with an email newsletter? Simple, cheap, effective, yet sadly, rare.

Repair doesn’t pay the rent if your shop is enthusiast-heavy because enthusiasts like maintaining their own bikes but newbie customers need bike workshops. My main point would be that sales of new bikes will continue to decrease as a percentage of an IBD’s business and the days of having hundreds of bikes on the sales floor are long gone. Servicing – and, of course, selling accessories at full margin – is where bike shops make money.

By: alan

alan — Wed, 08 Oct 2008 08:08:32 +0000

Financing in the US retail bike industry has an interesting similarity to the way subprime home ownership was financed prior to the banking collapse. Most bike retailers are undercapitalized enthusiasts who are strong on product knowledge but weak on business skills. They operate with sketchy and unreliable budget planning that frequently results in delinquent debt payment to the bike manufacturers and distributors that supply them. However, they enjoy some of most generous and lenient vendor inventory financing schemes of any retail industry. Payable dating of 3,4, and 6 month duration is common even in the dangerous conditions of Fall 2008. How can that be possible? Here’s the similarity to the financing of subprime housing. Like the OPEC nations that constantly recycle their petro-dollars back to the oil consuming nations, the large bike factories in Taiwan and China and their banks have amassed large fortunes that need to be utilized. The OPEC banks, investors, and sovereign wealth funds ultimately “invested” their money in bonds of the CDO (Collateralized Debt Obligations) type. These contained RMBS (Residential Mortgage Backed Securities) of various qualities, but containing enough toxic sub-prime ones to make the whole security worthless. Some bike retailers of dubious credit-worthiness are the retailer version of subprime mortgagees. I predict that today’s banking crisis will cause the current vintage of bike manufacturer’s finance programs to be the last of its kind and that in the future, bike retailers will face financing needs similar to the real world of manufacturer-retailer economics.

By: chris

chris — Wed, 08 Oct 2008 04:10:16 +0000

If we consider ‘enthusiasts’ to be those who are enthusiastic about cycling, then I’d say that segment is not dying at all, thanks in great part to the gas prices and health issues you mention. But I agree with you that the higher end is tougher to get excited year after year, and growing the world cycling population is a far better goal and focus. I just think relying on servicing (that is, fixing broken stuff) is a stretch, as bikes are getting more and more reliable all the time (especially the newbie bikes!).

Shops can make money in service, but at the shop I was at, it was the lifetime value of our core customer base that kept us running and growing, and at times surviving. That adage that 20% of your customers are 80% of your revenues might be a stretch for the bike biz, but it’s definitely not even revenue across all customers. And repair alone does not pay the rent, the math at $50/hr just doesn’t work. Maybe at $100/hr, but that seems an unlikely price to reliably charge repeat clients.

For an example of a shop that I think is doing an utterly fantastic job of staying healthy and developing a tribe of customers to help weather a storm, take a look at http://www.passiontrailbikes.com, a shop near me (and yes, a Specialized dealer, but that’s not the reason). Be sure to sign up for their email newsletter.

By: Carlton Reid

Carlton Reid — Tue, 07 Oct 2008 23:04:42 +0000

All true, Chris. But how much of what you write here applies mostly to the enthusiast-only side of the biz?

Selling to newbie consumers is good because (a) they aren’t yet locked into the model year malaise (b) they’re cost conscious but not RRP conscious and (c) they’re new. Enthusiasts are a dying breed, we’re not making enough of them to survive only on their business.

Getting new folks into cycling has always – but always – been the big dream. Gas price worries and the health fixation (of self and planet) is now bringing more newbies into cycling. Not all are buying new bikes just yet (there’s still not a lot on the sales floor they’d be attracted to for utilitarian purposes) but bike shops in US and UK are reporting servicing is way up.

And bike shops can make good money from fixing stuff, often better money than flogging brand new bikes. Consumers can compare online prices and know how to squeeze a bargain: it’s tougher to haggle over a fork bleed or a winter overhaul.

It’s the servicing side to the bike business that will expand massively in the years to come. Bike sales will continue to leak via a multitude of channels. The very top IBD-only brands will be able to tough it out in bike shops but there’s only a handful of these brands.

By: Cafiend

Cafiend — Tue, 07 Oct 2008 20:44:13 +0000

The bike industry has helped put itself in the bind by getting sucked into “model years” in the first place. This grossly inappropriate concept came in during the destructively competitive mountain bike boom from the very late 1980s through the end of the 1990s, when the technological spiral succeeded in chasing almost all the consumers away.

Our current customer base made up of numerous niches has spawned more than enough models to supply them, but the industry is still stuck on the model year concept. Constant change, labeled as innovation, but really just annoying manipulation, still destabilizes customer satisfaction and devalues inventory already in stock. Meanwhile, no one has developed a more powerful and advanced engine. Poor saps still have to pedal it.

Electric and electric-assist bikes try to get around the limitations of the motor, but at the cost of more technological gimmickry and massively greater weight.

Take away the need to pedal and you take away the urge entirely. But that’s another subject for another post.

By: Fritz

Fritz — Tue, 07 Oct 2008 20:36:52 +0000

So maybe General Motors can use that government bailout cash to come to Specialized’s rescue after all?

I just noticed you redesigned your website.

By: chris

chris — Tue, 07 Oct 2008 05:57:54 +0000

Agreed, I meant backwards-vertical, into the supply chain for raw materials and parts (the part that needs credit). But you’re right, vertical can go the other way to the consumer, and once I worked for now-defunct Supergo, a company that exploited that very fact. That said, I’m not convinced that the bike industry distribution model is “behind”, though I admit it’s different and doesn’t follow the newer rush towards services, or the digital distribution options that exist. The model exists because of the fragmented base of dealers that consumers rely on for sales and service. Experiments are being made with company owned stores from Specialized, Trek, Giant, and even smaller companies like Stork, but the purchase experience really depends on there being a place to go to try the bike. What if the model were simply as evolved as it could be, given “typical bike buyer behavior”?