A look at this week’s issue of the Economist, as it might relate to the bike business.Â Or vice versa.
As the US economy, and the world, stare down the long barrel of a certainly-powerful economic danger, I thought I’d try to make sense of it using what I know best: bicycles.Â So as the Economist points out in this article in this week’s issue, we are certainly facing a global economic crisis.Â At the risk of oversimplifying an admittedly complex problem, it all comes down to the fact that banks won’t lend money to each other, and they sure as hell won’t lend to plebeians like you and me.Â And then when banks do loan money, it’s at rates that are reminiscent of vegas bookies who back up their loans with kneecaps and teeth – basically, they’re demanding a risk premium to lend to each other, when historically there has been none.Â As we’ve all seen, lots of banks seem to be disappearing these days.Â Would you lend to one?
So, back to bikes, as I’m trying to keep this from getting too ungodly boring – the bike industry model is pretty simple.Â While supplemented with in-season refill orders, bike companies sell a substantial amount of the year’s business in bikes and bike stuff to shops in a big early “booking” order that helps companies with forecasting and market trends, usually around the late summer or early autumn, and then the bike companies get paid for this big order over a generously long time (warning: that’s like CREDIT.Â Danger suspected!Â Blinky lights!)
To a great extent, this has already happened for the 2009 model year: most of the bikes you’ll see on showroom floors now and through the spring have already been ordered.Â So, depending on how a bike company books revenue, things might seem pretty peachy right now.Â But if bike shops, a classically cyclical business that tends to do poorly in the winter, have to borrow money to get through the winter – say, because christmas sales are down due to a crap economy – then we could be facing a situation very similar to what the banks face.Â Shops have inventory (just like banks have inventories of bad debts, which now apparently the government might buy), but like the bad debt inventory, they may be challenged to sell it (and there’s no chance the government will offer a bail out package to buy bike shop’s bad inventory of unsellable bikes).Â For sure, you can’t pay rent with a new road bike.Â So bike shops may start doing what banks are doing now: hoarding the cash they do have, and reducing the amounts they pay to creditors (the bike companies).Â This spring could be a very, very difficult time for bike retail.
America only?Â Not likely.Â Just as the USA banking problems are now spreading to Europe, so too is Europe exposed to similar bike industry risks.Â As the Euro tanks (As of writing, it’s down to 1.3488), the forecasting orders placed in recent months from any USA-based bike companies are getting more and more expensive to repay.Â Not to mention that the same banking industry problems, and lack of affordable credit, are now ripping through the European economies.Â Just ask Germany about their $51-Billion government loan to save Hypo Real Estate, Germany’s second-largest property lender.Â Sound familiar?
So this begs the question: imagine there was no credit for bike shops.Â This is the most doomsday scenario, but I rather enjoy taking ideas too far when they’re still considered hypothetical.
If bike shops could only display what they could afford to purchase, and had only their sales to support the inventory of their sales floors, we’d see a few things happen pretty quickly, I suspect: shops would seem empty, sales would fall precipitously, and many would move or close due to overheads they can’t afford.Â On the supply side, manufacturers would be crippled by a lack of forecasting capability, and would be forced into just-in-time style delivery.Â But that presumes they’d have the inventory in stock, which they wouldn’t, because manufacturers depend on the credit from suppliers for drivetrains, components, wheels, tires, and in some cases even the frames they adorn with their brand name.Â The COD model can sometimes help a single shop through a tough time while they get back on their feet, but it doesn’t seem to work well in aggregate.
Basically, the bike industry business model is krazy glued to the availability of global credit markets, and just to be sure they’re together, they’re then welded shut together in a steel box.Â They’re inseparable, as the model exists today.Â If the worst happens, and I hope it doesn’t, a total meltdown of global credit will vaporize the way the bike industry works within a year, and the only companies that might stand a chance of survival are those with a lot of cash in the bank, and those with a deeply vertically-integrated supply chain.Â Which is probably nobody, as far as I can tell.
And I bet the bike business isn’t alone in this.