Thursday, October 9, 2008

Are Bicycle Businesses Heading To Potential Turmoil? Your Say

Some months ago, (and perhaps still now) one of the buzzwords bringing good fortune in the bicycle industry was 'high gas prices'. While the automobile industry was faring badly, the bicycle business was booming. Most prayed for lower gas prices, but the diametrically opposite people in the bicycle business secretly wished that it kept increasing. That seems like a cunning way of thinking, but in the end, business is business.

Now a bigger calamity might put all that to rest. Of course, you all know what I'm talking about! Just open the front pages of your newspaper.

But there could be a fair share of you who are still clueless about the breadth and depth of this huge financial mess. For the uninitiated in financial knowledge, just read this funny Subprime Primer put in simple stick figure terms.

Getting back, in the midst of such an issue of global proportions, I find it awful that very few in online bicycling circles (that includes publications, websites and blogs) are talking about the more pressing current state of affairs. Let's put Interbike 2008, Lance Armstrong and Britney Spears aside for a moment here.

The cold fact is that like all businesses, the cycling trade also depends upon such a thing as credit. And when credit stops flowing from markets, to banks, to businesses and to consumers, almost everything begins slowly heading downhill.

Now I'm not involved in the bicycling trade in any major way. Strictly speaking, I'm an outsider and that's the way I like to stay for now. But I did manage to chalk out a schematic of how money and goods and services flow in the bicycle business.

If you find anything out of place or not making sense, please feel free to correct me.

My Simple Schematic on How the Global Bicycle Trade Works

I'm not going to go into immense detail on every aspect shown in the graphic above. But just check out the overwhelming role that credit plays, not just in business but also in our personal lives.

Since the credit markets are at great distress, I see a lot of weaker brand names and small businesses having the possibility of being affected.

And the other funny thing is .... oil prices are falling as well, not rising.

I understand there'll be a good percentage of readers here closely associated with the bicycling industry. Here are some questions from me to you and to all in general to ponder over, discuss and intelligently comment on.

I think most of the questions, if not all, will be put forth from the perspective of those at the lower end of the supply chain.
Bear with me on the train of thoughts.

How do you foresee the impact on the bicycling industry because of the global financial turmoil?

Will brick and mortar bike shops make enough money to sustain themselves? Will we see a lot of bikes selling for cheap just to get rid of excess inventory?
And with lesser access to credit in order to get new line of bikes in, are we going to see some unusually empty bike shop floors early next year together with dwindling shoppers?

2. Will big brand names cut on the variety of lines of bicycles they offer to the public?

3. And what about the average consumer who won't be able to get a loan or credit with the same ease as in the past? With his buying power decreasing, what will the demand for bicycles be in the coming months? Don't you think the consumer mindset will be to hold onto money in these tough financial times? Shouldn't bicycle design itself change and strive to keep costs down instead of pushing for the high end bike sales.

4. And how on earth could we solve this? What can and should change in the way retail business is conducted today? Should the industry target more newcomers to cycling, as opposed to the ones who already have 400 bikes in the garage? Should bike shops focus more on service as opposed to emphasizing the selling of goods to make the margins? Should they charge higher prices on those services? And how will that decision affect the customer as a result.

5. Finally, as far as smaller brand names are concerned, how will they fare? Are consolidations of smaller bicycle companies by the bigger ones be the answer to saving them from possible collapse? The issue is in keeping the industry going, and maintaining people's jobs in these tough times.

Update : Oct 30,2008

Bruce Hildenbrand over at Active talks about Teamwork in the bicycle industry.

Thanks also to Bike Hugger for this video called Economy, Bike Industry. It looks like people are going to bring out more bikes from the garage to the shop for tuneups as the economy slumps.


Colin Griffiths said...

Look at it another way. There's a remote possibility (number 6 on your list) that bikes could become a utility as opposed to a luxury item and MORE will be sold. perhaps the bike industry could work on that.

Anonymous said...

Re:your schematic
1 - Don't kid yourself; bike shops don't have until the end of the year to pay. We need cash flow. The retailers that do take too long end up on a downward spiral, don't get the better bike brands to sell and end up failing in the end. (Amazingly, the end usually seems to draw out for quite some time.) The bicycle retail business is largely made up of cycling enthusiasts not business people. Most have no idea of their business’s day-to-day health. For that reason we will see more retail failures in trying times.
2 – Some suppliers/manufactures, such as Trek are self-financed and do not depend heavily on the banks.

ant1 said...

The last thing I want is more consolidation. Like we've seen with airlines, banks, etc..., it works out in the short term, but leaves the industry much less able to adapt to new conditions, stiffles innovation, and keeps prices inflated. Of course, there's nothing the consumer can do but grin and bear it. Gotta love being the little guy.

Jon said...

I'm wondering if one of the results would be fewer high-end bikes. It seems the price of the "stock" high-end bikes--especially road--has gone through the roof with many brands offering off-the-shelf bikes approaching $10K.

Anonymous said...

I agree with Jon too. I don't see putting more high end $10K bike out there in the shops as a solution to anything, especially if the aim is to attract more beginners to the sport.

Anonymous said...

I agree with a couple of comments here that bike makers need to address the need for cost effective, functional bikes more. Purchasing power of the customer is likely to decrease like you mentioned.

Ron said...

That reminds me of a story that ran in the Economist of how Giant bicycles sold over 400,000 bicycles last month. While sale of bicycles are doing comparatively better than cars, are they really recession proof?

From the way the slowdown of the economy is going on now, we're likely heading into a depression here in the U.S and elsewhere (Europe, possibly Asia). We're already there - think about it, 1 trillion dollars wiped out in 5 days through the stock market decline! Plus, the bailout plan seems only like a band aid solution. The deficit crisis is never going to stop on a dime.

Anonymous said...

the reason giant is doing well in taiwan is two fold and has nothing to do with the health of sales in the US.

1. Trek has moved even more of their production to Giant over the past year

2. Giant has moved a ton of production back to Taiwan due to escalating costs in China

This never really stated in the mass media articles it is always spun as more sales.

Simply not true. We are on pace to sell less bikes in the US than last year.

Robb Sutton (198) said...

Great article Ron...

I think we are going to see several things happen and this is pretty standard across most industries during times like this.

1 - Sales are going to drop no matter what the gas price is. People are unsure about their employment for the next year, so disposable income drops. The biggest part of the market that will be hit is your middle of the road lines. These are people upgrading from cheaper rides or buying their first "real mountain bike". When the economy turns back around...this will change.

2 - More innovation. As sales slow, manufacturers will have to capture the sales that are there through new designs and product.

3 - Skinning lines. If certain manufacturers have bikes that are very close to might see one new model to replace two of last years model to improve efficiencies. Several have already done this including GT.

4 - Many aren't going to make it. The reality is that there are a lot of companies that are too far extended during the good times. When harder times hit...they are not prepared and can't make it through. Many of these rely on fast growth to maintain cash flow and are terrible businessman or book keepers. Expect to see some shops close and even some manufacturers close their doors for good. This is already happening in other pleasure industries like RV and boating.


Bluenoser said...

Come on ron,

Would you think for a moment that the pres of Trek would come out and say we are screwed?

That's for the table behind the closed doors.

Of course everything in public is happy happy never been better.


Anonymous said...

Ron, the only retailers that will end up closing shop are the ones that do not plan and prepare for times like this. Like I said before, most retailers are not business people. Budget, cashflow, balance sheet... are all mysteries to them. I speak from experience, I used to be one of them. Since we took "control" of our business things have never been better. Mom and pop shops may be a thing of the past but that doesn't mean they'll lose out to big boxes just better bike shops.
Most people here are enthusiasts, if you look at where the big brands like Trek and Giant are at you'll see they are most definitely trying to cater to the up and commers.

Anonymous said...

i posted about giants reasons for success this year above.

Just wanted to clarify where the data was coming from. The data I am using is from the mainly from bicycle retailer, ceo's of bike companies and bicycle import data from the US govt. This is not anecdotal data - its hard numbers.

Why do you think Breezer was for sale? It was not because he wanted to cash out - he needed more resources to continue.

Trek does seem to be strong but there are literally dozens of brands struggling. It is getting tougher too as Trek, Specialized and Giant require an ever growing slice of the shop floor. I would think they will have to look at their minimum buys and adjust down if credit issue continues.

Anonymous said...


To stay in business, a lot of small companies may downsize and layoff workers. We could say a good number of people losing jobs. Ebay just did it today.

David Kalowski said...

Good post going here and great comments. If you look at this issue in one way, it could be a positive for big companies who could become more successful because all the smaller ones around them are crumbling. I tend to think the TREKs and GIANTS of the world will do fine. However, I'm wondering what'll come of someone like Cervelo, who's only product line are the high end road and TT bikes.

kind1 said...

Sometimes it seems that the industry is pinning its hopes external factors to grow. Whether its high gas prices or the fixie trend, both happened outside of the industry's influence. There is nothing wrong with taking advantage of those situations but a real effort has not been made inside the industry, even though we all know it should and needs to be done.

James over at Bicycle Design poised the question of what kind of bike would draw in the masses? There are some good points in there (Ron) that are relevant to this topic.

Carlton - like you mentioned over on ChrisWrites - the demographic is male, getting older and afluent, but I think the industry has painted itself into a corner because thats who they were marketing to (and still do).

At least we know we can market effectively...