Letter From America – Banks Shaping Bike Industry

Sante Fe, New Mexico

The US banking industry – turned topsy-turvy with the demise of Silicon Valley Bank (SVB) in March – is quietly reshaping the bicycle industry.

Retailers, facing a raft of cash flow issues, are finding it increasingly difficult to refinance older loans, refinance and pay for overpriced inventory, or seek loans to aid their business.

Small business loans – the lifeblood for many dealers – has become a fast-tightening tourniquet on future retail, as well as other small businesses that support the retail environment.

National Bicycle Dealers Association (NBDA) president Heather Mason succinctly summed it up: “Retailers are sitting heavy on inventory; this is for sure. I have retailers facing cash flow issues and (they) agree that banks seem less favourable to help at this point.

“Many retailers are self-funding or giving up margin to move product. With the adjustments on pricing, some retailers are trying to get vendors to kick back the difference, but not having much success. Very trying times.”

There’s a lot a lot going on beneath the surface, with few dealers or suppliers eager to publicly discuss what is an ongoing shift in the financial structure of the US bicycle industry. How this will play out through the end of 2023 and into 2024 is anyone’s guess.

But, in general, dealers ordered inventory during the pandemic in 2021 and 2022, and many received that inventory too late to catch the boom in sales. That inventory is now way over-priced in a market flush with inventory. Banks hate that.

Shimano Offers Flexibility

On the supplier side of the equation, Shimano is an industry bellwether. A memo sent to its North American customers is a broad signal that it’s bringing its manufacturing capacity in line with an overall easing in demand for its components.

On April 4, Shimano North America’s senior manager for OEM sales, Andrew Kempe, sent a notice to customers telling them they could adjust their orders throughout April and through the end of May. Kempe noted that lead times are now reduced from 150 days to 90 days and is allowing changes to confirmed orders.

“The last two months we all have worked hard to clean up orders,” Kempe wrote.

“As a result we see that lead times are reduced drastically. Considering significantly changed market conditions, we would like to offer the final opportunity to adjust your orders. Based on this we will relax our order handling rules from April to May 31.”

However, Shimano will not allow orders to be postponed. If necessary, suppliers can cancel an existing order and place a new one, the memo added. That memo, in part, supports Shimano’s earlier forecast that it expects a 21% drop in sales for fiscal 2023.

“Blood will most likely flow among poorly capitalised companies.”

Shimano’s changes to its lead times are further signals the US market is distressed. Consider these other factors:

• There is insufficient equity within the industry to support the amount of money tied up in accounts receivable and accounts payable. The industry is financially over-leveraged and, in general, that’s across the board.
  
• An area to keep an eye on is how Trek, Specialized and, to a much lesser degree, PON manage the stores they have bought—close to a thousand units among them—as the industry moves through spring. More importantly how big will the discounts get on parts, accessories and apparel this summer and fall if the spring sales season is a bust.
  
• Specialized and Trek have been running online sales—20 to 40% off – on virtually everything in stock. Trek Fest, the company’s annual clearance sale, will run through 30th April. Shoes, 35% off; helmets, 40% off. Specialized has been doing the same. And bikes, virtually all models, are being discounted online, depending upon the model, from 7% to as much as 22%. How these online sales will impact their retail outlets … well, that’s a good question.
  
• A phrase now making the rounds in economic circles is “place-based economics”. It’s another way to consider the state of the market. In high-income cities and suburbs with an affluent consumer base, high-end bikes (e-mtbs, carbon gravel, family-oriented cargo bikes and more expensive e-commuters) are selling, but often at a modest discount. Low to mid-priced inventory in less affluent areas is gathering dust. These are bread-and-butter sales for smaller IBDs – and it’s the smaller IBDs that help keep distributors in business through orders for routine P&A.
  
• And one more item. The pandemic drove many retailers to attempt selling more product online through their stores. As a result, there’s a plethora of pricing for all sorts of products sold online. Recently, one online magazine offered its readers a guide on how to take advantage of all the discounts now available on the web.

Finally, blood will most likely flow among poorly capitalised companies. And there have been numerous acquisitions in the market over the last six months prior to the banking bust at SVB. That bolsters reluctance of banks, at the moment, to finance these sales or poorly financed startups.

“For sure, the industry is in a very financially leveraged position and will not see any real guiding light for at least 12 to 18 months. I do expect there will be some blood-letting soon – and it could be the new venture capital funded brands, as well as the regional brands dependent on a narrow geographic area, for their results,” one finance expert told me.