Letter from America: Taking Stock of the Chaos

Sante Fe, New Mexico

So much change, so much disruption, so much unknown—that characterises much of what can be discerned from the steady drumbeat of economic news today.

“Where there’s chaos there’s often opportunity, and it takes an optimist to find those opportunities.”

Most of it has been decidedly downbeat.

It’s a bull market for pessimists and is shaking the faith of optimists everywhere.

Nonetheless, where there’s chaos there’s often opportunity, and it takes an optimist to find those opportunities. But at the risk of adding to the near universal Sturm und Drang (look it up for a bit of an art lesson), let’s take a snapshot or two of the US bicycle business.

Inventory

Nothing focuses attention in the executive suite like inventory — it’s either too little or too much and seldom just right. The same holds true for every bicycle dealer in the business. Profit and loss hinge on sharp-eyed management of inventory whether it’s bicycles, parts or accessories.

At the moment, bicycle inventory at the wholesale level is a mixed bag. Overall, analysts calculate there is about eight months of inventory on hand. Whoa!

But let’s dig a bit deeper. The bulk of that inventory lies with kids’ bikes and BMX bikes — low-cost, low-profit units that weigh less on inventory costs.

On the other hand, key-category inventory on higher price-point units — e-bikes, full-suspension mountain bikes, road bikes and upscale commuter bikes — is more or less in hand and perhaps a little tight for e-bikes.

But – and there’s always a ‘but’ – more units are on the water making their way to ports on both coasts of the US.

How many? That’s anybody’s guess.

These bikes were ordered and booked months ago as suppliers traversed a rock-strewn path through supply-chain disruption, ocean freight costs and backed-up ports. While these units flood into the market as spring turns to summer, all eyes are on the consumer.

2022 Uncertainty

Among dealers, there’s widespread concern over how the 2022 season will shakeout.

Here are a few items top-of-mind among dealers.

Almost all recognise the 2020 and 2021 seasons were aberrations. Demand was too high, too many unit-sales were pulled forward due to the pandemic, and consumers willingly paid whatever the price. Think Peloton.

Meanwhile, suppliers were tightening terms, allocating units and pushing hard for future orders playing on dealer fears of a product shortage in 2022.

Now let’s view that supplier strategy in the light of the past few months. Ukraine has exploded any hope of global normalcy. Stock markets worldwide have tumbled precipitously.

In the US, the market is flirting with the bears. Inflation is rapidly rising, driven by food, gas and housing costs.

And when Walmart, Target, Best Buy and other major retailers say consumers are pulling back on spending, bicycle dealers have reason to worry.

Overall, this will be a tough year for the US industry and much of it — for dealers — will depend on inventory management. Did they order the right mix at the right price point in the right numbers?

I suspect in some markets there will be heavy discounting later in the summer and fall.

Domination by Goliaths

There’s been much hand-wringing and words written (I’m guilty as charged!) over what appears to be Trek and Specialized’s aggressive move into retail.

Let’s set aside Pon for the moment; they are a bit of a cipher.

In talking with a half-dozen industry leaders, fear of Trek/Specialized market domination is overblown. Here’s a number to consider; depending upon who’s counting, there are approximately 5,000 IBDs of various sorts in the US market and only the gods at Google know how many D2C retailers are strictly online. Trek and Specialized combined directly control fewer than 400 outlets, or about eight percent of the market.

Admittedly, both companies have focused on major markets in Southern California, Austin, Texas, Chicago, and major metro areas on the East Coast.

Both want to expand and defend their market share in these lucrative metros. And as both move aggressively into online sales, these stores — or better yet, let’s call them outlets — become quasi distribution centres for online orders.

Brad Hill, one of the industry’s best-known dealers and who will unabashedly say he made a ton of money as a retailer, sold his three New Hampshire stores, with significant reach into the Boston metro area, to Trek about two years ago.

He also owns the property and leases it back to Trek.

At 68, he’s retired, sort of, and follows the industry like a hawk. As one of the few dealers who sold both Trek and Specialized brands and who has a sense of their strategies, Hill bluntly summarises it this way: “Most of the stores they bought were in financial trouble to begin with,” he said, and rattles off a string of such purchases.

Heather Mason, president of the National Bicycle Dealers Association, views their push into retail as an opportunity. Most of the Trek/Specialized stores tend to be sterile in terms of product mix, they struggle at being community oriented, and they face all the IBDs must face in today’s market — expertise among staff being number one.

Mason argues that IBDs can out-point a company-owned store if they pay attention to their market.

“Now is the time for good companies to survey the economic chaos, tighten up operations, and invest in the products that made their company a category standout.”

Another analyst at one of the majors pointed out that the margin saved at retail (say 32% on average for bikes) is being repurposed to direct-to-consumer sales. That entails an expensive expansion into digital technology, aggressive online customer acquisition costs, online service, and the cost of shipping a single bike to an online consumer or directly to a retail outlet, assuming that bike is not in stock. Eighty bucks per bike is a fair guess and it may be too low given today’s fuel prices.

Testing Times Demand Tested Strategies

One further point. As fear stalks the marketplace and as interest rates move upwards, venture capitalists are less eager to dump money into digital start-ups (think online retail, publishing and advertising) or finance the consolidation of marginal companies into healthy ones in hopes of increasing market share, scale or whatever.

The appropriate strategy should be for healthy companies to compete aggressively and force the marginal companies to try and compete or die. Now is the time for good companies to survey the economic chaos, tighten up operations, and invest in the products that made their company a category standout.

It’s old school but it works.

It’s going to be a tough year, for certain. But fear isn’t a strategy.