Letter From America: Rationale Behind the Great White Feeding Frenzy

Santa Fe, New Mexico

It’s as if someone tossed a ton of chum into the turbulent waters surrounding independent bicycle dealers, attracting a scrum of swift-moving sharks snapping up prime retail locations in the prosperous suburbs of major metropolitan areas. Look at a map and it’s easy to see where the Great Whites — Trek, Specialized and Pon — are seeking prey.

In the past three weeks or so, retail waters have been churned into a froth as the Great Whites take a bite out of long-established retail stores.

Here’s a quick rundown. Trek bought a two-store operation, The Bike Race, in Lincoln and Omaha, Nebraska. Lincoln is the State capital and Omaha is where Warren Buffet, a financial shark of the first order, calls home. The stores have long been what its owner calls a “Trek partner”.

Pon took a bite out of the Denver, Colorado, market by purchasing four stores, Elevation Cycles, in mid-June. Former Trek employees had launched the chain in 2012 with Trek’s help and later expanded. Now that Pon owns Elevation, Trek dropped it like spoiled tuna and is looking to open other Trek outlets in the region.

Specialized, not to be outdone in the short term, is building what it calls an Experience Center in Bentonville, Arkansas, home to Walmart’s headquarters. That announcement again spurred rumors that Mike Sinyard would — at some point — sell Specialized to the Walton family.

But just as interesting has been the recent expansion of several chain operations driven by their owners. Wheel & Sprocket, a Wisconsin chain closely associated with Trek, just bought Fitchburg Cycles, a 7,000-square-foot (700 square metres) store in Madison, Trek’s headquarters and the State’s capital. It’s Wheel & Sprocket’s 12th location, including stores in three toney suburbs of Chicago.

Conte’s, an 18-store chain with three locations in the greater District of Columbia, home to the US Capitol, is opening another store at a local Amazon facility. Its other locations, particularly in nearby Virginia, are found in upscale communities in Florida, North Carolina and Massachusetts. While Conte’s is a Specialized dealer, consumers can find brands like Cannondale, Orbea and BMC.

And Wheat Ridge Cyclery, a 50-year-old institution in the Denver region, is opening a second store in Littleton, Colorado, often ranked as one of the best places in the US to live thanks to its vibrant historic district downtown. Wheat Ridge Cyclery is one of the few stores left in the US that sells both Trek and Specialized brands, among others.

At this point, it seems the strategy is clear: Buy retail in the prosperous suburbs of America’s key cities where the potential for more unit sales at higher price points far outstrips the value of stores in smaller cities nestled in the rural stretches of the US.
But ultimately, is the cost worth the investment? No one really knows. But industry experts note the following:

• The Great Whites directly own fewer than 500 outlets in an industry that counts about 4,500 retail establishments. That’s about 11% of the IBD market. That figure doesn’t include independent stores that primarily sell Trek or Specialized bikes and accessories, as well as other brands. There are few dealers left in the US who sell both.
  
• The Great Whites want to protect and expand in key regions by being the first to buy a store or chain in high-value markets. The ‘first mover’ strategy makes head-to-head competition less likely, a must in terms of profitability. Trek is far ahead of Specialized in terms of ‘first mover’ strategy.
  
• The move is part of a longer-term strategy as the Great Whites enter retail while, at the same time, aggressively moving into D2C sales. Owning brick-and-mortar outlets serves as a focal point for regional-direct distribution, in-store assembly and routine service, especially for D2C customers.
  
• The trend eliminates dealer margins on bikes and accessories. It’s no longer necessary to finance dealer inventory. IT integration allows for better management of inventory at the retail level, which improves inventory control throughout the supply chain, improves internal forecasting, and trims the need for company sales reps – among other savings. What once was a decentralised system tied to supplier-financed dealers serviced by national sales reps is now a more tightly centralised operation.
  
• On the other hand, those savings must cover the cost of local, State and federal taxes, the expansion of in-house human resource management, growth in IT services, increased personnel benefits, managing pay scales across a wide spectrum of stores, finding and retaining employees especially in the service sector where e-bikes have increased service complexity; internet advertising and marketing costs needed to acquire new customers to compete with other online retailers.
  
• Trek, Specialized and, to a lesser extent, Pon have concluded they have little to fear from alienated dealers. For years, Trek and Specialized swore allegiance to their dealer base, concerned with a loss of market share and brand status if dealers bolted to a competing supplier. No more. D2C (distributor to consumer) sales, which spiked during the pandemic, signalled that consumers were willing to buy and perform final-stage bike assembly and that brand loyalty was only as deep as a credit card.
  
• Finally, these companies are facing the same issues as any other retailer. The pandemic pulled too many sales forward, skewing longer-term sales trends. IBD-quality bicycle sales are flat-lining. Weather has become a significant factor in store profitability (floods, hurricanes, wildfires). Fast-rising interest rates are impacting the cost of money. Inflation is cutting into consumer spending in general while, at the same time, consumers are shifting their spending to travel, entertainment and restaurants. The retail environment for the bicycle industry is as difficult as it has ever been.

As one industry veteran told me recently: “What they are doing makes total sense and frankly, what’s shocking, is they’ve waited this long. It should have happened sooner.
“They were carrying inventory, maintaining warehouses, financing dealers, locking up dealers’ open-to-buy to keep competitors out, offering loose payment terms—they might as well be in retail.”