Decision Looming on Kitzuma Future

Melbourne, Victoria

Online retailer BikeExchange has foreshadowed it will soon make an announcement on Kitzuma, the US bicycle delivery service it purchased in December 2022 in the hope their synergies would deliver rapid growth for both organisations.

However, BikeExchange (BEX) executive have stated Kitzuma has been “burning a lot of cash” at a time when the Melbourne-based retailer has been focused heavily on reducing its costs.

In a quarterly update to shareholders last week, BikeExchange CEO Ryan McMillan reported BEX has achieved a 49% growth in nett revenue and 17% improvement in total transactional value (TTV) during the second quarter of 2022-23.

Part of its gains have been produced from a higher average value of sales, from $638 to $684, and a 22% rise in its conversion of sales from visits to the site.

“We are converting more customers on the page, through technology and customer service team,” he said.

Kitzuma Operations Suspended

They were also underpinned by a significantly reduced cost base, including an undisclosed number of job cuts and suspending Kitzuma’s operations.

The forum presentation showed BEX’s quarterly costs had been halved over the past 12 months, from around $4.5 million in the third quarter of 2021-22 down to approximately $2.3 million in the most recent quarter.

Both Ryan and non-executive director Dominic O’Hanlon told the update BikeExchange is stringently analysing how it would proceed with Kitzuma and the executive would soon make an announcement on its future.

That review would examine Kitzuma’s operational and funding model, “including its delivery business and new third-party logistics, boxed delivery and fulfillment services”.

Ryan said: “While at the time of acquisition of Kitzuma, it was seen as a very high-growth business, which it is and was, it’s also one which consumed a lot of working capital chasing long-term growth.

“The jury is out on where exactly we finish with that. At the moment, a lot of analysis is going into it.”

BikeExchange (BEX) paid US$3.375 million ($A4.75 million) to buy Kitzuma in late 2021, declaring the US-based ready-to-ride bike delivery and logistics business would unlock many opportunities for BEX’s online sales platform.

The BEX CEO at the time, Mark Watkins, said Kitzuma’s purpose-built logistics platform, which allows bikes to be transported box-free and fully-built, would eliminate a significant barrier for many customers purchasing a bike online – having to unpack and assemble it.

“Kitzuma will be a compelling white-glove service for retailers and brands using the BikeExchange marketplace and broader,” Mark announced.

The announcement said Kitzuma’s proprietary logistics systems, including a unique racking system within its trucks, removed the need to have bikes shipped in boxes and delivers them ready to ride, including fitting at the point of delivery.

But late last year, the US General Court of Justice – Superior Court Division found Kitzuma has a case to answer against allegations of fraud, misappropriation of its trade secrets and other confidential information and common-law unfair competition.

A court hearing in November dismissed an application by Kitzuma founders Taylor Essick and Christopher Cosgrove to dismiss the claims by rival company Tribike Transport, which previously employed both Taylor and Christopher.
The hearing was told TriBike, founded in 2005, transported customers’ bikes to triathlons and other cycling events and had started developing a new business plan (D2C) “to pick up high volumes of bikes directly from manufacturers, refurbishers, and online retailers, and transport them — boxless, fully built, and ready to ride — directly to consumers”.

This closely matches the business model of Kitzuma, which was launched in December 2020.

Initial reports of the court action coincided with Mark’s departure as CEO, along with news of an 83.45% decline in BEX’s share price over the preceding 12 months

New Business Focus and Priorities

Dominic said BikeExchange had altered the businesses focus and priorities in response to a changing market.

“We have taken a lot of cost out of the business, in terms of marketing spend, in terms of investment in areas that were non profitable and also in headcount.”

He said when BikeExchange was first listed on the Australian Stock Exchange in January 2021, it was amid a high-growth market.

“As the market has shifted towards a focus on bottom line results, sustainable profitability and not burning as much cash, it was very clear to me and to most of the other directors – or all the other directors – that we need to get our cost base down, and do so quite quickly, so we’re not always raising capital in a tough and tight market,” he told the shareholder forum.

“There’s been a big focus on that and it’s been ongoing. We have taken a lot of cost out of the business, in terms of marketing spend, in terms of investment in areas that were non profitable and also in headcount.

“In December, we announced we were putting the Kitsuma operation on hold during the quiet period, their winter, and that has brought our cost base down.”

Dominic revealed BikeExchange raised $4.4 million in the December quarter, after holding an extraordinary general meeting earlier that month.

“While we have taken significant cost out of the business, where we are investing is in the IP (intellectual property), because the IP is what will put the most value on this business,” he said.

“We think we have something quite special and unique globally and we want to continue to invest in it. Technology continues to change and it’s important we are at the forefront.

“The board remains really focused on getting the business to a point where it does not have to constantly raise capital to survive, where it’s focused on generating positive cash flows from business operations and continuing to invest in growth, primarily through our own IP.”

Jobs Cut Across Organisations

Ryan said jobs had been trimmed from throughout the organisation, to “consolidate skillsets broadly across the business”, as the industry grapples with a post-Covid excess in inventory and increased price competition.

“We’ve got great potential to grow the seller base and change the seller mix on our platform.”

“The recent headcount changes – as communicated in the Annual, Q1 and Q2 market updates – are connected with the company’s focus on achieving a sustainable cost base and driving performance for our sellers via automation, consolidation of skills and synergy across regions to significantly accelerate our progress towards profitability.

“BEX continues to invest in expanding its customer service teams – for consumers and retail sellers – and its technology team, and plans to launch its new consumer platform in Q4, 2023.”

Ryan said the company is also focusing heavily on establishing new seller partnerships.

“We really see we’ve got great potential to grow the seller base and change the seller mix on our platform,” he said.

Last December, BEX announced it had signed Australian-based retailers 99 Bikes and BikesOnline, along with Specialized Bikes and Factor’s operations in this country.

Its new US partners included Cinelli and retailers Decathlon and Playtri.

Ryan said BEX is really trying to target the best sellers and products likely to maximise the site’s sale conversion rate. The included working with those sellers to manage their inventory.

“BEX is working closer with its sellers to list and advertise their inventory more efficiently, resulting in improved campaign performance,” he added.

“We are investing in our technology stack to provide customers with a better online experience with search, content and payment improvements, as well as AI recommendations to drive a more modern and personalised buyer journey.

“We envisage this will improve our marketing conversion metrics and better enable BEX to scale globally and ultimately drive performance to our seller network.

“The increasing number of leading retailers and brands signing up to the platform gives us confidence that BEX is delivering on its mission.”

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