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Credit Crunch Revisited: Let the Price Reductions Begin

SOME QUICK BACKGROUND

We first started to comprehend the full force of the global economic meltdown in October 2008. We predicted in a What’s New column back then a few inescapable consequences, all of which are slowly-but-surely coming true. The imminent demise of manufacturers like ABG and Teschner represent the tip of the iceberg. Retailers are proving to be no less susceptible to the pain of failure. And for every one story like these, there are 10 rumors about companies in dire straits. Make no mistake, the culling has begun.

Another prediction we made had to do with the pricing of the goods we sell. One important fact for you to keep in mind: Competitive Cyclist doesn’t establish the advertised retail pricing of our goods. Rather, manufacturers and importers mandate these prices, and we are obligated to follow them. Due to multiple factors, we anticipated that manufacturers and importers would eventually reduce suggested retail pricing on bikes and bike-related goods. Why? In order of priority:

(1) Reduction in demand. The consumer economy is in a tailspin. The bike industry is not immune. Unfortunately manufacturers set their production schedules prior to October/November when it became apparent that in 2009 consumer demand would be far less than in 2008. What did manufacturers base 2009 production volume on? An optimistic view of growth over 2008 demand. This has led and will continue to lead to a glut in supply. Manufacturers and wholesalers can’t warehouse their overflow of goods forever. Inevitably pricing will need to come down to balance out supply and demand.

(2) Currency factors. In July the USD:Euro was 1.59:1.0. Since then it’s gotten as low as 1.24:1.0, and currently sits at 1:32:1.0. What we now know for a fact is that US bike industry importers are a greedy lot. As their dollars bought more Euros, the landed cost of their imported goods became ~20% less costly. Nevertheless, they made the conscious choice to NOT pass this cost savings on to retailers (and, ultimately to you). Rather, their strategy was to pocket the difference. Given that importers work on an approximate gross margin of 30%, this nearly doubled their gross margins.

As consumer demand falls -- thereby slowing wholesale demand by retailers -- the most accessible weapon for importers is to reduce wholesale prices and MSRP. Even if they cut 10% from these prices, the strong dollar is still giving them a far greater gross margin percentage than anything they’ve seen since late 2005. Importers have massive wiggle room in pricing because of currency. Plummeting demand will motivate them to wiggle, and to do it soon.

(3) Incredulous retail pricing. High-end bike stuff is expensive. $5,500 for a Pinarello Prince frameset. $550 for a pair of Sidi Ergo 2 shoes. $350 for a set of Assos FI.13 S5 bib shorts. $1,000 for a Campagnolo Super Record crankset. Who doesn’t say holy shit when they first see these prices? We don’t dispute or begrudge the development costs and manufacturing costs for such amazing goods. But, as a manufacturer, to conceive that it’s a good idea to manufacture goods at those prices is to presume that there’s a suitably large audience size for them. How big is that audience today vs. the audience size in January, 2008? Inevitably price must come down to attract an audience of adequate size.

CHANGE YOU CAN BELIEVE IN

Fast forward to mid-January 2009. The downward price pressure we predicted 4 months ago is finally underway. Most visibly, Campagnolo USA announced yesterday that they’re reducing US wholesale pricing and MSRP by 5% across the board. They claim that this is due to reason #2 above, currency factors. Is this a good thing? We’ll answer the question with a question:

If Campagnolo is reducing price for currency considerations, then why aren’t they dropping price more in proportion with the actual increase in the buying power of the US Dollar vs. the Euro, i.e. 15-20%? We’re certainly grateful that prices are moving in the right direction, but let’s face it: How many people previously unprepared to spring for a Super Record 11 group will do so now -- because it’s $3,150 instead of $3,300? Campagnolo has just devalued our not-inconsiderable inventory of their goods by 5%, but they’ve done so without doing anything of consequence to spur demand. Worst of all worlds? It’s easy to think so.

Our suggestion? Instead of a 5% price drop, how about a 15% price drop? Given the strengthening US Dollar, it’s something Campagnolo can afford to do. And by doing so, suddenly Super Record 11 would become price competitive with Dura Ace 7900, and Chorus 11 would go toe-to-toe with Ultegra SL 6600. The net result would be an authentic upswing in Campagnolo sales. Flat demand (reason #1 above) is almost certainly the true motivator for the 5% price drop, not currency fluctuation. Campagnolo is struggling to fight a universal condition -- not a Campy-specific one -- they’re eager to do something, anything, to stimulate demand. A more aggressive price decrease is their best (and their only?) means to accomplish this.

But there’s more to this story: As we mention above, Competitive Cyclist does not set the retail prices of the goods we sell, nor does any retailer. In the case of Campagnolo, we are obligated as an authorized dealer to advertise their product at what’s known as Minimum Advertised Pricing (MAP). It is illegal for anti-trust reasons for Campagnolo to mandate how much we sell their products for. But they reserve the right (legal or not) to unilaterally suspend sales of their goods to us without prior warning and without explaining the cause. In other words, the threat they hold guillotine-like above all retailers’ necks is that if we advertise their goods below MAP, they’ll deprive us of access to their goods. And it’s not just Campagnolo. Every other manufacturer and distributor out there wields this same threat.

Just as there is MAP for retail sales (i.e. the lowest cost Competitive Cyclist can advertise a Campagnolo Super Record Rear Derailleur to you), there are also regulations for wholesale MAP (i.e. how much a 3rd party Campagnolo wholesaler can advertise that rear derailleur to Competitive Cyclist).

But post-Lehman Bros reality is this: As the economy has tanked, 3rd party wholesalers of Campagnolo (and Shimano and SRAM, et al.) are struggling for business. How are they trying to earn it? By discounting wholesale prices in deals they present to us via email and telephone. It’s not ‘advertised’, but it’s relentless & aggressive salesmanship via asymmetrical means. And this is where the hilarity starts: On the one hand wholesalers are dropping prices at significantly below ‘minimum pricing’ to earn our business. (This isn’t just a Competitive Cyclist phenomenon -- other sizable retailers we’re friendly with tell us the same thing. ‘Unofficial’ wholesale pricing is less costly now than October ’08 for all of us.) But at the same time these 3rd party wholesalers warn us that we absolutely, positively can’t advertise this stuff below MAP. 3rd party wholesaler tactics are in violation of the spirit of their agreements with companies like Campagnolo, but at they same time they’re acting like the police, warning us not to violate retail MAP. Every cop’s a criminal. All the sinners, saints.

SIGNIFICANT PRICE REDUCTIONS

Due to MAP requirements, we cannot sell individual Campagnolo, Shimano, and SRAM components for prices below MAP. This is because we show the retail pricing for these individual items on individual product pages. But where we CAN pass along the savings is in the cost of complete bikes. Why? Because in the case of complete bikes we’re not showing individual component prices. Rather, we’re just showing one complete bike price.

Through yesterday, our complete bike pricing was built on an important (and, in retrospect, a flawed) assumption: It was based on the minimum advertised wholesale pricing for Campagnolo, Shimano, and SRAM products. But in the last few days we’ve done a comprehensive analysis of our true average wholesale costs -- which we now understand is considerably less than minimum advertised wholesale pricing. Because of this, you’ll see a reduction in the retail price of our bikes. We’ll give an example using the Ridley Noah below. Please note that the savings is consistent across all bike brands and all models:

Super Record

Record

Chorus

Dura Ace 7900

Ultegra SL 6600

Red

Force

Rival

Was $6959 $6517 $5858 $6267 $4785 $5706 $4950 $4559
Is $6419 $5910 $5331 $5903 $4423 $5148 $4550 $4214
% Savings 7.8% 9.4% 9.0% 5.8% 7.6% 9.8% 8.1% 7.6%

While the only reduction you’ll see in individual component prices (if you’re going rear derailleur shopping, for example) is the 5% reduction in Campagnolo MSRP, the savings outlined above on complete bikes is present for all brands and is in effect now. And we’re taking bets on when we see a wider-ranging wholesale price reduction from companies other than Campy. For better or worse, more interesting times await.