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Bike Industry Business School, Credit Crunch Edition

– Look at a line graph tracking the Euro to US Dollar conversion since late 2005 and it looks like a map of a mountaintop stage at le Tour. It stabs up and up, with only the occasional downward tease. For 3 years it’s been the financial equivalent of a leg-and-lung crushing attack-fest up the Tourmalet. We’ve gone from 1 EUR = 1.15 USD to upwards of 1 EUR = 1.6+ USD. The net impact to us as a retailer, and to you as a consumer, is pretty simple to assess: Prices have gone out the roof. Where they hurt the worst are in European-manufactured products. To paraphrase Phil and Paul -- the price spikes have come thick and fast.

To wit: Our best-selling (and best-loved) shoe is the Sidi Ergo II. It started out in 2008 at a price of $429. Mid-way through the year the US importer raised the MSRP to $479. Then just a month or two later they raised prices again to $509. The shoe has a small cosmetic change for 2009, nothing more, and the price will be upwards of $530. Ditto with Colnago frames -- we saw not one, but two price hikes in 2008, and another significant hike is afoot for ’09 . And Campagnolo and Deda prices climbed in a steady fashion throughout the year. Why? The excuse we heard was always the same: Currency, currency, currency. Upon occasion there might be a mention of raw materials cost increases, but the go-to culprit is always the exchange rate.

This is all old news, of course, except for one interesting wrinkle. In the last 3 months we’ve seen a spectacular return of USD buying power. On 7/14/08 the FX was 1 EUR to 1.59 USD. As of yesterday, it was 1 EUR to 1.34 USD. I’m no economist, but that looks like an increase of buying power of ~20%. For 4 years we’ve heard ceaseless bellyaching about how the cost of goods are intimately tied to currency. Is it unreasonable to perhaps expect a reversal of the pricing trend? Shouldn’t the cost of bike goods start coming down?

It’s important for us to bring this up because there appears to be a belief in some circles that retailers choose MSRP pricing. In fact, we don’t. For 95% of the products we sell, the MSRP is mandated by manufacturers and/or distributors. We have no discomfort in selling a Campagnolo Super Record 11 crankset for $1,000. But when our customer base asks us when they might see some reductions in MSRP based on advantageous exchange rates, all we can tell them is this: We do no currency exchange here. We buy everything from US distributors. They are responsible for converting dollars to Euros, not us. We are not, as sometimes accused, enjoying a windfall here. But if the current reversal of the FX trend of the last 4 years gains some permanency, will we see price corrections offered up by our suppliers? In our view, there ought to be. Time will tell.

– An added layer of strangeness is the fact that, currency aside, in the last couple of years bike manufacturers have exuberantly re-defined the ‘high end’ price-wise. We could cite numerous examples, but BSNYC illuminates this point far better than we ever could.

– The Boulder Report did an excellent write-up of how the annihilation of Lehman Bros hit the bike market right between the eyes. It must be noted that this is where the Lehman/SRAM story appeared first. It’s only after both parts of this article got significant circulation on the web that Bike Retailer and Cyclingnews bothered to report on it. Props to Joe Lindsey for the scoop & for providing high-quality reportage, and shame on the cycling media for ignoring real stories out of fear that it might stunt ad revenue or deprive you of an invite to next year’s all-expenses-paid trip to a media camp.

While we’re having a heck of time playing connect-the-dots with who’s acquiring what, our belief is that Barclays Bank bought some of the remnants of Lehman. And who does Barclays also own? Ishares. It’s a name that ought to be familiar to bike racing fans. An anecdotal irony, but one worth mentioning for posterity’s sake. Not unlike a Dow Jones Index of 14,000, the memory of Floyd in Yellow is too damn painful to remember.

– One of the most buzzworthy items at Interbike 2008 were the sub-200g road brake calipers from eebrake. They had a lot going for them: They’re light, they’re lovely, their mechanical design is unique, and they’re available from eebrake for immediate shipment. Even better, they did a fantastic job in getting product placement throughout the show. Swiss Stop used them to display their pads. The jawdropping display at the Edge Composites booth had a few bikes equipped with them. We saw them in other places, too (we can’t remember where, sorry.) But with the thrill of the Zero Gravity brand arguably petering out over the last year or so, eebrake did some rock-solid positioning at Interbike.

But, getting back to the ‘economics’ theme of this What’s New article, they had one critical flaw: The pricing structure to dealers. Without getting into sensitive pricing details, we’ll summarize things this way: We have to make money on the things we sell. Our gross margins vary from category to category, and from brand to brand. Like any business, though, we need to pair adequate gross margins with operating expense discipline in order to eek out a net profit at the end of the year.

An eye-opening document is the Nat’l Bicycle Dealer Association (NBDA) bi-annual ‘Cost of Doing Business’ survey. I’m not sure if anyone can buy these, or just bike industry folks, but it beautifully lays out just how difficult it is to make a net profit as a bike retailer. They divide the survey up into two categories: ‘All firms’ and ‘High Profit firms’. What’s fascinating is this: In terms of Gross Margin, ‘High Profit firms’ average 1.7% less profit than ‘All firms’. NB: The key to bottom-line profit is control over your operating expenses.

As much as we’d like to get into details of profitability, we don’t feel like we can pass along the NBDA’s data like that. But what we CAN say is this: ‘All Firms’ have a net profit barely above 1.0%. And the gross margin on eebrakes is a whopping 19% lower than the average gross margin on goods sold by ‘All firms.’ What that means, of course, is that for every pair of these brakes bought & sold by a bike shop, it’ll be done at a net loss even if they’re sold at MSRP. Which is a long-winded way of saying that unless eebrakes changes their pricing structure, we imagine you’ll hear very little about them once the Interbike buzz wears off. You heard it here first.

We loved the brakes, and we wish the company well. But it kinda stuns us that an innovative manufacturer could be absent-minded about the fiscal necessities of its customer base: bike shops.

– A really interesting article by Dan Empfield over at Slowtwitch about the perspective of manufacturers and how the credit crunch worries them. If we wanted to be a hardass we might call him out for the fact that he’s the same person who sells advertising on the site, and that two of his biggest advertisers -- Scott and Cervélo -- are the two main subjects of the article. But Dan long ago earned the respect of the industry for his superb journalism. ( This is possibly the greatest article ever written about the bike industry. Hubris kills.) Like Joe Lindsey, he’s a shining light in terms of thoughtful writings on the industry. We wish he got into more detail about what % of manufacturer revenue has to get written off as non-collectible, and how the credit-check process helps them determine who new dealers will be, etc. But the fact that Scott Montgomery and Gerard Vroomen were willing in the least to even mention things like A/R insurance indicates that this article has more depth than almost anything else you’d read about the industry.

The comments on distributor consolidation are intriguing to us since they are absolutely reliant on credit. Distributors must pre-pay for their shipments. These shipments are often sent via surface (i.e. container ship), which has a ~40 days lead time. Then they must extend 60-90 days of credit to their retailers. And, of course, they might have to sit on their inventory for 60-90 days before they even sell it. Do the math: That’s a half-year of float they have to cover, and they’ve gotta do it with credit from the banks. A smart retailer can use their suppliers as banks and get long-term 0% financing. Distributors don’t get that luxury.

We have a distributor dead pool here, yes. If this was an anonymous blog, we’d post it and take bets on which ones will bite the dust first. But we’re not anonymous, so suffice it to say that we absolutely agree with the conclusions of the article: There are weak outfits out there, they will perish, and the industry will be no worse off for it. Perhaps even some interesting opportunities awaits the visionaries. Volatility presents opportunity, and heavy hitters like QBP are going full-tilt. The next 6mos should be fascinating.

– Just curious: If you ran a superstar company like Sidi, would you beat down the door of Zappo’s to get your shoes sold there? Maybe the $530 Ergo II’s are too expensive. But sub-$300 shoes would seem to be a viable opportunity for both companies. Or, given that sizeable mainstream companies like Oakley sell their wares direct-to-consumers, have you ever wondered why bike manufacturers don’t do the same? I think about Sidis. Or Giro helmets. Or Shimano for that matter. Can you think of any other industry so reluctant to go consumer-direct? We think it’d be great because it’d force manufacturers to think REALLY HARD about the wants & needs of the retail consumer. Unfortunately, that sometimes doesn’t seem like a priority to them right now.

Manufacturer-direct sales wouldn’t cannibalize our sales. Rather, it’d make all of the companies we work with 10x more cognizant of the end user of their products. Any steps manufacturers can take to be more responsive to consumers will benefit the whole -- the consumer, the manufacturer, and the educated, motivated retailer. Could you imagine for one moment the idea of Apple not selling iPods? We totally don’t get this industry sometimes…

The linchpin moment will be when one of the big companies decides to go direct. We’re talking the big, big bike-making companies. Once one of them breaks the seal, all hell will break loose in the industry and the reverberations will be fascinating to watch. We wonder if such moves are imminent given the sorry state of the US economy. Tough times trigger tough decisions. Again, time will tell.