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Fred Clements: The E-Commerce Challenge

Published September 13, 2013

 

Editor's note: This blog post was written by Fred Clements, executive director of the National Bicycle Dealers Association. Clements' previous blogs can be read on bikedealerblog.wordpress.com.

Discount internet retailing is a big challenge for brick-and-mortar retailers and the brands they carry. It is also a huge threat to the cycling consumer now and into the future, although they may not realize it.

That’s the conclusion of a new white paper from the NBDA entitledCommoditization and e-Commerce: How Specialty Cycling Can Beat this Techno-Economic Cycle.

Written by retailer Jeff Koenig with input from multiple sources, and supported with funding from the NBDA, the paper focuses on the increasing commoditization of specialty bicycle retail products as a result of Internet discounting and the inability or unwillingness of specialty brands to control their distribution.

The executive summary that opens the 77-page document notes, “The NBDA has prepared this white paper to discuss the onset of commoditization of specialty bicycle retail products, the harm that this is causing to consumers and traditional brick-and-mortar retailers, and to raise up potential approaches to address the problem.

“From the NBDA’s perspective, there has been an unhealthy shift of focus away from high quality/service retailers to low service/price ones. Because of this shift, full service, specialty retailers are disappearing at an alarming rate.

The document points out the loss of almost 3,000 bike shops from the industry’s high-point, and notes that “In their place are mass market retailers, particularly the new wave of discount online retailers, who do little more than collect orders and deliver products at razor-thin margins. They are mere sales conduits who offer nothing else.

“They limit their relationship with brand owners and customers and disconnect these two from each other. They provide a disservice to the local economies and drive customer support away from communities where traditional bike retailers once existed.”

Showrooming, (consumers using smartphones in stores to find lower Internet prices) is used to illustrate a problem facing many specialty retailers today. Customers are increasingly using the local bike store to learn, fit, take test rides and look at accessories, and then go home to buy from Internet providers.

“Then, while proceeding to shop online, the customer finds a bicycle claiming to offer the same experience as the ones offered in-store while finding the identical accessories to purchase with free delivery to the home. The customer attempts self-assembly with difficulty and later takes the bicycle back to the same shop for ‘quick adjustments’ that the customer expects to be cheap or free.

“As this activity increases around this shop, it will soon lose viability and close its doors, laying off its employees and removing local support from the community which halts attracting existing and new riders to enjoyment of the sport.

“The loss of one more shop may not seem significant to the whole industry, but it is certainly significant to the next community in which it occurs. Many smaller towns and cities could only previously support one or two shops such that, once gone, there are left behind broadening gaps in availability of local support of cycling. When consumers must leave their own communities and drive significant distances to find experiential product education and mechanical support, and when they no longer have local organizers for cycling events, they will usually abandon the sport before long and new entrants will not be attracted to replace them. Novice and casual cyclists, which are the majority of them, require convenient access to a merchant who can afford to risk a commitment to location costs, maintain a broad range of choices in costly inventory, hire and train knowledgeable sales and service staff, and support community advocacy for cycling.

The paper continues, “Dollars spent in these stores support the local economic, tax and job base. Customers develop relationships with these stores and their staffs and become dependent on their support throughout the lifecycle of the products they have purchased.

“Thus, the loss of one shop is far more damaging to the consumer than often considered. This damage is not limited to the local level, but affects distributors, brand owners, and manufacturers. The damage done may be masked by the short-term sales volume being delivered through mass-market and/or online channels, but this unit volume replacement will have its days numbered.”

The paper acknowledges that while consumers who were educated in local shops may temporarily have enough knowledge to help themselves with ongoing online product selection and limited self-support, “this knowledge is not easily or widely passed on and new entrants to the sport will not be attracted to replace this singular generation of online shoppers.

“As they retire from the activity, mass market sales of the industry’s products will have no place left to shift; they will simply plummet. Once a distributed network of local shops is effectively gone and without a critical mass of shops that covers most geographical areas of the population, there will be no opportunity to rebuild that network as the population will have stopped looking for the product – they will already have moved on to something else.”

The document suggests that the trend toward commoditization is not inevitable, however. If a brand makes a conscious decision to remain a specialty brand, they can do so by managing their distribution using legal means.

“Smart brand management is essential to maintaining a mature specialty industry, and it can be maintained indefinitely if care is taken. The customer is best advantaged by this smart management when a healthy network of specialty shops is rewarded with sufficient retail margins to support showrooms, staff training, stocking of multiple brands, and high quality repair and warranty service. Specialty brand competition drives innovation forward to continuously improve the product and the consumer experience. Excellent experiences draw new participants to the sport and increase the opportunity for more brands to enter, compete and grow which furthers offer the consumer additional, wider ranges of products to enjoy with healthy price competition.

The paper continues, “Mass-market and online discount retailers take unfair advantage of specialty brick-and-mortar retailers by ‘free riding.’ Specialty retailers must invest heavily up-front, the costs of which must be made up in their retail margins. Online retailers can exist, in sharp contrast, with a tiny fraction of up-front costs which allows them to profit on the backs of specialty retailers who first educated the converted online customers and who grew the online-purchased brands’ awareness and value in these customers’ minds.

“This industry must once again recognize that without specialty local retailers, there will be no industry, and without sustainable retail margins that support specialty local retailers, specialty retailers cannot exist.”

The white paper urges the bicycle industry to consider the following approaches to maintain and grow anew a healthy bicycle industry. Details are offered for each of these, emphasizing the benefits not only to retailers and brands, but especially to consumers who rely on their local bike shops:

Approach #1 Retire the Use of MSRP For Non-Commodity Products.

Approach #2 Emphasize Product Quality and Service, Not Price.

Approach #3 Support Healthy Retail Margins.

Approach #4 Employ Effective Minimum Advertised Price Policies.

Approach #5 Limit Sales to Authorized Specialty Dealers.

Approach #6 Limit Internet Sales Only to Authorized Specialty Dealers.

Approach #7 Employ Effective Minimum Advertised Price Policies Outside of the U.S.

Approach #8 Limit Closeouts to Authorized Specialty Dealers.

Approach #9 Grow Brand Sales Through Product Diversification.

Approach #10 Consider Allowing Individual Models to Run in Longer Independent, Overlapping Sales Cycles.

Approach #11 Limit Warranty Service to Original Purchasers from Authorized Specialty Dealers.

Approach #12 Offer an Easy-to-Find Authorized Dealer Locator on Website.

Approach #13 Encourage Product Education Through Authorized Specialty Dealers Rather Than Consumer Self-Education Via Website.

Approach #14 Increase Authorized Specialty Dealers’ Education through Software Solutions.

Approach #15 Take a Long-Term Approach to Growing Product Sales.

Approach #16 Avoid Direct Selling to End-User Customers.

The entire document can be downloaded here:www.nbda.com/goto/whitepaper

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