A version of this article ran in the September issue of Bicycle Retailer & Industry News.
I proposed partnering on a three-part series to Jay Townley and Rick Vosper after reading that the Bicycle Industry Employers Association guarantees a $32,000 a year job to mechanics who complete their training.
Outside-the-industry folks were livid. "That's not even a living wage in most urban markets!"
Industry vets on the other hand seem resigned to the trade-off of doing fulfilling work, changing peoples' lives for the better, being immersed in the sport and the gear they love, while making less money than their high school friends and college roommates.
To better understand the compensation dynamics at work, and maybe even find some solutions going forward, Jay will address the history below, Rick will explore the supply side in Part 2 on Thursday, and I will finish up with a look at retail in November. First, a couple quotes from retailers to frame the dilemma:
"Few people got into the bike industry with the thoughts of getting rich ... but I think most that stuck with it have had a rewarding career and life. I know I have!" said Scott Cowan of Century Cycles in Cleveland and Akron, Ohio.
"At the end of the day, 'it's just a bike' and we are paid accordingly. No one on the retail side is getting rich in bikes, from the sales guy to the mechanic to the shop owner," offered Geoff Hewett of Two Broke Spokes in Tampa, Florida.
Part One: How We Got Here
By Jay Townley
Of course, not all bike business salaries and profits are low. However, the typical bike shop in the U.S. has not made a net-pre-tax profit on the sale of a new bicycle for several decades — until the COVID-19-induced sales surge of 2020-21.
This statement is based on the National Bicycle Dealers Association Cost of Doing Business Survey, which was conducted from 1993 through 2014. This survey consisted of a uniform set of financial statements filled out by participating retailers.
While the typical bike shop did not make a profit on the sale of a new bicycle, the top 25%, or what the study report referred to as "High Profit" shops did, while the remaining 75% didn't.
BRAIN published a blog by NBDA Executive Director Fred Clements in 2014, titled, Are bikes the black hole of IBD profitability?
Quoting Clements: "This may be old news to many, especially retailers wrestling with unruly income statements and stiff price competition, but the new report uses hard numbers to show that the failure of new bicycles to generate retail profit is much more than urban myth.
"In fact, the report shows that new bicycle margins do not even cover their share of the basic operating costs of the average bike store. Overall store profitability is only possible because sales of higher margin items such as parts and accessories drive the average up, categories now facing increasing price competition from online retailers."
While the CODB study was last conducted in 2014, little has changed in the industry, at least until the pandemic sales surge that began last year.
In an earlier blog published in March of 2014, Clements asked, Are bike retail salaries too low? This is the same question we are still asking today, and while the recent surge in sales and revenue has made many bike shops "cash-rich," there is real concern about what the future holds for our retailers.
"The farther backward you can look, the farther forward you are likely to see." — Winston Churchill
Before we look forward, I think it is important to look back at how we got to our current dilemma. Why is compensation in the bike business, and in particular bike shop salaries and profits, so darned low?
The story goes back 70 years, to 1951, seven years before I started working for Hazel Park Bicycle in St. Paul, Minnesota. The history is very much entwined with the history of Arnold, Schwinn & Company, as it was known then.
Schwinn was the leading bike shop brand after World War II. Here is a 25-year chronology of the commercial and legal events that led us to where we are today.
- Aug. 31, 1953: Arnold, Schwinn & Company initiates a national Franchised Dealer Program. The independent servicing bicycle dealer in the U.S. rises from the status of essentially a repair shop to that of a retail merchant.
- 1956: Schwinn establishes two new categories of retail dealers: The 500 and 1000 Club Dealers, who sold over 500, or over 1,000, Schwinn-brand bicycles per year.
- 1958: The U.S. Justice Department files a civil complaint charging Schwinn with price fixing, allocation of exclusive territories to distributors, and confinement of Schwinn bicycles to franchised dealers.
- 1963: The Schwinn case begins in the U.S. District Court in Chicago.
- 1964: After 70 days in court, the case goes to the judge.
- 1965: The District Court dismisses the price-fixing charge, and approves Schwinn's limitation of sale of Schwinn bicycles to franchised dealers. The government files Notices of Appeal in March but ultimately does not appeal the dismissal of the price-fixing charges.
- 1966: Schwinn initiates a "Total Concept" store development program, which becomes available to Schwinn dealers throughout the country by 1968.
- 1967: In a 5-to-2 decision the Supreme Court rules that it is reasonable and lawful for Schwinn to confine sales of its bicycles to franchised Schwinn dealers it selects when such sales are made direct from Schwinn to the dealer.
- 1968: The Schwinn Doctrine, based on the 1967 Supreme Court decision, becomes the precedent law governing franchise and selective distribution agreements between franchising companies and selected franchisees.
- 1973: Because of the basic change in the franchising industry, and the resulting laws and regulations, Schwinn begins referring to its dealer program as an "Authorized Dealer" program of selective distribution.
- June 23, 1977: The Supreme Court hands down its decision in Continental TV Inc. vs. G.T.E. Sylvania, which replaces the Schwinn Doctrine.
- Dec. 14, 1977: Federal Judge J. Sam Perry dismisses with prejudice the U.S. government's action against Schwinn in U.S. vs. Arnold, Schwinn & Company, et al.
- March 31, 1978: The majority of Schwinn Franchise Dealer Agreements are allowed to expire. They are replaced with a new Authorized Dealership Agreement.
This is the inflection point, or commercial event, in the bike shop channel of trade that drove the contractual relationships and resulting economics that have resulted in the current low-profit situation.
Schwinn dealers knew and trusted the relatively simple legal language of the one-page Franchise Dealer Agreement. And when the more complex four-page Authorized Dealership Agreement was issued, they trusted that too — because the original contractual agreement was basically fair and equitable for both the dealer and the company.
What is important to understand: The 1977 Sylvania decision was a significant change in American Antitrust Law. The Supreme Court was forthright and deliberate in mandating that the 1965 Schwinn decision was wrong and should be overturned.
The 1977 Sylvania decision gave manufacturers more legal authority to enforce location clauses and prevent retailers and wholesalers from selling their products from unauthorized locations.
Although the court did not say such restrictions are always legal, it did say that they are not automatically "per se" illegal — and each such restraint may be presumed to be legal until proven otherwise on a case-by-case basis. "The burden of proof is to be borne by whoever challenges the legality of any such restraint."
The Sylvania decision recognized that manufacturers who limit the number of dealers they appoint, as Sylvania and Schwinn did at the time, and many brands in the bicycle business continue to do today, could have legitimate reasons for confining dealerships to approved locations and for requiring dealers to maintain reasonable standards of sales and service performance.
What does this have to do with dealer and bike shop profitability? From 1978 through Schwinn's 1993 bankruptcy, a period of 15 years, Schwinn expanded both its rights under the court-approved Authorized Dealer Agreement and restricted the rights of its retailers. As a part of his final judgement and order, Judge Perry ruled:
"The vertical restraints in the revised Schwinn Authorized Dealer Agreement ... are reasonable restraints under the 'rule of reason,' and do not violate Section 1 of the Sherman Act as indicated by the extensive record in this litigation and under the Supreme Court's decision in the Sylvania case."
So you're thinking: "So what, Schwinn isn't a top brand anymore!" However, the "court-approved" Authorized Dealer Agreement that Schwinn promulgated was picked up and redeployed by other top-tier bicycle brands in the American market from 1993 to the present.
Some of these agreements serve to restrict and control their dealers' ability to make a profit on the sale of new bicycles. This in turn makes it difficult to increase salaries, hourly wages and benefits.
We are certainly willing to be proven wrong, but it is no longer possible for third parties to obtain copies of the Authorized Dealer Agreements employed today, because the top-tier brands require their dealers to enter into Non-Disclosure Agreements.
Remember the language in the 1977 Sylvania decision? The burden of proof is to be borne by whoever challenges the legality of any such restraint. Even the largest bike shops don't have the resources to challenge the restraints contained in their dealer agreements.
I will close by referencing the Guide to Authorized Dealer Agreements that the NBDA commissioned in the 2000s from John R.F. Baer, a prominent franchise and dealership law attorney.
The advice from Baer was for bike shops to seek legal advice before signing any such agreement, and he provided alternative language for many clauses. One of Baer's suggestions has stuck with me.
Instead of accepting a clause stating that litigation will be the means of settling any disputes between a brand and a dealer, Baer advised binding arbitration as the means for settling any disputes.
This arcane string of legal decisions explains the (im)balance of power we see today. The top-tier bike brands are in control, and dealers who have worked their way up to the top 25% are still fighting for a fair and equitable profit and the ability to pay competitive wages and benefits.
"Men occasionally stumble over the truth, but most of them pick themselves up and hurry off as if nothing ever happened." — Winston Churchill
I have laid out the history of the modern Authorized Dealer Agreement as part of what creates low wages and profits in today's dealer channel. I also realize there are no quick or easy answers.
Bike shops can start by holding onto the profits they have enjoyed during the pandemic-related surge in consumer demand. How? Resist the brands' push to purchase and hold inventory beyond two or three turns.
Bike shops can also join an NBDA P2 Group. Some of the benefits: Sharing business and financial information with dealers of like size and getting first-hand advice and counsel on how to make a fair and equitable profit and attract and retain good employees.
Negotiate with the brands when you can. Do whatever you can to end up with as fair and equitable an Authorized Dealer Agreement as possible.
Sources: Post Trial Brief Of Arnold, Schwinn & Co. August 12, 1963. Schwinn Bicycle Company Marketing Analysis and 1979 Marketing Plan, August 31, 1978.
