Store Owners Feel Financial Squeeze

REDWOOD CITY, CA—When Washington Mutual Bank began to waver this fall amid the national financial crisis, Mike Jacoubowsky started to worry.

Jacoubowsky, owner of Chain Reaction Bicycles, regularly taps into his home equity line of credit, financed through Washington Mutual, to pay his supplier invoices early, which earns him significant discounts.

When the banking giant began to show signs of failure in September, Jacoubowsky went to his local bank branch intending to pull money from his line of credit, concerned that it could be his last chance to withdraw for a while.

“They said we are not one of the accounts that will be getting a letter,” he said. “We have enough equity in our house that they were not going to be chopping down our credit line.”

And if the bank had frozen Jacoubowsky’s credit line?

“It could’ve been a very, very lean winter,” he said, acknowledging that he thinks his suppliers, primarily Trek, would’ve worked with him in that situation.

Federal regulators seized Washington Mutual in late September and JP Morgan Chase later purchased its assets.

It was the 13th U.S. bank to fail this year in a credit crisis that has led many financial institutions to tighten the reins on lending, leaving small business that rely on loans scrambling to find other resources.

The bike industry has not been immune to the crunch.

Fred Clements, executive director of the National Bicycle Dealers Association, noted a fair amount of chatter on the association’s dealer E-Group about the topic.

“There’s a lot of concern, which—I think for all sizes of shops—is if you have a line of credit to get you through slow cash flow times, whether that line of credit is going to be there when you need it,” Clements said.

Karl Olson, owner of The Spoke bike shop in Mankota, Minnesota, didn’t lose his line of credit, but in August, lenders for the two credit cards he uses for payables and other business expenses, instituted a new 10-day holding period.

Now, when Olson makes a payment, usually in the range of $10,000 to $15,000, that credit isn’t available for 10 days. Previously, he could use the money immediately.

To adjust, Olson has changed the timing on how he does his payables.

Even retailers who don’t use credit are changing how they operate given the current financial unpredictability.

“We have already begun the process of watching our inventory closer, and ordering based on sales, not on anticipation of something being hot tomorrow. The budget process for the 2009 season is taking a little more time, due to so many new variables,” said Rick Schmitt, owner of The Bike Shack in Dubuque, Iowa.

Schmitt has an established line of credit, but hasn’t used it in years and doesn’t plan to in 2009 either.

Schmitt said he’s working closely with his major suppliers so they can plan their inventory needs.

Suppliers are equally committed to working with their dealers to help them succeed.

Danny Fitzgerald, credit manager for Giant, said he’s heard from a handful of dealers lately who have lost credit cards or lines of credit, even retailers with a solid financial history.

And given the financial environment, he’s been telling dealers not to even bother asking the bank for a new credit line or a line extension.

“It’s lean. There’s going be a ton of reliance on us vendors. We usually carry virtually everybody’s debt anyway and it’s going to be a challenge for all of us until March,” Fitzgerald said.

Fitzgerald said Giant is on solid footing with its lenders and both Trek and Specialized issued letters to dealers to the same effect last month.

He believes retailers who have done well in 2008 and came into October strong will likely sail through this tight time, but those who are already upside down could struggle.

“It’s become very bleak for those who are the have-nots. There’s a number of stores that are going to go away,” Fitzgerald said.

His best advice for retailers who are already feeling the pinch is to contact their main vendors now and be honest about their financial situation in order to work out a plan to get caught back up.

“I’m always going to try to figure out a way” to nurse a dealer back to health and get them viable in one or two years, Fitzgerald said.

Trek is on the same page, said Paul Moran, Trek’s national sales manager. Moran said Trek’s ultimate goal is to work closely with its dealers to help them succeed.

“Our financial services department will continue to advise dealers that are in need of working capital on preparing business plans for presentation to lenders,” Moran said.

“Also, we are advising dealers to carefully consider vendor terms when deciding who they will buy from and support those suppliers that recognize the seasonality of the bike business and offer appropriate dating terms,” he added.

Martin Schwartz, chief executive officer of Dorel Industries said during an earnings conference call in November that he isn’t worried about the financial viability of retailers in the independent bike dealer channel because so many shops performed exceptionally well this year.

Dorel owns Cannondale, GT, Mongoose, Schwinn and Pacific Cycle.

Schwartz said he has no plans to treat dealers’ credit worthiness any different in 2009 than in other years.

“If it’s a poor season and people don’t buy bikes then we’d have to act accordingly,” Schwartz said.

“But based on 2008, which was a difficult year and happened to one of the bike industry’s best years, I’m not ready to draw a conclusion on 2009 yet,” he added.