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Rick Vosper: The Balance Of Power Has Shifted. Again.

Published February 25, 2019

By Rick Vosper

I often ask people, "Which group is stronger — retailers or bike brands?" Right now, we're in one of the relatively few periods of agreement. The early 2000s was another. But in the interim, the perceived balance of power has flipped completely.

There's no getting around the fact that suppliers and retailers compete directly for their share of the cycling consumer's dollars. Nor that whatever share of those dollars dealers and suppliers have respectively, they'd prefer a larger one. But it's equally true that both groups have to cooperate to be sure there's any dollars to be had at all. (How we do that — and why we do it so miserably in our industry — is a topic for another time.)

Some call this ever-changing relationship a dance, a struggle or, occasionally, a war. A biologist might call it a symbiosis, but that's not quite right either. Economists call this relationship "coopetition," where competitors have to cooperate for their own good. Specific to this essay, we're looking at competition among the various members of a supply chain. If any link in the chain — design, production, distribution, resale — fails, we all go down. Everyone has to get a slice of pie, or everyone goes hungry.

Generally, when I ask who has the upper hand in the relationship between bike brands and retailers, each group thinks the other is more powerful. I ask that question a lot, and I've been asking it for almost 30 years. But occasionally both groups reach consensus.

That was the case in the early to mid-2000s. Pretty much everyone agreed that retailers were in the driver's seat at that point. After all, there were more brands than the market could handle, the market was flat to declining overall and there were fewer retailers every year. But there's equal consensus now that it's suppliers who enjoy the upper hand. So what happened?

What happened was Bike 3.0.

Tail or Dog? You Decide.

As a relatively few bicycle brands — two or three or four, depending on how you count it — came to dominate the industry at the turn of the millennium, those brands established and now maintain their dominance through closer and closer relationships with the strongest retailers in each consumer market. That's the core of the 3.0 model.

Top-tier brands courted top-tier retailers with all kinds of incentives, key among these being lower pricing ... which is to say, higher retail margins. Unlike (most of) the 2.0 era, retailers earn better margins nowadays not just through sales volume, but according to the share of retail floor space allocated to — and therefore effectively controlled by — the partner brand.

This is true not just for bikes, but for all kinds of equipment as well. So it is correct to say the 3.0 model is as much about bike brands locking their competition out of key retailers as it is about locking themselves in.

The net effect is that the concept of an independent "store as brand" becomes secondary to the reality of "product as brand": The retailer's brand tends to become the line of products to which it devotes the majority of its in-store experience.

To be sure, store as brand is a critical differentiator among retail businesses selling the same product line in a given area. But ultimately, content is king. The more one type of content dominates, the more that content becomes brand. The more one or more bike brands become dominant in the mind of the consumer, the more powerfully they define the larger brand of the stores that sell them.

The ultimate expression of this notion is the concept store — where store, product and brand fuse into a single undifferentiated identity. Its antithesis would be Amazon, where almost every brand of product is available and none dominate, so the only true brand for the overall experience is Amazon itself.

But back to the balance-of-power question. As more retailers give over more floor space to fewer brands, those brands necessarily acquire more leverage with their retail partners. However, the reverse is not true. Overall, the top four bike brands collectively have almost 10 percent more retailers now than they had in 2011. (More about these numbers, including updated changes in the overall retailer population, coming next month.)

Nowhere is the change in the power relationship more apparent than in the very tool that helped create the current supplier/retailer dynamic: retail margins on bikes.

In response to a poll I created on the Cycling Industry Recovery Facebook group, 93 percent of retailers representing a wide spectrum of bike brands reported their overall bike margins had decreased throughout the past 10 years. In a separate poll, a similar number (92 percent) reported their once-higher margins on premium bikes (defined for purposes of the poll as $5,000 or more) had depreciated even faster.

Of course, retail margin is just one element in the complex industry pricing/profitability picture. Retail prices themselves change, values of currencies fluctuate, factory and freight and money costs are all in constant motion. And my little poll is not exactly scientific, either. But the evidence does create a case for the notion that, regardless of the size of the pie being served, retailers' slice of it is shrinking. And that comes as a direct result of a significant, and likely long-term, change in the supplier/retailer balance of power.

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