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Vosper: How the other half lives

Published September 24, 2019

When I premiered the notion of a Bike 3.0 era nine months ago, I was just looking for a convenient way to mark different time periods in the evolution of the U.S. bicycle business from the end of World War II to the present day. Feel free to skip this recap if you’re already familiar with the concept: 

  • Bike 1.0 was defined by the presence of Schwinn, culminating with the Bike Boom of the 1970s and the transition to the current Selective Distribution (Authorized Dealer Agreement)-based retail model.
  • Bike 2.0 was the bike business’ second Wild West epoch (the first being at the turn of the 20th century). 2.0 culture was characterized by the rise of the mountain bike and the huge number of industry changes that accompanied it, together an economic state of perfect competition — a situation where no single player can gain sufficient market share or competitive advantage to gain control of the market.
  • Bike 3.0 is where we find ourselves today, with a powerful group of four bike/equipment brands represented in just over half (52-53%, depending on how you parse the overlap) of the approximately 7,000 current U.S. bike shops. Collectively, these four brands are responsible for a large, and perhaps even dominant, share of bike and (non-component) equipment sales. Joining them is component giant Shimano, which is absolutely dominant at both OE and aftermarket levels for components as well as a strong player in many other categories.

The 3.0 model also predicted a collapse or consolidation of the majority of bike and component brands, not to mention a large-scale collapse in the number of traditional retailers. In short, the stronger players drive the weaker ones out of business, regardless of what happens to the market overall. But this kill the weak/eat the dead scenario has simply not come to pass, and I suggest some reasons for that here and here. To be sure, leading suppliers (Trek, Specialized, Giant and Cannondale, which I’ve chosen to label The Quadrumvirate) have been very successful, and that is to their credit. But what about the other 48% of U.S. retailers who don’t sell Quadrumvirate bikes or equipment, and their suppliers?

Unlocking the power dynamic
One key to the entire 3.0 model is the power of the dealer agreement, which itself was a Schwinn innovation, created near the close of the Bike 1.0 era. As currently practiced, many (and generally, smaller) retailers agree to devote some large percentage of their floor space for both bikes and equipment to one Quadrumvirate supplier in exchange for more desirable pricing and terms. This is expressly intended to lock other suppliers out of that retailer’s business and, very often, that’s exactly what happens. The retailer gets preferred pricing, the supplier gets preferred position on the retailer’s floor. In theory, it’s a win-win arrangement. 

Retailers complain (with some justification) that suppliers can get around dealer agreements by simply opening more retailers for their products in competing locations, and undeniably, sometimes they do. Of course, retailers have the reciprocal option to open or acquire new locations of their own, but that’s an orders-of-magnitude more time and capital-intensive proposition than just negotiating and signing another dealer agreement.

Regardless of what may happen in a particular city or dealer area, the total number of retailers among Quadrumvirate brands nationwide is quite stable since 2011, and even more so over the past five years. The names of the players may change, but there’s still about the same number in the game. 

As the chart above shows, there was a small bump (4.5% net increase) in Quadrumvirate retailers between 2013—2015 (note there are no data points for 2014). But the increase was just 1.5% over the next five years ... despite the total number of overall retailers increasing by 8.8% during the same time period. Over the entire 9-year period since 2011, the mix of Quadrumvirate dealers averaged 53.3%; as of January 2019, that number was 51.9%. It’s pretty conclusive that despite what you may hear, the top four brands are not just adding new retailers willy-nilly.

The view from the other side

In theory, the all-powerful dealer agreement creates a symmetrical arrangement. It locks competing suppliers out of Quadrumvirate retailers, but it also locks Quadrumvirate suppliers out of competing dealers. And some of those dealers — like many of the bike and equipment brands they sell — tell me they are doing quite well, thank you very much.

The Georger Data Services numbers used here won’t update until 2020, so they don’t reflect recent changes this year with ASI and the Accell North America. We won’t see those effects for another several months. But certainly there has been no large-scale decline in the nearly 100 bike bands available to retailers since 2011 … nor of retailers willing to sell those brands. In fact, all available numbers continue to be stable, which suggests the same for equipment brands as well. 

I’m not aware of any comprehensive hard data among these nonaligned brands and retailers, but based on what I’m hearing, things are not nearly as bad as predicted with the 3.0 model. For sure, times are tough for any number of reasons — from consistent oversupply of product to the corrosive effects of internet pricing on all links in the supply chain — but overall, the other 48% seems to be doing remarkably well in a remarkably tough market. 

All of which suggests that while times are undeniably getting leaner, there is no wholesale exodus of either brands or retailers, and definitely not the kind of cataclysmic die-off many industry pundits (including me) were forecasting in the mid-2000s.

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