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Vosper: The Last Mile, Part Two: the power to reshape markets

Published January 20, 2020

In Part One of this series, we looked at The Last Mile Problem in terms of the challenges it presents for D2C bicycle brands and the potential upside it offers to independent bicycle retailers. In the present installment, let's take a look at the larger-scale market changes that may come from a last-mile paradigm shift. It's a shift that takes us away from the Bike 3.0 concept of shops as rent-free warehouses for mainline brands, away from the practice I call Invendentured Servitude.

What the Last Mile teaches us about Bike 3.0

Don't kid yourself. Virtually every bike brand is already in the D2C business, either through literal direct sales or via Click & Collect programs that accomplish an identical outcome via existing dealer networks. Everything else is just semantics.

Traditionally, there has been a reactive attitude to the sight of a customer bringing a biked box into a bike shop. If you didn't buy it from us, the reasoning goes, why should we assemble it for you? You're not our customer, and we don't want your business.

It's a huge Catch-22: the retailer is expected to add more value to the traditional bike sale, but is actually compensated less for it overall. The inescapable conclusion is that dealers are literally being punished for increasing the value they deliver for traditional bike brands.

But the problem with that reasoning is that it ignores two mission-critical realities:

First, bicycle sales have never been a significant profit center for bike shops, according to decades of the NBDA's Cost Of Doing Business studies. By the time you factor in basic overhead and markdowns, plus the time/labor costs to sell, service and warranty those units, most shops are lucky to break even on bikes at the end of the year. And that's been the story year after year, except now it's getting worse. Which brings us to the second mission-critical reality:

The "hidden" upside to bike sales has generally come from retailers' potential to sell equipment and labor services to those same consumers after their initial bike purchase. At least, that's been the reasoning since the Bike 1.0 era. In functional terms, whatever you lose on the bike sale becomes part of your Cost of Customer Acquisition.

But in the years since the advent of Bike 3.0, CCA has increased (among other factors, there was a 59% reduction in overall in-store traffic between 2000 and 2014, according to 2015's The Retail Landscape Report for U.S. Adult Bicycle Purchases by Jay Townley). At the same time, Customer Lifetime Value has dropped sharply as both new and existing customers make more of their purchases via Internet sources...including products sold directly to them by your own suppliers. And that goes double for high-ticket and formerly high-margin categories like helmets, rubber, shoes, wheels, and component groups.

Which means shops' need to affordably acquire new customers has never been greater.

Meanwhile, shop overhead is up and margins on both bikes and equipment are down as those categories struggle to approach parity with online pricing. And the price difference disproportionately comes straight out of the retail business owner's pocket. It's a huge Catch-22: the retailer is expected to add more value to the traditional bike sale, but is actually compensated less for it overall. The inescapable conclusion is that dealers are literally being punished for increasing the value they deliver for traditional bike brands.

But the real question isn't about a limited number of D2C sales fulfilled by dealers. When many retailers can make a better bottom-line profit assembling that D2C bike than warehousing, building, selling and servicing a comparable product under a Quadrumvirate brand, what does that say about the fundamental validity of the entire Bike 3.0 dealer-facing value proposition?

Something's got to give

Bike brands in general and The Quadrumvirate in particular simply cannot continue to have it both ways. Either the presence of the local retailer in the sales process adds significantly to their bikes' value or it doesn't. And if it does, that increased value needs to be reflected in the bike's price. Even more importantly, the dealer is entitled to fair compensation for the portion of that added value they bring to the table. Which is to say, 100% of it.

The store in question belongs to an independent retailer, not to the bike brands. It's not theirs to give away. And it never has been.

Ultimately, of course, the market will decide what that price differential will be. But in the meantime, fear of a relatively small number of lower-cost Internet sales is driving bike brands to literally give away the store. Except the store in question belongs to an independent retailer, not to the bike brands. It's not theirs to give away. And it never has been.

To learn more about the business mechanics of this situation from the dealer's point of view, I turned to my friend and sometime BRAIN colleague David DeKeyser. He's an interesting guy. After years of running a successful midsize store in northern Wisconsin, DeKeyser is now building a consulting business focused entirely around helping bicycle retailers maximize their profit potential. He works as a retained consultant for the NBDA and contributes regularly to their OutSpokin' newsletter.

On the larger topic of whether dealers should even be in the D2C fulfillment business, DeKeyser is up-front in his support. "In my shop, in the last year or two of the business, I woke up, and my mind changed," he told me in the first of a five-hour series of live interviews and online discussions. "We started getting some B2C bikes in for assembly; we were charging over a hundred dollars for build-up or final tune, and nobody complained. We told the employees to roll out the red carpet for them, as these brands were essentially paying us to grab a new customer."

DeKeyser and I are further in agreement on the notion of Invendentured Servitude, the idea that bike brands—especially the Quadrumvirate brands—are forcing dealer inventory commitments as a means of exercising control of the channel overall, locking competing brands out of many of the most profitable retail businesses. It's an idea I first explored in a piece called Of Bikes, Beer and Balkanization back in October. But DeKeyser sums it up better than I did:

“A loaded dealer is a loyal dealer. And a dealer who is … behind in payments is the most loyal dealer of all.” — David De Keyser, industry retail consultant 

"A loaded dealer is a loyal dealer. And a dealer who is sometimes slightly behind in payments is the most loyal dealer of all. One, because they're scared. Because when they're down to one main brand and your competition has those other brands, you're painted into a corner: you can't go someplace else. Two, because the brands have done such a good job of having you build your whole identity around their brand. I've gone through the books (with small Quadrumvirate dealers) and their margins are too low because they had to take what they could get."

Where DeKeyser and I differ is on the question of what the pervasive shifts in resale mechanics means for the future of the independent dealer channel over the next five or ten years. In the first place, he points out, it's not even about bikes or who sells them:
"The Next Big Thing is for shops to become more financially literate. They know everything in the world about their products, but many just don't understand how their business works. There are markets where one shop fails and another excels simply by controlling costs and maintaining margins.

"The sales reps sometimes realize a retailer is pretty savvy and take a more hands-off approach. For us, it was a constant battle to maintain our independence. It probably took fifteen years before one vendor stopped pushing us to do things that weren't fundamentally good for our business. But once they understand you are financially and data literate, the conversations can become more focused. Or, you can be viewed as non-compliant because you are using this data too much, and it threatens the vendor's ability to keep selling inappropriate amounts or types of inventory into the shop."

And that, he says, is where the most fundamental changes will take place.

Bottom line, DeKeyser thinks D2C assembly can become a (minor) profit center for shops that want to be in that business, primarily as a negative-cost (e.g., "you make money on it") customer acquisition tool. But what if all the bike shops embraced that and treated D2C customers like kings?

"Do we want to feed that bear? Maybe," he replies. "But guess what? The customer will always be in the driver's seat, and I think refusing to take somebody's money will always be the wrong answer."

On a future where shops push back on the Quadrumvirate and simply floor less inventory, he is adamant but cautious. Ultimately, he says, the sweet spot is not so much to be found in floor space, but in how retailers utilize that space.

“The need to flood dealers with inventory and shove the risk onto them in order to monopolize their business is the true driving force between Bike 3.0's increasingly narrow niches and huge proliferation of SKUs. But that equation hardly ever works to the retailer business owner's advantage.” — David DeKeyser

"I think where people get scared is they have this idea of the size of the store and a fear of empty space. The amount of turns for the average the store is about two, and on bikes it's often even less, especially on higher-dollar bikes. But we can take baby steps here. If we can go from two turns to three or three and a half, that's progress. You can't cut 50% of your inventory overnight, but if you can do that eventually, you've just freed up a tremendous amount of cash and doubled your turns."

And the first place to address that inventory, he says, is in all those boxes "behind the wall." In these days of JIT logistics, there is simply no need for brands to house so much of "their" inventory in other people's last-mile silos.

"The need to flood dealers with inventory and shove the risk onto them in order to monopolize their business is the true driving force between Bike 3.0's increasingly narrow niches and the huge proliferation of SKUs," he says. "But that equation hardly ever works to the retail business owner's advantage. You no longer have control of your own brand because you have so much invested in theirs."

If you're going to get a really wide swath of consumers, De =Keyser says, your customers have to feel like there's a selection to choose from. That's just how Americans see the shopping experience. "I think the boutique style doesn't work for most retailers," he conjectures, "but that may change over the next 10 years—maybe not by 2025, but maybe by 2030".

"The question is whether the big brands would be willing to sell in smaller stores (with less inventory even if there's comparable sales volume). Personally, I like having at least two brands to give people some choice, and for me, if your inventory is lean and you're running your business off the data, you don't have to be a visionary: you just need to be sure there's enough gas in the tank to look out for tomorrow. E-bikes right now are the perfect example. You're buying into an inventory category and before you've ever sold a single unit , they want you to write them an order for $12,000 in order to get the 'good' pricing or even have access to the category.

"To me, half of (today's) typical shop inventories could be healthy. If you go from two turns to three with minor loss of sales, you're still money ahead. If you look at the auto industry, they're very good at running through the old inventory before taking on the new model year. The shops are already becoming physically smaller, just due to the increase in occupancy expense. Dealers are also getting a lot more creative with their space, and that bodes well for the future of reducing inventory.

Margins are going down, DeKeyser says, payroll expenses and lease rates are going up, and that's beginning to lead to smaller spaces. "I think that overall the trend is to go smaller, but not ridiculously small. I used to feel that the average was 3,500 to four or even five thousand square feet for a typical store, but I'm hearing of a lot more with as little as 2,000-2,500 feet. I recall hearing a retailer say they measured their store sales in available cubic footage because that's how they display inventory and how they profit from it."

Finally, DeKeyser sees the proliferation of D2C brands as more of a canary in the retail coal mine than as the market disruptor many are making it out to be. The real shift, he says, will come from within the specialty retail brand base itself.

"We've gone so far into the mono-brand style of store that it seems the majors are going to have to loosen up a little bit," he suggests. "You have these next-wave brands that say, 'hey, I'm bringing back 46 points on $500 hybrids'." It will become harder and harder for dealers to ignore the fact that retailers can do much better at some point by bringing in some competing product to sell at higher margins, regardless of the backlash."

The Quad will either have to raise their margins and the price points that go with them, DeKeyser says, or else prepare to accept a whole new class of competitors on "their" shop floors. As retailers become more astute at the game, they will begin to realize that margins matter. And if those longtime "partners" cannot provide the profits needed, retailers will look elsewhere.

But will the big brands shift to allow that competition onto retailers' floors, or will they address their margin issues to remain competitive with dealers? Or will they continue trying to lock those brands out entirely and risk losing some retailers altogether?

"I just don't see that happening," DeKeyser says. "Something's got to give. There definitely needs to be more balance. At a certain point, you can't keep rolling back the margins and increasing the inventory demands before something pops. My bet and hope is that the major suppliers realize they really need their brick and mortar retail partners, and that means those partners have to be healthy."

When that pop comes, it will create a tipping point, where the entire specialty retail business model changes. Fundamentally, inexorably and irrevocably. And, maybe, we come to a new era which might or might not end up as Bike 4.0.

We'll explore some more aspects of a mixed traditional and D2C 4.0 model in Part Three of this series, scheduled go live Monday, Feb. 7

Vosper has been helping companies in the bicycle business solve marketing problems since 1989. Email for a free consultation.

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