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Vosper: How much is a dealer worth, anyway?

Published August 10, 2020

Hidden in the current where's-my-bikes scramble is a far more important question for the long-term future of the IBD marketplace: exactly how much margin does the retailer earn in the final sale of a bicycle?

There's nothing abstract about this question. "Earn" in this case is not shorthand for how much the supplier "gives" the retailer in margin; it's about the actual worth of the retail channel in the process of selling bicycles to consumers. Because, on a level playing field, a retailer's margin is (or, at least ought to be) equal to value delivered.

Of course, we don't have a level playing field

In the Bike 3.0 era, a relatively few large brands have accumulated enough collective share of market to effectively dictate industry-wide pricing and dealer margin practices, despite not having a classically defined position of collective market dominance. Other brands simply follow their lead, and margins are set by supplier consensus.

Take a look at any cycling magazine — or the bike brands’ own websites, for that matter. Is there any mention whatever of the benefits dealers bring to their products? Didn’t think so.

This point about market dominance is key, because it suggests that other brands have the power to move markets by simply paying dealers more for the services they provide. But that just brings us back to the fundamental question of how much value those services represent in the first place.

One opinion about retailer value is currently expressed through the actions of brands selling via Click & Collect: the retailer merely provides assembly and warranty services for bikes "sold" exclusively by the brand itself. But that standard fails as a benchmark when we consider what a small portion of total bike sales C&C actually provides.

The plain fact is that the numbers prove the overwhelming majority of consumers prefer to buy bike-shop quality bikes in bike-shop quality bike shops. Duh. And brands ignore this reality at their peril. The sustainable price delta between bike-shop brands and consumer-direct-plus-freight-and-assembly indicates there is a genuine and very substantial value-add in the customer's mind for the retailer's contribution, and that this value-add that goes far beyond basic services.

Yet this rather obvious fact seems lost on virtually every bike brand in the industry.

Sell what the customer wants to buy

Instead of showcasing the added value of their dealer networks, these brands behave like overpriced consumer-direct vendors where freight, assembly and service is sort of thrown in as a deal-sweetener and other benefits are ignored entirely. These include the opportunity to shop and compare models (more about that in a bit), the undeniable selling power of test rides, sizing assistance, the ability to swap out components, and many more advantages over ordering a bike sight unseen.

By putting brands and their retailers into an adversarial framework, the fundamental value of having dealers in the first place is being lost. And losing track of that added value is very, very bad for business.

By marketing themselves at parity with consumer-direct models, the mainline bike brands disregard their single biggest differentiator. Even worse, the brands are so focused on competing for consumer-direct sales that they're ignoring the fact that consumers are overwhelmingly voting — literally with their dollars — in favor of bike shops.

Take a look at any cycling magazine — or the bike brands' own websites, for that matter. Is there even a mention of the benefits dealers bring to their products? Didn't think so.

The problem is this. With the move to Click & Collect and the struggle to "control" the customer (guess what: that's not possible in any case), brands have lost track of the essential reality that bike shops should be seen as partners, not competitors.

The basis for this is simple, and I've discussed it before. Brands are terrified of dealers taking a customer the brand has spent time and money bringing into the store and switching that customer to another brand. This may happen because the other brand happens to be on sale that month, or because the dealer is holding a lot of inventory in that brand, or they have a payment coming due, or for any number of other reasons.

The dirty little secret of Click & Collect programs is that while there is no evidence whatever that they incrementally increase sales, they are undeniably effective at preventing brand switching. And brand switching — regardless of how often or seldom it actually happens — drives brands absolutely nuts. But the distrust it breeds is far more dangerous than any actual loss of sales.

To be clear, Click & Collect itself is not the problem. The far more troubling concern is that by putting brands and their retailers into an adversarial framework, the fundamental value of having dealers in the first place is being lost. And losing track of that added value is very, very bad for business.

Calculating dealer worth

So given the previous discussion, how much value does the dealer add to the sales picture? Are current margins too high (as margin erosion in the past ten years would seem to suggest), or too low (as retailers almost universally insist), or just about right?

The bottom line is that it’s not a level playing field, no matter how much we might like it to be.

The bottom-line answer is, it doesn't matter. Because dealer margins aren't set by how much value the retailer adds; they're set by market pressures. As I pointed out back at the top of the page, the bottom line is that it's not a level playing field, no matter how much we might like it to be.

For margins to go up, two unlikely things would have to happen.

First, one or more bike brands would have to break from the pack and offer higher margins than their competitors. The easiest way to accomplish that is simply by raising MSRP. That's not very realistic in an intensively competitive market. In fact, if it worked, retailers would already be selling above that base price and driving new Teslas. The only other alternative would be for the money to come out of suppliers' pockets. But outside of The Quadrumvirate, suppliers' margins are just as lean as retailers'. And The Quadrumvirate seem very happy with things the way they are, thank you very much.

Even assuming some suppliers are able to squeeze out a few more margin points while maintaining competitive MSRPs, a second thing would have to happen as well: retailers would have to be willing to reward those suppliers by purchasing more of their product. And that means abandoning traditional brand partners in favor of those who offer better margins. That's an easy thing to say, but a lot harder to actually do. But, as retail margins continue to erode, it may also be an idea whose time has finally come.

Until then, the industry is stuck in a paradigm first proposed by that famous author Anonymous: "Things are more like they are right now than they have ever been before."

Special thanks to retailer Mike Jacoubowsky of Chain Reaction Bicycles in Redwood City, California. for suggesting this topic.

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

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