This piece is a follow-up to one I did in September called The most interesting year in decades. In it, I described the making of the Perfect Storm that was (and largely, still is) the 2020 season; how suppliers seek to exploit the economics of scarcity to increase control over retailers; and how dealers are responding by adding new product lines for 2021 to increase their likelihood of actually getting enough inventory to sell.
In this installment, I'd like to explore those themes in more depth. This is both because we are three months into the 2021 preseason and it's now clearer how each side is moving, and because the ongoing supplier/retailer relationship is the single most important dynamic in the evolution of the Bike 3.0 model.
Suppliers: old barrel, new pork
If the overarching theme of Bike 3.0 is control of the market by locking down floor space in a critical mass of retailers, what do suppliers do when they can't guarantee enough product to fill that space? The answer, it seems, is to exploit the 3.0 pricing model to increase short-to-midterm profits while maintaining as much retail presence as a limited product supply can afford them.
At the end of the day, suppliers are shaving the edges off the dealers’ slice of pie and transferring the results to their own plates.
This is happening in at least six different ways. First, by keeping inventory lean ... and by lean, I mean as close to zero as possible. This is done by transferring inbound product to retailers via preseason orders as fast as it comes in, then enforcing that transfer by making orders either noncancellable and/or by instituting hefty cancellation fees. In either case, the objective is to minimize the cost of supplier-side warehousing and move that savings to the suppliers' bottom line. This is fundamentally different than prior preseasons where distributors retained substantial inventories of their own.
Second and third, suppliers are tightening payment terms and reducing anticipation discounts. These three aspects are all cost-of-money moves that yield pure profit for suppliers.
Fourth, suppliers are raising minimum purchases necessary to qualify for free freight. Fifth, brands are narrowing dealer margins on many product categories, increasing dealer cost without a corresponding change in recommended sticker price. Sixth and finally, multiple retailers tell me suppliers are now withholding available inventory so they can sell it consumer-direct, taking advantage of huge consumer demand to cut out the dealer entirely. Dealers say this is most often done with equipment, but in at least one case, with bikes as well.
As one retailer remarked, "The playing field is only level in their direction."
In every one of these instances, the costs are already baked into the pricing model; they represent services retailers no longer get but continue to pay for. At the end of the day, suppliers are shaving the edges off the dealers' slice of pie and transferring the results to their own plates. The savings — in the form of increased supplier profits — all come straight out of dealers' pockets.
At the same time, manufacturers aren't going to build more production capacity when they don't know how long it will be needed. Combine this with the fact that OE venders are taking orders now for delivery in December of 2021, and it becomes clear that product shortages will continue at least into 2022, with no relief in sight.
Retailers: searching for options
In a recent, not-even-attempting-to-be-scientific poll of more than 80 retailers on the Facebook group Cycling Industry Recovery, more than half (57%) indicated they were adding one or more new bike lines to their product mix for 2021. Note these are not just inventory fill-ins, but brands dealers say they intend to feature in-store in the coming year.
We can expect a significantly more diverse range of product in dealers’ showrooms in the coming year … precisely what the Bike 3.0 model seeks to prevent.
Alternate lines of supply is basic Business 101 stuff, and in a time of ongoing product shortages, it's an essential tactic for the long term health of any business. More about that in a minute.
What makes the 57% number all the more remarkable is that dealers are adding bike lines at a time when many top-ten brands are publicly stating they will not open additional retailers, since they don't anticipate having enough product to service their current ones. Which means we can expect a significantly more diverse range of brands in dealer showrooms in the coming year ... precisely what the Bike 3.0 model seeks to prevent. The only question is how much of the limited available production capacity those B- and C-level brands can get.
Dealer — and supplier — attrition
The other thing we're beginning to see as 2020 winds down is dealers going out of business.
In researching this article, I spoke with a number of supplier reps from different markets, and one told me that 7% of their dealers have closed, either permanently or temporarily. An additional 10% are barely holding on and/or actively looking to sell.
Other reps say they haven't seen dealers actually going out of business yet, but everyone I spoke with anticipated at least some business failures over the coming winter months.
"Single-employee/owner shops that are overwhelmed (and) can't even keep up with the repair business," one rep said. "The more brands the dealer can get on their side, the better off they are. The next couple months are going to be really, really tough."
"Yes, a few of my dealers have closed," another says, "but it was mainly due to retirement: 'no inventory + no debt = why not!' Even excluding retirement, I think the industry will see some shop closures next year."
A third rep says, "Shops who were able to get product went through a whole lot of bikes and that's worked as a buffer. Shops who understand how to play the game are negotiating with vendors and getting product. But the shops who don't know how to do it, those shops could very well be in trouble. And at some level, that will extend to vendors, too."
This will be a difficult situation to monitor. When a bike shop closes unexpectedly, there's often no public announcement. Even retail competitors may not notice a failed shop's absence for weeks or months. The affected dealer's distributors will find out soon enough, but again there's no official statement, even when the business is removed from a brand's dealer list. We may have to wait until spring to get an idea of the actual death toll when Georger Data Services does its 2021 shop count. The same is true of smaller distributors and self-distributed brands, a portion of the industry that is not tracked at all.
Bottom line is, it doesn't matter how much demand is out there if you can't get the products to satisfy it. And since factories are already running at redline with no end in sight, that's just as true for distributors as it is for retailers.
So it's time to strap in, buckle up, and try to hang on. The winners will be those who manage to ride 2021 all the way to the buzzer. And as I said back in September, it's going to be an interesting year.
Rick Vosper has been helping companies in the bicycle business solve marketing problems since 1989. Email rick@rvms.com for a free consultation.
