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Broken Chain: Some reasons this all might not end in a glut

Published March 13, 2021

Editor's note: Today we published an analysis by consultant Jay Townley about the likelihood of an inventory glut. This is our analysis on the same subject, not presented as a counterpoint to Jay's, but sharing some insights from the many interviews we're done recently. 

BLOOMINGTON, Minn. (BRAIN) — The industry probably can't control when the current surge in consumer demand will end (although we'd all like to extend it). But it might be able to influence how it ends.

Optimists have good reason to believe that bike riding will be more popular — and bike sales will be bigger — post-pandemic than they were pre-pandemic. And early indications are that retail demand in 2021 remains very strong; it's unlikely supply will meet demand this year.

But even the most optimistic observers understand that the feeding frenzy for bikes that began 11 months ago has to slow to a new normal. And it might take some restraint and careful observations to make sure bikes and other products don't keep pouring out of factories and into warehouses and retail showrooms after demand winds down.

"At some point the demand curve that we've been experiencing is going to start to actually slow down, and everyone is going to need to back off a little bit on the inventory they are bringing in. Otherwise we are going to have a glut," said Rich Tauer, the president of QBP, in a video interview from the distributor's recent FrostBike Business Summit.

Tauer noted that QBP has placed bike orders two years in advance in some cases and factories have tightened their cancellation policies. "In some cases we can only cancel a year before (bikes) are produced," he said. That makes it extra critical to recognize a slowdown as early as possible. 

While the factory lead times are unprecedented, the industry has experienced booms and busts before, of course. In the video, Tauer noted they haven't always ended well.

"We've seen a version of this before when we've had spikes in sales for things like mountain bikes and then when things slow down we have these gluts ... we want to pay really, really close attention to these things because they have the potential to be harmful. We don't want to come out of this gift and have it ultimately turn out to be a negative." He said the industry needs to be collectively planning for a soft landing.

Overall, if you were wondering, after many interviews with insiders on the supply side, we'd have to report a general sense of pessimism. Many predicted that the post-pandemic bike market won't be much different than pre-pandemic, and some said there could be excess bikes at wholesale and retail, and even in the used market, causing major discounting. "This is a boom, and only one thing happens after a boom," one said.

Still, some are more optimistic and could cite some specific reasons why a glut is not inevitable. Here are some.

  • First, suppliers are not exactly flooding the market with bikes, and they may not even be capable of doing so. Last year's U.S. bike imports were impressive in the second half, but the yearly total ended up being about average compared to the last 20 years. That revealed that the industry has a relatively fixed production capacity and is at its upper limit. So while a lot of bikes will be built this year, in the end it might end up being perhaps 20% more than average — not 150% of average. So if there's a glut, it might not be catastrophic.
  • Second, the pipeline is essentially empty, which creates a buffer. It wasn't like that in the mountain bike boom, when inventory levels went from relatively normal to bulging in a blink. This time, when retail and wholesale inventory starts to refill, it might be time to turn off the tap. The IBD channel has the capacity to hold a lot of inventory — typically a 4 to 6-month supply, often more.
  • This boom is very widespread. It spans regions from North and South America to Europe to Australia. This allows manufacturers and multi-national brands to shift inventory around if demand slows in one market but is continuing in another. It's also not confined to one product segment, like the mountain bike, so retailers and suppliers are less likely to have bet it all one category.
  • There's less chance of devalued inventory—so if there is a bit of a glut, inventory might retain more of its value than in past gluts. The industry has been de-emphasizing model years. And while there are always upcoming high-end component groups in the pipeline, there doesn't appear to be any major platform or "standards" transitions in the works. The road disc brake transition is mostly complete, Boost and Super Boost axle changes are old news, and the mountain bike wheel size wars appear to be on ceasefire. For the near future, brands that are planning major platform changes to their frames can easily wait until the previous platform has sold-through at retail. Should a massive slow down in retail demand happen in early 2022, let's say, it's less likely than at times in the past that retailers will be stuck with a lot of devalued inventory.
  • Globally, the industry is in the midst of two booms: the bike boom and the e-bike boom. Many suppliers say the e-bike market is still a long way from maturity. They predict that the industry — factories, multi-national brands and retailers — can count on the e-bike market to long outlast the pandemic. That lessens the chance of a glut of regular bikes. "The factories are taking the money from the pandemic boom to build e-bike factories," one source in Taiwan told BRAIN recently. Indeed most of the recent factory openings, which are mostly in Europe, have been e-bike factories.

Things could turn out just great.

There are solid reasons to believe bike sales will remain strong post-pandemic, so perhaps a slow-down will be more gradual than some fear. The new normal may include more outdoor activity, more family time, and more white-collar Americans working from home, with more time and money to ride bikes.

While some pandemic bike buyers will leave their purchases in the garage after they have other recreation options, some percentage will become committed recreational or transportation riders and will provide steady business for the industry for years. What percentage is impossible to say, but it's a big group, so even a small percentage is significant.

If the federal government starts making major commitments and investments in fighting climate change, that could inspire more Americans to chose bikes for transportation.

And in the immediate aftermath of the pandemic — after most Americans are vaccinated and travel restrictions and travel fears are reduced — we could see something like another boom, suggested Steve Gluckman, an industry consultant and former head of REI's bike business.

"There's going to be all this pent-up demand," Gluckman said. "People are going to want to get out and go places to ride, to do races and events and take bike vacations," Gluckman said. And they'll need new bikes.

The pandemic is of historic proportions and post-pandemic reactions could be just as world-changing. There could just be a glut of enthusiasm for cycling.


Topics associated with this article: Supply chain, Broken Chain

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