There is a widespread belief among retailers I’ve talked to that while their post-pandemic profits have been stripped to the bone with discounts, suppliers are still enjoying comfortable margins from the pre-pandemic era. And since suppliers don’t discuss their internal margins to retail partners, there has been nothing to refute this notion.
To get the real story, I spoke with five senior executives at five different bike suppliers, two of them from top-ten brands, three from lower-volume or boutique names. All agreed to talk with me only under condition of anonymity, so I’ll be referring to them as Suppliers A through E for continuity purposes.
In the course of these discussions, one thing quickly became apparent: The inventory burden has almost exclusively affected costs of bread-and-butter models at entry-level or midline price points. Although sales of premium models have been slow post-pandemic, inventory in those categories is much lower and margins for suppliers have held steady at traditional (2019-level) industry norms. So when we talk about supplier margin reductions, we’ll be talking about discount pricing on excess and aging inventory.
Suppliers speak out
“The outcome is that the price to consumers has come down, the price of the bike has gone up, and margin is squeezed for everyone in the chain.” — Supplier C
“A lot of the excess inventory that’s currently on hand is old stuff … ‘20, ‘21,’22 inventory,” says Supplier A. “What’s that inventory worth? We’re selling it at 20, 30, or even 40% off and the inventory is still just not moving. Half of the sales happening at wholesale are new bikes and half are old. The older ones are selling at deep discount and the new ones are selling at good margins.”
Supplier B agrees. “Supplier prices actually have mostly been going up while retail has been under downward pressure.” There is still some hangover inventory in stock at dealers being sold at or below cost or at a small positive margin, they say. “Suppliers are just trying to get it out of the way and turn it into cash.
“Unfortunately,” they continue, “there is a crushing imperative from Specialized, Trek, Santa Cruz to load (dealers) up beyond reason. We're talking terms in the over 200 days zone (I've heard 250!) plus discounts in the 30-40% realm. This is going to crowd the dealers’ warehouses and showrooms and put them in debt for the next year.” (Note: according to the latest Circana data, overall dealer inventories are being held at or close to historically normal levels). “It is not clear how well all that product is going to move. Everything is a good deal, so it's hard to differentiate that way. The saturation of the market is here for a while.”
Supplier C elaborates on the bike brands’ margin woes. “Generally speaking, in the environment we are in, everyone is taking a smaller margin than they were prior to the downturn. The economics of the environment that we are in have three things that have added cost to bikes that have nothing to do with the bike being spec’d or built. Interest rates (bikes have a very long cash cycle), freight inbound (during COVID it was excess demand, post-COVID it has been war/unrest in the Middle East), and freight outbound (labor and fuel costs/surcharges).” These extra expenses have added pressure to the cost of a bike, they say, but the excess inventory has made the need to be very price competitive. “The outcome is that the price to consumers has come down, the price of the bike has gone up, and margin is squeezed for everyone in the chain.”
The bottom line, they say, is that “Many retailers see this as suppliers keeping their margins the same, and pinching them as a way to keep their own profits high. This is far from the truth. I suspect that there is not a single bike company that is not faced with too much inventory, and margins that are at or below their operating costs.”
So supplier profits (on excess inventory, anyway) are way down, with single-digit and even in some cases, negative margins not uncommon. Even so, sales are sluggish and dealers are understandably reluctant to invest in inventory that is unlikely to turn anytime soon. That’s one definition of market gridlock. Further, no one knows for sure when it’s going to change, so we can expect to see these kinds of discounts continuing for the foreseeable future.
What about ongoing dealer margins?
“There hasn’t been a lot of churn at the dealer level, or at the supplier level, either. It’s amazing to me just how resilient both suppliers and retailers are.” — Supplier D
For all the foregoing, at some eventual point the excess inventory will move through the pipeline and sales will return to normal. But what about dealer margins? Again, the news is not encouraging.
Here’s Supplier A again: “I’m guessing that retail margins are not going to be returning to 2019 levels. There are simply too many pressures on the marketplace from D2C, tariffs, and other places. The real problem here is that fewer people are coming into bike shops to buy bikes, and increased margin dollars per unit (due to higher per-unit prices) are not going to change that fact. It’s really a question of survival, and the retailers have to get smart about it.”
Supplier D adds, “Every dealer wants more margins on bikes, but the truth is, there’s just as much margin pressure on suppliers as on dealers. Suppliers are struggling to turn a profit too.” They point out that while everything has gone up for retailers — pay rates and rent to name just two — but consumer demand cures all ills. “A return to healthy consumer demand will certainly help” they say, “but until then, dealers have to look at their OpEx to remain profitable. (The good news is that) dealers aren’t going away, there hasn’t been a lot of churn at the dealer level, or at the supplier level, either. It’s amazing to me just how resilient both suppliers and retailers are.”
I’ll leave the last word to Supplier E, who brings a unique viewpoint to the topic. “I have the experience of having owned supplier P&Ls and retailer P&Ls,” they say. “I doubt many industry execs have really felt the burden of making a bike shop profitable, and thus are not really considering how bicycle margins really impact dealers — and vice-versa. Therefore, there will be the discomfort of an evolution as the laws of economics play out.”
Discomfort indeed, but it’s all a part of the new post-pandemic normal. Margins are down for retailer and supplier alike, and it looks like those low margins are here to stay for everyone … even after we finally manage to clear the current inventory backlog.
