A version of this article ran in the October issue of Bicycle Retailer & Industry News.
Most ambitious shop staffers look ahead to rising up through the ranks in the industry. How many of you have talked to a successful company's sales rep and thought, "I wish I had their job!"
And while supply-side companies are generally more stable than many retail operations, they struggle with many of the same issues that keep retail pay low, for both owners and staff. So be careful what you wish for.
In Part 1 on Wednesday, Jay Townley explained the history of retail margins in the U.S. industry, and how the law allows agreements between retailers and their suppliers that tend to depress retail margins, on complete bikes in particular. In Part 3 next month, Ray Keener will interview shop staffers on their current jobs and their futures in the bike realm. In this part, I look at industry jobs.
There's an interesting dynamic at work in the industry: Retailers generally see suppliers as greedy and immensely profitable concerns that continually squeeze dealer margins in an effort to further enrich themselves. Suppliers tend to see retail business owners (a few of them, anyway) as the ones getting rich. In this segment, we'll explore profitability and salary norms from the suppliers' viewpoint.
The View from Supplier Headquarters
Obtaining profitability information from companies in the bicycle business isn't easy. Suppliers don't publish their P&L statements, and those that are publicly owned (including Cannondale/Dorel, Fox Factory, Giant and Shimano) publish corporate-level information that isn't detailed enough to see how their USA-based bicycle divisions are faring. Nor does any company publish salary tables showing their employees' compensation.
To get an estimate of how suppliers have done financially over the past 10 years (and how they are continuing to do in the current demand surge), I reached out to two industry professionals who have been or are senior executives with big-name suppliers in the bicycle business.
Understandably, both of them spoke with me on condition of anonymity, so I'll call them Bill and Jim (not their real names). I started with the question of supplier profitability.
"It depends on the business," said Jim. "All of our equity is tied up either in inventory or accounts receivable. And at the end of the day, it all comes down to the cost of money. When you're borrowing money and paying 4-6% interest, your profitability is not going to be what it is if you're able to take capital and invest it directly into inventory or capital assets."
Bill agrees. "Bike industry companies borrow money from the bank so they can extend credit to dealers, often over six months or even longer," he said. "But the bottom line is, that cost of money comes right off the supplier's net profit. That was probably 10% gross margin at one time. And there are a lot of defaults, which can cost a lot of money. It's not unheard of for companies to be sitting on half a million dollars or more worth of bad debt from dealers."
Ultimately, Jim said, people in the bike business are historically passionate about cycling. They're more about selling at a competitive price and providing bikes for people than about rolling up huge profits. "I don't see anybody being greedy and making a huge margin," he said. "From what I can see, in terms of EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization), they're historically somewhere in the area of 5 to 7%. Ten or 12% would be somebody who is operating really smoothly."
Financial sources generally agree a company needs an EBITDA of greater than 10% to have achieved "good" profitability. Over the last several years, EBITDA has ranged between 11 and 14% for S&P 500 companies. Bike industry suppliers typically make half of that.
Now compare and contrast these numbers with retail bike shops, who typically operate with an EBITDA between 5 and 12%, according to the NBDA's Cost of Doing Business surveys. That puts them in line with most suppliers. But of course, a 5% EBITDA on a million-dollar retail business makes long-term stability a lot tougher than 5% on a hundred-million dollar supplier business.
Jim went on to add, "But in the past two years, we've had zero closeouts, and that's where businesses really get caught. We've had a phenomenal couple of years where we haven't had to liquidate inventory, and that's why our profits have been up significantly."
Suppliers have almost zero inventory, he said, so they have lower carrying costs. They're selling to dealers on shorter terms, too, which is also good for profits. "And dealers have plenty of cash, so they're buying in container lots and paying for them promptly. It's an amazing time for both retailers and suppliers, but that won't last forever."
Benchmarking Supplier Salaries
When it comes to supplier salaries, Bill was adamant. "When you hire somebody into your company, and you have three candidates and the front runner is more expensive, you hire one of the cheaper guys." It's a false savings, he said, and it ultimately comes back to hurt the company in time, errors and missed opportunities. But there it is.
To learn more about the compensation landscape I got in touch with executive recruiter Eric Raynard. Raynard brings a unique perspective from more than 25 years as an independent third-party recruiter across a variety of industries, including bike clients like Canyon, Cervélo, DT Swiss, Niner, and Pivot, among many others.
But when asked about supplier compensation rates, the first words out of Raynard's mouth are a disclaimer: As a retained recruiter, he is exposed to a limited sample size. "Companies hire me to find people with very specific skills," he said, "and they never give me the easy ones. So my perspective on compensation is skewed."
Raynard said employee compensation with suppliers has been static over the past 10 years, increasing only slightly to match the cost of living.
"Bike industry compensation is roughly equivalent to other vertical segments in outdoor and sporting goods," Raynard said. "A national sales manager can expect to earn a base salary of about $150,000 plus variable incentive compensation based on performance, whether the product is bicycle wheels or tents."
Beyond this, Raynard said, are the Passion Tax and the Desire Test. Here's an example of each:
"I placed (a candidate) in a production role at a major bike P&A company. The successful candidate was in a leadership development program with a $10 billion+ multi-industry company. I asked, 'What kind of compensation do you need to consider an opportunity?' The candidate said, 'I am flexible. Right now, I'm comfortable taking a pay cut. I make just over six figures with a 15% bonus. I am looking for something in the $75 to $80K range.'"
Raynard went on to explain that the candidate wanted to leave the management track in the Midwest to be in the bike business in the West with a company — and in an industry — he could be passionate about. And he found that role, ending up with a $75,000 base. (That candidate has subsequently been promoted to a production leadership role, which was always planned, Raynard said. And his compensation has increased.)
As for larger companies that seem like they would pay more, Raynard is adamant that they don't. "In my experience, brass nameplate companies like the big four bicycle brands are roughly equivalent in compensation to smaller companies," he said. "That's because candidates have to meet the 'desire test,' which is another, company-specific version of the 'passion tax.' Their attitude is 'Hey, everyone wants to work for us.'"
But still, why are supplier salaries and profits so darned low?
I've been writing about this question literally for decades and about the larger issue behind it, which is that the bicycle business is an example of Perfect Competition. But I've never heard it summed up better than this quote from Bobby Noyes, chieftain at RockyMounts:
"The barriers to entry in getting Asia-sourced goods are low. If you want to make seat bags, handlebars, even alloy bike frames, contacting these overseas vendors is easy, and you do not need to invest in factories and infrastructure. This creates the Wild West of competition with budding consumer-direct brands, distributors private labelling, and vendors themselves setting up Amazon stores. This creates too many sellers and reduces margin, so many brands scrape by, so wages will suffer."
In the end, as another anonymous industry-watcher put it, it's a zero-sum game. "You can pick a place along the fun/finance continuum in terms of how much you want to make and how much you want to enjoy your work," he said. "But there's still no free lunch."
