The Perfect Storm - The Story of Bicycle Retailing
Part 2: The Emergence of the Mass Market, Mail Order,
and the Math behind Distribution Channels
by John Neugent
John Neugent probably knows more about bicycle wheels than anyone else alive. Maybe more about bikes as well. He's spent his life in the bike business, at every level. He now owns Neugent Cycling, a firm devoted to delivering world-class equipment at the lowest possible price. If you are in the market for a set of wheels, please, check out John's site. He really knows his stuff. —Chairman Bill
The Perfect Storm – The Story Of Bicycle Retailing
The Perfect Storm was a book and a movie that describes the story of the Andrea Gail, a fishing boat that underestimated the confluence of two weather fronts and a hurricane – the perfect storm. In much the same way, bike shops have been lately riding into the headwind of a perfect storm.
In this series of short articles, I will document the story of bicycle retail from the 60s. Through it all, bike shops (which will be my name for the independent bike shop) have changed with the times. Like all retailers, they had to adapt to changes in both technology and competition.
The Perfect Storm Part Two – The Emergence of the Mass Market, Mail Order, and the Math behind Distribution Channels
In the late 70s the Bike Industry was recovering from the end of the bike boom of the 60s and early 70s. Mass merchants were getting much stronger and taking more and more of the kid’s bike business. Business wasn’t good but a lot of shops had made a lot of money in the bike boom there was an emerging market for quality products.
BMX and later Freestyle started in the early 70s when kids started racing their 20” bikes off road. They wanted and needed upgrades to their Schwinn Stingrays and soon companies like Mongoose, Redline, and others were offering higher quality, and therefore more expensive, kid’s bikes.
Also in the mid 70s there was a developing market for higher end road components and a number of distributors catered to it. Specialized was started in 1974 when Mike Sinyard sold his van to tour Europe and ended up buying Cinelli stems. Mountain Biking also started in the late 70s and Specialized introduced their first Stumpjumper in 1981.
In the mid 70s a number of quality cycling publications either started or found their footing. Bicycling Magazine, Velonews, Bicycle Guide (a little later, early 1980s), and others were catering to the developing higher end market. For the first time, it was possible for brands and retailers to advertise economically directly to cycling consumers. As a result, a number of mail order companies formed. Performance, SuperGo, Nashbar, and others would have had a hard time marketing without those publications.
Bicycle Guide had some of era's best writing about bikes. Could a bike magazine get away with this cover today?
SuperGo started when Alan Goldsmith decided to run some ads to get rid of excess high end inventory and found out there was a huge market for it. The change to a higher end consumer created opportunities for both the publications and their advertisers.
So while the bike shop business was getting better because of the growth of the higher end market they had new competition in the form of mail order but mail order was more of a thorn than a real issue. Bike shops were the place people hung out and got most of their information. They became, and in many cases still are, the heart of the cycling community in the towns they serve.
To understand the industry it’s important to understand the profit margins of the various stakeholders. All of this information is available with Internet searches so I am not giving away any new information. In rough numbers a manufacturer in Asia will work on a 40-50% margin, the brand they sell it to normally works on about the same margin, the distributor they sell it though generally works on a 30-40% margin and the bike shop works on 35-50% margin. If a product costs $1 and you work on a 50% margin it sells for $2. So doing some quick math of a $1 factory cost @ 40% margin = $1.68 Brand Cost @ 50% margin = $3.33 distributor cost @ 30% margin = $4.76 bike shop cost at 40% bike shop margin = $7.93 retail price. This is not factoring in freight or duty costs. It’s not unusual to see a factory cost of $1 in Taiwan or China and see a retail price of $10 or more.
That’s been the traditional distribution system for decades but when the market for higher end products became larger and mail order companies became larger than many distributors or brands, there was nothing preventing them from eliminating a layer or two of distribution costs. Especially when products were manufactured in foreign countries and the brands didn’t have distribution in the US.
Add to that the fact that many distributors and retailers were slow to catch onto the emerging higher end market and it’s easy to see why a quality clothing company in Italy could get more business from one mail order company than from a US distributor. But while the mail order companies were a thorn in the side of bike shops they were not a game changer.
The first real blow to bike shops since the mid-70s bust came in the form of a new type of mass market bike company and a guy named Chris Hornung. That’s due in the next installment
John Neugent was was one of the first to establish quality hand building in Taiwan around the turn of the century. He now owns Neugent Cycling, a firm devoted to delivering world-class equipment at the lowest possible price.