Cycle pedlars fiddled as bike market fizzled
CYCLING is estimated to be a R1-billion industry supported by wealthy executives and other high-income earners all sweating it out on weekends on bike trails and national roads.
It is not surprising then that the sector, which has shown steady growth for the past 10 years and is regarded as the new golf, has attracted enthusiasts who have opened a flurry of small bicycle shops.
In 2008 it was a very different scenario. The sector was taken by surprise by the sudden economic downturn, during which bicycle sales declined. That was when retailers and wholesalers met in an attempt to fix prices to protect their failing businesses.
Following an investigation by the Competition Commission, 17 of the 20 bicycle retailers and wholesalers implicated in col- luding to set the prices of bikes, cycling equipment and accessories have reached settlement agreements.
They admitted that they had colluded with each other at the 2008 Cape Argus Cycle Tour Expo and a September meeting that year.
But wholesalers Omnico and Coolheat Cycle Agencies have defended their decision not to reach a settlement on pricefixing. Omnico director Vincent Stevens admitted in Competition Tribunal hearings that wholesalers would never have agreed to increase the mark-up on bikes from 35% to 40% — as requested by retailers — for fear of pricing themselves out of the market. Asked why Omnico had then raised its prices so soon after the two meetings, Stevens said it had been under discussion for some time.
The third company that did not settle was retailer Fritz Pienaar Cycles as the business has been liquidated.
A retailer who was invited to the ill-fated first meeting but elected not to attend because he “believed it would be a waste of time” said: “Those were hard times, many of the shops were closing down. These guys were never going to get an agreed pricing system to work, it was all just talk, which is why I never bothered to go. And it was fortunate for me, because I didn’t realise it was illegal.
“There were just too many independents to get that sort of consensus, and a lot of shops were not at that meeting so they would continue to charge what they wanted.”
The meeting was organised by Fritz Pienaar, who had opened a third shop in 2008.
For the commission the fact that price-sensitive information was exchanged at the meeting was a key contravention.
The shops were then able to price their goods in line with those of their competitors. Evidence given this month showed that Omnico introduced a 40% price increase after the meeting.
The cycling companies were accused of: increasing gross margins by raising retail markups on cycling accessories from 50% to 75% and on bicycles from 35% to 50%; setting a proposed date for the price increase (October 2008); agreeing to end discounting and the practice of undercutting each other; and wholesalers allowing retailers to introduce higher recommended retail prices.
Bruce Reyneke, the owner of Bruce Reyneke Cycles, who has been operating since 1988 and is about to open his second store, said a number of small cycling companies had come and gone.
“The reasons differ, but some have been lost because of poor management or just because they expanded too quickly. Many of the owners were former [competitive] cyclists, not businessmen,” he said.
“I can tell you that when I started out, a shop the size of mine carrying imported cycles with more than three staff members was unheard of.”
Bruce Reyneke Cycles was not implicated in the commission’s investigation.
Stephen Reardon, the former CEO of MoreCycle, which owns South Africa’s largest cycle retail chain, CycleLab, said retailers battled in 2008 with the recommended prices put forward by wholesalers, which left them with very narrow margins.
CycleLab paid an admission of guilt fine.
“The problem is that the industry does not have big wholesalers and the suppliers held sway,” Reardon said.
“In this case [before the Competition Tribunal] the industry came together to attempt to im- plement collective bargaining and try to move the margins up. They had very small margins because of the prices, even with the increase in trade.”
But since the difficulties in the late 2000s, cycling has grown. Research by MoreCycle estimates the sector is now worth about R1.5-billion a year, if not more, taking into account segments such as children’s bikes.
A study undertaken recently by the Department of Economic Development, which is looking into the viability of establishing a bicycle and accessory manufacturing sector locally, found the net import value of bicycles and related products to be about R40-million a month.
Mike Bradley, the general manager of Cycling SA, believes the environment is sufficiently competitive to ensure that cycling is available to all participants and that customers are getting competitive prices.
“It is possible to get a bike for as little as R1 500 from wholesalers like Game or Makro.
“The real growth in the sector is the mountain bike or off-road segment, which is where the high-end bikes are used, pushing prices into the R110 000 range. This is where people are also buying accessories.
“There is a bigger market that hasn’t been reached yet and that is where the real growth is — the commuter sector.
“This would be particularly beneficial in the rural areas. Already government is putting in bike lanes to try to encourage people to use bicycles,” Bradley said.