Will con­sumer-di­rect brands turn brick-and-mor­tar into rub­ble and ash?

Bike (USA) - - Contents -

It’ll huff, it’ll puff, but will it blow brick-and-mor­tar down? Is ‘con­sumer di­rect’ the ‘big bad wolf?’ Bike’s gear edi­tor Travis En­gel an­swers all ques­tions (well, al­most all) in this hard look at the fu­ture while se­nior writer Ryan Palmer SHOW­CASES Ea­gle al­ter­na­tives, bring­ing big range to 11-speed SRAM and Shi­mano driv­e­trains.

TO DRIVE A YEL­LOW CAB IN NEW YORK City, you need to buy a busi­ness li­cense. A “medal­lion,” they call it. At their peak in 2013, a New York taxi medal­lion could cost you as much as $1.3 mil­lion, and you had to wait in line to buy one. Still, it was con­sid­ered a re­li­able in­vest­ment, given that the aver­age price a decade ear­lier was just $250,000. The to­tal num­ber of medal­lions in cir­cu­la­tion is tightly reg­u­lated, but the New York pop­u­la­tion keeps grow­ing. If you want to hail a yel­low cab, it will be from one of only about 14,000 li­cense hold­ers. That’s in a city that in 2010 had a pop­u­la­tion of over 8 mil­lion.

Then, in 2011, Uber’s rideshare ser­vice reached the Big Ap­ple, and oth­ers soon fol­lowed. The yel­low cab in­dus­try’s cen­tury-long mo­nop­oly crum­bled, and a hand­ful of medal­lions were re­port­edly sold at auc­tion in 2017 for just $186,000. The ge­nie is out of the bot­tle.

A sim­i­lar con­flict is rag­ing in the bike in­dus­try, though it’s not quite as far along. Con­sumer-di­rect sales of com­plete bikes are only just start­ing to pull high-end buy­ers out of bike shops, but if the trend con­tin­ues to grow, what will it mean for shops? What about for the riders?

The New Par­a­digm

A 2017 sur­vey from the Na­tional Bi­cy­cle Dealers As­so­ci­a­tion (NBDA) cites com­pe­ti­tion from on­line re­tail­ers as the No. 1 con­cern among shops. Ask any store owner about gray mar­ket OEM Shi­mano com­po­nents be­ing dumped on­line for prices be­low whole­sale, and they will rant like a Dust-Bowl-era farmer. But un­til now, the threat has only been to sales of com­po­nents and ac­ces­sories. That’s a sig­nif­i­cant chunk of a shop’s in­come, but the NBDA points out that, on aver­age, new bike sales ac­count for nearly twice the rev­enue that com­po­nent and ac­ces­sory sales do. So, if on­line sales of com­plete bikes be­come as pop­u­lar as those of af­ter­mar­ket com­po­nents, they will have at least dou­ble the im­pact on the bike dealers’ col­lec­tive bot­tom lines.

This threat is emerg­ing at a tough time for bike re­tail. The num­ber of in­di­vid­ual store lo­ca­tions in the U.S. has been drop­ping steadily from more than 6,200 in 2001 to about 3,700 in 2016. Those num­bers aren’t quite as dire as they sound be­cause the aver­age gross rev­enue per lo­ca­tion is ris­ing while the herd is thin­ning, but not quickly enough to re­flect healthy over­all growth. The­o­ries on what has put the bike in­dus­try in its cur­rent state are as nu­mer­ous as the­o­rists who are the­o­riz­ing them. But con­sumer-di­rect sales is prob­a­bly go­ing to even­tu­ally be one of them.

The trend is catch­ing shops so off-guard be­cause shops have had a mo­nop­oly on high-end com­plete bike sales for a long time. Prob­a­bly as long as high­end has ex­isted. Mail-or­der bikes have been around for decades, but they’ve been sec­ond-rate at best. Think Nash­bar. For years, there was lit­tle in­di­ca­tion that high-end cus­tomers wanted in on that game, but that was long be­fore Ama­zon had primed Amer­i­cans into mak­ing 10 per­cent of our pur­chases on­line. Shops are wel­come to come and play too, but many brands re­strict them from selling bikes un-as­sem­bled and boxed up. They

also tend to re­strict shops from overtly selling cur­rent model bikes at be­low re­tail. These rules pro­tect con­sumers by mak­ing sure bikes are de­liv­ered in a safe con­di­tion, and they pro­tect re­tail­ers by lim­it­ing un­fair com­pe­ti­tion. But like the reg­u­la­tions that kept the New York taxi in­dus­try so dom­i­nant for so long, they’ve left shops un­pre­pared for when dis­rup­tive in­no­va­tions show up.

The New Model

In late 2012, Com­men­cal re­turned to the U.S. with a di­rect-to-con­sumer model that had al­ready taken hold in Europe. Ger­man brand, YT, crossed the pond in 2015, and Canyon just ar­rived in 2017. That same year, we saw Di­a­mond­back, Spot and In­tense join the club.

YT has been con­sumer-di­rect since its in­cep­tion. Markus Floss­mann, its founder and CEO, is con­fi­dent that our in­dus­try is ca­pa­ble of adapt­ing. That’s what in­dus­try does. “Busi­ness models have changed over the cen­turies, even be­fore in­dus­tri­al­iza­tion. And ev­ery time there was a big leap, there were voices pro­claim­ing the worst. But we have to find ways to use cur­rent de­vel­op­ments to our ad­van­tage.” YT ac­knowl­edges that con­sumer-di­rect sales are dis­rup­tive to bike shops, but it and brands like it aren’t mo­ti­vated to eliminate them as com­peti­tors. “Bike shops have a clear strength. They are in­di­vid­ual and there­fore cater to the in­di­vid­ual. Who says we can’t co­ex­ist and cre­ate busi­ness for each other?”

In­tense is an in­ter­est­ing case study in a con­sumer-di­rect brand co­ex­ist­ing with bike shops. Its ‘Rider Di­rect’ model drops In­tense’s prices, but al­lows buy­ers to shop ei­ther on­line or at an In­tense dealer and pay the same re­gard­less. Hav­ing it both ways meant ask­ing shops to ac­cept lower mar­gins. It was no doubt a hard pill to swal­low, but In­tense has al­ready opened sev­eral dealers since in­tro­duc­ing Rider Di­rect. In­tense founder and CEO, Jeff Ste­ber, sees the hy­brid ap­proach as more sus­tain­able in the new econ­omy, “We’re seek­ing a fu­ture-proof model, not only for the brand but for the con­sumer and the dealer.” The new ap­proach of­fers a way for In­tense, which has his­tor­i­cally been con­sid­ered niche, to reach a broader au­di­ence. “It would help the riders who wanted an In­tense bike to ac­tu­ally af­ford it,” ex­plains Ste­ber. “In the end, my big­gest goal was to get the riders on our In­tense prod­uct.” This meant re­build­ing their ap­proach to sales. “We had to to­tally change our men­tal­ity. We had to cre­ate new po­si­tions within the com­pany. We spent a good year just work­ing out the de­tails.”

In­tense fi­nally made the switch soon after we were done test­ing its new Car­bine at last year’s Bible of Bike Tests. So soon that we were still in post-pro­duc­tion on its Roundtable video when we got the news. Our $7,000 Car­bine dropped to $5,000 overnight. We had to re­think our take on the bike. Sud­denly, much that we were nit­pick­ing about it be­came ir­rel­e­vant. The prices that con­sumer-di­rect brands are able to achieve are so dras­tic, it’s throw­ing off the scale by which we eval­u­ate bikes.

There are too many ex­am­ples to list, but put any of the new breed of con­sumer-di­rect bikes next to an evenly matched model from a bike shop, and you will feel the ground shake be­neath you, es­pe­cially if you hap­pen to be in­side that shop at the time. That’s ex­actly why other brands are hold­ing out … for now. Every­one is watch­ing the ‘big three’ closely. Spe­cial­ized has kept it clas­sic, leav­ing its web­site to sim­ply chan­nel vis­i­tors to their lo­cal shop. Trek and Gi­ant are tee­ter­ing on the edge with their own hy­brid models. Buy­ers pay full price on­line but pick their bike up at a lo­cal dealer, who will pocket a large per­cent­age of its usual mar­gin. Without need­ing to tie money up stock­ing a bike, dealers are able to take in some profit. But bike shop mar­gins are al­ready thin, and there’s still con­tro­versy two years after launch.

Re­gard­less, Trek and Gi­ant’s sys­tems are a long way away from be­ing truly con­sumer-di­rect. An­drew Juskaitis, global mar­ket­ing man­ager at Gi­ant Bi­cy­cles, ex­plains why the world’s largest shop-qual­ity bike man­u­fac­turer doesn’t just want shops to stay in the loop, they need them to. “Go­ing purely con­sumer-di­rect takes the dealer out of the equa­tion. For war­ranty, ser­vice and day-to-day sales sup­port, Gi­ant dealers re­main the lifeblood of the Gi­ant-con­sumer re­la­tion­ship.” And he goes on to make a point that there’s a rea­son that the con­sumer-di­rect trend started in Europe. It’s dif­fer­ent over there. “The re­al­ity of the United States be­ing such a large mar­ket (both phys­i­cally and pop­u­la­tion-wise) makes the real-world con­sid­er­a­tion of after-sales sup­port and war­ranty a very com­pli­cated mat­ter.” But it’s a per­ilous de­ci­sion. It’s not just their dealers, but these brands them­selves who are fac­ing com­pe­ti­tion from con­sumer-di­rect bikes.

Put any of the new breed of con­sumer-di­rect bikes next to an evenly matched model from a bike shop, and you will feel the ground shake be­neath you, es­pe­cially if you hap­pen to be in­side that shop at the time.

The New Wave

One so­lu­tion you’ll of­ten hear is that shops will have to be­come more “ser­vice-ori­ented.” The Path bike shop in Tustin, Cal­i­for­nia, is the def­i­ni­tion of a bou­tique des­ti­na­tion shop. It is packed to the gills with high-end Pivot, Santa Cruz, Kona, Rocky Moun­tain, Tran­si­tion and In­tense bikes. Founder and owner Tani Walling in­vests heav­ily in his back room. “My goal with our shop is that our techs make over $20 an hour. You’re try­ing to build a job that a tech will fight to keep, and that means pay­ing them.” Find­ing good

help is dif­fi­cult in the bike in­dus­try. In fact, dealers re­port it as their sec­ond big­gest chal­lenge next to com­pe­ti­tion from on­line sales.

It’s es­pe­cially dif­fi­cult in an in­dus­try where ser­vice has long been un­der­val­ued, though Walling will say that’s get­ting bet­ter. “Drop­per posts are a great ex­am­ple. There isn’t a price that was es­tab­lished in the ’70s that we’re try­ing to get out from un­der.” But ask him if a shop could sur­vive after los­ing the rev­enue it re­lied on from bike sales, and he will ad­mit things would have to get a lot bet­ter. “If we can de­mand what au­to­mo­tive re­pair de­mands per hour. If we can get $80 and you pay some­body $20, that works.” Cur­rently, most shops charge $60 an hour, and the aver­age hourly wage for a ser­vice man­ager is about $15. We will need to ac­cept that, if shop­pers move out of bike shops en masse, re­pair prices will need to sig­nif­i­cantly in­crease for those shops to stick around.

Mo­bile bike re­pair ser­vices like Bee­line Bikes and VeloFix seem to be brac­ing for a change in the bi­cy­cle dealer ecosys­tem. Ac­cell Group, which owns Di­a­mond­back, just ac­quired Bee­line. And Velofix of­fers a pre­mium ser­vice that will as­sem­ble and de­liver your Canyon or Spot bike to you. But look at a map of the ser­vice ar­eas of this small army of Sprinter vans can reach, and you’ll see just how small it is. They are in strate­gic, pop­u­lated ar­eas, but the mo­bile re­pair model has a lot of ex­pand­ing to do be­fore it ap­proaches the cov­er­age of the coun­try’s in­de­pen­dent bike dealers. If it can, it will likely be a sur­vivor in a post-worst-case-sce­nario sce­nario.

If purely con­sumer-di­rect sales gain much more mar­ket share, it’s hard to say how many high-end buy­ers will still opt to sup­port their lo­cal shops, es­pe­cially if we ex­pect sup­port it­self to be part of the mo­ti­va­tion. Across most in­dus­tries, con­sumers tend to make morally gray de­ci­sions if it means get­ting sig­nif­i­cant sav­ings. Just look at gar­ment and elec­tron­ics pro­duc­tion for a short study in eth­i­cal con­sumerism. The bike in­dus­try has faced this is­sue be­fore, and on just as global a scale. Our de­mand for ever-higher-tech prod­uct has pushed nearly all of our man­u­fac­tur­ing over­seas. Not long ago, Santa Cruz, In­tense, Yeti, and even Rock­Shox were made in the U.S.A. Fac­to­ries were closed and jobs were lost. But car­bon bikes have emerged and im­proved and alu­minum bikes have be­come more af­ford­able. The par­a­digm shifted in high-end moun­tain biking be­fore, and riders are bet­ter off even though it wasn’t pain­less.

The New Nor­mal

How­ever painful the ad­vent of rideshar­ing has been for the taxi in­dus­try, it’s hard to deny that its riders are bet­ter off. In fact, they’re quan­tifi­ably bet­ter-off. In 2016, a hand­ful of econ­o­mists from the Na­tional Bureau of Eco­nomic Re­search were given ac­cess to data on mil­lions of trans­ac­tions in four large cities where Uber op­er­ates.

Re­searchers iden­ti­fied the max­i­mum price peo­ple were will­ing to pay for a given ride when Uber’s de­mand-based pric­ing struc­ture was ‘surg­ing.’ By watch­ing would-be riders check pric­ing but then opt to wait un­til the surge passes, that max­i­mum price emerges fully formed, like magic. They com­pared this price to that of the same ride when pric­ing wasn’t surg­ing. The gap be­tween those two prices is what econ­o­mists call a “con­sumer sur­plus.” It’s the dif­fer­ence be­tween what we pay and what a prod­uct is re­ally worth to us. The study es­ti­mated that UberX alone gen­er­ated a nearly $7 bil­lion con­sumer sur­plus in 2015.

This has a com­pelling par­al­lel in the re­tail-bike in­dus­try. The op­po­site of a con­sumer sur­plus is a con­sumer deficit, and it’s a log­i­cal im­pos­si­bil­ity. If a prod­uct isn’t worth the price, peo­ple sim­ply won’t buy it. Or, in the case of high-end bike re­tail, peo­ple will bar­gain for it, which shifts that deficit to the dealer. Re­mem­ber that NBDA sur­vey that cited the No. 1 and 2 chal­lenges fac­ing bike re­tail­ers? The No. 3 is pres­sure to of­fer dis­counts. Dealers are reg­u­larly asked to knock off 10 per­cent, kick in the tax or throw in a rid­ing kit and some ped­als. Nearly all dealers al­ready pro­vide some pe­riod of free ser­vice with the bike, of­ten worth hun­dreds of dol­lars in it­self.

If we had no prob­lem pay­ing full price ev­ery time for our high-end bikes and gear, maybe the dis­rup­tive force of con­sumer-di­rect sales wouldn’t have the mo­men­tum that it does. But that ge­nie is out of the bot­tle.

“If we can de­mand what au­to­mo­tive re­pair de­mands per hour. If we can get $80 and you pay some­body $20, that works.”

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