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A podcast about the founders, the innovators, and the remarkable people in the cycling industry and the stories about the icons they've created.
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Wade Wallace 1:03
This is the third episode in our series that takes a deep dive into what the bike industry experienced during the COVID. Boom, and how it got into the trouble. It's in now. In the last episode, we heard from various industry professionals about the early warning signs that told them that this bubble was about to burst, and some of the reckless behaviour and pressure that was being put on to various parts of the supply chain by some big brands. But it's not so clear cut. We're also beginning to hear some finger pointing in all directions. And I suppose the fragmented nature of the bike industry makes it really easy for things to slip through the cracks. And in hindsight, it was perhaps a recipe for disaster. In this episode entitled, The famine, we zoom into the timeframe when the demand came to an abrupt halt and what the bike industry was left with. We'll start again with Ellery Slater, who's the owner of sports garage, an independent bicycle dealer in Boulder, Colorado.
Elorie 2:01
I think what are more important question is is like, why are we seeing the demand declined? When everyone should have known that it would? I hate to say that, but like, I'm the marketer, right? I'm in marketing. And I'm not the manager of the service department. Right? So from a marketing standpoint, I'm always thinking about like the target market. And you know, if you go back to the very beginning of our conversation, when we're listening for the first time, at the very early days of COVID, to these people saying I'm looking for a bike less than $1,500, my mind is a marketer's thinking about that person. So when we say demand declined, I want to know, declined, from what, from our expectations of how people were going to continue to enter the sport, our expectations of how we thought people would upgrade, like, Where was the demand forecast coming from?
Wade Wallace 2:46
This is a consideration too, but the timing of a lot of this because, again, you said earlier, people were saying this was gonna last for years. Nobody knew when this was going to end. And is there any leniency possibly or or consideration on maybe the timing of the demand, the forecasts should have been declining? Versus when they actually did? Is there something in that
Elorie 3:08
I think leniency is a good word, because no one had a crystal ball. And so, you know, I'm not saying that there was just this, like, intentional negligence on behalf of the forecast. And who knows, again, I'm sitting here today talking as an IBD. Like the things that are coming out of my mouth. I think I'm speaking on behalf of what a lot of bike shop owners are wondering, we don't know how the sausage is made always with the manufacturers, you know. And so I think certainly, I don't think that our colleagues as manufacturers, they didn't have a crystal ball, they don't know when this is going to end, they have the exact same problem that we have, right? They can't convert product to cash without the product in the building, right? They're doing the same dance that we're doing. And I can see where we're all trying to figure out like, how do we do this dance? But I think the smoking gun in the conversation is the we're still increasing our forecast. When did they forecast even more, even if we were in the pandemic? Even let's say that the pandemic was going to last for six years? I still am curious about the person who paid $1,500 for a bike, did we think that was gonna last forever? Do we think that people would have kept buying 1500 ollar bikes for the entire pandemic, once they have them, they have that there's like a maximum number of people that want to buy a bicycle. There's a viable audience out there. Remember, I said like, we saw people like tap out at 3500. Like I will find something else to do that tells you right there. There's like a vibe, there's like a certain size of the population. That's like a viable audience. You know. So what I'm wondering what I was wondering about as a manufacturer is I'm like, at the point in time, or the dealer, I'm thinking of the manufacturers when they had these huge back orders, and they're trying to get all this product, like Did anybody ever just stop and say, Are there this many buyers out there next year? You know, or and this is where I think they deserve the leniency? Are they trapped? I don't know. These are questions that I probably will never have answered. Are they like trapped in In contracts with the factories that they just can't get out of,
Wade Wallace 5:03
it goes all the way to raw materials, right? Because they were floated to the
Elorie 5:09
right. So like, somehow, you know, and again, I want to say like, I couldn't read the crystal ball, I can't assume that our manufacturer partners could read the crystal ball. But we're only seeing demand and supply constraints in our one business. So our lens is only as big as our local market. You go to the manufacturer level, their lens is only as good as the collective lenses of all the dealers where they're placing bikes, right? Yeah, you go to school dad. Yeah, exactly, exactly. Right. So you can see I mean, and I'm sure it's hard for the listener to weave the fabric of a business model together. But I've talked about things like, hey, we were in a situation where we felt like we had to be caught up in dramatically increasing our order, we had a backorder problem. And we did have customer service. We know our manufacturers did, right, we've got bikes on the floor that we're going to sell or not sell. And then I think that it is a call, I think that all of this experience and where we're at today, I think that the real conversation we're having is, is the bike industry going to see this moment for what it could be, which is an opportunity to get more sophisticated.
here in Boulder, there's a couple of high end appliance places. And I remember when like bikes were having these problems, people would say, oh, yeah, it's the same thing with your appliances. Like, if you want, you know, like a high end, you know, refrigerator for your home, like get in line, you're gonna have to wait like over a year. And then they would proceed to describe the exact same market situation that I'm describing to you, right, with respect to their refrigerator. Okay, I am dying to walk into the high end refrigerator place here in town and say, do your manufacturers have four years worth of inventory on hand? And have they cut your margin by 20? Points? I want to ask, right, because they had the same type of dynamic that we had in the bike industry, like offshore manufacturing partners, stuff that had to get shipped from overseas, distribution points, independent dealers, and consumers waiting, like all the same things that characterise the supply chain struggles that we dealt with as a dealer. But today, what I'm looking at as a dealer is manufacturers with multiple years of product on hand, and my margins have been cut dramatically.
Wade Wallace 7:30
When you say others have been cut. Do you mean you've had to reduce your prices? Or have they raised their prices or how's the
Elorie 7:36
manufacturers have reduced their prices. So if I took a bike in December, this actually this happened to us. I'm comfortable saying that this happened to us. We took our preseason order. They're one of the first shipment windows for your preseason order is always like November, December. Usually when you place your preseason order with a manufacturer, you get your first round of bikes delivered in December, it's pretty normal. You paid a price for that bicycle, you probably placed the order in September, you got the bike in December, it had been invoiced at a certain price with the assumption that the MSRP is at another price. Yep, this year, what we have experienced is a rolling cascade. If I buy the bike, they drop the price, I buy the bike, they drop the price, I buy the bike, they drop the price, our gross product margin this year on selling bikes at the store is dramatically lower than last year in the past years like and again, I just I want to when I say when listeners are listening to this, and if other bike shop owners are listening, I know that like your gross product margin is wildly different based on what you can buy, what product lines, you're representing what's happening in your service department. So but rather than tell you the absolute high and the absolute low, I will tell you that we have had like a delta, a decrease of I would say on average 12 to 15%. Right? Yes, absolutely. And all that. Remember when I said we were uncomfortable with the amount of inventory we had at the beginning of the year? Yep, we sold all of that inventory. So much of it. We sold with $100 profit $200 profit, not because we were panicking and poaching our inventory, because that was the manufacturer's advertised price. Yeah, like we would get a dealer email that said, we're running a special these bikes are now on sale. Great. Yeah. Wow. This, I think is the hardest thing to talk about today, the most vulnerable thing to talk about, because that's, that's the real time thing. But
Wade Wallace 9:28
tell me more about and maybe if this doesn't fit into this part of the narrative, but tell me more about you. We're talking about the agents and when agents get paid and incentivized to just the ship an item versus sell an item. Is this is this the appropriate time to talk about that and when the agents started over selling? Oh,
Elorie 9:45
yeah. So again, and there are other industries that don't do it this way, which I always use that as an example. And I'm a bit of a heretic Wade because I've for a long time said that the bike industry that you know, one of the single largest Missing initiatives is to benchmark bike warranties, right? Because when bike gets registered, that means it's in the hands of an end consumer, like someone bought it, and they registered it and they own that product. And that is a very important, like, macro economic piece of data.
Wade Wallace 10:16
Are you saying registered? You're sitting registered for warranty? Warranty? Registration? Yeah, yeah. Okay, got it.
Elorie 10:21
Got it. So, I'm going to use an example from the outdoor power equipment, industry, steel, chainsaws, or really high end landscaping equipment and the agents in that industry. And I'm full disclosure. I know this, because my husband actually worked in that industry. When we had former careers like we, when we bought the bike shop, we came with a very different business context, we had just been bike buyers and bike riders, we'd never worked in the industry. We were not cool kids, we were not racers, we were just people that had run businesses and now decided to buy a bike shop when he worked in that industry. So for many decades, when an agent would sell, for example, like a riding lawnmower into a dealer, again, very synonymous to the bicycle industry, those are largely outdoor power equipment industry, the outdoor power equipment dealers are like the bike industry, there's a lot of mom and pop shops with service departments, right. So the agent would sell, let's say, the riding lawnmower into the floor plan of the independently owned outdoor power equipment dealer, just like a bike rep will sell a bike into the floor plan for an IBD. But the agents in that industry and with this particular company, and the three or four other companies like it, it was not recorded as a sale for that agent until that products warranty was registered. So as a part of their work protocol, right, they would place the stuff in the floorplan, the prices for these items are about the same as the high end MOBIKE. Okay. And then part of their work protocol is when the product would move through, like it was the dealer's responsibility to capture the customers information and register the product because as sold, and it would include information like date of birth, and the date and MSRP and all that stuff. And right, well, then when that product got registered, the agent got paid. Okay. So the agent was incentivized to support the dealer with the sell through of their floor plan. And to make sure the product got registered. That also gave the manufacturer incredible insight into the first person data of who their buyers were. So this was the business context that specifically my husband came from, because he and I run the business together, we were mind blown, to learn that our agents got paid on everything that was sitting on our floor, whether we sold it or not. Once it hit our floor, they got a paycheck. Kind
Wade Wallace 12:38
of like you said earlier, you're the top 10 buyer, not necessarily Seller Protection
Elorie 12:42
buyer. And I've got I've gotten some dirty looks for saying that I really have. And I've even said like, Oh, I could be a top 10 dealer tomorrow, you know, and manufacturers are like, No, you couldn't I'm like, Oh yeah, I could move to North Dakota, and I could be a top 10 dealer next week. And they're like, No,
Wade Wallace 12:56
earlier, you said,
Elorie 12:57
I'm like, Oh, yes, I could, I could buy $2 million for the bikes and give them away in a high school parking lot. And you would still send me a plaque.
Wade Wallace 13:03
You said earlier, you were basically saying just send us all the parts you have. Right. And and what was Was that something that other shops would have done to that in conjunction with the agents to have possibly gotten themselves into trouble now? Or was it does that relate to the agents?
Elorie 13:25
Maybe you know, that's interesting. I feel like every time we asked for a bike and send it without parts, we didn't do it like to just have more inventory on the floor. We typically did it because we had a product that was sold that we were waiting for. And we felt like again, I can't again, like I said earlier, you cannot underestimate the importance in a good bike shop of customer service. And part of this landscape, the COVID landscape, especially in late 2021 was sold products that a customer was waiting for. Right? And
Wade Wallace 13:57
when you speak about the agents and the incentives for them to sell to the the IBDs did this create a behaviour that we hadn't seen before? Because of the influx of orders and requests? Yes, there
Elorie 14:09
were a few examples that were just silly. And I don't want to make a direct correlation between like the sell in I think the sell in, they knew it was important for getting a paycheck. I think the real problem with the way that Asians are paid when product gets shipped is that it actually creates a black hole of information for the manufacturer about how much of their product is sitting in the field. It's it's like a two fold problem. But it's not I don't want to say exactly. It's like these are super self interested agents that are like, Oh, if I sell you more I get paid. Of course they're thinking that but if you think about what the larger problem is, and the situation that we're in today, when uh When did today's situation start to evolve? You know, the agent is not your partner in selling the product to Tonya for their are not, they're your partner in placing the product on the floor, right? So then if you're the manufacturer, and you've got all these back orders, and you've got a forecast for next year, how can you accurately forecast and assess the health of your back orders? If you have no idea what's sold and what's not sold on the floor, I mean, somewhere in some point in time, wasn't there someone sitting at their desk going, Wow, we sold 300% of our volume in one year, we should look into that.
Wade Wallace 15:31
Going back up the supply chain. Here's Roger TELUS, again, describing what the consequences of the bubble bursting looked like in Asia, where most of the bike industries manufacturing is done, when demand did subside, when that did actually happen. What was the aftermath in the assembly and manufacturing part of the supply chain? What was the what was what were they left with?
rob gitelis 15:54
Well, I think that a lot of companies probably had to take loans against purchase orders in order to buy the materials. So a lot of assembly factories or other factories got sort of you know, extended terms from the bank in order to kind of keep things going. Now, again, the brands are saying hey, you know, we don't need that can you please hold it, you know, we need to slow down delivery. And now the banks are all pushing the factories like you we gave you these you know, line of credit, you need to pay it back, and it started this whole cycle kind of over again, and then to add a little more stress to the system. peloton bicycles are produced in Tae Jong and there was an enormous amount of peloton stock of semi finished goods at factories all over Taiwan, where peloton had the same level of euphoria was asking factories to produce huge quantities of product without even giving them any security or our purchase orders just say make it and we'll buy it and so then the factory is you know, maybe one factory is just making extruded aluminium. Another one might be making, you know the saddle for that or this or that. And then all of a sudden, peloton, as we know, completely tanked. And so it was it was something in the realm of a billion dollars of work in process that is all in the city of tie jump, which is where giant married factor are all located. And we're using a lot of the same subcontractors that were building parts for peloton. what
Wade Wallace 17:33
did this mean were? You said extra warehousing, extra manufacturing? I imagine this meant a lot of layoffs is that happened?
rob gitelis 17:44
I think that's what we've seen. Now. I think a number of factories are working three days a week now, not necessarily layoffs, but definitely slowdowns. Yeah,
Wade Wallace 17:51
a lot of this extra manufacturing capacity that's been been ramped up and purchased and leased? Is that just simply like you say you just slow down or is that deserted? Or what it what does it look like? If you were to take a walk through these? Well,
rob gitelis 18:05
I think a lot of it was rented properties. And so you know, all these warehouses or whatnot were all rented. And so I think it probably gave a bump to the economy or bumped to those landlords in the short term. I think a lot of landlords probably built warehouses, they came that Okay, now, there's this good opportunity. It's not very expensive to build a warehouse here in Taiwan. So I think slowly, all that product has been consumed. It's now no longer here in Taiwan. Now it's all you know, in your doors, America and Europe, you know, waiting to be sold. So
Wade Wallace 18:34
is that right? So it was so what's happened is you've had all this warehousing space, that was a backlog of climbing, like you said, and these warehouses are now empty, they'd been shipped around the world, and now we're sitting in bike shops or brand warehouses, and that is really, yeah, I
rob gitelis 18:51
mean, that's, that's my understanding of it, then, you know, things have really started to normalise in the sense that the demand is not, you know, not that crazy strong. And so, you know, factories that, you know, had, you know, greatly hired by to let some people go, you know, in 23, there was definitely a pretty big slowdown in the industry that caused factories to work, you know, less, I think in 24, it's already starting to come back. And you know, I continue to remind everybody, everybody's like, Oh, this, this is so bad. And I'm like, how does it compare to 2019? And they're like, oh, it's ahead of 2019. I'm like, well, then it's not so bad. You know, and that's how you need to keep looking at this is like, you can't compare what happened in the pandemic, to where we are today. You had to look and see where we were before the pandemic. Where are we now and almost everybody, I think, will tell you, we're ahead of 2019 Even you know, and so that's really all we should be concerned with.
Wade Wallace 19:48
Here's Tyler Jordan of seven mesh once again,
tyler jordan 19:50
we slowed down in 2023. And we finished 23 slightly down from 22. You know, we've heard stories of people going back to pre pandemic levels. Going back to where they would have been if the pandemic hadn't happened, that hasn't happened to us, we've maintained most of the growth we had during the pandemic, but didn't grow last year, we're just slightly down because we were notably down on our b2b business with cancellations for dealers and fuel having too much inventory now. But our direct to consumer business on our economy grew considerably last year, and made up a bunch of the gaps. So we're still seeing demand for products at the consumer level, maybe not quite as robust as we'd like to see. But you know, we, like I said, we had decent growth last year. But we're not seeing that necessarily strongly on the b2b level, we're losing access to some of the consumers like to buy our product at the best retailer. And that was the biggest chunk of our business. So it's really total. So right now, I feel like I don't have a great understanding of how fast that the b2b situation will unwind. And the interrelationship of it doesn't matter whether it's apparel or a bike, that's filling up the shop that is taking up all the open to buy dollars. But you know, we have, we have buyers that want to bring in our stuff, but can't right now until we move some other inventory. And so we're in a pretty tough spot, playing a bit of a waiting game. And sitting and waiting is not what we're good at. And it's not very comfortable. So the
Wade Wallace 21:05
the hard goods, oversupply is just taken up all the cash flow of the bike shops and the wholesale businesses that a summary of that,
tyler jordan 21:13
that is the narrative, as we understand it, from what we can see and what we're generally tool. But I don't know that I don't have enough data to know if that's the case, the risk for me is to think that it's a hard goods bike issue, and then actually realise that people are sitting on an endless amount of cycling apparel out there, that's gonna kind of that to that makes it really easy to get something decent at a great price. And that's excellent value for the consumer, and is less opportunity for us to give them something even better, they will be quite a bit more expensive than what they can get on a close out. I'm trying to steer away from the narrative, that it's that it's a bike thing, because I don't want us to assume that. And it's kind of like blaming the other and not looking yourself in the mirror and saying what can I do to resolve this problem for ourselves on our dealers?
Wade Wallace 21:52
So what are the challenges right now that you are facing? Is it high inventory levels and cash flow? What are some of those challenges? And how are you dealing with them?
tyler jordan 22:01
Yeah, those are definitely the challenges. So we have, we don't feel overly exposed on inventory, we had to decide when everything slowed down, we face a very clear decision point of we can react to this one of two ways, we can either think this is a life or death situation right now. And the first people to pull the trigger and blow blow it all their inventory on sale, protect their cash flow and hunker down, those people are going to be winners, and those that wait too long are going to be trying to sell their product in a heavily discounted market, and they're gonna be losers. That's one viewpoint. And the other viewpoint was the brands that fire sell stuff are going to damage their brand, and they're going to burn their retail relationships and they're going to get hurt, you're better off to this the patient work through this properly, you know that we have great products that people are going to keep coming to etc. I don't think that was an easy choice for some people. And I understand that. For us, we're trying to do things a certain way. And you know, the bulk of our business was wholesale. And so we wanted to take the high road and do what was right. And so we accepted dealers placing cancellations, we worked with them to take back some inventory, we did what we could to protect our relationships with our retailers, which was, you know, was tough on our business and was financially really hard. We thought it was better than the alternative of doing serious damage to something we worked so hard to build. And so we decided that we were going to weather the storm carefully and come out the other side, as we worked with our dealers, we worked your our old inventory and some inventory bubble that was left in cancellations. And we were cautious about that. And so our focus for last year was let's just move through or our product while there's heavy discounts going on. And let's be patient and slow and accept what's happening. And let's be a good partner to our dealers, and hopefully realise a lot of benefit from that on the other side as things strengthen again, as we come through this
Wade Wallace 23:45
this podcast is fully funded by our members that escaped collective. In fact, all of our content on our website and our podcast network is 100% supported by our members who believe that cycling media should be independent from the sport and industry we cover and that we should exist to serve you rather than live or die by our ability to be a platform for the sole purpose of selling you more stuff. If you enjoy this podcast or any of our other work and believe it our mission of independence. Please go to escape collective.com/join and become a member today. Thank you for your support. A recurring theme from conversations I've had with brands who don't make bikes is the difficulty they're having getting the products into dealers, where much of their product is sold. Much of the shops cash is tied up in bike inventory that's either not moving or not making any profit because of discounting. Here's Josh Portner. From silica again, we also
Josh Poertner 24:43
had certain long lead time items that had you know, we over ordered on a year prior that ended up getting fulfilled as the demand was was waning and collapsing. And I think we've we're fortunate that we're across a bunch of diversified product lines and so on It certainly didn't hit us everywhere. But yeah, we we took it into shorts in a couple of product areas. And I think the folks I truly feel the worst for are the clothing companies you think of, most people don't realise, but like the clothing company supply chains really run out way more than a year in advance and during COVID went out almost two, because you're picking fabrics and suppliers and colorways. And then it's like 10 to 12 months just to get your fabrics and then you've got to Cut and Sew the fabrics. And then you've got to get them shipped in or on the water whatever to your customer. And it's it's minimum 18 months, those companies as a category took it worse than anybody else, not necessarily due to the decisions they were making. But just due to the nature of their supply chain. They weren't no spot unless you were over inventory at the beginning of COVID. As a clothing company, you weren't in a place to capitalise almost at all during COVID and then right as you're getting inventory that you could actually capitalise it all. And so that's another place I feel really lucky, you know, we we have nothing in our business that runs out anywhere near. And the fact that is
Wade Wallace 26:08
no, I like the fashionable nature of clothing as well too. Right? Like they write that to deal with. I'm curious on your perspective of this because a bike shop owners have told me that the way the agents are incentivized is when they sell to a bike shop, not when the bike shop sells something. Right? So and the bike shops notoriously have bad first party customer data. So the bloat, so to speak where, you know, distributor goes or brand direct goes and sells to a bike shop, they're done. They think 100 bikes or whatever they're they're sold. Meanwhile, they don't have proper insight to how many bikes was sitting at that bike shop even and or even asking that question, then, you know, you say two containers or a container of groupsets show up. They don't realise that the bike shop actually is not sold through any of these. Is that an accurate description of where some of this digestion issues come from? Yeah,
Josh Poertner 27:10
I think we're certainly we're still experiencing it from dealers we work with who have no cash to buy our products, because it's all tied up in inventory of of bikes. You know, I think particularly like E bikes in Europe right now are amazing. I mean, I don't know how many 100 million dollars of inventory of E bikes there are in Europe, but everybody's sitting on piles of bikes they can't sell when you sit amazing, amazingly Bad. Bad. Yes. Yes, are amazingly, you know, when their cash is tied up in that product that's not moving, they can't buy stuff from us, the eating, our stuff is moving. And so, you know, we
Wade Wallace 27:47
use started to go hand to mouth with, you know, we'll order one pump, we'll order one bottle of lube or the case of wheat or whatever.
Josh Poertner 27:54
Yeah, we definitely see some of that, you know, we definitely see some dealers actively moving away from some of the larger brands that are maybe a little bit more more forceful, or have more power in their dealer agreement of what the dealer needs to buy, has changed. I think a lot of the conversations that are happening, and I think a year or two from now, the dealers who remain are going to be a lot like we were coming out of the 2018 2019 supply chain issues we had, they're going to be stronger and smarter two years from now or a year from now than than they are today. And I think it's unlikely they make similar mistakes in the future. And so I think what's going to happen is we're gonna weed out, we're already weeding out companies that behave to egregiously and in some cases, those companies were just extremely unlucky. So it really wasn't all just misbehaviour, but I think the shops that are left are now and I feel like I see this in my conversations. They're conversing about business at a level that was not there pre COVID. You know, I think there definitely, absolutely there are shops out there that you know, we're like the happy go lucky shops that were suffering before COVID riding the wave of happiness during COVID and, and are now gone, because they didn't understand any of it. The Yeah, the shops I see now performing well, they're minding their inventory. They're negotiating for better terms. With those bigger companies, they're really putting their focus where it matters, you know, building community, things like that, because you gotta have people to buy the stuff. You know, we're certainly seeing it I would say through things like hot wax is a service. That's really an interesting bit of business that's kind of blowing up for us and it's a lot of dealers love the thought of a customer is going to come in once a month and get their chain waxed. And you know, I think it's a little bit like, you know, us keeping the doors open with masks. You don't need to make a bunch of money how waxing chain for people just getting them in the shop is huge. And having those conversations and they're probably gonna buy something else. We're low there. But it really is that that building the community that's going to hold all those new Customers that walked onto the playing field during COVID, we want to hold on to those people, and we want to keep them with us. And I think the local dealers in particular are going to be a huge piece of that.
Wade Wallace 30:23
What I've been told by dealers is that they're being forced to discount on the shop floor because the brands themselves are discounting on their own online shops. I mean, we're even seeing two for one deals from companies like Kona, the problem is they're not making any margin on any bike soul,
Josh Poertner 30:40
the challenge they have is, you know, it's classic sunk cost fallacy, right? Like, I've got so much money in this thing, I gotta get the money in, like, Dude, it's, you just need to start looking at that bike that the factory lowered the price on you got to look at it as like, a briefcase full of cash and, and move it in then make a plan? How are you allocating that cash, convert that unit into cash and move on? Because if it's sitting there, it's just tying up cash? Right. And a lot of cases, you know, you owe the bank for that inventory. It's not just cash. It's, it's a pile of cash that's growing every day. Right? It's, it's worth more. Yeah, that that is where I, you know, there are amazing dealers running amazing businesses out there. But there are a lot of them that I think could probably use a little bit more business education, cashflow, and certainly not putting, you know, I'm out there trying to learn this stuff every day. I mean, it's have advisors have people they surround themselves with, to talk to you to diversity of opinions, I think that's a huge, you know, bunch of bike shop owners talk to each other, the conversation goes really differently than if you get a bunch of diverse business owners talking to each other. They need some. Yeah, you did. Everybody needs Andy's in the room. God, I'd say that. Yeah, that's a big piece of it. But I, I do think we're, we are starting to come out of that inventory. Picking the Python, you know, I know, probably seven months ago, one of the major brands, someone with one of the major brands told me they were they were spending a million dollars a month to store their inventory on bikes. And so I don't know how many bikes you have to have in a warehouse, that it costs you a million dollars in storage fees, but it's a lot. But eventually those bikes get sold and get moved. And if they don't go into business first, if they don't go to business first. Yeah, for sure. For sure. But But I think you know, you you are seeing a tonne of companies right now discounting, trying to move product, I think there are deals to be had. But you do also see a lot of not to name names, but you know that that like $14,000, roadbike, that sitting there? Well, I get that you're upset that it's so expensive, but like the company might have paid $1,000 to ship it here. And they're back to our sunk cost fallacy. They're looking at that same boy, I can't discount that I've got the cost of the bike plus the $1,000. I paid to ship it, eventually that's gonna, that's gonna have to break. But
Wade Wallace 33:01
if they're not, if they're making 100 bucks off that bike, though, like how did they afford to pay their staff? Right? Like it's just going through inventory, not making any money, can't pay the costs go into business? Agreed?
Josh Poertner 33:11
There's no long term business model in that right. You can't Yeah, I'm in no way advocating that you're selling bikes with $100 of profit margin. But I think we also have to be realistic in the situation. If you're a shop that can hardly pay their employees, and you've got $80,000 of bikes on the floor that you cannot sell. You need to convert that into cash. Yeah. So you can do other things. And sorry,
Wade Wallace 33:34
I'm not insinuating they're standing on who knows what I mean, but it's just like, we're spinning our wheels.
Josh Poertner 33:40
Yeah, yeah, no. And I think that's the hopeful, right sizing that the industry needs to get back into. And I do think we're gonna see it, I think, you know, material costs are starting to come down. Shipping costs have already come way, way down. You know, we still see like inventory and storage costs are quite high because of the stuff that's happening in the real estate markets. But, you know, oil costs have come down quite a bit. I think we've been really lucky that Ukraine has been the badasses that they are in that in that also that that has been escalated in an even worse way. That you know, mean, oil could have been driven to $500 a barrel or something and it just hasn't been. So I again, I think some of this is we've been lucky some of this is that this stuff just needs a little more time to play out. I think you know, it is a whipsaw. But I think like any kind of harmonic excitation, right, it it will damp itself back down to the centerline. At some point. We're just now living through you know, we've been through the big roller coaster will kill us. Now we've, we've just got to survive the small ones.
Wade Wallace 34:49
Perhaps the biggest shock of the industry was the overnight bankruptcy of Wiegel chain reaction. I got in touch with Jake Dudek, who was formerly the VP of commercial operations. After he wrote a candid and insightful post mortem on LinkedIn, about the online retailers downfall, unlikely confluence of events that took place for
Jake Dudek 35:10
Cigna sports, I think the first important thing too, for people to kind of wrap their head around is Cigna sports was initially just a subsidiary of Cigna holdings and Cigna Holdings is this, you know, a massive holder of commercial real estate in the EU, and with exposure to all sorts of things like hotels and high end, you know, like fashion, retail spots, and office space, et cetera, et cetera, et cetera. So there's a difference there between those, those two entities, you know, there's a, there's a relationship, deeply tied relationship between signal holdings and signal sports, but they were different entities. And signal sports was very reliant upon sitting holding, you know, in the event that it had cashflow issues that needed a cash infusion, whatever like that there was you have one key shareholder that links these two things together, basically, I think that's probably like the first headliner for people to keep in mind, then the second headliner really is like the Cigna sports business, you know, encountered some real issues associated with the bullwhip effect. And the pandemic, certainly probably got caught up in a similar way that many other brands have gotten caught up with over procurement, you know, reacting to a demand signal, taking a read during the pandemic, being a bit over optimistic on how was this demand signal a new reality or not, you know, was is it artificial? Or is it not, that led to some serious cash issues, you know, like cash tied up into inventory, the need to liquidate massive discounting. And then the third headliner, really, I think, is that although had this connection between do this is important shareholder serving as this link between Signet sports, united and Cigna holdings, there was a capital backstop there, right. So there was a commitment from the shareholder, you know, to Cigna sports. If you get into trouble, like I've got you covered. And I think the other main headline is that there was a whole host of other issues that were that's associated with commercial real estate. And that's, you know, a change in foot traffic, right. That's also due to the pandemic, in Central Bank's raising interest rates, also a function of the pandemic. And so there was a set of different challenges on the real estate side on the signal holding side that kind of like triggered an inability, or at least that triggered the shareholder to make a decision of like, I know I said I had you guys but I don't because I've got I got bigger problems. I think that that is really like, if you're looking at three or four main dominoes in the stack, like those are probably the ones.
Wade Wallace 37:59
That gives you a high level idea what went on at Cigna sports. Jake's LinkedIn post gets into SPACs despatch box pipes, shareholder breath and liquidity. And if that's up your alley, I highly suggest you head over to our show notes where I'll post a link to Jake's piece, the other contributing factor to Wiegel Chain Reaction situation was deserved. That's zero interest rate policy, which refers to the conditions of near zero interest on borrowed money that propped up economies all over the world during the pandemic. According to reports, the real estate side of signal holdings felt the sharp interest rate rises associated cost blowouts, which put it into their run tipping them into insolvency. We haven't spoken about private equity yet, and that topic deserves an entirely separate episode in itself. Here's Tae Huang again from QB P, describing what the slowdown meant for the distributors.
Tae - QBP 39:11
Ah, yeah, road bikes were in rough shape. Gravel was continuing to look good mountain bikes were tricky because we were looking at web traffic for our own internal bike brands as as our kind of bellwether for end consumers and we were still getting plenty of traffic on our mountain bike product pages. But because there wasn't any mountain bikes to buy, there wasn't any sales data to support it. By then it was also really interesting that kids bikes had all but fallen off a cliff, you know, early COVID I you know, mountain bikes, kids bikes, you know, that's all they wanted. That was done. No one was asking for more kids bikes, BMX bikes were and the dumb comfort bikes and hybrids. No one was buying those either. It was yeah, it was it was pretty clear that that only Gravel was still going strong from a sales perspective. And even that one was concerning because the average sales price was continuing to grow, because we didn't have any low cost gravel options anymore that it all sold out. Right? So this customers who probably should have bought a $2,500 bike, probably buying a $5,000 bike and stack, right. Yeah.
Wade Wallace 40:25
What was the view? On or the theory on how this new market might consume cycling? Was it thought that, you know, the low end consumer would graduate to a higher end and become that person? Was it thought that maybe person who bought this bike just basically delays that purchase for a later time? And, you know, it's six of one half and as the other? Or how were you? How was the bike industry looking at this, or at least from your perspective on? Does this make sense to last?
Tae - QBP 40:57
So when we were in the middle of things, I remember that first summer, mid to late 2020. You know, I was talking about the different product categories that were selling. Well, you know, all the Carmen's and the carbon stuff is doing great. The $50 helmets and Trump bags were just sitting in piles. And when we, when we had that comfort confirmation that those lines were forming outside of shops, people wanted bikes, again, retailers couldn't get enough, some of those categories still weren't moving, which was very confusing, because when you sell a $300 bike, you also sell a $50 helmet and a $50, trunk bag and a tire patch kit. And you know, there's like these add on pieces. And those work moving, right. And so initially, the conversation was well, shops are locked down. It's tough for consumers to be trying on apparel right now, right? Retailers can't move the slatwall outside for them to shop, you know, lights and bells, right. So this is all reasonable. So the expectation was okay, if they bought the bike, this consumer is going to come back eventually and pick up the add ons. And then we started seeing the add on sales kind of Peter back, right. Some of that was shops opening up again, but the thought was, there's a strange lag that's, that's been created, and we should see it catch up. And so I think there was expectation, okay, it's been a year and a half, some of these hybrid buyers are going to come back, they're gonna buy a road bike, they're gonna come back, buy a mountain bike, but it was hard to ever confirm that that was actually happening because stock on everything was so low that you can't measure something you don't have any of by the time that I left in 2023. And again, hindsight being 2020, the consensus within the building was pretty unanimous that what the COVID period had done was just accelerate the bike industry through almost inevitable change that we would have gotten to anyway, it's very likely all those sales we saw in 2020, and 2021, we just spread them back out, we would have had a perfectly even trendline between 2020 and 2024.
Wade Wallace 43:18
This just accelerated the market versus creating a new one. Yeah,
Tae - QBP 43:22
we moved sales from the future into the present, is I think, how I like to talk about it. Yeah, it is kind of a downer in this case, because our projections were always for sales to continue to diminish. You'll have to do some more research on this one, because for the life of me, I tried to google it, I can't find it anywhere. So I'm sure it's buried in some industry back end somewhere. But we had a report from s&p, with like a 15 year projection for the bicycle industry. Part of what made it hard to use was it was a mixture of boutique bikes, IBD, and department store bikes, and then it overlaid electric and acoustic bikes into the same chart. And it had a very clear downward trend each year 2016 2015 or 2017 2018? You know, right, that's with E bikes in the picture. So when you split those apart, and you pull the E bikes away from the acoustic bikes, you can see them rapidly taking market share, even as overall units continue to diminish. And so with that in the back of our heads, when when the COVID boom fully started, I think there was a lot of optimism and hoping that this would be a kickoff to a new golden era of cycling a lot like we saw in the recession. There was a whole that we get enough people back on bikes that we would love refill the channel with consumers, right, which I think tells you a lot about the bike industry. You know, our default is just selling more expensive bikes to the same people over and over and over again.
Wade Wallace 45:14
When you when you refer to the surveys, and you're only getting a handful back, and you said earlier, you've got your hand on the stop button. What happened when you said we should push the stop button? And what did you have in the pipeline?
Tae - QBP 45:27
At that point, when we decided to stop the survey, and I sent out an email to the full survey recipient group, which had our CEO in different has different teams, they had already been trimming back on POS for a quarter, at least at that point. I don't recall the exact timing. But we had our head of distribution retire and someone new had come in to take over. And I think it was under their direction that they already wanted to start slowing things down. Yeah. Okay.
Wade Wallace 45:59
Interesting. A lot of the other stories I've heard is, you know, it looks Let's keep it going. This is gonna go for another eight years type thing. So that's, that's interesting.
Tae - QBP 46:09
I'll pretty vindicated honestly, early this year when we saw like, MYRIN did their buy one get one?
And then today, Kona, do you think we're going to see more of these bankruptcies 100% 100%. Kona is frankly, at the top of my list. The fact that they had to let go of their sales team tells me that they weren't able to move enough product and people started to panic. And then the fact that they went online as their primary sales channel, but are still selling through IBD retailers, but haven't adjusted their pricing model to be an online pricing as a non bike industry consumer. Now, I'm not going to buy a $8,000 GX bike off of Conas website when I can get the same product spec on a Kenyan for half the price, right? So it's just the value isn't there. But they have to be charging that because they need that revenue. And if they're that desperate for that revenue, then it tells me they're sitting on more product and they feel confident they can sell and then the Buy One Get One only confirms that to me. Our number two competitor on the distribution side, or QB P is number two is hollyland. Bear earlier last year, they got bought out by a private industry company, and they got a bunch of money brand new website brand new like ERP systems. You may read private equity. When you say private industry, I mean private equity. Yep, exactly. I'm sorry. Yeah. Honestly, it was it was enough money that got injected with enough hiring that they did that. I don't want to say that we were concerned. But it was definitely big enough to be on our radar, we joke that they started COVID in good shape, because they were in such bad credit hell, that they couldn't get product. And so when the slowdown happened, they didn't have anything that they couldn't not sell. And then lo and behold, I think it was not even a month ago, they let off like a quarter of their staff. My guess is private equity is asking where the profits are right. And if that's not coming, then they're going to keep cutting to the bone until it does and
Wade Wallace 48:24
and private equity is borrowed money at near zero interest. And the what people don't realise is that the company that they've bought is responsible for that debt.
Tae - QBP 48:42
Exactly. Yeah. You know, we've been hearing Chain Reaction wiggle noon roof. I'm still surprised Moran is got his doors open. They did that BOGO. But they must have done it early enough to write the ship a little bit. I mean, that's that's what we had been doing. Our Q started massive discounts last fall, and they just kept is that joke that internet meme, someone's turning the dial and looking back at the crowd waiting for someone to say stop. And every week. All right, let's add another percent to add another percent. And it was because we our surveys pretty clearly indicated that retailers knew a slump was coming. So we had to overcome their own best interests. Again, because our sales reps were going in there saying you need to buy this product. And so the discounts had to be good enough that a retailer who knew better bought it anyways. And they did. I think that was difficult for a lot of cue folks, because like I said before, and so many of us are shop rats at heart. It's tricky because you know, they shouldn't be buying this product. The last thing they need is to buy a bunch of panniers at 80% off just because it's 80% off, no one's coming to buy
Wade Wallace 50:04
As we've heard, there are many contributing factors to the troubling situation. The bike industry is in after the slowdown of consumer demand, when the effects of the pandemic began to wane. We've got an inflexible supply chain that's not used to massive fluctuations like it's saw, there were brands putting ordering pressure down on the retailers that were retailers and brands over ordering, there was little to no first party data to actually make decisions on. The current challenge for bike manufacturers and bike shops is playing the waiting game and staying away from a cycle of discounting in a way that’s going to normalise unsustainable prices while the inventory slowly digests.
What I’m hearing that’s happening on the ground at bike shops is that they’re starting to self-organize. If a customer wants a bike that’s not in stock, the shop will call around to other independent dealers so they’re not ordering it from the manufacturer and continuing to keep dealer network clogged up.
If the big brands can’t move their inventory to their traditional dealer network, they’re going to have to find somewhere else to move it. You might have seen the news that the big US chain Dicks Sporting Goods and their speciality stores will be a Giant dealer in some states, and who can blame them. But it’s hard to see how this move would benefit the Local Bike shop.