Last month Cycling iQ analyzed Flight Centre Limited, the Australian-based global travel agency that, in 2008, diversified into selling bicycles domestically. Super Retail, another publicly-listed Australian enterprise best known for its ‘Super Cheap Auto’ automotive accessories division, followed suit the same year – and quickly got a reality check about the bicycle business.
Whereas Flight Centre Limited’s (FLT) market entry began modestly with three existing bicycle retail outlets and a methodical roll-out of its ’99 Bikes’ retail network, Super Retail quickly established a large retail footprint with the purchase of the Goldcross Cycles retail chain. A Melbourne institution, Goldcross Cycles had been operating for thirty years as an independent bicycle dealer (IBD) with a group of 11 stores in operation when the Super Retail deal was announced.
The Super Retail purchase of Goldcross Cycles, at a cost of AUD15m, included AUD5m in assumed debt, and a performance-based payment of AUD3m for meeting FY2009 profit targets.
David Hall, founder and 100% stakeholder of Goldcross Cycles, was quoted in the press release (13 May 2008) as saying:
“I am very pleased to be moving forward in a partnership with the Super Cheap Auto Group. We have been discussing this opportunity over the past 18 months and I am confident that there is a good cultural fit between the two organisations. We share the same vision of a national chain of category killer bike stores offering the widest range in convenient locations.”
Borrowing from the strategy book of FLT, Super Retail also purchased a 50% stake (valued at AUD1.4m) in Australia Bicycles Pty Ltd, a bicycle wholesaler that supplied the Goldcross retail network. Australia Bicycle Pty Ltd (now trading as Oceania Bicycles Pty Ltd) was also 100% owned by David Hall at time of acquisition.
Its management team heavy with personnel from the supermarket, finance and FMCG sectors, Super Retail’s Managing Director Peter Birtles believed the company had the requisite ability to “grow a successful national network” of Goldcross Cycles stores.
From Super Retail’s website:
“The Goldcross vision is to inspire all Australians to get on a bike. We’d like to provide individuals and families with products, services and information to make cycling more accessible and in turn become a real part of a healthier lifestyle. We understand that cycling is a personal experience and will respect your cycling journey – regardless of what level you ride.
Longer term, Goldcross has a goal to grow up to 100 stores across Australia and New Zealand and become the largest and most exciting group of specialist bike stores in Australia.”
This view was challenged by Super Retail’s FY2008/09 report, the first full year in which Goldcross Cycles was included as a business unit. With sales of AUD19.1m and gross margins of 42.5% (2.1% higher than Super Retail’s ‘Super Cheap Auto’ business anchor), Goldcross Cycles still recorded a EBIT loss of AUD4m. This was primarily due to retail expansion (five new stores opened in Queensland and two – Victor Cycles and Rider’s MacGregor – were acquired) and below-forecast sales. Additionally, a goodwill impairment charge of AUD2m demonstrated that either Hall was a talented salesman, or insufficient due diligence was conducted by Super Retail before the acquisition.
Not surprisingly, management announced a revised business development plan and Goldcross Cycles was rolled into the new ‘Auto and Bike Retailing Division’ of Super Retail. This on-paper consolidation served two purposes; it highlighted an expectation that operational guidance and procedures from Super Cheap Auto would be applied to Goldcross Cycles, and it made shareholder (and competitor) scrutiny of the group’s bicycle division more difficult.
No additional stores were opened during FY2009/10, as Super Retail further evaluated and defined a sustainable retail strategy. The outcome of this review was a decision to focus on smaller retail outlets (between 400m2 and 600m2) and less inventory. This would involve moving eight existing Goldcross stores to more suitable sites as they became available, but ideally over a two-year period.
Recognising that annual price discounting was systemic in the bicycle industry, Super Retail moved to preserve gross margin by introducing own-brand bicycles, under the ‘Nitro’ and ‘Flight’ labels. The ‘Flight’ brand, in particular, would provide top-down category solutions in road and mountain bikes.
Flight CR1 Ultegra
Unfortunately, the following 12 months did not deliver the turnaround expected. Though grouped together as a cash-generating unit, the respective Auto and Cycle divisions experienced dramatically different results. Super Cheap Auto recorded “very pleasing” year-on-year earnings in FY2010/11 and was recognized as the ‘Oracle Retail World Australian Retailer of the Year’ in June 2011, while Goldcross continued to languish. Contributing just 2% (AUD21-22m) to Super Retail’s FY2010/11 sales of AUD1.092b (suggesting flat growth), the cycle business clearly remained a puzzle. Although gross margins had picked up several percentage points, online retailing was now filed under ‘T’ in ‘SWOT Analysis’.
Goodwill write-downs and substantial tempering of expectations aside, perhaps most embarrassing for Super Retail is the inclusion of the Merida bicycle brand within Goldcross’ portfolio of product. Merida bicycles are imported by Advance Traders, the bicycle wholesaler operated by Pedal Group Ltd, which is 50% owned by Flight Centre Limited.
It’s interesting to see the Put Option provision within Super Retail’s FY2010/11 Financial Statement Notes, relating to the option to purchase the remaining 50% stake of Oceania Bicycles during the next seven years. If this happens, you can bet Super Retail’s bean-counters will be valuing every last business component down to the nibbled pens on Oceania’s sales desks.