Vertical limit: bicycle industry supply chains

2011 is a fine time to be a consumer of cycling equipment. Brands and their downstream re-sellers are clambering over each other to cut through the noise created from market re-structuring. Many players in the bicycle industry have been left stranded as they’ve failed to adapt to a new competitive normality. The only trick left in their toolbox is to slash prices. It’s a buyer’s market. Unlike two decades earlier. What’s changed?

In yesterday’s article, we learned the early 1990’s was a fine time to be selling cycling consumer goods. The internet was making its first global appearance; nascent websites were text-heavy and extremely basic. Online shopping carts didn’t exist, and they wouldn’t be widely used (or trusted) across borders for years. Competitive pressure was entirely – the occasional mail order or overseas vacation-sourced trinket an exception – a local concept.

Bicycle importers, sometimes just one person working from his home garage, had set up exclusive multi-year brand import/distribution agreements in their territories. For Australian importers, this typically meant the entire country, whilst some importers in Asia were allocated a region (ie, a Singaporean importer might be given exclusive distribution rights within South-East Asia) to make brand development easier for all involved [note, easier is not necessarily inter-changeable with better]. These importers were therefore only concerned with competing against same-category brands within their borders.

It’s also worth noting that import/distribution agreements were often poorly composed, ignored key market-specific legislation (ie, national standards for assembled bicycles) and were ultimately legally non-enforceable and therefore entirely symbolic. If either party – supplier or importer – wanted to abandon the distribution agreement at any moment, they could have done so with little or no legal recourse. When viewed through a commercial lens, it’s a remarkable testament to industry trading partners that, until recent years, the bicycle industry’s tight supply chains held together largely through goodwill and trust.

So, from his garage in Sydney (or dining table in Hong Kong), an importer sat almost equidistant from either end of the supply chain (click for large version):

This was the most common bicycle industry supply chain in the 1990’s. Today there are several “supply chain verticals” which we will go into later.

Whereas consumers today have an informed and/or pre-conceived expectation of a product’s value, there were few peripheral cues two decades ago. Exclusive brand access empowered importers to the extent that bottom-up pricing was standard practice.

If an importer felt he needed 50% gross margin on a frameset to achieve his various commercial targets (if there was a business plan at all; conjecture was common) then so be it. Often, the retailer would be offered smaller gross margin percentages (GM%) due to the upstream gross margin dollars (GM$) being more generous. For example:

Factory cost = $20
Supplier cost = $35
Importer cost (pre-export) = $70 (50% GM% or $35 GM$ for supplier)
Imported cost (post-export) = $100 (ie $30 shipping/duties/customs costs)
Sell to retailer = $200 (50% GM% or $100 GM$ for importer)
Retail price = $400 (50% GM%, or $200 GM$ for retailer)

A supplier never needed to justify its own pricing to appointed distributors so long as everybody was making healthy profits. And, for well over a decade, everyone in the transaction stream did.

Cycling consumers (especially those in isolated regions such as Australia) could generally be characterized as patient, trusting, willing and grain-fed. If a respected bicycle magazine said it was expensive but worth it, then it was worth it. As an early-adopter consumer, you likely couldn’t connect to anyone else who had actually bought said product, so you made friends with the local bike shop employee – who was probably an honest, incredibly enthusiastic cyclist with actual product knowledge from use and technical information gleaned from the distributor; who in turn was probably an honest, incredibly enthusiastic cyclist/s with good product knowledge drip-fed from the supplier; who in turn was probably a company of incredibly enthusiastic cyclists with excellent knowledge and belief in their own product; [additional insert for certain brands: that was sourced from a OEM factory run by a bunch of people that couldn’t care less about bicycles or their low-paid employees] – and, perhaps after several visits, gleefully handed over several month’s disposable income for a lightweight handlebar stem and went riding with your now good friend from the bike shop. (to all readers with similar or drastically different retail experiences in the 1990’s, I’d love to hear from you to learn if that shop is still in operation and how their business may have changed since)

It was not until the late 1990’s that economic change, aggressive growth strategies and technological innovation gradually altered, then tore apart, the protected long supply chains.

One of the industry pioneers of aggressive growth was Giant Bicycles, the Taiwanese-based manufacturer that today produces more bicycles (close to 10,000,000 units annually) than any other company in the world. As noted in yesterday’s article, Giant opened an Australian office in 1991. Much more than a simple administrative agenda, this marked a new era of Original Brand Manufacturer (OBM) supply chain superiority in the Australian bicycle industry. Together with the emerging influence of the internet, juggernaut OBM’s like Giant extensively contributed to the structural supply chain changes that have shaped today’s aggressive and commoditised bicycle market. More on this tomorrow.