Vertical limit: surviving compression fatigue
Consumers of cycling products have been taken for quite a ride during the last two decades. Bicycle brands, their distributors and retailers, demonstrated a remarkable endurance and capacity to sustain a profitable, trust-based supply chain model that ultimately could not resist a swell in capitalistic desire urged forward by the confluence of global trade re-structuring and technological empowerment.
Will high-end bicycle stores be victims of the rush to secure market share at any cost?
Of the three basic economic needs, it isn t food and clothing that downstream businesses in the bicycle industry s supply chains covet the most it is shelter; shelter from the calamity that is happening from above, as brands and suppliers abandon long-standing trading principles in the rush to conserve market share through any means necessary.
While consumers of bicycle paraphernalia have quite reasonably accused distributors and retailers of price gouging over past years, a large number of bicycle brands have left their traditional partners in the dark whilst setting up parallel (and often much shorter) supply chains without notice. Think it s strange that big online retailers can offer cut-price deals on branded products you d sometimes pay substantially more for in your home market? It s not always the distributor at fault. Often, a supplier would knowingly dump excess product into the e-commerce landscape, leaving their global distributors (warehouses still housing list-price product purchased on forward-order) at a major competitive disadvantage.
On the other hand however, veteran distributors and retailers have failed to adapt to a new reality; enthusiasm is no longer enough to run a successful business. Commercial acumen and marketing nous are basic prerequisites. It is no longer enough to have good product knowledge, either. Many consumers have equal information about the products they see in the marketplace; maybe more if they are enthusiasts. Brand stories are also insufficient to justify derivative products that are so easily benchmarked within an exposed and homogenous landscape. [In the past, brands were often reliant on their distributors to manage local marketing programs and even content; flip through the pages of any bicycle magazine from the last two decades and evidence of ill-conceived and inexperienced print advertising abounds.]
For some suppliers, the quest for market capitalisation can mean openly deserting the incumbent industry model of distribution exclusivity. SRAM, for example, has multiple distributors in many countries. This introduces competitive tension into a market place, mitigating the complacency (some might say arrogance) which can arise in an exclusive market. Better pricing, service and product supply are the desired outcomes.
If you re a consumer, it should be pretty clear the plethora of bicycle brands are desperate for your business and are looking for ways to move closer to you. So what is the vertical limit, and can all brands survive?
Earlier in the series, we looked at the various supply chain verticals that exist, and how it is possible for the different business models to re-structure, or compress, their respective supply chains in order to position better (read: lower consumer pricing) for market share. Of all the business models, it is the Original Build Manufacturer with an OEM function that has the head-start. Why?
Lower manufacturing cost-base*
ability to purchase raw materials directly from material suppliers; in some cases, has a subsidiary which produces raw materials
by working with OEM clients, an OBM can improve its own manufacturing processes, competencies and knowledge
in producing an OEM client s frames/bicycles, an OBM therefore has intimate understanding of the client s costs, product direction, market capitalisation and supplier relations
Best lead times and dynamic response
inherent ability to deliver new products to market quicker (no third-party communications prolonging R+D, prototype or production cycles) whilst responding to market changes and production demands immediately
*There is also the geopolitical advantage for manufacturers in China, whereby the Government uses monetary policy to effectively provide subsidisation for Chinese exporters [note: anti-dumping tarrifs are applied on low-value CHN-origin bicycle imports into regions like the EU, thereby reducing this advantage].
Having invested in this model from the beginning, Giant Manufacturing has built upon its competitive advantage to massively scale up and invest the proceeds into downstream global infrastructure. Giant has not only succeeded in delivering high-quality, aggressively priced bicycles to the world; by integrating distribution and concept stores into its business model, Giant is able to drive brand communication consistency through its numerous points of sale and therefore better control its brand identity. This underpins its ability to gain association. Ask anyone on the street to name a bicycle brand, and you will likely get two answers before any other: Giant and Shimano. Both of these brands have built short and direct pathways to consumer wallets. However, Giant has also invested heavily into bricks-and-mortar retail. This carries a significant overheads input cost, which materially impacts bottom line profit floors.
A brand realised through Original Design Manufacturers has the most potential for ultimate vertical status. Potentially, a brand can be born and offered exclusively online and delivered from factory to consumer. In Australia, the Azzurri brand of bikes is a great example of this, with Azzurri branded bikes being sold through the parent company s (Learsports) online store, Cycling Express. This highly integrated model allows close to full control over supply channels, marketing and pricing. The downside risk is in production. There still exists a complete reliance on the manufacturer to deliver on time; miss this crucial step and potential market share will erode inversely proportional to same-category ODM brands arriving earlier.
Being a highly vertical bicycle brand is crucial to delivering competitively-priced product to market, but that quickly becomes a zero-sum game. OEM s cannot win this game. There will always be consumers that never undertake the aspirational product journey that high-end brands with long supply chains want them to take. These consumers will flock to the ODM brands and OBM market majors for value and stay there.
OEM brands, potentially no more innovative than their ODM/OBM counterparts, have the biggest challenge; convincing consumers that their heritage, origin, authenticity and exclusivity (read: high market price) are worth the wait and premium. Even with their added margin layers, long supply chains are not necessarily the problem. There will always be a percentage of the consumer market with sufficient disposable income to justify the perceived status associated with purchasing an OEM brand. However, the real battle for OEM brands is to win back market share from the less-expensive OBM and ODM brands. Transparency and consumer-focused communication, long in short supply over the years, are not optional. OEM brands need to explain their multiple supply channels and associated benefits to consumers, whilst giving all downstream stakeholders equal opportunity to deliver best value and service to the end consumer.
Any party in that value chain who is not prepared to try harder should think seriously about leaving before the market makes that decision for them.