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Guest Opinion: Who will be the winners in a consolidating bike market?

Published March 30, 2016
A Guest Opinion by Steve Maxwell and Felix Magowan

The bicycle media has been abuzz lately with news of ongoing mergers and acquisitions around the industry. It seems every few days we read of one company buying another competitor – down the street, or on the other side of the world. The recent Wiggle-Chain Reaction, Amer-Enve Composites, and Vista-BRG deals come to mind. As we described in our Guest Opinion editorial last month, with overall growth rates starting to come down the bicycle industry is clearly entering a consolidation phase.

On the surface, it seems fairly easy to identify who the losers might be, in a market where there are going to be fewer and fewer companies. For example, will there really be 20 different point-of-sale system suppliers if the number of independent dealers shrinks? Can there possibly continue to be so many cycling websites and cycling magazines if the number of suppliers buying advertising decreases? And will a consolidating independent dealer base support the hundreds of bike and accessory brands and other product wholesalers that are out there today?

But who will be the winners as the bike industry starts to regroup into fewer, but potentially stronger players? The winners will generally tend to be those players who are strongest financially – suppliers with minimal debt, strong balance sheets and the excess cash to take advantage of deals – new customers, new suppliers, or acquisitions of competitors. The winners will be those companies who have good relationships with their investors and their lenders. Or dealers who have financial staying power, a deep management bench and loyal employees. In short, the winners will be those folks who can best leverage their assets: cash (or a ready access to it), a strong management team, a proven distribution channel, and a solid relationship with customers.

Financial players are attracted to (and typically start to become major players in) consolidating markets because less competition eventually tends to result in higher margins. This explains why much of the recent consolidation activity in the bike industry has been driven by private equity firms or publicly-traded companies, beholden to the constant drive for higher quarterly earnings.

So, if you are a financial player looking at this industry, here are some of the possible investment opportunities in our crystal ball:

  • Asian factories that lack established end-consumer brands. It's generally cheaper to acquire a brand-name than to create one from scratch.
  • Large mail-order companies that currently compete on price, selling the same pedals, tires and kit as everyone else, but who could stand out from the crowd by buying a company with good consumer brand equity as an in-house brand (think Kenmore, the Sears private-label brand).
  • New regional dealer chains – such as what Erik Saltvold has done in Minnesota and Wisconsin. Roll-up enough locations and scale to buy direct from Asian factories (under a house brand label), negotiate better terms with key suppliers, and combine service locations.
  • Intellectual Property plays: In many other industries, one interesting investment approach has been to roll up small companies with valuable patents, and then use deep pockets to enforce those patents, through licensing deals, or bringing new products to the market.
  • Bicycle electronics consolidation: We live in a world where we expect our different electronic products to all synchronize with each other. However, in the bike realm it seems we all have power meters, GPS systems, bike trainers, electric motors, odometers, websites, and apps that don't talk to one another very well. The opportunity to consolidate many of these into one platform seems considerable.
  • A consolidation of various clothing brands under one umbrella, to take on market-share behemoth Pearl Izumi – with one brand taking the custom club market, another direct-to-retail, and the last a full-line supplier to IBDs .
  • Tires: This is one of the largest aftermarket categories in the bike business, but also one of the most balkanized. There are by our count 27 different tire brands sold in bike stores, and to be honest, many are not that different. Is that really necessary, and is this a sub-sector ripe for consolidation?

The consolidation process helps to rationalize markets, bringing supply into balance with demand, and helping to refashion the industry for new growth and different directions in the future. This seems inevitable in the bike industry. However, consolidating markets often tend towards greater and greater concentration of market power in the hands of a few – and there is always the danger of over-consolidation or monopolies that can develop inequitable pricing power. In some corners of the U.S. bike industry there is a fear that Shimano has again developed this sort of dominant market position in the cycling components sector. Furthermore, and given its current revenue base of over $3 billion, this market consolidation will provide even further opportunities for Shimano to move into new and different markets that it doesn't already participate in – suspension, tires, saddles, and electronic apps – and perhaps gain even stronger market power.

Observers and customers may differ on whether this is necessarily a good thing or a bad thing for consumers. A high percentage of us may carry Apple iPhones, yet few economists are suggesting the break-up of Apple – and most of us like our iPhones. Most of us also like our Shimano components. The U.S. Federal Trade Commission and the European Union's Directorate-General for Competition are chartered to protect the public against emerging monopoly powers, and these institutions have famously broken up monopolistic companies in the past – most famously the Standard Oil Trust case in 1911, the break-up of AT&T in 1982, or more recently the EU's investigation of Google. However, the relatively small scale of the bike industry and the still highly competitive nature of most sub-markets mean that this industry will not see an anti-trust review or action anytime soon.

Steve Maxwell is co-editor of the cycling website, theouterline.com and managing director of TechKNOWLEDGEy Strategic Group, a Boulder, Colorado-based firm specializing in merger and acquisition advisory services. Felix Magowan is partner at Pocket Ventures, a private equity firm, former owner of VeloNews, and a founding investor & board member at Pearl Izumi. Maxwell and Magowan have advised dozens of firms on strategy and transactional issues, and can respectively be reached in Boulder at (303) 442-4800 or (303) 443-4360, or via e-mail at maxwell@tech-strategy.com or fmagowan@pocketventuresllc.com.

 

Topics associated with this article: Maxwell/Magowan columns

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