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Internet vs. Brick & Mortar

Published February 28, 2011

Global Competition Heats Up

By Jason Norman

Exchange rates that have closed the gap between Asian currencies and the dollar and a growing gray market for bike parts globally have combined to exacerbate a battle that has long existed between brick-and-mortar bike shops and online retailers.

The issue at hand is unfair pricing, and it reached a fever pitch in February when a group of Spanish dealers posted an open letter to the industry asking that suppliers cut ties with Chain Reaction Cycles, a longtime etailer headquartered in Ireland.

“This big low-cost online shop is specialized in selling to other countries where there are already distributors with the only argument of offering the same product at a lower price, with free delivery and customer service in the customer’s language,” the letter stated.

International and U.S. retailers have long grumbled about their struggle to compete with major online retailers such as Chain Reaction Cycles and Wiggle, another company with operations in the UK, among many others, pointing to cutthroat pricing and lack of sales tax as unfair advantages.

In response to the controversy surrounding its business model and pricing, Chain Reaction’s Michael Cowan offered a statement saying: “Our stance is to focus on continually improving our own company and ensuring we provide all our customers with great products and service. We have great relationships with our many industry friends and suppliers and we try not to get caught up in industry politics.”

Still, the pricing issue seems to have compounded of late as brands continue to grow their distribution in global markets and mail-order/online companies leverage lower pricing structures and streamlined business models to gain an edge over brick-and-mortar shops.

Online retailers are able to sell bikes and components cheaper by acquiring product at cut-rate prices from international distributors, straight from Asia, or through OEMs unloading excess components and bike parts, according to people close to the matter.

Brands like Shimano have revamped their pricing policies on aftermarket components at wholesale in an effort to curtail this practice and level the playing field between brick-and-mortar and online retailers. But policing where and for how much product sells globally is an ongoing challenge for most brands.

Suppliers that have expanded their sales model to include online or consumer-direct sales say they walk a fine line, but it’s a choice they’ve had to make to remain competitive in a global marketplace.

Jim Ford, president of the BMX brand Mirraco, said most European consumers shop for BMX products online, leaving the brand no alternative but to open its distribution to that channel.

“If we wanted to move forward and grow the business, we were going to have to address it and give it a try,” he said. “And so we did that, and I’d say with the exception of Chain Reaction, there’s been basically no negative feedback at all.”

Ford said that Chain Reaction gets Mirraco product through its UK distributor IMG.

Doug Stuart, who oversees aftermarket sales and marketing for SR Suntour North America, which sells product through Chain Reaction, said consumers expect to be able to purchase products through both channels.

“From a consumer perspective, in our day and age, they want to be able to go down to the local shop or go online and get the credit card out and have what they want, and when they have a challenge with that, in the consumer’s mind, they think there’s something wrong. And there is,” said Stuart.

Still, in most cases, brick-and-mortar retailers are turned off by this dual-distribution model.

James Moore, owner of Moore’s Bike Shop in Mississippi, said he reconsidered his partnership with one of his store’s brands after that manufacturer decided to go consumer-direct.

“I still do some business with them, but it definitely changed my relationship in terms of the volume of business I’ve done with them since that time,” Moore said, who sees online sellers as a direct threat to brick-and-mortar stores.

“As I look to make purchasing decisions in the future, the thing that we look at most carefully is what other avenues of distribution can this product be had through, and I look to partner up with vendors and suppliers that see great value in the IBD channel,” he added.

The effects of Internet discount pricing are far reaching as even retailers in Australia are battling Internet prices from these major players, said Phil Latz, founder and president of Bicycling Australia, the country’s leading consumer magazine.

Latz said Bicycle Industries Australia, a wholesale trade organization, is lobbying Australia’s Parliament to lower the taxable threshold on imported parts and components shipped to Australia in an effort to curtail the impact these online and mailorder businesses are having on the country’s 800 dealers and wholesalers.

Currently, the Australian government collects a 10 percent tax on all products coming through customs with a value of $1,000 or more. (The Australian dollar and the U.S. dollar are now on par in terms of value.)

“There are allegations that a lot of $999 groups are coming into the country,” he said.

No matter who or how many independent dealers band together to fight what they deem as unfair online business practices, it is an issue that is likely to persist as long as consumers choose to shop online.

“People always want increased options, so to try and put it back in the box is almost impossible,” said Greg Brodsky, president of The Bike Cooperative, which provides services to U.S. retailers to improve profitability. “Even though we might all want to put it back in the box, I don’t think that’s possible,” Brodsky added. “I think what it comes down to is, what’s the most proactive way you can deal with it?”

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