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Specialized Hits Shop with Suit

Published October 16, 2007

BY JASON NORMAN

SAN DIEGO, CA (BRAIN)—A dispute between Specialized and a retailer with five stores in the hyper-competitive San Diego market has sparked a lawsuit over $412,000 in receivables.

The legal challenge between Mike Simmons, owner of the Bicycle Warehouse, and Specialized appears to be a collections lawsuit. However, it reveals several simmering issues as Trek, Specialized and to a lesser degree Giant demand larger dealer commitments.

At the same time, suppliers are also pursuing a strategy that puts concept stores in competition with their existing dealers. Most dealer agreements offer little protection for retailers andcontain terms that can force dealers like Simmons into lawsuits.

“This dispute is nothing more than a symptom of these underlying issues,” said Jay Townley, a consultant with extensive experience with dealer agreements.

Steven Hansen, an attorney familiar with cases like Simmons’, said his best guess is that Simmons agreed to tough payment terms whether he realized it or not. “These are all contractual agreements,” Hansen said.

“Usually there’s language in the contract that has an accelerating clause, where they (the supplier) can demand all of it (money) at once. They (suppliers) have to get a judgment to enforce it. They can’t just go in and scoop up all the bikes,” he said.

According to the lawsuit, Bicycle Warehouse breached its Dealer Alliance Agreement by failing to meet payment obligations in accordance with its credit and payment terms, and failing to pay extended credit on products sold within 30 calendar days.

Simmons, however, said he had no problem paying the $412,000 to Specialized, although he had been looking for a sensible payment plan.

John Thompson, U.S. sales manager for Specialized, in a letter sent to Bicycle Retailer & Industry News (See page 4), said that Simmons was given more than 100 days notice before Specialized terminated the dealer agreement. Thompson also said he extended Simmons new credit terms to close out the account. But Simmons failed to make payments even after selling off Specialized products.

“We only filed when negotiations failed to result in an agreement to be paid as originally promised,” Thompson said.

Simmons acknowledges that the dealer agreement included stringent terms. And, in a heartfelt posting to the Internet, Simmons warned dealers in capital letters: “Read your dealer agreement and don’t sign it until you agree with it.”

Still, the background of this case points to growing tension between top-brand suppliers and dealers, particularly as Trek and Specialized engage in a no-holds-barred fight for market share in lucrative locales like San Diego.

Bicycle Warehouse is the largest IBD in the area and has been in business for 15 years. Besides Specialized, Bicycle Warehouse stocks brands like Diamondback, Felt, Giant, Raleigh and Santa Cruz.

Several years ago, Performance bought out nine stores doing $15 million in sales. Trek and Specialized hadto pull out of the Performance shops and Performance picked up Giant. Trek took the opportunity to open a concept store and Specialized went to Simmons to open him as a dealer. Trek and Specialized were—and are still— jockeying for area dominance.

“Within a short couple of years our Specialized account grew to over the $1 million-plus level and was growing,” Simmons said. “We opened three new stores in territories suggested by the Specialized team.”

Simmons said Specialized encouraged him over the years to open three new locations but then failed to supply one of them, claiming it was too close to another Specialized dealer. The company later opened a Specialized concept store less than four miles from Simmons’ main outlet.

However, Simmons sells other brands that compete with Specialized sales at Bicycle Warehouse. In terminating its dealer agreement with Simmons, Thompson said Simmons had placed “insufficient” emphasis on Specialized.

“Bicycle Warehouse stuck to a multiple brand/warehouse model that placed insufficient emphasis on our brand and vision,” Thompson said. “We asked them to change on several occasions, but our concerns weren’t taken seriously. We concluded they couldn’t change or wouldn’t change, so we decided to end the relationship.”

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