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Retailer Shares Lessons from Closure

Published December 21, 2009

DEARBORN, MI (BRAIN)—Tom Demerly says the story of his Bikesport Michigan closing after 17 years in business is not one of doom and gloom, but rather of necessary and hard learned adaption that can provide important insights to other retailers.

“I think that for small brick and mortars like myself there are some positive lessons taken forward from this. The prevalent one is that when retailers enter into a merchant agreement with a credit card processing company they really do need to read that entire agreement,” Demerly said in a recent phone interview.

A driving force behind the shop’s recent demise was the decision by Demerly’s credit card processing company last January to establish a $60,000 reserve account that was off limits to the business.

The processor characterized the reserve account as a necessity to protect itself against liability in the midst of the credit crunch and the weakening economy in case Bikesport wasn’t able to weather the storm. At the time, Demerly said he had no outstanding debt to the processor.

But there was little he could do.

Demerly’s signed agreement with his credit card processor expressed the company’s ability to establish such a reserve.

He took his case to several attorneys who all gave him the same answer.

“It was interesting to see their response as the case went up the food chain of attorneys. They’d read the contract, shake their head, look at me and say, ‘As a business you agreed to this and this is going to be difficult to fight because you agreed to it,’” Demerly said.

The reserve account was to stay in place for a year, but Demerly negotiated it down to six months (it was eventually extended back to the full year). His shop pulled in about $1.4 million in sales annually, and even though the reserve account delivered a huge blow, he thought he could stay afloat.

“Initially didn’t seem as much of a hardship. As the economy worsened and the amount of cash removed from our resources became greater, it became more and more difficult to operate on a daily basis,” he said.

Then another setback.

A bike brand that accounted for 35 percent of his shop’s sales ended distribution through Bikesport citing changes in the dealer agreement (Demerly declined to identify the vendor).

The changes prohibited Demerly from selling the brand via mail order and required stricter adherence to MSRPs depicted in advertising. The highly competitive product was heavily price-shopped by consumers and Demerly said the price matching protocol he had in place was standard in the industry.

Though he doesn’t blame the vendor for its decision, the ensuing loss in gross sales coupled with the reserve account proved too much to survive in a region that was among the hardest hit by the recession in the country.

The shop closed Nov. 29. Demerly returned as much product as possible to vendors, but a bankruptcy court will likely have the final say in how any remaining assets are settled.

Looking back, Demerly, who now works at Trisports.com in Tucson, admits he made mistakes. He said he didn’t close soon enough, thinking up until the 11th hour that his factoring agent could secure capital to keep the business going, at least until the money was release from the reserve account.

But like any time of growth he learned valuable lessons from which he believes other retailers could benefit. First, understanding relationships with vendors outside the tight knit bike industry, like those with banks and credit card processors is key. And keeping cash reserves on hand and being your own landlord helps immensely when times are tough.

“I think that all dealers are more responsible to have significant cash reserves built up, which takes time and discipline, and potentially have additional assets, possibly real estate,” Demerly said.

If similar credit issues have hampered your business in the down economy, consider sharing lessons you’ve learned with other retailers. Email nformosa@bicycleretailer.com or call (949) 206-1677 ext. 209.

—Nicole Formosa

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