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Chain Reaction Builds Web Behemoth

Published September 21, 2011

By Nicole Formosa

BALLYCLARE, Ireland—As the industry’s largest online retailer, Chain Reaction Cycles catches flak for selling discounted out-of-season product, and is often the brunt of brick-and-mortar shops’ complaints about competition from Internet sales straining their businesses.

But company director Chris Watson shrugs off the negative image his company might carry with some in the industry, pointing to its success built over 26 years in business.

“A lot of that just has to do with just getting on the job, just getting on with certain customers and stop bitching essentially about what somebody else is doing or what somebody else is discounting in the industry. You concentrate on your customer and take care of them, you’re going to get somewhere,” said Watson, who has worked for his parents’ business since he was a teenager.

That attitude seems to have worked well for the Irish web retailer, which has seen 40 percent annual growth for the past five years, and last year reported revenue in excess of $100 million.

The model is simple: reinvest company profits to grow the business. Chain Reaction now works with 600 brands, stocks 90,000 SKUs, owns the Hotlines and Decade distributors, and runs nine house brands including Vitus Bikes, Nuke Proof, Ragley and Brand X. A new 10,000-square-foot brick-and-mortar store opened Aug. 1 in Belfast to complement online sales.

CRC was started in 1985 by Watson’s parents, George and Janice—both of whom still work at the company—as a small storefront in Ballynure, Northern Ireland, with a 1,500-quid bank loan. The business grew into mail order as its reputation for selling specialty products difficult to find in traditional shops expanded outside of Ireland. Chain Reaction closed the shop in 1998 and opened its first warehouse. The website launched the following year, and sales exploded. It became the largest employer in the region, now with 534 on staff; Royal Mail’s largest customer in Northern Ireland; and Parcel Forces’ largest export account. The website gets about 1.5 million hits a month.

Chain Reaction’s headquarters is spread across a massive 100,000-square-foot warehouse in Ballyclare amid the farmlands outside of Belfast. A second warehouse across town stores bicycles only. Workers wearing headsets pluck product from shelves following orders from a state-of-the-art voice-controlled system. Orders are filled 24 hours a day Sunday through Wednesday and 16 hours a day on Friday, with 35,000 parcels shipped per week. The company employs speakers of French, Spanish, German, Italian, Japanese and Russian to handle customer service and also runs wheelbuilding, warranty and returns departments, as well as an onsite showroom that rings up about $3 million in sales annually.

Watson sat down recently to talk with Bicycle Retailer and Industry News about Chain Reaction’s business model and the state of e-commerce in the industry.

Have suppliers become more open to selling online than, say, five years ago?

Watson: Bicycle brands are probably one of the last ones, and that’s because there are additional complexities dealing with bicycles, and not everyone’s set up to do them and it’s expensive to do. Even from a smaller-shop point of view, you can’t really mail order bicycles until you can get some economies of scale to market it more. But when you can begin to get your economies of scale, then you get a good offering and you get the numbers of customers that are interested in the product and you just go ahead and serve them. The industry spends a lot of its time and effort on industry politics and kind of forgets the customer is the actual one who buys the product. A lot of brands think they need a distributor to buy their products, and the distributor thinks they need a bike shop to buy the product. You need customers to buy your product. Then it’s how you get it to the customer. There are more and more brands starting to sell direct. A lot of European brands and European sites, more of them are offering direct sales to their customers.

Will the industry get to a point where the distributor
is obsolete? Are there too many links in the supply
chain?

Watson: People say the bicycle industry isn’t profitable, but when you look at a lot of other industries, it actually is very profitable. It just depends what you spend that on; you’re not wasting the profits. There’s room for everyone in the chain because everyone offers a value service and the customer will pay for a value service. So if you take a look at our business, we do 600 brands. Some of them we deal with brand direct; the majority of them we deal through a distributor because we wouldn’t have the capacity to deal with 600 individual people. So the distributor repackages several of those together for you and presents one product offering, then helps you with the logistics. Then the retailer is there as well—obviously can be online or retail or a combination of both. It’s a very important service back to the customer. Some people research online but still want to go touch and feel in the store. The user might be someone who never purchases online.

Is that breadth of the market why you have decided to open a brick-and-mortar store?

Watson: At this point, yes. Again, we always come from a retail background, so we always kept the aspect all the way through. A lot of people forget that about us. But you just can’t get our economy of scale in a retail unit. Because of our focus and growth over the last number of years, we never got that time to increase the retail offering, but we’re happy to be doing that again through the Belfast store.

Do you anticipate opening additional stores?

Watson: We’re going to open this one first and see how it goes, and see if our customers want it. We believe they do.

There are legitimate concerns from suppliers about their distributors breaking a contract by selling to an online retailer. Do you monitor that?

Watson: It is one that comes up. Certainly from our point of view, the bike industry is large in terms of sales and customers. In terms of its own internal politics—and its knowledge—it’s very, very tiny. You shaft someone in the bicycle industry and they’ll still be around in 10 years and so will you. You can’t do anything but hurt yourself, so we’re always about building relationships with our suppliers and our people. So we never really go behind people’s backs. We work with distributors and we work with brands, and a lot of the times when we work closely with brands, it’s in conjunction with distributors as well. A lot of times, we outstrip even the distributor’s supply, so it’s logistics. He can’t deliver the product from the brand to ship to us, so it’s like: Look, get the brand to ship directly to us; you’re still in the middle of the market, you still get your cut of the profits. We’re working with both parties so everyone’s happy. The only way to operate in the bike industry is to keep everyone happy.

So suppliers know then if you’re buying old product from their distributors at a discounted price or product that’s not moving?

Watson: Generally, yes. On most occasions, they all do. On most occasions, [distributors have] been offered it first and haven’t been able to take it. Talking earlier about bicycles, because the lead times are so long and because a lot of the time if something doesn’t turn up on time from a vendor, it’s not able to sell, it hits the market two months too late. It’s too much product; you just have excess inventory. You can’t send it back from the vendor you bought it off because they won’t give you a refund. So what are you going to do with it? It has to be sold somewhere, so you have to find a market. And that happens all the way through the supply chain.

What’s your response to the brick-and-mortar shop that says it can’t compete with online prices?

Watson: To the bigger extent you just run your business and get on with it, but you are aware of it. You can’t help go, “Yes, I bought out-of-the-line clearance product, our distributor’s whacking that stuff out because it’s last year’s model, and I bought it and I’m offering a 50 percent discount on it. You probably had an opportunity to purchase that too and you didn’t, so you can’t complain that I did and that I’m selling it on.” The reality is, if it’s not a brand that works for your customer, then you offer them something else. And you would like to think if you have a customer standing in the shop, he’s always going to give you a few percent more than what he would give you online. A lot of it is complaining and griping in the industry, and you just get on with it and serve your customer as best you can. If you’ve got the customer in your shop and they’ve researched the product in your shop, that’s your opportunity to sell it to them. So if he leaves and you haven’t sold it to him, you lost the sale. It’s not that I stole it.

Are suppliers pushing you to offer different pricing according to the country where it’s being sold?

Watson: They do, and we have to accommodate that in some way. In terms of pricing, the world is flat. Other than local customers and local taxes, it has been something not always factored in. The price of a product should be relatively even across the board, and you get major price discrepancies where it’s not—where a distributor in the UK may be working on 30 percent margin and a distributor in Japan or wherever is working on a 60 percent margin. And that’s not sustainable long term from a customer’s point of view because a customer’s going online saying, “Why is it this price there and that price there? Am I being ripped off?” That’s going to continue to grow over the next few years, so I think you’ll see all brands start to see flat pricing across the board. I’ll use Apple as an example. I can’t buy an iPod any cheaper in the U.S. than I can here; it’s the same price. Our industry the way it is at the moment, some brands are catching on to that fact and others haven’t quite got there yet, and they’re the ones that have an issue with worldwide supply. When you do that, it removes the currency or the strength of the pound or the dollar out of that.

Do you think more brands will start selling online in the future?

Watson: If you look at concept stores, that’s only one step away from a Specialized store itself. So you move forward five or 10 years and that’s what it’ll be, because again, they’ve got to control their way to get to the end consumer. So it’s fairly clear what they’re doing in that way. But again, all the other dealers are still purchasing from them and still see it as a support. It’s probably going to grow the market.

Topics associated with this article: Web/Internet

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