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Vosper: What happens next

Published December 12, 2022

Last month, I wrote about the early onset of winter sales conditions and the effect of too much inventory within the specialty retail channel. This month, I'd like to flesh that out with even more bad news: a review of what we can expect as we chew through all the excess product on our way to what is hopefully a healthier, more profitable spring selling season ... but one which might not arrive until summer or even later.

Where we are now

The simplest way to sum up the current situation throughout the channel involves a single word: gridlock. There's way too much inventory in some categories and not enough in others, leading to a one-two punch on factories, suppliers and retailers alike. And to top it off, it existing holiday price reductions are not stimulating the kind of consumer response that's needed to clear the backlog.

Black Friday store traffic was up across all retail sectors, according to a December 7th newsletter from industry analyst NPD, which compiles industry sales data to People For Bikes. But actual sales, not so much, except where deep discounts are involved.

"Black Friday was busy, but it didn't have that classic Black Friday feeling," said Marshal Cohen, NPD's chief retail industry advisor.

It's difficult to capture "a consumer who has grown weary of ongoing promotions."
— Marshal Cohen, chief retail industry advisor, NPD

"The morning bustle and hunt for hot new items was missing." The only real draw, the report said, was deep discounts. It's difficult to capture "a consumer who has grown weary of ongoing promotions," Cohen said.

Matt Powell, senior NPD sports industry advisor, agrees. "Black Friday has become increasingly less important to sports retail," he said in the same newsletter. "Given the high levels of inventory, and lack of hot new sports items, promotions at brick-and-mortar retail were tepid. However, online promotions were shockingly deep, which will be difficult for brands to offset come next holiday."

What's next

The sheer amount of inventory in the pipeline will lead to months of increasingly deep discounts, resulting in significantly lower profits for suppliers and retailers alike.

The sheer amount of inventory in the pipeline will lead to months of increasingly deep discounts, resulting in significantly lower profits for suppliers and retailers alike.

So if there's gridlock now, how do we get out of it? The only way is via consumer incentives to clear excess inventory from the channel, which means price reductions until the backlog is cleared. Here are nine not-very-pleasant consequences you can expect see from this reality:

The sheer amount of inventory in the pipeline will lead to months of increasingly deep discounts to move product, resulting in significantly lower profits— and therefore, significantly greater financial stress — for suppliers and retailers alike.

At the same time, supply-chain and inflation-induced price increases will keep even discounted prices relatively high in consumers' eyes, stifling demand. The overall practice of discounting product can be expressed by what's known in game theory as the Prisoner's Dilemma: the brand or retailer that discounts first and deepest gets the most benefit, while those who try to hold to MAP or suggested retail pricing are the big losers. This is especially true on the internet, where the Perfect Competition phenomenon of Perfect Information is evident to any customer with a cell phone and a willingness to google items.

"Name" brand pricing will approach that of "economy" brands. In selected categories, everything will be on sale all the time, with premium pricing for name brands being one of the first victims of the discounting reality. The upshot: Quadrumvirate (Trek, Specialized, Giant, and Pon/Cannondale) dealers will be hit just as hard as everybody else.

The move to online sales will continue, including brands offering D2C pricing at or below normal dealer wholesale, not to mention retailers selling online at close to cost just to move inventory and free up cash.

Increasingly, consumers will expect discounts on everything, even for categories not in oversupply.

Ultimately, we're going to see companies failing in both the supplier and retailer sectors. Companies will be bought, consolidated (merged), or go out of business altogether. Faced with order cancellations and no new orders, some factories may fail as well.

Survivors will not necessarily be the biggest brands, but the ones with the deepest pockets and/or the ones powerful enough to cancel the most pending shipments. This principle puts even the most popular brands at risk, depending on their banking connections and ability to arrange credit lines. Survivors may turn out to be the suppliers and retailers who made the lowest level of inventory commitments. Conversely, the Bullwhip Effect suggests that businesses that pushed all their chips to the center of the ordering table back in 2021 will turn out to be among the biggest losers.

Acquisition of retail businesses by Trek, Specialized, and perhaps Pon, will continue and even accelerate as more retailers are unable to handle the financial strain and, perhaps reluctantly, position themselves for sale. But the law of supply and demand means that the going price for a retail business will be discounted as well.

New players — often smaller, more agile companies — will emerge at both wholesale and retail, challenging established brands and resellers. This is already happening with e-bikes and some other categories.

Reaching beyond the bottom line

So is there a silver lining to all this? Not until the inventory backlog clears, and there's no telling when that will be. According to my colleague Jay Townley, "(T)he U.S. bicycle business is headed for an inventory-induced shakeout that will probably last from three to five years."

Other industry watchers, including myself, believe the period to clear excess product from the supply chain may be a matter of months rather than years, although the aftereffects will carry on longer. But under either scenario, the specialty retail channel will be hit hard and hit repeatedly, and the only eventual winners will be the ones who are very smart or very lucky ... and preferably both.

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