In the first part of this series, I took the measure of who is to blame for the industry’s current oversupply crisis and its aftereffects (short-sighted suppliers, abetted by short-sided orders from short-sided dealers and the equally short-sighted factories that blindly accepted those suppliers’ orders).
As one longtime dealer friend and industry legend, who asked to remain anonymous, put it to me in an email: “Bike biz people with our years of experience — 1971, 1973, MTB & road booms, etc. — easily predicted the dealer over-ordering, brand get-rich-quick euphoria, and related stupidity to avoid getting stuck.”
Well, maybe. But plenty of people in all phases of the supply chain got stuck, big time. And the industry is certainly hurting as a result. Both dealers and suppliers are closing businesses and consumers seem in short supply, even at the height of summer.
According to Circana data through May of this year, trailing-12-month (TTM) sales in the specialty retail channel were down 11% for bikes, down 8% for accessories, down 9% for parts, down 4% for helmets, footwear and gloves, and down 8% overall. And remember, that’s in comparison to the 12 month period of June 2023-May 2024, which was hardly something to write home about, profits-wise. (Editor's note: By the way, this Circana data (and more) is shared in the Dashboard feature in every issue of Bicycle Retailer & Industry News. Industry members can sign up for your free print or digital subscription here. And thanks for the leadout, Rick - SF)
But like the phoenix, a new cycling industry is arising from the ashes of the old, and in Part Three, I’ll provide some suggestions to prevent the current supply disaster — both short- and long-term — from happening again.
We’ll begin our examination of the long-term causes of our industry’s pitiable overall profitability, plus an interview with Wayne Stetina for some added insight into factory responses to the order deluge.
Fair Warning: This will be a long piece, almost 3,000 words, but I hope you’ll find it worth reading the whole thing. For the TL;DR crowd, it’s all about Perfect Competition; SRAM and Shimano had very different responses to the order frenzy; and Prisoner’s Dilemma explains why there’s always that one brand or dealer who’s willing to cut prices, stifling competition and destroying industry profits for all of us.
The root cause of all this
“At the Taipei bike show we place our orders for the year, and there’s a guy standing behind us at the booth who plunks down a Gold Card and says, ‘I’ll have what he’s having.’” —Industry Legend Skip Hess
It is literally a textbook case that the bicycle business is in a state of Perfect Competition. First proposed by longtime industry member Chris Allen in 2001, Allen was then an MBA candidate taking a Managerial Economics class from Dr. Maurice Rahimi at San Diego State University when he suggested the U.S. bicycle business as an example of Perfect Competition. Rahimi researched it and decided Allen was right. Now Perfect Competition in the bike business is an accepted bit of economic theory and taught as an example in colleges in universities across the USA and probably worldwide as well.
I’ve written extensively about Perfect Competition as far back as 2010, but the basic idea is pretty simple, and consists of eight (sometimes nine) basic parts. You can read the piece linked above for the full story.
Here’s the bottom line on all this, particularly with respect to low barriers to entry. As industry legend Skip Hess told me back when he was president of Electra bikes, low barriers to entry means that “My product managers and I bust our asses all year long designing the very best bikes we can, and at the Taipei bike show we place our orders for the year, and there’s a guy standing behind us at the booth who plunks down a gold card and says, ‘I’ll have what he’s having.’”
So there’s this thing called Perfect Competition, the cycling industry has it, and it’s the main thing keeping our industry’s prices and profits so darned low. To put it another way, no one brand can achieve a sufficiently strong market position to command significantly higher price points and profits. It’s literally a race to the bottom, and we’ve been in it for years.
The good news is, there are also things we as an industry can (legally) do to lessen the effects of Perfect Competition, and I’ll be talking about them next month in Part Three of this series.
What happened with Shimano and SRAM
“One key to profitability for Shimano has always been accurately forecasting demand to avoid overinvesting in factory capacity.”—Wayne Stetina
Wayne Stetina is a 13-time U.S. national road and time trial champion. He was inducted into the U.S. Bicycle Hall of Fame in 1999. More importantly for purposes of the present piece, he’s held senior management positions at Shimano and special projects reporting directly to senior management at SRAM during the COVID and post-COVID eras, which makes him uniquely qualified to take us inside both these industry powerhouses.
Following is part (!) of an interview I did with Stetina regarding the role of both companies in the industry oversupply fiasco and their current respective positions in the industry. The interview has been edited for clarity.
I’ve referred to Shimano as “the adult in the room” during the COVID product debacle. You were VP and Road Product Specialist at Shimano when the COVID-fueled ordering frenzy hit. What ultimately led to Shimano’s strategic decision to stick to its existing production schedule and effectively turn its back on what must have been hundreds of millions of dollars in orders?
Wayne Stetina: Shimano did have backorders up to two years and more for our most popular component groups. Since we were not able to increase capacity during the pandemic to reduce these backorders, my analysis is that all the factories were already running multiple shifts at maximum capacity (i.e., maximum profitability), plus Shimano supplier capacity must also have been a factor.
Shimano never believed (the) consumer demand everyone was reporting was sustainable at the peak pandemic level, so they were unwilling to invest to break ground on new factories that would take three to four years to come fully online. I believe this was based on rational self-interest to maximize Shimano profits. One key to profitability for Shimano has always been accurately forecasting demand to avoid overinvesting in factory capacity.
Over the decades Shimano has often been forced to play the role of the adult in the room every time we launched an extremely popular new group. Some of the biggest OEs frequently tried to corner the market by gaming the order system, trying to place initial orders for far more than their previous market share in each category. Initial demand to fill the pipeline for new bike models is always greater than long-term demand. As a responsible partner for every OE customer, Shimano always made sure every brand had a chance to place orders for initial delivery with allocations based on previous market share orders.
Usually it takes several months of factory production to ship enough product to every OE customer, ensuring every brand has bikes for new component/bike model launches. Shimano also paused all new group introductions (during the COVID ordering frenzy) to avoid any production slowdowns for new-model tooling to maximize production of existing product.
The Bullwhip Effect on inventory was common during every new model launch as dealers also inflate orders with multiple OE brands trying to get allocated the bikes they believe they can sell through to maximize their profits. The pandemic increased consumer demand for several years while the supply chain was simultaneously disrupted. Dealers logically ordered far more than they needed, desperate to get allocated the bikes they had consumers trying to purchase. Consumers began playing the same game with multiple dealers. It was a never before seen multi-year Bullwhip Effect on steroids. For most of that time the largest warehouse for every bike brand was on container ships waiting to unload at port.
Q: In the absence of short-term availability of product from Shimano, bike brands shifted their spec to microSHIFT and other formerly down-market brands, especially for their lower-end and mid-priced models. How did this move impact Shimano’s sales picture in the long term?
WS: It gave all those second and third tier price point component brands credibility with an established business relationship. Consumers bought those bikes and generally found they worked OK. Certainly “good enough,” considering the price points. I believe that had to cost Shimano, especially below the $800-$1,200 price points where they had always been dominant. So now we are seeing Shimano fight back aggressively with added value of better technology trickled down from higher-end product. Shimano has always been committed to sell a better cycling experience, and refuses to be trapped in a commodity price war that erodes margins.
For the last two decades, SRAM and Shimano have been fighting to become the dominant brand for premium components. SRAM basically doesn’t play in bikes below $2,000 retail. Now Shimano is fighting a rear-guard action against Taiwanese and Chinese brands with products that the market has yet to decide if they are good enough for $800–$1,200 bikes. For e-bikes that translates roughly to $1,600–$2,000. These “budget” component brands aren’t standing still. They all continue to rapidly upgrade quality and performance.
Q: After 37 years with Shimano, you made the move to SRAM in January 2022 to become its Senior Field Guide. What was the situation on the ground for SRAM, both with respect to the initial wave of orders and the subsequent wave of cancellations?
WS: SRAM was able to ramp up production dramatically. Nobody was ever disappointed with a SRAM bike and said “Wow. I wish I had waited for a new Shimano-equipped bike.” Especially with AXS versus Di2. This marked a permanent shift in the road market for dealer and consumer brand perception. Based on what I saw in bike shops during the pandemic, I believe market share was around 50/50 for premium road/gravel Di2 versus AXS. It remains to be seen how that will shake out after the inventory glut finally clears.
For MTB, even before the pandemic, I believe Shimano recognized they (SRAM) were the market challenger. I believe this was in large part because Shimano initially failed to embrace 1X and was playing catchup ever since. Shimano’s latest XTR wireless Di2 is really good. Underestimate Shimano engineers at your peril. Game on for premium MTB now as well.
When the wave of order cancellation requests finally hit, it's my understanding that SRAM was flexible to allow cancellations. If true, this was extremely bad for short-term profitability, but extremely strategic long term for OE customer relationships.
Shimano didn’t ramp up production nearly as much as SRAM, but they still had years of backorders secured with deposits, work in progress, and product ready to ship. I can’t comment on (what they have now), and that’s all I’m going to say about that.<
Q: What’s the Big Picture here?
WS: SRAM permanently established itself as an equal player to Shimano in the road and gravel markets.
Now Shimano is fighting back. Each subsequent generation from both companies is significantly better functionally and ergonomically. So much better that each time I ride the latest group from either company, I have zero interest to continue ride the previous group. Personally, as a long-retired racer, I prefer SRAM ergonomics and gearing flexibility for all my riding in every condition. But anyone looking for the winning Tour de France edge from a shifting or braking advantage based on SRAM v. Shimano components is looking in the wrong place.
Shimano and SRAM are battling to be the dominant premium component brand, but no OE bike brand wants to become over-dependent on a single supplier. It's far better for our industry to have two very strong component brands. We used to call it sympathy spec when OEs would spec a few models from a struggling supplier. Now we see OE brands offering SRAM and Shimano on the same frame, or alternating groups at different price points. Retailers can be very strategic again, deciding what they actually prefer to stock for their market. Because they no longer need to preorder to guarantee they will have enough bikes to sell.
The biggest unanswered question for me is how good for performance/durability/value will the new Chinese electronic shifting systems be at half the cost of Shimano or SRAM? Only the market can decide when they are good enough to eliminate mechanical shifting at lower price points. Because I am confident they will rapidly get better.
It all becomes part of the product performance/value equation that was the focus of my 39-year bike industry career. But the bottom line is, nobody’s ever going to ride any new bike and say “Shit, that sucks.”
Welcome to the Prisoner’s Dilemma
“The validation of their existence and the dopamine hit of volume sales outweighs the desire to build something where the whole team can prosper.” —Gary Bird, director, Hoops Velo (UK)
We’ve seen now how Perfect Competition imposes low profits on the entire industry and how Shimano and SRAM responded in completely different ways to the oversupply orders, each with its own advantages and disadvantages.
But I’d like to turn now to the long-term picture. What happens months or perhaps years from now when the current glut of product finally sells through and business finally returns to normal? I’m afraid the answer is, we go back to doing what we’ve always done, which is to say, “doing what we’ve always done.”
First, as I’ve said before, there’s no “returning” to anything. This, unless we decide to do something very significant about it, is the new (ab)normal, whether we like it or not. Remember, we’ve had excess inventory and pervasive in-season discounting in 18 of the past 20 years leading up to the COVID and post-COVID eras. And all the other principles of the Bike 4.0 era are still very much at work, both now and for the foreseeable future.
But even given all the above, why do brands and retailers continuously put perfectly good product on heavy discount even at the height of the selling season?
Two reasons. The first is pretty simple: year after year we make way too much stuff relative to actual market demand. And year after year, we do this because we have an industry that values sales volume over profits.
Gary Bird is the director of Hoops Velo, a single-location bike shop in Farnham, Surrey, in the U.K. When I put the question about product oversupply and resultant in-season discounting a LinkedIn discussion thread, he responded as follows:
“It's … that there are a number of 'players' in the bike industry where success is product out-the-door (volume) (turnover) and not profit. The validation of their existence and the dopamine hit of volume sales outweighs the desire to build something where the whole team can prosper.”
Amen to that, Brother Bird. We have an industry that measures its success in sales volume rather than bottom-line profitability, and this inevitably leads to inflated forecasts and concomitant oversupply. Now compare and contrast with Wayne Stetina’s interview and notice how many of Shimano’s strategic moves are made to either maintain or increase profits. Can you imagine any of the Quadrumvirate members doing that?
Me neither.
Combined with this is the second reason I promised to address earlier: In an industry dominated by the principle of Perfect Competition, there is always someone willing to sell stuff at discount, often a significant (or in the post-COVID years, a below-cost) discount. This is because being the first to discount product yields large (if short-term) benefits. In Game Theory, this is called the Prisoner’s Dilemma, and I wrote about it back in 2020. The formal version is more complex, but here’s how I applied Prisoner’s Dilemma to the bike business at the time:
“Logic would normally suggest that if everyone holds prices, everyone benefits,” I said. “But when there's an opportunity to drop prices, whoever sells out first gets the most benefit, which is to say, the most sales volume. Then everyone else drops their prices too, (to avoid losing even more sales) and all we end up doing is transferring the difference into the consumers' pockets who likely would have bought (many of) those same bikes, and at full margin, too, anyway.”
And guess what: that’s exactly what the bike business does, year after year. And it’s time for it to stop.
If you’ve read this far, thanks for your patience. Stay tuned for Part Three of this series, which is scheduled to go live Sept. 8. In it, I’ll interview a major industry player for their insights into the supplier thought process in over-ordering the current product tsunami, and offer some suggestions as to how we might extricate ourselves from the larger Perfect Competition/Prisoner’s Dilemma mess we’ve been in for the last quarter century.
