Welcome to the final installation in this series about the industry's current and ongoing oversupply situation.
In Part One, we looked at some of the immediate causes (hint: Suppliers over-ordered, egged on by dealers doing the same, with the two combining to cause an unprecedented Bullwhip Effect). Part Two looked at some of the industry response, including an interview with Wayne Stetina about the thinking going on at both Shimano and SRAM at the time.
Now in Part Three, we'll go back to some of the root causes of a quarter-century of virtually uninterrupted industry oversupply, featuring an interview with an anonymous senior executive as to what was going on with suppliers during the COVID-ordering frenzy and what the fallout was, and finish up with some suggestions about what we as an industry can do about all this.
Let's start with how things got this way in the very largest sense.
The plain fact is that bike and equipment brands in general and the Quadrumvirate in particular are still operating under the basic business principle of perpetually increasing their market share, and this has been the case for ever since the Bike 2.0 era (end of the bike boom and introduction of the mountain bike through the late 1990s/early 2000s). Win enough market share, the theory goes, and your brand will become dominant and we can worry about the profits then.
Here's a newsflash: It didn't work then and it doesn't work now. So there's that.
During 2.0 era, brands attempted to increase market share by the simple expedient of adding more and more dealers. But it didn't work. Dealers — especially large dealers — responded by simply adding more brands, thus diluting the market share per brand at that dealer's business. So brands were trying to increase market share by controlling more dealers; dealers were trying to increase market share by controlling more brands. As I said, it didn't work, for either of them.
In the Bike 3.0 era (roughly 2000-2020), brands realized the 2.0 model had failed and began to focus on increasing market share by controlling more of the floor space (and thus sales) within individual retail businesses. Starting in about 2015, suppliers also began opening company-owned stores, largely ditching the never-very-successful Concept Store model.
Both these moves were successful for a time. But they didn't effectively increase market share among any of the Quadrumvirate brands (with the possible and relatively short-term exception of Trek's acquisition of Electra); they just took market share away from previously nonaligned brands and retailers ... who, as often pointed out in this space, control a lot of retail businesses (some 45%) but at comparatively low sales volumes.
So what does all this have to do with oversupply? Simple: One way to take sales away from your competition is to discount your product, thus sacrificing profits but hopefully gaining market share by stimulating sales versus competitors. And it works, short-term, particularly for the first player to drop prices (See also "Prisoner's Dilemma"). At the risk of pointing out the obvious, there's ultimately no net change in market share from this tactic because everyone ends up selling at the same reduced prices. All you're doing is forcing more product into the market than it wants through the mechanism of profit-destroying discounts.
And this is exactly what'd been happening, all season long, year after year, since 2000.
Combined with this is the absurd notion that brands, especially large brands, can continuously increase sales in a market where, for years, there has been flat to declining demand. Well, here's a newsflash: There are simply fewer Americans riding bikes in the past 25 years than has been the case in the 1.0–2.0 eras.
The Bike Boom was 50 years ago, guys, and it's not coming back anytime soon.
Hence the over-ordering of product every year, the forcing of that unwanted product onto dealers' floors, and my conclusion that the oversupply practice is not merely deliberate, but an essential part of the Quadrumvirate business model.
But here's the larger point. The oversupply merry-go-round has to stop if this industry is ever going to get out of the clutches of Perfect Competition and start making decent profits for a change.
The alternative is positively dystopian. It's the long-ballyhooed Race To The Bottom, and it's not just coming. It's actually been here, literally for decades now. But like the famous frog in the gradually heating pot of water, we just haven't been collectively smart enough to realize what's happening to us. But more about that in a bit.
What were they thinking?
"Brands like Specialized and Trek thought the brand would trump other products on the market and win customers and floor space. They were wrong." — Anonymous Industry Executive
To get the inside story on the current oversupply catastrophe, I talked via text message with a senior executive at a major industry supplier who agreed to speak very bluntly about the whole situation on condition of anonymity, for reasons that will soon become manifestly evident. This is a person who knows firsthand "what they were thinking" because they were one of the people thinking it.
You were in a unique position to observe the industry's over-ordering process firsthand. What happened from your point of view?
Yes, there was euphoria and brands did place lots of orders. Lead times on high-barrier-to-entry components extended to 730 days with several (factories) implementing contracts which stipulated orders were not cancelable. The lack of understanding by the brands on the supplier limitations and placing more and more orders in a very short (6–8 month) period of time was the downfall.
You had to be boots on the ground to understand the dynamics.
Products with low barriers to entry were flowing smoothly, while assemblers awaited key components from the more difficult suppliers. No one was ready to take responsibility for the components for a bike (that was) 95% complete. They waited until the bike was complete then shipped. This was often well after the surge, and not necessarily what the rider wanted.
(Brands) proceeded to place orders with multiple suppliers for comparable components, hoping to get something, then cancel everything else. This really created a mess with suppliers and compromised trust and respect.
Brands like Specialized & Trek thought the brand would trump other products on the market and win customers and floor space. They were wrong.
With bikes not available, consumers choose other recreational and social activities.
Ultimately, I don't think anyone is responsible. We never experienced it before, brands and companies made assumptions without truly understanding the limitations, and this resulted in the oversupply. The suppliers and assemblers are always ready to take orders. They ship and collect cash and close the transaction.
We've talked a lot about the industry's oversupply situation with respect to bikes, but what's happening on the equipment side of the business?
People talk about the supply chain issues with bikes, but few people talk about all the parts, accessories and rubber (PA&R) inventory on hand everywhere. There were few capacity restraints (on these factories) and makers shipped whatever was ordered throughout the pandemic. (Now) some of these products have months if not years of inventory on hand at both wholesale and retail.
My view (is that) this is a serious issue with less floor traffic and so much product available.
And what's happening to all this inventory, both on the supplier and retailer sides?
My observation of the bikes in stock at both retail and wholesale is the majority are unsalable. Wrong sizes, wrong colors, wrong experience, wrong models, etc. Few (in the channel) want to write down this inventory because it contributes to their asset base, which they are leveraging for credit with banks and suppliers.
So all that inventory is just sitting there, unsold, and probably unsalable, too, since consumers are not responding to months of ongoing discounts. Where does this leave us as an industry?
I am aligned on the supply challenges. Here are the reasons:
Brands are only purchasing and shipping exactly what they need. There is less than three months on hand at brands. My guess is that 40–50% of what is on hand is outdated, mixed colors/sizes, and product that is otherwise not desirable. Orders (if any) are tiny for future shipments. No one is certain what will happen after July 9 with reciprocal tariffs. (Note this interview was in late June. Since then, the tariff situation has remained unstable and in fact become even more complex.)
Moreover, no one has equity to place big orders and hold inventory for future sales. At the same time, the NT$, Euro, Yen, and CHF have strengthened by 7–12% over the past 90 days. And ocean freight rates have about doubled since April 2nd. And remember lead times are 90+ days and 30 days on the water!
That's troubling. What's happening on the retail side of the business?
From the retail side, inventory on hand is as bad as wholesale. Maybe 60% is what customers want. Many dealers have reached their credit limits with high value bikes. (And currently) there is about 3–3.5 months on hand at retail (if that inventory is perfect). This is true for both wholesale and retail inventory, and includes the old stuff they can't move at any price.
My own prediction is (that this is) different from Covid. We are in for a supply vacuum now. And the brands will be servicing (their) D2C and owned-retail (businesses, often at the expense of their traditional retailer base).
I talked to one retailer who said they are now actively pursuing used bikes and will be aggressively repairing, refurbishing, renewing and reusing them to stay relevant.
I agree about the brands servicing their own outlets. Retailers aren't dumb, and they see this too. I talk about it in my July BRAIN piece. And they are all over the Circular Economy aspect of things. Anything else?
Well, we are in for a rough 6 months. And the administration is not making things easier or certain.
So now what?
Instead of chasing perpetual growth, companies now need to focus on their bottom line, on improving the profitability for the limited amount of products they are actually able to sell.
As described in the previous section, the reality for us as an industry right now is that we simply have too much inventory. We've had too much inventory for years. And we're still going to continue having too much inventory for the foreseeable future because — also for reasons discussed previously — suppliers are unwilling or unable to write it off. They are pretending all this stuff will eventually become sellable somehow. And guess what: it won't.
So the situation will continue. And it won't be easy. Or comfortable. But there is a light at the end of the tunnel.
When I was director of marketing at Specialized in the early 2000s, Mike Sinyard would often say something that has always stuck with me: "Every problem is an opportunity." And he was generally right about that.
In this case the opportunity is simple: Stop making so darned much stuff. Sounds easy, right? But, as I implied almost 2,000 words ago at the beginning of this piece, breaking our oversupply addiction will require an entirely different business approach, particularly from the industry's largest and most deeply entrenched players.
Instead of chasing perpetual growth and the failed goal of increased market share relative to competitors, companies now need to focus on their bottom lines, on improving profitability for the limited amount of products they are actually able to sell, and improving those profits throughout the distribution channel.
That means changes that will be felt throughout the supply chain. If suppliers, particularly on the bicycle side of the business, no longer have the cash/credit reserves to acquire more product than the market wants to buy, preseason order quantities and stocking requirements for dealers should necessarily go down, although the need to spread inventory risk throughout all players in the supply chain will always be with us. Lower order/inventory requirements, in turn, will have a deep impact on physical retail space.
With less inventory on the floor, shops can allocate some of the retail space saved to more profitable categories, like used bikes or expanded service offerings. As buy-in requirements ease, some dealers may opt to close less profitable locations or relocate operations to smaller quarters, reducing rent costs and overall OpEx (operating expenses), which goes directly to bottom-line profits. At the same time, dealers' realized margins will grow overall as in-season discounting becomes rarer or nonexistent.
But don't mistake this for a utopian solution. This potential change in focus will also bring its own set of challenges, and there will still be plenty of pain to go around.
For one thing, we've been training consumers for a quarter century that bikes and equipment are always available at a lower price, either via advertised sales events, online closeouts or simply by dickering with a compliant retailer. Even assuming suppliers have the collective willpower to move away from their current doomed business model, it will take years for consumer expectations to readjust to the new reality.
In the Bike 4.0 era, the economics of product scarcity (another name for what might be more appropriately termed "supply that's actually consistent with demand") may take on a new and troubling dimension. As dealer inventories shrink, the temptation for suppliers to allocate the most desirable product to their own virtual warehouses will grow, making it more difficult than ever for dealers to gain access to in-demand product.
It's a no-brainer that every D2C sale is more profitable to suppliers than any sale made through a dealer, and as profits throughout the industry grow while the total volume of product shrinks, the temptation will become greater than ever for brands to goose their D2C sales by simply denying dealers access to their most desirable models.
We may well end up with a two-tiered distribution system where lower-margin, bread-and-butter products are readily available in bike shops, but premium (or merely popular) models are effectively only available via the D2C channel.
For all this, the move away from perpetual oversupply and eternal discounts is not merely the best but is literally the only healthy solution for an industry that is metaphorically drowning in its own products. The alternative, as we've been seeing for decades, is simply not sustainable.
As author Alex Haley famously said, "Either you deal with what is the reality, or you can be sure that the reality is going to deal with you." We are now at an inflection point, and the choice is ours to make. But either way, the choice will be made. We can either make it ourselves, collectively, or let the market make it for us.
Choose wisely.
