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Retailers unimpressed by Kona's new D2C program

Published June 26, 2023

A version of this article ran in the July 2023 issue of Bicycle Retailer & Industry News. 

By Steve Frothingham and Dean Yobbi

BELLINGHAM, Wash. (BRAIN) — Kona USA, facing the same excess inventory and stagnant consumer demand challenges as most other IBD brands, rebuilt its website in early June to add consumer-direct sales for the first time. The company also overhauled the terms of its Ride Online click-and-collect sales option. The move came amid several major changes at the brand, which was sold by its founders last January.

While most traditional IBD brands now offer some variety of direct sales and click-and-collect — and many dealers respond unfavorably every time those programs are unveiled — few have received such a negative initial response from retailers.

"Terrible news, and we aren't sure if we are going to continue carrying Kona Bikes," one dealer told BRAIN in an email.

The response may have been due to the terms of the program, especially the 15% commission being offered to dealers who participate in the optional click-and-collect program. Those orders are fulfilled with inventory held by Kona, which also will handle all transaction costs and shipping to the store. But some dealers said the 15% margin will do little more than cover the cost of bike assembly, especially on sub-$1,000 retail bike purchases. 

The negative response from dealers also may have been bolstered by other recent changes at Kona. A week before the consumer-direct program announcement, dealers learned that Kona had laid off almost all of its sales representatives and was closing its Bellingham, Washington, company store. Insiders told BRAIN that Kona also laid off members of its product group and warranty staff.

A June 7 email to dealers shared details of the program and promised "open communication and transparency," but many dealers said they learned of the layoffs and the new site indirectly before the email arrived, and some said they were unable to get in touch with anyone at the company in the days after getting the notice.

Kona was purchased from its founders in January 2022 by Kent Outdoors, an Ohio-based outdoor sports group that also owns Arbor Snowboards and the O'Brien watersports brand, among others. Kent Outdoors — no relation to the New Jersey-based bike maker Kent International — is owned by a Boston-based private equity firm, Seawall Capital.

After being led for a third of a century by its charismatic founders Jacob Heilbron, Dan Gerhard, and Jimbo Holmstrom, many retailers are suspicious of the brand's new ownership.Kona co-founders Jake Heilbron and Dan Gerhard.

After the acquisition, Kona was led for about a year by outdoor industry veteran Ken Meidell, who had joined Kent as CEO and helped broker the acquisition. Meidell has led brands including Dakine, Outdoor Research, Cascade Designs, and Western Spirit Cycling Adventures.

Meidell left Kona and Kent Outdoors in January; Kelly McCarthy, a Kent Outdoors board member, has been leading Kona as interim CEO since then. McCarthy's background is in corporate communications, with stints at the luxury brand conglomerate LVMH and Nike, among others.

Gerhard and Heilbron, who continue to own shares of the brand, were not involved in the decisions about the recent moves.

The details

Kona USA General Manager Christopher Halcrow sent an email letter to dealers on June 7 announcing the updates to the Ride Online program and the new direct sales program, Direct-to-Rider.

Halcrow told the dealers that the updated Ride Online program was "designed to help us acquire customers through Kona channels and matchmake them with you, our retail partners, for a lifetime of service and community."

Under the program dealers bear no inventory risk and have the opportunity to make add-on sales when they hand over the bike to online customers.

"By adding on bike fits, suspension tuning, service plans, accessories, and equipment, the rider will have a fully built experience from the first moment they see their new ride IRL," Halcrow's letter said.

Dealers told BRAIN that the previous Ride Online terms allowed them to fulfill sales from their inventory and receive nearly a full margin on the sale while being responsible for shipping, tax, credit card fees and more. The prior program prohibited dealers from charging an additional assembly fee for bikes bought online; it's not clear whether that is allowed under the new program. 

"Before I think we got all of our commission minus 4 or 5%. It was really good," said Michael Roberts, the owner of Epic Cycles in Black Mountain, North Carolina. "You didn't care that they bought it online because you really got a good deal on it." By contrast, the 15% commission offered in the new program, Roberts said, "is barely enough to cover the assembly." 

Dealers said that bikes being shipped directly to consumers are almost completely assembled by Kona before they are shipped. It's not clear if click-and-collect bikes are partially assembled.

Halcrow told BRAIN that Kona is now bearing more of the burden of making the sale by holding the bike inventory, the transaction costs, and by educating consumers with a revamped website. 

"We saw a disparity of service and rider support across the market and decided to take a step back and look at the program as a whole," Halcrow told BRAIN in an email.

"Online-to-offline (O2O) programs like these are constantly evolving with the marketplace. At the end of the day, this is about the rider. We're committed to continuing to partner with dealers that offer a great rider experience. Both Kona and the cycling community depend on these partnerships."

Halcrow's letter to Kona dealers said the updated website was a response to Kona "wanting to interact with consumers on their own terms."

"We watch riders stand at every point of sale and pull up the web on their phones and devices in search of content to help them find the perfect bike. We didn't feel that our site was rising to the occasion and offering as robust of a set of knowledge as if the very designers were standing by their side. We've now launched a new pilot site which will grow in content and enable knowledge transfer in the coming weeks/months. In addition, as part of the new experience, we are now able to serve riders who wish to order online and have their bike shipped directly to their door," the letter said.

The site indicates that consumers pay varying shipping costs when they opt to have a new bike shipped to their homes. In the checkout process, they click a box acknowledging that professional assembly will be required and build fees are the customer's responsibility.

The Kona site contains a dealer locator page, but when BRAIN reviewed the site in mid-June there was no obvious way to order a bike for fulfillment by a local dealer. The previous site refers to the consumer-direct sales site.

Bellingham store

Several dealers and former Kona employees mentioned the May 31 closure of the brand's hometown retail store. When Kona opened the store in 2015, the company told BRAIN it was intended to help it better understand retailing and test merchandising ideas. It also hosted events for visiting Kona dealers.

A 2015 photo of Kona's Bellingham, Washington, store.Dealers and former employees said the closure suggested Kona was struggling and moving away from the IBD channel. Oddly, in 2015 some Kona dealers told BRAIN they were concerned that opening the store was a sign that Kona was abandoning the IBD network.

Halcrow told BRAIN the store's time had come.

"The Kona Bike Shop had a great eight-year run in Bellingham. We're grateful to the staff and the community of cyclists who trusted us with their setups over the years. We closed the shop to better focus on the thing we do best: dream up and make great bikes," he said.

'Not suffering'

Halcrow's June 7 email to dealers referred to the inventory challenges faced by the entire industry.

"We have been confronted with post-pandemic excess inventory and a rightsizing of consumer demand alongside our competitors," the email said.

But Halcrow told BRAIN that the brand is taking steps to deal with the current conditions.

"We're not immune to the marketplace conditions affecting our industry and others, including excess inventory post-pandemic. But we're not suffering," he said.

"It's motivation to evolve in a marketplace that's changing. We believe the changes we're making today are the right ones for Kona's future.

Longtime Kona dealer and athlete Erik Tonkin, owner of Sellwood Cycle Repair in Portland, Oregon, said he's taking a wait-and-see approach to Kona's recent announcements. Tonkin noted that Sellwood added Norco bikes recently but said he'd been talking to that brand since before Kona's sale in 2022.

"I'm not a big panicker," Tonkin said. "I think my fears around this are a little less tied to the click-and-collect thing and more to (Kona's) changes to their standard business practices. Looking at the scenario where their U.S. sales team went from 10 to three people in the last year ... it's a clear message that the focus is not going to be on the IBD landscape."

Another dealer, who asked not to be named, said he viewed the moves as "maybe, hopefully, good for Kona, but bad for dealers ... I've expressed my dissatisfaction already with the company but it's their company, their choice."

Michael Roberts, the North Carolina Kona dealer, said he's lost trust in the brand.

"COVID changed a lot of things, and we've been blessed that we've been able to take advantage of some things and put ourselves in a pretty good position," he said.

"But when one of your main lines does something like this, they break all trust with you. You don't know what they'll do next. Are they going to end up in department stores? Are they going to wind up selling bikes wholesale online?"

Roberts noted that Kona is discounting its bikes online. Epic Cycles also carries Rocky Mountain, Intense, and Jamis at its two locations.

"We're just going to discount (our Kona inventory) and get rid of them and drop the line," he said.

A 2015 photo of Kona's Bellingham, Washington, store.

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