larry fisher , a former New York Times reporter, writes about business, technology and design.
Published September 15, 2022
Some Econ 101 classes teach the bicycle business as a textbook example of perfect competition. These days it looks more like a perfect storm.
The storm in question is partly the consequence of a pandemic-induced sales boom, which led to broken supply chains, which led to shortages, which led to cautionary outsized orders, which led to a slowdown in demand and bloated inventories. Just to confuse things a bit more, in the midst of glut there are ongoing supply chain constraints on critical components and popular high-end models. And even before the whiplash from Covid, the bike business was facing consolidation along with a shift to company-owned retail outlets (à la Apple or Tesla) and direct-to-consumer online sales — not to mention the swift rise of e-bikes. It’s a lot to cope with, and perfection it’s not.
Perfect competition describes a market with many sellers of identical or nearly identical products, so that no seller is able to raise prices above the level of adequate profitability without losing pretty much all its business. And that’s seemingly the bicycle business, with over 100 bicycle brands in the United States.
But it has long looked quite different at the manufacturing level. Two Taiwan-based companies, Merida Industry and the appropriately named Giant Bicycles, churn out bicycles by the zillions. Moreover, they use largely interchangeable components made by the Japanese conglomerate Shimano or by Chicago-based, privately held SRAM. A $1,000 bike from Brand X looks and feels like a $1,000 bike from Brand Y or Brand Z.
But back to the glut. “It’s a very imbalanced, unprecedented situation, and the industry is not paying attention,” worried Jay Townley, a veteran Schwinn executive turned consultant. “You cannot build this kind of inventory without harm. Warehouses are crammed to the roof and more bikes are still coming into the ports. They’re going to have to now be very careful about what’s coming next, which is markdowns.”
Bikes, Bullwhips and Beer
When Townley talks about the bicycle supply chain, people listen. “I was the corporate officer responsible for shutting down Schwinn’s domestic production in 1982 and getting it offshore in six months,” he said.
Schwinn shuttered a million-square-foot factory in Chicago and moved manufacturing to Taiwan. “We were the leader in globalization, then eventually the Taiwanese industry went to China as their costs went up, and we went with them,” Townley explained. “The Taiwanese own or control probably 80 percent of the Asian bicycle industry,” with production spread across China, Vietnam and Cambodia.
Giant went to school on just-in-time manufacturing, sending legions of new managers to Japan to learn from the master: Toyota. American bicycle manufacturers like Trek and Cannondale closed their factories and became brands, focused on design and marketing. Specialized, the other dominant brand, never manufactured its own bikes. Merida, its primary supplier, purchased 49 percent of the company in 2001. The business model worked well for all concerned until Covid-19.
“The bike industry was really ingrained in JIT, and during Covid, it was jettisoned and they went to JIC (just in case),” Townley quipped. “By 2021, they were bringing in anything they could because consumer demand went wild. But by Q4, the bloom was off the rose, and backups started to occur. Unless something changes, the bicycle industry is in for a worse time than the economy. And it’s because of the bullwhip effect.”
The bullwhip effect is a system dynamics theory based on the work of Jay Forrester, a computer engineer (one of the inventors of random access memory) who joined the MIT Sloan School faculty in the late ’50s. It’s taught using the MIT Sloan Beer Game, a simulation that shows how an unexpectedly large order for beer typically sets off a wave of panic orders and inventory-building to the point of glut, with the effects amplifying along the supply chain back to the factory. Generations of business school students have learned its lessons — but maybe not the ones in charge of the bicycle industry.
“There are no economists in the bike industry,” Townley said. “The industry was lulled into thinking that the surge would go on forever, which is nuts.”
The big box retailers are already slashing prices to move excess inventory. For bike shops, it’s a very different story: they’re still having trouble getting the bikes customers want.
So You Want to Buy a Bicycle
The retail brick-and-mortar bicycle business is bifurcated. Big box stores like Walmart sell millions of bicycles, typically priced below $200 — some with venerable American brand names like Schwinn and Huffy, but all manufactured as commodities in Asia. The independent bike store channel sells bicycles priced from $1,000 to the low five figures from status brands including Trek, Specialized and Cannondale. All are manufactured by the Taiwanese Big Two.
Townley said the big box retailers are already slashing prices to move excess inventory, and The New York Times reported that Liquidity Services has a giant warehouse full of Huffy and Schwinn bikes available at deep discounts. For bike shops, it’s a very different story: they’re still having trouble getting the bikes customers want.
“If somebody wants a bicycle, we have bicycles. But if a consumer gets very focused on a particular product in a particular color with particular components, it can be very challenging to fill that need,” lamented Lars Thomsen, owner of Trailhead Cyclery in Cupertino, California. “We have options, we have substitutes. But these are expensive bikes — $6,000 or more — and people want what they want.”
Trailhead has been in business for 25 years, but Thomsen said recent events have upended his business. “My model has changed from having a bunch of demos on the floor, and then you order a SKU and it shows up in a couple of weeks,” he explained, using a retail industry acronym for stock keeping unit. “Now I order SKUs 12 months in advance, and when they finally arrive those are the bikes I can sell.”
Independent stores like Trailhead now also have to compete with stores owned by the brands they sell. Trek has several hundred company stores in the United States. And many independent Trek dealers also effectively function as Trek stores, with every product they carry, from clothing to chain lube, branded by Trek. Specialized is opening company stores as well, and Pon, a Dutch conglomerate that owns Cannondale, Cervelo and Santa Cruz, among other brands, recently purchased Mike’s Bikes, a Northern California chain.
“Back in the day, independent bicycle retailers opened their stores in territories and competed with others for market share,” said Thomsen. “A shop like mine would compete with Mike’s Bikes. Nowadays there’s Mikes Bikes, but that shop is owned by Pon and they have much more sophisticated marketing capability than I do.”
The Onshoring Option
Ibis Cycles, based in Santa Cruz, California, is an industry anomaly. Founded by Mountain Bike Hall of Fame member Scot Nicol in 1981, Ibis is still owned by Nicol and four core employees. He likes to joke that it was his decision to name the company after a bird rather than the founder that has kept it independent. Consider: Gary Fisher Bicycles, acquired by Trek; Gary Klein Bicycles, acquired by Trek; Keith Bontrager Cycles, acquired by Trek; Greg Lemond Bicycles, acquired by Trek.
About 20 years ago, Ibis shifted manufacturing to Taiwan and later to Vietnam. But last July it introduced the Exie, a carbon-fiber mountain bike that’s made in California. Development times being what they are, the move was underway years before Covid-19 reared its head. But it does demonstrate that domestic manufacturing can be viable.
“Our engineers came up with some ideas about how to make bikes much more efficiently,” Nicol said. “We knew we could make bikes with fewer man-hours and less energy, that are stronger, lighter and stiffer. We wanted to build a very high-end bike with maybe a little more attention to detail than the Asian companies are willing or able to do. Labor is five times as expensive here, but we were able to close that gap.”
The Exie sells for $8,000-plus and Ibis is plainly a maverick. But not the only maverick: Bianchi, the venerable Italian brand, announced last year that it was investing $40 million to fabricate with carbon fiber in Italy. Meanwhile 3T, founded in 1961, declared that it was bringing production back to Italy as well. “With order times that now vary between 500 and 700 days,” Bianchi chief executive Fabrizio Scalzotto told Italian media, “it is the right moment to take production back.”
I learned of the bicycle industry’s embodiment of perfect competition from Rick Vosper’s columns in Bicycle Retailer and Industry News. It began with the proliferation of brands after Schwinn’s Supreme Court loss in 1967 after a decade-long antitrust battle, and the bicycle boom that kicked off with the first Earth Day in 1970 and accelerated with the introduction of mountain bikes later in the decade.
Now fast forward: the industry is dominated by just four brands —Trek, Specialized, Giant (which sells bikes under its own name as well as for others) and the new Pon brands (Cannondale, Santa Cruz, Cervélo et al.) — which Vosper calls the Quadrumvirate. The Quadrumvirate’s strategy has been to control key retailers in each market by tying them as closely as possible to a single brand and locking out competitors. Among the four, only Giant has stated it will not buy or open retail outlets; the other three are rapidly adopting direct-to-consumer or “click and collect” (online sales with local store fulfillment) as well as acquiring brick-and-mortar stores.
“Will the partial integration of the supply chain allow a few dominant players to control the market sufficiently to put an end to more than four decades of perfect competition,” Vosper asks? “It really depends on how large a role the company-owned stores play in the long term and how much revenue the various direct-to-consumer initiatives generate.”