Shut Up and Drink the Kool-Aid!

Bad news brewing for the bike industry?

(Cross-posted over at my other blog...)

For years now, the bike industry has been riding a wave of popularity not unlike the "bike boom" of the 70's. Not only has this boom been good to the US bike industry, but the entire worldwide bike industry as well. It's been a really good ride, but almost all of us in the idnustry knew it would have to come to an end one day.

The world is not going to come to an end for the bike industry or for cycling enthusiasts and consumer, but there is going to be some noticeable change very soon.

Bicycle sales, especially in the US market, have been doing very well over the past 10 years. In many markets, that can be traced back directly to that Lance Armstrong guy and all those French bike races he managed to win. At least one brand really made out well on that deal, but at the same time many of the rest of us got a boost from their good fortune. Road bike sales climbed to an all-time high during the peak of the boom. Other categories faired pretty well too, in the end, with overall interest in cycling reaching higher levels than ever before. All in all, the past several years have been good to the bike industry.

The very competitive nature of the industry has lead to incredible values for consumers. Many years ago, a $1,000 bike was a pretty good bike. Maybe even a great bike. But now, the amount of product and technology present on a $1,000 bike is amazing. It is still possible to buy a bike that is not worth the money you pay for it- at all ends of the pricing spectrum- but it is pretty hard to. Technology and manufacturing have created a time where consumers typically get a very good product for the money they spend- this is especially true of bikes sold in the IBD/ specialty retail channel (ie- not Wal-Mart, Toys-R-Us, etc).

The down side of all of this pricing competition has meant that many manufacturers (and retailers) have had to operate with incredibly small profit margins- selling at lower than reasonable prices to gain market share. In essence, buying floor space (at the wholesale level) or buying loyalty (at the retail level). Thing is, it's hard to keep a business afloat like that and it is the major reason brands or stores come and go from the bike industry. Worst of all, when you operate on such narrow margins, any kind of increase in costs of goods means an increase in ultimate sell price...

... which brings us to my point...

Over the past few months, the bike industry has seen the "perfect storm" of circumstances hit it (like much of the rest of the economy); a slumping US and global economy, a massive increase in manufacturing costs, a dramatic jump in labor costs in both Taiwan and China, a sharp drop in the value of the US dollar and an increase in value of nearly every other global currency. The Taiwanese dollar, the NT, has gone from a little over $34NT/ $1US to just barely over $30NT/ $1US in just over 3 years. That may not seem like much, but it adds up quickly and doesn't even take into consideration any of the cost increases- that is just a loss in currency value. When you add in the cost increases for the actual products, it can become significant very quickly.

By some estimates, the cost of steel alone is going up as much as 65%! For my brand, which is heavily biased towards steel these days, that spells some pretty serious sleepless nights. Aluminum is going up. Carbon is going up. Anything petroleum-based is going up- like the materials used to make handlebar tapes and saddles. These costs are increasing leadtimes significantly as well, since many vendors are now unwilling or unable to spend the money to stock vast quantities of materials. This means that they need to order more often to meet their demands, but at least they don't have their capital resources tied up in raw materials.

In China, recent laws there are forcing a much needed increase in wages being paid to factory workers- as well as limiting the amount of overtime a worker can work. These are good changes, but they mean an increase in costs just the same. In Taiwan, there is a massive shortage of qualified skilled labor. The bike industry was once one of the best paying in Taiwan, but the rise in power of the tech industries there has drawn in a lot of the once strong work force in the bike industry. So now wages have gone up to compete for and retain good labor. It's a good time to be a factory worker in both China and Taiwan... or at least a better time.

In the past few months, I have seen 3 and 4 price increases from the same vendors. Just in the past 6 months- from some of the biggest names in the industry. Some vendors will not even quote a price any longer until they have a firm PO and then the pricing is only good for that one PO. This makes it impossible to accurately forecast the cost of a product and very difficult to create a selling price- when you have no idea if you will be making money on the product in 6 months. For me and the other brands at Haro, we print one price list per season and we live with that pricing for the duration of that product cycle/ season. This year though, we've had to issue a price increase to compensate for some of the price increases we've seen recently. We do our best to absorb those increases and preserve the pricing we've created, but when you are seeing double-digit increases, it becomes impossible to swallow all of those costs.

What does all this mean? Well, it certainly means there is a lot of nervousness in the bike industry right now. Many of us are very concerned about what the consumer is going to do; will they simply stop buying bikes (partly in thanks to what the economy is doing as well), or will they understand that we (the manufacturers and retailers) simply have no choice if we wish to stay in business? Some of us smaller players even worry if the Big Guys will simply eat the increases in the short term to maintain market strength and wait the situation out/ drive competitors from the market. Most things I have seen and heard indicate that those Big Guys are likely to pass on at least a small increase to their customers too. It would be hard to believe that they can afford such an increase in costs without passing along some of that burden. More to the point, it means that prices for Masi Bicycles are going to increase a little. On some bikes it will seem like nothing, but on others it might be more noticeable- when a bike goes from $700 to $775, it is more noticeable than when a bike goes from $4000 to $4300. Based on percentage, it is much less significant and the typical consumer in that higher price market is not as phased by the increase- generically speaking of course.

Bottom line- as much as it sucks, the bike industry is raising prices to slightly compensate for the rapid and painful increase in costs to produce a quality bicycle. I am seeing anywhere from a simple 5% increase to a massive 15-20% increase in my costs... and that's just the ones I know about so far, but that does not mean the retail price (or dealer price) is going up that sharply. In all likelihood... more increases are coming. And coming fast. Does it mean you are getting any less of a bike for the money? No, not at all. It just means that you'll be paying what is a more realistic price for the bike you get. Sure, there will be a slew of new low-spec bikes showing up on the market to keep the perceived necessary price points met. Some manufacturers will undoubtedly find ways to cut spec to keep a certain price (not our plan though). I'm not saying they are wrong to do it and we might find ways to create new models in those sensitive price ranges- it's just going to be a fact of life.

How long should this last and what does it mean long term? Well, that has yet to be accurately predicted to my knowledge. My guess is that prices are not going to be coming down any time soon. The global economy is still looking pretty volatile and the US$ keeps taking a beating. The Chinese Yuan is getting stronger, as is the Taiwan NT, and the Euro and the British Pound... so it is unlikely the Dollar is going to regain enough strength in the short term to eat up the cost increases. The overall volatility is likely to settle down, but as oil/ gas/ petroleum costs remain high, costs of goods will remain high- as will the costs to transport them. The global demand for raw goods- like steel- isn't going to decrease either. China and India, specifically, are eating up massive amounts of resources of raw goods as their economies expand and their development and growth increase as well. So, yeah... it's not too likely things are going to change any time soon to keep prices where they are now. I do predict that some smaller companies (retail and manufacturing) are going to pay the ultimate price for these increases and will either fade into history or be eaten by healthier competitors.

All of this would seem to point to very dark days for the bicycle industry, but things have actually been coming back up a bit after a mild slump in sales the past two years. Road sales have dropped, but are remaining strong- especially at the higher price points- and MTB and BMX are both seeing nice signs of life across the industry. At first glance it would appear that the industry is getting some support from consumers who are seeing the price of their other purchases going up all over the place. Costs of nearly everything across the board are going up... it's just a fact of life right now.

So even though buying a new bicycle might not feel as fun, due to the sudden increase in price, you're still getting a great deal on great products and the industry you are supporting is showing good signs of health... which hopefully means I get to keep my job a bit longer... I hope.

Tim Jackson
Chief Kool-Aid Dispenser

Labels: Bad News, Cost Increases, Health of the Bicycle Industry, Rant

Posted by Tim Jackson at 11:00 PM