Austro-Daimler Olympian

This is an Austro-Daimler Olympian. It has been hanging in our garage for more than twenty-years. It was a mid market bike, not as high end as the Ultima and the Superliecht. It is in pretty good shape, having been ridden very lightly. A bit of rust on the head tube. It has Huret components (long gone French component manufacturer), Weinmann brakes, Reynolds 531 tubing, and Belgium made Wienmann rims and KKT pedals. It is a good example of how confused the corporate identity of Styer-Daimler -Puch was in the mid 80s: the head tube logo is Puch, the side tube Austro-Daimler logo mentions "Made by Puch" and the lettering is blue) and the down tube has three logos: Steyr, Austro-Daimler and Puch. At the time, Steyr-Daimler-Puch was the manufacturer; it was soon broken up and that was the end of Austro-Daimler bicylces in the US. Some other features: there is an A-D imprinted on the shoulders of the fork and a Puch on the seat stays. The gearing on the cranks are 45/54. Weight of this bicycle is about 25lbs. 

The business plan: impact of economy on buyer

The state of the economy will clearly have an impact on demand for performance carbon racing frames; these items are very much discretionary items for all but a very few people. Most consumers will delay purchases of new carbon road frames until their confidence about the economy or spending power improves; other consumers will search for second hand frames on eBay or settle for a lesser expensive model. Some may decide to upgrade their existing frame or repair it. In 2008, when the financial crisis sank in to the local economy, demand for high end carbon frames dropped of a cliff: the local shops were stuck with floors full of bikes, demand was non-existent and sale representatives were trying to stuff more frames into the distribution network because the manufacturers were flooded with frames. Frame and Wheel heard rumors of sales representatives from manufacturers selling frames out of the back of their cars. Clearly, a weak economy has an impact on demand for carbon frame bicycles.

Frame and Wheel believes that less tangible factors such as demographics and passion influence demand for carbon frames. The so called MAMIL (Middle Aged Male in Lycra) wants a carbon frame because he is seeking to improve his fitness, he has the income and all their friends have high end performance bicycles. This market is not very big, but it is a feature of the cycling demographic. Also, committed racing cyclists will buy a new carbon frame regardless of the economy because they need the technology to remain competitive. Clearly, these buyers represent a very small segment of the market: most consumers are middle market buyers who want an affordable bicycle that they can ride out the door.

Frame and Wheel appreciates that its performance carbon frames are more likely to sell in an strong economy. However, the company will adjust prices according to demand using the auction function on eBay. Frame and Wheel takes the view that more consumers are purchasing their cycling equipment on eBay. Indeed, the company's experience selling items on eBay suggests that there is large number of people who prefer to obtain their equipment through this channel. Frame and Wheel postulates selling its frames through this channel using the eBay store function and PayPal, at least at the outset; this will help raise the profile of the company in the on-line market and allow the company to sell frames at a discount using the auction function. 

For example, the full price of the frame could be $2,500, but an auction sale could be arranged with a reserve price of $1,750, implying a 30% discount. This discount is typically what occurs at the end of year sales at the IBS. The company will have to pay fees on each transaction (about $58 for a frame selling for $1,750 and $65 for a frame selling for $2,500) and the company may have to bear shipping costs; nevertheless, these costs are lower than investing cash and time in building an e-commerce function. Additionally, this approach allows the market to set the price and it again encourages buyers to purchase their frames during the off season. 

Traditional authorized dealer model

Frame and Wheel learned about how the traditional authorized dealer model works: the independent bike store (IBS) buys "slots" from the manufacturer; each slot represents one frame or bicycle and those slots are available for one year. For example, the IBS buys 12 slots from a manufacturer and each slot requires a payment of $500 per frame. The IBS pays $6,000 (12 x $500) up front and becomes an authorized dealer for the manufacturer. This is a cash outlay made by the IBS and results in a link on the website, display material, etc; it is the membership fee for joining the club. The manufacturer requires that the IBS must always have a frame in the window. Thus, the IBS orders a frame and pays a wholesale price of say $1,000 for a frame (total cost to the IBS is $1,500 for the frame); the IBS now has 11 slots left (valued at $5,500). The IBS displays the frame in the window or builds the frame up. 

Perhaps the frame retails for $2,000 per frame and it is sold. The IBS gross profit on the frame is $500 ($2,000 less the wholesale cost of $1,000 and less the "slot fee" for the frame of $500). The IBS orders another two frames: one for display and one for a customer. Total cost is $3,000 (2 x $1,000 wholesale plus the 2 x $500 for the slots) and the value of the remaining slots is $4,500. The IBS sells the frame to the customer and generates a gross profit on the frame of $500, but the display frame does not sell. It is the end of the year and the IBS has sold only two frames and one is on the floor on the verge of being made obsolete by the introduction of the manufacturer's new model. The IBS has nine slots left valued at $4,500; this is "rolled over" into the next year less a percentage fee required for the IBS to remain an authorized dealer and to generate additional income for the manufacturer (the fee is say 3% or $135 in this example: 3% x $4,500). 

This is a simple example for a small IBS and perhaps it does not apply to all IBS. Nevertheless, it helps quantify the cost of being an authorized dealer. An IBS that wants to have 12 slots for three different brands might be looking at an investment of $18,000 in authorized dealership agreements. Additionally, manufacturers require the IBS to carry a range of sizes and to make purchases of more slots at the end of the season in order to remain an authorized dealer. They may require a frame to be fully built up and hanging in the window or positioned right at the front door; this is a detail dealer representatives check on. Meanwhile, the IBS is not permitted to sell the outdated frame or bicycle on eBay in order to recoup its investment. Frame and Wheel learned that with that with some manufacturers discounting the price below the MRSP is not permitted unless it is part of an organized campaign from the manufacturer. This  increases the chance of an outdated frame languishing on the floor of the shop collecting dust and growing obsolete This example certainly has some variation to it but it quantifies the costliness and riskiness of the traditional model.

The business plan: geographic market

Frame and Wheel uses the Internet and the Independent Bicycle Store (IBS) channels for distribution. The company positions itself as a "crossover brand" which means that the frame can be obtained either directly from the company and sent to the customers favorite bike shop or through the customer's favorite IBS. The company uses the agency model and takes the view that working with the IBS channel is better for the company, the consumer and the IBS. Frame and Wheel is based in the Northeast and this region apparently represent 40% of the cycling market; although the region will be the company's target market, the company is using the Internet to sell the frames, and this means that the company's reach is global.
Frame and Wheel notes with interest the disclaimers that can be found at the bottom of the websites of some of the IBS that sell bicycles on the Internet. These statements say in effect that if you are outside of the USA you cannot buy the bicycle from an IBS that is selling the bicycle in the USA; you have to buy the bicycle from the dealer in your country or region. Although the big on line bicycle retailers do not require this, the point is that the Internet opens up the global market to consumers and they want to be able to shop in different countries or regions if they choose. Frame and Wheel will not require that a consumer buy the frame from only a dealer in their country or region.

The business plan: market saturation

Frame and Wheel takes the view that the market is saturated with carbon racing road frames. If you type in carbon road frame into eBay, you find thousands of new, generic carbon road frames listed for $300 per frame, the excess inventory of distributors of Asian manufacturers, no doubt. Not many of these frames are selling primarily because they are generic (they have no brand) and they are old designs. Additionally, the consumer has no idea what they are getting; it all looks very dodgy. Add to that the thousands of branded carbon road frames that are being pumped out each day by the big manufacturers and pushed out into the market through the IBS distribution channel. The market is clearly awash in carbon and it makes one wonder where all of the old carbon frames go once people are done with them (Indeed, Frame and Wheel has a recycling program just for this purpose).

Frame and Wheel takes a less scientific approach to determining market saturation. Everyone at the races in New England is on a carbon road frame. Frame and Wheel's primary competitors at the races are on the following frames: Trek, Giant, Cannondale, Ridley, Specialized, Cervelo, Scott, Fuji and Look. However, Frame and Wheel rarely sees classic brands such as Bianchi, Pinarello, Raleigh, Eddy Merckx, Colnago and DeRosa. Although these brands are certainly there, they are not ridden by the riders who are usually at the front. This suggests that the more competitive riders are riding newer brands and the less serious riders are on older more classic brands. Frame and Wheel beleives that the market is saturated with carbon road frames brands from the big three (Trek, Specialized and Giant) and the newer brands, but less so with the classic brands. On this basis, there is room in the market for a cross over classic brand that is brought to market using a scaled out production and distribution network, a demand pull model and mass production techniques for sophisticated services. 

Frame and Wheel notes that the market is devoid of any classic brands from Northern Continental Europe. This is probably a function of this local market. A riding friend who lives in London mentions that the club rides are full of Italian brands (Colnago, Pinarello, etc) and that many bikes are set up using Campagnolo. It has been a long time since Frame and Wheel has seen a bicycle in New England set up with Campagnolo. Interestingly enough, a rider in Maine described to Frame And Wheel his preference for Campagnolo components and the lack of choice in the local market. This rider had just purchased an Italian frame on line too. He is a model example of the cyclist consumer today.

The business plan: market size

 Frame and Wheel makes an estimate on the size of the market for its frames, knowing full well that it is probably a lot smaller than what the figures suggest.

People who ride bikes	%	m
For sport	6.0%	2.3
For racing	8.0%	3.0
Total	14.0%	5.3

The National Bicycle Dealer Association 2009 report estimates that there are 38.1m people in the US over age seven who ride their bikes more than six times in 2009. The report also points out that 73% of adult cyclist ride for recreation, 53% for fitness, 10% for commuting, 8% for racing and 6% for sport (some people ride in multiple ways). Based on these numbers, Frame and Wheel estimates that the target market in the US is the 14% of adult cyclists who ride for racing or sport. This works out to 5.3m cyclists. This conclusion does not reconcile with the number of licensed racing cyclists in the US: 72,000 cyclists. However, it quantifies the fact that there are cyclists out there who race using one day licenses and cyclists  who race at unsponsored events. It also quantifies the number of cyclists who only ride at club rides or for sport.

The business plan: NBDA report 2009

Below is a summary of key points from the National Bicycle Dealer Association (NABD). 

• Total value of bicycle sales in the US decreased 7% y-y to $5.4b in 2009
• Unit sales volume of bicycles (> 20" wheels) decreased 24% y-y in 2009
• There were 4,200 specialty bicycle stores (SBS) in 2009
• SBS accounted for 18% of volume sales and 50% of value sales
• 38.1m Americans age 7 or older rode their bicycles more than 6 times in 2009 (2008: 38.7m).
• Adult cyclists use their bikes as follows: recreation (73%); fitness (53%); commuting (10%); racing (8%); sport (6%).
• 2,000 companies are involved in manufacturing and distribution
• There are about 150 brands.
• Hybrid and cross bicycles accounted for 20.4% of SBS sales in 2009 (2008: 19.0%).
• Road bicycles accounted for 14.9% of SBS sales in 2009 (2008: 13.0%).
• 99.5% of bicycles sold in the US were imported from China and Taiwan.
• The industry is dependent on free global trade.
• SBS revenue breakdown: 47% bicycles, 36% accessories, 11% repair, 1% rental, 2% fitness gear and 4% other.
• Gross margin for bicycles is 37%; break-even point is 39%
• Gross margin on hard goods are 48%

The report notes a positive outlook for the industry given increased interest in sustainability, environment and the impact rising gasoline prices have had on demand for bicycles and service; the report notes increased spending by the federal government on bicycle infrastructure; and, points out that stability is the key objective for the industry. The report notes that there is little brand crossover between channels: in other words, one does not find a Trek at Wal-Mart or a Huffy at a high end independent bike store. 

Bicycle sales breakdown 2009

2009	Volume	Value	$ b	units m	per unit	ratio
Department stores	73.0%	32.0%	1.8	10.9	165	0
IBS	18.0%	50.0%	2.8	2.7	1,044	3
Outdoor specialty	5.8%	2.0%	0.1	0.9	130	0
Chain sporting goods	4.0%	5.0%	0.3	0.6	470	1
Internet	3.0%	5.9%	0.3	0.4	739	2

Frame and Wheel crunched these numbers while trying to answer the saturation question. The table above shows that the IBS remains the most important and valuable distribution channel in the industry: it sells only 18% of the volume, but accounts for 50% of the value. This implies that the average price per bicycle is about $1,000 per bicycle. Department stores account for 73% of the volume, but just 32% of the value because the bicycle they are selling are mass market products with an average price of $165 (based on the numbers above). Interestingly, the distribution channel that has the next highest per unit value is the Internet at $739 per unit. The Internet channel accounts for 3% of sales volume but almost 6% of sales value. This implies that consumers are ready to buy higher value product on line. 

Frame and Wheel's agency model positions it to be a "crossover brand" between the Internet and the independent bicycle store. This means that the consumer will be able to buy the frame directly from the company (direct channel) or through their favorite independent bike store (indirect channel). These two channels are clearly the most important ones for the company's target market and they are not necessarily exclusive to each other.

The business plan: some demographics

Frame and Wheel spotted a piece in the Catskill Mountain Region Guide for July 2010: it has a section titled The Sport of Cycling in the USA. Frame and Wheel believes that these stats are from USA Cycling. Here are the bullet points:

• There are 72,000 licensed cycling racers in the United States
• Median age is 34 years old
• Median household income is over $80,000
• 81% have college degrees
• 27% have post graduate degrees
• 57% of licensed racers are in professional / managerial positions
• 35% are married

The business plan: affordability and justification

The company expects the retail price for its frame to be $2500 per frame or about 2.5x on a price to weight ratio basis. The average retail price for name brand carbon performance frames that Frame and Wheel beleives will be competitors is about $3,000 per frame. Frame and Wheel will be about 23% less than the market average of 3.2x on a price to weight ratio basis. The penetration of carbon frames at this price point and above suggests that the consumer can afford frames priced at this level. Consumers are justifying the purchase based on weight as well as the brand name recognition of the brand. Important factors include which pro temas use the frame, is the frame in the Tour de France, do other serious cyclists in the consumers immediate region use the frame, etc. Consumers also justify the expenditure because they ride frequently in order to stay fit and thus the bike equipment is viewed as a necessary piece of equipment for that purpose; there is also the notion that if you ride or race a lot you might as well use a good piece of equipment. Finally, consumers can justify the purchase if they know that other people view the brand as a good one and worth the money; no one wants to be spend large sums of money on a brand that is unknown or disliked.

The business plan: can the customer buy

Frame and Wheel saw an article in a local magazine in July of this year that summarized the demographics of the cycling market. The article complemented a story about the Tour of the Catskills and made the following observations. Cyclists are on average about 35 years old, they are married with families and they hold professional jobs and earn about $80,000 a year. Frames and Wheels would add that the average cyclists increasingly buys their gear on line: pre-race parking lot banter is full of conversations about where and how a frame or bike was obtained on line. USA Cycling breaks down its 66,800 membership in their 2009  demographic report: 87% of USA Cycling members are men, 17% are from California, 31% are age 35-44 and 22% are 45-54 (or in other words 53% of the membership of this organization is a masters or enthusiast cyclist). USA Cycling notes that membership increased about 6% in 2009.  Of course, more work is needed on this question, but these numbers suggest that the average cyclist has the income and the interest in obtaining a performance frame. Accessibility is the challenge for the company. 

Frame and Wheel envisages scaling out distribution using the agency model and the Internet. The agency model means that an Independent Bike Store (IBS) can become an agent of the brand without any cost or risk: they perhaps obtain some basic display merchandise and a link from the website; they are not obligated to purchase an inventory of bikes (they can purchase a demonstration bike if they wish); they order a frame when a customer wants one. They are rewarded a commission on every frame they order from the company. To get the agency model established, Frame and Wheel will scale out distribution by using eBay Stores. This is a low cost and effective way to reach consumers. The company will offer to send the frame to the customer’s favorite IBS and when this happens, the company will have a reference for potential agents. 

Frame and Wheel plans to experiment with the idea of using the auction method to sell frames: the reserve price will be set high enough for the company to make its profit, but at a level that generates interest to the consumer. For example, the reserve price might be set at $1,600, and from there market demand can determine the premium and ultimately the retail price. This makes sense to the company because it encourages consumers to purchase frames during the off season when there is less demand; it also means that extra large or small sized frames might sell for less than the standard size frames, reflecting more accurately supply and demand. Most importantly, the company will provide all the benefits typically provided to buyers of new frames: warranty, crash replacement, customer service, some free merchandise, etc. The risk is that the consumers might assume that the frame is used or second hand and it may therefore dilute the value of the brand. It could also create pricing complexities for an existing agent and it might be too time consuming for the company to manage all the auctions. Nevertheless, it might be a good way to start out.

The business plan: the target market

This is an interesting article about the cycling market in Britain. It is titled the The Rise of the Mamil (Middle Aged Men in Lycra). It is tongue in cheek, but there are some relevant facts: many cyclists are older, say between 35-44 years of age, and they have enough income to buy bikes like the Pinarello Dogma (a frame that retails for $5,500). The article suggests that this behavior is a function of a mid life crisis for men and that rather than buy a car or a motorcycle, they are buying high end frames so that they can get out and get fit. It describes the club scene in pretty good detail. Frames and Wheels knows from riding in the club rides and at the races that there are many riders in this deomgraphic.

The business plan: Can the company compete?

Frame and Wheel can not compete directly with any of the existing manufacturers and does not plan to. These companies have established brand names and loyal customers, comprehensive national and global distribution networks, huge factories that create massive economies of scale, deep resources and huge marketing budgets. They also compete in the low, middle and high end of the market: they try to be all things to all consumers. Additionally, Frame and Wheel will be hard pressed to compete with the smaller boutique manufacturers and the custom frame shops: these companies have track records and bikes that are already on the road. 

Frame and Wheel can compete because it does not have to follow the existing rules of distribution, pricing and production that characterize the bicycle industry today. For example, instead of requiring an independent bicycle store (IBS) to become a dealer and then stuff them with inventory at the end of each year, the company can use the agency model and allow the IBS to purchase frames when there is demand. Alternatively, the company can sell frames directly to consumers and then have the frames shipped to the consumer or to the consumer's favorite local bike store. Or, the company can use ebay to auction the frames to consumers without requiring the consumer to sacrifice the benefits of warranty or crash replacement programs while simultaneously rewarding consumers for purchasing their frames during the off season. In simple terms, the company is not beholden to the existing business model and can adopt the strategies and policies that benefit the consumer and the IBS. The industry is ripe a change.

The business plan: Who is the competition

Frames and Wheels ranks the framesets of the competition according to the price to weight ratio. This ratio is the retail price of the frameset divided by its weight; it gives an indication of how many dollars the consumer is paying per gram of weight. Based on the universe of framesets below, the average weight for a performance road frameset is about 955 grams and the average retail price is $3,100 per frameset.  The price to weight ratio for this universe of framesets is 3.2x. In other words, the consumer is paying about $3.20 for each gram of frameset weight. Frames and Wheels will continue to expand this analysis to broaden the universe and add more detail.

In this analysis, the most costly frameset is the Pinarello Dogma 60.1 at $5.80 per gram of weight. This represents a 78% premium to the marketaverage (3.2x) and can be explained by Pinarello's position in the market as the ultimate brand in racing, or at least among the oldest(but not the most common in New England anyway). Right behind Pinarello is the Trek 6.9 Series which retails at a 32% premium to the market average. The premium on Trek frames perhaps can be explained by its strong association with Lance Armstrong and the Tour de France.  The BH G5 is priced at a 26% premium to the market and is comparable to the premium of the Cannondale Supersix Ultimate (22%). BH is relatively new to the US market, but is nevertheless positioning itself with other premium brands. It does have the advantage of being a frame used by professional teams in the Tour de France.
Specialized Tarmac and CerveloR3 are priced at 5% and 2% premium to the market. This is a small premium and explains the high market share for these brands: Frames and Wheels sees many Specialized Tarmacs and Cervelo R3s at the races. Clearly, these frames are not cheap but on a price to weight basis and relative to the market, they represent good value. Both frames also benefit from the tremendous exposure they receive from the Tour de France (Contador and Schleck both rode Tarmacs and Cervelo has its own Team) and the brands have comprehensive warranty programs, crash replacement programs and cusotmer support (important for the IBS). Ridely is priced at similarly low premium to the market, but has not yet achieved the same kind of market penetration. However, Frames and Wheels sees more of these frames at the races.

Brand	Model	MRSP (USD)	Weight (grams)	Price to weight (x)	Premium / (discount) %
Pinarello	Dogma 60.1	5,500	950	5.8	78
Trek	Madone 6.9	3,500	815	4.3	32
BH	G5	3,300	810	4.1	26
Cannondale	Super Six Ult.	3,800	960	4.0	22
Scott	Addict R1	3,000	800	3.8	16
Ridely	Helium	3,100	900	3.4	6
Specialized	Tarmac SL3	2,900	850	3.4	5
Cervelo	R3	3,100	940	3.3	2
Fuji	SL	3,000	920	3.3	0
Jamis	Xenith SL	2,800	890	3.1	-3
Cervelo	S2	3,100	1000	3.1	-4
Giant	TCR Adv SL	2,750	900	3.1	-6
Fuji	SST	3,100	1040	3.0	-8
Ridely	Noah	3,500	1200	2.9	-10
Parlee	Z4	2,500	890	2.8	-13
Guru	Evolvo	2,500	990	2.5	-22
Austro-Daimler	Superleicht	2,500	1000	2.5	-23
Look	585	2,250	990	2.3	-30
Felt	F1 Sprint	2,700	1210	2.2	-31
Colnago	CLX 2.0	2,200	1050	2.1	-35
	Average	3,055	955	3.2

The Colnago CLX is priced at a 35% discount to the market average of 3.2x whcih makes it the best value in this analysis. However, the big discount could also mean that the brand is not in favor with the market, despite its Italian origins, its long racing history and its use by professional teams. Perhaps Frames and Wheels is not conisdering the right frame in this analysis, but given that its weight is comparable to the Cervelo S2 and the Fuji SST, it seems justifiable to include it. Colnago is very much a premium brand and it may be the case that the brand appeals only to the consumers who are purchasing higher end models. Meanwhile, the Felt F1 Sprint is priced at a 31% discount to the market average and represents very good value for the consumer. However, Frames and Wheels does not see too many Felts at the races and is puzzled by this: the frames are used in the Tour de France and they are understood to be good frames. Frames and Wheels gets the sense that the frame is more popular with the middle portion of the market. For example, Felt bikes can be found at Eastern Mountain Sports whcih is not a cycling specific retailer.

This analysis helps quantify the premium effect in cycling: The Pinarello Dogma weighs 950 grams and retails fro $5,500; the Parlee Z4 weighs 890 grams and reatils for $2,500. The Dogma is priced at a massive 78% premium to the market and the Z4 is priced at a 13% discount; yet consumers still buy the Pinarello (although Frames and Wheels has only seen a few).Clearly, the reputation of the Pinarello brand is at work here. Pinarello has been around for years and is understood to be the luxury brand of frames. However, it is heavier than the relatively new Parlee and more than 2x as costly. Despite this glaring difference, Frames and Wheels beleives that many consumers are reluctant to buy a new brand of frame for fear that they will be perceived as riding something of less value or junky even. It is similar to the markets reaction to a giveaway: something given away for free is perceived as junk; something for whcih a massive premium is demanded is perceived as valuable. It is counter intuitive in a way but Frames and Wheels that this phenomena is at work in the frameset market and will consider it when setting the price for its frames. Frames and Wheels remains committed to the notion of matching supply and demand and will work this in to its pricing strategy. Stay tuned.