What it really costs

Frame and Wheel reads in The Economist Magazine that Life Should be Cheap. This article an elaboration on the principle of frugal innovation, which Frame and Wheel has shamelessly adopted as its guiding management theory. This article touches on the vast disparity between health costs in the West relative to Asia, and describes how manufacturers in Asia can produce medical devices that perform the exact same functions as those in the West, but cost one tenth the price. It is pretty sobering stuff and worth a read. 

The point that resonates with Frame and Wheel is the idea that when it comes to health care, consumers want the very best, and thus they do not care what it costs (the fact that insurance companies are typically paying rather than the consumer doesn't encourage shopping around). This explains why medical device manufacturers in the West can get away with selling devices for hundreds of thousands of dollars, even though the same machine can be obtained from an Asian manufacturer for a tenth of the price. 

Frame and Wheel is not convinced that the consumer fully appreciates that his $2,000 frame costs the bicycle brand $500 or less. Perhaps they are, but then black arts of marketing and branding take over, and the consumer convinces himself to pay a $1,500 premium for a carbon fiber frame that will be obsolete in three years and fully depreciated soon after that. Frame and Wheel reads in the The History of the Bicycle that as far back as the turn of the 19th century, cyclists were paying this premium purely for reasons of perception. The only difference is that now we have eBay, the great arbiter of value, and a ruthless one at that. EBay is a mechanism that through the auction process helps indicate what the salvage value of an item is. Typically, salvage value is not too far off from original cost. 

For example, Frame and Wheel recently auctioned a 2004 Trek 5900 Superlight for $530, a bicycle that retailed for $4,800 in 2004. The auction had 1,500 views, 108 watchers, 27 bids and 16 bidders. It was a healthy auction. The strongest draw for the bike Frame and Wheel believes was its brand as well its relatively light weight; otherwise its components were dated (nine speed) but good quality and the frame had cracks, chips and flaking.  Assume that half of the value is the components and wheels ($265) and the other half is the frame ($265).  For a high volume manufacturer like Trek, $265 per frame does not sound too far off the mark. 

Persistent discounting at retail and the continued popularity of EBay and other online channels suggest to Frame and Wheel that the consumer will soon be (if he is not already) fully educated about the real cost of their frames, wheels, components and other accessories. Epiphanies like this spawn new business models that result in industry upheaval, red ink, corporate whining, lawsuits and so forth. Ultimately though these turning points benefit the consumer. The music, book and car industry have had their moments. Frame and Wheel cannot help but thinking that this moment is not too far away for the bicycle industry.

White and light

Frame and Wheel posts an image of a carbon fiber Austro-Daimler Superleicht. This is apparently a large frame, a 62 cm, with a unique white finish (the original was a yellow "champagne"). This version of the Superleicht is around 1,200 g (2.6 pounds) including frame and fork compared to the original version 2,000 g (4.4 lb). White is elegant, but creates problems when cleaning. The graphics on the frame are very simple by modern standards, and might be too boring for many consumers. The Superleicht lettering appears too close to the center of the top tube, and is the result of inadequate graphic design software. The frame features internal cabling and standard English thread bottom bracket (68 mm). 

More on discounting

Frame and Wheel discussed discounting in a previous post and returns to the topic after receiving numerous emails from on line retailers about year end deals available. Below is table that summarizes the discounts on some complete bicycles and framesets from one retailer:

Brand	Model	Bike	Components	Year	Previous ($)	Current ($)	Disc. (%)	Sizes (cm)
Cervelo	R3	Complete	DA 7900	2010	5,900	3,500	41	3
Cervelo	R3	Complete	Ultegra 6700	2010	4,000	2,400	40	1
Cervelo	RS	Complete	Ultegra 6700	2010	3,600	2,400	33	1
Cervelo	RS	Frameset	-	2010	2,500	1,500	40	1
BMC	SLC 01	Complete	SRAM Force	2010	4,200	2,800	33	17
BMC	SLC 01	Frameset	-	2010	2,600	1,600	38	15
Pinarello	Prince	Frameset	-	2008	5,500	4,000	27	10
Ridley	Noah	Frameset	-	2010	3,250	3,150	3	6
Ridley	Excalibur	Frameset	-	2010	1,900	1,800	5	4

Frame and Wheel assumes that the IBS can obtain a Dura Ace 7900 build kit for about $1,500, and that the IBS purchased the Cervelo R3 frameset for $1,500, or a total cost to the IBS of $3,000. At the beginning of 2010, the Cervelo R3 retails for $5,900; the bike is the same as the previous year, but the finish is different. For whatever reason, there are no buyers for the R3 and in early 2011, the on-line retailer needs to make room for the new 2011 R3s (again the same bike, but with a new finish), and thus wants to recoup its investment in the frame and build kit before it becomes even more dated. Based on Frame and Wheel's assumptions, which are not too far off the mark, it appears that this on-line retailer is selling the 2010 R3 at the beginning of 2011 for $500 more than it bought it for or 16% above its cost compared to almost 100% more than its cost had the IBS been able to sell it at the beginning of 2010. The point is that bicycles lose their value very quickly, even when they sit on the floor of an IBS.

Bike Snob excoriates road cyclists for being "free-loading cheats" and "product-grubbing discount hunters". This seems a bit harsh. Frame and Wheel learned long ago that the best value for a bicycle is obtained by purchasing last year's model right before the arrival of the next year's model. This is not grubbiness, it is ruthless intelligence. Bike Snob has the conservation part right, but the "push"nature of the industry, the huge capacity of the factories in Asia and the industry's tactic of planned obsolesce has conditioned the road cyclist into searching for and demanding discounts. A friend of Frame and Wheel observed that cyclists very rarely pay "full price" for their bikes and accessories. How right he is.

Proof of Liability with bikes

Frame and Wheel recently read Proof of Facts: Proof of Liability for Design, Manufacture, Distribution or Sale of a Defective Bicycle or Component by Eric M. Larsson. This short booklet, intended for lawyers, is very well written and understandable for the lay person.  It is a terrifying read for anyone who is interested in entering the bike business. Nevertheless, Frame and Wheel feels like that it has benefited from the time spent reading it. Some of the key points are this:

• Liability in the bicycle industry is concurrent or "joint and several". This means that everyone along the supply chain is responsible, from the manufacturer, to the wholesaler and to the retailer, although some of these parties might have greater "fault" than the others.
• An assembler of a bicycle can be considered a manufacturer.
• The idea of imposing "strict liability" on the manufacturer and distributor is intended to make sure that these parties know that they are responsible for producing a safe product. The buck stops with them.
• Federal law requires that instruction manuals be sold with the bike. Presently instruction manuals are on bike company websites. The manufacturer must warn the consumer about the risks involved.
• Anyone who puts out as one's own a product manufactured by another is subject to liability as a manufacturer. 
• Federal law requires the bicycle to bear a marking or label that cannot be removed without being defaced or destroyed.
• The marking or label must identify the name of the manufacturer or private labeler; there must be information that allows the manufacturer to identify the month and year of manufacture of the bicycle.
• There are three theories of recovery: strict liability, negligence and breach of warranty.
• Strict liability attaches when a manufacturer puts an article on the market knowing that it is to be used without inspection for defects, and it proves to have a defect that causes injury. Negligence theory means that the plaintiff prove that the defendant knew something was wrong; breach of warranty means that the plaintiff prove that he was using the bicycle in a manner that it was designed for.
• Proof that a defect resulted in an injury is a prerequisite to any recovery.
• The plaintiff must prove the following: there was a defect in the product; the defect made the product unreasonably dangerous; the defect existed at the time the product left the defendant; and, the defect was a direct and proximate cause of plaintiff's injury or loss.
• Product modification may result in defendant avoiding liability.
• Manufacturers must exercise due or utmost care in assuring that their product is safe.
• Conclusions: Frame and Wheel must write and instruction manual about how the consumer should ride the bike and warn about the hazards; Frame and Wheel should have the frames tested with various component packages; Frame and Wheel needs to read the entire Consumer Protection regulations on bicycles 16 CFR 1512.8; Frame and Wheel should test the frames in the United States.

What's in a name

Frame and Wheel appreciates that a good name for anything comes right away. A good name is obvious and requires very little thinking, perhaps because it comes from the heart or from a strong personal experience. Indeed, the more time spent thinking about and searching for the perfect name, the harder it becomes, and sometimes the less satisfactory the result. 

Frame and Wheel admits that from the beginning of this adventure, thinking up a name for the company and the brand has been very difficult. Frame and Wheel struggled to name itself, and arrived at the name "Frame and Wheel" only because it was sufficiently vague about its core business, and that was appropriate at the time. Frame and Wheel must admit that the name has grown on the founder, but it still sounds a bit odd for a high performance racing bicycle brand.

When it came to originate a name for the brand, Frame and Wheel remained stumped; naming the brand after the founder seemed presumptuous given that the founder's race results are not exactly legendary, although the founder is indeed proud of them. Additionally, the United States Trademark and Patent Office (USPTO) does not allow you to trademark a surname. 

Frame and Wheel thus looked around for some old brands that have some lingering luster to them, and that would only need some polishing and technological upgrades, in order to restore them to their former glory. This is the Mini Copper model more or less and it solved the problem of thinking up a name. Frame and Wheel only had to look in the garage for inspiration, where an old Austro-Daimler "Superleicht" languished (it now sits in the office). The idea of restoring this brand came from the heart, and it was based on years of experiences. Although the idea has not yet been completely discarded, the fact is that Frame and Wheel must begin thinking up a new name: it will be easier and highly preferable to being slapped with a writ from a deep pocket corporation, and it will take longer to get established. The inspiration has not yet come to Frame and Wheel, but it will at some point, so long as Frame and Wheel does not think about it, and keeps forging ahead. Learn to suffer with resolve.

The outlook for 2011

Frame and Wheel has pretty much finished answering the questions in the business plan; it was supposed to take one hour, but it took one year. Frame and Wheel will now go back and rewrite the plan; given that most of the ideas have been internalized, it will be easier to write, and some of the ideas will be more concrete. Perhaps this document will be posted on the blog, perhaps not. It will be useful to have in case Frame and Wheel must seek outside financing. The goals for 2011 for Frame and Wheel include setting up a website, opening a Facebook account, opening a Twitter account, and getting a smart phone. Frame and Wheel would also like to post a detailed account of the training camps attended in Chiang Mai, Thailand over the past two years.

This is an image from the New England Championships "A" race held in Milton, Massachusetts in April 1987. The photographer, Jim Goodwin, took a great picture. Frame and Wheel is in the white "B" championship jersey; it was too small, and Frame and Wheel has taken a fashion hint and refrained from wearing socks, like most of the other riders. Frame and Wheel notes how few of the jerseys have any kind of lettering on them; "peleton" is the only word on some dozen riders. Compare this to an image of a dozen riders today and it becomes clear that the idea of sponsorship has become much more common. Frame and Wheel notes that the Oakley sunglasses were in favor because LeMond was making them popular in France. Frame and Wheel is always stunned at how little water was carried. Of course, there are no carbon frames and all the bikes have classic handle bar bends. Frame and Wheel might be on the Mavic MA 32s, but cannot be sure. The race worked out well for Frame and Wheel, but that is a subject for another post.