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.