The independent bicycle store (IBS) purchases the frameset from the bike brand for $1,500 per frame. This is the variable cost of the IBS. Fixed costs for the IBS include payroll expenses, overhead and administration. Additionally, the IBS might have to borrow money to finance the purchase of next year's inventory, or the IBS has chosen to purchase the building where it is located. This implies another fixed cost in the form of interest expense. Effective tax rate is 35%.
The National Association of Bicycle Retailers estimates in their annual survey on the industry that operating expenses as a percentage of sales for the average IBS is as follows: payroll expenses: 20.5%, occupancy expenses: 7.7%, advertising and promotion: 3.0% and everything else: 5.8% (shipping, depreciation, insurance, licenses, professional services, office supplies, travel, etc). Total operating expenses, as a percentage of gross revenues, is estimated to be 37%. Frame and Wheel uses these figures in the example above. The NBDA also provides estimates on average margins for the IBS: income before tax as a percentage of sales (4.2%), gross margins on bicycle sales (36%), gross margin on clothing sales (43%) and gross margin on other equipment (48.1%).
Payroll is the largest expense (20.5% of gross revenue) because the IBS employs the owner, a mechanic or two and perhaps a sales person. During the riding season, seasonal staff are added. Mechanics are needed because they build the bicycles when they arrive from the manufacturer, and they fix the bicycles when customers bring them in. Sales persons are employed so that there is a person dedicated to the job. Employing staff and paying their benefits (social security taxes, health care, state employment taxes) is expensive. Overhead is the next largest expense (7.7%) because the IBS needs a large space in a premium location. The IBS benefits if the location is accessible by foot and by bicycle. Convenient parking is important if accessible by car. Large spaces in premium locations are very expensive.
Traditional / per frame | Factory | Bike Brand | IBS |
Revenue | 500 | 1500 | 2500 |
Cogs | 100 | 500 | 1500 |
Gross profit | 400 | 1000 | 1000 |
Operating expenses | |||
Staff | 75 | 150 | 513 |
Overhead | 125 | 100 | 193 |
Marketing, R&D, admin | 25 | 300 | 243 |
Total | 225 | 550 | 948 |
Operating income | 175 | 450 | 52.5 |
Interest expense | 50 | 100 | 10 |
Income before tax | 125 | 350 | 42.5 |
Tax | 25 | 123 | 15 |
Net profit | 100 | 228 | 28 |
Gross income margin | 80.0% | 66.7% | 40.0% |
Operating income margin | 35.0% | 30.0% | 2.1% |
Income before tax margin | 25.0% | 23.3% | 1.7% |
Net income margin | 20.0% | 15.2% | 1.1% |
OPEX as % revenue | 45.0% | 36.7% | 37.9% |
The National Association of Bicycle Retailers estimates in their annual survey on the industry that operating expenses as a percentage of sales for the average IBS is as follows: payroll expenses: 20.5%, occupancy expenses: 7.7%, advertising and promotion: 3.0% and everything else: 5.8% (shipping, depreciation, insurance, licenses, professional services, office supplies, travel, etc). Total operating expenses, as a percentage of gross revenues, is estimated to be 37%. Frame and Wheel uses these figures in the example above. The NBDA also provides estimates on average margins for the IBS: income before tax as a percentage of sales (4.2%), gross margins on bicycle sales (36%), gross margin on clothing sales (43%) and gross margin on other equipment (48.1%).
Payroll is the largest expense (20.5% of gross revenue) because the IBS employs the owner, a mechanic or two and perhaps a sales person. During the riding season, seasonal staff are added. Mechanics are needed because they build the bicycles when they arrive from the manufacturer, and they fix the bicycles when customers bring them in. Sales persons are employed so that there is a person dedicated to the job. Employing staff and paying their benefits (social security taxes, health care, state employment taxes) is expensive. Overhead is the next largest expense (7.7%) because the IBS needs a large space in a premium location. The IBS benefits if the location is accessible by foot and by bicycle. Convenient parking is important if accessible by car. Large spaces in premium locations are very expensive.
Using the assumptions from the NBDA, the IBS generates a net profit after tax of $28 per frame set or a net margin of 1.2% if the selling price of the frameset is $2,500. Not much profit. The IBS loses money on this frameset if the gross margin is 36% as the NBDA estimates. This example demonstrates that high payroll and overhead expenses make selling just framesets unprofitable for the IBS and explains why they sell higher margin accessories and clothing.
The cost structure of the IBS is characteristic of a "push model" of demand where manufacturers produce the product and then push it out into the distribution network. The IBS has high overhead because it needs a large space to store the inventory that the manufacturer produces in high volume and thrusts upon it. Additionally, the IBS has high labor costs, because it needs people to manage the inventory and then push the product into the market. Frame and Wheel believes that a pull model of demand will allow the IBS to carry smaller inventory in smaller spaces, match supply more efficiently with demand, take less risk and reallocate staff resources to providing fitting, maintenance, procurement and other value added support support services.
No comments:
Post a Comment