Discounting of framesets

Frame and Wheel read a briefing about Ford Motor company in The Economist Magazine that pointed out a number of reasons for that company's recovery from financial disaster just two years ago. A lot of it was a change of  management style, but the other reason was the company's ability to come to terms with its overcapacity, at least in North America. The company had too much capacity and was thus making more cars than the market could absorb. Consequently, discounting at the dealerships was rife. In the end, the company did close factories, and the the result was a better match between supply of Ford cars and demand for Ford cars, and thus less discounting. The company also did some innovative marketing plans that Frame and Wheel plans to emulate with its test riders

Frame and Wheel also read a story about how luxury car brands are managing their inventories. This article points out that the luxury market is becoming a made to order business, and that every car that is on the lot is increasingly already reserved for a buyer. The article also points out that buyers have to wait and end up paying more, but they get the car they want. Essentially, this trend means that there is less discounting of cars.

Both of these articles resonate with Frame and Wheel because they show that "push" industries like the auto industry are increasingly moving to "pull" models, at least in the higher end of the market, where buyers are prepared to wait. Additionally, these articles identify the problem of discounting, a practice that still remains wildly common in the bicycle industry (visit any bicycle retailer this time of year and you will witness the discounting first hand). Discounting eroded margins for Ford, and undermined the value of the brand in the eyes of the market, and it was primarily a result of over capacity that was put in place to generate the economies of scale that all push models hold sacred. The auto industry is taking more care to control over capacity, but it is not clear that the bicycle industry is doing that too.

These articles made Frame and Wheel recognize that "write-offs" or "write-downs" on the value of inventory is also a cost that affects both bicycle brands and the independent bicycle shop. Write-offs are non-cash expenses that reflect the value a bicycle loses as time goes by and newer more advanced models are introduced; it is the quantification of planned obsolescence and like a car it is about 30% per year. These are non cash expenses that appear on the profit and loss account as depreciation. 

Using the example from the previous post, an IBS buys a frame for $1,500 from the bicycle brand, but is unable to sell it. When they do their inventory (that ominous time at the end of the year when the IBS is closed all week), they review wether they are likely to sell it next year by discounting its retail price to say $1,900 or wether they should write it off as an item that is unlikely to sell because a newer version of the same model is due out in the next year. In that case, the IBS might sell the frameset on eBay and get a salvage value of $500 for it, and then recognize a write-off of $1,000 on the income statement. Remarkably, many IBS are not allowed to sell their excess inventory on eBay because of dealership agreements, which explains why at some IBS, there are bikes from previous years hanging form the ceiling and lurking in the store rooms out back. Thus IBS are forced to sit on huge inventory losses, which at some point begin to reflect badly on the image of the IBS.

Frame and Wheel believes that a pull model of demand, where the framesets are ordered by the IBS for the customer six months in advance, combined with the agency model, where the IBS receives a commission or an interconnection payment on each frameset delivered to the IBS, will result in less discounting, fewer write-offs and more efficient allocation of IBS resources. this changes a cost and turns it into a revenue. Frame and Wheel also believes that the stigma of auctioning items on eBay is misplaced:  the price paid on eBay is what the market will bear; it is not an arbitrary price set by the manufacturer (to cover high overheads and large sales forces) that is ultimately discounted. Finally, a refund policy that allows the consumer to return the frameset after three years of use to the manufacturer for a credit or cash towards a new frame makes sense from a sustainability standpoint and allows the consumer to benefit more easily from the salvage value in the frameset.