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.

The business plan: who is the competition

The company competes with large and small manufacturers of performace racing bicycle frame sets that sell to the high end of the market through independent bike stores (IBS) and on line.  The company will have its work cut out competing with these companies given the size, resources and brand name recognition of its competitors. However, the company beleives that it will able to compete for the following reasons. First, the company is scaling out distribution by working with independent bike stores (IBS) using the agency model rather than the traditional distribution model. Second, the company scales out production to More Choice, Inc. in Taiwan (an eventually to others) which is able to provide quality carbon frames in much lower volumes and on shorter notice than the larger contract manufacturers. Third, the company provides frames to its IBS agents when the IBS agents have a customer who is ready to buy one rather than requiring distributors to take delivery of an inventory of built up bicycles months in advance. Finally, the company uses mass production techniques to create economies of scale in delivering the frames to its IBS agents and thus allows the IBS to implement measures that create economies of scale in assembly of the bikes.

In more simple terms, the company concentrates its resources on providing high quality road racing frames (not completely built up bicycles) to the "I want it right" market rather than competing in the "I want it now" market which is saturated and dominated by the big manufacturers. The company's business model allows the consumer to use the Internet to make choices and to place orders, but the company does not try to cut out the IBS. The company beleives that most consumers are still going to need the IBS for some services or they will want the community that is associated with the IBS; the company also beleives that the opinion of the IBS about a brand matters a lot. Additionally, the company beleives that it will be able to restore an old premium road frame brand for its frames which will differentiate the company from existing brands, complement the inventory of brands that the IBS offers and allow the company to introduce this new business model to the market. The company recognizes that it is not in a position to innovate frame technology and will leave that to the manufacturers in Asia who are clearly more skilled at such things. However, the company can innovate the processes of bicycle production, distribution and delivery in such a way that all parties benefit.

Scaling out distribution: The Unilever way

The most common example of scaling out distribution is the ice cream truck or, as seen in Thailand, the fish truck. The ice cream truck in the US drives around suburbia playing The Entertainer through a loudspeaker; the children here the music and come running. In Jakarta, the Walls Ice Cream cart plys the narrow streets playing an unforgettable melody with similar effect (Walls Ice Cream is owned by Unilever).  Frames and Wheels rode through a remote town in the hills to the east of Chiang Mai and saw the fish truck: this is a pick up truck with ice coolers in the back full of fish and a large loudspeaker on the roof of the cab through which the driver broadcasts at startling high volume the selection of his inventory (Frames and Wheels saw the cat fish truck). These forms of distribution are common in emerging markets because of poor distribution networks, the remoteness of markets and perhaps poor infrastructure or transportation alternatives that prevent the customer from coming to market.

There is another example from Uilever, the consumer products company. In remote villages in India, the company appoints individuals to become dealers as well as educators for their products. The way Frames and Wheels understands it, there is a distribution point near a target market. But the target market is so remote or impenetratable that selling through traditional kiosks is too costly or difficult. Consequnetly, the company hires the people who use the product the most: in the case of detergent, it is women who run households. These women act as ambassadors for the product and convince their friends and acquaintenaces to use the product too. It is the Avon Lady model, but instead of cosmetics, it is household products. This is a great example of scaling out distribution. Applying this model or something like it to bicycle frames is one that Frames and Wheels will mull over and explore in a later post.

The business plan: who will buy

The buyer of the company's frames are independnet bike stores (IBS) that serve the dedicated amateur cyclist nationwide. The target IBS is located in cities, it has high income, masters cyclists as customers who are "I want it right" rather than "I want it now" consumers; it has accounts with high end component and wheel manufacturers; retains knowedgeable staff and supports amatuer racing among other things. The company seeks to complement the brand selection of an IBS with a choice that is high quality, good value and customized for the consumer and profitable and low risk for the IBS. The company does not envisage selling frames directly to consumers because the consumer will always need and want the support of the IBS. Additionally, the company will always need and want the goodwill and support of the IBS. The company is not trying to cut out the IBS from the market; rather the company seeks to help the IBS reduce its risk and better serve its customers using the principals of frugal innovation. The fundamental difference between the company and other manufacturers is that the company does this by retaining the IBS to be an agent of the company's brand. This allows the IBS to better match supply with demand and liberates the IBS from buying a dozen fully built bicycles up front months in advance.

Motobecane rider at the Catskills

Frames and Wheels met a rider at the Tour of the Catskills bike race over the weekend and learned a lot about why consumers buy these frames on line. This rider was an experienced racer, but he was entering the one day "Assault on Devil's Kitchen" stage; he did not enter the entire race because he knew his fitness was not high enough. He was I think entering the Category Five (35 plus) race or had done so in the past. He was very pleasant and more than happy to talk, which is generally the case for most cyclists when it comes to discussing their bikes. His first name is Ad and I think he is from Scandanavia (but residing in New Jersey).

Ad said that he had heard of Motobecane, but it was not the brand he set out to obtain. It sounded like he was looking for value.  He read reviews about the brand and the bike on line and learned that reviews were generally favorable (although Frames and Wheels had heard less favourable reviews from bike stores, and read some pretty awful reviews on line. But perhaps they are improving their game). He was aware of the background of the company: a business man from Texas had acquired the rights to the brand and others and retained Kinesis, a Taiwanese manufacturer, to make the bikes; he did not seem to have a problem with this. The bikes are assembled in Taiwan and sold directly to consumers on line for pretty competitive prices (no overhead, labor or rent factored into the price). I think Ad had the Motobecane Immortal Ice. I am not sure about components, but I think it was Ultegra; he had a carbon Zipp wheel on the back and a carbon American Classic on the front. Ad had done a lot of customization to the bike. This bike retails for $3,400 when built up with Simano Ultegra 6700 and Mavic wheels.

Ad mentioned that the pricing on the bike was very good; he described a sentiment that Frames and Wheels has heard before: he could order the bike, take all the components off the bike and sell them on eBay and then build up the remaining carbon frame with his own components. Assuming that he could get about $800 for the unused groupset and $400 for the wheels, his cost for the frame would be lowered to $2,200. Frames and Wheels thinks that this is a bit high for 2.7 pound frameset with a somewhat tainted brand, but it is clear that consumers are willing unbundle bikes to save money and get what they want.  Frames and Wheels has also heard of people ordering a Motobecane bike, taking off all the components and then selling the frame on ebay. There are only two Motobecane frames on ebay at the moment and they are offered at about $500 each.

Ad mentioned that he does all of his maintenance himself. He knows how to do it and he also noted that he lives in a rural part of New Jersey; this makes trips to his local bike store difficult. He had never brought his Motobecane to a store for service so he was not sure how they would react if he did. This makes Ad an exceptional consumer: most riders at some point will need some help on something. Nevertheless, Ad is a good example of the type of consumer that is out there. Frames and Wheels also overhead a rider explaining how he had bought his Cervelo R3 on line from another individual. The rider was lamenting the recall for the fork, but I think he was satisfied overall with the purchase (I seem to recall that the frame ahd the new 3T front fork). Anyway, this exchange also supports the conclusion that cyclists are very much at ease buying their frames on line. It also occured to Frames and Wheels that consumers will forgo warranties and crash replacement programs in exhcange for a deep discount on an established and popular brand (such as Cervelo); this suggests that consumers consider carbon frames to be commodities and what they really want is to be seen as having obtained that "great deal" on that really light carbon frame. "Who cares if the thing cracks after one year; the discount was great, the ride was fast and I  can get another  one  on line any time". That is the thinking of the new consumer