The business plan: geographic market

Frame and Wheel uses the Internet and the Independent Bicycle Store (IBS) channels for distribution. The company positions itself as a "crossover brand" which means that the frame can be obtained either directly from the company and sent to the customers favorite bike shop or through the customer's favorite IBS. The company uses the agency model and takes the view that working with the IBS channel is better for the company, the consumer and the IBS. Frame and Wheel is based in the Northeast and this region apparently represent 40% of the cycling market; although the region will be the company's target market, the company is using the Internet to sell the frames, and this means that the company's reach is global.
Frame and Wheel notes with interest the disclaimers that can be found at the bottom of the websites of some of the IBS that sell bicycles on the Internet. These statements say in effect that if you are outside of the USA you cannot buy the bicycle from an IBS that is selling the bicycle in the USA; you have to buy the bicycle from the dealer in your country or region. Although the big on line bicycle retailers do not require this, the point is that the Internet opens up the global market to consumers and they want to be able to shop in different countries or regions if they choose. Frame and Wheel will not require that a consumer buy the frame from only a dealer in their country or region.

The business plan: market saturation

Frame and Wheel takes the view that the market is saturated with carbon racing road frames. If you type in carbon road frame into eBay, you find thousands of new, generic carbon road frames listed for $300 per frame, the excess inventory of distributors of Asian manufacturers, no doubt. Not many of these frames are selling primarily because they are generic (they have no brand) and they are old designs. Additionally, the consumer has no idea what they are getting; it all looks very dodgy. Add to that the thousands of branded carbon road frames that are being pumped out each day by the big manufacturers and pushed out into the market through the IBS distribution channel. The market is clearly awash in carbon and it makes one wonder where all of the old carbon frames go once people are done with them (Indeed, Frame and Wheel has a recycling program just for this purpose).

Frame and Wheel takes a less scientific approach to determining market saturation. Everyone at the races in New England is on a carbon road frame. Frame and Wheel's primary competitors at the races are on the following frames: Trek, Giant, Cannondale, Ridley, Specialized, Cervelo, Scott, Fuji and Look. However, Frame and Wheel rarely sees classic brands such as Bianchi, Pinarello, Raleigh, Eddy Merckx, Colnago and DeRosa. Although these brands are certainly there, they are not ridden by the riders who are usually at the front. This suggests that the more competitive riders are riding newer brands and the less serious riders are on older more classic brands. Frame and Wheel beleives that the market is saturated with carbon road frames brands from the big three (Trek, Specialized and Giant) and the newer brands, but less so with the classic brands. On this basis, there is room in the market for a cross over classic brand that is brought to market using a scaled out production and distribution network, a demand pull model and mass production techniques for sophisticated services. 

Frame and Wheel notes that the market is devoid of any classic brands from Northern Continental Europe. This is probably a function of this local market. A riding friend who lives in London mentions that the club rides are full of Italian brands (Colnago, Pinarello, etc) and that many bikes are set up using Campagnolo. It has been a long time since Frame and Wheel has seen a bicycle in New England set up with Campagnolo. Interestingly enough, a rider in Maine described to Frame And Wheel his preference for Campagnolo components and the lack of choice in the local market. This rider had just purchased an Italian frame on line too. He is a model example of the cyclist consumer today.

The business plan: market size

 Frame and Wheel makes an estimate on the size of the market for its frames, knowing full well that it is probably a lot smaller than what the figures suggest.

People who ride bikes	%	m
For sport	6.0%	2.3
For racing	8.0%	3.0
Total	14.0%	5.3

The National Bicycle Dealer Association 2009 report estimates that there are 38.1m people in the US over age seven who ride their bikes more than six times in 2009. The report also points out that 73% of adult cyclist ride for recreation, 53% for fitness, 10% for commuting, 8% for racing and 6% for sport (some people ride in multiple ways). Based on these numbers, Frame and Wheel estimates that the target market in the US is the 14% of adult cyclists who ride for racing or sport. This works out to 5.3m cyclists. This conclusion does not reconcile with the number of licensed racing cyclists in the US: 72,000 cyclists. However, it quantifies the fact that there are cyclists out there who race using one day licenses and cyclists  who race at unsponsored events. It also quantifies the number of cyclists who only ride at club rides or for sport.

The business plan: NBDA report 2009

Below is a summary of key points from the National Bicycle Dealer Association (NABD). 

• Total value of bicycle sales in the US decreased 7% y-y to $5.4b in 2009
• Unit sales volume of bicycles (> 20" wheels) decreased 24% y-y in 2009
• There were 4,200 specialty bicycle stores (SBS) in 2009
• SBS accounted for 18% of volume sales and 50% of value sales
• 38.1m Americans age 7 or older rode their bicycles more than 6 times in 2009 (2008: 38.7m).
• Adult cyclists use their bikes as follows: recreation (73%); fitness (53%); commuting (10%); racing (8%); sport (6%).
• 2,000 companies are involved in manufacturing and distribution
• There are about 150 brands.
• Hybrid and cross bicycles accounted for 20.4% of SBS sales in 2009 (2008: 19.0%).
• Road bicycles accounted for 14.9% of SBS sales in 2009 (2008: 13.0%).
• 99.5% of bicycles sold in the US were imported from China and Taiwan.
• The industry is dependent on free global trade.
• SBS revenue breakdown: 47% bicycles, 36% accessories, 11% repair, 1% rental, 2% fitness gear and 4% other.
• Gross margin for bicycles is 37%; break-even point is 39%
• Gross margin on hard goods are 48%

The report notes a positive outlook for the industry given increased interest in sustainability, environment and the impact rising gasoline prices have had on demand for bicycles and service; the report notes increased spending by the federal government on bicycle infrastructure; and, points out that stability is the key objective for the industry. The report notes that there is little brand crossover between channels: in other words, one does not find a Trek at Wal-Mart or a Huffy at a high end independent bike store. 

Bicycle sales breakdown 2009

2009	Volume	Value	$ b	units m	per unit	ratio
Department stores	73.0%	32.0%	1.8	10.9	165	0
IBS	18.0%	50.0%	2.8	2.7	1,044	3
Outdoor specialty	5.8%	2.0%	0.1	0.9	130	0
Chain sporting goods	4.0%	5.0%	0.3	0.6	470	1
Internet	3.0%	5.9%	0.3	0.4	739	2

Frame and Wheel crunched these numbers while trying to answer the saturation question. The table above shows that the IBS remains the most important and valuable distribution channel in the industry: it sells only 18% of the volume, but accounts for 50% of the value. This implies that the average price per bicycle is about $1,000 per bicycle. Department stores account for 73% of the volume, but just 32% of the value because the bicycle they are selling are mass market products with an average price of $165 (based on the numbers above). Interestingly, the distribution channel that has the next highest per unit value is the Internet at $739 per unit. The Internet channel accounts for 3% of sales volume but almost 6% of sales value. This implies that consumers are ready to buy higher value product on line. 

Frame and Wheel's agency model positions it to be a "crossover brand" between the Internet and the independent bicycle store. This means that the consumer will be able to buy the frame directly from the company (direct channel) or through their favorite independent bike store (indirect channel). These two channels are clearly the most important ones for the company's target market and they are not necessarily exclusive to each other.

The business plan: some demographics

Frame and Wheel spotted a piece in the Catskill Mountain Region Guide for July 2010: it has a section titled The Sport of Cycling in the USA. Frame and Wheel believes that these stats are from USA Cycling. Here are the bullet points:

• There are 72,000 licensed cycling racers in the United States
• Median age is 34 years old
• Median household income is over $80,000
• 81% have college degrees
• 27% have post graduate degrees
• 57% of licensed racers are in professional / managerial positions
• 35% are married

The business plan: affordability and justification

The company expects the retail price for its frame to be $2500 per frame or about 2.5x on a price to weight ratio basis. The average retail price for name brand carbon performance frames that Frame and Wheel beleives will be competitors is about $3,000 per frame. Frame and Wheel will be about 23% less than the market average of 3.2x on a price to weight ratio basis. The penetration of carbon frames at this price point and above suggests that the consumer can afford frames priced at this level. Consumers are justifying the purchase based on weight as well as the brand name recognition of the brand. Important factors include which pro temas use the frame, is the frame in the Tour de France, do other serious cyclists in the consumers immediate region use the frame, etc. Consumers also justify the expenditure because they ride frequently in order to stay fit and thus the bike equipment is viewed as a necessary piece of equipment for that purpose; there is also the notion that if you ride or race a lot you might as well use a good piece of equipment. Finally, consumers can justify the purchase if they know that other people view the brand as a good one and worth the money; no one wants to be spend large sums of money on a brand that is unknown or disliked.

The business plan: can the customer buy

Frame and Wheel saw an article in a local magazine in July of this year that summarized the demographics of the cycling market. The article complemented a story about the Tour of the Catskills and made the following observations. Cyclists are on average about 35 years old, they are married with families and they hold professional jobs and earn about $80,000 a year. Frames and Wheels would add that the average cyclists increasingly buys their gear on line: pre-race parking lot banter is full of conversations about where and how a frame or bike was obtained on line. USA Cycling breaks down its 66,800 membership in their 2009  demographic report: 87% of USA Cycling members are men, 17% are from California, 31% are age 35-44 and 22% are 45-54 (or in other words 53% of the membership of this organization is a masters or enthusiast cyclist). USA Cycling notes that membership increased about 6% in 2009.  Of course, more work is needed on this question, but these numbers suggest that the average cyclist has the income and the interest in obtaining a performance frame. Accessibility is the challenge for the company. 

Frame and Wheel envisages scaling out distribution using the agency model and the Internet. The agency model means that an Independent Bike Store (IBS) can become an agent of the brand without any cost or risk: they perhaps obtain some basic display merchandise and a link from the website; they are not obligated to purchase an inventory of bikes (they can purchase a demonstration bike if they wish); they order a frame when a customer wants one. They are rewarded a commission on every frame they order from the company. To get the agency model established, Frame and Wheel will scale out distribution by using eBay Stores. This is a low cost and effective way to reach consumers. The company will offer to send the frame to the customer’s favorite IBS and when this happens, the company will have a reference for potential agents. 

Frame and Wheel plans to experiment with the idea of using the auction method to sell frames: the reserve price will be set high enough for the company to make its profit, but at a level that generates interest to the consumer. For example, the reserve price might be set at $1,600, and from there market demand can determine the premium and ultimately the retail price. This makes sense to the company because it encourages consumers to purchase frames during the off season when there is less demand; it also means that extra large or small sized frames might sell for less than the standard size frames, reflecting more accurately supply and demand. Most importantly, the company will provide all the benefits typically provided to buyers of new frames: warranty, crash replacement, customer service, some free merchandise, etc. The risk is that the consumers might assume that the frame is used or second hand and it may therefore dilute the value of the brand. It could also create pricing complexities for an existing agent and it might be too time consuming for the company to manage all the auctions. Nevertheless, it might be a good way to start out.