The business plan: persuading the IBS and customer

Frame and Wheel recognizes that it will be difficult to persuade an IBS owner to take on yet another brand. Most IBS have at least four brands already and they are hard pressed for additional space and capital to accomodate another set of bicycles. Additionally, with too many brands on site, the customer gets confused and the IBS becomes tempted to push the brands that are in favor with the market at the expense of other brands. This becomes a loss making proposition for the IBS and it reflects badly on the IBS eventually. Too much choice or selection undermines the IBS marketing efforts, confuses the customer and creates additional expense for the IBS. Having too many bicycles on the floor also makes the IBS appear like a dumping ground for bicycles and creates the risk of inventory obsolecense. Some manufacturers are aware of this and perhaps do not permit their dealers to carry their competitor's brands.  The only reason an IBS will take on yet another brand is if the manufacturer allows the IBS to fill a market niche and requires no additional financial or inventory risk. The only models that can deliver this to the IBS is the pull model or just in time model, where inventory is delivered as an when there is demand, and the agency model, where the IBS orders a frame on behalf of a customer and receives a commission on the order.

This model does not require an upfront payment by the IBS in order to buy "slots" to become an authorized dealer. Trying to convince an IBS to carry a new brand where they have to pay up in order to be an aauthorized dealer is a very hard sell in a weak economy. Frame and Wheel beleives that the greater difficulty will be persuading the IBS that the company can stand behind the brand. This means that the IBS has to see that the company has all the support features offered by other brands: warranty program, safety certification, crash replacement, immediate access to the company. The IBS does not want to be associated with a bad brand.

Frame and Wheel understands that a big part of the marketing effort for a brand comes from the dealer. A good word from the dealer on the floor can make all the difference to the customer. This is why Frame and Wheel believes that the IBS is still part of the future of the bicycle industry. Beyond this, the product has to be safe, good quality and good value, exactly what the customer wants and distinctive from other brands, such that the customer wants to be seen on the bicycle . It also has to have a sustainability strategy: the customer cannot help but wonder where all that crashed carbon goes and where it all comes from.

Focus group

Frame and Wheel had a good race in Vermont over the weekend, winning the time trial and spending the second day basking in the yellow, before losing the jersey to the competition, and then flatting on day three. Day four was the best criterium for Frame and Wheel in a long time, so there can be no complaints.

Frame and Wheel and the team spent one morning discussing bike shops, the team and the club: one team mate noted that shopping on line for components was very convenient and efficient: when you know what you want, it is easy to order right on line. Price is part of it but so is convenience. Other team members noted the hassle of going to the local IBS, asking them to order the part or the good, and then waiting and hoping that they in fact remember to put in the order. If the item does get ordered, it means another trip to the IBS to retrieve it. If it does not, it is a delay and an irritation. Clearly, the team members demonstrated their increased comfort with shopping for their gear on line. However, all noted the importance of the community and support of the local IBS, but acknowledged that it is hard to pay higher prices for things that can be found on line for less and sent directly to the residence. This confirms the view that it hard to have one without the other.

The business plan: prospective customer

Frame and Wheel reads in the NBDA "statpak"that the number of independent bicycle stores (IBS) shrank 1.5% y-y to 4,256 in 2009. This is part of a trend: the number of IBS has shrunk 30% from 6,195 in 2000. Although the number of stores are decreasing, the same number of bicycles are being sold through them (3m). The conclusion is that this channel is consolidating and fewer IBS are selling more of the bicycles. The reasons for the shrinking number of IBS is most certainly high labor costs and overheads combined with keen competition on the bicycle prices themselves. Internet retailers are no doubt making things more competitive for the IBS. One interesting result of consolidation is that the IBS has the opportunity to carry more brands. This can result in too many brands and at the very least can become expensive or cumbersome for the IBS. Indeed, the IBS is being encouraged to carry fewer brands. 

Frame and Wheel will have to target the owners of the IBS: these are the people who decide which brands to carry. They look for customer service from the manufacturer, reasonable terms of authorized dealership and the reputation of the brand in the market. Frame and Wheel believes that the "slot free" business model and the niche market appeal of the frames will make the frames a compelling choice for an IBS. The customer service, the warranty programs, safety certification and crash replacement programs will have to be strong too in order to help make the sale. Frame and Wheel recognizes that it will have to have all of this in place long before the first pitch to an IBS.

It's all about a sustainable bike

Frame and Wheel is spending the long weekend in Vermont at the Green Mountain Stage Race doing research on the market and suffering on the climbs in search of glory. This morning Frame and Wheel listened to an interview by the BBC with Ellen MacArthur, a woman who sailed around the world singlehanded. This woman is a strong advocate of sustainability, and has established a foundation called the Ellen MacArthur Foundation. Frame and Wheel has linked to this blog and will spend more time exploring the notion of bicycle manufacturing and sustainability: indeed, this is one way the company plans to differentiate itself from the market. 

Frame and Wheel is reading It's All About the Bike by Robert Penn. This is a book about a man who sets out to build his dream bike: he has a frame custom made from steel, he goes to Seattle to get a Chris King headset, he goes to Italy to get a Cinelli handle bar and a Campagnola Record group and to other parts of the world to build up this bike. It is a good read and he explains a lot about the history of the bicycle, which is fascinating. In the early 90s, Frame and Wheel retired from competitive and did what Mr. Penn did: purchased a "dream" bicycle. This was a custom made steel Moots Mountain bike: at the time I thought I would keep it forever. I still have it, but it spent a good ten years in the attic, before being returned to use. When Frame and Wheel started riding it again, bicycle technology had changed so much that the bicycle was really more of an antique than anything else, and despite great charm, it was difficult to service and difficult to obtain replacement parts. Frame and Wheel appreciates the desire to have a bike that will last (this is indeed the pitch made by Seven, the titanium frame manufacturer), but the fact is that they do not even if they are made of steel. This lesson is why Frame and Wheel will have a sustainability strategy for its frames. As Ellen MacArthur notes, "A carpet is a carpet is a carpet" This could mean that a bike is a bike and then its a bike again or something useful or something that reflects the awareness that there is not an infinite supply of oil, plastic and other raw materials out there for use in making bicycles.

Austro-Daimler Olympian

This is an Austro-Daimler Olympian. It has been hanging in our garage for more than twenty-years. It was a mid market bike, not as high end as the Ultima and the Superliecht. It is in pretty good shape, having been ridden very lightly. A bit of rust on the head tube. It has Huret components (long gone French component manufacturer), Weinmann brakes, Reynolds 531 tubing, and Belgium made Wienmann rims and KKT pedals. It is a good example of how confused the corporate identity of Styer-Daimler -Puch was in the mid 80s: the head tube logo is Puch, the side tube Austro-Daimler logo mentions "Made by Puch" and the lettering is blue) and the down tube has three logos: Steyr, Austro-Daimler and Puch. At the time, Steyr-Daimler-Puch was the manufacturer; it was soon broken up and that was the end of Austro-Daimler bicylces in the US. Some other features: there is an A-D imprinted on the shoulders of the fork and a Puch on the seat stays. The gearing on the cranks are 45/54. Weight of this bicycle is about 25lbs. 

The business plan: impact of economy on buyer

The state of the economy will clearly have an impact on demand for performance carbon racing frames; these items are very much discretionary items for all but a very few people. Most consumers will delay purchases of new carbon road frames until their confidence about the economy or spending power improves; other consumers will search for second hand frames on eBay or settle for a lesser expensive model. Some may decide to upgrade their existing frame or repair it. In 2008, when the financial crisis sank in to the local economy, demand for high end carbon frames dropped of a cliff: the local shops were stuck with floors full of bikes, demand was non-existent and sale representatives were trying to stuff more frames into the distribution network because the manufacturers were flooded with frames. Frame and Wheel heard rumors of sales representatives from manufacturers selling frames out of the back of their cars. Clearly, a weak economy has an impact on demand for carbon frame bicycles.

Frame and Wheel believes that less tangible factors such as demographics and passion influence demand for carbon frames. The so called MAMIL (Middle Aged Male in Lycra) wants a carbon frame because he is seeking to improve his fitness, he has the income and all their friends have high end performance bicycles. This market is not very big, but it is a feature of the cycling demographic. Also, committed racing cyclists will buy a new carbon frame regardless of the economy because they need the technology to remain competitive. Clearly, these buyers represent a very small segment of the market: most consumers are middle market buyers who want an affordable bicycle that they can ride out the door.

Frame and Wheel appreciates that its performance carbon frames are more likely to sell in an strong economy. However, the company will adjust prices according to demand using the auction function on eBay. Frame and Wheel takes the view that more consumers are purchasing their cycling equipment on eBay. Indeed, the company's experience selling items on eBay suggests that there is large number of people who prefer to obtain their equipment through this channel. Frame and Wheel postulates selling its frames through this channel using the eBay store function and PayPal, at least at the outset; this will help raise the profile of the company in the on-line market and allow the company to sell frames at a discount using the auction function. 

For example, the full price of the frame could be $2,500, but an auction sale could be arranged with a reserve price of $1,750, implying a 30% discount. This discount is typically what occurs at the end of year sales at the IBS. The company will have to pay fees on each transaction (about $58 for a frame selling for $1,750 and $65 for a frame selling for $2,500) and the company may have to bear shipping costs; nevertheless, these costs are lower than investing cash and time in building an e-commerce function. Additionally, this approach allows the market to set the price and it again encourages buyers to purchase their frames during the off season. 

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.