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Road Surplus Could Create Closeout of High-End Bikes

By Matt Wiebe

JANUARY 01, 2007 -- MONTGOMERYVILLE, PA--Suppliers shipped 6 percent more units to bike shops through September, and posted a 9 percent sales jump. The increases come at a time when Wal-Mart and other major retailers are lowering their sales expectations.

Road bikes, which have driven specialty sales over the last few years, only posted a 3 percent sales gain.

In contrast, hybrid sales jumped 30 percent, followed by front suspension mountain bikes, up 17 percent, and full-suspension, up 11 percent, according to the Bicycle Product Suppliers Association’s (BPSA) third quarter 2006 report.

Considering that overall bicycle imports through September are down 9 percent in units and dollars, the specialty channel seems to have picked up market share from mass retailers.

The drop in imports also suggests mass suppliers and retailers have plenty of inventory on hand.

The big downside for the specialty channel is the huge growth in road bike inventory and slim supply of hybrids that may cause spot shortages.

“The inventory situation on road bikes is not a good one. In 2005, the inventory on Jan. 30 was $23.7 million or, by my estimates, a little more than two months on hand,” said Bill Austin, Raleigh USA’s chairman and chief executive officer, and chair of the BPSA’s statistical committee.

“Now at the end of October road inventory was $67.2 million. However, with the sales lower in the coming months, what we have on hand could supply the road market for more than five months,” he noted.

Scott Montgomery, Scott USA’s vice president of the bicycle division, wonders if the situation may play out a bit differently because of low retail inventories.

“From my retailer visits, it seems like they are buying way more conservatively than in the past. While inventory levels are high for some suppliers, they could be drawn down quickly through the channel,” he said.

Suppliers reporting to the BPSA were sitting on 25 percent more road bikes last September than in 2005, or 19,818 more units.

More telling is the 44 percent jump in value of that inventory. The average value of a road bike in suppliers’ warehouses last September was $677 per unit, compared with $585 in 2005.

Since suppliers report inventory at cost, a $677 bike in inventory likely sold for $1,512 at retail after supplier and retailer margins are added on. Last year’s average bike in inventory sold for $1,306.

Pricier road bikes would not be a problem if they were what consumers wanted, however, the average road bike shipped to retailers last September sold for $1,295 at retail, or about $200 less than the road bikes still in inventory. Suppliers may be forced to closeout inventory of higher-value road bikes to bring inventory levels down.

“My concern is the brands will start discounting and it will serve to devalue the carbon frame. Carbon construction is increasing in cost, so the perceived value of carbon will likely be damaged,” said Bob Margevicius, Specialized’s executive vice president of the bike group.

Due to the lack of sales data from the channel, suppliers can do little to improve forecasting. Next season suppliers could be stuck with a surplus of hybrids and not enough road bikes.

On the bright side, the robust 30 percent sales growth of hybrids coupled with the huge drop in inventory suggests that the category is one of the major success stories of 2006.

“I don’t think anyone is surprised about where all the hybrids are going. Gas prices are driving the bikes as transportation,” said Jacob Heilbron, Kona’s chairman of the board.

“Dealers have not been able to keep any hybrid priced at less than $500 on the floor, and I think some of the jump in front suspension sales is also due to people picking up one for basic transportation,” he added.

Since gas prices are not likely to come down anytime soon, Heilbron sees commuter or utility bike purchases as a great opportunity for future business.

However, with no consumer data available, it’s hard to tell just how many of these hybrids are being purchased for trips to the grocery store or commutes to work. Given perennial consumer fear of traffic, hybrids could be going to leisure, recreational or fitness riders.

Front suspension, the second major growth category, may be riding on the coattails of the success of hybrid bikes. But growth in racing, 24-hour as well as festival events, also is pegged as contributing to strong hardtail sales. The racing crowd bought higher-spec bikes and raised the unit value in 2006.

“The rise in hardtail value is also attributed to greater carbon content and higher-valued Shimano and SRAM spec,” Margevicius said.

Dual suspension rounds out the big sales gainers and although BPSA members shipped fewer units, 2 percent less, average unit value is up 13 percent to $1,119. The category now represents 14 percent of suppliers’ dollars.

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“My concern is the brands will start discounting and it will serve to devalue the carbon frame. Carbon construction is increasing in cost, so the perceived value of carbon will likely be damaged,” said Bob Margevicius, Specialized’s executive vice president of the bike group.

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