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Road Cycling “It is by riding a bicycle that you learn the contours of a country best, since you have to sweat up the hills and coast down them. Thus you remember them as they actually are, while in a motor car only a high hill impresses you, and you have no such accurate remembrance of country you have driven through as you gain by riding a bicycle.” -- Ernest Hemingway

LBS profit on bikes

Old 08-10-06, 10:10 PM
  #1  
C_Heath
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LBS profit on bikes

I know these guys dont make a killing on selling bikes, espicially my LBS. He retired from a bank and opened up a shop from love of the sport. Today, I was in there and the UPS guy had dropped off a shipment. 3 Boxes in the floor with the invoices still on the box. I did manage to bend down and check out what they said.

There was an 06 Lemond Reno 56cm and the invoice was from trek. $503 the bike lists for $899.

Also, a Trek Navigator on/off road deal. Model 150 I think, cost on it was $235.

Heck, After they spend the time in assembly and cutting the price to the customers to sweetin the deal if they have too, they are not getting rich, thats for sure.

Wished there had been a Madone 5.9 ssl sitting there, then Id have him by the balls LOL
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Old 08-10-06, 10:18 PM
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That's a 44% GROSS MARGIN. Pretty crappy compared to my business, but great compared to fast food, and home improvement retailers...

NBDA claims industry average gross margin on bicycles at around 36%.

Too bad this is all GROSS and not NET.

As you mentioned the assembly, the sweet deal to the cool customer who doesn't want the owner to get rich off of, the lights, rent, salaries, insurance, workman's comp, advertising, etc....

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Old 08-10-06, 10:30 PM
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Pretty sure the margins get worse as you get into the more expensive bikes. I know we don't make a lot on some of the bikes, especially when considering those buying the top dollar stuff are much more demanding in terms of adjustments etc.
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Old 08-10-06, 10:33 PM
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for real?
that's it <36%?
i thought bike shops were always trying to rip me off.
but i guess in ur perspective they are scratching by.
the prob is that most customers are one or two time customers, cause they only need a few bikes to last a long time. and not many ppl bike anyways. so right there their demographics aren't good.
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Old 08-10-06, 10:37 PM
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Originally Posted by BigFloppyLlama
Pretty sure the margins get worse as you get into the more expensive bikes. I know we don't make a lot on some of the bikes, especially when considering those buying the top dollar stuff are much more demanding in terms of adjustments etc.
'm calling BS on this...unless you're in a low imcome area where profits are driven off sheer volume, margins increase as bikes rise in price, just like anything else...
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Old 08-10-06, 10:37 PM
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I bet the helmets are marked way up....
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Old 08-10-06, 10:56 PM
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Originally Posted by BigFloppyLlama
Pretty sure the margins get worse as you get into the more expensive bikes. I know we don't make a lot on some of the bikes, especially when considering those buying the top dollar stuff are much more demanding in terms of adjustments etc.

- This is funny because I just spent an entire day training another division's Marketing Department about how margins may seem OK, but the true transaction cost of the sale may net out to a loss due to the high maintenance customer. It's always great to see sales guys go,


Them - "but I make money on that sale."
Me - "No you didn't."
Them - "Yes I did. The margin was like 30%."

Me - "On $1000 - that's a $300 contribution margin. It took an Engineer 2 days to work up the quote and create the drawings, we had to fill out their inspection report and fax it over to them, they entered the order by sending us a fax so we had to have someone spend time on the phone figuring out what the customer really wanted, entering the order, etc....Your $1000 order just lost me $xxx. Ever think that maybe it's stuff like this that accounts for why you're losing money at the bottom??"

As for bikes - Odds are that the margins(%) remain mostly constant across the line, but you will definitely stand to net more money on an expensive bike over an inexpensive bike. Then again in the tool business we used to skimp by on <20% margin on big ticket items, and make back 50-80% on the blades, bits, etc.
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Old 08-10-06, 11:29 PM
  #8  
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If the typical LBS is making say 40% PROFIT on the bike (not including rent, etc) and is providing for example, free tuneups (- parts) for life, then in reality that profit is much less... and active riders actually make the margins, less. LBS really make their money on the customers who come in for accessories only, or who buy bikes and rarely ride. My LBS sells lots of hybrids and low buck MTBs... and their is a reasonably high margin on those... and they may never see them again.

I personally do not believe that bike shops really make a whole lot of money in the end... look at the amount of stock they have! I revieve nearly 20% or more off everything I buy through my LBS... I have spent nearly 15k+ there (4 bikes, lots of accessories, etc), and I do a lot of maintence myself. I know in the end (expecially with all the time configuring and selling with me) they probably do not clear much of a profit, but for the service they are great!
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Old 08-11-06, 12:14 AM
  #9  
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Originally Posted by knucklesandwich
'm calling BS on this...unless you're in a low imcome area where profits are driven off sheer volume, margins increase as bikes rise in price, just like anything else...

I'm just basing it on what the manager has told me. I know we sell 10-15 $250-350 comfort bikes to every one road bike we sell (even the bottom of the barrel road bikes). I wouldn't be surprised if it was 20-30 comfort bikes to every $1.5k+ road bike we sell.
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Old 08-11-06, 12:28 AM
  #10  
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My Ruby Pro has an MSRP of $4400. The cost to the shop will run around $2400 or so depending on the volume of bikes they order. That gives you an idea of the markup on more expensive bikes.
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Old 08-11-06, 03:55 AM
  #11  
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in Australia, the bike shops must make a killing on accessories though, and i even thikng their profit margin on the bikes is higher too!

For instance, in the states a pair of pearl izumi attack shorts is US$65, while in oz its AUD$189, even with the exchange rate difference, thats like AUD$100 difference!

Also,the RRP (MSRP) for an orbea orca frame only here is AUD $4,300, in the US$2,400. thats a AUD$1200 difference!

So even accounting for higher demand and competition in the states, those LBS's over there arnt making that much on anything as compared to their aussie conterparts. just wanted to rant
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Old 08-11-06, 04:23 AM
  #12  
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I think shops do ok on margins, but they also get stuck with stuff that doesn't sell until they close it out at the end of the year. This hurts especially if it took up floor space for 9+ months.

What kills me are the accessories (gotta be 75% margins), and many LBS never discount. One shop even sells jerseys with the shop name in them, but for $75, WTF they should give them out free with a bike - free advertising - right. If Performance/Nashbar can discount accessories then the LBS could to. I was at one shop a couple months ago that always has 50% off all clothing - now selection will vary a lot, but they move a ton of clothing thru the shop. In most of the shops the same shorts and jerseys hang on the racks for months at full price.

I don't think many of the shops are making tons of money, but they could certainly price more aggressively on accessories and move a lot more volume. Bike prices seem ok, for the most part people are willing to pay for quality bikes and a good LBS. A few internet low-dollar internet retailers do well, but the pluses of a test ride and a good LBS usually make up for the difference in pricing.

John

Last edited by R900; 08-11-06 at 06:20 AM.
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Old 08-11-06, 04:32 AM
  #13  
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^^
But in Australia VAT is included in the MSRP, in the States it is added on the the MSRP. Also VAT is a lot higher in Australia (18% or so if I recall correctly, it's been a long time) than in the States (between 5% and 9% on average, none if you buy on the internet.)
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Old 08-11-06, 05:16 AM
  #14  
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Originally Posted by knucklesandwich
'm calling BS on this... margins increase as bikes rise in price, just like anything else...
Why do you say that? Do you have any data to back up your statement? I'm calling BS on you.
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Old 08-11-06, 05:24 AM
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I think it all comes down to reputation, relationship and marketing. Its the number of buyers not the markup. You can have small margins but high volume. Some stores are very successful. Richardson Bike Mart in TX can't stop growing. They built a nice store in expensive Frisco that probably cost an easy 1.5 million. They just doubled the size of their Richardson store that would be 2x the size of a office depot...or a full size grocery store....(This is only about 10 miles down the road from the Frisco store) I never been to the original Dallas location but I am sure it is just as big since that is their busiest store.

Then there is the corner store down the block that sells no name bikes and is only as large as a dry cleaners.....but the service there sucks....I took a bike there to get the derailleurs adjusted and the guy couldn't get it done....he said "it must be bent and I got it real close, that'll be 12 dollars". BS!!!! ....never go back there. I am sure that store barely gets by.
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Old 08-11-06, 05:25 AM
  #16  
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Originally Posted by Ziemas
^^
But in Australia VAT is included in the MSRP, in the States it is added on the the MSRP. Also VAT is a lot higher in Australia (18% or so if I recall correctly, it's been a long time) than in the States (between 5% and 9% on average, none if you buy on the internet.)
Oh my christ! 18% is disgusting... I thought Ontario was bad, we get hit with 14%... Trips to the states, FTW(The border guard never suspects a Madone in the trunk)!
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Old 08-11-06, 05:31 AM
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Originally Posted by Psimet2001
That's a 44% GROSS MARGIN. Pretty crappy compared to my business, but great compared to fast food, and home improvement retailers...
Really? Fast food? Those guys pay a nickel for the soda that costs the consumer $1.59

A 37 cent chicken sandwich goes for up to 3.50

fast food is easy money, if you can afford a franchise.
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Old 08-11-06, 05:39 AM
  #18  
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Originally Posted by R900
I think shops do ok on margins, but they also get stuck with stuff that doesn't sell until they close it out at the end of the year. This hurts especially if it took up floor space for 9+ months.

What kills me are the accessories (gotta be 75% margins), and many LBS never discount. One shop even sells jerseys with the shop name in them, but for $75, WTF they should give them out free with a bike - free advertising - right. If Performance/Nashbar can discount accessories then the LBS could to. I was at one shop a couple months ago that always has 50% off all clothing - now selection will vary a lot, but they move a ton of clothing thru the shop. In most of the shops the same shorts and jerseys hang on the racks for months at full price.

I don't think many of the shops are making tons of money, but they could certainly price more aggressively on accessories and move a lot more volume. Bike prices seem ok, for the most part people are willing to pay for quality bikes and a good LBS. A few internet low-dollar internet retailers do well, but the pluses of a test ride and a good LBS usually make up for the differece in pricing.

John

Volume depends on the shop. The one I work with and through does four million in bikes. A year. In that case, there is less of a desire to "deal" because we can run 20 hybrids out in a day. Last weekend, I was there four hours and did six grand in sales. We can get there, if we need to. But most of the time, the bike will sell to someone else.

Jerseys...I'll give you one free if you sign a contract to wear it every single time you ride your bike. If I catch you not wearing it, I'll sue you... Kinda like a Nike or Reebok deal with a pro athlete.

If you are a customer with a track record, ride with a sponsored team, or are involved with a cycling organization (local club for example) the shop supports, you get a discount. Walk in off the street without a relationship, sorry. Otherwise, why have prices?

In addition, the shop supports, financially, many cycling organizations with donations of various sorts.

BTW...why discount all clothes 50% all the time? Why not just cut the price and post that....unless their "discount" is not really a discount... I mean, we have clothes on clearance all the time. Usually stuff that's a year or a season old...nothing wrong with it, but Pearl moved the logo or altered the chamois. So it goes on the clearance rack.

What stuns LBS employees is...how little people really know about bikes (but think they do), which are pretty simple machines, and that they do, indeed think they are dealing on a bike like a car. People want to "negotiate" on a $350 hybrid . If a customer is buying a lot of stuff, sure, sometimes they can get discounts (like buying two $350 hybrids). Like yesterday....a guy comes in and is looking at an R700 Cannondale...says to me, "I'll buy the bike if you throw in a set of clipless pedals." I just laughed. I could not help it. I took him to look at Keos, and he had no idea how much they were.
Sophisticated buyer...but I did offer to discount the pedals and any other accessories he bought with the bike.

One day, all of us out here that are on the receiving end will start a thread about what we observe...95% of the customers are great. Like 95% of the LBS's are great. But the bad stuff is all you really hear.

Last edited by roadwarrior; 08-11-06 at 05:54 AM.
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Old 08-11-06, 06:10 AM
  #19  
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Originally Posted by knucklesandwich
'm calling BS on this...unless you're in a low imcome area where profits are driven off sheer volume, margins increase as bikes rise in price, just like anything else...
I don't know why I keep trying to explain business to unknowledgeable people but I do. Higher priced products may or may not have a higher initial gross profit at list price. However, higher priced products "turn" more slowly. That means it takes more average inventory investment in dollars (with inventory holding costs) to earn the gross profit. Also, since higher end products turn more slowly, they are often discounted more. On average, the higher end products are likely to have a lower margin as a percent to selling price.

In my business (not retail but consumer E-commerce,) where the average price of a product is around $60, the low end products have to have a higher margin to cover the fixed costs of handling them. It costs just as much to handle a $20 product as a $200 product but those costs are recovered from different amounts of gross profit.

If what I said confused you, make a trip to library and check out a basic business textbook.
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Old 08-11-06, 06:17 AM
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Good points, the more I ride the more I like my LBS, although I bought my bike at an out of town bike shop. Now that I'm a "regular" they do discount items, but selection is still limited compared to buying online. That said, I am trying to shift my business from online to LBS when I can.

Wow, $6K in 4 hours, makes a nice day on the bottom line, helps pay for those rainy days when the shop is empty.


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Old 08-11-06, 06:29 AM
  #21  
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Originally Posted by Ziemas
^^
But in Australia VAT is included in the MSRP, in the States it is added on the the MSRP. Also VAT is a lot higher in Australia (18% or so if I recall correctly, it's been a long time) than in the States (between 5% and 9% on average, none if you buy on the internet.)

VAT is 10% in Australia. Australians get screwed by usually only having one agent for each brand (small population and distance from markets are issues).

I looked at buying a Cannondale Road Warrior when I was living there and it was going to cost me A$4,500 (about US$3,375) and the MSRP was about US$1,400 in the US. I could have flown to the US, bought the bike, and flown back again for cheaper than what it would have cost me in Australia.

The same bike in Japan was about A$2,700 (about US$2,000).

Lots of people buy from overseas via the internet now. I was buying clothing and components from the US and the UK.
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Old 08-11-06, 07:52 AM
  #22  
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As Psimet points out, theres a big difference between Gross Margin, and profit. And 36% gross margin is not very big compared to other industries. Particularly for a brick and mortar retail business that is expected to provide a high level of service. Typical high end furniture stores operate on "Mark +10" which means they set their retail price at 110% of their cost.

If you think owning an LBS is a good way to make a killing, I'm sure any numbers of LBS owners would be willing to sell at very reasonable prices.
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Old 08-11-06, 08:24 AM
  #23  
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Originally Posted by not2fast
Really? Fast food? Those guys pay a nickel for the soda that costs the consumer $1.59

A 37 cent chicken sandwich goes for up to 3.50

fast food is easy money, if you can afford a franchise.

You are correct that Fast Food has a pretty good gross margin. Actually most food in general does. I ran a restaurant a while ago that had a gross margin of 75-80% depending on the month. However individual franchises dont' make much money, you don't really start bringing in the cash until you have 10 or more stores.

However after that their are serious expenses that go into food and all other businesses. The one that kills pretty much everyone is labor followed closely by rent (good location=lotsa money bad location=closed store)

I'd imagine that bike shops are hit pretty hard by both of those. They all have pretty big locations around here in Madison, easily over 4000 sq feet. Lets just say that they have an okay deal on rent. They are paying about 8-10,000 each month on rent. I'd also guess that labor is ball park 15-20%.

There is a lot that goes into the markup on a bike. I don't see many bike shop owners driving around in Porshces, wearing Armani, and sporting Rolex watches. I'm gonna have to go out on a limb and say that LBS owners dont' run shops to make money, they run it because they love the job.
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Old 08-11-06, 08:38 AM
  #24  
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Refer to the WSJ article on rising costs due to materials. Over $3000 segment of the total bike market is only 1.5% of the market. So for every $200,000 worth of comfort bikes your going to move 1 high end road bike. The whole thing that gets missed in these discussions of how wealthy the LBS guys are getting is the time value of money for carrying the inventory. Gross margin does not mean anything. Net after everything is all that matters. I can imagine this conversation: Banker, "well Mr. LBS how many bikes did you sell last year?"
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Old 08-11-06, 09:29 AM
  #25  
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Originally Posted by oilman_15106
<snip>The whole thing that gets missed in these discussions of how wealthy the LBS guys are getting is the time value of money for carrying the inventory. Gross margin does not mean anything. Net after everything is all that matters. <snip>
+1 - I like how you brought in time value of money. Keep in mind the opportunity cost of running an LBS (or the cost of the best next foregone alternative). Inventory turns vary by industry, but right in my industry we are looking for 26 turns annually (every 2 weeks), but we were at about 2 turns annually, and find that 6-10 turns a year is taxing our logistics systems. Just In Time - right???!!!

Low inventory turns used to be OK when the 1920's minded, absorption costing, industrialists figured inventory was free because you would eventually sell it. I love these guys. They make my job entertaining.

Carrying costs vary by industry. I have seen some as high as 18%. Keep that in mind the next time you see a bike sit in a shop for a year. If that owner had not bought that inventory, and invested his money instead then he would have made much more than he ever will by selling the bike after holding it for a year. That's his/her opportunity cost. His/her decision to sell it at a discount becomes more about cash flow than making money.

If you want to make a million $ selling bicycles....start with $2 Million.
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