Our articles earlier this year highlighted poor profitability across the IBD channel, both historically and currently. We suggested that there’s no real impetus for IBDs to harness their collective appeal and become rewarded for their crucial role in creating value for the manufacturer brands. And so it has proven. In this article, we’ll delve deeper into why IBDs are continually on their back foot and not able to generate an acceptable return for the role they play in the supply chain.
The influence of corporates is the heart of the matter. Over the years, consumers and manufacturers have grown to love the likes of Wiggle, Chain Reaction and Evans Cycles as the marketing and predatory pricing of these retailers has undoubtedly fuelled growth in recent years. The growth of Evans, as the number one specialist cycle retailer in the UK, is of particular interest. Although now a multichannel hybrid, with over 60 stores and an internet-direct business, at £135.8m of turnover Evans is the size of perhaps 400 mid-sized IBDs, so exerts a considerable influence in the market. According to its recently- published annual results, it continues to operate its “price match guarantee policy.”
Turnover increased – by 1.8 per cent – but gross margin slippage – from 37.7 per cent to 36.0 per cent – and an inability to contain administrative costs – 5.7 per cent higher – caused Evans to slip into the red. Operating profits of £1.7m in 2015 – not a lot in itself on £133.4m of sales – reversed to a loss of £2.0m in 2016. The headline loss was in fact at £6.5m, after £4.6m of exceptional costs.
Jill McDonald arrived at Halfords in May 2015 only to leave earlier this year to take up a position at M&S. The problem is contagion, with Evans dragging down returns across the whole of the IBD channel while at the same time hoovering up brands.
Manufacturers are taking the easy option by signing up with Evans and letting Evans do their marketing; Evans’ admin expenses of £49m buys manufacturers a lot of market penetration. It’s a very short-term approach. Manufacturers should instead be increasing their own marketing, working with quality IBDs who provide a consistently higher level of service and expertise, coordinating marketing campaigns, creating centres of excellence to include demo bikes and strong point of sale and providing strong account management including warranty support. When the proverbial hits the fan, as it undoubtedly will, manufacturers will be left with nothing, they need to start thinking a medium term strategy that invests in key small to medium-sized IBD partners rather than pile-it-high retail multiples and internet players, before it’s too late. The impetus for change probably needs to come from the more enlightened manufacturers, IBDs are currently too beaten up by it all to change the system.
So – over to you, Enlighted Manufacturer. Deliver key retail partners the above and you’ll find a very willing audience.