John Styles is an independent sales agent in the bike trade. The former marketing manager, product manager and in-house sales rep gives us his thoughts on what to expect from the trade in 2015…
As I travel around High St stores I keep hearing the same three things. One, it’s unusually quiet and it has been for several months. Two, our turnover is down but our profits are up. Three, we are fundamentally re-assessing what we stock next year. This fits with a wider pattern I have been observing and leads me to the conclusion the cycle trade is in for a year of very big changes.
Over-Supply and Over-competition
There is both over-supply and over-competition in the market. The former is caused by the stage of the product lifecycle offering (we are in mature market) and the latter by the number and diversity of channels of sale. In other words, if 50 different suppliers offer a pump, and they all broadly similar and available through almost all online and offline channels, the price of pumps will fall.
This is the primary classical macro-economic force at play in the market and has amplified since 2008 when the global economic crash abruptly reduced demand below supply (a function of the 7 year economic cycle compounding with the 50 year economic cycle). There has been over-capacity in the means of production ever since.
How that plays out in the market expresses itself in different ways. For example, grey imports as bike brands and/or manufacturers find over-stocks that can’t be absorbed by the after-market channel. Or intense price competition in the online sector. Or surplus goods that need an “86% off” headline to generate any interest from the consumer (and yes that banner ad is out there today). Many people in the trade tell me “the only one who’s winning right now is the consumer”.
And they are right. But it’s not just because of over-supply. It’s caused more fundamentally by the long term structural shift in the economy caused by the Information Age (broadly beginning in the late 70s and accelerating though the 90s and 00s).
PSQ3 becomes PSQ2x2 (or the death of showrooming?)
Since 2000 until the present day the consumer has enjoyed a “cake and eat it” scenario. It is said that any business can deliver two out three factors from Price, Service and Quality. A bit like Keith Bontragers’ “Strong, Cheap, Light, choose any two”. If a business tries to deliver all 3, they will find insufficient profits (for example, Planet-X closing their Edinburgh branch).
The trouble is, the trade has collectively been providing all 3 to the consumer through the mechanism of showrooming (both pre and post purchase and both online>offline and offline>online). So whilst that has been a fundamental driver for cycling “great bargains, great service” it is no longer a viable long term strategy for the trade.
Or for the short term either, which is why 2015 will likely mark the end of one phase and the start of another. The end of PSQ3 and the beginning of PSQ2x2. PSQ2x2 expresses the notion that a consumer will be able get 2 of the 3 Satisfaction drivers from either online or offline transactions, but he will no longer be able to get all 3 by mixing channels (Showrooming).
Many stores have been telling me how quiet it has been for the last 3-4 months. Unusually quiet. I suspect that right now we are in the pit of a Non-Consumptive Pause as the consumer struggles with the withdrawal of PSQ3.
To give an example. Rob is a regular MTBer. He started asking about winter tyres in September.
“I’ve been to the local (Concept) store but they want £35 for their tyres! I’m not paying that! I’ve seen some (other brand) tyres at £11.99 clearance on eBay. Will they fit in my forks? What’s the grip like, are they any good? Is there a catch?”
Rob still hasn’t bought any tyres, he’s locked in a circle of trying to get a bargain but not having the knowledge or confidence to press the button.
He keeps asking for advice from us and reading forums trying to find the knowledge and advice his local shop won’t give him for free. He wants to have his cake and eat it and has just discovered that it’s off the menu. So, he’s stopped cycling so much and justifies this strategy with “Oh well I’ll just come out on drier days”.
Consumers can see, touch and gain advice on Products/Brands as well as being inspired to purchase within a product category
Consumers can see, touch and gain advice on Brand A,B,C that are wholly or mostly sold in-store. These brands will also offer Click and Collect to enhance the offering.
Consumers can purchase the same brands cheaper online or via mail order
Consumers can buy Brands D, E, F online but will rarely find pre-sale advice or post sale assistance in a High St store. These brands will have to work harder with marketing to drive the sales of their brand & category.
Why now, why 2015?
As smartphone diffusion has driven price awareness and the economic mechanism of “Perfect Information” into stores with the consumer, the High St is suffering like never before. The current generation of store keepers are giving up on certain brands and in many cases entire categories.
In other countries the effect has already hit harder. In the UK cycle trade we are incredibly lucky to have had such a broad range of drivers to grow cycling generally. The publicly accepted view is that the cycle market is booming (we all know it’s not quite so rosy of course) and that the primary causes are drivers for healthier lifestyle, c2w, the Olympics, Bradley Wiggins, Victoria Pendleton, Team Sky, Sustrans, etc etc. All these things are drivers. All these are fantastic and very very welcome. They are necessary, but not sufficient on their own.
All these things have been driving cycling but there may be a much deeper and more potent force that has been working over the last 15 years which is about to very abruptly stop. PSQ3 has possibly been The driver. In 2015 we are likely to see a rapid withdrawal of the PSQ3-Driver contributing to several things happening simultaneously. I suspect the effect will be rapid, we’ve reached a tipping point.
1) The Polarisation of Brands (online/offline)
Until recently, many distributors and brand owners have also enjoyed strong sales growth from both sales channels under this scenario. However, many have been “filtering” new brand additions to their stores for at least 5 years by asking “who else sells it”. Now they are actively de-stocking brands they had sold for years. In some cases there may even still be profit in that product. Yes, you can make a profit on selling 3 pumps, but if 7 more were show-roomed it makes you feel sick to the stomach (literally). You don’t feel as happy as if you just sold 3 pumps. It might not be strictly Rational, but it is Natural and Understandable (if this interests you check out “Priceless – the hidden Psychology of Value” by William Poundstone).
Distributors and brand owners will face an increasingly stark choice 3-way choice this year between (a) being in-store, or (b) being online, or (c) facing down the cost of PSQ3 themselves with a margin underwrite or other support mechanism. I’m not making any value judgement here. Which route may be “best” is down to the type of product, the brand and the distributor of course. For some brands the best distribution model will be a small number of internet stores. That can work just fine. For others it will be High St only, or High St + Click and Collect. I’m just highlighting that the “one size fits all, a foot in both camps” choice for brands/distributors is likely to recede this year.
2) The Abandoning of Categories and the Spectre of Non-Consumption
Now, faced with the above choice, many brand owners will say Let the Market decide or “Does it really matter how the goods reach the end consumer? We are better at A B or C than our competitor and have X% market share, so we will sell the same number regardless”. This is absolutely right according to classical economics. But, it ignores the real world Driver-Effect of Bricks and Mortar stores (or Micro Economic Free-Rider problem). It also avoids the issue that your biggest competitor might not be your nearest rival Brand but Non-Consumption.
For example, Product Z (names changed to protect the innocent) is now a massively Non-Consumed category. Only a handful of stores stock them nationally and even these few die-hards struggle to sell them and consequently don’t really make much effort to sell them (relative to other categories in store). Why? Because any time and money invested in making a Product Z sale will likely result in an online or mail order purchase elsewhere.
Ok, so Product Z spec’ing on complete bikes has been much better for the last 10 years. But that’s only half the story and affects the Upgrade market more than the Replacement market. To give an anecdotal example (and yes I know it’s dangerous and not statistically valid to extrapolate from a single example). My local ride group has 10 more active members who ride week in, week out. 5 of them needed products Z’s and had absolutely no idea that they did. Each had a different problem which was affecting the way their bike rode and its safety, and mine. I convinced 4 of the 5 that they needed new Product Z’s and they bought them. The 5th came off and broke his leg, his faulty Product Z may have been a contributor. Thankfully, after 6 months off the bike, he’s now made a full recovery.
Now if that pattern is repeated nationally, 50% of cyclists could have Product Z’s that at the very least need some mechanical attention – or who could benefit from a new set. And week after week their bikes go in for regular services and both mechanics and shop owners see these bikes. At best, they get an “advisory note” – to cover the shop if the guy has accident. Usually the bike just goes back out the door. And who can blame the store for that? Of course, there is high quality service in the form of live-chat/IM/forum type support from many online retailers. That can help a consumer choose which Product Z to buy. But it doesn’t make him aware that he needs a new Product Z in the first place. There is no longer any Drive Mechanism to sell Product Z as a category. This is the classic micro-economic lose/lose outcome summarised in The Art of Strategy (Dixit/Nalebuff). (From such a small sample, I could be wrong of course, maybe just check out a workshop and then draw your own conclusions. And we’ll come back to statistically valid sample sizes in a moment…)
Even some key players in the market privately complain “we just can’t sell Product Z anymore” (i.e. not in the volumes they used to). So what happens if this moves to wheels, drivetrain, stems, bars, saddles, shoes…. oh hold on a minute… are we there yet?
3) The Downsizing of Stores
Despite this, we have seen very few casualties in the last 15 years in either the online or offline sector. And those we have seen can usually be attributed at least in part to some aspect of the individual business, not the market overall. Internet sellers, IBDS and multiples are (mostly) still there. IBDs seem to be there in greater numbers, given the number of new store openings.
One of the reasons why we haven’t seen many High St closure’s is stores strategies of the “the 5 Ds”
- Diversify – expand into services like classes, fitting, physio, travel, café-hub
- Decide – which brands or suppliers we want to work with
- De-stock – entire brands or categories that don’t “earn their keep”
- De-staff – reduce part timers and new hiring’s as fewer sales staff are needed
- Down-Size – sublet some of the store space or move to smaller premises
It’s only when 1-4 have been exhausted (or there’s some other sort of issue peculiar to that store) that we see a store downsize or close entirely. But we have also seen some stores reach the end of the life-cycle. Perhaps their owners have retired or decided to get out of the trade, unable to sell the business on to anyone. In the short term it’s hard for stores with long leases, deep stocks and emotional investment to downsize. Instead they are surviving through these coping mechanisms. But the next generation of store keepers are opening very different business models (cafes, service only stores, fit and training centres etc etc.) Or as one new shop owner put it to me “I don’t want a millstone around my neck, my store will be very different to where I have worked”. Is that where we are headed folks?
I suspect 2015 is going to be the year that the trade largely moves away from PSQ3 (which was never a Sustainable business proposition in the first place) and will be forced to adopt PSQ2x2. With that shift we will have to face Brand Polarisation, Non-Consumption and the Downsizing of Stores.
It’s going to be a year of change that could be positive or negative for the trade overall. My fundamental hope is that “the Non-Consumptive Pause” I described earlier is just that – a pause. And that consumers are sufficiently wedded to cycling that they will continue to spend as much under PSQ2x2 – just in different ways.
I doubt very much that the words I write here will make any difference to any of it. These are fundamental and deep seated forces that will run their own course, I’m just commentating if you like. Nor can I have any degree of certainty that my gut feeling about where the trade is going is right. Without some numbers, my Opinion is just as valid as yours or anyone else’s. This is why I am going to suggest a Poll, which has been set up here.
(a) which categories you have already abandoned and
(b) which categories are on the critical list (and of course those that are still steady or even healthy)
This should at least give us a set of base numbers to work with, if more than 200 of you take part, a statistically valid sample. We might then start to discover some correlation between the number of stores that stock a category and the sales in that category. And in a year’s time we can run the Poll again and at least gain a perspective on what just happened.
Perhaps then we can attempt to objectively answer the big question. How much do High St stores drive the sales of the whole industry? I think 2015 is the year we might just find out.
You can get in contact with John Styles via firstname.lastname@example.org