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March 11/99 10:27 am - Industry News


Posted by Editor on 03/11/99
 

Industry News
(courtesy The Coffrin Group)

A. Skip Hess Now Running Giant USA.

Skip Hess was named President of Giant USA on March 4. Hess was previously Schwinn's Senior VP in charge of the bicycle division. Six years ago Hess was recruited by Schwinn from Giant USA when he was the product manager for bicycles.

COFFRIN GROUP ANALYSIS.

Giant's entry into the USA market was extremely rapid by any standards. Bill Austen, original President of Giant USA, built an efficient distribution organization. This infrastructure supported aggressive growth ... from sales of nothing to 300,000 + bicycles in a few short years. This was a stunning achievement.

Giant's appeal to retailers during the 1980's was in essence this: We are the company that builds Schwinn and Specialized bicycles, and we can sell comparable quality at a cheaper price.

After three or four years of watching Giant's growth in the USA, Trek, Specialized, and others got very aggressive on prices for bikes, particularly models retailing under US $400. It seemed everyone, except Cannondale, was pursuing a market acquisition strategy driven by price alone.

When many of the established names in cycling became competitive with Giant's prices (and after designer Skip Hess left for Schwinn), Giant did not have much of a marketing story left to tell. USA sales have slipped to probably less than 40 percent of the peak under Austen's tenure.

The price story had been told so hard that Giant had a hard time telling any other story. When suspension bike sales were growing quickly in the 1990's, Giant had neither great designs nor much credibility among enthusiasts.

What will Skip Hess do at Giant?

We predict that the first visible step will be to recruit a top marketing person with an aggressive and daring character.

Next, we expect Skip Hess to focus on strengthening Giant's bike range, particularly at the over $400 price points. We may not see exactly a top down marketing strategy, but we will see a product line with strengths in a variety of price ranges. And, expect Giant's juvenile line to continue to improve.

When Hess took over bikes at the reorganized Schwinn company, it was nearly impossible for Schwinn to sell any bikes over US $500 retail. With hip marketing, both new and retro designs, and some USA fabrication of high-end models, Schwinn obtained sales in the high-end of the market and a credibility among retailers that nobody thought possible.

Expect a revitalized Giant to emerge under Hess. And, expect the company to start regaining sales it had lost to Diamond Back, Specialized, Schwinn, and Trek.

The bottom line: Hess's arrival at Giant is good news for retailers ... and bad news for Giant's competitors.


B. GT Co-Brands Bike With Sports Apparel Retailer.

GT has selected sporting goods retailer American Eagle Outfitters as it's first retail partner for co-branding. The first co-branded product will be an AE/GT all-terrain bicycle.

American Eagle Outfitters is a consumer-direct seller of proprietary apparel, accessories, and footwear that targets an audience from ages 16 to 34. In addition to mail order and internet sales, American Eagle operates 388 stores in 41 states.

American Eagle Outfitters (Nasdaq: AEOS) had 1998 sales of US $587 million. GT's 1998 sales were US $216 million. GT, like Schwinn, is owned by Questor Partners investment group. Questor Partners is a private equity fund located in Michigan.

The bike, similar to GT's Timberline model, will retail for under US $500. A July introduction date is planned. Initial quantity commitments to GT are at a modest level of 600 units.

Bob Hadley and Steve Blick at GT describe the relationship as follows:

1. AE will sell the bike in its catalogue and on its web site.
2. AE gives the buyer a voucher receipt. The closest GT dealers are identified for the buyer.
3. Buyer goes to the shop and is sized for the bike. The dealer orders the bike.
4. The dealer assembles the bike and receives the basic profit margin.

Reports Hadley, GT's Director of Marketing, "GT receives brand exposure ... while increasing dealers' traffic."

COFFRIN GROUP ANALYSIS.

The AE/GT alliance is the result of a productive Promotions Department at GT.

The character of this initial partnering (as AE calls it) or promotion (as GT calls it) has elements that are interesting. American Eagle Outfitters is a commanding and aggressively growing retailer that uses consumer-direct sales methods that most large bicycle companies have at least contemplated using themselves: The web and mail order catalogs.

GT had been one of the largest wholesalers to serve only Bicycle Specialty Retailers (BSRs). What an interesting promotion/experiment this is, with GT joining a retail partner selling products by mail order and the internet.

The co-branding strategy lets GT gain new sporting goods or sports apparel channel sales and exposure. It is a novel experiment that could lead to all sorts of speculation.

All of which would probably be wrong in the short term.

With bike brands like Mongoose aggressively selling into the mass merchant channel of distribution, GT's co-branding a bike with a sports apparel firm will probably receive only mild objections from GT retailers.

Co-branding that gets bike products into non-specialty channels is probably something more bike companies will try. Do not be surprised if you see some other bike brands implement a co-branding strategy that totally bypasses the specialty channel.

Could there ever be, to toss out hypothetical unions, a Cannondale/Costco or a Schwinn/Toys-R-Us bike? (Ed. Note: In Canada we already have something similar with CCM (built by Procycle), Precision/Leader (Victoria Precision), Bonelli (various, including Raleigh and Procycle), etc.)


C. France's Decathlon To Open USA Stores.

Decathlon, a leading European sporting goods and bicycle retailer, plans to open retail stores in the USA. Decathlon has established offices in Pennsylvania, but has offered no timetable for store openings.

Decathlon, a French based company, has been selling bicycles in its product mix for over 20 years.

Decathlon is one of the largest sporting goods retailers in Europe. The company has 220 stores in Europe, Asia and Latin America.

COFFRIN GROUP ANALYSIS.

The announcement by this French based retailer shows that the USA is not protected from the globalization of the retail market place.

Decathlon's entry into the USA market may have long-term impact. However, it will take some years for Decathlon to establish a strong retail network in the USA.

Decathlon's entry into the USA market seems to be part of a continuing trend for the Bicycle Specialty Retailers to be under attack from the sporting goods channel.


D. Derby Cycle Buys Diamondback.

Derby Cycle Corporation, the parent company of Raleigh USA, has acquired Diamondback International, excluding Diamondback's German and French operations.

The main equity holders in Derby are Thayer Capital Partners and Perseus Capital, private equity investment firms headquartered in Washington, DC.

DB has a range of fitness equipment that has generated good profits in the USA. Line expansions and redesigns have created a product range that is strong enough to support a significant growth is sales.

Derby Cycle is now the world's largest manufacturer and marketer of bicycles. World-wide, Derby brands sold nearly 2 million bicycles last year. Most sales were at prices of US $300 to $500 in Europe and probably $200 to $400 in the USA. Derby's 1998 revenues totaled US $500 million. The company's brands include Raleigh, Nishiki , Univega, and the European brands Gazelle, Kalkhoff, Musing, Winora, and Staiger. (Ed. Note: They also own Raleigh Canada)

DB's bike revenues in the USA were probably greater last year than Raleigh's.

On March 5 Derby terminated 20 + employees at DB USA. Several support staff employees were fired, as were some product development, marketing, purchasing, and inside sales people.

COFFRIN GROUP ANALYSIS.

The DB acquisition gives the Derby brands combined sales that make the company the number three seller of bicycles (as measured in units, not dollars) in the USA market. That alone, to this USA writer, makes the DB acquisition interesting.

Derby will use the Diamond Back brand to build volume at the Raleigh assembly plant in Kent, Washington. And, that move will certainly make Raleigh USA more profitable.

Duty savings available to USA assemblers are greater on more expensive bikes. DB generates more USA sales at higher price points than Raleigh ... and has enjoyed at least some success with its high-end DBR brand bicycles.

The Derby strategy of strongly focusing its resources on bikes in the $200 to $500 price range makes great sense in Europe. And, in my opinion, less sense in the USA, particularly for Diamond Back. Why?

The European market has a great many more brands (!) than the USA. The different consumer characteristics of various geographical regions and numerous small brands have created a market that is much more fragmented than the USA market.

Derby has become a Euro powerhouse by making several acquisitions and by conducting large marketing campaigns made possible by the company's size. In some Euro markets, a 10 to 12 percent market share can make you a number one or two player. Not so in the USA.

All of Derby's USA brands (Univega, Nishiki, Raleigh) pursue a similar value strategy: Cheap prices on bikes at the lower end of the specialty market.

I am not certain that the USA has room for any more low priced brands. Nor am I convinced that Diamond Back can even maintain current sales levels if it shifts to a value strategy that emphasizes lower price points.

What path should DB take other than a value strategy? Coffrin Group recommends these steps:

1) Ruthlessly pursue operations efficiencies made possible by the consolidation.
2) Jumpstart fitness sales into various distribution channels.
3) Expand on DB's BMX roots that still shape consumer perceptions of the brand.
4) Focus adult bike design efforts on products that could takes sales away from players like Specialized and Schwinn.
5) Recruit the top talent needed to carry out these strategies.

Will Derby management kill off DB's more expensive bikes, including the DBR line? Will DB bikes start to look a bit like re-badged Raleighs? I do not know.

Certainly the smart and energetic Bill Austen might pull a rabbit out of his hat. He could have huge success with a strategy different than I would recommend.

The industry will watch with interest as he remakes the Diamond Back organization and brand.

Ed. Note: Diamond Back has never done particularly well in Canada - largely because the distribution has changed so frequently. Asama has picked up the line now, and it will be interesting to see what sort of support they receive from the parent company. I expect little, since the parent will be spending all of its time (and money) south of the border.


E. Electric Bicycle Exhibit Planned for CABDA Expo.

In a first for the USA bicycle industry, Extra Energy of Germany is organizing an exhibit devoted exclusively to electric bicycles for the CABDA Cycling Expo. Extra Energy will create a centralized area for companies to display and promote their e-bikes and components.

Extra Energy is a non-profit group that was started by Hannes Neupert. He started work to develop the association in 1993 as a project for his Masters Degree in Industrial Design in Germany. Neupert's book, Das Powerbike, is perhaps the world's most comprehensive volume on e-bikes.

In additional to providing a platform for e-bike manufacturers to show products, Extra Energy will set up a test track. The testing area will have electric bikes from all over the world that may be test ridden. Several manufacturers, some of whom have never shown goods in the USA, have already pledged their participation.

Electric bike companies interested in participating should contact Hannes Neupert at . The CABDA Cycling Expo is in Chicago, October 8 - 10, 1999.

COFFRIN GROUP ANALYSIS.

Hannes Neupert is a young man driven by his passion to promote ecologically sensible vehicles that do not use gasoline. His enthusiasm is enjoyable and refreshing.

Electric bicycles are already a significant part of the bicycle industry in Japan. E-bike sales in Europe are accelerating, although Europe is perhaps three years behind Japan in terms of consumer acceptance. And, certainly the USA is at least three years behind Europe.

The Extra Energy exhibit and test track at CABDA will offer a fun and efficient way for retailers to learn more about this emerging product category.

And, we predict you will see numerous product managers from USA companies trying to learn more about e-bikes from international (and domestic) experts.

Ed. Note: Canada is even further behind than the US in the electric bike market. This is due primarily because of archaic and conflicting provincial transportation laws across the country. BTAC (Bicycle Trade Association of Canada) and Procycle (who produce an electric model - the Electron - are both working on getting electric bikes accepted in this country. In Ontario, for example, electric bikes are considered mopeds, requiring motorcycle helmets, licencing, etc.


F. BREC Lowers Conference Fee.

The Bicycle Retail Education Conference, sponsored by NBDA and CABDA, has reduced fees to just $499 per attendee, a savings of $100. There is no requirement that retailers be members of CABDA or NBDA to obtain the reduced price.

Jay Townley, producer of the event, said, "We want to make the BREC affordable to as many dealers as possible." BREC's location has been moved from Florida to San Diego, CA in an attempt to improve attendance.

BREC 2000 will be held January 13 - 16. Call 1-888-228-8068 for more information.

COFFRIN GROUP ANALYSIS.

BREC is only education event in the USA produced by bicycle dealers for bicycle dealers. That is commendable and BREC deserves industry support.

Business owners and mangers seldom spend enough time on strategic planning. Attending BREC could be the best tactical move a retailer might make during the year.

If I may be so bold, let me suggest that already the best run bike retailers are meeting their business challenges more successfully than their suppliers! The top retailers are running their businesses better than their vendors.

Five years ago I would never have thought of making such a statement. Now I am convinced that the best retailers are certainly listening to their customers better than their suppliers are listening to them.

And, the well-managed retailers are getting a significantly better return on their investment than bicycle manufacturers (although this may be so simply because the bike companies are doing so poorly).

Ed. Note: BREC is well worth consideration by Canadian retailers, plus you get to go to San Diego in January!

Copyright 1999 by Coffrin Group.

 


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