As we start down the road to the next year and the next decade we need to take a look back to learn what corrections to make to the road maps we use going forward. If we don't have good, sound and accurate road maps, or business plans that we review, renew and update regularly - there is a good chance we will not get to the destinations we want, or expect! In turn, our business plans need to be updated through a strategic situation analysis based on where we have just come from.

This month we are going to look at bicycle manufacturing, distribution and the business environment.

2000 started out just great! 2000 started with a great deal of enthusiasm because of improvements in the Pacific Rim and European economies, and continued expansion of the already strong U.S. economy. Good weather during the first quarter in the U.S. also helped to get bicycle sales off to a good start.

Manufacturing

2000 saw huge changes in bicycle manufacturing in the U.S. and Mexico. Huffy announced that it was closing all of its North American manufacturing facilities and would out-source all of its bicycle products in Asia, followed by a similar announcement from Brunswick Bicycles relative to the U.S. and Mexico and the GT division of Schwinn Holdings about its U.S. manufacturing and assembly plant. Tomkins finally sold Murray and the new owners confirmed that they had no interest in continuing bicycle manufacturing.

What had been the top three-volume manufacturers of bicycles for the mass merchant channel in the U.S. over the past decade, Huffy, Murray and Roadmaster (Brunswick Bicycles), all stopped manufacturing operations by the third quarter of 2000.

Trends in Manufacturing

Trek, Raleigh USA and Cannondale remain as the largest U.S. bicycle manufacturers, and it is significant that all three are suppliers to the specialty bicycle retailer channel of trade. The trend of out-sourcing primarily in Asia for bicycles for the U.S. market will continue. Pacific Cycles, the new Madison, Wisconsin-based owner of Brunswick Bicycles, has been out-sourcing bicycles for the mass merchant channel in the U.S. for over a decade, and there is no reason for any near-term changes in this sourcing plan, which already includes the Brunswick Bicycles sourcing program in Taiwan and China.

Small U.S. manufacturers of bicycle frames and niche bicycle products such as recumbents, road racing and touring bikes, full suspension mountain bikes, BMX bikes and folding bikes will prosper because of the growth in the number of enthusiast and moving-up adult and X-game teen riders. Some of the small U.S. manufacturers will grow to mid-size and either be acquired by the larger players or will attract the venture capital they need to grow to the next level. However, it will take the better part of the next decade for bicycle manufacturing in the U.S., or for the U.S. under NAFTA, to grow back to a significant percentage of U.S. market consumption.

The U.S. will continue as the largest net importer of bicycles going into the next decade and the Pacific Rim, primarily Taiwan and China, will be the manufacturing centers and source countries for the vast majority of bicycles consumed in the U.S. market. The Pacific Rim will therefore be the most significant center and source of bicycle manufacturing, and investment in global bicycle manufacturing over the next ten years. Given recent events to establish a direct and official trading relationship we are assuming that there is a growing probability that the political tension between Taiwan and China will ease, and accordingly that Vietnam will be less viable as a potential source country for bicycles over the next decade.

EU bicycle manufacturing is going through a period of reorganization and further consolidation. In the short term, and perhaps for the rest of the next decade, the EU will maintain a protectionist position relative to domestic bicycle manufacturing, and may expand this position to cover bicycle component manufacturing as well. This protectionist stand has led to Asian and American bicycle manufacturing companies investing in and building production facilities inside the EU. This trend will continue and both current European bicycle manufacturers and foreign bicycle manufacturers will look for more competitive production positions in Eastern Europe and particularly in countries that are candidates for EU membership over the next decade.

Distribution

In the U.S., mass market-suppliers predicted specialty bicycle retailer prices would decline and the number of bicycle dealers in the U.S. would also decline with prices. Specialized established a new selective distribution dealer agreement and relationship paradigm with its Alliance Program.

In the EU, Dealer Buying Groups continued to grow and expand from Germany to other European countries. In the UK a new type of Dealer Marketing Group has emerged that incorporates a complete brand building and marketing program.

Web-based "Pure-Plays" have failed absolutely. Bike.com, the Austin, Texas-based internet retailer of bicycle products, with Lance Armstrong as a partner, went out of business in December, and what was left of its assets were sold.

Lastly, no clear B2B business models have yet to emerge on a global basis, and there are no announced start-ups that have gained any traction in the EU, North America or the Pacific Rim.

Trends in Distribution

In the U.S., the mass market-suppliers' predictions were both flat wrong! Average retail price points in the specialty bicycle dealer actually increased. The number of specialty bicycle retailers went down slightly, but not significantly, and they have maintained or gained market share. Specialty retailers are gaining market share in most U.S. retail segments, and in Sporting Goods in particular. Look for the specialty bicycle retail channel in the U.S. to gain market share over the next ten years, fueled by its ability to better serve the growing number of adult cycling enthusiasts and aging baby boomers and seniors.

Whether Specialized is ultimately successful in the marketplace or not, it has established a new, and much more friendly and profitable way of doing business between a bicycle brand and its authorized dealers. This new selective distribution paradigm will have a lot more traction if Specialized is successful in the marketplace, but once a sufficient number of top tier U.S. specialty bicycle dealers have had a taste of a better business relationship with a brand supplier it is going to be very hard, if not impossible to stop them from demanding similar agreements with their other brand suppliers. Look for the trend toward selective distribution dealer agreements to grow in the U.S. over the next decade.

Bicycle dealer buying groups in the EU have grown substantially over the past ten years, and are positioned to grow more dramatically over the next decade as bicycle brands continue to open their own retail store fronts. The new dealer marketing groups in the UK appear to be the next step in the evolution of dealer cooperatives in Europe and if the first business models are successful in the UK look for this model to spread to the rest of the EU. Dealer buying groups have not yet migrated to North America - but there is the potential for one or more of these groups to be established in the U.S. over the next ten years, depending on the spread of the selective distribution model established by Specialized and any future attempts by the established bicycle brands to start their own retail storefronts or otherwise sell directly to consumers.

While bike.com is now gone, there are several multi-channel bicycle retailers that appear to have been successful with their web retail efforts, including REI and Performance. There are also a number of specialty bicycle dealers in the U.S. and Europe who have successfully integrated web sites into their positioning as multi-channel specialty bicycle retailers. Hybrids like Derby's bikeshop.com have seemed to struggle and will probably be reassessed under the recent restructuring and new management team. Look for variations of multi-channel bicycle retailers that incorporate the Internet and web retailing into their business plans and merchandise mix to emerge as the dominant model over the next decade. The brands and manufacturers who help develop and support multi-channel bicycle dealers will have the best chance of success in the future.

The fact that no B2B business models have yet to be established anywhere in the global bicycle industry is not a sign that the promise of B2B has diminished. It is a sign that the B2B business models that have been discussed to date do need more development time, resources or refinement. The bicycle industry can realize huge financial rewards from a good sound B2B business model or models, and look for more time and attention to be paid to development of industry wide standards for Business-to-Business connectivity and commerce over the next five years.

The Sporting Goods Industry has established two B2B initiatives that appear to be well positioned for success, and accordingly as examples for the Bicycle Industry. The SGMA has a new B2B initiative aimed at commerce between sporting goods manufacturers and their OEM suppliers, and the NSGA has a new B2B initiative aimed at commerce between retailers and suppliers. Watch both of these B2B business models very closely over the next 18 to 36 months.

Business Environment

2000 demonstrated continuing pressure on bicycle industry margins and profitability in Europe, North America and the Pacific Rim. While most of the economies of the world markets improved over the last year, from 1999 to 2000 the bicycle industry had a very hard time being one of the beneficiaries of global economic prosperity.

The strength of the U.S. dollar against the Euro was blamed for a downturn in profits among the U.S. bicycle brands doing business in the EU. The U.S. bicycle market got off to a good start, and will probably still end up with 2000 showing a 2.5 to 3 percent increase over 1999.

However, the U.S. economy slowed considerably during the fourth quarter of the year, driven by the Federal Reserve's policy to curb inflation. This slowing led to one of the worst year-end holiday retail selling seasons in perhaps the last decade.

Of the two global players in the bicycle industry, Giant Manufacturing Company appears to be financially solid and early reports indicate an increase in revenue and profit in 2000. Derby International ended the year in apparent financial trouble, with reorganization starting under a new senior management team by the second week of 2001.

In the EU, in addition to the problems attributed to Derby, Cycleurope, the second largest European bicycle group, is reported to be going through its own reorganization. As noted, all the U.S. brands doing business in Europe, including Trek, Specialized, Cannondale and Schwinn/GT, have been reported as experiencing a drop in profits on their European business in 2000 because of the strength of the U.S. dollar against the Euro.

Trek is reported as doing very well in its other markets, including a dominant position in the specialty bicycle retail channel of the U.S. market. Schwinn Cycling & Fitness has recently announced a reorganization, which includes greatly expanding marketing, distribution and sales of the Schwinn brand in Europe and has installed a new senior management team in its headquarters in the U.S. Cannondale has gone through refinancing and is reported to have worked out the problems with production of its new motorcycle. Specialized is still shaking out its new Alliance program, and has also experienced management changes over the last half of 2000.

As previously covered, the top three-volume U.S. manufactures of bicycles for the mass merchant channel over the past decade, Huffy, Murray and Roadmaster (Brunswick Bicycles), all stopped manufacturing operations before the end of 2000.

Business Trends

While the Federal Reserve has taken action to lower interest rates, this relief will take another quarter to make itself felt at U.S. retail cash registers. The predictions are for a "lousy" first quarter 2001 for most U.S. business, with little or no economic gain. The second through fourth quarters are predicted to show steady improvement, with next year posting an overall gain in GDP of 2 to 2.5 percent and a "soft" economic landing.

The U.S. bicycle market in 2001 will probably be flat to down slightly, with a great deal depending on how severely the economic slowdown impacts all retail channels during the first quarter of the year, which is normally the slowest quarter for bicycle sales. This is good news, since the second quarter and the months of April, May and June represent the key to the 2001 bicycle market and sales. The U.S. economy is now projected to head back up by the end of March going into April.

The U.S. dollar is projected to remain strong against the Euro through the coming year, and accordingly U.S. companies doing business in Europe will continue to have profit problems in 2001 because of this currency situation.

The bright spots are the relative strength of the bicycle markets in Japan, the EU and the U.S. The Japanese market should remain stable, as should most of the European bicycle markets, and the U.S. market should get out of 2001 with a slight downturn. Assuming the "soft landing" scenario holds, the global bicycle market should be ready to resume steady growth by 2002 to 2003.

The power of a good sound business plan is as important going forward as it was in the past. We hope you will find this analysis and our observations valuable to your 2001 business planning process. We can't put enough emphasis on the vital importance in these quickly changing and challenging times of a well researched and sound business plan that is reviewed and renewed on a regular basis. We suggest reviewing business plans monthly and revising them at least once a quarter as business conditions and company performance inevitably change!

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