The cycling world, or “velo-verse” as some call it, is currently facing significant challenges. For almost two years, key financial indicators like inventory-to-cash ratios have been unfavorable. Many industry insiders anticipated a market correction by the end of last year, but the situation appears to have worsened. This has put considerable pressure on Bike Companies across the board.
Several major players in the bike industry are feeling the strain. Trek has drastically reduced its product range and implemented layoffs. Cannondale also recently laid off employees. Rapha has effectively closed its US operations. Stages Cycling, a power meter manufacturer, defaulted on its debts and was acquired by Giant, to whom it owed a substantial sum. Giant itself is rumored to have over 100,000 unsold bikes in the US. ENVE was divested by its parent company and sold to private equity. Kona Bikes has essentially collapsed, and its parent company is actively seeking a buyer. Adding to the woes, popular online retailers like Colorado Cyclist and Planet Cyclery are shutting down. The list of struggling bike companies continues to grow.
What are the underlying causes of this industry-wide downturn affecting bike companies?
The core issue stems from the pandemic period. Global lockdowns led to a surge in bike popularity as people sought outdoor activities. This unprecedented demand, coupled with reduced production capacity in Asian factories, created significant supply shortages. Bike shops could sell almost any available inventory at full price. This was a genuine boom, triggered by a unique global event.
However, as the world reopened, the surge in bike demand sharply declined. This market correction, often referred to as ‘reversion to the mean,’ highlights the relatively stable year-over-year demand for bikes under normal circumstances. In 2023, the bike industry revenue plummeted because many potential buyers had already purchased bikes during the pandemic boom in 2021 and 2022. Essentially, several years’ worth of sales were concentrated into a shorter period.
Bike companies failed to anticipate this sharp decrease in demand. Consequently, they forecasted and ordered significantly more bikes than the market required, resulting in a massive inventory surplus and driving prices down. While it’s easy to criticize product managers and forecasters, reports suggest that factories pressured them, essentially stating, “order these bikes, or you will receive none.” This mirrors the long-standing practice of bike companies pushing excess inventory onto bike shops. The consequences of this overstocking were predictable.
While inventory levels have started to decrease in 2024, the situation for bike companies has actually deteriorated further. Several factors contribute to this: Firstly, despite reductions, inventory remains excessively high for most major brands. Secondly, these large companies are now cash-strapped due to the costs of holding this unsold inventory. Thirdly, high interest rates exacerbate financial pressures. Fourthly, negative cash flow is pushing even industry giants towards debt defaults or near-default situations. Fifthly, the aggressive price reductions and extended spring sales by major players are hurting smaller companies who were initially less affected. These smaller domestic manufacturers, who did not contribute to the overstock problem, cannot afford to match the drastically reduced prices of larger competitors. Bike shops are also suffering from reduced profit margins on heavily discounted sales.
In this challenging environment, financially weaker and indebted bike companies are vulnerable to acquisition by larger entities or purchase by private equity firms seeking distressed assets. This consolidation trend may not ultimately benefit consumers. The deep discounting may tempt consumers to buy bikes that are unsuitable or unnecessary, which will then flood the used bike market, further depressing prices.
Looking ahead, increased acquisition and bankruptcy announcements within the bike industry are expected throughout 2024. The industry landscape at the end of the year will likely look significantly different. These changes will undoubtedly bring shocks, with job losses impacting all sectors of the industry. Even organizations like TCI are feeling the effects, as sponsorship opportunities diminish due to company marketing budget cuts. While many believe the situation will stabilize by the end of 2024, the hope now is to minimize the loss of valuable individuals and companies due to circumstances largely beyond their control.
Alt text for the image: Advertisement for Shimano GRX mechanical groupset highlights new product launch amidst bike industry challenges.
