Retailers need to adjust to cycling’s changing image, from sport to transportation, such as Gears bike shop’s new electronic assist, manual cruiser bikes, shown with co-owner Ira Kargel in Mississauga on Saturday.J.P. Moczulski/The Globe and Mail
Just a few years ago, Ira Kargel put a big focus on road bicycles in her Gears stores, with prices ranging up to about $12,000 apiece.
But Gears, which launched its fourth store this month, has now shifted its spotlight from road bikes to urban and mountain models, which can be almost one-third the price of a road bike.
While cyclist Lance Armstrong helped galvanize a generation into buying the workout-friendly road bikes more than a decade ago, his fall from grace played a part in consumers kicking the high-end road bike buying habit. What is more, the sturdy bikes didn't need frequent replacement, leading to softer sales.
"That Lance Armstrong fad – every CEO needs to be on a road bike – you don't see that as much," Ms. Kargel, co-owner of Gears, in Mississauga, said.
At the peak of the bike-selling season, retailers and suppliers are bracing for the effects of big shifts in the bike business that are catching some players off guard and forcing them to operate more nimbly or face weaker results.
The changes include sluggish sales of pricey road bikes and a lift in those of generally lower-priced urban or multi-purpose bikes amid a more crowded market and the emergence of low-cost online bike sellers.
"The business model is changing," said Larry Koury, managing director of Specialized Canada Inc., whose parent company is one of the industry's biggest bike suppliers, based in Morgan Hill, Calif. "The speed and the willingness to change are probably the biggest determining factors in how things will be in two or three years."
Already some companies are feeling the pinch. South of the border, the changes have led to a glut of some premium models and heavier discounting – and in some cases, lower sales and thinner margins.
Montreal-based Dorel Industries Inc., which produces the upscale Cannondale bikes, saw its first-quarter operating profit tumble to $5.3-million from $11.6-million a year earlier in its sports division, pointing to an oversupply and markdowns in its U.S. premium bike business, which is known for its road bikes. Sales in the division fell to $216.5-million from $228.9-million.
As consumers moved to buying more mountain and urban bikes, "we responded maybe a little late," Jeffrey Schwartz, chief financial officer of Dorel, said. But the company is catching up now with new models in those popular categories and sales already are picking up, he said. "That's going to pay off."
The wider shift is being driven by millennial consumers who are looking for affordable urban or multi-purpose bikes with upright handles, rather than upscale road bikes that are geared to fitness buffs with money to spare, said Matt Powell, sport industry analyst at researcher NPD Group in Port Washington, N.Y.
"This whole industry really has to recognize this shift in consumer preference and make the move," Mr. Powell said. "There are some who have resisted it. If you've made your living selling $6,000 to $8,000 bikes and now you're going to sell $800 to $900 bikes, that's a whole different business model."
Even so, U.S bike sales are growing overall (no Canadian data were available): Last year, bike sales in the U.S. rose 3.9 per cent to $1.7-billion (U.S.) from a year earlier, according to NPD. Sales of road bikes, previously the single largest category, fell 6.2 per cent to $508.2-million, while sales of mountain bikes, today's biggest category, picked up 6.2 per cent to $518.5-million, it found.
Other data tell the broader story: Bike profit margins were an average of 38.2 per cent of revenue last year – but those of road bikes were just 33.7 per cent; mountain bikes, 36.7 per cent; and urban commuting bikes an attractive 41 per cent, NPD data show.
U.S. bike prices fell 2 per cent to an average $722 in 2015, with the price of road bikes an average of $1,518, compared with only $556 for commuting bikes and $996 for mountain bikes, it says.
Urban bikes are emerging as an important segment and one that Montreal-based distributor Outdoor Gear Canada is increasingly emphasizing, said company president David Bowman. Electric bikes and those for children are small but budding businesses, he added.
OGC, which produces the Opus line and carries other brands and accessories, has seen its sales rise about 3 per cent between October and April from a year earlier, although its gross margins slipped roughly 2 percentage points amid discounting to clear prior-year premium road bikes, he said.
Weather is a critical factor in bike sales and the often cool and rainy spring in Central and Eastern Canada didn't help, Mr. Bowman said.
More importantly, cycling is evolving from principally a sport – road and mountain bikes – to a more popular form of transportation, helped by cities building bike paths, he said, adding that suppliers and retailers need to reflect the changes in their offerings.
The challenge is that suppliers have little visibility into retailers' current sales trends, while overseas orders for the following season are made as much as a year in advance, Mr. Bowman said.
At the same time, the retail market is becoming more crowded – not just with online discount sellers, such as British-based Wiggle, but also larger retailers that are putting a bigger push on bikes.
Vancouver-based Mountain Equipment Co-op has expanded aggressively into bikes, angering specialty rivals that view the co-op's tax-exempt status as unfair competition. And MEC focused early on urban bikes, while "the rest of the industry was a little slow to get on it," Jeff Crook, MEC's chief products officer, said.
But Mr. Crook sees online players, even Amazon.com Inc., as bigger threats to traditional retailers. Some suppliers, such as Trek Bicycle Corp., have rolled out their own e-commerce. MEC has been adding more cycling items to its cyber offerings, including many that are not stocked in its physical stores, he said.
Other smaller bricks-and-mortar retailers are starting to sell products online, including – in March – Ms. Kargel at Gears, whose sales and profit margins have been relatively flat in the past year.
"Clearly people like to buy online," she said. "When your competition is Amazon, you'd better be able to reply quickly and be engaged. Otherwise you fail."
Editor's Note: An earlier online version incorrectly located the parent company of Specialized Canada Inc. This version has been corrected.