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John Gardner of J&J Cycles in Kingston rides a high-end Cannondale bicycle manufactured by Dorel Inc. (Paul Weeks/Paul Weeks)
John Gardner of J&J Cycles in Kingston rides a high-end Cannondale bicycle manufactured by Dorel Inc. (Paul Weeks/Paul Weeks)

Cyclists are warming to Dorel. What about investors? Add to ...

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Five years ago, Specialized Bicycle Components invited J&J Cycle in Kingston to become one of its dealers. J&J co-owner John Gardner was keen—Specialized is one of North America’s top makers of high-end bikes. But if J&J wanted to sell Specialized, it would have to meet the company’s considerable demands, including taking the lines Specialized wanted, and hitting ever-increasing sales targets.

Sales boomed and Gardner was thrilled—for a while. “Bit by bit, Specialized was taking over more of our store,” he says. “They were very forceful with the products they want you to represent.”

Last year he decided to add a third brand: Cannondale. The Specialized rep pooh-poohed the idea. Gardner pressed, then wrote to Specialized Canada managing director Larry Koury to say he was serious. Koury’s e-mailed response: “Cannondale in, we’re out. Simple.” That is exactly what happened. “They crossed the line and tried to run our business,” says Gardner. (Koury declined to comment.)

The competitive zeal of elite cyclists is matched in the industry that supplies them. With adult bike sales stagnant in the U.S. (at about 13.5 million units in 2010), it’s trench warfare in the independent dealer channel, marked by a never-ending race to create more innovative and sophisticated components, frames and designs, and a fight for floor space. Apart from Cannondale, the principal combatants are industry leader Trek Bicycle Corp. of Wisconsin, and No. 2 player Specialized, based in California.

Cannondale was started by Joe Montgomery above a pickle shop in Connecticut in 1971, and it soon made a name for itself as a design innovator. Like Specialized and Trek, Montgomery introduced a mountain bike at the dawn of the mountain biking craze in 1983. In the late 1990s, Cannondale began a misadventure in off-road motorcycles and ATVs. In 2003, it filed for Chapter 11. A new owner, private equity firm Pegasus Partners II, took over.

Around that time, Dorel was preparing its big move into bicycles. By then, it was a Canadian success story: Leo Schwartz had founded the company in 1962 as a manufacturer of baby mattresses, then merged in 1987 with a furniture company built by his son Martin and son-in-law Jeff Segel and went public. In 1988, Dorel bought Cosco Inc., a U.S. children’s furniture manufacturer three times its size. That gave it a reach into Walmart; other successful acquisitions followed. “Mergers and acquisition activity and integration ability are critical given the company has not typically been a brand innovator,” RBC Capital Markets analyst Tal Woolley said in a 2009 note. “It tends to purchase brands established in the market and enhance them by applying [its] sourcing and logistics skills.”

Dorel’s purchase of Pacific Cycle in 2004 for $310 million gave it another category to offer its discount retail customers. Later that year it brought out an update of the classic Schwinn Sting-Ray “banana seat” bike. Dorel could barely keep up with demand, but the Sting-Ray revival proved to be short-lived, and then sales in the bike division sagged.

Dorel’s bike story needed a second spin. Schwartz had had ambitions for the independent channel from the outset: While bike shops typically accounted for just 15% to 20% of unit sales in the U.S., their pricier merchandise meant they collected around half of the dollars.

But Dorel encountered rejection from independents when it tried to peddle its Schwinn brand to them. “We as an industry shot it down,” says Darrin Duhamel, owner of Revo Cycles in Lake Forest, California, one of Cannondale’s top customers in the Sunshine State. “Pacific had devalued the brand by putting it in Costco and Walmart.”

“That’s when we turned around and said, ‘Look, if we want to grow the next step in bikes and grow in the independent bike dealer channel, we have to grow with a proper brand,” Schwartz says. He approached Cannondale’s owner and liked what he saw. Cannondale still had a reputation for making excellent bikes, but also for providing little brand support. Marketing was weak and the company struggled with product availability. “So many things Cannondale did were better than the competition, but they just failed at getting the word out,” says Duhamel.

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