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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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Martin Schwartz looks like he’s about to pass out from exhaustion. The CEO of $2-billion consumer products manufacturer Dorel Industries Inc. got back from China last night. Schwartz can be combative when faced with questions he doesn’t like. But on this day in late April, it appears, during an interview in his office in Westmount, Quebec, that the fight has gone out of him.

That changes once the subject turns to Dorel’s trophy asset, Cannondale Bicycle Corp., which it purchased in 2008 for $202 million. It seemed like an odd match at the time: Cannondale was a maker of elite, high-performance bicycles; Dorel sold mass-market high chairs, infant car seats, assemble-it-yourself furniture—and cheap bikes. Cannondale customers were typically hard-core types who spent thousands for state-of-the-art riding machines at expert-staffed independent bike dealers; Dorel customers walked into Canadian Tires and Walmarts looking to buy a bike for $100 with little help from teenaged store clerks.

Industry players worried Dorel would drag Cannondale down-market and move units by the millions at Walmart. After all, Dorel was already the biggest peddler of bikes to U.S. mass merchants—including its Schwinn brand, which had been banished by many independent bike shops when the brand started selling for Every Day Low Prices.

When I tell Schwartz there are those who still suspect Dorel will start churning out $100 Cannondales, he becomes feisty. “I’m not surprised,” he snaps. “I think we’re going to get this forever—‘Dorel is not a high-end bike company, when is the axe going to fall, when are they going to find it in mass merchants,’” he says mockingly. “All of that stuff is just not going to happen.”

You can’t blame Schwartz for resenting the second-guessing. By most measures, Dorel has had a successful run—it’s one of the last significant Canadian-owned consumer products manufacturers, boasting top brands including Safety 1st car seats, Cosco high chairs and Sugoi athletic apparel. Free trade killed a lot of Canadian companies, and cheap Chinese imports wounded others; Dorel, by contrast, grew stronger by moving big time into the U.S. market and offshoring production to China early.

But when it comes to the stock market, Dorel seems to wear the “kick me” sign. Dorel barely registers with investors. It recently traded in the $25 to $30 range—which is where it was in 1999, when it was a much smaller business. Schwartz, who manages and controls Dorel along with two younger brothers and a brother-in-law, has complained for years that people don’t appreciate his company.

Even when it adds a new business, Dorel gets no respect. Take Cannondale. In the past four years, Dorel has consistently acted like a company that wants to excel in the specialty bike business and to restore Cannondale’s name as an innovation and performance leader. Indeed, Cannondale is the best news coming out of Dorel these days. In 2011, Dorel’s bike-focused recreation and leisure division posted a stellar 11.2% revenue gain and a 17% operating profit increase. Strip out the stagnant mass-merchant brands such as Schwinn, and the results are even better: Sales to independent dealers grew 25% last year. The division earned a first-quarter operating profit of $21.4 million, up 20%, making it Dorel’s most profitable business.

But the success has done little to shake Dorel out of a seven-year funk. It started with problems in its furniture business. Then mass-market bike sales softened. The recession hit, plastic prices rose, and its children’s products business has suffered ever since. Profits have bumped along—$104.6 million net income last year on $2.4 billion in revenue—which is less than any of the prior three years, and barely ahead of the $100.1 million Dorel earned in 2004.

So what to make of Dorel? It’s both a low-margin supplier to mass merchants and a high-margin supplier to specialty stores—and, since buying a chain of juvenile products stores in Chile and Peru last fall, it’s also a retailer. That makes it hard for investors to value. Would it be better to break it all up and unearth the value analysts say is buried within? For that matter, could Dorel be sold? “If someone comes with the right deal, we’d definitely look,” says Schwartz. “For me to say, ‘No, we’d never sell,’ I’d be lying to you.”

* * *

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.

Schwartz saw the shortcomings but also the opportunity. In a zero-sum competitive market, there was more upside for a respected but undernourished brand with a new lease on life than a market leader trying to defend its position. “The dealers we talked to said they would support Cannondale,” says Schwartz. “Everyone was looking for, not necessarily the number one brand, but a strong number two. We thought we could take it to a much higher level.”

Rather than try to hide its relationship with Walmart, Dorel portrayed itself as a well-financed and motivated owner that understood bicycles and would invest in the brand. It sent a key message by splitting management of its bike business in two. “We said, ‘Give us six months, okay? And if we’re in the mass merchants [with Cannondale], don’t buy from us,’ ” says Schwartz. “And it calmed down and went away.”

Dorel spent the next four years turning the brand around. Dealers say the transition has been slower than hoped—supply problems persist—but welcome. “There have been growing pains, no question,” says Gardner. “It’s getting better daily, and they’re fixing it.” Dealers like Duhamel worried Cannondale’s quick decision to shift production to Asia would cost it customers, but the veteran outsourcer Schwartz wasn’t worried. “Listen, we’re probably the last ones to be manufacturing anything in the States,” he says. “[Everyone] realizes it. This was really a non-event.”

Schwartz is particularly proud of the reviews Cannondale has been getting. Bike Magazine declared that Cannondale’s Jekyll Ultimate “might just be the ultimate mountain bike.” Road Bike Action Magazine called the new $5,500 Cannondale SuperSix Evo “probably the most intriguing bike for 2012.” Even better, German magazine Tour anointed the $12,100 SuperSix Evo Ultimate as the best road bike in the world over the past 10 years. Skeptics, please note: All three bikes were developed after Dorel bought the company.

Cannondale is winning more floor space with existing dealers and adding new ones. Bob Laughton, owner of Bushtukah in Ottawa, began selling the brand in 2010 and has been surprised by customers’ positive reaction. “As an owner, Dorel has to be thrilled by what they have been able to do with Cannondale,” he says. “They’re displacing some manufacturers from dealer shelves.”

* * *

Cannondale may be getting all the attention, but Dorel’s juvenile products division is what rules the stock. Economic weakness and rising material costs have taken a toll. Further growth opportunities are limited in North America and Europe, so Dorel is expanding into faster-growing South America and Eastern Europe. Its assemble-it-yourself furniture division, one of the 10 largest in North America, has posted five consecutive years of sales growth. But operating profits have declined for three years.

It all adds up to a pretty unimpressive run. On the other hand, Schwartz is right to say the company has held up well amid economic uncertainty: “If I start comparing us to a lot of other companies out there, I would say we did quite well.” And he is sensitive to investor frustrations. He acknowledges the company would be worth more if broken up, “but that’s very short-term and in our eyes it’s quite foolish,” he says. Others would like the company to drop the dual-class share structure that allows Schwartz and his kin to maintain voting control while holding just 17% of the equity. “It’s something we’ve looked at,” he says. Raising Dorel’s 15-cents-per-share quarterly dividend is another option. “We’re thinking of something,” says Schwartz.

You have to feel for Schwartz. His family has built a solid company and proven a Canadian-based manufacturer can thrive in low- and high-end retail and survive through downtimes. But he’s just turned 64. He won’t lead Dorel forever, and “there’s no family succession” scenario. It must be humbling to know that, after all that, his best chance to improve shareholder value is by selling out. The question appears to be more “when” than “if.” “I haven’t put a date to anything,” Schwartz says. “We manage the company as a group, the four of us, the family. We’re in together, we’re out together.”

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