After forty years, a community cornerstone bike and outdoor shop near one of our locations recently called it quits. Near another Fit Werx, three shops closed in 2017. While the reasons for these closures are multi-faceted, the reality is that changes in consumer buying patterns and back-end margin are affecting the bike industry. We are not immune.
In the internet era, it is easy to be a passive consumer and buy on-line. However, the fabric that makes up many of the communities and activities we enjoy requires a more active approach to sustain and grow. A huge way that you participate and support the cycling community is via how and where you spend your cycling money. The services and products shops like us offer depends on you; our success depends on you.
Our clients tend to be smart and thoughtful people; the more you know, the more informed your decisions. With this in mind, here is a candid and thorough (lengthy…) explanation of the profitability structure for Fit Werx in 2018.
Break-even Point for Bike Shops
According to the National Bike Dealer Association, in 2013 (the most recent year of readily available stats), the average bike shop break-even point was 37%. This 37% break-even point has its challenges for medium sized bike shops in particular. It is easy to be too big to cut overhead and still serve your clients well, but too small to get the margins you need to be profitable in an environment of changing consumer buying patterns and expectations.
Where Do Specialty Bike Shops Make Their Money
With the notable exception of Amazon, almost all businesses have to generate a profit to be successful. We hear a wide range of comments from suppliers and clients about where we should be making our profit. Here is the reality:
- While a busy fitter working out of their house might be able to make just fitting bikes work financially, full service fitters and shops can’t even come close. From inventory costs, to skilled staff, rent and insurance expenses, we are in trouble if people are not buying bikes and equipment from us.
- We’ve often been told that accessories are where the profit is on equipment sales. While this may still be true for some high volume urban shops, it has never worked well for Fit Werx. It takes a lot of derailleur cable and chamois creme to equal a bike sale. Also, the internet has notably affected parts and accessory sales for most bike shops. Twelve years ago we were selling 60 trainers a year out of our VT location. Last year we sold one. Yes, one. This is not an unique example.
- Related to the last item, if we aren’t selling bikes, we probably aren’t selling that many accessories.
- While basic parts and accessories can have better margins than bikes, many better quality parts and accessories do not. Garmin computers and accessories are 25-29%. Shimano parts are 28-35%. While a basic generic tube might provide a shop with 60% margin, a better quality tube will often be under 40% . The same holds true across many accessory categories.
- I’ve often heard that, “Bike shops don’t make money selling bikes. Service is where the money is at.” Service categories are important to our success and bike margins are as tight as I have ever seen them. However, we need to sell bikes in order to provide service departments and bike fitting services at the level people expect. Bike shops are called “bike shops” because we sell bikes.
Economics and Other Reasons Why Our Service Offerings Can’t Support Themselves
- 175 bike fits a year = $61,250 a year at $350. While this may sound like a lot of revenue, fitters are some of the most skilled labor a shop employs.
- With rent and insurance, even a small shop can significantly exceed $60K in annual fixed expenses. This doesn’t include the biggest overall variable expenses like payroll and taxes, which are often much higher.
- We’re in a seasonal area. Almost 80% of our service work happens in a seven month window, but our expenses span all 12 months.
- We don’t tend to service bikes that can be tuned in thirty minutes. Our mechanics have limited capacity and we don’t want them rushing. 350 tune-ups a year at $100 equals $35,000 in gross revenue. This revenue doesn’t even cover the annual salary of a good mechanic.
- Disc brakes, suspension and Di2 shifting have increased bike build times. Our labor costs have gone up $50-$100 per bike in recent years. Like most shops, we continue to not charge assembly on bikes we sell.
- A bike sale is usually a larger transaction than a fitting or a tune-up. It takes a lot of tune-ups to equal a bike sale.
- We remain committed to employing career based employees. Our clients expect (and deserve) this and we continue to feel that you get what you pay for in this regard.
Product Profit Margins, Preseason Programs & Financing
The bike industry has never been known for generous margins. The specialty retail bike industry is a tight game; a couple percentage points are often the difference between a successful year and being in the red. To make this more challenging, manufacturers and retailers are often at odds regarding inventory management and profitability – these items play a big role in determining those couple points.
- Despite much higher preparation and service costs, many manufacturers provide a lower margin on enthusiast level equipment than basic equipment. This is a time honored and regressive mechanism, but the reality.
- The average margin on bike sales across all price points was 36% in 2013 (the last year there is readily available information) – a percentage point below the average break-even point for a shop in 2013.
- Our shipping and freight costs have doubled on many items over the past ten years. While some manufacturers do have freight programs, they often require that we order multiple bikes at the same time. If we order extra floor inventory to save freight costs, we would likely end up in the position of many other shops – always having to unload inventory (well matched to the rider or not) to get rid of it. We remain committed to never doing this.
- While there are a few “hobby shops” run by benefactors who are not concerned about turning a profit, shops that depend on being profitable to exist simply can’t afford to give big discounts (even to their best clients). While we understand that price is an important variable with many purchases, it is important to remember that expecting a shop to price match or provide big regular discounts is akin to asking them to go out of business.
- While there are exceptions on some closeout product, promotional sale items by the manufacturer often mean that the dealer assumes part of the discount.
- Manufacturer margins can vary by over 10% across their dealer levels – the difference between 28% and 38% is life and death for a shop. As they have for decades, most manufacturer programs are designed to provide margin based on high volume and loading up early on pre-season inventory. This may still work for a traditional large volume bike shop in an urban area, but it leaves shops our size (and with our approach) in a challenging middle ground. Base level dealer margins are not adequate to stay in business and buying the preseason inventory volume that is often requested is suicidal.
- Related to the last item, manufacturer programs seem to be set-up to encourage two shop models to be the most likely to succeed.
- Traditional high inventory shops that are big enough to buy enough product to get best margin and not have to sell it all on sale at the end of the year. This means you are doing at least a couple million in sales each year and with only a few bike brands.
- Shops that are so small that they have low enough overhead that they can squeak out a profit on a lower tier dealer level. These shops might be seasonal, part-time or 1-3 person operations with very low overhead and minimal inventory.
- While other sporting goods based industries have pricing structures and mechanisms that provide a reasonable margin for dealers when product goes on sale, the bike industry does not. When things go on sale, dealers usually take a hit on in-stock inventory. If the starting margin of a product is 55% and it goes on sale for 25% off, this could work. However, when the starting margin is 28-35%, it doesn’t work. Margins on bikes and components almost always fall into the latter range.
- Per the previous, bike dealers own their inventory. It is rare that we can send it back or exchange it if we have the wrong mix in-stock. We are often asked to bring in 50-60% of our previous year’s sales volume between October 1 and December 31 – when cash flow is tightest and sales are at their lowest. Small to middle sized dealers who finance inventory almost always get into financial trouble. We try to only buy what we can pay for at the time and what we know we will sell. We remain convinced that this is the only way to stay solvent year-in and year-out.
Lower On-Line Prices on Some Products
Bike shops know how it looks at times when it comes to internet pricing on some brands and items. While it may appear on the surface that bike shops are taking advantage of people on some products, that is rarely the case. Some of the biggest component and accessory brands in the bike industry are prime examples.
Why can’t bike shops sell for the same prices as the lowest priced internet sellers and stay in business? A big reason is that some brands don’t provide a very level playing field for their retailers; they don’t control their international distribution. The way that a big mail order company in Ireland can buy many internationally distributed products is totally different than authorized U.S. retailers. U.S. laws are rarely enforced on goods being imported direct to consumers from many of these international retailers.
Related to all of this, the products where the biggest price difference exists are rarely those that offer a higher dealer margin. The dealer margin, on a Shimano Ultegra GS rear derailleur is between 28% and 36% (depending on distributor). Remember, the average break-even point is 37%. Bike shops don’t have room to come down in price on an item like this and stay in business.
We won’t sell questionable grey market product and we can’t sell components for the same (or less) than what we can buy them; we greatly appreciate those folks who continue to work with us despite periodic price differences that are outside of our control. We will continue to endeavor to offer you value beyond price on these items. We’ll also guarantee that your money will help support cycling in the U.S. and will support local families.
Convenience vs. Community & Contribution
We get it. We’re not as convenient as the internet to buy some products. It takes more effort to drop us an email, stop in, or pick-up the phone than to click. From the value of our fitting and mechanical services to our experience, advice, and support of the cycling and tri community in our region, we hope that we make it worthwhile for you to take the extra step required to buy from us. We doubt that a mail order company (particularly one in the U.K.) is going to be offering tech support at a charity ride or triathlon anytime soon. We also doubt that Jeff Bezos cares much about fitting a bike properly to you or making your cycling experience all that it can be.
Manufacturer Direct Sales
Many manufacturers now sell their product direct via the internet. We understand how easy it is to click and buy from a manufacturer or work with a frame builder direct on your next bike. It is worth thinking about the following though:
- Dealers see nothing from many consumer direct sales by manufacturers. Even if you live right next to a dealer, if you buy your Mavic or Zipp wheels or TACX or Kickr’ trainer directly off their website, they get all the money – including what used to be the dealer’s margin.
- While ethically questionable and likely short-sighted, some manufacturers promote consumer direct sales at the expense of their dealers as it is the most profitable sale they can make. This can come at the expense of independent guidance and after-the-sale support.
- Dealers are often expected to service and provide warranty support for product bought manufacturer direct with no compensation. We’ve seen at least one manufacturer with the audacity to advertise that buying direct from them is a great option as the product is supported by their substantial dealer network. This is a significant conflict of interest.
- Despite their success often being built on people who were initially exposed to custom bikes via shops and fitters like Fit Werx, a number of smaller frame builders don’t work with dealers any longer. We lose a moderate number of bike sales and clients a year to these companies.
- Most manufacturers are more motivated to sell things direct than support them after the fact. While one of the biggest things an independent dealer offers you before a purchase is experience with a variety of competing products and companies, one of the biggest things we offer after a purchase is experience and advocacy if you have an issue. We try to make a point of doing all that we can to make sure our clients are taken care of if a concern or issue arises with any product we have sold.
2018 Bike Category Trends
Fit Werx started out with a focus on road and tri fit and equipment. However, we have sold mountain bikes since day one and we were early adopters of eBikes and fat bikes over the years as well. The popularity of different categories of bikes ebbs and flows; when mountain bikes are popular, road bikes often are not and vice-versa. Whether you are looking at a new mountain bike, eBike, tri bike or road (gravel or paved) bike, it is more important than ever that we earn bike and equipment business across as broad an array of categories as possible.
Beyond Bike Fit
I recently took a call from a rider who worked with us on a bike fit years ago, but has not worked with us since. He was having a fit related problem on a new bike he had bought. He was really happy with what we did in his fitting years ago and thus he thought of us immediately for help with his fitting issue. However, in all those years he had bought a number of bikes and countless equipment, it didn’t cross his mind to work with us on bikes or equipment.
Likewise, a rider we recently lost a trainer sale with said he didn’t realize that we sold trainers. We had been consulting about a new trainer with him, but it didn’t cross his mind that we actually sell trainers from almost all the top brands. The miscommunication led to our loss of the sale.
In both cases, we may have failed at communicating the scope of what Fit Werx is about. This being said, there is little that feels worse than consulting and advising on a product, only to learn that you lost the sale when the person walks in with the product that they bought elsewhere. These are not isolated incidents.
Based upon this, we hope that you know that Fit Werx goes beyond bike fit. From bikes to accessories, if it has to do with riding, we likely sell and service it. If we don’t carry it, we likely carry something very similar that is worth knowing about.
From size to approach, being average can put you out of business more rapidly than ever in today’s world of bike retail. While some of the above shows many challenges for shops like Fit Werx, that is not the goal of this article.
We know that the challenges of a shifting marketplace are ours, not yours. We aren’t looking for sympathy; we are looking to help you choose what what you want to support and to know why. We know that we can continue to be a success if we are able to keep doing what we have been doing – fitting bikes to riders in a way that is not readily available in many other places and selling bikes and related equipment along the way. We depend on revenue from both product sales, as well as services, to do what we do. Our biggest future challenge is to grow the number of people we have worked with on fittings who come back to us for bikes and equipment after.
We are thankful that we have been blessed with working with a number of people who have wanted us to succeed through the years. If you are one of these folks, thank you very much for your faith in us and your support via your purchases. We depended on you then and we depend on you now.
Where you buy matters. Each of us make daily decisions that play significant roles in what the community and support options that surround our activities and life look like. If you value and respect our services, knowledge and expertise, we hope that you will keep us in mind the next time you are buying equipment. We’d like the opportunity to earn your business beyond servicing and fitting your bike and giving advice. Whether it is fit or equipment, our goal, as always, is to help your cycling reach new levels.
Thank you for taking the time to read and understand our business better. Ride hard and ride smart.