How Specialty Bike Shops Make Money

How Specialty Bike Shops Make Money

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.
    1. 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.
    2. 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. 

Conclusions

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.

About Ian

From first time riders to Olympians, Ian has helped thousands of athletes achieve their cycling and triathlon goals. Ian develops much of the Fit Werx fitting and analysis protocols and is responsible for technology training and development. He is regarded as one of the industry leaders in bicycle fitting, cycling biomechanics and bicycle geometry and design. He is dedicated to making sure the Fit Werx differences are delivered daily and provides Fit Werx with corporate direction and is responsible for uniting our staff and initiatives.

Find out more about Ian Here

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17 Responses to How Specialty Bike Shops Make Money
  • Tory

    This is a brillant article. I’m about to purchase 2 mid to high end mountain bikes. Was looking around to find out the average margin so I can get a fair price. Which to me is one were I feel I got a good price and the sellers is happy too. So not the cheapest, but not the shelf price. Your article has made me think alot. The depth and transparency of info is excellent. I’ll defn now be buying off a store. I’d come see you guys, but I’m in Aus. Will also be sharing this with my mtb club. Cheers, Tory.

    • Ian

      Hi Tory,
      Thanks for reading. Sadly, most specialty shops that sell much below “shelf price” won’t last for very long – especially on higher end mountain bikes where some of the margins are the lowest in the industry. It is too bad that the bike industry hasn’t taken a more long-distance approach to this. I worked for years in the ski industry and, historically, that industry had a better way of approaching pricing from both a consumer and dealer perspective. Right now, there are many brands in the industry that it doesn’t even make sense for a shop to represent; you’d go out of business selling their product all day at the margin they offer.

      Best of success finding your new mountain bikes in Australia and thanks for the share.
      Ian

  • Doug Collins

    Thought provoking post.

    I am not familiar with the bike industry, but, from the outside looking in, the supply chain dynamics makes me wonder if a specialty bike manufacturer has ever tried vertically integrating — running their own specialty retail shops.

    The transfer price between manufacturer and retail shop seems to be the big issue in this space — along with the carrying costs tied to inventory. Would be interesting to know whether anyone has tried just-in-time manufacturing tied to a direct-to-consumer model (i.e., embracing lean manufacturing principles out to the end user).

    • Ian

      Hi Doug,

      Vertical integration has, and is, being tried. However, being limited to the products of just one manufacturer is a significant limitation in the bike industry. Part of what makes the bike industry special is that most retailers are independent and represent a wide variety of products. This helps us select the best products within each category to represent to our clients. As an example, being a factory store for a single bike line would be doing a tremendous disservice to our clients; there is no single manufacturer that makes bikes that fit everyone properly or serve their use ideally.

      Trying to commoditize an industry as diverse as the bicycle industry is not in the consumer’s best interest – retailers have significant responsibilities for making the products from many manufacturers work properly together and fit the rider correctly. Some retailers are better at this than others. Achieving the lowest price on all products comes at the expense of getting the best fitting bike, having experienced repair facilities, and other things that play major roles in the end riding experience for many riders.

      This all being said, you are right that there is a lot broken in the distribution system that relates to transfer price. Global manufacturers need to look at the world as a whole. They need to simplify and streamline their regional distribution systems. Likewise, ethics and parity in how manufacturers distribute needs to be improved and enforced. You can’t do one thing in Europe, another in Asia, and a third in the Americas at this point and expect them not to overlap and conflict.

  • Ben Koyle

    I have found that over the years that I’ve become more brand loyal in many aspect of my life, bicycling included. I am willing to pay for a product or service if I know they have my back. (Whole Foods stays in business for a reason.) FitWerx Peabody has my back. I do look online and price compare, but I can tell you that more often than not, the online retailer doesn’t have exactly what I want or what I need. They sell something at an extremely low price, but beware, it might not really be what you think it is.

    Since moving to New England in 2004, every wheel but two (a bike purchased before knowing about FitWerx) has been either purchased (6 total) or built (7 total) in Peabody. Working with the staff there, I have been able to build wheels that are equal to if not better than anything online.

    And I am almost Evangelical about having a proper bike fit at a place who really knows what they are doing. FitWerx fits that bill.

    I wouldn’t be able to race at the level I am now without FitWerx (and Dean’s advice on training).

    • Ian

      Thanks for the note Ben and thanks for your business and trust.

      Our staff comes with working with us. I can’t tell you how important having a good staff is to a business like Fit Werx. We are lucky to have a good group who are willing and able to help beyond things that directly relate to what you might buy and use. Whether it is talking through a training or nutrition question, talking about the biomechanics and physical therapy based solutions behind a nagging chronic problem that is beyond bike fit, or figuring out compatibility or gearing issues on your bike, we have people who are dedicated to solutions. If they don’t know an answer, they want to find it and we try to make sure that they have the resources to do that.

      As you noted, we are competitive on price on many things. But if you buy on price alone, it is unlikely the rest of what shops like us are dedicated to offering. Does Amazon or Chain Reaction care if you PR next year? We do.

  • Doug Burritt

    Ian, This is one of the best summaries of the cycling business I have read to date. Thank you for the concise and insightful review of the IBS and the slim and declining margins on merchandise sales. It is undoubtedly a troubled industry and saddens me to think that the shops and personnel that are so dedicated and supportive of local races and events have to work that much harder to earn the business they are so deserving of in the first place. I fully understand the ease of purchasing a product with a simple “click” but will continue to look to those in the bike shops that have more experience, more knowledge and a better grasp than I, of new product developments in the industry. I’ve had the pleasure and rewarding rides of a Fit Werx “fit” and bike purchase several years ago in Peabody. Marty, Dean and Mike were instrumental in my purchase decision and I can’t imagine trying to garner that kind of knowledge through a web purchase. I had the pleasure of visiting Fit Werx VT this past summer and still tell friends about the amazing and personal attention from the moment I walked in the door until I reluctantly left to return home. Keep up the great work and please know that I will share this article with many friends and co-riders / consumers.

    • Ian

      Thank you for reading and sharing Doug; our success has always depended on folks like you. While change is inevitable, the best business relationships are built on trust. We figure that the more transparent we can be about what is going on around us the better equipped we’ll be to handle things and the more well informed folks will be when they make decisions as to where to buy. Like any business, we need to earn repeat buyers and we need to always be developing new clients too. We hope to offer continued value via information and experience moving forward and we hope that people will use us for both their equipment and service needs in exchange. We want you to feel like you ride better each year in part because of what we provide.

  • John Stuart

    I appreciate the comprehensive overview as presented. My perspective on how I select a bike shop may or may not be representative of other bike shop clientele, but I thought I would share it anyway.

    For me, buying a bike or components usually involves considerable research to either satisfy my curiosity or collect the information I need to make a decision. I will always buy the best product I can afford knowing that I can ride without having to worry about quality or performance. This rule works every time for me. The internet will never be able to fulfill this important part of the decision process.

    Fit Werx provides the best cycling advice and support. Period.

    • Ian

      We’re glad we can be part of that decision making process John.

      It is worth remembering that names like Peter Sagan, Roger Federer and Valentino Rossi all depend on coaches and others to provide perspective and advice to reach their potential. None would be at the top of their game without their team. You can choose to go it alone based on generic advice or develop a quality team or resources who are there to help you as an individual. You may feel penny smart along the way going it on your own, but you may also find yourself missing out on things and pound foolish in the end. Thank you again for your trust in us and your support!

  • Jon Kameen

    As someone who has shopped at bike shops, worked at bike shops, and then worked at vendors that sold to bike shops I’ve seen these challenges from all sides. If vendors want IBD’s to continue they need to support the retailers rather then compete with them. The big bike brands are not equipped or suffiecently consumer focused to sell direct to consumer and thus they need IBD’s like you to facilitate sales. Bike brands need to come to this realization soon rather then later and provide fair margin based on reasonable stocking levels not loading a dealer full. They need to provide truly differentiated/innovative product rather then paint changes or model years to prop up sales which devalues retailer inventory. Lastly they need to drive customers INTO a bike shop to buy rather then pulling the OUT of a bike shop to sell them something directly.

    • Ian

      Hi Jon,
      There is definitely a disconnect between many manufacturers and what is going on at the retail level. The actual cost of doing business for a shop is frequently not being taken into account and thus programs and pricing often end up not equating to what a shop can be sustainable providing. Manufacturers telling shops that 15-30% margin is perfectly adequate is self-defeating at best and delusionally patronizing at worst. The biggest obstacle to a shop’s success shouldn’t be their suppliers.

      Like many industries, a more long-term and sustainable approach based in realistic numbers would help manufacturers and retailers work together to develop a tenable business structure would benefit all. Instead, we often see desperation in the never ending quest for a short-term gain overcome both retailers and manufacturers. This drives costs up and profits down in general and frankly diminishes from the experience that the industry should be providing riders. Such conflicts of interest are damaging to all involved.

      From manufacturer, to retailer, to consumer/rider, we all play roles and have responsibilities in what the future of riding a bike looks like.

  • Jason Fenton

    Very good read and an accurate description of a dying industry. In real terms, if buying habits don’t change quickly, there will be very few local Shops. These shops are often community centers. In essence, by saving a few bucks from shopping online, we are stealing from ourselves. I own a shop and because of the lifestyle it affords me, i have donated around 500 hrs a year to local trail building. That will of course vanish if my shop fails. It’s a scary time.

  • Steve Tgettis

    Good comprehensive article. I’m a believer that all stakeholders in any endeavor need to have honest dialogue in order to come up with “win-win” solutions. I wish I had all the answers to reconcile customer demand for cost effective solutions and shop owners need to remain profitable. Giving some support to shop owners is personally satisfying to me as a consumer because I like to see local businesses succeed. Also, it’s in my self interest to have a go-to shop that can get me going quickly. That being said, I won’t lie and say that I’ll absolutely never use online again. I will say that your thoughts are in the mix for any decision I make in the future. I will say that I’ve been treated fairly by you and another bike shop (no names!) and that definitely puts you in the plus column in my book. Best wishes….to us all.

    • Ian

      Hi Steve,
      I agree. Online has its place for sure. As a shop, we know that we are unlikely to get all of someone’s business. Frankly, we’re likely not in a position to as there are categories that we have limited selection. We do hope that when it comes to some of our core categories – those categories where we have focused (bikes, shoes, trainers, power meters, wheels…) – that folks will remember us before clicking. Thanks for your comments and for reading.

  • Jim Piper

    Thank you for the comprehensive and honest article. Hard to tell where ‘retail’ is headed. One thing is for sure, local shops offer far more to all of us both directly and indirectly than most people understand. I’ll admit being taken by the ease and savings of shopping online. But, the ‘didn’t fit quite right shoes’ and bike parts not installed quite right issues started to pile up, literally. I now buy my running shoes locally and guess what – besides offering guidance and the ability to try them on – cost was comparable. Same can be said for great bike shops like Fit Werx. Best of luck to you!

    • Ian

      Hi Jim,

      Thanks for the thoughtful comments. It is easy to not know what you have until it is gone (or simply changed). While there are exceptions, as mentioned, we are price comparable on many things and it often takes just one pair of shoes that you can’t use to erase years of savings. From buying the right part/shoe the first time, to taking care of you if something isn’t working as planned, we endeavor to offer you much more beyond for those that work with us.

      The initial ease of buying most anything on-line can make it easy to become a pattern that crosses categories and quickly develops into a habit. If that takes over, some brick and mortar retailers will go under while others may have to make the decision to stop offering and supporting some services/products in order to remain viable. Where we buy is a significant determiner on what the community, support structure and activities we all do look and feel like. This has direct and indirect benefits to us individually and collectively.

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