One of the most important rules of the Internet is “Don’t Read The Comments.” RKP‘s comments are a happy exception, partly because they’re thoroughly moderated, and mostly because RKP readers tend to be interested in riding bikes, as opposed to sniffing spokes and arguing about the results. But sometimes I get paid to Read The Comments, just to see what cyclists are saying about my clients and their products.
Judging by chatter in the online birdbath, one of the more popular consumer topics among the spoke sniffer* crowd is how their LBS** is ripping them off because prices from online retailers are so much cheaper.
You will note there are two parts to this notion.
The second part—the part about online prices—is unarguably true, at least for anyone with a web browser and a hankering to see what bike stuff costs. We’ll come to that in the next installment, including exactly how it is that online retailers can sell stuff at such low prices. But the first part, the whole notion of consumer off-rippery by bike shops, is utter doo-doo, although most cyclists don’t know it.
They don’t know it because they have no way of knowing it because the answer is buried deep in the arcana of how the bike business works, and because even most people who work in the bike business don’t know it either. And the bike-biz people don’t know it because they don’t know the answers are right there, hiding in plain sight. They’ve never looked for those answers because hey, it’s the bike business and there are so many things in it that don’t make sense that what’s one more? And the things in the bike business that don’t make sense don’t make sense because the whole bike business don’t make sense to begin with. Make sense?
If you answered no to that question, you’re beginning to understand the wacky world of the bike industry. If you answered yes, you’re probably lying. If you’re in the bike business and answered yes, you’re a psychopathic liar and you really ought to know better. But I digress.
Bike shops, by and large, aren’t ripping their customers off. If they did, they’d be making a lot more money than they are.
Here’s a couple simple ways to prove this to yourself. Take a good look at the building the shop is in and the neighborhood around it. See any Apple Stores, Nordstrom’s, or Victoria’s Secrets in the vicinity? Didn’t think so. Those are high-profit businesses. Bike shops, generally, are not. Next, walk around to the back of store (or wherever the nearest available parking is) and see what kind of car the owner drives.
I rest my case.
The retail end of the bike business is a life of brutally long hours and wafer-thin margins. You start out in this line of work because you really, really like bikes, enough to devote the rest of your life to them. But once you’re in that line of work, you don’t get to ride bikes nearly as much as you would if you had a regular nine-to-five gig. (For the record, the distribution end of the business is even worse, although retailers will unanimously dispute this.) In all too many cases, you make less on a per-hour basis as a bike shop owner than the manager of the burger joint next door. But at least you work a lot more hours.
The typical bike shop owner is getting a lot of things, but rich ain’t one of them. To understand why, we need to look at some hard data.
There is an organization called the NBDA—the National Bicycle Dealers Association—which keeps tabs on this sort of thing. They also do a lot of other worthwhile stuff, like representing retailers’ interests to distributors and trade shows, presenting educational programs, and so forth. Every even-numbered year, they put out the NBDA Cost Of Doing Business Study, an 82-page behemoth full of facts, figures and charts, revealing pretty much everything there is to know about the financial side of the retail bike business in precise and, I don’t mind telling you, mind-numbing detail.
As you might expect, the contents of the CODBS are a closely guarded secret, strictly off limits to anyone who’s not an NBDA member. Unless you have 150 bucks and a credit card, of course, in which case they’re willing to make a special exception and sell you a copy.
The CODBS tells us that bike shops make their money in three different ways: Bikes, PARCS (Parts, Accessories, Rubber, Clothing & Shoes), and Service. Typically, 45% of IBD/SBR*** (local bike shop) dollars—more than two billion of those dollars in 2014—come from new and used bikes. 34.5% comes from PARCS, and 15% from Service, plus some miscellaneous items like rental bikes and fitting/coaching services. I’m leaving these out for purposes of readability, just as I rounded the three numbers above.
So bikes make up almost half of your retailers’ gross dollars. And—here’s my point—zero percent of their net profits.
Let me repeat that: your typical bike shop doesn’t make a nickel off bikes. Even worse, it’s the same darn nickel that bike shops in aggregate haven’t made off bikes for the past thirty years, which is as long as the NBDA has been keeping records. So for practical purposes, bike shops—whose main business, after all, is selling bikes—have never turned a profit selling bikes.
Bike shop sales nationwide have been more or less flat since 1990 (more about that another time), even though the number of units sold has gone down as mass market stores nibble away at the less expensive price points. So bike shop owners in this country have sold something like $50 billion worth of bikes since the turn of the century. With bupkis to show for it.
That’s something of an exaggeration, since in reality bike shops sell bikes to bring new bike owners back into the store where they will hopefully buy equipment and service, but you can understand the impact all those zero-sum sales have on a shop’s end-of-year profit picture.
Sure, some shops are doing better than others. But according to the CODBS, those higher profits come from internal efficiencies like faster inventory fill rates and resulting higher turnover, not from bikes and not from higher prices on everything else.
To reiterate, the profit categories in a bike shop are Service—which makes up about 15% of gross sales—and PARCS, at 35%, more or less. So 100% of the profits come out of half the dollars sold.
Trouble is, at one-third the gross sales of bikes, Service doesn’t do much to move the needle. Compare bike shop labor rates with your local car dealer—or vacuum cleaner service center or shoe repair place, for that matter—and draw your own conclusions. As for PARCS, bike shops perform about the same as sporting goods stores, which is like, um, well let’s just say that’s not the compliment it might be.
Apple makes almost double the margin on an iPhone 6 that you bike shop does on all the PARCS in the store, on average. A mainline company like Starbucks makes something like five times the net profit margin on every dollar earned as a bike shop.
Trust me, there’s only one person getting ripped off at your typical bike shop, and that’s the owner.
Which is part of the reason bike shops in the USA have been dropping like flies over the past fifteen years. But that’s a topic for another time. Next time, we’ll talk about why Internet prices are as low as they are.
Special Bonus Section: Vocabulary Items:
*Spoke sniffer is an industry term for cyclists obsessed with comparing minute details of product spec and lecturing their fellow sniffers about how product managers ought to have done their jobs. Don’t be one.
**You may be familiar with this term already. Online denizens (particularly in the UK) often refer to their local bike shop as their LBS. It’s an expression so ubiquitous among consumers that it has its own Wikipedia entry, but one which nobody in the bike business ever uses.
***Independent Bicycle Dealer and Specialty Bicycle Retailer, respectively. Suppliers generally use the former, despite (or perhaps because) retailers prefer the latter.