If there’s one thing your local bike shop hates, it’s a customer walking into his (or, increasingly, her) place of business holding a sheet of paper.
Of course, that paper might contain a shopping list of top-of-the-line goodies to buy in-store. But it probably doesn’t. And your retailer knows this from long and bitter experience.
The conversation inevitably goes something like this. The customer walks in, puts the piece of paper—the printout from a screeencap–on the counter face-up and turns it around so the text is facing the retailer. “Online retailer XXX has product YYY for $ZZZ,” he says (yes, it’s almost always a guy). “Can you match their price?”
The retailer looks at the page. He looks at the price. He looks at the customer. And he knows he is up shit creek without a pair of roller skates. The price is lower than his selling price. In fact, often enough to matter, it’s lower than the lowest price any of his suppliers offer.
The retailer knows all about pricing because he spends a huge amount of time on the phone or online, comparing prices and buying all the stuff you see on the shop floor. If it’s a large store, there’s a buyer whose entire job is to purchase and track those items. These folks know the best wholesale price, for anything, any time, anywhere in the country,
Worse is what the retailer doesn’t know the backstory for the item on that piece of paper. It might be damaged. Or last year’s model. Or only available in size XS or XXXL and then only in bright purple. Or it might be out of stock entirely. Or the consumer might already know this and is trying to game the bike shop owner, who has no way of knowing any of these things. And maybe the consumer knows that too.
Hence the creek, and the absence of skates.
Bike shop owners hate this scenario for a bunch of reasons. Because it makes them look bad, like they’re trying to rip off their customers. Because every time it happens it costs them either money or customers, sometimes both. And mostly because it makes them feel like the playing field is tilted so far out of kilter, there’s no way they can possibly win.
And with certain notable exceptions, they’re absolutely right.
Before we go any further, I need to make two things clear. The first is that business practices of online retailers, to my knowledge, are seldom illegal or even unethical. The ones I’ve met—probably half a dozen personally—are reasonable, competent, pleasant people.
The second thing is that my purpose is only to explain some of the ways online retailers are able to do what they do. I don’t presume to tell you what you ought to do about it. If you’re old enough to read RKP, you’re old enough to make your own decisions about where to buy your equipment.
Ask most cyclists—and most bike shop owners, too—why internet retailers can sell things so much cheaper than brick-and-mortar stores and they’ll usually tell you “low overhead.” It simply costs a lot less, they say, to run an online mail-order operation out of a warehouse in some weed-choked industrial zone with where a few trained monkeys pump stuff into boxes than it is to maintain a modern storefront with lights, displays, and knowledgeable employees who deliver a high standard of service.
Those people are wrong. They’ve probably never been to the offices of an online bike business, or called their salespeople, or seen the level of service for themselves.
Modern online retailers have all kinds of costs bike shops don’t. Relatively large and well-trained customer service staffs, for instance, who will chat as long as needed with customers by text or phone. Plus database administrators, SEO/SEM/SES specialists, e-commerce managers, copywriters, video production people, advertising and remarketing professionals, and pricey computerized pick/pack warehouse management systems.Of course every business wants improved operational efficiencies to keep costs down, but for online retailers it’s less about low overhead and more about low costs and high sales volume; low COGS and high GMROI.
Pretty much the same as regular bike shops. Only with a couple more zeroes on the end.
This will be a long explanation—just under 3,300 words worth–so for the tldnr crowd, here are the six reasons online prices are so much lower than your hometown bike shop’s: supplier discounts, closeouts, loss leaders, house brands, sales tax, and gray marketing.
The rest of you are invited to read on.
The first thing online retailers do that bike shops (usually) can’t is buy in bulk. If that sounds laughably obvious, that’s because it would be, in most other industries. But in this, as in so many other things, the bike business is different. Unlike most 21st-century industries, the bike business still has a relatively large number (thousands) of small, independent business at the bottom of the retail food chain versus a relatively small number (dozens) of very large businesses at the top. And almost nothing in between.
That means the relative disparity afforded by volume pricing is huge. Suppliers encourage this by offering massive discounts to their largest (and mostly online) customers, often close to or even below their own cost. Yes, really. They do this because driving their sales volumes up lets them get lower prices from their factories, so even a zero-profit sale today can result in larger profits tomorrow.
More to the point, when suppliers calculate sales forecasts and revenue plans for a product, they balance selling price against anticipated profit and demand. Low profit on sales to a few big guys is offset by higher profit on sales to a lot of little guys. This is all built into the pricing model. So your local bike shop is literally financing the discounts offered to online merchants.
Yes, that’s right. Every dollar saved by the big guys is paid for by the little guys. With few exceptions, it’s a zero-sum game.
Pricing is pretty much the same throughout the industry because the relatively few, primarily online retailers have enough clout (and the relatively many small retailers don’t act cohesively) that virtually every supplier plays the big-guy discount game. Those who don’t, miss out on their slice of the online pie; their order volumes go down and consequently so do their profits, meaning they have to raise prices to stay in business.
To be sure, this kind of pricing model is the case in virtually every industry. What’s different for the bike business is the disparity in pricing, which is driven by the disparity in order size, which is driven in turn by the disparity in the size of the businesses doing the ordering.
A similar chicken comes home to roost with closeouts, inventory that’s undesirable to the supplier for some reason. That reason might be that it’s “broken,” sold out in some styles, sizes, or colorways. Or it might be the product’s about to become “distressed” because something better or newer is scheduled to take its place due to an approaching model year change or midseason “line refreshment”.
Like some of the least comfortable sectors in Dante’s version of Hell, closeouts create a special dilemma for the bike shop owner. Often he can’t take advantage of closeout pricing because he’s already got a display case full of the stuff being closed out. Or even if he can purchase some of it, he’s only able to buy a fraction of what the online retailer can. In this case, the discounter doesn’t necessarily enjoy a price advantage (unless he buys up the last closeout dregs at a single bundled price), just a volume advantage. But that volume can be leveraged into big profits when combined with some other tactics.
You may already be acquainted with the concept of loss leaders: products marked down to a very low price in the hopes that once the customer is in the store (or on the site), they’ll buy some full-priced stuff as long as they’re there. In large-scale retail categories (grocery stores or consumer electronics, for instance) the “multiples” of add-on purchases are frequently three or even four times the value of the loss leader.
A nail down is a loss leader that’s not intended to be sold. It’s often discounted to an unbelievably low price, but maybe it’s only available in European size Small (meaning it might fit one of your niece’s Barbie dolls), or it’s an unusual color or out-of-date spec. Whatever. In any case, you come onto the site looking for this particular item only to discover you don’t want it after all. But while you’re there, maybe you’ll pick up a few things.
Similar to the nail down is the bait and switch, which is a loss leader that doesn’t exist and never did. Bait and switch (as opposed to just selling out of something) is technically fraud and therefore illegal, but it’s almost impossible to prove. If your grocery store runs out of something that’s on sale, you get a rain check for next time. But just try getting one from an online retailer…which means the line between selling out of an item and baiting and switching it can be as thin as the seller wants to make it.
Of course, bike shops can use these tactics too, and some do. But online retailers can do it in huge volume across a much wider breadth of products with fewer consequences. Every online add-on is a sale lost to the local bike shop. Plus bike shops have a limited customer base and simply can’t afford to alienate folks with things like nail downs or bait and switch.
But wait. There’s more.
Very large online retailers have their own house brands. In at least one case, the retailer is owned by the house brand, or to be more accurate, by the factory that makes the house brand. Quality of house branded products can vary from excellent to execrable, but in all cases, the online retailer is buying not just below dealer wholesale, but at distributor’s ex-factory cost. And in cases where the retailer is owned by the factory making the house brand, it’s even lower.
Called transfer cost, this is the factory’s cost to actually make the goods, plus the cost to move (“transfer”) it to the retailer. Put another way, transfer cost is distributor cost minus the factory’s net profit. (The factory makes its profit back when the house-branded product is sold to the consumer.)
Not only do house brand products mean a lower price for the customer and higher profits for the online retailer, they are products bike shops don’t have access to, sold at a price they can’t begin to match.
Brick-and-mortar stores also have to charge sales tax on every purchase. Online retails generally don’t. The law on this is constantly changing (Google “online sales tax law,” and it’ll return more than 60 million results), but the Marketplace Fairness Act of 2013 requires online sellers to collect sales tax in all states…but with many, many exceptions. The most common practice, in my experience, is for online retailers to collect tax only on sales they make within their own state. Your mileage may vary.
Of course, online retailers from outside North America don’t have to charge any sales tax at all. And if they’re selling into another country (ours) from somewhere in the EU country they don’t have to pay VAT (Value Added Tax, the EU’s equivalent of sales tax, more or less), either.
While sales tax doesn’t put money into the pocket of either brick-and-mortar or online retailers, it can take money out of the one pocket that impacts sales the most…yours.
Average sales tax in the USA in the first half of 2015 was a hair under 5.5%. In Canada, it’s higher, but let’s stick to the US model for now. As a consumer, when you make a $100 purchase without paying tax on it, you just saved five and half bucks. If you buy a Dura Ace Di2 groupset for $2,623.49, not only do you save 35% off Shimano’s recommended retail price, but you leave with nearly an extra $250 in your pocket in the form of tax savings. Or maybe you spend it on some more stuff, with the profits going straight into the pocket of the online guy.
(Actually, the online retailer I got that price from was out of stock on Dura-Ace Di2 kits in every configuration, so maybe it was all just a bait and switch.)
The question of discounted prices becomes even murkier when you realize that products from most major cycling brands in the United States aren’t supposed to be discounted in the first place. These brands, which include pretty much every major bike company plus equipment names like Bell Sports, Shimano, SRAM, GoPro, Oakley, Saris/CycleOps, Park Tool and so forth—you can see some more here—have a MAP policy.
MAP is Minimum Advertised Price, and it works just about the way it sounds. Retailers for a brand are required to sell its products at or above a set price, which is generally the same as or close to the brand’s suggested retail price. If they don’t, the brand can refuse to sell them more product.
MAP policies have been legal since 2007 when the US Supreme Court ruled that, with some exceptions, MAP is not a violation of antitrust law. The general idea is that manufacturers have a right to protect the value of their brands, and one of the way brands retain their value is through consistent (= not discounted) pricing. Consistent pricing also has the advantage of making the brands’ products more profitable, and therefore more desirable, for retailers. Hence MAP. There are a whole bunch of exceptions–sales, close-outs, and so forth—but you get the idea.
In Canada, the practice is called UMAP (the U is for “Unilateral”), and it’s slightly more complex, but it’s pretty much the same for our purposes.
Of course, retailers in both the USA and Canada can sell products for whatever price they want, once the customer is in the store. That’s why it’s MAP and not just MP. If you’ve ever seen an ad that says “Prices Too Low To Advertise,” or a website that says “Mouse over the regular price to see your special discount,” that’s MAP at work.
Like everything else, the devil in MAP is in the details. Some brands are stricter at enforcing their MAP policy than others. And online retailers know this. Amazon, for instance, has online bots that do nothing but crawl the web looking for MAP violations. And when the bots find one, Amazon lowers its own price to match it, literally within nanoseconds, There are also online services that do the same thing, for a price. Most suppliers have access to neither. Which makes it nearly impossible to enforce their own polices.
As you might expect, MAP violations and violators drive bike shops nuts. They feel they’re being held to different standards than the violators, and that MAP policies end up rewarding the violators while punishing the shops that try to honor them.
And you know what? They’re 100% right.
So how are online retailers able to advertise—and, more importantly, sell—products much lower than MAP without getting cut off by the brands? Simple. They buy those products outside of North America, specifically from Asia and (mostly Eastern) Europe.
The practice is called gray marketing or parallel import; basically, bringing goods intended for one market into another one. For online retailers, this can work in a couple of similar but technically different ways.
The first is for domestic (North American) online companies They buy products in Asia (remember some of them are owned by Asian factories, making this easy to do) or from Eastern Europe. (Western Europe typically has higher wholesale and retail prices than North America.)
The process is the same for European-based online retailers, except they may have to gray market twice—once to get the goods (if the goods are from outside the EU) into their warehouse, and again if they want to move them to the USA or Canada.
It’s also worth noting that bike shops in Western Europe have an even worse problem with gray marketing than their North American counterparts, because they have to pay higher wholesale prices to begin with. And since there is no MAP in the EU, bike shops there don’t even enjoy the theoretical price consistency that North America retailers have.
The upshot is that brands in North America can refuse to sell to the gray marketing (and MAP-violating) online retailers all they want. But if the discounting retailer is sourcing those products in Latvia or Bangkok, it can violate with complete impunity. In fact, the tighter the MAP policy on the brand’s part, the greater the benefit to the gray marketers who violate it.
Whether in North America or in Europe, the only recourse brands have is to locate the gray-marketed product at its source and shut it down. This is not an easy process, since the offending distributor has a vested interest in hiding the fact that it’s gray-marketing. This is partly because its violating its operating agreement and risks losing the line, but also because it’s so profitable. In addition to the base profit on sales to the online retailer, the gray marketing boosts the distributor’s sales volume, earning better pricing from the very brand whose operating agreement it’s violating.
Online retailers take the process a step further, to the point of removing or defacing tracking codes from the packaging of gray-marketed product, or serial numbers from the product itself. Stickers are peeled, numbers are marked out or scratched off, whole sections of boxes are cut out entirely.
Despite all the precautions, gray-marketing distributors still get caught regularly and cut off from a brand’s products. Online discounters just shrug. Bikes are a global business.
New markets are opening at a furious pace in developing countries all over the world. Consumers in those emerging markets don’t have the purchasing power of us First Worlders. So the incentive is strong for distributors in those countries to bump sales up a point or two or twenty by supplying product to other markets.
From the online retailer’s viewpoint, the supply of potential gray-marketing partners is effectively infinite.
At the end of the day, online retailers undercut mainline pricing by exploiting weaknesses in the cycling industry’s business mechanics, specifically in its distribution channel. Strategies include huge supplier discounts, closeouts driven by forced obsolescence, loss leaders in various guises; house brands, sales tax or VAT avoidance, and (in North America, anyway), MAP violations achieved through gray marketing.
Not one of these strategies is illegal. Online retailers achieve high sales volume at very low prices—and make significant profits in the doing of it—because of the very nature of the bike industry’s factory/ supplier/ retailer business model as practiced in North America and Western Europe. And the cost of online retailers’ success is disproportionately subsidized by independent bike shops, including the one you frequent on a regular basis.
So next time you pick up a screamin’ deal from your online retailer, be sure to thank the owner of your local bike shop. Because he paid for it. Literally.