The Elephant, The Room, And The Hidden Agenda

The Elephant, The Room, And The Hidden Agenda

Trek’s Online Sales Plan, Part Two

Last week we talked about Trek’s omnichannel sales program, where consumers can order Trek bikes direct from the company’s website and pick them up from (or even have them delivered by) their local Trek dealer. We talked about how the plan would work, and about the curious fact that no one else in the industry wants to talk about it.

But first, a bit of housekeeping. James Moore, President of the NBDA Board commented that the Trek initiative does indeed violate the NBDA’s position paper on Internet sales, and included this quote:

 By removing the local dealer from the critical selection process the Trek consumer direct model is in conflict with the Position Statement of the NBDA.

(You can see James’ entire comment here, but there’s a lot of other comments too, so you may need to do a search on Moore to find it easily.)

Back to business:

At the end of last week’s piece, I suggested the nobody-wants-to-talk-about-it part may be due to an elephant-in-the-room phenomena not directly related to Trek’s ambitious online plans. But not entirely unrelated, either. Because the aforementioned pachyderm is the real driver behind the sudden rush from Trek—and plenty of other brands, soon enough— to sell bikes consumer-direct online, and to fulfill and service those sales via their existing dealer networks. And they’re going to add online sales to their business model now. As opposed to, say, a couple years from now.

Pull-Quote 2.01Because the cozy bike industry poker game is about to have the whole table flipped over—what we marketing types call market disruption.

That’s the why part of the question we’re going to talk about this week. Beginning with the identity of the elephant.

The elephant’s name is Canyon.

Canyon Bicycles GmbH makes road, mountain, and tri bikes based in Koblenz, Germany, which is on the banks of the Rhine in the western part of the country, about halfway between Bonn and Frankfurt.

RKP readers may know the Canyon brand through its sponsorship of the Movistar and Katusha teams. Which, as we’ll discuss another time, is not a cheap date.

Canyon has been one of the rising stars on the European scene for more than a decade, hitting a growth spurt and going from €45 million in turnover (that’s Eurospeak for “gross revenue”) in 2011 to just over €100 million in 2014, which is $113 million US dollars. Canyon bikes are currently sold in fifteen countries worldwide. But not in North America. At least, not yet.

So how does a medium-sized-if-well-regarded European brand become an elephant in a North American room full of US-based industry behemoths? And, more importantly, what does this have to do with Trek Connect and/or other brands’ vision of omnichannel sales?

Three simple reasons:

Of course, Canyon has periodically announced it’s coming to the USA (since at least 2011), and they’re not here yet. Plus, there are plenty of other consumer-direct bike brands already available to consumers. So what makes Canyon different in the eyes of industry watchers?

First, Canyon product is acknowledged to be very good—at parity with other premium American brands, certainly. Second, the brand itself is relatively well-known, not just on the road, but in dirt and tri racing, too. But here’s the kicker: unlike many other discount brands sold consumer-direct, Canyon is pretty darn good at this stuff. They’ve been selling bikes direct to consumers at very significant discounts for a decade or more. Their track record in Europe and other markets is outstanding, and their customer satisfaction reputation is, well, adequate, at least by EU standards.

Every American brand with a presence in Europe already knows this, too. Because Canyon’s been eating their lunch for years.

It should be noted there are other consumer-direct brands that currently support customers at least as well, and in the North American market, too. But what those brands lack are Canyon’s multi-niche market recognition and its 9-figure sales horsepower.

So Canyon’s incipient entry into the North American market may well be the unspoken driver behind Trek’s decision to move now rather than later. Not to mention the unspoken driver behind every other major brand’s refusal to comment on it.

In the words of industry veteran James Maxwell Radcliffe, “If there are any traditional bike brand pants left un-peed after the Canyon’s Eurobike announcement, they belong to brands with either amazingly large gonads or amazingly poor arithmetic skills.”

Here’s why. With a direct online sales presence, the traditional brand’s proposition versus a Canyon or similar competitor is pretty clear: you can buy one of our bikes online and get the full protection and support of our local dealer network. Or, you can buy from a less expensive but lesser-known brand, and send your bike back to the factory with an unknown level of service and support when it has issues.

That’s a pretty good proposition.

Pull-Quote 2.03.1But without that online sales presence, there is no proposition at all, because there’s no direct comparison between the two business models. The consumer either leaves the traditional brand’s site with a referral to a local bike shop (who might or might not have the style, size and color requested), or the consumer rolls his eyes and clicks to buy the online competitor’s bike Right Now.

Right Now is pretty darn hard to beat when all you have in response to a consumer metaphorically yelling “shut up and take my money” is a referral to a bunch of dealers on the other side of town who won’t be open until Tuesday morning when said consumer is at work and y’know, working. With a proposition like that, a Right Now plus a hefty price discount from your competitor is nearly impossible to beat. Which is why every—and, yes, I said every—bike brand has to be in the Right Now business, right now. Or they’re just not going to be the famous cowboy at a gunfight, holding a knife.

To be sure, there are hybrid consumer-direct models like Buy Local Now—which is used by Raleigh and Giant currently—and Shopatron. But these models take control out of the hands of manufacturers. The beauty of direct sales, where the transaction takes place on the brand’s site and is fulfilled through retailers, is that the brand has full control at every step of the process.

This is important, because control is what makes direct sales through retailers the antidote to every bike brand’s worst nightmare.

The nightmare goes something like this. You’re a bike brand. You spend a lot of time, money, and effort getting a consumer to the point where they’re ready to buy your bike. They drive to your retailer’s place of business, step inside, and announce they want to buy your brand’s model ABC…and at full retail price, too. Everyone wins, right?

“Oh, gee,” says the retailer. “We don’t have that size right now but we do have (insert competitor’s brand here) model XYZ. It’s every bit as good, and it’s on sale this week.” This tends to happen especially when the dealer has a bunch of the competitor’s close-out or discounted stock in inventory.

Bike brands hate that, unless they happen to be the beneficiary. But what happens on the other side of the retailer’s door has always been a black box to suppliers—a black box which retailers have guarded fiercely and without compromise. Until now.

Trek has gotten inside that black box, at least in the case of sales coming from its website. And if it’s proactively defending both itself and its retailers against the eventual domestic competition from Canyon (and others) at the same time, so much the better.

But there’s a huge fly in the online pie. It’s pointed out in last week’s Comments section by retailer Mike Jacoubowski and others: consumers ordering online will often want to return products, and
in the Trek model, those costs will fall on the retailer.

Pull-Quote 2.03.2The enormous majority of consumers have no idea what their bike size is. And as Trek’s own website says, It is possible to give you some rough guidelines based on height, but these are only a starting point for a proper bike fitting with your local dealer. The only way to be certain of the right size is to visit an authorized Trek retailer (emphasis added).  

We know that sized items in general are a nightmare for online retailers, and it’s fair to predict that Trek will be no exception.

Zappos’ return rate for shoes, for instance, is 35%. And compared to bikes, shoes are dirt cheap to return. Plus they can be re-sold as new. If one in three Trek Connect bikes come back for poor fit (or the dealer sees it’s clearly not the right size) when the customer comes in, there’s not just going to be a problem, there’s going to be open dealer rebellion. And there’s a zillion other things too, from “the color looked different online” to the bike the customer ordered being completely wrong for what the customer wants to do with it.

Canyon doesn’t have those issues to the same degree because they’re set up to ship bikes back and forth in boxes (relatively) easily. Costs of unpacking/assembly/fitting fall on the consumer, as do costs to rebox the bike if they need to send it back under Canyon’s 30 Day Right Of Return policy. (Canyon also has a larger “Bike Guard Box,” at least in Europe, that allows the bike to be packed and shipped with just wheels and saddle/seatpost removed, but that’s an upcharge. No word on what US freight rates would be on a box that size.)

All of which bring us to the pivotal question: will Trek’s costs to adequately support retailers in replacing and/or servicing Trek Connect products ultimately make the initiative too costly to operate?  It’s pretty simple:

  • If yes, either retailers will opt out of the program en masse because they’re losing money, or Trek will shut the whole thing down because neither it nor its dealers are able to realize a profit.
  • If no, and assuming Trek and its retailers can come to some sort of equitable give-and-take agreement where each side feels they are fairly compensated, things just might work out.

So. At least potentially, Trek has incremental direct sales (that is, sales it wouldn’t have gotten otherwise), a preemptive move against market disruptors like Canyon, and increased control over the weakest link (from Trek’s viewpoint, anyway) in the distribution chain. What bike brand wouldn’t want a similar like this? And, when asked about a hornet’s nest like that, what brand wouldn’t vehemently refuse all comment?

Consumer-direct sales through retailers is just a smart business move…if it can be made to work. Assuming the bugs can be dealt with satisfactorily, the model makes sense for Trek, it makes sense for Trek dealers (at least in the long run), and it’s a move that every other major player is going to have to cover anyway, regardless of what they don’t want to say about it. Or how often they don’t want to say it.

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  1. Ripnshread

    I still think your missing the bigger elephant in the room. Is the “retailer service” worth the 30% upcharge, normally the dealers cut, that consumers will save when buying from Canyon, YT, ect…??? I can see the entry level consumer ($400-$1500 purchas) seeing this as worth it to eat, but for the enthusiast ($2000+) I don’t see paying a 30% premium worth the hassle. A good example of this is how the large majority of Shimano’s aftermarket parts, over Deore level, are sold online or through mail order at prices that the local IBD ends up losing money on.

    1. Author
      Rick Vosper

      Hi Ripnshread, Actually, the “upcharge” (dealer profit margin) varies considerably, but there are two questions here. The first is how much upcharge the consumer will pay versus online sellers (who have to perform at least some of the services brick and mortar retailers do), which will be narrower than dealer margin. For in-season product that’s not on close-out, good online retailers (the ones who take bikes out of the box and prep them properly)will be much closer to dealer price.
      The second point is, your observation about Shimano is well taken. but it speaks more to how messed up the distribution chain is.

      There’s really no economic reason suppliers can’t sell components to retailers at prices close to those sold to mail-order houses. For more on this, see my previous piece on the mechanics of online discounting. Hope this helps.

  2. Tom in Albany

    Great two-parter and, saving the elephant for the second part was a nice cliff-hanger!

    Anyway. I’m not a racer. Never have been. I like a nice bike. In ’98, I bought a Serotta Ti – in part because of the reputation and in part because I saw a lot of guys riding them in my area. (I live about 30 miles from Ben’s hometown and former factory location.) I still ride that bike. I didn’t test ride anything else. I didn’t do any real research. I just ‘knew’ I wanted a Serotta. For what it’s worth, that bike has NEVER disappointed me and it is still my regular go-to ride, though I mostly bike commute on it now since the kids want all of my free time and I like to give it to them!

    That said, I’ve considered a newer bike because I’m not as flexible as I once was and the old quill stem makes improving things really difficult. I’m not a bike geek and I still don’t do a lot of research. But, I do still like a nice bike. What I’ve gathered is that all of the major brands, and some of the minor brands, are all variations on a theme. So, since I don’t race, I’m not sure what brand I buy matters much from a ‘good ride’ point of view (YMMV) as long as the bike is sized right.

    My point in all of that is this: What I just described was an under-educated – not uneducated – potential customer. The online sales channel is NEVER going to tell me the drawbacks of a particular frame/bike. Hopefully, a good, trustworthy LBS rep will. I’ve been riding this bike for 17 years and I expect to ride the next one for just as long. So, I’m willing to pay a few $$ more to work locally and, after 17 years, I clearly don’t need the new bike today – though I understand that mentality. I shop for other things that way. In the end, I will still want a LBS because I do minimum maintenance and pay for the rest.

    One watchout for the LBS, make sure your customers don’t feel like they’re being upsold or switched to a brand/model that makes you more money (see car salesman feelings..). If you really want the rider to have an AWESOME experience, then you’re going to make sure we get what will give us that!

  3. Ransom

    I’m not sure how Canyon maintains this bit in the U.S.:

    “Canyon doesn’t have those issues to the same degree because they’re set up to ship bikes back and forth in boxes (relatively) easily. Costs of unpacking/assembly/fitting fall on the consumer, as do costs to rebox the bike if they need to send it back under Canyon’s 30 Day Right Of Return policy.”

    It seems like flinging bikes to and fro across the sprawling American landscape isn’t a gimme for anyone. Trek et al. may or may not be able to mitigate this issue by using dealers for “oops warehouses” by any number of accommodations, but without actual dealers, Canyon will need enough distribution centers to make returning tenable cost-wise, however that cost is split between themselves and consumers. Europe’s compactness and density may be central to Canyon’s success there. I’m not sure which fifteen countries they sell in, which -if any- are outside Europe, and whether those examples may indicate how Canyon will approach the U.S.

    1. Author
      Rick Vosper

      Hi backmarker44, that’s a big point, and one I didn’t have space to give justice to. I don’t know about EU countries, but here in the US, some parcel companies are utter hell on bikes, so much so that at least some bike companies refuse to ship with them.

      If you look at the link to Canyon’s Bike Guard box,it’s really well thought out. But it’s also an upcharge to get your bike in it, which brings the bike closer to equivalent bike shop price.

      It also looks like it’s significantly larger than the 107″ dimensional limit most freight companies use before they start hitting shippers with large increases on the rate schedule (“tariff”).

      So…we’ll see.

  4. Alex Palmer

    Great analysis Rick…

    Couple of points come to mind:

    – The return rate for Canyon is nowhere near that of Zappos which clearly markets the whole free returns to get the size right thing (as do say Bonobos and many others). Most Canyon customers seemed well informed on sizing, so returns due to wrong size were negligible. What’s more pertinent for Canyon in the US are returns due to damage in transit, bikes not working as they should when they come out of the box, dissatisfaction with color, spec etc… which is one area of frustration for Canyon customers. Speed of resolution of these issues can be less than ideal, especially when an equivalent replacement product is out of stock or has a long lead time.

    – “Costs of unpacking/assembly/fitting fall on the consumer, as do costs to rebox the bike if they need to send it back under Canyon’s 30 Day Right Of Return policy.” this is just someone’s time to do it, Canyon will send UPS to pick up a returned bike so there’s no actual cash outlay for a return.

    – As you correctly put it their “adequate” customer service in the EU will not fly here.. you only have to read the comments on many of their social posts to get the idea. The very nature of Canyon’s business model (lean, mean, just in time manufacturing) puts more pressure on this as customers get increasingly frustrated with lead times, delays and their ability to deal with any post purchase issues swiftly. What a German customer will put up with, a US customer will not as their service bar is set that much higher, and this requires a big cultural shift from Canyon to get it right.

    But they will shake things up for sure, the product is industry leading in many categories, the pricing amazing, and they continually do very well in magazine tests for these reasons. Whether they can adapt the EU model enough to really make a success of the US in the long term only time will tell, they will certainly sell out of everything they do market in the US in the first few seasons.

    I’m still a believer in a best of both approach winning out that combines the advantages of online (price, choice, immediacy) with the added services that really good retail can provide. The Trek model is a great start and the changing landscape should force everyone to raise their game (including traditional retailers) which can only be a good thing for consumers.

    Alex / @ajmpalmer

    1. Hackintheback

      I think you’ve nailed it, at least for the short-term. Anecdotally, I’m aware that their customer service is borderline abysmal. E.g., Read through a discussion the other day about a guy interested in buying a Canyon MTB. Took about 4 replies from Canyon owners and other knowledgeable parties to convince him to look at a different brand. Great bikes, to be sure. But if you ever have an issue or need support, good luck to you.

      I had read somewhere that Canyon’s plan for the US was to setup a few regional hubs for service and returns, so somewhere between their current EU model and Trek’s LBS-centric model. Personally, I’m skeptical that you can take the bike sales dollars out of an LBS and have them survive, but maybe I’m wrong on that point since margins on bikes are so low.

      Rick – hypothetically, let’s say 100% of Trek’s bike sales go online and they rely on the LBS for distribution and service. Do you see that loss of revenue (despite thin margins on bikes) being enough to significantly impact the dealer network; i.e. shops will close? Or does the potentially freed up capital that isn’t tied up in bikes lead to new, higher-margin opportunities? Further, what of concept shops – would they feel any impact at all?

      Particularly interested in this piece as good friends own a non-Trek, non-concept shop that carries 4 or 5 brands and am noodling over the ramifications for them long-term. They already made their peace w/ being unable to compete w/ Amazon et al. on price for many items, but that seems small-time in comparison to what appears to be a coming wholesale change to the bike distribution and service model.

  5. Scott G.

    Whatever happened to the dead mastodon of online bike sales, Airborne ?

    Campy has the online sales thing down, my LBS told me
    to get the stuff from Wiggle aka the Enthusiast fulfillment house.

  6. Author
    Rick Vosper

    Hey, Scott G., that dead mastodon was me. At least briefly.

    In 2009, Airborne brought me in to clear up their business model so their sales would rocket upward. (This was discount entry-level mountain bike version, not the titanium road version, which had three incarnations of its own). I spent months a lot of time working on the business model, drawing charts and making spreadsheets, but a lot of the issues were things I couldn’t do anything about. So Airborne and I parted way after a couple years.

    The current site is run by the folks at DK (BMX) bikes. It’s still there, but I have no idea what its sales are now.

  7. MCH

    Seems to me that the real elephant in the room is consumer preference. Consumers want to buy what they want, when they want, how they want. Sometimes that’s online, sometimes it’s brick and mortar, sometimes it’s both. All businesses need to make a choice: build bigger walls to keep the barbarians outside, or open the gates and figure out how to live with them. Here’s a look at the future. Those that keep the gates closed will starve and die – probably quickly. Those that open the gates may thrive, or maybe they’ll die to. It will depend on the strength of their new business model. Trying to protect old distribution and business models is no longer a viable business strategy. We all had better get used to it.

  8. Pat O'Brien

    It will be interesting to see how Trek’s hybrid marketing plays out. I wonder if the demographics of the average American cyclist mesh with Trek’s marketing plan? I am a baby boomer, and I would never buy bikes, bike frames, or shoes on line. Fit is just too important with both. But, I do buy my jerseys and other bike clothing on line, mostly in order to get made in the USA products.

  9. Dave

    The concern with Canyon or other direct sellers is pretty legitimate. One thing that has changed over the years I’ve worked on bikes is that the overall quality of bikes available to consumers has gone way, way up. In the early 1970’s, basic bike-store bikes could be just unbelievably bad by today’s standards. I won’t name names, but many European bike-boom machines and early Taiwan product were just shit, stuff so bad that Walmart wouldn’t put it on the floor now. Even relatively elite 1970’s bikes had frame construction and parts quality issues that no shop would tolerate now. Walmart and similar bikes now are as good as many bikes you could buy from an LBS in 1980. Of course a Walmart assembly isn’t!
    Bike brands just shouldn’t be very important to consumers because the bad stuff is much less common in the marketplace.

  10. BHK

    Well being from europe and owning a Canyon bicycle. I’ve bought my last two bikes online and i think the culture is wastly different in europe than in it USA. For me it’s about getting the bike i want spec geo and price, would i recommend others buying online yes and no, it really depends on if you know what you’re doing. The other thing is about options and not only having the big brands to choose from, sure if i want a Specialized, Trek, Scott or Giant i can go to a lokal store and get one but if i don’t it has to be online around where i live.

    As for online only Canyon is by far the most known with it’s pro tour sponsored teams, but there are several others ROSE also German but with more customization but not with the same brand recognition. There several other smaller companies doing the same thing all over europe. Both bikes have been delivered in pristine condition with courier one from Germany and the other from UK.

  11. Stephen Barner

    Being successful in any business is all about correct forecasting and adapting to changing markets early so that you are in the right place at the right time. Protectionism rarely works as well as does swimming with the current. What if a bike shop leveraged their strengths and embraced fulfillment services, ala the Trek model? There would be a distinct advantage to not having to finance and discount an inventory. When I was in the business, I hated the need to move the stock, as the closest bike in stock was rarely the perfect fit and match for the customer. It is intriguing to consider a business model where almost all sales are custom orders–the best match of model, size and color for every customer, delivered in a timely manner, with the sale prepared and completed by the dealer. Auto dealers have been doing this for decades. You still need a showroom and enough inventory for demonstration and impulse sales. I think people would pay a reasonble fee for this service, coming back to the shop for maintenance and other sales, if the experience is good, and the shop is an active, fun place to visit. The shop needs to become the bike place, the hub for all things bicycle, out there in front of the local cyclng community, all the time. The elitists, the profiteers, the ignorant, and the people-haters all deserve to go out of business. Good riddance to them.

  12. KJD

    Steve, you might be right, but unless I’m mistaken, the days of designing a car with every option selected or declined have pretty much passed. I’d bet that 90% or better of new cars sold or leased through dealers in the US are shipped to the dealer without a specific customer requesting it (particularly for general consumers rather than business fleets). That’s probably similar to the new bike market at an LBS… most are in-stock bikes or a spec/trim ready to ship from the “manufacturer’s” (designer/distributer) warehouse. Others might be a frame set order only, but some low percentage of bikes purchased new in shops are special order, usually from smaller semi-custom/boutique frame companies like Waterford/Gunnar, Lynskey and even moots or IF to some extent.

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