Can Local Bike Shops Survive?

Bicycle shops in the U.S. have been shuttering their doors at a brisk pace over the past decade or more, even as the number of Americans who identified themselves as bike riders grew by some 2%.

The demise of the neighborhood bike shop has stood in strong contrast to many other bike-related growth trends.

The numbers of trails, bike paths, and bike lanes continues to grow. Bike-sharing programs are springing up in cities across the U.S., from Boise to New York, helping to revive the popularity of bicycles as a practical mode of transportation. All this while the most serious riders are plunking down more than ever on their bikes and their gear.

In 2000, Americans bought 11.9 million bikes with wheels 20 inches or larger – bikes made for teens and adults. In 2012, that number stood at 13 million. Yet the number of U.S. bike shops over that period fell by 34%, from 6,195 to 4,089, according to the National Bicycle Dealers Association.

So, what's going on?

Wikimedia Commons: Joe Mabel

There are a lot of places to buy bikes
Competition for bicycle sales looks stiff from a distance. Local bike shops compete with big-box stores like Wal-Mart  (NYSE: WMT  ) and Target  (NYSE: TGT  ) , sporting goods chains like Dick's  (NYSE: DKS  ) and Champs, outdoor specialty shops like REI and its smaller brethren, and a growing number of Internet-only bike retailers.

But a closer examination reveals a much different picture.

Big-box stores like Wal-Mart and Target continue to sell the lion's share of bicycles in the U.S. Nearly three-quarters of all U.S bike sales in 2012 were rung up at what the industry calls "mass-market retailers," according to NBDA. But these sales hardly compete with local shops. The bikes they sell are cheap – averaging just $78 – and not something a smaller bike shop would even offer. Buyers of these bikes rarely upgrade to something they'd find in a specialty store for several hundred dollars or more.

Chain sporting goods stores like Dick's pose greater competition to the smaller shops at the low end. But still, the bikes they sell – at an average $240 – are just a third of the cost of the average bike that gets wheeled out the door of a specialty bike shop.

Internet bike shops like Bikesdirect.com offer high-value bicycles by combining off-label frames and high-quality component groups from well-known parts makers like Shimano, SRAM, and Avid. With an average selling price of $345, these sales undoubtedly take away from sales of local shops. Still, these bikes made up just 2% of unit overall unit sales in the U.S. in 2012, NBDA reported.

About the only stores that offer formidable competition to the local bike shops are specialty outdoor retailers, which target the same higher-end buyer and sell bikes at an average $574 price. Outdoor retailers sell just 2.5% of the bikes, but hold a 7.5% market share by dollars due to the bikes' higher prices.

When a sale can lose money
As it turns out, riders haven't turned away from smaller shops that remain bike-specific. In fact, some 52% of all the dollars spent on new bicycles in 2012 were spent at these shops – far more than any other channel.

The consolidation of the industry more likely is a matter of margins. Simply put, they're small. The gross margin on a typical bike rings in at 37%, or just about 1.6 percentage points below what the NBDA considers the "break-even point" for shops to cover all the costs of the goods sold. Others estimate that the break-even margin on bike shop sales is 42%.

That's right. Your neighborhood bike shop might just be losing money on the bike it sold you.

It can do so only because it plans to make up for that by selling you gear to go along with that bike, and maintenance and repair work over the years you own it. Gear sports a higher margin of 48%. And NBDA says that at the most successful bike shops, maintenance and repair make up nearly twice the amount of the total revenue – at about 11.4% – than it does at the average bike shop. 

The other things that weigh heavily on whether a bike shop succeeds of fails, according to NBDA:

  • How efficiently it uses the space it has available – The best-performing bike shops it surveyed were smaller than the average store. But they generated more revenue per square foot, at $328 to a $310 average.
  • How well it manages payroll – The average store spent 25.4% of its total expenditures on payroll. Contrast that to the best-performing stores, which spent 22.5%.
  • How much is the rent? – The average store paid 8.3% for rent, maintenance, and utilities, while the best-performing stores paid 7.1%.
  • Keeping a lid on administrative costs – The best-performing stores spent about 36% less on administrative expenses than the average store did.

The Foolish bottom line
Competition for bicycle sales is on the rise, but cyclists continue to spend the majority of their money at local shops. Still, the number of those shops continues to shrink. What separates a successful shop from a failure has less to do with how many bikes it sells, and more to do with how well it's managed and the quality of repair work it does. 

Warren Buffett took a bicycle tax deduction at age 13 -- and made billions since
Warren Buffett has made billions through his investing and he wants you to be able to invest like him. Through the years, Buffett has offered up investing tips to shareholders of Berkshire Hathaway. Now you can tap into the best of Warren Buffett's wisdom in a new special report from The Motley Fool. Click here now for a free copy of this invaluable report.


Read/Post Comments (0) | Recommend This Article (0)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

Be the first one to comment on this article.

DocumentId: 2933249, ~/Articles/ArticleHandler.aspx, 7/23/2014 9:11:38 AM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...

Today's Market

updated 11 hours ago Sponsored by:
DOW 17,113.54 61.81 0.00%
S&P 500 1,983.53 9.90 0.00%
NASD 4,456.02 31.31 0.00%

Create My Watchlist

Go to My Watchlist

You don't seem to be following any stocks yet!

Better investing starts with a watchlist. Now you can create a personalized watchlist and get immediate access to the personalized information you need to make successful investing decisions.

Data delayed up to 5 minutes

Related Tickers

7/22/2014 4:02 PM
DKS $43.74 Down -0.44 +0.00%
Dick's Sporting Go… CAPS Rating: ***
TGT $59.38 Up +0.08 +0.00%
Target CAPS Rating: ****
WMT $76.64 Down -0.13 +0.00%
Wal-Mart Stores CAPS Rating: ***

Advertisement