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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. 

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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.

  • Report this Comment On March 01, 2015, at 9:26 AM, crankdango wrote:

    The largest seller of bikes and bike parts in the world now is eBay. Alibaba and other on-line venues making bikes and parts available from China is having a huge impact. Personal story, about the time of this article I build a 16.3 lb. mostly carbon cyclocross bike using parts sourced from China via eBay and a few European sites like wiggle.uk for under $1200 complete. This was built on the EXACT same carbon bike frame offered by US retailers under a major brand name selling for $1500 alone, no parts. There are only 3 major carbon bike frame manufacturers in the world, making the frames for all companies, two are in China and one is in South Korea. Serious cyclists know this and many refuse to pay 75-100% premium to a brick and mortar where all you generally get to deal with is the ignorance and arrogance of 20 year old bike shop employees. This is a major factor in why many US bike shops are failing. They've honestly been lead to believe their "value add" is worth excessive margins while they are genuinely adding little value. "Organized group rides"... "personal relationships with your local shop" and $250 "bike fittings" are where they claim the value lies. Fitting someone on a bike for $250 isn't a "value", it's a rip off and those paying top dollar for bikes are not playing the game often. But they need not worry. There are plenty of new riders with no skill ready to buy more bike and kit than they need and counting on their LBS for advice in the matter. The best advice they could give is to buy a cheaper used bike on eBay and build endurance first, then spend $3k on junk you don't need to make you look "pro".

  • Report this Comment On August 16, 2015, at 10:00 PM, jtiv wrote:

    I've got news for you man. As a carbon engineer those bikes you're buying on the "grey market" are NOT exactly the same. They might have come out of the same mold, and look exactly the same, but likely if they came out of the same mold, they are scrap parts. Essentially the person putting the laminate together left out a piece or 2 or 5... One frame can have upwards of 500 pieces of carbon. Leave one out and you've got a bad frame. Generally every frame is weighed after cure and if it's more than a few grams off someone left a ply out i.e. it didn't pass quality control standards. They go in a pile and some make it out the back door. The best brands are EXTREMELY careful to ensure scrap frames are destroyed before making it to ebay. Unless you consider Taiwan part of China you also left out one of the biggest manufacturers of carbon frames. Giant Bicycles.... they happen to make bikes for Giant and Trek in Taiwan. Many of those frames are "knockoff" look-a-likes with no engineering let alone quality control. Building carbon is VERY complicated and takes an immense amount of QC to ensure it's done right. I wouldn't ride anything that didn't have a big deep pocketed brand standing behind. What are you going to do, sue Alibaba when you bike disintegrates under you on a 45mph decent? Sure it might be fine under normal riding conditions, but 1 pothole to many and that frame is gone.

    As for bike shops, you're right many are not so good, those are going out of business fast. But there are many with real professionals and can really help you out in a bind. It pays to make friends. I used to think I knew everything about bikes, then I met a real expert. He forgot more than I know, because ALL HE DOES is work on bikes. I have a full time job doing something else. Wiggle is selling product at cost so they make a dime on your purchase of a bottle cage. Just because a small local shop cannot compete with a large warehouse only no service, no problem solving no customer service at all online store, doesn't mean they are ripping you off. Give em a break. There are tons of great bike shops working really hard to get new riders on bikes, working in advocacy to ensure there are roads and trails for you to ride on with your grey market steed. As for bike fits for $250 being a rip off... I'd guess if you did as much research finding a bike fitter as you did finding that cheap carbon knockoff, you might have found one that is actually worth the $250. Little less hate, and a lot more love goes a long way my friend. Bike shop people are not evil rip-off artists, they are people who are even more passionate than YOU about bicycles/cycling trying to make a meager living selling solid proven product, not to mention, much of the money spent at a local shop goes back into your local economy, instead of 100% to China or England. Good luck my friend, and be careful out there.

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John-Erik Koslosky
jekoslosky

John-Erik Koslosky is a writer, journalism instructor, investor, and all-around Fool. He follows the media and social media industries, and writes about some of their publicly traded companies.

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