One of Australia’s leading business experts will be a keynote speaker at the third annual Australian Bicycle Summit to be held in Brisbane on Friday 12th May. Here’s some of his advice that every bicycle business owner should read!
James Stewart is often quoted in the mainstream media and usually works at the big end of town. He is a Partner at both Ferrier Hodgson and Azurium and through years of experience has helped to turn around companies with total combined sales in the billions of dollars.
Ferrier Hodgson deals with companies in distress. For example James is currently the receiver of Dick Smith and the administrator of Payless Shoes.
Azurium is a management consulting business owned by Ferriers. It deals with strategy work for clients, customer insights, real estate advisory work, performance improvement and change management.
“We deal with small and large businesses across the spectrum, from as small as one or two million dollars’ turnover to over a billion dollars,” James explained when he spoke to Bicycling Trade a couple of weeks prior to his keynote address to the Australian Bicycle Summit.
“I’ve spent the past 30 years working with distressed companies, companies going through change management, organisations that have been disrupted… I’m actually one of the few people who work in both Ferrier Hodgson and Azurium.”
A word often repeated by James is ‘disruption’.
Just in case you haven’t already heard of this term, here’s a definition in the context of the Australian bike industry; disruption is when Wiggle and other new players come along and sell products to consumers for the same price that dealers have to pay a wholesaler. More broadly, taxi drivers are being disrupted today by Uber and Kodak was disrupted by digital photography. You get the idea!
The Challenge
“I’ve worked in the bicycle industry. I can’t divulge who I’ve worked with, but through that work, I’m familiar with your business models,” James revealed.
“When I look at the disruption that’s happening to bike industry, it’s increasingly difficult to make money at the retail level. A lot of it is impacted by online.
“What you’ve seen across cycling is an increasing number of manufacturers taking over the downstream position of cycling retail. Cycling retail businesses are getting hammered by Wiggle and all these online organisations on accessories, which is where their margins used to be.
“The challenge you’ve got in the cycling industry, especially in the high end enthusiast market, is that the vast majority of spending is done by men. They are notoriously bad shoppers. If they can find a more efficient way to buy something, whether it is online or through their local provider, they’re going to do that.”
Emergency Ward for Businesses
James spends much of his time trying to save businesses that are in a life and death situation, not unlike an emergency ward doctor at any major hospital.
He reflected, “How many of the distressed business that we see are capable of being saved? That is a direct function of how early we get to them. More often we see people way too late in the process.
“It’s not until their burning business platform has just about expired on them that people have a good look in the mirror and say, ‘Maybe I need some help!’
“By the time they come to see us their ship has been holed in three or four places and they say to us, ‘Can you please save it?’
“It’s extremely difficult to do that when you see someone way too late in the process. But good business people are constantly looking three to five years into the future and making decisions at a strategic level well before the change comes.
“So when we talk about, ‘Why do businesses fail?’ most businesses are constantly being challenged and disrupted but the good ones are thinking ahead of the game. Their management are anticipating change and disruption, taking a view about whether they’re in or out of the game and if they’re in the game, how they’re going to win.
“A lot of the time when businesses come to us in a distressed form, they have had their heads in the sand for a long period of time. So it’s very difficult for us to recover any value for them and/or protect that business. I think we can protect the business about 30% to 40% of the time, but that very much depends on whether we get to see them early enough in the process.”
Key Bicycle Industry Trends
Although James has some specific bicycle industry consulting experience, he also has the advantage of working across a wide range of industries so that he can see parallels.
“The bicycle industry is slowly becoming like the car industry,” he observed. “The manufacturers are the ones making the money. The downstream operators are working as agents for the manufacturers and effectively getting paid on a de facto rebate or commission basis.
“The old days where a retailer bought a bike, whacked a margin on it and sold it and your profit was kept in your margin… I think there’s a risk that those days are going.
“Car manufacturers talk about, ‘moving metal’. The downstream operators might only make $500 margin on a car, but the manufacturer will rebate margin to the retailer based upon how many vehicles they can move that might be $2,000 or more. So the local retailer of cars still makes money, but not in the way they used to make money.
“It is more difficult to operate a multi brand retail outlet than it is to operate a specialist branded outlet. I’m generally a fan of specialists businesses. You can tell the story better, so the customer understands what you stand for and what you sell. You can train your staff and execute in store or online in a really clean environment. If you’ve got a vertically integrated business, which is what a specialist business can be, then you’ve generally got better margins.
“The multi branded retailers will argue the opposite of that. They’ll say that by having multiple brands you de-risk your business because you don’t have all of your eggs in one basket.
“I understand that argument, but that’s effectively a department store argument. If you look at department stores around the world, most are in significant decline or losing money.
“The top retail brands around the world are almost all specialty retail brands. The only exceptions are organisations like Amazon and Alibaba that basically don’t give a damn about the brands they sell. What they care about is the value that they can deliver to the customer.
“One of the challenges for the bike industry is, how can they balance out personal experience that your local bike shop can give to customers?
“If you look at the very famous bike shops of the past in Melbourne such as Hillmans and Cecil Walkers, they were effectively mini department stores. Bike shops used to make a lot of money out of accessories but that market has been heavily damaged by online.
“So you’re basically going into bike shops for complete bicycles and for servicing. The shop’s ability to make money on complete bikes is heavily dependent upon the pricing that the brand supplies them for.”
James sees the internet as just one of many disruptive challenges.
“Internet and mail order is not that new,” he said. “This is my point about anticipating change. The internet has changed all forms of retail, not just bike shops. It didn’t change overnight but it progressively changed, especially since 2008 and a lot of bicycle customers are very internet savvy.
“I’m not talking about family bikes, but your typical serious bike person is well educated with a reasonable income, because he’s spending chunky amounts of money on bikes. They know what they can hook into online, so they’re just being savvy about it.
“But it’s not just technology, it’s generational change. Millennials don’t want to buy ‘stuff’ like their parents and grandparents. They want to buy experiences. They would rather rent a $10,000 bike than buy one.
“Millennials also don’t care about brands in the same way as their parents. They care more about authenticity, localisation. My son for example is 25 and works in the city of Melbourne. He doesn’t have a car or a licence and has no intention of getting either.”
James thinks the bicycle industry faces an even tougher challenge because many bikes are so similar, they’ve become commodities (like wheat or coal) rather than brands (like Apple or BMW).
“I know that there will be arguments around this, but cycling largely deals with commoditised products. I don’t intend this as a blanket statement for all bike products, but if you’re in the bicycle retail you have to ask yourself:
- ‘What’s my point of difference in the market?’
- ‘How do I control my market share to protect it from online?’
“The answers will often come down to two things:
- Exclusivity of product.
- Service or personalisation that drives customer experience.
“If you look at a brand like Rapha, which is a luxury end brand, in reality customers are paying for experience. The experience is a big part of it.
“By the way, Rapha is actually not making a lot of money overall. I’ve been through their published financial accounts and they’re not flying. They’ve got huge marketing expenses, which mean they’re making less money than you might think.
“But I’m still a great fan of creating points of difference either through specialisation and/or experience. Whatever your point of difference is, when you look at your local market and the strengths of your brand, I would be deep diving into that and becoming a specialist.
“Generally speaking that gives you the greatest opportunity to have longevity. The challenge is that most Australian bicycle shops today are not like that. Most of them are mini department stores.
“I’m challenging the industry to rethink how they go to market. That might be confronting.”
Another huge challenge the bicycle industry faces is artificial obsolescence caused by defining bicycles by model years.
“It’s horrendous!” James exclaimed. “The way that’s set up makes it very difficult for a retailer. I think the industry has a lot more change to go through. Change is painful.”
So how can shops combat year model induced obsolescence and discounting?
“From the bike shops that I’ve seen, they’re often not very sophisticated in terms of their inventory management. They don’t really get granular on what new product they’re going to get through. I think there’s potential for improvement.
“Secondly, the best practice retailers have gone from a ‘customer push’ to ‘product pull’ model. In a traditional bike shop you will go and buy for a season, let’s say for a larger shop 1,000 bikes of all different types and varieties. You put them in your store with backup in your warehouse and get ready to sell them.
“That business model still has relevance, but in a specialty operation and you certainly see this in the car industry, they’re holding a lot less stock letting the customer come in and design the product the way they want, then getting it made in China or Europe or wherever and the customer is waiting for it.” (Just like Trek’s Project One for example).
“That’s the way the world is going in terms of cars and sporting apparel. If you look at some of the things Nike is doing overseas and now a little in Australia, what Adidas is doing… the world is going down the road of personalisation, bespoke to the consumer.
“This concept excites me, because I think it’s increasingly going to be the future of retail, whatever category you’re in.
“People are passionate about bikes. If a consumer is passionate about a bike product and they can have a point of difference, that’s exciting for them.
“But in a commoditised market it will be increasingly hard for retailers to make money and the manufacturers will increasingly control the downstream retail environment because the only people who are going to be making money are the manufacturers.”
James spends a lot of time working with fashion industry clients but surprisingly does not rate fashion stores any more highly in terms of their presentation.
“I think bike shops are on the same bell curve as fashion stores. In any category you’re going to have a small number of shops at either end of the bell curve and the majority in the middle.
“You can find bike shops that are really badly presented and you can find stores which are really beautifully presented.
“I don’t think the department store style in either fashion or a bike shop is a particularly inviting experience. Best practice retail says that the specialists deliver an in store experience way better than the brand aggregators do.
“For example, compare your experience in an Apple store to your experience in a JB HiFi store. And your experience in a Nike store is entirely different to your experience in a Rebel Sport store.
“I like the clean, clear customer communication of a single brand.”
What Should You Do if Your Business is Struggling?
“If your bike shop is in trouble I’d say to you, start by standing back and asking yourself honestly, ‘Can I win in this market?’ and ‘Can I win with my current business model?’
“Before you do anything else you have to answer those questions with real, cold honesty.
“If your answer is, ‘No’, you feel that you can’t win, then find a way to change your business model, or if you need to, get out of the industry.
“Conversely, if your answer is, ‘Yes, I think I can win. I think I’ve got the fundamentals of a good business.’ And if you like what you’re doing, then your next question is, ‘What’s the cause of what’s going wrong?’
“It has got to come down to either systems, processes or sales. Identify that down to two or three key factors. Then take control of your destiny and make decisions about how you’re going to fix these factors.”
Clearly identifying these factors is easier said than done when you’ve been living inside your business every day for years. This is where an outside consultant could bring a fresh perspective and help you to, ‘see the wood for the trees.’
James’ final challenge for bicycle businesses is not always possible to turn around overnight.
“In a world of disruption, I strongly believe that businesses with stronger balance sheets (that is, significantly greater assets than liabilities) win,” he stated.
“It’s not because they’re better managers or they make fewer mistakes, it’s just that they’ve got more wriggle room when a problem comes along. It buys them time to work their way through it.
“I’ve seen cycling businesses that gear both sides of their balance sheet. That means their inventory and business is getting geared (borrowed against) and they get finance for some of their customer sales.
“I think that’s just crazy! You’re effectively renting your business from financial institutions. “You need to find a way to have ownership of your assets, so that when your business is being disrupted and you need to adapt to the times, you’ve got wriggle room. Don’t be under capitalised!”
To register or find out more details about the Australian Bicycle Summit please follow this link.
