Frameconomics

It seems like all we do is talk about wheels lately, huh?  Well, there's a lot to talk about about wheels, and we have some really really nice wheels.  If you're on the mailing list, you'll know that we've just announced a Rail trade-in program, where you can trade in your older November carbon clinchers for new Rails.  It's a great program, but talking about wheels is not my purpose here today. 

Have you noticed that there are relatively fewer carbon frames going around these days?  I don't mean from Trek, Giant, or Specialized.  I mean like Blue (the company was shuttered a couple of weeks ago), and Van Dessel (their primary cx bike is the very cool new aluminum "Aloominator"), and companies sort of that size and smaller.  There are a bunch of different market forces at play creating that.

One is what I call the forest syndrome at the bike dealer.  The big companies are the tall trees and they soak up the sunlight and the moisture from the ground and the big get bigger and the small fight over what's left.  This is decidedly not me wearing some punk hat right now, it's a simple fact of the way things go.  In order to thrive in that environment you really have to be well adapted and do something unique.  We've chosen to go a different route entirely, and that's been pretty good for us so far.

Another thing is floor plan financing.  This is really part of the forest syndrome, but it bears talking about quickly.  The bikes that you see on the shop floor are being financed.  The bigger brands can finance more stuff at better terms than smaller ones can.  They have more access to capital, and their draw as brands puts people through dealer doors, so the dealers generally need them to thrive.  It drives a lot of shop floor homogeneity, but until it becomes a bad thing (dealer sales don't meet expectations, dealer gets behind financing) it's a good thing in terms of keeping inventory available to buy.  As the bike buyer, you pay for it, but that's part of the stew. 

A big and growing challenge for a lot of brands on the undercard is lead time and carrying cost.  If you want to buy frames from someone worth buying them from a) they're not cheap, b) you have to buy a ton of them, and c) there's a long lead time after you pay for them and before you get them.  So, say you are a company like us, and you are aware of and have access to the companies that you want to be buying frames from.  In order to have bikes to sell, you need to buy what we politely refer to as a metric f**kton of them, and pay for them at time of order.  Anywhere between 90 and 120 days from that time (from the quality suppliers, lead times have been growing, and prices have been rising), they'll be ready to ship to you, so you're out the use of that money for that entire time, and you're paying the vig on whatever of it you had to borrow. 

Call it 100 days later, you get the nice notice that the frames are ready to ship to you and you get to pay the shipping cost then, and soon enough customs duty and broker fees as well.  If you do it like we did our last pre-order, when the frames were a bit at risk of arriving behind our promised delivery window, you air freight them.  That costs a ton.  If schedule allows, you sea ship them.  That takes a ton of time.  Say you've shipped them by sea, which takes on average about 30 days from Taiwan.  Now you are looking at a clean 4 months from when you've paid for the frames to when you even have them.  Then you start selling them, but because of the nature of this whole morass you are taking any where between 6 months and a year of inventory in the shipment. 

If you've taken 6 months worth of inventory, you're going to sell approximately half of that inventory in the first three months and half of it in the back end.  Say your sales go well and you sell half of the inventory in the first two months (which, incidentally, has now given birth to your resupply problem).  So now you are starting to get recoup some of your investment that you made 6 months ago, and if sales continue to go well, you will get out of the red and into the black before much longer. Hopefully you've gotten the size mix right so a bunch of your inventory doesn't become a white elephant. 

Most small businesses simply don't have the capital to finance COGS (cost of goods sold - one of the acronyms I do use, and often) for half of their year's sales for 6 months.  The various responses to that are going out of business (a la Blue), or shifting to a different supply (Van Dessel), or realizing that their original plan of doing pre-orders is actually really smart (us). 

As with every blog post about complicated topics, I've had to leave out a lot in order to keep it to a length you might actually read.  If the world slows down just a little bit hopefully I will be able to fill in some of that shading.