The Price Of Long Dating Is Too High For Industry

With Schwinn/GT teetering on catastrophe, Specialized lining up over $150 million in new credit and bike sales through the specialty bike retail channel generally slow, perhaps now is as good a time as any for bike manufacturers, suppliers and retailers to think about the negative affect long-term credit is having on the industry.

I began to form this opinion at Interbike last year when I witnessed retailer after retailer signing up to buy Razor scooters for the Christmas rush. The terms to buy the scooters were tight—prepaid or COD only and there was no color choice. Still, no one complained. I guess when retailers really want something, they can and will pay for it.

This was in stark contrast to six months earlier when I was laboring through my last days at GT Bicycles doing research on industry dating practices.

As every bike retailer knows, you can choose from any number of long-term dating programs from virtually any supplier selling everything from clothing, repair parts and accessory items to all the bikes you will never sell from November to April.

This is a bonanza for retailers because low-interest or interest-free loans are great. But while the Razor experience told me retailers don't really need this kind of credit, it's another thing to ask them to give it up. Especially if it's offered so freely.

But as is often said, there is no such thing as a free lunch.

The issue is one of balance-sheet basics: The working capital requirements to make these bikes, which have lead-times from 90 to 120 days, and then floor them at another 90 to 120 days are staggering.

While retailers may never see the true cost of financing this inventory cycle on their invoices, it is there—every step of the way, from source factory to importer to distributor.

While it is perfectly normal for businesses to seek additional working capital to build-up seasonal inventory, the usual terms are 30 or 60 days, not 120 or longer.

A small distributor with a limited bike line and modest credit terms either opens a letter-of-credit (LC) or negotiates credit terms with their factory to secure delivery. If they went with an LC, the cash is frozen until the bikes are shipped, usually 120 days from confirmation of the order. That is cash that can't be used for normal operations, which means they will probably have to borrow money.

On the other hand, if they negotiated payment terms, the added cost is more direct. The factory will add at least 2 percent to the cost of each bike. While that is a pretty good rate, it accounts for about $10 of the retail price on the average $300 bike.

This is not an earth-shattering amount by any means. But if the supplier had to finance its working capital requirements via a commercial loan, the amount added to the price might be more—perhaps substantially more—depending on the rate and term of the loan and how the chief financial officer allocates the costs against the inventory.

And it doesn't stop there. When a supplier gives 90 or 120 days dating, it almost certainly has to borrow money to finance that interest-free debt. This cost, because the retailer didn't pay it as a finance charge, will no doubt be indirectly added to the cost of the bikes or other inventory.

Take the same $300 bike and add a 5 or 10 percent interest charge at the wholesale price, and we are talking perhaps an extra $25 added to the cost of a $300 bike.

Retailers expect, and should get, a higher margin than sporting goods chain stores or mass-market outlets. Every issue of Bicycle Retailer & Industry News has at least one letter condemning the pricing practices, discount strategies and the general nuisance of having to compete with these alternate channels.

But the bottom line is, There is nothing you can do to control them or their behavior and whining about it is not going to change things. But the cost of credit and out-of-control sales programs are areas you can control.

Next time the factory road show comes around, ask the chief executive officer to explain the pricing implications of their long-term dating and interest-free credit program. If the cost isn't being added directly into the bikes, then where is it going?

If you are one of those retailers who can buy everything on Net 30 terms, but sign up for these absurd programs to guarantee your allocations, start asking yourself if the extra cost is worth being less competitive in the face of lower-price competition in other channels.



Bob Hadley is product development manager for Razor. He worked at GT Bicycles for nine years and was its marketing manager, adult bicycles until he left Schwinn/GT last summer.