The National Bicycle Dealers Association (NBDA) regularly receives requests from people interested in starting their own retail bicycle businesses. Our message can be broken into two parts: Good News and Bad News. We'll start with the "bad."
THE BAD NEWS
We’d be remiss if we didn’t try to scare you off from the difficult task of starting a retail bicycle business. So here goes: Retailing is difficult, and it’s getting tougher. If we told you that you’d go broke within the first three years, we’d be right 70% of the time. The United States is in the midst of a revolution in retailing, with mass merchants, mail order, chains, and other forms of selling having momentum, and small independent stores under tremendous pressure. Today’s consumer wants high quality, great personal service, and a super-low price. There isn’t much room for error, and the small store’s costs are usually higher than the big guy's. The competitive battle is won through excellence, and excellence is not always easy to achieve.
The number of independent bicycle dealers is dropping, from a high of about 8,000 in the early 1980s to about 5,000 in early 2004. The bicycle retail industry typically loses about 1,000 bicycle dealers each year, mostly start-ups, but gains that many back because of even more start-ups. However, the overall number of storefronts has been declining in the last few years. Many people have lost their lives’ savings in the retail bicycle business because they loved bikes, but didn’t have a similar zest for the art of retailing. Bike shops run by people who are only bicycle hobbyists, and not business people, typically find the going tough in today’s competitive market.
Add all that to the overall slim profitability in the bicycle industry, and you can really get depressed. NBDA studies show the typical bicycle dealer needs about a 36% profit margin to cover the costs of doing business and break even financially. Studies also show the average realized profit margin on bicycles to be around 36%, which is a break-even proposition devoid of profit. Fortunately accessories products generally carry a higher profit margin than bicycles. Still, the average bike dealer’s profit is less than 5% at year’s end -- about $25,000 for an average size store of $500,000 in annual sales.
If you’re still reading this, maybe you’re ready for...
THE GOOD NEWS
The level of innovation and diversity has never been higher in "dealer-quality" bicycle products. The number of entrepreneurial companies designing and manufacturing appealing products for the public is high, both in bicycles and accessories items. There isn’t any part on a bicycle which hasn’t been improved in the last five or so years. The bicycle is tied to health, vitality, fun and exercise. The bicycle is one of the least-expensive transportation choices available, as well as a wonderful tool for fitness and fun. The bicycle affects peoples’ lives in very positive ways, and its use contributes to the betterment of the environment.
Cycling participation is solid. There are approximately 45 million adult "cyclists" today, and cycling ranks fifth on the list of most popular outdoor recreational activities. The government has started to include bicycles in transportation planning. And for the retailer, the opportunity to successfully operate your own business in this very special field can be personally very satisfying.
Look closely at yourself before taking on the difficult task of starting a bicycle business. Enthusiasm is important, but it’s not enough. Make sure you can muster excitement and creativity for merchandising, buying strategies, accounting, inventory control, advertising, employee relations, and sweeping the floors. You must want to serve people of all ages, types, colors and creeds. You’ll need some mechanical inclination and a strong constitution — not flinching from long hours, hard work and setbacks.
Use all the resources you can find to learn about small business basics. "Seat of the pants" business management principles can get you into a lot of trouble. Above all else, take the time to do your research and build a sound business plan (see article in the newsletter section of this web site). Planning, organizational skills, and high energy are prerequisites for success in the bicycle business.
The most successful dealers in the country stress personal service, and developing personal relationships with customers based on caring and service. Quality and personal attention are powerful ways to differentiate yourself from the various discounters and mail order outfits competing for the cycling dollar. The owner and key managers must truly want to help customers and the community, and be truly concerned about and involved with them.
This model of service affects almost every decision made by a retailer. Each time a customer steps into your store, he or she is judging the experience. You and your store are performing, and the showroom is your stage for showing product in interesting ways, where you interact with customers, and try to find out what they need and want that you can provide. The successful dealer pays very close attention to the quality of the customer’s "retail experience." Customers don’t like to be ignored, or taken for granted, or manipulated, or bored. Attention to detail, good selection, knowledge, a caring attitude, good product presentation — these are all keys to giving the customer that good experience. The store must be identified as "the brand" in the community -- not just the products they carry. Relying on the specific products you sell for your identity is extremely risky because others can also sell those specific products.
High quality retailing is not possible without being profitable, having the resources to meet customer expectations and wants. A common scenario of a struggling dealer is one who fails to maintain appropriate profit margins that allow financial viability, but instead uses unrealistic low prices across the board to attract customers. This can lead to what some refer to as the "death spiral." The retailer may appear busy and successful at first, but if revenue doesn't cover operating costs, failure is inevitable. The NBDA urges all dealers to keep records and know what their true cost of doing business is (rent, utilities, salaries, etc.) The numbers here are from the NBDA Cost of Doing Business Survey, reporting dealerships with expenses shown as a percentage of gross sales. It’s simple arithmetic — if your sales don’t cover your cost of goods plus your expenses, you’re losing money. Know what YOUR break-even point is. Be in control.
AVERAGE EXPENSES FOR SPECIALTY BICYCLE RETAILERS
(From NBDA Cost of Doing Business Survey, expressed as a percentage of gross annual sales)
Payroll Expenses — 20.5%
Occupancy Expenses — 7.7%
Advertising/Promotion — 3.%
Auto and Delivery — 0.5%
Depreciation — 0.9%
Insurance — 0.8%
Licenses/Other Taxes — 0.5%
Professional Services — 0.5%
Office Supplies/Postage — 1.2%
Telephone — 0.6%
Travel/Entertainment — 0.4%
Other operating expenses— 1.3%
TOTAL OPERATING EXPENSES — 37.7%
NET INCOME BEFORE TAX — 4.2%
GROSS MARGIN ON BICYCLE SALES — 36%
GROSS MARGIN ON CLOTHING SALES — 43%
GROSS MARGIN OTHER EQUPT. — 48.1%
We can recommend some additional resources to you:
-- The NBDA Cost of Doing Business Survey, from the NBDA for $150 ($75 for NBDA members). Detailed financial study of bicycle retailing, complete with average costs, profit margins and more.
-- The Bicycle Retailer and Industry News Industry Directory, from Bicycle Retailer and Industry News, www.bicycleretailer.com, or phone 949-206-1677.
Interbike Trade Expo, held in September in Las Vegas, Nevada, Web site: www.interbike.com. This show is open to the trade only and for 2013 invited consumers.
-- Trade magazines:
-Bicycle Retailer and Industry News, 25431 Cabot Rd., Suite 204, Laguna Hills, CA 92653, 949-206-1677. Internet: www.bicycleretailer.com