Beyond the Bullwhip: Taking Stock of the Bicycle Industry in 2025
Three years after the pandemic bike boom ended, the bicycle industry is still waiting for normal to return. What was supposed to be a temporary inventory correction has stretched into a prolonged period of discounting, brand failures, and dealer distress. Some of these companies resisted restructuring in hopes of a fast rebound.
Why is the recovery from the pandemic taking so long, and what might we expect once normalization finally arrives?
First, it’s worth quickly recapping what transpired during COVID and in the periods following. When lockdowns began in 2020, bicycle demand surged as people sought outdoor exercise and alternatives to public transportation. Bike shops, initially caught off guard, began placing significantly larger orders than their historical sales would suggest. Brands leaned in, spreading orders around to multiple component and bike assembly houses. Asian manufacturers, particularly in Taiwan and China, saw order volumes that were multiples of pre-pandemic levels and ramped up production accordingly. No one wanted to be left out of the bicycle gold rush.
This so-called “bullwhip effect” reflects a generalized supply chain phenomenon in which demand shifts at the consumer level can have amplified effects back up the chain, resulting in lots of behaviors that become problematic when demand normalizes again. In this case, inventory levels across the entire value chain became highly elevated, and as demand ebbed, there was quite a bit of excess product at both the assembled and component levels to sort through.
Oversupply, Pricing Pressure, and Market Fallout
There are actually two problems embedded in the demand surge and subsequent bullwhip effect that are worth unpacking separately. As noted above, the demand surge caused amplification and duplication of orders up the supply chain, magnifying the amount of production put in motion for the actual market demand. But the demand spike was also essentially a “pull forward” of future bike demand that was certain to lead to a demand trough. As bikes are something like a consumer “capital good,” purchased with a longer frequency than consumable items like tennis balls, socks, etc., when demand spikes, there is a portion of new consumers entering the market, but also a decent portion of future consumers accelerating purchases. One can look at increased ridership statistics2 to attempt a stab at a split, but there is little question that, in part, the surge in 2020 and 2021 was simply a borrowing of future years’ normalized sales levels.
To illustrate, consider the following framing, which, while imperfect, helps unpack the notion of near-term sales at the expense of future sales. If we imagine the bike industry naturally wants to grow at something like 2% per year in units, we can create a baseline level of future unit sales by year, starting off the pre-COVID base year of 2019. On the chart below, this is represented by the orange line. Actual sales are then shown on the blue line. In the beginning, spiked unit sales drove a supply surplus into the market, shown cumulatively in the green columns at the bottom. By the end of 2021, there were about 9.5M “excess” bikes compared to the normal levels sold. Unsurprisingly, this pull forward in demand was followed by a trough in which unit sales dropped below the normalized levels. By the end of 2024, the cumulative position had turned negative.
The ripple effects of both the demand pull forward and the bullwhip on supply chains led to a glut of inventory, exacerbating some fairly tenuous practices that had evolved since the global financial crisis (GFC). Major brands followed the GFC by capturing more independent dealer share by way of extended financing. The use of “spring terms,” in which many dealers commit to purchases in the fall but make payments on their commitments in the spring, felt like an advantageous benefit in financing bike shops pre-COVID. But when a market enters a period of substantial disruption, commitments far in advance of observable demand create exposure. Dealers committed to buying at high levels with fixed prices were left holding the bag as demand dropped, inventory surged, and prices descended into extreme discounting. Headline gross margins from Minimum Advertised Price (MAP) levels became less impactful on profitability in the channel, and as brands themselves became hugely overstocked, many dealers found themselves in situations where the brands they carried were being liquidated by the suppliers at or below the dealer’s cost. That is obviously a problem.
In fact, one of the important lessons from COVID, noted by a variety of industry watchers and pundits (references), is that a focus on headline gross margins is likely less valuable than structures that focus on total return on capital. Commitments to buy well in advance of the actual season, where prices may fluctuate, are likely less economically sound than brand-dealer models less dependent upon dealers maintaining lots of inventory. For what it’s worth, the car industry came out of COVID having made some significant shifts in the percentage of cars sold off the lot vs. in more of an agency model, allowing the dealers to maintain less capital in inventory, risking less end-of-season discounting, etc.
The combination of things above helps explain why it has been so hard for the industry to recover, with the discounting lasting beyond forecasts for working down the excess inventory. However, there is one more important aspect of the perpetuation of discounts worth pointing out.
Prices are always set on the margin. That is, the market price of any good, service, stock, or bond is essentially set by the marginal buyer and seller at any given time. As documented throughout much of the news cycle over the last couple of years, the COVID-19 disruptions took their toll on many brands. As brands faced increasing financial trouble, they transitioned from needing to discount to simply reduce inventory, to discounting to support core cash flow, to survive. Owners and investors anticipating that the market would soon turn, including those backed by private equity increased debt levels, or equity investments, were somewhat reluctant to resize their businesses to a new normal.
As a result, many brands that have either failed or become significantly handicapped compared to pre-COVID levels turned from mild discounting to bike liquidation. When a respected mountain bike company or electric bike company is selling very good bikes at 50% off for six months or more to generate cash with the hopes of staying alive, it is hard for other companies (even if healthy) to hold prices. The death rattle of a not insignificant number of brands has effectively prolonged the discounting period beyond what might have been required just to resolve the bullwhip of inventory.
Strategic Shifts for a Changing Bicycle Industry
Looking ahead, RAF’s Senior Vice President & Chief Operating Officer Peter Harris anticipates several significant shifts on the horizon. Here are a few.
Brand/Dealer business models will be rethought. “Likely not entirely, but some subset of the market will move away from placing committed season orders well ahead of time. Models that favor reducing the amount of capital dealers are required to use in running their businesses will grow. This could be slotting, agency, configuration, or other strategies that reduce the commitment, risk, and capital intensity for the dealers. Intense Cycle’s new Frame First approach in partnership with QBP is a solid attempt in this direction.” These shifts reflect broader strategies for business development, designed to reduce dealer risk and increase operational flexibility.
Channel blending will accelerate. “The bike industry historically saw a bifurcation between brands that sold only through dealers and those who sold only online. Today, these lines are blurring. Cycling is far from the first industry to go through such changes. Mattresses, eyewear, and outdoor apparel have all moved to meet the end customer where they want to buy, vs. adhering to strict separations. Patagonia sells on their own website, in their own stores, through independent stores, and other online retailers.”
Discounting will resolve itself. “This will likely be in part driven by tariffs. While we are not sure which tariffs will stick, unless there are meaningful category exemptions, increased landed costs from Asia will force a fair amount of repricing across brands.”
Market gaps created by companies that do not make it will mostly be filled by small to mid-sized brands that have stayed focused on the end customer. “While the big players will continue to maintain a strong total share of the market, many consumers hunger for more targeted brand experiences and have a high affinity for smaller companies. We see the gaps in the market being filled by companies that stay close to the consumer, building high-affinity communities of enthusiasts who resonate with the brands.”
Consortia will form to mitigate scale disadvantages. “The large players will continue to have certain advantages simply from their size. Smaller brands can mitigate some of these by working together on back-office activities like sourcing, event management, or coordinated dealer management. This gives them a lower hurdle to overcome in getting products to the end customer profitably. We think the healthiest mid-sized brands will likely end up working in concert with other companies with limited brand overlap to gain shared benefits.”
This may or may not end up being the year the cycling industry turns the corner, but all of the long-term trends associated with consumer participation, civic investment in infrastructure, and evolving smart city planning bode well for industry health. The post-pandemic period of pain and disruption also presents a powerful set of new opportunities for industry participants ready to step back and reassess their business models. For nimble, change-ready survivors prioritizing long-term business growth, the future looks far more promising.
Learn More About RAF
RAF was founded 45+ years ago and acquires control positions in middle market companies across a diverse set of industries. We maintain a long-term strategy focused on investing in businesses with strong management teams, a demonstrated history of business growth, and potential for acceleration, with EBITDA of $5-20 million.
References
1 https://cdn.hl.com/pdf/2024/houlihan-lokey-kearney-bike-industry-study.pdf
2 https://www.peopleforbikes.org/news/bicycling-participation-report-2024
3 https://autovista24.autovistagroup.com/news/mercedes-benz-moves-to-agency-model-european-sales/
