This article was written and originally published by Jay Townley of Human Powered Solutions (HPS). Sports Marketing Surveys collaborated with HPS on the NBDA Bicycle Buying 2021 study, an invaluable planning reference and guide for dealers, suppliers and brands as they shape their strategic and business planning around understanding consumer bicycle and e-bike buying habits over the last two years.
1. Trends in Inventory. Inventory of new bicycles and e-bikes has built at retail, fulfillment centers, warehouses, and distribution centers in the U.S. since at least the beginning of the fourth quarter of 2021. Not all SKUs are in stock, but the majority are. The supply chain is also full of product moving from the factory gates in Asia to U.S. ports, and manufacturer warehouses are full of the raw material and components that they can get. There are still high-end components that have lead times pushing out in to late 2022 and early 2023, but substitutions have filled many of the gaps in production schedules.
Throughout the supply chain, all the way to bike shop retail, a change in management mindset has occurred. Instead of managing for Just-In-Time, or JIT inventory, the pandemic and resulting supply chain disruptions have given way to Just-In-Case, or JIC inventory management, which has even been referred to as “hoarding” by some in the media. Some brands and retailers have said they won’t run out of the inventory needed to meet consumer demand.
High gross revenue during the surge in demand for bicycles and e-bikes has helped shift conventional wisdom from JIT to JIC inventory management, but as our senior advisor Dave Karneboge says, “…it’s not what you make, it’s what you keep!”
While gross revenue has increased with demand, the landed cost of goods has also increased as raw material costs, manufacturing costs, ocean freight costs, import duties, warehousing costs and inland freight costs have gone up.
Multiple price increases through this past year have increased retail prices, and the value of finished goods inventory, which in turn makes gross margin return on inventory (GMROI) and inventory turn important wholesale and retail metrics as well as key performance indicators (KPIs).
There are also reports from bike shops of shoppers who express “sticker-shock” at the current retail prices of new bicycles and e-bikes. This isn’t widespread, but it is an indication in some markets that some consumers are pushing back on the increasing retail prices of bicycles and e-bikes.
While it is possible that the current coronavirus pandemic variant will trigger a renewed surge in demand for new bicycles and e-bikes, we caution that there is every indication that consumer demand is declining and could return to pre-covid levels.
It should also be noted that the current 100 to 110 day in-transit time from factory gates in Asia and U.S. ports is full of finished goods headed toward U.S. brand and retail distributor warehouses, and they will keep adding to the inventory through the first quarter of the new year.
Prediction: With the trends we have been following and carefully considering the possible surge in demand that the current variant could trigger, we offer the opinion that an inventory overhang of mid to lower price SKU’s is the higher probability and will spill into the domestic distribution channels around Lunar New Year (February 1) and push into the consumer marketplace by spring. This in turn will affect product pricing and inventory value.
JIC inventory management will be set aside by growing numbers in the supply chain, including some bike shops, and variations of JIT focusing on flexibility and innovations in sourcing, assembly, manufacturing, warehousing, and logistics will quickly be tested and adopted by progressive entities in the U.S. bicycle/e-bike business.
2. The booming U.S. economy, according to international observers, increasingly looks like the main driver of global supply chain disruptions. The volume of the American expansion has manufacturers worldwide struggling to keep up, and is pushing up prices around the world. It is also attracting overseas companies to invest in the U.S., betting that growth will continue to accelerate and will outpace other major economies.
Retail sales in America during the holiday season grew by 8.5% compared with last year, according to a report compiled by Mastercard. E-commerce was particularly strong, growing by 11% during the November 1 to December 24 period. Consumers shopped unusually early this year, wary of delays caused by the world’s stretched supply lines.
The impact is evident in freight operations. Major U.S. ports are processing almost one-fifth more container volume this year than they did in 2019, while volumes at major European ports are flat or are behind 2019 levels.
According to international observers, global businesses are committing serious money into the U.S. as evidenced by the PON Holdings recent acquisitions, looking to gain from a potential sustainable increase in demand. Some of these new entrants have indicated they are bringing production closer to American consumers, as they seek to avoid supply shocks with steps that may reshape global supply chains.
How does this square with our prediction of new bicycle and e-bike inventory overhang? For now, economists expect the highly contagious Omicron variant to cause a short-term soft patch for U.S. spending and broader economic growth. Reported declines in consumer footfalls and purchases at bike shops fall within this scenario as does Moody’s Analytics downgrading its first-quarter U.S. gross domestic product (GDP) forecast to 2.2% growth from 5.2%, as their chief economist reports he “can see the economic damage mounting going into the first quarter.”
According to The Economist on December 29, after “… 2021’s big rebound, growth in 2022 will almost certainly be slower.” However, “slower” would still be “robust” by pre-pandemic standards.
Prediction: Given the downgrading of first-quarter GDP and growth to pre-pandemic levels, and the high probability of an inventory overhang in mid to lower priced bicycle and e-bike SKUs, we are projecting the size of the U.S. market in 2021 and 2022, including bicycle and e-bikes, at or near the average from 2014 to 2018 in units and slightly higher in retail dollars. Consolidations, acquisitions, and start-ups will continue to grow in 2022, and European, Asian, automotive and SPAC investors will compete for a piece of the very viable U.S. bicycle, e-bike and ride-share market as it evolves into micromobility.
3. COVID-19 and the pandemic: Economists have struggled to predict the impact of COVID-19 on economies throughout the pandemic, including the U.S., where changes in the labor market have surprised both the government and forecasters. Still, they expect Omicron will push economic activity from the first quarter into the second, with smaller impact than from prior waves of the pandemic. The Federal Reserve earlier this month forecast that the U.S. economy would grow by 4% next year
The questions the U.S. bicycle and e-bike business is asking: How long will this be going on? That is, when, exactly, will the pandemic be over?
The answers range from as early as the end of next year to three to five years. The pandemic, with its impact on available workers and opening and closing of plants, ports, businesses, movement and gatherings of people, lock downs, school closings and stay at home orders, is not projected to evolve to an endemic stage until the end of 2022 at the earliest.
This means the new normal is already here, and the U.S. bicycle and e-bike business has no choice but to get used to it. As The Economist opined December 18: “The era of predictable unpredictability is not going away. The pattern for the rest of the 2020’s is not the familiar routine of the pre-covid years, but the turmoil and bewilderment of the pandemic era.”
COVID-19 has also helped bring about today’s unpredictable world indirectly, by accelerating change that was beginning to happen or develop pre-pandemic. The pandemic has shown how industries can be suddenly upended by technological shifts. Remote shopping, working from home and Zoom meetings and conferences were once the future. In the time of COVID-19 from March 2020, they rapidly became part of the here and now, and our daily personal and business lives.
Prediction: U.S. bicycle and e-bike businesses will develop alternatives to frequent trips by air to Asian and European source brands and manufacturers, either in person or at trade shows, utilizing tools like Zoom, MS Meetings, Slack, Google Meets, et al.
Features like screen sharing and manipulation of 3D CAD drawings and renderings will be combined with live video to enhance virtual inspections, audits, and production start-ups, replacing on-site visits.
In-country prototyping in North America from 3D CAD drawings will begin to replace prototypes fabricated and shipped from Asian and European sources to North America. Collaborative teams located in different countries and continents, coordinating time zones and utilizing technology, IT and AI, will become the norm in product development and replace most air travel.
4. Inflation. The pandemic has ended the era of low global inflation that began in the 1990s and was ingrained by economic weakness after the financial crisis of 2007-2009. Having failed to achieve a quick recovery then, when the COVID-19 hit, governments spent nearly $11 trillion trying to ensure that the harm caused by the pandemic was mollified and softened.
Governments broadly succeeded, but fiscal stimulus and disrupted supply chains have raised global inflation. The apparent potency of deficit spending will change how recessions are fought.
Inflation has recently become central to the American mood during the last quarter of 2021 in a way that it hasn’t been for decades. The satire website The Onion warned in a recent headline that “higher prices may force Americans to eat reasonable portions on Thanksgiving.”
Even as inflation hits its highest level since 1982M, and inserts itself as a topic of daily discussion, trying to understand its pandemic rendered version can be a mind-boggling task.
Some people who have studied markets and the economy for years often do not know the ins and outs of how inflation is calculated, from who wins and who loses, to whether it is good or bad news.
What is inflation? Inflation is a loss of purchasing power over time. It means your dollar will not go as far tomorrow as it did today.
High inflation can spur the Federal Reserve to increase interest rates as it tries to cool off the economy and slow demand. Conventional wisdom tells us the worse inflation is, the more severe the economic shutdown has to be to cool inflation. If the central bank does so too drastically, it could even plunge the economy into a recession, which would be bad for everyone.
Is inflation sticking around? Bicycle makers offer some clues, according to the Wall Street Journal, December 1, 2021. “Bike prices in the U.S. and Europe rose sharply at the start of the pandemic because of booming consumer spending and snarl-ups in global supply chain that meant long delays and higher costs for manufacturers.”
Now brands are working with manufacturing sources in Asia on building bikes for 2022 in a continuing environment of economic uncertainty because of the emergence of the Omicron variant. 2021 U.S. consumer demand and the supply chain problems through the first three quarters have already pushed 2022 prices higher.
The bicycle industry’s challenges now go beyond the policy conundrum facing the Federal Reserve and central banks around the world. Policy makers have earlier said they believe inflationary pressures will dissipate over time as high demand for consumer goods subsides and disruptions in the global supply chain work themselves out.
The build-up of inventory and the slowing of U.S. consumer demand for bicycles and e-bikes reported in December, coupled with the Omicron variant again closing manufacturing centers and borders, will now play out over a longer period. Most of the first quarter of 2022 will pass before there is more clarity.
Fed chairman Jerome Powell said in testimony to lawmakers that “it now appears that factors pushing inflation upward will linger well into next year” (2022). He signaled the central bank would consider quickening the wind down of its easy-money policies and open the door to raising interest rates in the first half of 2022.
Inflation has had at least two impacts on the American bicycle and e-bike business. First, costs have increased in everything from raw materials, components and ocean freight that have driven up the cost of goods dramatically.
Second, the three to four increases in retail prices each year for the past two years have resulted in reports of consumer push-back, or sticker-shock, resulting in walk-aways during December of 2021, just as the brands were planning their orders with Asian manufacturers, and retailers are planning their orders and inventory for the coming year.
Inflation-induced landed cost of goods increases have resulted in multiple retail price increases. The former has increased the value of the inventory being held under the new JIC policies at wholesale and retail. The latter has increase the purchase price, and related value of a bicycle and e-bike to the American consumer.
The Federal Reserve has announced it will start increasing prime interest rates in 2022, which will increase the interest rates banks charge for loans to finance business inventories.
Prediction: The cost of money is going to increase. If, as we have previously opined, U.S. consumer demand for bicycles and e-bikes resurges for any reason, there will be moderate or no inventory overhang, or glut, with no resulting price decreases or devaluation of inventory. However, whether or not there is a resurgence in consumer demand, interest rates charged by banks will increase and it will cost businesses more to finance inventory.
Absent a resurgence of consumer demand to at least 2021 first half levels, the probable inventory overhang in mid to low priced SKU’s will materialize, and the cascading effect will begin around February and spill into the distribution channels the end of the first quarter, just as interest rates will start increasing. Retailers will start reducing prices and will run sales to entice buyers and reduce inventory, followed by brands, who will also reduce and cancel orders with OEMs and ocean carriers. OEMs will reduce and cancel orders with component brands and manufacturers. While the financial fallout will affect both the distribution and supply channels, the financial burden will fall particularly hard on bike shops and small to midsize retailers.
5. Supply chain disruptions are projected to last anywhere from August to the fourth quarter of 2022, and that was before the Omicron variant hit with its yet unknown impact on the bicycle-e-bike supply chain. Right now, the in-transit time for new bicycles and e-bikes from manufacturers in Asia to the brand warehouses in the U.S. is an average of 100 to 110-days. Pre-pandemic, that same in-transit time was an average of 40 to 45 days and had been for about three decades.
If all the disruptions were solved and went away today, there would still be about 100 to 110 days of finished goods in transit that would have to be processed, received and stocked before shipping to retail stores. That translates to 3.5 months of new bicycles and e-bikes in the supply pipeline on its way to the U.S. You can deduct about 1.5 months for the 40 to 45 days in transit, but that still nets out to two months, or mid-March (nothing moves during the first two weeks of February, or Lunar New Year in Asia) before the supply chain would settle down. And that is without factoring in the inevitable disruptions (in the form of plant and port closings and supply of workers) caused by the current COVID-19 variant.
Major ports in the U.S. will process almost one-fifth more containers in terms of volume than they did in 2019. Container traffic at European ports has stayed flat or declined. Consumer goods are flying off the shelves at a rate about 45% higher than they did in 2018: it looks like Americans will spend about 11.5% more in this holiday season than they did in 2020. American consumer demand was the key factor in the global supply chain bottlenecks in the first place.
We have also been talking since last year about the Bullwhip or Forester Effect, which is the documented over-ordering through supply chains. At the end of 2020 Dr. Brent D. Williams published an article titled “Slow Pedaling: How the Pandemic Affects Bicycle Supply Chains Now and Later.” Dr. Williams is associate dean at Walton Collage, University of Arkansas, and an avid mountain biker.
He references “rationing and shortage gaming” as causes of the bullwhip effect, and points out that, “The idea is that when faced with known shortage, retailers may ‘game’ the system by placing inflated orders.” While it might seem logical to retailers, shortage gaming can create future supply chain problems.
Dr. Williams teaches that if brands and manufacturers view the orders from retailers as “real” demand, they may overproduce, leading to excess inventory in the supply chain. Brands can control “gaming” by allocating inventory as it becomes available. However, both gaming and allocation make forecasting sales after demand subsides more difficult.
Typically, brands and manufacturers use sales history to forecast future demand and plan their capacity accordingly, but the sales history from 2019, 2020 and 2021 is highly unlikely to accurately predict sales in the future.
All the supply chain problems in the U.S., and specifically the bicycle and e-bike business, are directly attributable to consumer and consumer demand literally exploding since the second quarter of 2020 and continuing until November 2021.
The short story is that during the second quarter of 2020, when American consumers found themselves asked, or required, to stay at home and restrict their movements, they started to buy stuff, including bicycles and e-bikes. When they couldn’t visit or had limited access to retail stores, they turned to online shopping and buying more stuff than they had ever purchased before. They had money from the government, from working at home for companies, as independent contractors, or as entrepreneurs.
There are an estimated 25 million ocean shipping containers in circulation worldwide, carried by approximately 6,000 container ships of all sizes.
Retailers were totally shocked by the surge in demand for bicycles and e-bikes starting in the second quarter of 2020, and the brands, the importers, were also caught off-guard. They reacted by ordering as much as they could from original equipment manufactures (OEMs) in Asia, and primarily in China.
The OEMs were hit by the coronavirus in countries with “zero” tolerance policies that required shut-downs, lock-downs and quarantines if even one positive COVID-19 test was reported. While the orders from U.S. brands and large retail customers piled up, the OEMs ordered from raw material suppliers and component manufactures. They ran assembly lines when they could get workers and were not shut-down by “zero” tolerance policies. Truck drivers were in short supply, and the Asian ports and ocean carriers had the same COVID-19 induced disruptions, so when a container ship was loaded, it sailed into U.S. ports that were over capacity, overworked, suffering from pandemic-induced shutdowns and worker shortages.
This has been constantly going on for the better part of two years and is headed into the third year of the pandemic with consumer demand just now beginning to recede.
The bicycle and e-bike supply chain has been out of balance since the second quarter of 2020 and will not settle into more consistently reliable schedules and deliveries until U.S. consumer demand recedes, at least to something similar to pre-pandemic levels.
This leaves disruptions from the pandemic that will continue to interfere with the flow of finished goods from Asia until the pandemic ends.
Prediction: With mid to low priced new bicycle and e-bike finished goods, service parts and aftermarket inventories building in the U.S., it is possible that the U.S. supply chain will settle into more consistently reliable schedules and deliveries, subject to pandemic disruptions, starting as early as between the third and fourth quarters of 2022.
However, the forecasting difficulties will take longer to get under control. We estimate that if demand takes the pressure off and the supply chain resumes reliable schedule and deliveries subject to pandemic disruptions, forecasting will be able to achieve improved reliability by the end of 2022 for the 2023 season.
For more information about the NBDA study, please contact keith.storey@sportsmarketingsurveys.com
