After a very high demand, the bike industry is facing a difficult period due to overstocks and cash flow problems. While these have always been issues for the financial health of companies, they are the major concerns for companies in the cycle in 2023. Recently, we have seen the difficulties faced by leading players, struggling to find solutions to these stock problems. Here is an explanation of the current situation on the cycling market.
Stock problems in the bicycle industry
The issue of stocks of components and assembled bicycles has always been very sensitive. One remaining cause of these difficulties is the seasonality of the cycle industry, leaving little room for stock approximations.
In addition to this seasonality, there are new aggravating factors that weaken demand and so drive up stock levels, the increase in the price of components, which is justified by various crises (consequences of covid, the war in Ukraine, etc.) According to CONEBI, the price of aluminium has gone up by 100% since March 2020. Also price hikes for steel (+50%), carbon fibre (+30%), rubber (+70%) and lithium (+400%) have already had their impact on retail prices (mid 2022). Although the use of electric bicycles is undoubtedly increasing, the economic climate is not always favourable to purchases of a few thousand euros (general inflation, energy crisis). These variations in purchasing power for individuals and in financial capacity for companies (distributors, etc.) have a negative impact on sales, which are very volatile.
The cycling industry is now going through the “Bullwhip effect” or “Forrester effect”, a theory describing that small changes in demand can produce a whip-like effect upstream! Indeed, the industry is facing a storm due to pandemic-induced sales boom, that led to supply chains breaks & shortages, that led to cautionary outsized orders, that led to a slowdown in demand and bloated inventories. Of course, this is added to supply chain constraints that already existed on critical components and popular high-end model.
When retailers saw the demand for bikes increase, they ordered 25% more inventory than usual. When the inventory didn’t arrive in time, they ordered the same amount from someone else and started hoarding the parts they had. The distributors took this 50% order and added their own 10% increase. The brands did the same, asking the factories to make 70% more than they would normally need. Two years later, the whip finally snaps. The missing parts have arrived, the factories have caught up on back orders, the freighters have sailed, the port strikes have ended. Now all the inventory is arriving in warehouses and shops, at the same time as consumer demand is falling, talk of recession and inflation is jamming wallets, and the used bike market, especially online, is overflowing.
A few weeks before Eurobike 2022, Taiwan experienced a first wave of order cancellations, followed by a very high demand immediately after the event. But this post-Eurobike boost has also seen significant levels of cancellations for European and global orders in Taiwan. Manufacturers of complete bikes, frames and components that have secured orders through 2024 and 2025 are likely to see these figures reduced by the end of the year.
The market is now facing stabilization challenges and needs to have better insight to forecast realistic growth levels, which is very difficult to follow due to this bullwhip effect.
Cycling industry is facing lead time issues
The main reason for these stock problems are lead times, which have increased by a factor of 3, 4 or more for certain components. These lead times make it impossible to match orders to requirements, which must be anticipated sometimes 2 years in advance. In addition to these lead times, which are paralysing the industry, there are also differences between the lead times of the various components of the same bike, which is a real headache for supply management.
Major suppliers have a total stranglehold on the cycle industry, setting the pace and forcing brands to manage huge stocks. This balance of power could be reversed if lead times of 3 months were imposed, to allow brands to adapt production to demand. On that matter, standardisation is part of the answer, and we can also think of relocation challenges.
To reduce lead times, relocate may stay the best option. And some major manufacturers know it, such as the Italian brand Bianchi, investing $40 million to manufacture carbon fiber in Italy. “With order times that now vary between 500 and 700 days,” Bianchi chief executive Fabrizio Scalzotto told Italian media, “it is the right moment to take production back.”
What perspectives for the bicycle industry?
If the beginning of 2023 showed bad signals, all studies yet prove that the bike market is healthy, with a strong dynamic, due to the mobility transformation for sustainability. Prices for bikes are dropping at the moment because of high inventory and the mentioned cashflow problems. Brands are trying to reduce those stocks and because of the big offer the average discount is now 9,2 % (2,8 % in the past). When the crisis will be over and the stocks gone, the prices will go up because of increasing raw materials. The industry will adapt and find balances during 2023-2024. For brands, this is also a challenge to either play it safe, either focusing on the future with innovation to differentiate their offer and seduce more riders. The second choice will be a strong competitive advantage with high value-added products on the market when things will get back to normal. To bet on the future, Velco can sure be a great support to help you create your next smartbike and move forward. Contact us to talk about it!