Behind the handlebars: Decoding the Bike Market’s bumpy ride

October 4, 2023

by Hendrik Winkelmans, Founder at Freshmen Fund

As an entrepreneur who once steered a chain of bike stores (Bike Republic) and now founder of Freshmen, a VC firm with a keen eye on the cycling industry, I stand at the intersection of experience and opportunity in the world of bikes. In this article, I'll take you on a journey through some of the twists and turns of the bike market in 2023, hoping to offer some insights into the challenges it currently faces and the horizons that await.

Market Fluctuations: A Rollercoaster Ride

2023 is proving to be a challenging year for the bike market. Following the boom brought about by the COVID-19 pandemic, consumer demand is softening significantly. Adding to the turbulence, an oversupply of bikes floods the market, a consequence of supply chain disruptions during the pandemic. This period saw the placement of "long-lead-time-yet-firm" orders fueled by expectations of perpetual double-digit growth. The sector now grapples with an inventory conundrum as consumer demand contracts just as oversupply peaks.

Stockpiles of unsold new bikes. A common sight in most brands' & retailers warehouses these days

Reading the Numbers: A Clear Downturn

The numbers for 2023 year-to-date leave little room for ambiguity. Except for China, where activity is robust, the rest of the world witnesses declining demand across geographies and market segments. A case in point, one of the largest bike manufacturers, Accell Group (recently de-listed by KKR), reportedly maintains inventories at three times the pre-pandemic levels, reaching close to 1 billion EUR compared to the previous 300-350 million EUR. That's roughly nine months of sales stashed away in excess inventory for Accell.

A Market in Limbo: The Slowdown's Ripple Effect

Activity throughout the value chain is coming to a sudden halt. Clients sitting on a year's worth of inventory are understandably reluctant to place new orders. Market leader Shimano reports an 18% reduction in bike business activity in the first half of 2023, with MERIDA BIKES INTERNATIONAL and Giant Group 巨大集團 echoing similar figures. Europe and the US grapple with declines of 11% and a staggering 44% respectively. A closer look at the monthly trading updates for Giant and Merida reveals that the contraction in activity is worsening in Q3 rather than improving.

Turnover evolution 2023 1H vs 2022 1H

Separating Hype from Reality

Is the cycling frenzy just a passing trend? Quite the opposite. Fundamentals in the bike business remain robust, especially in the realm of functional bicycle usage (A to B commuting). With infrastructure improvements, increasing urban restrictions on cars, and a growing focus on sustainable and healthy lifestyles, the long-term growth potential for cycling remains alluring. Despite short-term hurdles, industry watchers like Fitch and McKinsey & Company maintain their bullish long-term outlooks.

The Pandemic Effect: A Sudden Surge

What did happen is that the COVID-19 lockdowns accelerated demand significantly. With most activities curtailed, people suddenly found themselves with ample time and fewer leisure or travel options to spend their money on. As a result, many individuals, even those with vague intentions of acquiring a bike, rushed to buy one. This unprecedented growth led to a dry pipeline for the quarters that followed. However, it's crucial to note that the bike market often experiences this sequence of events—an external trigger sparks peak demand, followed by a dip. A similar scenario unfolded in the Netherlands in 2014 when government subsidies for bikes ended, resulting in remarkable growth before a subsequent slowdown in 2015. Fundamentally, there was nothing wrong with the Dutch bike sector in 2015; it simply needed time to replenish its sales pipeline. The same expectation holds today. Looking at the data: new sales may be down, but the number of kilometers traveled by bike continues to rise, and bike stores often see double-digit growth year-on-year growth in repair and maintenance sales.  People are cycling, and more and more so.

COVID - 19 triggered investments in city infrastructure supporting growth in cycling. Example in po

The Road Ahead: Challenges and Opportunities

Will things improve? Most certainly, but the timing of recovery will vary for different stakeholders.

Retailers positioned close to consumers are likely to experience a rebound in the upcoming season.  We expect this particularly in Europe, where adverse spring weather in 2023 led some consumers to postpone their purchases until spring 2024. However, with a surplus of inventory searching for owners, price pressure and reduced profitability are anticipated, in a context where demand rebounds.

On a sidenote: on the service & maintenance side of the retailer business there is (and has been for years) an opportunity to better serve ever growing demand.  Yet in the short run, this is not a business bringing significant liquidity to the sector.

At the bike brand level, situated further up the supply chain, the situation is different. Over 80% of bike sales flow through third-party retailers. These retailers will prioritize clearing their own excess inventory before placing new orders. Brands heavily reliant on B2B sales, which is the norm, will continue to face challenges on their top lines. Their customers are cash-strapped and stocked up on inventory, making it difficult to land new orders. However, adding a direct sales channel (that comes with its own significant set of challenges) is often not a viable option for long standing players, as it risks eroding dealer goodwill—a valuable asset in the long run.

Players positioned vs corporate buyers (e.g.; leasing) seem better insulated against current market headwinds as well as brands that manage to sell to the customer directly.  In this latter group however, there are few players able to pull that strategy off profitably (but that’s a whole different post on itself).

Finally component manufacturers will require patience, as clearing inventory at the retailer and brand level is a prerequisite for their recovery. Established players at this stage of the value chain (e.g.; Shimano, Bosch eBike Systems), have always extracted the highest EBITDA margins in the sector. With their well-filled coffers, they are well positioned to weather the storm. Newer component players, although they bring much-needed innovation in the ‘concentrated’ component playing field, must likely prepare for a longer runway to significant sales, particularly in today's market.

Looking Ahead: The Road to Recovery

In conclusion, while the bike market navigates these challenging waters, it's important to recognize that this phase of consolidation and correction is healthy for the industry. The low barriers to entry in the bike business have led to a proliferation of brands, many offering similar products.  The influx of fresh capital over the last 5 years has also created an excessive situation where industry profitability was squeezed by some players selling even below cost while snapping up top talent.  Shaking out excess players and consolidating the market is a natural next step. More than in the past, long-term success for brands will hinge on offering distinctive product attributes protected by intellectual property rights and likely nurturing strong relationships with dealers—an enduring distribution model.

The next wave of investment in the sector is on the horizon. Over the past decade, VC and private equity have made their mark in the sector.  Now automotive players are starting to tip their toes in the water and seem poised to enter the scene significantly in the next decade.

For full disclosure: I currently invest in the micromobility sector through Freshmen Fund. The fund holds interests in Classified Cycling (Shifting technology), GOFLUO (Commuter accessories), Ahooga Bike (Compact Urban Bikes), Ellio (High-speed Bikes and Engine technology), and Sentinel Tec (Smartlock technology and software).