A German bike company could turn the entire industry on its head

Nairo Quintana rides a Canyon bike in the Vuelta a España. (Canyon)

No industry has been entirely immune from the disruption brought on by online shopping. But so far, the high-end bicycle business has mostly remained in brick-and-mortar bike shops.

This week, however, an anticipated direct-to-consumer bike brand from Germany called Canyon comes to the U.S., a move that may have a marked effect on the industry.

The main players in the bike world are Specialized, Trek, Cannondale, and Giant. And the way those companies and most others offer bicycles has been the same for years: through a bike shop. Founded in Germany in 2002, Canyon has never followed this model, instead offering its bikes directly through the internet.

Though bizarre to many back then, Canyon’s alternative business model hasn’t interfered with its success or street cred. Currently its bikes are under the riders of two major professional cycling teams — Movistar and Katusha Alpecin — and Canyons have become some of the most desired bikes around. Offering prices around 25% less for comparable bikes from high-end competitors, Canyon operates with a powerful formula that threatens to disrupt the industry.

‘The final frontier’ of the bike industry

Wheeled-sports — largely cycling — in the U.S. is a $97 billion industry in terms of sales, according to a Outdoor Industry Association report out this year. While some companies like Giant (9921.TW) and Cannondale are public — Cannondale is owned by Dorel (DII.B) — many, like Canyon, Specialized and Trek, are privately held.

According to Blythe Jack, a managing director at TSG Consumer Partners, a significant minority shareholder in Canyon that is helping with its U.S. logistics, the direct-to-consumer business model makes more sense even without the modern shift online.

“When you think about the retail model today, independent bike dealers are limited for space for offering whole lines [of bikes],” said Jack. “It’s not feasible for a small floor plan as well as capital intensity required to floor plan a large inventory. It’s the biggest bottleneck of the retail experience.”

Katusha Alpecin’s Tony Martin rides through Paris in the 2017 Tour de France. (Wikimedia Commons)

The benefit of being online, Jack says, is being at the crossroads between multiple factors that surround big-ticket items. Social media, research, reviews, specs, and product photography are all part of a buying experience. It makes sense for the purchasing to happen there as well, especially since all sizes, models, and colors can be accommodated.

Canyon USA president Blair Clark told Yahoo Finance that this is the “final frontier” for the industry.

“You don’t have to look back very far in history to see this is not the first time the bike industry has been revolutionized or disrupted in terms of distribution,” said Clark. “Schwinn in the 1960s decided to announce they were no longer going to sell to distributors, [instead pivoting] to sell to dealers.”

In his view, it’s time for the next step in retail innovation in the industry.

“The consumer is driving this change across all industries, whether it’s razors or buying your coffee, or now Amazon purchasing Whole foods, or Zappos and shoes,” he said. “So we are, I think, hitting the market in terms of timing that’s very ideal from the standpoint that a consumer is ready to purchase a bike online.”

Making online easy

The challenges of bicycle buying sight unseen are myriad. Fitting is guessing, test drives are imaginary, and some assembly is required. Canyon’s 15 years in the industry has, however, ironed out these issues almost completely to the point where returns are in the single digits.

“The bikes are so advanced in terms of performance relative to quality controls — we really don’t have a returns issue to speak of,” said Jack. “That tends to be a major stumbling block for many companies, the prohibitive costs of returns.”

Fitting is taken care of via online fitting tools that take much of the guesswork out of choosing a frame size, and building is straightforward with tools included and video demos available.

“For somebody that’s reasonably mechanically inclined, [building is] a 30- to 45-minute job,” said Clark. Test drives, however, will always be imaginary.

As far as delivery goes, the company established a distribution center in Chino, California with 30 employees and counting, so it doesn’t have to ship bikes from Germany or directly from manufacturing facilities in Taiwan.

Where the industry goes from here

Not surprisingly Canyon’s combination of street-cred, logistic mastery, and lower prices has other industry players nervous, especially bike shops that fear being cut out of the loop. For accessories and parts, this has already happened as today’s era of two-day Amazon Prime offers undercutting prices and door-to-door convenience.

Canyon’s Clark told Yahoo Finance that the company is hoping to establish market share in the “teens” within a “few years,” though noted it’s hard to predict something that hasn’t been done before.

Nairo Quintana rides a Canyon time trial bicycle in the 2017 Tour de France. (Wikimedia Commons)

The bike industry’s delay in adapting to a direct-to-consumer model for bikes themselves can be explained by the current framework of distribution. Companies already established in the U.S. may not want to risk relationships with bike shops by offering their own direct-to-consumer options, despite the fact that buying online from the manufacturer is becoming standard across most industries.

“[The direct business model] is a healthy thing and it’s an inevitable thing that frankly has been postponed. Trek and Specialized have held industry back,” said Jack. “The world around us has changed — it’s what consumers want. We think this will deliver sustainability that will serve the industry well over time.”

In calls with Yahoo Finance, both Jack and Clark took great pains to make it explicitly clear that the company has no desire to supplant bike shops, which they maintain are incredibly important to Canyon’s success as “service partners.” But instead of dealing with inventory requirements, which can lead to money-losing discounts when bikes don’t sell, they want to see a shift to service, fitting, assembly, and tuning, which they view as more sustainable.

“We can make the industry more healthy,” Jack said.

She may be right: Germany still has bike shops.

Ethan Wolff-Mann is a writer at Yahoo Finance focusing on consumer issues, tech, and personal finance. Follow him on Twitter @ewolffmann. Got a tip? Send it totips@yahoo-inc.com.

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