Discover more from BIG by Matt Stoller
The Bicycle Thieves
There's a bicycle shortage due to, yes, monopoly. And now the monopolists are trying to build a world without independent bike shops.
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In 1817, German Baron Karl von Drais introduced a two wheeled machine called the Dandy Horse to the world. The Dandy Horse had no pedals or gears, but it was the first of what would eventually become known as the bicycle. Eventually engineers and tinkerers added modern tires, brakes, drivetrains, and so forth, improving comfort, feel, and speed. There were two ‘bicycle crazes’ in the 19th century alone, and mass production began in the 1860s. The bike industry, in other words, is very old.
There’s still incredible innovation, from new materials to different styles to the incorporation of mapping software into the sport - there’s even a “bike computer” industry. The most important change to high-end bikes in the last fifteen years is digital drivetrains (either wired or wireless), which allow the rider to shift gears by pushing a button attached to an electronic motor.
Today there are a billion bikes worldwide, and in some cities, biking is a key part of taking cars off the road, improving traffic and reducing pollution. The industry is also in the midst of a serious merger wave, with major bike producers vertically integrating, particularly in the retail sector. “One thing I frequently see in my news alerts but never tweet about: Trek sure is buying a lot of bike shops,” said Peter Flax, a writer at Bicycling magazine.
Indeed, trend during the pandemic has been the roll-up of bike shops.
Specialized has added several new locations recently, while Trek continues to buy up stores at an even faster rate. Last month, for example, Trek acquired the BikeBarn chain, with eight locations in the Houston, Texas, area. Over the summer Trek also acquired Big Ring Cycles in Golden, Colorado, and Golden Bear Bikes in Broomfield, Colorado.
What happens after a purchase is important for the structure of the industry. Take Trek’s purchase of a local D.C. retail chain called Spokes. What’s going to happen? As a friend told me, “Spokes was previously a neutral vendor - sold multiple BIG brands (Giant, Trek, Specialized) but also some small brands. Now will only be a Trek store. Note that there’s already two vertically integrated Trek stores in the area - one in Georgetown, one in Courthouse Arlington.”
Marc Eisenberg, the founder of the BikeSource chain that just sold to Trek, explained that the industry increasingly requires bargaining power, aka ‘scale.’
"Ultimately, I see the current bicycle retail model as one that has been failing for quite some time, but within a disciplined business, was sustainable. After getting over the euphoria of success we had during the pandemic, I realized two things: First was that we were at the top of our game and that is always the best time to get out. Secondly, I realized that the model is broken and that the 'new normal' would be far more challenging if not perilous. We need to have better resources at all levels which are not affordable for small independent operators."
Like a lot of the retail sector, independent bike shops have been having trouble since 1977, when the Supreme Court made it easier for the big brands to dominate the small retail sector and ushered in an age where dealers can’t even disclose their contract terms. Since then, the industry has gradually consolidated, though a bunch of new brands entered the market over the last twenty years. But because most bicycle production happens in Asia, the situation got a lot worse during Covid, when supply disruptions and high demand for bikes caused a bike shortage. It is increasingly difficult for independent bike shops to get bike parts and new bicycles, because the big retail outlets, and vertically integrated firms like Trek, are first in line. (Interestingly, exactly this kind of price discrimination against smaller firms is what Lina Khan’s Federal Trade Commission is investigating in the grocery sector).
The problem is compounded by the duopoly of bike parts conglomerates Shimano and SRAM. Shimano is a 100 year-old Japanese firm that has 70% of global share in gears and brakes, and about half of the overall component market, buying up much of its competition from the 1980s onward. SRAM was started in Chicago in the 1980s, and through a series of acquisitions, also has market power in bike components.
The most important bike part is the drivetrain, which is comprised of all of the parts that power the bicycle and make it go. Shimano and SRAM have locked up that market due to the complexity of the product, but also a thicket of patents and what is likely a rebating system to make it unprofitable for bicycle makers to use rival systems. In addition, compatibility is an issue, as one anonymous product manager for a big bike brand noted.
Most decent-sized bike companies are selling bikes in nearly every country in the world. You want to make sure there is a solid support network in all of those countries so your customers don't have a nightmare hunting for brake pads, fork seals, chains, etc. When you smash your Box or TRP derailleur on a rock in New Zealand, is it going to be easy to get another one? Will your local dealer have something that's compatible in the case? If not- you as a product manager need to seriously consider what advantages you're getting from a smaller vendor that will make up for this deficiency. In my view, it better be a DAMN impressive product. Certainly some consumers specifically want something unique, but most people just want something that works well and isn't a hassle.
The bicycle industry is not just based on demand and market forecasting, it’s also based on legal capacity. To even break into bike components in the 1990s, SRAM had to sue Shimano multiple times for antitrust violations, winning judgments that Shimano was both bundling its products together to lock SRAM out of the market, and engaging predatory pricing to destroy its product line. SRAM and Shimano are now competing and innovating, but they both have an interest in keeping rivals out of the market and inflating prices. That’s probably one reason bicycle manufacturers like Trek who buy from those firms are looking for ways to bulk up: to have more bargaining power. And with digital drivetrains, SRAM and Shimano can use right-to-repair restrictions and digital rights management tools to extract more out of repair shops.
And so this acquisition craze of independent bike shops matters for a number of reasons. First, test riding a bike is the key to sales, so the inability to get a bike into a local store means that Trek can foreclose competition from rival brands, especially the small new American ones like Kona, Surly, and All-City. (There are direct to consumer brands like Canyon, but these are niche products). Second, bike stores are a key place for repairs, so eliminating independents means that a smaller and smaller number of brands and components can get service from narrower and narrower retail networks.
Once the independents are gone, then it will be basically impossible to introduce new independent brands into the market. There will be a few big bike conglomerates like Trek, Giant and Specialized, who do various parts of manufacturing, retail, distribution component production, and assembly, and there will be SRAM and Shimano. And that’s it.
And that’s a shame. This industry is over 200 years old, but bicycles are still as great and as important as they ever were. Perhaps even more so today. There shouldn’t be a de facto floating cartel to control this industry. And hopefully, as we resurrect antitrust law, there won’t be.