Monday, December 03, 2007

Life - So You Want to go into the Bike Biz?

So you want to live the bike shop dream? Wrench fancy bikes, have all sorts of goodies on display, talk to folks about how great this or that bike is all day? A wonderful life, right? In fact, I bet some of you would take this over sitting on the couch and having a beer.

If this was a movie, that's when you'd hear the "Screeeeeeeech" and everything skidding to a halt.

So, let me ask you again. Think a Clint Eastwood voice.

"You want to live the bike shop dream?"

Keep your day job.

Okay, that might be a bit harsh. But, in all seriousness, things aren't that easy in the bike biz. So here's how you figure out if you really want to do it. And you'll get some side benefits while you're at it.

First, call your favorite shop or two and ask if they want FREE help on the evenings and weekends. Free? That'll be you.

What's in it for you? In return you're requesting severe discounts on some items (think of some big ticket items you want to buy if you need to justify this free work). You will buy them from the shop. The discounts will not affect the shop bottom line - it might even help them by getting them free shipping on an order (or upgrade to expedited shipping, etc). Keep your day job, keep your almost free medical insurance, don't worry about someone suing you, don't worry about paying rent and utilities for the shop, and don't worry about some punk trying to steal things from you. Live the bike shop dream at the peak hours, help your shop out, and let them help you.

If, after a month or three of this, you still think it's cool, then start thinking about it seriously. You need a lot of cash to get a shop going so figure out how you'll get it - figure $100k would be good, more would be better. Right now I figure you need about $500-750k in cash. Know about business, accounting, and some of the basic laws of business in your state. That handles the financial stuff.

After that, it's straight forward - a bunch of money for rent/deposit, utilities, a nice aluminum bat to fend off yellow pages salespeople, and figure out some way of getting really smart and overqualified kids/students to work way below their payscale so they can be around bikes. Get credit lines with vendors and pay your bills on time (most shops don't - 80% or so, according to one industry number I saw).

Consider this too.

Are you the person that everyone, and I mean everyone, goes to for bike/accessory advice? This might even include people who are in the industry. Every shop needs a someone like that, a Guru if you will, and if you're not it, it'll cost a lot of money/favors/etc to get one that isn't lying through his teeth or has no clue what he's talking about.

A bike shop is simply a method to earn money. If you think that's the best way to earn money, then it's all good. If you love cycling and sharing your enthusiasm for cycling, post a lot of stuff on a forum or two, perhaps run a team or a race or a club or all of that, and volunteer at a shop you really like.

And earn your money elsewhere.

What's a bike shop cost, say to buy a shop? I've heard as little as $15k for a shop that had virtually no business in a small town that still has a hard time supporting an independent bike shop. One guy I know spent $350k starting up his shop and earned back $70k a year (and he was a business man first, a cyclist second). He left the business to return to the financial world and never looked back.

If you're buying a shop, I'd expect at least $100-120k for a shop which includes perhaps $50-70k in all sorts of inventory. Tooling and display stuff (slatwall, bike racks, slatwall hooks, lights, register, etc) alone is probably $10-12k wholesale per shop (meaning new - you could get it less used but that would take forever).

So some factors:
1. Gross income
2. Net income
3. Seasonality
4. Territories
5. Overall market

1. Gross income - the magic number for a shop with, say, a $7-8k monthly lease is to hit about $500-600k/year gross. Include payroll, utilities (electric - try air conditioning bills in the summer, heat, phone), insurance (liability, medical for the employees and yourself), web expenses, the chunk that Visa and Mastercard take out. There's more but I think that's the main stuff. I think at that rate it's $15-20k costs per month, and to make $20k, you need to sell about $50-60k of product (33-40% margin). That's every month, and in this area, with the lows each night for the next four nights to hit 19 degrees F (-7 deg C), well, you can imagine that folks aren't lined up the door thinking about doing a 5 hour ride.

2. Net income - 5% margin is considered pretty good for the owner. $500k = $25k for you. Again, you have to hit the magic number first, then it's gravy. For example, if you sell $50k of product in a month, you cover your $20k expenses. If you sell another $50k, you still have a $20k margin - but you've paid for all your fixed costs. So the $20k margin? It's yours. Minus the taxes and stuff.

3. Seasonality - In Oct, Jan, and Feb, shops in the area can do as little as $15k/month gross. You make all your money from March till August. September is like you dropped into a ditch. Think Hincapie at Paris Roubaix. December when you try to chase back on - it can save you or break you. Catch on and you're good till the sprint. I mean Spring. Don't, and, well, hopefully you have a really big rainy day fund. That $20k in expenses happens every month, whether or not there's good weather out there.

4. Territories. Territories go hand in hand with big vendors (bike companies). Bike companies try and limit the number of shops opening up in a particular area - it wouldn't do two neighboring shops any good if they both carried the same lines. Most vendors will extend you their lines to you if they're there there for the previous owners.

Hey I used all three "their/they're/there" in one sentence! Some English person verify it's okay, please.

Word games aside, to get a credit line, you have to put something up. Like in poker. "Ante up!". What do you have that's worth at least $50-100k? Hm, let me think. If you're driving a Ferrari or that sweet McLaren SLR I saw back in September you probably don't need a bike shop to buy things for your cycling habit. So let's think of what normal people have that's worth that much.

I got it.

Your house.

Sobering, isn't it. Usually a getting a credit line means putting a personal guarantee on that amount. In these financially shaky days I don't think companies take no for an answer. So you've just entered a big game of poker. Win, you get a 30% discount on that sweet set of carbon fiber wheels. Lose? You move out of your house. Do not pass Go, do not collect $200.

Think about that.

4a. Related to territories is the internet. If you don't have an internet presence, you'll get hurt at some level. You'll still get bread/butter customers but not the enthusiasts. If you have an active forum or participate in one of the bigger forums out there, you can build a reputation for yourself. You need to be there at 1 AM for the guy just jonesing to buy something, and if he hits your site and all it says is your hours and what brands you carry, you're not feeding his habit. There are a couple sites and features I've seen that allow your site to cater to such an enthusiast, all while you're asleep at home. Or, if things are busy, wrenching away in the back room at 2 AM.

You're not supposed to sell over the internet but my last bike was an internet bike. The listing stated "Used" but it was simply built up and then packed up. It's less used than a new bike in a bike shop - I don't think they test rode it more than a hundred yards. You can use this tactic to increase your volume by blowing out bikes at discounts. Volume helps you with your discount level, free shipping, etc. It may not make you money but it might help you save money. You know what freight is on a 200 bike order? Say you ordered an extra 50 bikes and blew them all out - and in return you saved a few grand in shipping? It might be worth it.

5. Overall market - how is retail? Are people buying bikes? Helmets? Is riding popular? Can you get into schools and stuff and do helmet talks, safety talks, maybe "sponsor" the police department? Whatever it is, you need a market. If the town is not buying a lot, then you're done.

5a. Who are your competitors? In the area I know best, there's a family shop, a super big outdoors shop, a high end road shop, and a ski shop that sells bike shop bikes. Who are they aiming at? Where are the holes? In war, you don't attack the enemy's strongpoints - you attack where they're weak and outflank them. The bike business is the same - if someone has a particular market, you need to be in a slightly different one.

Some things on the bike industry:
1. No one has money in the business except the vendors so they're the ones who need to extend credit to the shops. Think about it this way - you think you're in a position to finance Trek? If you are, you won't need a shop - you could just buy your own bike company. Apparently, at some point, 80% of shops pay 30 days late or later. Vendors share this info with each other (except Specialized) and if you get on someone's bad side, you'll find doors closed everywhere. They actually have an industry credit meeting prior to the Interbike tradeshow. It's not official but they apparently spend a day or two comparing notes on good and bad shops. I don't know if they still do this but they definitely did this before.

2. Since everything is bought on credit, the vendor encourages you to pay earlier. Typically there's a discount if you do COD (and everyone will force you to do that for a bit). Maybe 2%. The larger your order, the more extended the terms. Cannondale, about 10 years ago, would ship in September and the payment due date would be March. They gave you 9% discount if you paid in Sept or something, and like 7% for Oct. By Feb it was 1%. And if you got more than, say, $100k, you got free shipping. By doing this they tie up your money so you can't buy as many Specializeds or Treks. I'm sure everyone is doing the same thing now.

3. Problem is most vendors manufacture based on pre-season orders because those are guaranteed sales. If you're Cannondale and you got a 10,000 total preseason order of SuperSix bikes, will you make 50,000? Probably not. It makes more sense for them to make something close to that number. Good for them. But say you can't keep them in stock and you want another 50 of them. Cannondale may not have anymore. Now you're stuck. You can trade with other shops but courtesy, at least back then, is you pay 5 or 10% for their "stocking" expenses, plus assembly if they assembled it already.

4. Pay - I'm not sure what pay is in different areas but one shop I know, at its peak, got the owner $60-70k/year. He sold the shop and went back to managing a hedge fund - he said he made as much in the fund in a month as he did in the shop in a year. I would expect less than that number - maybe $50k. Remember, if you pay yourself $1k/week, you need to sell about $3k/week just for your pay (not including the 7.68% social security, med insurance, liability, etc etc). If you hire a good manager ($40k ought to do it, you're looking at $800/wk or $2400 in sales per week to pay for the guy.

5. Tooling etc - If you buy a shop it'll have most of it. Otherwise you'll have to buy everything. It'll run you maybe $10k, maybe more. In addition you'll have to get new tools as they come out, suspension, fork, BB tools, cassette tools, chain, etc. Tools inevitably go missing or wear out or break so you'll be replacing them along the way.

6. You need a good service manager - one that keeps things in order, can run the repairs (triage, etc), doesn't overbook, etc. Now and then you get into the "We need to pull a late night" but it shouldn't be all the time.

7. Sales - if you base it on commission, you can pay people for performance. In general it'll be hard to find people for the floor or for mechanical work. I think kids in high school will want $10/hour. College maybe $12-14/hour. Plus the discount (always paid in full, or they work toward it - better if they pay for it, less cash out of your pocket).

8. Guru - all shops need a guru. Here's the scene. Someone comes in and asks "Hey, how do I replace the whatzit in the whosit? I bought the bike back in 1974." Then the kids grin and say "Hey Guru, can you help us out here?" And the Guru shows up. You need that guy, whoever it is. Guru will probably be your store manager too, sales and service.

9. You can't buy just one Zipp wheel. I think minimum buy in for 2007 was $10k in wheels. A lot of "cool" companies are like that - high buy ins. So those carbon wheels you wanted to buy for yourself? They'll cost you $10k up front. I can buy them a set for a little less than that.

10. There are internet only companies out there. They sell at wholesale to the retail. It's harder to support but for commodities (i.e. generic superlight carbon frame, generic aero wheels, etc) they will dig into a shop's margin.

What I've told people in the past is that if you want to be in the bike biz, get the money for the shop. Put it in the bank. Then volunteer at a shop you like on evenings and weekends. Ask for an employee discount but otherwise no pay. The shops are dying for evening and weekend help.
Employee discount doesn't hurt anyone, and if you can make yourself useful selling helmets or bikes or just shooting the breeze with someone on the floor (which frees up the other guys to do repairs, build, etc), you'll do the shop good. You keep your real job, you don't worry about liability or health or rent or upcoming bills, and you still get to live the bike shop dream.

I had people like what I just described at my shop. One guy in particular loved bikes, did IT, and I paid him to work evenings and weekends - he even opened the shop for me on Sundays in my burnt out days. I also had a kid who I didn't want to pay because money was too tight and I couldn't justify paying him over his learning curve months. His parents liked me so much though that they paid him to work for me. I also asked for help from the team that I sponsored - and on some days I'd have 8 or 9 guys talking about roof racks, helmets, pumps, bottle cages, and why the funny shorts are so comfy to customers all day. It was fun but I lost 10 years of "real life salary" doing it.

Bike shops are hard. But if you make it work, there's a reward.

At the end of a long day, we'd shut the doors, the lock echoing across the suddenly empty shop. We'd pull our bikes off the floor (employee bikes sit out there to prove we sell what we ride), fiddle with them just a bit, kit up, and go for a kick ass ride.


gewilli said...

how do you make $1 million a year owning a bike shop?

you have to spend $2 million

Anonymous said...

Great advice. I sent this post to my friend who owns a thriving bike shop w/ tons of e-biz (Glory Cycles). He got a kick out of it and is thinking of going back to finish law school, just in case. He's really flying now, with lots of employees and huge stock that turns over quickly, but it's such a low mark-up buisness and there is always so much competition, that you never want to put all your eggs into that one basket. Knowing him, he'll retire off the bikes and help his people do the same know matter what it takes.

Anonymous said...

Note from an English person: You DID score the their/they're/there trifecta. Minus points, though, for repeating the final "there" when you didn't need to. I'm thinking you got so excited about scoring that trifecta that you just added an extra "there" from sheer exuberance.

Oh, yeah--another great article, too!

Aki said...

I'm glad that the friend who owns a shop got a kick out of the post. That's the ultimate test of this post. I think some of the numbers are perhaps outdated but overall I think my ideas still apply. Otherwise I wouldn't have put it out there.

There are questions on the legality of "volunteer" work but I'm not a lawyer so I don't know about that. However, if a guy hanging out at a shop happens to talk to another guy hanging out at the same shop, well, it's just two guys talking in that shop.

Daggumit I knew I'd screwed up the their/they're/there. Exuberance is right :)

I'll have to do a post on why you don't "break" your bike to stop it. And some of the other commonly misused words which are so frustrating to see when they are used incorrectly.

Jay said...

Great post. And informative, too!