Canyon

Vosper: Specialized lays down five big bets with its D2C move

Disclaimer: I was director of marketing for Specialized from 2000-2005. I have no insider or private information on the company’s strategy regarding its sales programs. What follows are purely my own insights and analyses. 

When Specialized announced to dealers in January that it would henceforth sell its pedal-only bikes consumer-direct in addition to through its normal retailer channel — not to mention reducing dealer margins on click & collect sales by as much as half — dealers were understandably not happy.

But what’s done is done. Much as dealers may not like it — and I certainly don’t blame them — Specialized has crossed a formerly inviolable line by selling direct to consumers. What remains to be seen is how the move will pay off. Or not. 

In the largest sense, Specialized has put down a huge bet that its incremental direct-to-consumer sales dollars will more than offset whatever losses Specialized dealers extract in terms of fewer orders, in-store brand preference, or even by dropping the line entirely. 

That’s a big bet. In fact, it’s five smaller bets rolled into one big one, and the outcome of any of them is far from certain. Here they are, one at a time.

Bet #1: Double up on margin dollars 

By going consumer-direct and taking up to half the dealers’ margin on click & collect sales, Specialized takes existing retail dollars directly out of dealers’ pockets and puts them into its own. But this is only true to the extent that these are sales that would have otherwise gone through dealers (see #2 following). 

The Bet: Increased margin dollars (including ancillary fees) from these sales will offset losses from dealers dropping the line or cutting back on their Specialized purchases in favor of other brands with more dealer-friendly sales policies.

Bet #2: Level the playing field with Canyon and other D2C players 

The success of Canyon, both in the USA and especially in Europe, has put a big dent in traditional bike brands’ pocketbooks. To be sure, there are plenty of smaller brands sold consumer-direct via online resellers, but Canyon is by far the largest player in that channel. Interestingly, the place where D2C sales are strongest is in the burgeoning market for e-bike sales … which Specialized has specifically exempted from its D2C program. At least for now. 

Problem is, everyone knows these online-only customers are out there, but no one knows how many of them there really are (what us marketing types call the “blue ocean”). Online customers for complete bikes don’t generally go into bike shops (or if they do, they are showrooming), so that also makes them new customers for what had heretofore been bike shop exclusive brands. 

If Specialized can take market share away from Canyon and similar operations, or appeal to customers who otherwise might not buy a new bike at all, that’s pure incremental revenue: sales it never would have gotten otherwise. 

Realistically, this opportunity is the biggest slice of the Big Bet pie.

The Bet: There is some significant number of consumers out there that are not buying Specialized bikes because they’re only willing to do so on a consumer-direct basis. If Specialized can take a significant number of those sales away from Canyon and other online retailers by going toe-to-toe with them in reaching out to consumers, there is a potentially huge upside that cannot be realized through brick and mortar sales alone. 

Bet #3: Create a safeguard against dealer erosion

By creating a D2C presence, Specialized is at least partly safeguarding what it sees as Trek (and now Pon) eroding its dealer base via acquisition, while D2C companies like Canyon nibble away at its sales overall. Selling consumer-direct effectively puts a Specialized-exclusive dealer into every town on the planet. (Note: the company’s current announcement only includes Europe and North America.) 

Selling consumer-direct effectively puts a Specialized-exclusive dealer into every town on the planet.

The Bet: Creating a worldwide D2C market will effectively negate loss of revenue due to both dealer erosion by acquisition and consumer sales by brand competition.

Bet #4: Shift sales away from dealers by manipulating product allocation

This is actually a hybrid of Bets 1 and 2. In an era of product scarcity, the sale of a new bike does not necessarily go to one channel or another, but to whoever can deliver the product. And if the product is only available D2C, consumers who want to buy it will be forced to do so, regardless of their actual preference. If Specialized is allocating product to itself at the expense of dealer backorders, this puts 100% of both wholesale and retail profits into its own pocket.

“Specialized is holding back that inventory to sell direct. I literally have riders in my store holding their phones up, showing me the bike they want that they can get direct but I can’t.”

Is Specialized prioritizing allocation to its D2C program? When this and other questions were submitted by BRAIN editors for comment, a Specialized spokesperson replied, “We do not wish to answer these [questions] at this time.”

But dealers I’ve spoken to agree it’s already happening. As one told me on condition of anonymity, “We are a Level 1 aligned dealer. I have bikes on backorder. I would take them into my inventory immediately. But Specialized is holding back that inventory to sell direct. I literally have riders in my store holding their phones up, showing me the bike they want that they can get direct but I can’t.”

The Bet: Some unknown but significant number of bike shop customers will switch loyalties and buy bikes direct if that’s the only way to get them.

Bet #5: But what about the dealers?

Suppliers like to believe the customer is completely pre-sold on a particular brand before ever setting foot in the store and the retailer just writes it up the sale. But as every retailer knows (and brands really ought to know), this is not the reality on the shop floor.

There is this notion circulating that dozens if not hundreds of Specialized dealers are going to drop the brand, in a sort of wide-ranging protest vote. But that’s just not the way retailers think.

But brands are also terrified of in-store competition because they’re afraid the dealer will switch the pre-sold customer off their brand and onto another one. These two notions are directly contradictory, I know, but there they are. And increasingly, I think that’s what’s going to happen. 

There is this notion circulating that dozens if not hundreds of Specialized dealers are going to drop the brand, in a sort of wide-ranging protest vote. But that’s just not the way retailers think. In my experience, most dealers will do what they normally do when confronted with change: Wait and seeKeep your options open. There’s no real downside, and there’s still plenty of time for dealers to make a move in accordance with their own best interests and timeframe.

The wait-and-see strategy also gives retailers time to line up alternate sources of supply. 

The Bet: some large majority of Specialized retailers will stick with the brand, at least long enough for its D2C program to find its legs. 

Overall, this is a nontrivial problem with a lot of moving parts. It’s easy to make Specialized the bad guy and the rag-tag band of feisty dealers the lovable underdogs, and frankly, that’s not an unreasonable position. After all, riders overwhelmingly do their business with bike shops, not with the brands themselves. And, as noted previously, there are already plenty of exceptions to that rule, with smaller brands being sold either direct-from-factory or through online retailers. But Specialized is the first of the Quadrumvirate — Trek, Specialized, Giant and Cannondale, in that order — to cross that line, and it comes as a shock to everyone in the supply chain, from other brands to retailers and consumers alike.

As Michael Corleone famously put it, “It’s not personal, it’s strictly business.” Be that as it may, you can like the Specialized situation or not, but Specialized is putting a lot of chips behind D2C, and both retailers and consumers will have the opportunity to vote on that bet with their dollars in 2022 and beyond.




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