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by Rick Vosper
August 17, 2016
Photography by James Huang
TECH NEWS BROUGHT TO YOU BY BIKEEXCHANGE
I’m sitting in a swanky restaurant across from a renegade Shimano employee who insists, tongue-in-cheekily, on being identified only as “Source Ninja.” Really. Ninja is schooling me in the byzantine mystery of Shimano’s shifting pricing, both in the North American and worldwide markets.
“It’s just typical lack of Shimano communication,” he says.
Cyclists who have tried to buy Shimano components — particularly high-ticket items like drivetrains or whole groupsets — will be quick to agree. Prices shift from month to month, and they’re often so much cheaper online that customers may suspect their local bike shop is trying to rip them off.
But, as Ninja explains, that’s probably not true. Depending on where you live, the plain fact is that your local bike shop is likely paying a far higher price for its Shimano components than the online retailer. And of course a local retailer may offer services the online guys can’t, like installation and follow-up service. But for many cyclists, price is still the bottom line.
Nor is it just a Shimano thing. The same realities are also true for many other equipment brands in the cycling world. But Shimano holds such a dominant share of market that it offers a sort of ship-in-a-bottle perspective on everything screwy and perplexing in the way components get sold to cyclists.
Why is this happening? Let’s start with some trade law. In North America and some other countries, brands can impose something called MAP (Minimum Advertised Price) on their products. To establish MAP, the brand publishes a set of minimum prices and tells retailers they can only advertise its products at or above those prices. Retailers can transact actual sales at whatever price they want, but they can only advertise at or above MAP. Any retailer deviating from this policy can be canceled and denied access to the brand’s products.
MAP exists for two reasons. The first reason — and the one generally given to the public — is that pricing can be an essential part of a brand’s identity. Think Apple. Or Ray-Ban or Oakley in optics. Or Rolex, Cartier, or DeBeers in jewelry. These brands have plenty of cachet, and part of that cachet comes not just from the products themselves, but from the premium price those products command.
The second reason is something covered in the first week of any accounting course: For any manufacturer, profit equals the difference between what it costs to make your products and what you sell them for. In practical terms, this means the higher MAP price is, the higher the brand’s (and its resellers’) profits.
At the risk of being obvious, higher MAP = higher profits throughout the supply chain. This is a particularly attractive strategy in affluent markets like the United States, Canada, Australia, Scandinavia and the European Union, where consumers are less sensitive to price on high-end goods. In less affluent markets, the process is reversed, and prices are often much lower.
But the EU has never adopted the MAP practice. In fact, it’s officially considered a form of price-fixing. Australia got rid of theirs in 2013. Canada’s version, which is called “price maintenance,” is similar to the USA’s. So retailers and distributors in non-MAP countries can advertise Shimano (or other) products at any price they want.
This includes — and here’s Ninja’s point — sales made into affluent and especially MAP-constrained countries.
“U.S. retailers tell me they think Shimano hates them and doesn’t care at all about their business,” Ninja says. “Some even say Shimano perceives retailers as competition and is deliberately trying to put them out of business.”
The notion that Shimano is trying (or would even want) to put bike shops out of business in North America, or anyplace else, is pretty far-fetched. But here’s the scenario that makes retailers crazy: An online retailer buys Shimano products from a distributor in a less affluent market with no price constraints and lower Shimano prices to begin with. They then sell the product into a MAP-constrained or other premium-priced market. And, due to price differential, the online retailer can often sell to consumers at or below the price the local bike shop can buy the same products from its in-country distributors.
For retailers in those affluent markets, the playing field is steeply tilted, and not in their favor.
This works, by the way, whether the online retailer is based in the target market or elsewhere. Large domestic players purchase Shimano (and other) products offshore at close to distributor-level pricing.
Shimano’s in-country offices can’t block sales of the product because it’s coming from places where MAP is not just meaningless, but prohibited by law.
Most distributors have restrictions as to which countries they can sell to as a part of their operating agreements. But these are easily circumvented and it’s very difficult for brands to detect and police. So an online retailer buying Shimano in undervalued markets like, say, Poland and reselling it into Australia or other premium markets does so at a huge price advantage.
The trade term for buying products in market A and selling them in market B is “gray marketing,” and it’s become one of the most powerful commercial forces in the worldwide cycling industry. The mechanism can be complex, but the takeaway is simple. Consumers in affluent markets can buy Shimano (and many other brands) at well below in-country dealer wholesale. For a while, anyway.
In February, Shimano dropped its U.S. wholesale and MAP prices on many products by as much as 40%. This may or may not have been part of an attempt to stabilize its North American pricing. “Due to all the litigation potential around pricing, we don’t discuss strategy or why we make those moves,” said an unnamed company spokesperson in the industry bulletin Bicycle Retailer and Industry News. “We don’t discuss pricing at all.”
Pricing from brick-and-mortar retailers versus online improved at least somewhat, although it never reached parity with online sources.
Then in late May, Shimano raised its U.S. prices again, by as much as 14% on products sourced from its Japanese factories — although not, apparently, from factories in China, Malaysia, or other locations. Bike shop owners were furious. “The system is broken, return to sender,” raged one.
Whatever its intentions, Shimano’s about-face on pricing only exacerbated price instability for consumers and retailers alike. Other countries face similar changes. And there are more on the way, because now there’s the Brexit result. And two of the largest online retailers, Wiggle and Chain Reaction, are both located in the UK, in Portsmouth, England, and Ballyclare, Northern Ireland, respectively. Combined revenues of the partners are £300M (about €350M or US$390M, currently); UK antitrust authorities approved the merger June 30.
Initially, cyclists saw the post-Brexit kerfuffle and the decline of the British pound with a certain amount of glee. After all, a weaker pound meant their Euros or U.S., Canadian or Australian dollars could buy more from UK resellers, right?
Not really. As Luke Musselman, director of business development at Duro Tire/Hwa Fong explains, “With some of the world’s largest Internet/mail order companies based in the UK, the Brexit vote may have component pricing implications well beyond its geographic borders. As the British pound declines against the yen [and the Taiwan NT and yuan], its purchasing power has been greatly impacted and will surely be felt through the Channel.”
Simply put, although the pound may decline against the euro or various dollars, it will also decline against the yen and other currencies that component pricing is pegged to. So although a consumer’s money may buy more GBP, a UK reseller still has to spend more GBP to buy product from its source, wherever that source may be.
Or, as another Internet wag put it, “Brexit: Helping to correct Shimano retail pricing since 2016.”
Well, maybe. Online retailers from countries with strong local currencies, sourcing from low-price markets in Central or Eastern Europe or Asia, may overtake the current UK giants to emerge as the new low-price leaders. Or, prices from brick-and-mortar retailers may get closer to parity with online sources.
But until then, and unless Shimano and other manufacturers can stabilize their prices worldwide, cyclists will continue to pick up bargains wherever they find them.