Good questions ahoodlum. First off, you got bad information. We (Bikesport in Michgian) and most other retailers do not "keystone" or mark-up wholesale prices by 100%. That is absurd. If we did, I'd be driving a Hummer H2 and living in a 5,000 sq. ft. house instead of 1100 sq. ft. and driving a dented Subaru.

Here is an inside look at pricing on a part from the Quality catalog, sitting right here on my desk:

Campagnolo Record Titanium Cogset, 10 speed, 11-23 #FW9026

Quality Bicycle Parts wholesale price to accredited bicycle retailer: $219.95

Our margin: Divide cost price by .75 (219.95/.75=293.26) Round up to $299.99. That is selling price.

Now, on the surface, it looks like we are making an $80.04 profit. Wrong. This is why:

-Personal property taxes from city on every piece of corporate property.
-Payroll.
-Payroll processing cost.
-Income tax of gross profit.
-Rent.
-Utilities such as electricity, sewerage, water, gas, waste disposal ($400 per month alone), building maintenance, telephone, internet.
-Repair of damaged/destroyed equipment (sometimes thousands per month).
-Updates to technology such as software.
-Website maintenance ($1500-$3000 per month).
-Legal counsel for litigation.
-Mandatory workmen's comp insurance.
-Liability Insurance.
-Inventory insurance.
-Bonuses for employees (free bikes, parts, etc.)
-Sports marketing costs for event sponsorships, printing costs for contribuint to local event production, prize contributiions, etc (over $10,000 every year).
-Charitable contributions to local charities such as school programs, child helmet programs (100 free Bell helmets), local hockey, soccer, figure skating, robotics and football teams. 2 local high school graduation party sponsorships. Paying for new bleachers at the local private school that has no more money fro their gym, etc. (over $15,000 in 2003).
-Accounting costs.
-Freight (sometimes free from Quality if orders are over $500).
-Office supplies.
-"Shrinkage" (theft).
-Other stuff I forgot.

All those are backed out of that $80.04. Based on our 2003 fiscal year that means $75.23 (94%) of the gross profit is used for fixed and variable overhead. That leaves a good profit margin (net) of 6%. That is a fair margin. For store that grosses about $1,000,000.00 per year that nets $60,000 in profit. For the guy who owns the place, who probably should be collecting a salary of about $30-40K per year (that is part of the payroll cost) he is grossing between $60-100K per year before taxes including his profit from the company. He pays taxes on that income, further reducing it. That also assumes the guy is not sharing the profit with his employees. I make it a practice to do so and have handed out bonuese in previous years in excess of $4,000 cash + other substantial ammenities.

So, before you feel "used", consider the guy (bike shop owner) is probably working 70-100 hours per week (NO exageration, look at the times of day I am on slowtwitch posting, that means I am probably at work), probably has devoted his life to the industry and subsequently trashed the rest of his "life" over it, but still comes through the door every day to take his licks. If you do the math it works out to $13.46 per hour gross, before taxes.

There are perks. Going to Thailand (the company DID NOT pay for that), going to Curacao, going to New Zealand, being able to look in the mirror and tell the boss what you really think, etc.

But any way you look at it, you aren't being used. In fact, given the insane things I occasionally (frequently) do for other people I could make a sentient argument for the other way around.

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Tom Demerly
The Tri Shop.com

Oh, I should add this, but I am not positive about this since has been some time since I read an annual report for any of these companies since the market is basically kicking ass right now (I tend to only read the stuff when I'm going broke).

Fortune 500 companies also typically look at profit margins of between 3% and 6% if my memory serves me correctly- you MBA's and CPA's on this forum can back me up on this if I am on the mark. A Tyco, Lockheed, Raytheon, Bechtel, General Electric, Nippon Heavy Industries, AIG, 3M, Johnson and Johnson, etc. typically show profits of 3%-6% (at a high) in their disclosures to stockholders, so a little place like bikesport doing around a million in sales is on about the same profit schedule as the biggest corporations doing billions.

Business is like survival in nature, things shake themselves out. The weak may survive for a while, but are eventually cut from the herd. Hard times come (2002 and 2003) and go. The determined, resourceful, stubborn and smart survive. The rest (K-Mart, Worldcom, United Airlines, Enron) do not.

Business law = law of the jungle.

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Tom Demerly
The Tri Shop.com

Tom, you explained it in much more detail than I would but the bottom line is:

gross income - overhead - expenses - taxes = profit

Having a large gross income does not necessarily equal a large profit. In fact, more than often it doesn't. It's quite often hard for people who haven't been in business for themselves to understand this.

You said in one line what took me paragraphs cerveloguy. Thank you.

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Tom Demerly
The Tri Shop.com

I've worked in bike shops, climbing shops, scuba shops. "Keystone" or 100% margin is typical for most retail. If you really want to feel used and abused, just go shopping at Peir 1 Imports. If you knew the killing they were making on all of the crap they sell, you would puke. And Tyco, well Kozlowzski made that money the old fashioned way, he snookered it from investors. I have total respect for those who can keep on stealing when 172 million dollars just isn't enough to live on. Grecian birthday anyone?

Brett

Thanks for the input Tom. You almost made working in a bike shop sound halfway enjoyable...almost. I knew when I was writing my post I could count on you to give it to me straight. So if a shop is making 6% on a 100%, 75%, 65%, whatever markup, how is the distributor making his money? Does he just act as a third party and rely on volume and have arrangements with parts makers to take a small percentage of all sales? I assume wholesalers carry no inventory and just drop-ship everything.

"Other stuff I forgot"

though your list is extensive, you forgot two items that certainly rate in the top 5 of all your expenses:

1. the cost of money: you have inventories in your shop that you paid for years ago, and still have, unsold. i just wrote an article on handlebar plugs. if you buy them cheaply and have a good pross profit, great, but when you buy them cheaply it's because you buy them in bulk, and don't turn this inventory for years. the money that's tied up inventory, tools and fixtures represents a lost opportunity, that is, you could be using it to make money in other areas. that's especially true in the bike retail biz, where the number of SKUs you have to have in stock at any one time is enormous.

2. depreciation: what do you think it means when, the day after xmas, you get to buy samsonite luggage for 60% off? here's the funny part. the store that sells you that luggage is probably still making a slim profit, because most other businesses have much better margins than the bike biz. when tom sells you an inventory blowout bike for 25% off, however, he is NOT making any money. that's because his blended gross margin on bikes is about 33%, BEFORE he assembles them, floors them, etc. but if you forget the cost of flooring a bike, paying for it months before you sell it, etc., his 33% becomes 30% immediately because he's got to pay a shop guy's salary and benefits to build it up (not including the tools to build it, which tom pays for). tom will sell 4/5 of those bikes for 30% margin, but he'll sell 1/5 of those bikes for 5% margin, or no margin, or minus margin, because they're dog bikes and he has to blow them out at the end of the year. so his BLENDED gross margin on bikes isn't 30%, but maybe 22% or something thereabouts.

so subtract cost of money and depreciation and tom loses money every year for the privilege of getting rich off you.

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Dan Empfield
aka Slowman

Another good question a hoodlum. I don't know the wholesale end of things very well. I have worked for a rep agency, magazines, a manufacturer but never a wholesale distributor. I would like to though. Sometimes I fantasize about working at Quality Bicycle Parts, which (in my opinion) is the wholesale distributor standard of the industry. It would be fun for a while.

I'm not sure how things operate at the distributor level, or at least, I don't know enough about it to comment on it knowledgably.

Happy New Year Sir!

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Tom Demerly
The Tri Shop.com

Anybody with access to a Quality catalog can tell you that that the local bike shop could almost buy out of an online service for certain products.My point is that so can the retail customer.The LBS has to sell service first because they cannot compete on price.
Cullen

<<how is the distributor making his money? Does he just act as a third party and rely on volume and have arrangements with parts makers to take a small percentage of all sales? I assume wholesalers carry no inventory and just drop-ship everything. >>

Not hardly. Manufacturers hate the idea of warehousing their own finished product. You have to pay for a warehouse, lights, heat, insurance, forklifts, staff, tracking, etc. In some locales, you pay tax on your inventory. The ideal is to get the shiz to go right from the assembly line to the back of a truck as quick as possible. 2/10 net 30 FOB shipping point and boom--you now have sales revenue and an accounts receivable, which is the least expensive asset for a company to own. Plus, as a mfr, you don't want to take a risk of the product you carry becomming obsolete next model year. Best to put the risk on a middleman. Wholesalers/distributors usually purchase and warehouse the product, paying the associated costs of storage/warehousing inventory, phone lines, fax lines, e-server, risk that there will be a product change midway through the catalog year etc.. The benefit to the wholesaler is they don't have to invest in manufacturing equipment, R&D, testing, much less liability, usually very little advertising etc. I'm not saying it's shooting fish in a barrel, but there are plusses and minuses to all parts of the distribution chain.

Brett

Twolf is right, but if you think bike shop margins are low you wouldn't believe how low QBP's margins are. The fact that they are by far the largest distributor and do massive volume makes up for it. What I don't understand is how the little guys like United, Hawley, Oschner, SBS, SBA, etc. manage to stay afloat.

Hey jaylew, not to be a dick, but you kind of contradicted yourself there my friend....

:)

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Tom Demerly
The Tri Shop.com

Wouldn't be the first time.

That Tom's being a dick? Or you contradicting yourself?

(sorry...j/k Tom...that was just too easy)