Taken for a ride?

The Competition Commission says it has uncovered a ‘possible cartel operating among local bicycle retailers, aimed at increasing their margins’. Here’s what informed the allegations

After referring to minutes posted on www.thehubsa.co.za, the Competition Commission initiated an inquiry and issued a summons against shop retailers Fritz Pienaar Cycles and Cycle Lab. What follows is an edited excerpt of the minutes of the September 10 2008 meeting placed on the website.
More than 40 retailers and wholesalers are said to have been present.

Fritz Pienaar (Fritz Pienaar Cycles): Welcome everyone, thank you for attending this meeting. First of all I would just like to say that this meeting is not aimed at the wholesalers, but the wholesalers do play a part and it is they that created the concern that retailers are not making enough money and that this leads to their accounts not being paid. I would just like to say that everyone agrees in principle with raising the margins in the cycling retail industry. We have support from many retailers, who have phoned or contacted me personally to say that they are behind the decision and that it’s time something like this occurs—Bowman’s, Hatton Cycles. Wholesalers all agree in principle that this is needed.

Andrew Mclean (Cycle Lab): The urgency of this meeting means that we should have had it by July [2008]. Everyone agrees that our industry is not healthy at the moment. We’re simply not making enough, and the margins are too low. Times are tight; there is never a right time to introduce higher prices. We can continue to moan about the industry, we have the smallest margins in the sporting [goods] industry. This is something that’s in our power to change and rectify, so that we don’t battle to cover expenses and pay our suppliers.

Yes, there have been previous meetings that have just fizzled out, nothing has come of it. In summer all goes well, we make some money, then winter comes and the urgency of this matter becomes apparent again.

The one complaint is that there are too many retailers. Yes, this is true. Shops should not undercut each other, as we’re doing ourselves in at the end of the day. If no one gives discounts no one will shop around; then it’s up to each shop’s service and relations with their customers to set them apart. We should perhaps look at ways to structure the industry in the winter, which would draw more feet, perhaps by introducing a “Cape Epic” stage race in the winter? This could stimulate margins.

As a strict analysis bike shops are a bad investment with no return on investment. For example a shop with R3-million in stock would be a bad investment to buy ... it would be more lucrative to invest in a bank.

Fritz Pienaar: Our South African cycling retail industry is not on par with international standards. For example the United States has about a 75% bike margin and a 100% accessories margin. I propose a gross increase for accessories from a 50% to a 75% margin. And a bike margin increase from 35% to 50%.

The only way we can do this is by all agreeing and uniting with the price increase and getting the wholesalers to back this decision and help us by providing the new suggested retail price to the retail shops they supply and advertise that price to the public. Many of you are concerned that this is some form of price fixing; it isn’t and this is not illegal. It could be seen as price fixing from the suppliers that we need to sell at only 35% margins.

Andrew Mclean: We can create a sustainable, healthy industry; the kingpins in major areas agree that higher margins are needed to create this. We need your cooperation and support to introduce this on October 1 [2008]. Support wholesalers and retailers: the bigger shops will apply pressure on the wholesalers and the wholesalers will in turn enforce the new retail prices on the smaller shops.

Question: Can we not creep bike prices up over time so that there is not such a dramatic price hike?
Answer: The quicker this happens the better it will be for everybody.

Fritz Pienaar: There is sufficient time to change stock pricing and change price tags. The industry is already expecting a price increase with all the 2009 stock, which is coming in at around 20% increase on average.

In 2002 we experienced a similar price increase with the rand/dollar. When the rand was at its lowest we were a new shop, and we had some of our best sales over the years in that time. Top-end bikes were still bought regardless.

We can do this without any upsets if we all do it at the same time. We can start in Gauteng and it will in time spread through the whole country, with help of the wholesalers, increasing the suggested retail pricing and supplying their customers with price lists showing the new suggested retail amounts.

Questions and concerns
Fritz Pienaar: Online shops seem so cheap, but it’s actually a schlep. Products lost that you order by mail. Shipping problems—they ship or deliver the wrong stuff. There’s always hidden costs, you sit with warranty issues—warranty void with grey products. Internet competition creates concern, people do research on the web, and then consolidate buys with some friends. Yes, this is causing some problems.

Andrew Mclean: The percent of business you lose is actually very small. As an example Cervello’s overseas online pricing is almost identical to its retail pricing. A shop will not make it in business today if it does not sell Shimano. I often refer to Steven [Shimano] as the Godfather. Shimano is in the favoured position to regulate support for retailers. Steven can choose whom to supply and whom not. Passion is why we make profit: can you run your business at 35% mark-up? Most businesses run at 100% to 200% mark-up.

Derek Edwards: Do we need a suggested retail price?

Fritz Pienaar: Wholesalers can then enforce a suggested retail price, weed out dealers that piss off others by undercutting.

Andrew Mclean: We need to create reputable stores, not discount stores. As far as shops like Cajees are concerned I would embrace another eight Cajees around my store in Fourways, because you only ever buy one bike from them and then you learn and move on to bike shops who have reputable service and advice.

Andrew Mclean: It’s very important to stick to these mark-ups. There are 180-plus retail shops and on October 1 [2008] Fritz Pienaar Cycles and all Cycle Labs in the country will start with the new margins.

Jacques Maritz: If I can negotiate a better deal from my suppliers that’s my “cream”, which I then put away for the winter days.

Mike Bradley: We’re here to make money. Labour has more mark-up than bikes; sell your labour.

Andrew Mclean: The entire industry is to benefit from this.

Fritz Pienaar: Does everyone agree? Is there any retailer or wholesaler who disagrees?

Pienaar says the minutes held by the Competition Commission are inaccurate. He says the gathering on September 10 2008 in Midrand was an open meeting to which both biking retailers and wholesalers were invited.

“Since we started the business in the retail industry, the recommended retail price was determined by the wholesalers and we as retailers were pressured to stick to that.” The meeting, he says, was to change this. Pienaar strongly believes the Competition Commission should have inquired about this before it put out the press release. He says all they want is “more freedom for each shop to determine its own retail price”.

McLean of Cycle Lab says that “inaccurate notes not minutes” of the September 10 meeting were circulated. He will present his case to the commission next Tuesday.

He says “there is no price-fixing in the cycling industry”.

Client Media Releases

Utility outages: looking at the big picture
UKZN scientists get L'Or'eal-UNESCO Women in Science grants
Springbok-mania hits MTN head office
Optimise your SMS campaigns this Black Friday