A story on pricing, two bikes stores and you, the customer. As very cautiously told by Stirling Kotze.
You walk into a bike shop (shop A) today and you stroll around looking at all the latest road and mountain bikes. If you haven’t bought a bike for the last five years or more you’d be rocking on your heels looking at those price tags! Easily a few million Rands on the floor.
There are two main reasons for those big ticket prices – one is the Rand/Dollar (or Euro) exchange rate and the other is technological advancement in bike design and materials. Added to that is the increased cost in highly-skilled labour and in raw materials (primarily aluminium and carbon fibre). Finally, a big factor is import duty, shipping costs and road transport into the various world markets. The supply chain from raw materials to the bike on the shop floor is so long it could fit four pages of this tabloid you’re reading!
Let’s take this potential buyer through the price tag on a bike priced at R50 000 which is pretty much the sweet price point in terms of affordability and technology – it’s a good price for a quality bike. For most mountain bikers it ticks all the boxes. Carbon frame, full suspension, mid-point group set, tubeless tyres and decent wheels and perhaps a dropper post.
So, let’s take off the VAT and the tag price drops to just under R44 000 and Shop A has made a gross profit of around R12 000.
This gross profit is turned into net profit once all these expenses have been paid:
- Rent, electricity, cleaning, etc.
- Insurance and security
- Staff and management wages, UIF, SDL
- Loans and interest
- Advertising, sponsorships and promotions
- Credit card fees and bank fees (this is bigger than you’d ever think)
- Stationery, staff consumables and supplies
- Transport, deliveries and courier fees
The impact of these expenses depends on the number of bikes sold each month and each shop would have its own targets – for example 15 to 20 new bikes a month for a medium sized store. Small stores will sell less and large stores a lot more – with increased costs of course. Whatever the store size, I don’t know of many (actually any) shops that show a net profit equal to the amount of money they pay to the tax man and the banks.
Finally, the sale of accessories, spares and clothing need to be taken into the equation. Mark-ups are higher but Rand amounts are lower. And most regulars get looked after at the till, rewarding their loyalty to the store. Other risk factors include stock becoming obsolete or slow movers, shop-soiling and shrinkage.
You’ll notice that I haven’t mentioned workshop profits. Talking to most shops they accept that their workshops pretty much break-even (if it’s well run) over a financial year. Wages, rent cost per square meter, sick leave, compassionate leave, interest-free staff loans, damages, consumables, lubes and fluids, electricity usage, tea, coffee, butter, spreads, milk, tooling etc. On the positive side, the workshop is the soul of the store and is essential to bringing customers into a bike shop indirectly adding to profit and turnover. More directly the profitable part of the workshop is by selling replacement parts during the service adding to overall turnover.
The reality is that bike shops come and go. This is where shop B comes into the story. The most common cause of failure is chasing sales by discounting sales for the sake of turnover instead of selling a product or service for what it’s worth – its value which is the quality of the product and expertise in advice and technical skills and creating long-term relationships.
If shop B has that R50K bike (after tax to R44K) and discounts it by 10% then store B ends up with about R8 000 profit (compared to store A’s R12 000 shown above) which in reality represents a 30% discount off gross profit. Times this R8 000 by the number of bikes sold and shop B’s gross profit has decreased considerably compared to shop A’s profits. Store B is not only on the road to closure, but has negatively influenced Shop A as well.
The moral of this story is – when the shop owner gets a bit too generous with his pricing, be weary of their reasons and longevity. The shop owner must have enough confidence in his brand, his service and his relationship with you to charge a price that ensures he makes enough money to continue running an industry leading store without you feeling overcharged.
Yes, it is a delicate balance.