Rose Bikes: "We have already completed the consolidation"

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Soon higher prices in sight again: After significant price reductions in November, Rose Bikes boss Thorsten Heckrath-Rose sees the possibility of price increases

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The bicycle industry is facing a difficult year of consolidation, associations predicted a few months ago. In fact, individual market participants had to report severe setbacks. Rose Bikes, on the other hand, one of the big names in the scene, took countermeasures early on and recognized what strategy was necessary after the boom, says Thorsten Heckrath-Rose. In an interview, the managing director explains the strategy, what this means for revenues and why Rose Bikes will soon have the confidence to raise prices again.

manager magazin: Mr. Heckrath-Rose, the bicycle industry has had wild years. During the pandemic, demand exploded, everyone wanted to buy bicycles. At the same time, supply chains from China collapsed, posing unprecedented difficulties for manufacturers and retailers. Geopolitical tensions are currently intensifying with China, the most important supplier of wheels and accessories. Is the next bottleneck imminent?

Thorsten Heckrath-Rose: This cannot be ruled out. The U.S. is already the road, working in doses with punitive tariffs. For this reason, American bicycle manufacturers in particular have a great interest in the rapid relocation of parts production to other countries. I don't think it's very likely that Europe will get carried away with a real trade conflict. We have much less of our own production, and the dependence on China in many areas is simply gigantic. We cannot afford a large-scale trade war with massive reciprocal sanctions at the moment.

Rose Bikes has most of its carbon and aluminum frames manufactured in China. Doesn't that worry you?

Not at the moment.

You have recently been to Asia, including Taiwan, and have met other manufacturers and suppliers. How is the bike industry preparing for a possible intensification of the conflict over Taiwan?

Many of my interlocutors in Taiwan are counting on Beijing to recognize that a trade war is economically and politically disadvantageous. But in fact, companies are asking themselves how they can make supply chains more secure in the event of a possible crisis. And they are acting: There are already the first newly established production facilities in Vietnam, Myanmar, Cambodia and Bangladesh. However, even these first outsourced production facilities have a disadvantage.

How?

An aluminum plant in Vietnam, for example, still obtains the tubes and forgings from China in the vast majority of cases. The same applies to the first new production facilities that have been built in the so-called Bike Valley in Portugal. Even these factories for aluminum or carbon frames and other components cannot work without intermediate products and materials from China. In this respect, I believe that we are now seeing the first steps. However, there is still a long way to go before bicycle production that does not require intermediate products and materials from China.

Is independence possible?

The current fact is that part of the value creation still takes place in China. The effect of US punitive tariffs also fizzles out if materials or intermediate products continue to come from there. In this respect, what we are seeing now is also a bit of window dressing.

Let's change the focus from the international to the national perspective. The great boom of the pandemic period, when demand skyrocketed, is over. The industry associations in this country recently spoke of a transitional year for the German bicycle industry. What's your take on that?

I recently spoke with a few competitors who position themselves as clearly as we do. Accordingly, they all have a lot to do because the demand is high. If, on the other hand, you rely heavily on mountain bikes or are in the lower price segment, I think you face major challenges and have to manage inventory and sales perfectly. I also see the market as a whole in a year of consolidation. There will be some retailers and smaller manufacturers who may not pack it. In a year at the latest, however, the situation will have largely returned to normal.

And Rose Bikes themselves?

At times, we actually had high stocks due to missing parts, which are now visibly dissolving. Overall, things are looking very good for us at the moment. Demand is strong, and some segments such as gravel are even sold out in between. In the current fiscal year, we expect to produce and sell around 30 percent more bikes than in 2022, and we will also increase sales again. We expect bicycles sales to grow at a double-digit percentage rate over the next two years. We have nothing to worry about at this time. By April 2024 at the latest, we should have digested the last aftermath of the crisis and get back into a normal planning rhythm.

You talk about a year of consolidation for the entire industry, but paint a rosy picture for Rose Bikes – that seems strange.

But it's not. We have, if you will, already had a certain degree of consolidation.

You'll have to explain that.

For some time now, we have been reducing our dependence on pure merchandise and strengthening our own brand, which is essentially bicycles. In other words, we are trying to direct the proceeds more from accessories and clothing to the bicycle business. This is working quite well, we are on schedule.

Why this pivot?

It is becoming increasingly difficult to earn money with pure merchandise – as currently shown by the results and forecasts of the listed Bike24, for example. I hear similar signals from the environment of other bike internet stores. Competition over the winter was disastrous because prices for accessories and, in some cases, bicycles plummeted and many segments hardly yielded any profit margins. Spring business got off to a slow start for the industry, but things are getting better now. For some market participants, however, this is unlikely to compensate for the sales gap.

How do you reduce your dependence on merchandise in concrete terms?

While some market participants added an exercise bike free of charge to the purchase of a bicycle because otherwise they would not have been able to get rid of the goods, we significantly reduced our inventories in individual segments at an early stage in order to minimize the risk.

Does that mean that you now offer significantly fewer items in the Rose Bikes online shop than before?

Yes, we have drastically reduced the so-called Stock Keeping Unit – also known as SKU: from 50,000 to 27,000. To understand: A jersey in a certain color and size represents a SKU. As a result, the customer can no longer buy a jersey in five, but only in two color variations, for example. In this way, we massively reduce the complexity of our inventory and streamline product ranges so that they still remain relevant.

Do you also throw out individual brands altogether?

The fact that we completely separate ourselves from a brand is rather the exception.

What does this strategic shift mean for your revenues?

This year, we will generate about 60 percent of our sales with bicycles, compared to 35 percent a few years ago. So there has been a strong shift, and the sales ratio will continue to shift in favor of bicycles. In about three years, we want to bring in 75 percent of the proceeds exclusively with bicycles. A growing leasing business will certainly contribute to this. In the meantime, about 15 to 20 percent of the bikes we produce find a new owner as company bicycles.

What are your sales expectations for the current financial year?

We will probably be 8 percent higher than last year.

This is modest compared to the previous year, when sales had climbed by 17 percent to 174 million euros.

Yes, but that's what we expected. If we end up with 8 percent plus X, we are satisfied with it because it reflects our planning exactly.

In November last year, Rose Bikes had reduced the prices for bicycles by an average of 15 percent. When do you need to make adjustments?

Not so fast. We started to react to the development early on and therefore do not have to turn prices again on a broad scale. For new model series, however, we will not be able to avoid raising prices slightly again at the end of the year or at the beginning of next year.

The two-wheeler industry association expects that more than 50 percent of the bikes sold will soon be electric. Does this also apply to Rose Bikes?

No, the proportion of e-bikes is not that high here. Our customers tend to be more ambitious in terms of sport. The share of e-bikes is likely to be closer to 15 percent in the current year. However, we expect it to rise to about a quarter in the next two to three years. E-bikes are also becoming more important for us – in every segment. So also with road bikes.