How Bad Sponsorship Hurts Good Business.

By Tom Demerly.

Poorly administered sponsorships are like showing too much cleavage at a dinner party. They attract plenty of attention, but not the right kind of attention.

Earning a net profit in the bicycle industry is extremely hard.  Poorly managed  sponsorships, mostly at the dealer level, contribute to making it harder.  They create a damaging subculture of “sponsored consumers” who expect to pay less than retail,  are trained to resist MSRP’s, set an example for others to expect discounts and return almost nothing measurable – except red ink. Worse yet, through unprofessional use of social media some amateur sponsored athletes have created the impression that if you are paying full price, you are somebody’s fool, and you’re not one of the cool kids.

It’s a tough thesis, but one the specialty bike retailer needs to own. Low level “sponsorship” discounting isn’t all that is wrong with bicycle retail, but it is one of the many small wounds that has bled the dealer network dry in a sort of financial “death by a thousand cuts”.

The NBDA, National Bicycle Dealer’s Association, reports that the “number of bicycle retailers is dropping” from a high of about 8,000 independent bike shops in the early 1980’s to about 5,000 in early 2004. In 2011 the NBDA reported 4,100 independent bicycle retailers, a loss of nearly 50% since the 1980’s. This is contrasted by significant growth in the number of USA Triathlon licenses sold, the number of triathlon events and the growth in popularity of cycling during the Armstrong era prior to the loss of his titles. It doesn’t make sense that there are less bicycle retailers today than there were before the triathlon boom and the Armstrong era. If we had seen similar expansion in any other specialty consumer population we would have seen growth in the number of retailers servicing them. We haven’t. In fact it has been the opposite.

Business owners driven by personal involvement in the sport and not  focused on the bottom line have created a subculture of amateur “sponsored athletes” that don’t generate additional net profits at all. These “sponsored athletes” have full-time jobs outside of endurance sports, earn middle class or greater incomes in their full-time careers and don’t devote a significant amount of hours returning anything to their so-called sponsors. They are hobbyists. Worse yet, if they weren’t “sponsored” most of them would still be buying at full retail. Retailers have, in many cases, “sponsored away” their best customers.  Many of these customers are very good athletes but they aren’t in the business of sports marketing to return a profit to their sponsors. They are consumers turned bad, ruined by a bike retail industry not focused on the bottom line and looking for quick popularity from customers looking for a quick deal. It’s like buying votes rather than earning them, or showing a little too much cleavage too early and risking a bad reputation.

Consumer level athletes aren’t the ones to blame for the sponsorship dilemma. Undisciplined retailers are. I should know, I’ve been one, and the last four years have been a cathartic process of trying to learn something from my own mistakes and teach others as well. Teaching bike dealers anything is tough since, like most entrepreneurs, they believe they know everything. I did. Before I failed. Many dealers are impervious to business education. Before their nearly inevitable failure though, they are unrepentant champions of knowing everything about how to run a small retail business. Right into the ground.

Another obstacle is that once local bike dealers launch their sponsored athletes and teams they do almost nothing to broadcast the message about it. There are proven axioms in professional sponsorship that, for every one dollar a sponsor spends on sponsorship they need to spend eight to ten dollars talking about it. Big brands can afford this. Bike dealers can’t. As a result the effectiveness of local club and individual sponsorship programs erodes to nothing with no real return at full margin for the dealer. Once the discounts and schwag are given out the dealer sees little in return, except more sponsorship requests as savvy consumers learn to “never pay retail” when they can easily negotiate a sponsorship discount instead. It begins a death spiral of increasing expectation for discounts that the retailer has a difficult time reversing.

The quandary of this phenomenon is that, if bicycle dealers offering sponsorships had a higher degree of attentiveness to the bottom line they would realize a series of elegant solutions to the dilemma. Realizing that giving the local hot shots a discount hasn’t sold much (or anything) at full margin is step one. Secondly, working with brand-level suppliers to leverage their sponsorship efforts is a better plan than trying to run a local sponsorship/discount program and it preserves the integrity of the local market. Big brands can afford to sponsor big names and pay for the media to talk about it. That is one factor that drives full-price consumers to a brand in an independent bicycle retailer. Thirdly, discounting product to retail consumers through sponsorship sends a bad message; the better you are, the more visible you are in social media, the less you pay. Instead of regular participants becoming better consumers, they are trained by retailers to become discounted/”sponsored” consumers.

An argument the local bike retailer has made for their consumer discount “sponsorship” programs has been that it supports their local market. That’s a good argument, for something else. If the local dealer wants to support the sport locally, build relationships and create additional demand they wouldn’t sponsor local athletes, they would sponsor local events. The difference between sponsoring events and sponsoring athletes locally  is significant. Firstly, price and margin are not eroded and demand is increased. Supporting local events creates more full price consumers on a broader level. Done correctly it can leverage a shop’s brand identity to full price consumers every weekend. Event promoters shoulder the burden of continuing the message on Monday morning with their own website when they report results. The branding message reaches everybody in the event. It reaches them before the event date through promotions to enter the event, during the event and then after the event with results. It also gives local retailers an easy “out” when the inevitable neighborhood hotshots come calling for sponsorship discounts. The retailer simply says, “We support the sport locally through our sponsorship of local triathlons, bike tours, mountain bike series and cyclocross races. If it weren’t for our support, those events couldn’t continue to grow and provide cyclists with events to enjoy.” Everybody wins.

Like all arguments there are a few exceptions, but only a few. One good example is Fraser Bicycle and Fitness in Fraser, Michigan. Their “Club Fraser” initiative to involve athletes in the sport has created community rather that eroded it. It has benefitted charities and encouraged athletes to participate. It is built on involvement and development rather than discounting and schwag deals. It creates good customers rather than converting them to discount customers. It’s also hard work for Fraser to administer. The program has raised the visibility of Fraser at regional and national events and been recognized in national publications like the USA Triathlon newsletter. Best of all, the program hasn’t eroded the strong business model of Fraser Bicycle. Fraser Bicycle and Fitness is the exception rather than the rule, and few independent dealers have the focus and business discipline the Fraser management team has demonstrated in innovating and administering a sponsorship program.

Poorly conceived and administered sponsorships at the dealer level aren’t the only obstacle to earning a net profit in bicycle retail. There is no single factor to the contraction in specialty bicycle retail over the last two decades. It is an awful conspiracy of recession, changes is how consumers access products and information and ineptitude on the dealers’ part among other factors. The first step to facing the challenges to improving profitability is owning the problems, something independent dealers have had a difficult time with.  Seeing each contributing factor for what it is from the perspective of objective business will help the independent bike dealer mount a comeback. Starting with one problem at a time, like poorly administered shop sponsorships, is part of the solution.