Is Inflation Sticking Around? Bicycle Makers Offer Some Clues

Date: Friday, December 3, 2021
Source: The Wall Street Journal

For a glimpse at why inflationary pressures aren’t likely to ease anytime soon, consider the bicycle.

Bike prices in the U.S. and Europe rose sharply at the start of the pandemic because of booming consumer spending and snarl-ups in global supply chains that meant long delays and higher costs for manufacturers.

Now, manufacturers are working on building bikes for 2022 in a continuing environment of economic uncertainty—with more questions added recently by the emergence of the Omicron variant of the coronavirus. Today’s rampant demand and strangled supply are already pushing next year’s prices higher.

“The cost of our product is not going down,” says Richard Thorpe, chief executive of Karbon Kinetics Ltd., which sells Gocycle electric bikes world-wide from its base in Chessington, southern England. “If that is inflation, I wouldn’t call it transitory.”

Mr. Thorpe says that beginning Jan. 1, he plans to increase the prices of his range of folding e-bikes by up to 25%. The company’s latest models will cost between $4,999 and $6,999, depending on the specification, compared with $3,999 and $5,999 in 2021.

The price increase is needed to cover the higher costs of components and shipping, Mr. Thorpe says, and to provide a financial cushion should supply-chain bottlenecks again hurt production, as they did this year. The company is also aiming to bring in more per unit, after shortages have kept it from increasing production to meet demand.

Prices for handlebars, brake levers, reflectors and chains have risen sharply over the past 12 months. Mr. Thorpe is still waiting for delivery of a thousand pieces of an electrical component he ordered more than a year ago, and he is competing with auto makers and online ordering bots, which use software to scoop up stock, to get hold of computer chips.

He says he is making decisions based on his belief that supply-chain knots won’t untangle and that consumer demand won’t ebb anytime soon, and says Omicron, a possibly more-contagious variant of the virus that causes Covid-19, has reinforced that view. “It’s all disruption, which costs money,” Mr. Thorpe says. “It’s the Wild West out there.”

The bicycle industry’s challenges—when generalized across the economy—go to the heart of the policy conundrum facing the Federal Reserve and central banks around the world. Policy makers have earlier said they believe inflationary pressures will dissipate over time as high demand for consumer goods subsides and kinks in the global supply chain work themselves out.

With Omicron again closing borders, that process looks set to play out over a longer period of time than initially thought.

Fed Chairman Jerome Powell said Tuesday in testimony to lawmakers that “it now appears that factors pushing inflation upward will linger well into next year.” He signaled the central bank would consider quickening the wind down of its easy-money policies, which would open the door to raising interest rates in the first half of next year. Consumer-price inflation in the U.S. rocketed to a 31-year high in October.

The Bank of England has signaled it expects to begin gently lifting short-term interest rates in the U.K. imminently to restrain the accelerating growth in prices. Central banks from Canada to Australia to Norway, New Zealand and the Czech Republic have already begun withdrawing pandemic-era stimulus or nudging up borrowing costs to manage inflation.

Economists say the potential economic effects of Omicron are unclear, as health experts still don’t know how dangerous the variant is.

Bicycle makers and retailers say they see no respite on the horizon from the intense pressure on prices.

“We don’t see any improvement for 2022, for sure. We’re going to be in the same boat that we’ve been in since the end of the summer 2020, when there’s not enough supply to meet demand,” says Larry Pizzi, chief commercial officer at Alta Cycling Group LLC, based in Kent, Wash., which owns cycling brands including Diamondback, iZip and Redline.

The average selling price of a new bicycle in the U.S. in September was $346, up 28% compared with 2020 and 54% higher than the average selling price of a bicycle in 2019, according to data from NPD Group Inc., a market research agency.

Pandemic lockdowns in the U.S. and Europe turbocharged a cycling renaissance that was already benefiting from growing consumer interest in personal fitness, greener forms of transport and the proliferation of bike lanes in big cities.

Countries such as the U.K., where Prime Minister Boris Johnson is a cycling enthusiast, designated bicycle repair an essential service during lockdowns, allowing stores to remain open.

In the U.K., bicycle prices were 26% higher in October 2021 than they were at the beginning of 2020, according to official inflation statistics. The country left the EU on Jan. 31, 2020, remaking trade agreements. Brexit in most cases didn’t cause tariffs on imports of bikes or components from the EU, though it did disrupt supplies from EU manufacturers.

In Germany, bicycle prices were 9% higher in October than they were in January 2020, according to official inflation statistics published by Eurostat. In Sweden and Poland, prices were up 15% and 13% over the same period, respectively. In Lithuania they were up 16%, in Hungary 19% and in Slovenia 18%.

For Mr. Thorpe, of Karbon Kinetics, raising prices in 2022 is essential to cover ballooning costs.

A basic child’s bike might have 50 components. A full-suspension electric mountain bike might have 350. Gocycles have around 800. A single missing part can cause delays that bring the entire production process to a halt.

Mr. Thorpe resisted pushing up prices for Gocycles in 2021 because he spent a chunk of the year explaining to unhappy customers why supply-chain disruptions meant there would be delays to their orders. That and cost pressures mean the company is unlikely to report a profit this year, he says.

He says he is pressing ahead with price increases for 2022 because he doesn’t expect these supply-chain issues to get much better. He estimates the cost to the company of producing a single bike has shot up by 20% to 25% compared with the cost before the pandemic, as competition between manufacturers for common parts pushes prices skyward.

Seatpost prices have gone up 20% in the past 12 months. So have prices for the cranks the rider turns when pedaling. Handlebars are up 11%. Brake levers and calipers are up 14%. Chain prices are up 17%, and reflectors are up 50%, according to Karbon Kinetics.

Mr. Thorpe learned by email Wednesday that higher prices for magnesium—used in Gocycle wheels—mean future shipments of wheels will be 17% more expensive than they are now.

Multiple industries are competing for the batteries, semiconductor chips and tiny electronic components Gocycle uses for its dashboard displays, power management systems and charging ports.

Mr. Thorpe says at one point in the pandemic he became so desperate for stock he toyed with ordering some chips from sellers he knew little about on Chinese online commerce platform Alibaba. In the end he thought it wiser to stick with a trusted supplier and swallow sharply higher prices.

One essential circuit board in Gocycle bikes cost 1.66 euros, or about $1.87, as recently as six months ago. Now Mr. Thorpe says he is being quoted prices as high as 30 euros to 40 euros for the same tiny component.

A switch for controlling power to the motor used to cost 80 euro cents. The cheapest he can source them now is 1.70 euros. A Gocycle needs seven of them.

Shipping a container full of parts from China costs him around $20,000, Mr. Thorpe says. It used to cost $4,000. Shortages of pallets and blockages at ports mean he can’t be certain when shipments will arrive. He estimates shipping costs for a single bike have effectively doubled, on average, depending on where exactly it is destined.

The flood of demand for bikes as the pandemic arrived took the industry by surprise, executives say, an example of how unprepared the global economy was for the mass switch in consumption to goods from services as the pandemic forced people to stay home.

That switch has fueled rapid price increases in everything from consumer electronics to used cars, propelling faster inflation overall. Consumer prices in the U.S. rose by an annual 6.2% in October, the fastest rate of price-growth in more than 30 years.

Alta’s Mr. Pizzi says at the beginning of the pandemic he thought he was going to be canceling orders. By April 2020, he says, he was asking his suppliers in Asia if there was any way they could increase production.

Before the pandemic, the company would have expected to sell 200,000 bikes a year. In 2020 it sold 250,000, completely exhausting its stock. “It was bike in, bike out,” Mr. Pizzi says.

Alta could easily have sold another 125,000 or so last year if its contractors in countries including Thailand, Cambodia and Vietnam could have kept up with retailers’ appetite, he says.

“The pandemic has been a curse for a lot of businesses, but it has been a blessing for ours,” says Woody Smith, owner of Bike Mart, which has five bike stores in Texas. He sold 13,400 bikes in 2019. In 2020, he sold 18,200 and this year he is on track to sell 22,000. Manufacturers of the bikes he sells over the past 18 months increased prices by around 8% and 10% on average, he says, which he passed on to his customers. He says he stayed in line with those recommended selling prices without adding any premium.

Part of the explanation for consumer demand for bikes is a Covid-19-related trend that is pushing up prices for all sorts of manufactured goods. The pandemic has meant people are less able to spend their income on eating out, overseas travel and other services, so have been splashing out on gadgets and recreational products instead.

Retailers say consumer demand pushing up bicycle prices is still intense. Some bike buyers are seeking ways to avoid traffic or public transport as they return to the regular commute, a trend that is fueling adoption of pricey electric bikes in particular. Some retailers say they are seeing recent converts to cycling upgrade basic models for more expensive rides.

Wary of being caught short of stock, Mr. Smith of Bike Mart says he has already placed orders for 75% to 80% of the bikes he anticipates he will need for Christmas 2022. Final prices with his suppliers haven’t been agreed upon, but he says he expects those models will be 8% to 10% more expensive than those he is selling this year.

Karbon Kinetics, the maker of Gocycles, has also absorbed other cost increases, including on staff. One new hire is a former aviation industry executive who has been tasked with managing the logistical headaches of tangled global supply chains. Others are focused on keeping up stocks of spare parts and servicing the growing number of Gocycles on the road. Energy prices are up, too.

The supply-chain mess meant Karbon Kinetics fell 40% short of its production goal this year, making only 3,000 of a planned 5,000 bikes—cutting the company’s expected revenue for the year.

Mr. Thorpe says he is hopeful of hitting the 5,000 mark in 2022, a more conservative goal than the 10,000 or so he had penciled in before the pandemic struck.

That is if he can get the parts. The prospect of further disruption because of the Omicron variant means he is more sure than ever that raising prices is the right strategy, as it will mean higher revenue on every bike he can deliver. “I’m so glad we made the plan we did,” he says.


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