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about 3 weeks ago

Sprinting for The Yellow Jersey in America

Ask any bike connoisseur in the Lycra set: There’s something special about a bike put together by a bike lover rather than a marketing department. An aficionado just knows a top-rate bike from the rest. And in that top category, what’s so special about bikes from Canyon Bicycles? It’s that you look down at your frame, whether it’s carbon or aluminum, and you see and feel the components, and you know they are … perfect. Those are the cranks you wanted, the wheels you wanted, the derailleur you wanted. You didn’t compromise on anything. Because that’s the point: When you buy from Germany’s Canyon, they knew you before you ordered, and they’ve got a bike off the rack that you would have carefully pulled together in your basement workshop if you had the time. And money. Because Canyon has eliminated the wholesaler and the retailer and they put your perfect bike together and then send it right to your doorstep, for less.

The German love for Canyon bikes has grown along with the company over two decades. And now Americans are beginning to discover the firm. That’s because Canyon only entered the US market in August. Dominated by established brands such as Trek and Specialized, each with about three times Canyon’s sales, the American market can seem daunting to newcomers. But Canyon is betting that Made-in-Germany still counts for something, and that it can transfer its success in its domestic market to the land of baseball, apple pie and clunky Schwinn Roadmasters.

Canyon’s German success began in the 1990s, when Roman Arnold inherited a backyard bike business from his father. He soon had the then-novel idea of eliminating wholesalers and retailers to sell bicycles directly to customers, who might then become loyal fans. Mr. Arnold sourced parts, including his own frame designs, from Asia. And, in 1999, registered the domain canyon.com at a cost of $30,000. This was when loading a single picture over dial-up could take minutes.

His idea accelerated away from the pack, because he cared as much about bikes – down to the spokes – as they did. By eliminating the mark-ups usually swallowed by wholesalers and retailers, he also made them more affordable. These days, Mr. Arnold’s bikes cost from several hundred to several thousand euros. With a good reputation in Germany and at least some market presence in 100 other countries, Canyon is expecting sales of about €225 million this year. His success has attracted plenty of offers over the years from outside investors hoping to draft off his success. Mr. Arnold kept them all in a folder at home, but never really thought much about them.

That changed in 2015, when Mr. Arnold began to feel his limits, like a cyclist in the Tour de France, minutes ahead of the peleton but struggling up the summit of Mt. Ventoux. He wanted to upgrade his traditional bicycle assembly line in keeping with the gleaming production lines of Germany’s revered automakers. He built a new and state-of-the-art plant with whizz-bang enterprise software from SAP. Computers would know where every component had come from and where it needed to go. Assembly at its Koblenz plant would become more efficient. But the transition was abrupt and hit snags. Orders were delayed and customers annoyed.

So Mr. Arnold hired experts from the car industry and fixed the problems. The plant now runs as intended. But the episode was humbling. He remembered that old folder with investor offers, and thought that it was time for some outside capital. After a few calls, he discovered a good fit with an American investor in San Francisco. Named TSG Consumer Partners, this private-equity firm invests in promising retail brands for diverse markets: Norway’s Voss WaterPabst Blue Ribbon and even Portland, Ore.’s Stumptown coffee. Why not bikes?

Talking to the Americans, Mr. Arnold realized he was ready to pedal into the vast US market. Trek and Specialized are formidable and deliberately rejected Canyon’s direct-sales model for fear of irking retailers. To Mr. Arnold and TSG, that suggests that the US market is ripe for disruption. And, at $6 billion per year, it is more than double the size of Germany’s bike market, worth $2.8 billion, according to Statista and the German ZIV bike industry association. US market experts are torn on the German brand’s prospects– premium products like Canyon always have it easier but the top is also shrinking in the US and no one can explain why.

So Canyon opened a logistics center in Chino, California, to speed deliveries. For now, Canyon is only offing a pared-down portfolio of bikes in America – most conspicuously, its commuter bikes are still absent there. But Blythe Jack, an investor at TSG, says this methodical onboarding is the right way to go. “It has been only a bit over a year now that we have invested in Canyon Bicycles, but I can very proudly say: We have successfully accomplished all things we hoped to achieve so far,” she says. “It’s a combination of three things: the really strong product portfolio, the compelling Canyon brand and the unique direct-to-consumer business model.”

Back in his office in Koblenz, not far from the Moselle river with its abundant temptations for bikers, Mr. Arnold is sipping green tea. That call to TSG, he reflects, “was the best decision of my professional life.”

Source “Handelsblatt Global Edition", authors Corinna Nohn and Andrew Bulkeley
© Handelsblatt GmbH. All rights reserved.
September 30, 2017