When Black Friday Comes...

Hat tip to Steely Dan for today's title, even if Black Friday is now much more known for people leaving Thanksgiving dinner early to go play Fight Club with their neighbors in orders to save $8 on the latest TV.  Not for me, and I suspect if you are reading this, it's not much for you, either. I had a better time stealing a friend's Beetle Cat, getting out on the water with some friends, and escaping the gathering hordes that way, even if it was somewhat colder than ideal for a day on the water. 

I also suspect that a lot of you have been getting emails from various cycling vendors announcing their Black Friday/Cyber Monday/Crazy Eddie's Christmas In August sales.  Nothing wrong with a sale, but some of the discounts do give me pause.  A set of lobster gloves whose selling season is somewhat rapidly expiring (we are a fore-thinking lot, after all) that's normally $69 going for $59 is one thing (and I need some new lobster gloves...), but frames from big brand names, which originally sported the latest innovations and $3,500+ retail prices, going for $1,999 is one of those things that makes me go hmmm...  Why?

That's a pretty big discount, right?  Does it make you wonder how they can discount that deeply?  How much margin is there in the frame in order to sell the aging inventory for roughly half the original price?  How much padding is there in the original retail price to guard against such radical markdowns?  These last two are rhetorical questions, and the answers are "a lot" and "a lot," respectively. 

One of the business risks that we most fear is inventory risk on frames.  The cycle from when we release the order to when we start selling frames is long, as we've discussed before, and it's a cash flow challenge of a fairly high order to finance 6 to 8 months of your sales cycle.  You can't get a lot of inventory turns out of frames because of the long lead time, and adding to all of that there's your exposure to having guessed incorrectly on size mix.  You don't want to wind up with a warehouse full of size 52 frames when the world wants size 58s. 

In order to mitigate this inventory risk, we invert the process: we call our Black Friday "pre-order." By doing the pre-order, we're able to avoid locking up all of our working capital into slow-turning inventory, and sell as many frames and bikes as possible with pre-determined sizing.  This takes A LOT of risk off of our shoulders, for which we pay you rather well.  The pre-order price is on the order of a 15% savings, in return for you paying between 3 and 4 months before you'll have the bike.  For those astute finance students out there, this equates to and APR somewhere between 45% and 60%.  Sure, for us, almost any other financing would be cheaper, but no other financing would mitigate risk in the way this does.  Frames sold from in-stock after the pre-order need to be priced to reflect the risk we retain in holding inventory.

We'll be launching this pre-order/Black Friday bonanza soon, and you won't even need to leave dinner early and stomp a fool to take advantage.