Wednesday, February 6, 2008

Pacific Buys Cannondale

Congratulations to Pegasus Partners. Pegasus has just sold Cannondale to Pacific Cycle for $190-200 million (the final price will depend on this year’s EBITDA). Following the purchase of Cannondale out of bankruptcy for roughly $58 million in 2003, Pegasus rebuilt Cannondale from its ashes into a $200 million/annual company.

While it should be noted that prior to the Cannondale bankruptcy Pegasus was C’dale’s largest secured creditor, making its complete investment greater than the $58 million purchase price, it nearly tripled its investment in four years. Take that Wall Street!

Even so, it should be noted that today’s economic climate did not permit Pegasus to realize a multiplier on its annual revenue numbers. Not too long ago bike companies were going for three to five times earnings.

The press release announcing the sale named Dorel as the purchaser, as do all the stories in the media, but Dorel is Pacific Cycle’s parent company. Plainly put, Pacific bought Cannondale. Saying Dorel bought Cannondale is like saying the American people (rather than Ford) bought Volvo. Ford is a publicly owned company and its directors authorized the purchase of Volvo. Ford is the corporation we identify as the owner of Volvo.

So what’s the big deal, you ask? Pacific Cycle is a colossus of a bike company. Their lines include Schwinn, GT, Mongoose, Pacific, InSTEP, Roadmaster, Flexible Flyer, Powerlite, Murray and Dyno. It’s largest accounts aren’t respected IBDs but big-box chains: Wal-Mart, Target, Toys “R” Us, Sports Authority and Dick’s. Now ask yourself this question: When was the last time you walked into a bike shop you respected and saw one of those brands? Chances are, it was prior to 2001 when Pacific acquired Schwinn and GT. Pacific’s largest IBD account is Performance.

Performance has stores in most of the major cycling markets around the country. With more than 80 stores in 15 states, they are a larger retail operation than all of Trek’s and Specialized’s concept stores put together. What’s more is that Performance has plans to operate 150 locations by winter 2010, fueling the growth through acquisition of existing stores and opening new locations. Performance’s consolidation of its product lines is such that only one of its lines—Iron Horse—isn’t either owned by Pacific or Performance. The tally: Schwinn, GT and Mongoose are Pacific, while Scattante and Tirreno are Performance house brands. Now, multiply that by 80 locations … and growing.

Jeff Frehner, the president of Pacific Cycle is leaving his current role to head up the newly formed Cannondale Sports Group, which includes Cannondale and Sugoi as well as the brands Pacific will use to focus on the IBD channel: Schwinn, GT and probably Mongoose.

How significant is Frehner’s move? Frehner joined Pacific Cycle in ’07 to replace the retiring founder and CEO Chris Hornung. Hornung founded Pacific in ’77. It was under Hornung’s leadership that Pacific purchased Mongoose and Roadmaster and later Schwinn/GT and transitioned the brands into price points appropriate to big-box retailers.

Pacific’s management style is nothing if not clear. Each brand it has purchased has been removed from high-end IBDs and transitioned to focus on the price-point or entry-level segment consisting of sub-$2000 bikes.

Dorel’s Martin Schwartz had this to say: “Dorel recognizes the importance and potential of the Independent Bicycle Dealer channel and is purchasing Cannondale as the first step to become the world's number one IBD player. Cannondale will be the crown jewel of this new Dorel division, which will seek additional such growth opportunities.”

Given that supply-side integration is the big catch phrase these days, Schwartz’s words take on a rather ominous tone. First, just how does Pacific define IBD? Their definition would seem to include Performance, which defies any association with the traditional neighborhood bike shop, which is how many of us would define Independent Bicycle Dealer. Second, you can’t hope to compete as “the world’s number one IBD player” unless you consider Cannondale part of Pacific. Third, “seeking additional growth opportunities” means selling more bikes, and the easiest way to do that is to open up Cannondale to Pacific’s largest account. After all, private equity firms don’t engage in business models that depend on independently owned, single-location boutiques.

Performance has long lamented its unhip status to cycling insiders. It is no secret that Performance has long been considered to PRO what Kryptonite is to Superman. They’ve always lacked a premium brand that would in effect make their stores a destination. Landing Cannondale would be tantamount to being handed Excalibur by the lady of the lake.

Creating a concept store program based on a Cannondale/Schwinn/GT etc. formula may seem like a no-brainer, but there seems to be some hostility on the part of devout bikies for the folks who dumbed down Schwinn and GT. One could be forgiven for thinking that Cannondale will be dumbed down in a similar, if lesser, way.

So who are the winners in this? Well, Pegasus and … we’ll see. It could be Specialized and Trek and maybe some of the other brands with a complete product line that could replace Cannondale in IBDs, such as Felt.

It’s premature and unfair to sound the alarms regarding Cannondale’s future. It’s place in the pantheon of great brands is assured. No other brand has done more to advance the use of aluminum in bicycles than Cannondale; were it not for Cannondale, Gary Klein’s bikes would have seemed freakish, not the next wave, and who knows how much longer it would have taken for such a great idea—using thin-walled, large diameter tubing to gain stiffness and reduce weight—to gain traction.

That said, given Pacific’s history, vis-à-vis its management of acquired brands, things are likely to change for Joe Montgomery’s brainchild. It is fair to surmise many current Cannondale dealers will cease to carry the brand and we will soon see Cannondales available mail order through Performance’s web site. Or maybe not. But anyone who isn’t suspicious of how this will affect Cannondale hasn’t read Machiavelli.

Image courtesy of Cannondale.

20 comments:

Anonymous said...

na na na na hey hey hey goodbye Cannondale.

velomonkey said...

As someone who just yesterday received their new system six I am really bummed. I don't care what Trek does, they will always, to me at least, still be the pathetic company of the 90s and their concept stores are just too much to handle. Specialized is OK, but their bikes just seem to lack a certain something and MTB seems to be their real jewel.

Dale was the bike you started out with, tried a bunch of others and then came back to. Look, Cunego won the giro on an aluminum dale with Ksyrium wheels. That combo is, in my opinion, the best dollar for value bike that has ever been.

Maybe Felt will benefit and if they do, great. But man, to see Dale go the way of mongoose et al is just sad.

Anonymous said...

well written P. thanks for translating this. i knew it meant something but couldn't sound it out in my little brain...


noel.

Ari said...

I have lost all faith in the stupid production bikes. I just purchased a custom, american made Ira Ryan. Who really cares about Trek, Cannondale, Specialized or any other production bike?? If they don't care about quality and only think about money, they might as well be sold at the local grocery stores.,
Ari

Eddie B said...

nice post. It's always a shame when quality brands like Cannondale get acquired by huge conglomerates. Hopefully Cannondale can keep its identity and quality despite the purchase. Unfortunately your post doesn't paint a pretty picture.

EMB

Anonymous said...

Nice analysis. We'll have to wait and see, but I'm not confident in Cannondale's future...

Anonymous said...

The thing I dont get about what you wrote is that Pacific already has a big market share in the big boxes and Proformance. Why would Dorel spend 200 million to dummy down the Dale brand and put it in places they already have a big selection. Thats stupid and bad business. I gotta figure that any company that can get 200 million for Cannondale cant be that dumb.
What if they really wanted to be a player at both ends of the market. They couldnt do it with Mongoose and Schwinn. So they went out and bought a highend brand. I think it makes sense......Just dont dummy the product down, Then it might work

Shane"CRASH"Jones said...

I still have my Homegrown mountainbike from before Schwinn suffered the same fate.

The Sporting Life Society said...

Do they make steel bikes? Then who cares?

Nico said...

I was a GT dealer back in the 90s when Pacific bought GT and I recall the agenda was the same. Keep GT separate from the Pacific brand. That meant: out of mass retail, staffed by the same dedicated souls who built GT into what it was. For whatever reason, that plan lasted less than 12 months. It is inevitable, no matter how you sum it up, Cannondale will never be the same again.

Suitcase of Courage said...

While its easy to lament the sale of Cannondale to Pacific because of their corporate-ness, how is that much worse than a private equity company with no cycling relationships. Pacific, while being the big business side of the industry, gets more people riding bikes in this country than anyone else by simply selling the kind of cheap machines BKW (and I) wouldn't touch. People that start riding a Dyno Sledgehammer today are more likely to someday buy a Soulcraft or Moots than someone who just stuck with the car. And they're more likely to respect BKW readers when they're behind the wheel.
In addition Jeff Frehner is a true bicycle enthusiast, someone who lives and breathes cycling. I wouldn't be surprised if he enjoyed BKW. So as long as the corporate overlords give him room to carry out the whole "crown jewel" plan, there's plenty of hope yet for Cannondale.

Super Action Guy said...

What, is BKW now a part of Bicycle Retailer? This post is not PRO...

Jim said...

It’s place in the pantheon of great brands is assured.

Great brands like Ross, Schwinn, Diamondback, that wrecked their good reputation when they got mass-mass marketed.

You really think they will be able to survive being linked with Performance, nevermind whether Pacific will get the urge to big-box-ify them?

Don't get me wrong. If you need to buy name brand stuff from Performance, you can do alright. On their house brand stuff - clothes, tools, etc. - it is good from the standpoint of making decent performance accessible at sub-Assos prices. That's a huge service to cycling - Performance provides the gateway drug gear into higher performance riding. But I've found a lot of their house brand gear is sketchy quality. While some of their stuff is great (kevlar socks, higher end house brand gloves, discounts on name brand nutritionals and components), only their superb no-questions-asked returns policy makes up for things like shoes that blow out, chamois stitching that can't survive a long day in the mountains, and tires that blow apart faster than an Amy Winehouse marriage.

I'm skeptical. If I see Magnas with shodilly scraped-together Lefty forks, I'll know the gig is up.

Anonymous said...

Wow...what to say. I've worked for IBD's (still do) and, thanks to an early acquisition by Performance spent several years working for and even running one of their stores. My perspective on Pacific is that they are a publicly traded company looking to maximize prophets for their investors. As pure at heart as their intension's may be if they don't increase their investors profits they will be forced to make changes to what they are doing. If that means 'dale is placed into Performance stores so be it. Performance can NOT sell higher end bikes. They have tried and failed, failed miserably. Their staffs are untrained kids that happen to be working in a bike shop. They could just as easily be selling clothing at The Gap as selling a bike. Performance isn't interested in training their employees to sell high end bikes because it takes to long and too much effort to do the training AND in turn sell those bikes. The customers need to be fit, they take long test rides and ride too many bikes. That would mean either hiring more staff OR selling fewer units...not going to happen.
Say what you will about companies like Trek, Specialized, Giant and even Cannondale. They have ALL had their problems when it comes to quality (in fact I think Cannondale has recalled more bikes more often then any of the other three put together) the reality is that in the grand scheme of things they each offer solid bikes for the money. Look at other industries and tell me one that offers the width of selection AND bang for the buck performance that you get from any of the companies. Are they a custom built, one off jewel that fits like a glove and anticipates your every desire and whim on the road....not always. Are they rock solid light weight progressive (yes I said it) great performing machines for the masses....most of the time, yes. Cannondale's future looks a bit bleak...which is a sad thing but lets not point fingers when Cannondale was the one that got themselves in this situation when they thought it was a good idea to build motorcycles. And lets not forget that if it wasn't for Trek, Specialized, Giant and whoever else. We probably wouldn't be able to buy those real jewels, nor could we appreciate them for what they are...true works of art. Besides is that limited addition print you bought any less a work of art than the original?

wallace said...

good post man, i had no idea to all the stuff going on underneath.

DXW said...

I stopped in performance the other day to pick up a rain jacket ($12), some Sidi Genius 5s ($204), some tubes, bars, socks, etc...all damn cheap. But I noticed that in addition to Shcwinn, GT, Iron Horse, Mongoose, they were also selling Fuji - including the Fuji Team Pro road bike and the Fuji Cross Pro cyclocross bike, which are relatively high-end bikes. Maybe this is only because I'm in the SF Bay Area and there is a relatively large market here for these types of bikes?

mtgoatboy said...

5 years ago when Pacific bought GT I came up with the Brian Lopes Theory, every team he has raced for has been bought by Pacific. First it was Mongoose, then GT and now Cannondale.

Anonymous said...

Noooooooo! Lopes is riding Ibis and I just got mine. Literally, today about an hour ago it came in!

Anonymous said...

I have to admit my experience with a few of the local LBS have not been great. I am 42 years old and a novice as far as bikes go, but I am interested in commuting. It became apparent that as soon as I said I wanted to spend around $400, that the local LBS was not particulary interested in answering my questions. Note that this is still significantly more than the Walmart special. Seems to me there is "tweener" market that is not being represented by either the mass marketer, or the typical LBS. I am one those, and the club is growing in number. Schwinn seems to fit the bill with their lineup right now. And who knows maybe someday a Cannondale will be in my sites. But try and find an LBS that carries Schwinn. Off to Walmart I go I guess. It is a sad day. :(

Keith said...

Hopefully Pacific will give Cannondale the GT treatment when it comes to product segmentation and segregation from the mass-retailers. Seeing GT's 2009 line-up has convinced me that Pacific wants a big slice of the premium bike market, in addition to the mass-retail market (and by the way, GT carries bikes that are well over $2000, so I would not say that GT has been watered down to be more budget shopper friendly). If Pacific is willing to funnel more funds to the ailing brand to bring forth more appealing models and designs (i.e. - See GT 2009 line-up), Pacific may do well to uphold Cannondale's image, contrary to what some bikers out there believe.