Trek Situation Analysis by Alej Leon

Alex Hernandez Intro to Market Research 10/25/13

Bicycle Corporation

The Trek Bicycle Corporation is an international company based in Waterloo, Wisconsin. They specialize in designing and manufacturing bicycle frames, along with all of its components. The company got its start in 1976, making bicycle frames from an old Wisconsin barn. Since its birth, the company has grown to become the nation’s largest bicycle manufacturer. (2) Trek manufactures road, mountain and town bikes. It provides race performance, sports, triathlon, fitness, touring, cross country, recreational, dual sports and technical trail bikes, as well as producing brakes handlebars, helmets, bags, saddles, tires, wheels, bar tapes and locks. It also provides riding gear for both men and women, as well as accessories and individual bike parts. (4) Trek’s philosophy as a company is to “produce the best bikes in the world for competitive value, deliver it on time and in a positive environment.” The company sells close to a million bikes a year. They have two additional separate lines, Gary Fisher and Greg LeMond, named after one of the inventors of the mountain bike and a racing star respectively. (3) Trek operates 5 manufacturing plants in Wisconsin and 4 distribution centers, as well as having several subsidiaries across Europe and Asia. Trek distributes to 90 countries around the world. (5) Dicke Burke and Bevill Hogg founded Trek at the height of the 1970’s bicycle boom with the financial backing of Intrepid Corporation, their parent company, who Burke worked for at the time. From the start, Trek was committed to selling bikes through specialty bicycle stores rather than generalized retail stores, which helped establish the company as a producer of quality. Trek’s build quality quickly became popular with bike connoisseurs and specialty stores.

Having its main competitors being Japanese and European, Trek quickly gained attention for their quality product and for being an American company manufacturing in the U.S. By 1978, Trek was distributing to both coasts and selling $750,000 in bicycles annually. (3) By 1980, Trek outgrew their first plant and moved into a bigger production plant, and it was also around this time that Trek contracted a Taiwanese firm to produce some of the bikes. During this period of time, Trek became synonymous with some of the best bicycles around and their sales practically doubled each year. (3) Trek has had a rich history of experimentation and innovation. In 1983, Trek became one of the earlier manufacturers of mountain bikes, with their introduction of the 850 model. They introduced the first aluminum-bonded road bike in 1985, the Trek 2000. They also introduced the first carbon fiber road bike in 1986, the Trek 2500. (5) During the 1984 year, Trek sold more than 45,000 bikes due mostly to the increase in popularity of mountain bikes. These bikes dominated the market around the time due to their comfortable seats, wide tires, and more gears than the 10-speed road bikes of the time. (3) The Trek 2000 was received enthusiastically by serious riders, but it brought production problems for Trek. Stock started piling up and morale slumped, resulting in the company losing money. It was a problem that came close to bringing the company to its end. The production problems brought Burke and Hoggs to many disagreements, which resulted in Hoggs eventually leaving to start his own bike company in 1986. Burke who had played more of an advisory role in the company, took the reigns and brought the company back to profitable grounds. (5) The same year, company expanded its waterloo production facility by 76,000 feet. Although a troubling for Trek, demand continued to grow and Trek made $16 million in sales. (3)

When Burke took over, he implemented a back-to-basics style of management, which resulted in the company jumping back on to the fast track and sales doubling for the next 3 years. In 1987, Trek introduced a new line of mountain bikes, which helped the company sell about 100,000 bikes by 1988. (3) During the remainder of the 80’s, Trek continued trying to find new ways to gain more market shares while tapping into new markets as well. During these years, they introduced a line of biking apparel, a stationary Trek Fitness bike, the Jazz line of children’s bicycles, and the company opened subsidiaries in Great Britain and Germany. Within of 5 years of entering the European market, international sales accounted for 35% of the company’s sales, successfully overcoming some European snobbery towards American bikes. (3) By 1990, Trek was selling 350,000 bikes a year and by 1991, making annual sales of $175 million. (5) During the early 90’s, Trek continued to press for innovation, leading to the creation of the Optimum Compaction Low Void (OCLV) carbon fiber process. Through this process, Trek was able to make the world’s lightest bike frame weighing in at 2.44 lbs. They implemented this process on their first road and mountain bikes in 1992 with the Model 5500 and the Model 9800 respectively. Trek continued to grow and went through another expansion bringing their total space to 140,000 square feet. (3) During the early to mid 90’s the United States bicycle industry experienced some stagnation in sales. It was during this period of time that Trek diverted their efforts into international sales. Besides concentrating in changing European views that American bikes were heavy and clumsy, they were also able to bump Japanese sales up by 40 percent from 1991 to 1993.

During this period of time, Trek also concentrated in accessories and other competitors. It was in 1992 that the company started making bike helmets, and by 1993, they were selling about half a million pieces a year. They also launched a small line of tandem bikes, which were successful with families. That same year, Trek bought out competitor Gary Fisher Mountain Bike, and Fisher’s sales increased dramatically from $2 million to $20 million within the year. (5) This was especially impressive taking into consideration the tanking of the industry that saw the demise of bicycle giant Schwinn. By 1994, Trek had reached more than $250 million in sales, and was producing 65 different models at their Wisconsin plant. In 1995, Trek also opened a new state-of-the-art facility that could produce more than 3,000 bikes a day, greatly surpassing their other plants. (3) The mid 90’s saw Trek further their growth as they acquired smaller niche competitors. In 1995 they bought out Bontrager Bicycles and Klein Bicycles. Trek continued using their plants for operation. It was also around this time that Trek signed the deal with Greg Lemond for their road bike line. They also designed a Y-shaped mountain bike frame, which won engineering awards. The Secret Service has purchased these for use in patrolling the White House. (3) John Burke, son of Dicke Burke, took control over the company in 1997. (5) In the late 90’s Trek partnered with Volkswagen of America to sponsor a bicycle team. With the partnership, Volkswagen released the Jetta Trek, a car equipped with a Trek mountain bike and a bike rack. Even though at this point the company’s place was at the top, they solidified their place when the bicycle team they sponsored rode to victory on the leadership of Lance Armstrong. (3) Riding a Trek, Armstrong finished first in the

1999 Tour de France. He repeated the feat in 2000, 2001 and 2002 becoming the first American to win the tour more than 3 times. He continued to win it in 2003 and 2004 as well. Trek had hit PR gold with the sponsorship. In 2008, founder of the company Dicke Burke passed away from complications from heart surgery. It was that same year that Volkswagen and Trek’s relationship ended. (5) In 2007, Trek reached sales of $600 million, nearly doubling from 2000’s $330 million. (5) Also as of 2007, they employed 1,100 people and were reported as the market leaders with a 22.5% market share. (16) In 2011, the company made more than $800 million in sales, with 1.5 million bikes sold worldwide. (5) Trek’s Primary SIC code is 3751 – Motorcycles, bicycles, and parts. Other secondary codes are 3949 – sporting and athletic goods, and 5091 – sporting and recreational goods. (6) The primary SIC includes the following: bicycles and parts, brakes, frames, gears, handle bars, mopeds and parts, motor scooters and parts, motorbikes and parts, and saddles and seat posts, both for bicycles and motorcycles. Secondary SICs include helmets, bicycle tires and tubes, and sporting gear and wear. (6) Trek produces BMX bikes, city and bike path, kid bikes, mountain bikes, road bikes, and police bikes. (5) In 2011, there were 39.7 million riders during the year, with 38.5% of the riders utilizing road bikes. The best selling brands were Trek, Giant, Specialized, Redline, and Raleigh. (1) Although sales were strong for Trek in the 2012 year, there was an industrywide slow down in demand for high-end bikes, thanks to the American and European recession. (7) Even with demand for high-end bikes slowing down, demand for lower-end bikes was on a steady increase. Taiwan is a big manufacturer of high-end bicycles, and although their international sales took a hit of 8.96%, their domestic market showed an

increase of 5.81%. Japan also had an increase in high-end bicycle demand of 1.6% as people were looking for travel alternatives after the recent earthquake and tsunami. Overall, the bicycle industry has had a slow down, but the Chinese and Japanese markets have seen growth, which brought an overall slight growth to the industry in 2012. (7) In the United States, consumers were reluctant to spend and therefore went seeking for cheaper bikes. During this time, imports increased by 9.66%. This was also a reflection of import’s price going down by 7.59%. The biggest imports came from China, at an increased 11.4%, while Taiwanese imports fell by 16.06%. (7) Treks main competitors are Dorel Industries, Giant Manufacturing, Specialized Bicycle, and Columbia Manufacturing. (5) Although Dorel manufactures in several consumer markets including furniture, they own Pacific Cycle, and high-end Cannondale in addition to sweeping up Schwinn from bankruptcy. (8) Pacific Cycle, also based in Waterloo, WI, is the top producer in bikes in America, in terms of volume. It has a wide range of brands to cater to as many segments as they can. The own Scwinn, Mongoose, InStep, Iron Horse Bicycles, Kid Trax, Playsafe, Pacific, Roadmaster, DYNO, and Powerlite. (9) As opposed to Trek, Pacific Cycle markets their bikes to be sold in mass merchandisers like Target and Walmart, and sporting goods chains like Dick’s. (11) Pacific cycle has various brands dedicated to targeting the youth segments. Outside of their Cannondale brand, Pacific Cycle tends to serve the lower-end markets rather than sell high quality bikes. Pacific Cycle, aggregated with its sister brands, has the biggest market share out of any company. (11) Out of all of Pacific Cycle’s brands, Cannondale is the one that directly competes with Trek. Their focus is to make lightweight, high-performance bikes. This includes,

road, mountain, hybrid, recreational, and specialty bikes. Their bike construction consists mostly of aluminum frames. They offer about 80 models throughout 70 countries around the world. Like Trek, Cannondale also sponsors bicycle teams to gain greater name prominence. Cannondale, has hit a few rough patches recently however. It was forced to recall 1,500 bicycles because a defective part was making riders lose control and crash. Repeated quarterly losses and an unsuccessful expansion into the world of motorsport caused the firm to file for Chapter 11 bankruptcy, and eventually be sold off to their now parent company, Dorel Industries. Cannondale has since sold off their motorsport division to Dinli Metal Industrial Company, an ATV manufacturer. (12) Giant Manufacturing originally started out making bikes under private labels, but has since created their own brand. They are based in Taiwan and are considered the largest bicycle maker in the world. They manufacture bikes for competition, exercise, recreation, and transportation. Their bikes come in traditional pedal-powered or equipped with battery-powered engines. They also produce cycling apparel, helmets, saddles, grips and other related gear. The company sponsors more than 30 professional cyclists, as well as distributing to more than 50 countries around the world. China is the worldâ&#x20AC;&#x2122;s leading bicycle manufacturer, and about 20% of Giantâ&#x20AC;&#x2122;s sales were conducted here. Giant plans a move to a new production facility, where it will be able to manufacture 3 million bicycles a year. (13) Specialized Bicycle Components was the first company to put out a mountain bike, which is now exhibited in a museum. (15) The company was founded in 1974 and made about $292 million in annual sales in 2011. (14) With the creation of the mountain

bike in 1981, they were launched to the high-end market along with Trek and Giant. The company makes road bikes, mountain bikes, hybrids, BMX and children’s bikes. (15) Columbia manufacturing also produces bikes, but is geared more towards a general consumer, rather than making lightweight competitive bikes. Columbia is one of the oldest bike makers in the world still around, having been in production since 1877. (17) Some of the models they produce are the Comfort and Classic cruisers, the Eagle and the Sienna mountain bikes, and the Intruder freestyle bike. Columbia is also a metal and wood furniture manufacturer, which today, is its main focus. (18) In 2003, Trek introduced the Trek Madone series of super high-performance bikes. It was the bike that Lance Armstrong used to cross the finish line as the Tour de France winner. The latest Madone models come equipped with electronic shifters and their own computer. The computer can relay piles of information like altimeter, heart rate zones, trip time, percent grade, maximum percent grade, current speed, maximum speed, odometer, elapsed time, pacer, and temperature gauge. The bike is made with Trek’s highest-grade carbon fiber, a military grade fiber only available to NATO countries. The entire bike weights in at 15 lbs., barely making it legal at the Tour de France that requires a 14.99 lbs. minimum. (19) The bikes are hand-made and are customized to the buyer. They can reach prices of up to $16,000. (20) Some of the bikes that compete with Trek’s Madone, are the Raleigh Revino, and the Cannondale SuperSix Evo. Using new carbon fiber technology, Cannondale claims they have brought the bike down to 11 lbs. using lightweight components. (21) The bike is so light that it would be disqualified from professional competitions. The bike was called “the best road bike in the world over the last 10 years,” by German magazine Tour.

The frameâ&#x20AC;&#x2122;s tubes are narrower than other bikes, helping it reduce weight and drag, while increasing speed. (24) The Cannondale SuperSix retails at about $14,000. (21) The Raleigh Revino is also a carbon bike, with internal gearing. The Revino is designed to give a more comfortable ride for endurance races. Although the bike is Raleighâ&#x20AC;&#x2122;s highest-end aluminum bike, it is still considered and entry-level high-end bike. (23) The bikeâ&#x20AC;&#x2122;s handling is relatively stable and a compact crank helps with scaling hills. The Raleigh Revino retails for $2,250. (21) In 2012, there were nearly 9 million weekly bicycle riders. Of these, 69% are men, while women make up only 30% of the riders. The ages are spread rather evenly with about 38% usage in both the 18-34 and the 35-54 age groups. There is a noticeable decline as age increases from that point. The age group with the highest potential for development is the18-24 age group with an index of 148. The biggest chunk of users tend to be in the $75,000-$149,999 income bracket at nearly 30%, although there is not much room for development with this segment. Bike riders also tend to be educated people, with nearly 70% having attended or graduated college or grad school. There are more cyclists in the West with a 34%, followed by the Midwest with 28%. The South has a 26% usage while the East has a mere 12%. White consumers make up 80% of the riders, dominating the market, while the Black population follows with a very distant 10%. Most are light TV watchers and heavy Internet users. They are heavy Discovery, and History Channel viewers, as well as ESPN. (22) The segments that have the biggest potential for growth and further expansion are the college educated, 18-24 male. Geographically, they would mostly reside in the West and the Midwest. These would be people who have never married, and have lived in their

current address for less than a year. For the most part, the consumer will be the ones living in cities, where owning a car is harder and less convenient than owning a bike. (22)

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