In a recent blog by Jacob Dudek ex VP of Signa Sports NA he wrote an interesting paragraph about the barriers to exit in the cycling business. I have always thought about this but never seen it written in such a succinct way:

“Due to emotional and romanticized attachment with the industry, shareholders and management teams often fail to make economically justified exit decisions when they earn low or even negative returns on invested capital (“ROIC”).

Even when bankruptcies occur, the industry often sees assets that are kept on life support due to either subsidies from existing shareholders (personal wealth), new money that wants to come into the romanticized space, or acquisitions that likely result in cannibalization. As such, capacity never actually leaves the way it should.”

Here I will dive deeper into this topic to better understand the dynamics and explore how they shape the landscape of the cycling industry. You can also listen to the podcast with Jacob here.

Global Potential Fuels Continuous Growth (in theory)

One of the key factors contributing to the high barriers to exit in the cycling business is the global potential of cycling brands. Unlike some niche markets, cycling has a universal appeal, and there always seems to be room for growth. The global nature of the sport ensures that entrepreneurs can tap into diverse markets, expanding their reach and potential customer base. This ever-expanding horizon encourages business owners to persevere through challenges, as the promise of growth on a global scale remains a compelling incentive.

The Allure of the ‘Cool Factor’

Cycling, often considered a sexy and trendsetting activity, adds a unique dimension to the entrepreneurial journey in this industry. The cool factor associated with cycling products allows entrepreneurs to maintain a higher tolerance for financial setbacks. The allure of being part of a stylish and dynamic community becomes a driving force, enabling business owners to weather losses with a passion that transcends mere financial considerations. The intrinsic coolness of the cycling culture becomes a powerful motivator, reinforcing the resilience of those invested in the business.

Cycling as a Dream Business

Owning a brand in the cycling industry is often perceived as a dream come true for many individuals. This dream status further elevates the tolerance for loss, as passion for the sport plays a significant role in decision-making. Cycling is not just a business; it’s a personal aspiration for many entrepreneurs who are deeply connected to the sport. This emotional attachment can cloud judgment and intensify the commitment to the business, making it harder for individuals to exit, even in the face of financial challenges.

Rabid Global Fandom

Cycling brands, especially those with a storied history, boast a fanatical global following. These passionate fans can heavily influence the perception of a brand’s success. A few outliers, whether vocal supporters or detractors, can significantly impact the overall image of a cycling brand. This heightened sensitivity to public perception creates an environment where exiting the business may not only entail financial repercussions but also a potential backlash from loyal fans. The fear of disappointing or alienating this dedicated global community adds an extra layer to the barriers of exit.

Low Barriers to Entry and the Rise of Direct-to-Consumer (D2C) Model

Paradoxically, while the barriers to exit are high, the barriers to entry into the cycling business are lower than ever. The advent of the direct-to-consumer (D2C) model and the ease of starting a brand in the modern era have led to an intensely competitive landscape, particularly in the clothing sector. The flood of new entrants makes it challenging for established businesses to bow out gracefully, as the market becomes saturated with fresh and agile competitors. The constant influx of new players intensifies the need for existing businesses to adapt and innovate, further fortifying the barriers to exit.

The cycling business, with its global appeal, cool factor, dream-like allure, passionate fanbase, and a landscape teeming with competitors, presents a unique set of challenges. The high barriers to exit are not just financial; they are deeply rooted in emotional and cultural factors that make leaving the industry a complex and daunting prospect.

As entrepreneurs continue to navigate the twists and turns of the cycling business, the blend of passion, global connectivity, and competition will likely ensure that these barriers remain resilient, shaping the industry for years to come.