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<b>Russia 2009: </b> Bike Sector in Panic Mode

Sales & Trends

MOSCOW, Russia The Russian bike market looked so calm and peaceful this winter that one may have wondered if it was alive at all? No ads for 50% off sales, no announcements about new 2010 models, and some vague rumours about the fate of several Moscow-based companies selling bikes and components from the world brands.

<b>Russia 2009: </b> Bike Sector in Panic Mode

MOSCOW, Russia – The Russian bike market looked so calm and peaceful this winter that one may have wondered if it was alive at all? No ads for 50% off sales, no announcements about new 2010 models, and some vague rumours about the fate of several Moscow-based companies selling bikes and components from the world brands.

The good news came only from Rosstat – state agency for statistics. According to its figures although general industrial production has plunged 20.4% in January compared to December, there were 45.2% more bicycles assembled. This healthy growth corresponds to just 53,200 bikes though. As one of the Moscow VeloPark show participants put it, “We are all so vigorous and vital here, but it is a poker face, – in fact we are all deep in panic.”

Market trends

Sales went down 40 to 70% in 2009 depending on the segment. New custom regulations hit the low price import tremendously and high end bikes are usually brought by preorders. What is left more or less intact is local production of entry level bikes from imported parts and mid-level branded bikes.

There are at least two points of growth – service and internet-trade. The latter was a real beneficiary of 2009 market trends. But it came at the expense of local bike shops. They do try to bite into this market, but they have to keep prices on a par with ones in the shop while internet prices are quite close to the wholesale rates. The predicted big time for international internet shops didn’t happen last year. Still it could be much cheaper to buy bike components from foreign shops on the web than from local ones particularly now that new parcel delivery rules have gone into effect with deals under 10,000 Russian roubles (roughly € 240 or US$ 300) coming under a customs tax threshold.

Bike workshops have always been the most savage part of the Russian market. They are very slow to develop, even in Moscow. A typical customer would rather buy a new bike than have an old one serviced by an authorized dealer. This trend is being changed slowly as the economic crisis made people count their money.

Bike dealers are very confident about forthcoming season, but they are not ready to make a big investment in equipment and training, so it is still hard to find a reliable place to fix a bicycle. One of the biggest contradictions about bikes in Russia is a clash between Kremlin- proclaimed nation-wide campaigns for health and mass sports and local authorities inability to take a risk on cycling infrastructure. No new bike paths, even in Moscow, but a number of ‘no-bike’ areas (like the Red Square or Tsaritsinsky park), very few sports parks, and a lack of bike events.

Challenging times

2009 hit the bike industry hard in Russia, with lots of businesses leaving the market and survivors experiencing their most challenging times to stay in the game. Government has slashed budget funding for a number of federal programmes and made regional governors do the same with their local ones. The golden rain stopped and demand evaporated, especially for sporting goods associated in the Russian mentality with good times, not everyday life.

Nevertheless, the 2009 national budget deficit was about € 60 billion or 5.9% of GDP, covered by state reserves. This year it is expected to exceed this number and could equal 6.8% GDP. Experts predict a rise of unemployment by the summer, but officials consistently refute their statements. According to Rosstat, there are about 2.3 million unemployed registered in Russia. But including those who don’t care about state aid the number is up to 6.8 million or 9.2% of the total workforce. The unemployment benefit ceiling is € 120 (matching with an average cost of living), but most people who claim aid get much less, sometimes just € 21!

Business-wise 2009 was a year of very expensive money. Small companies could get a loan at an interest rate of 15-20% (or were refused at all) with yet uncertain exchange rate for the Rouble – the Russian currency. Bank of Russia has widened significantly its target zone for the Rouble exchange rate during soft devaluation in late 2008. Obviously not the best time for long term investment in slow moving inventory!

The government is striving to boost local production to cut imports and create jobs. It is one of the reasons why they introduced stricter custom clearance rules and raised import taxes. Bike factories with more in-house production processes are better prepared for the year 2010. There are two major companies of this type – one is making bikes under Stels brand in Near Moscow region and another one is using Forward brand with production facilities in Perm region at the Ural mountain chain. Their distribution is focused mainly in the corresponding regions with some overlap. The total production of these two companies could be between 600 and 800 thousand bikes last year. Which is a large chunk of the total Russian bike market — estimated at 1.8 – 2.5 million. We have heard about new production lines being set up for both companies.

Unsold 2009 stock

The biggest secret is the amount of actual sales and leftovers. It is not uncommon to see 2007 model year bikes selling as new even in Moscow shop. A large number of unsold 2009 stock is going to hit the shelves in 2010. Experts note a paradox, Orders for the current season are down, but demand is expected to rise about 10-15% despite an expected 10-15% price increase for quality bikes.

In this situation bike vendors want to move their extra stock before customers come across “the latest and the greatest” on the Internet. Those interested in a specific higher-end 2010 model must be prepared to wait and pay more than they’ve expected. That is how mass production goods become niche market in certain circumstances!

That said, we should admit that bestsellers from the world brands well-established on Russian market will be available in abundance. Quality conscious management supports local bike shops and has a cautious approach to internet sales because of inability of some web-only based vendors to guarantee right bike assembly and tuning before delivery to the end customer.

More luck is needed for importers of cheap no-name bikes originated from China. A certain number of them are being passed through corrupt customs officers and selling in local marketplaces. This business becomes much riskier after last year’s massive police raid on Cherkizovsky marketplace in Moscow. It was a virtual state of illegal trade with all kinds of fake or just cheap goods selling to resellers as well as retail customers from most regions of the European part of Russia.

The marketplace spanned over 200 hectares, with all kinds of business and some 100 thousand people, mostly immigrants working there. During the crackdown on Cherkizovsky market an astounding number of 6000 freight containers of illegally imported goods were confiscated. It was said that investigation led to some customs broker companies dealing with bike importers among others. Authorities claim to carry-on anti-corruption operations and yet it is next to impossible to make profit on no-name bikes imported according to all rules.

There is a relic bike factory in Minsk, Belarus capital. It is the only place where bikes are assembled in the traditional way, as it was during Soviet times. “Old school” factories relied on in-house production of most components and great sales volumes. They had only very basic models with a single gear and steel frame. Vast workforce numbers was the Soviet way to fight unemployment. A quality control department staff could be as big as 120 workers with additional dozens of engineers working in the office.

All bike factories of the kind became bankrupt in Russia and one surviving in Belarus only did so by raising efficiency. This is the Minsk ‘MotoVelo’ factory that survived with the help of foreign investors and Belarus government and now is struggling for a better life. ‘Aist’ branded old style bikes are seen beside more up-to-date ones in a catalogue and the share of the latter is due to rise when market is ready. According to the factory representative, about 300,000 low-cost classic bikes are made, while new models account just for one or two thousand.

Central Russia is end of March still snow-clad and cycling season won’t start until late April or May. Long term weather forecasts promise a hot summer in Russia. Good news for the bike market!

 

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