To drive a yellow cab in New York City, you need to buy a business license. A "medallion," they call it. At their peak in 2013, a New York taxi medallion could cost you as much as $1.3 million, and you had to wait in line to buy one. Still, it was considered a reliable investment, given that the average price a decade earlier was just $250,000. The total number of medallions in circulation is tightly regulated, but the New York population keeps growing. If you want to hail a yellow cab, it will be from one of only about 14,000 license holders. That's in a city that in 2010 had a population of over 8 million.

Then, in 2011, Uber's rideshare service reached the Big Apple, and others soon followed. The yellow cab industry's century-long monopoly crumbled, and a handful of medallions were reportedly sold at auction in 2017 for just $186,000. The genie is out of the bottle.

A similar conflict is raging in the bike industry, though it's not quite as far along. Consumer-direct sales of complete bikes are only just starting to pull high-end buyers out of bike shops, but if the trend continues to grow, what will it mean for shops? What about for the riders?

The New Paradigm

A 2017 survey from the National Bicycle Dealers Association (NBDA) cites competition from online retailers as the No. 1 concern among shops. Ask any store owner about gray market OEM Shimano components being dumped online for prices below wholesale, and they will rant like a Dust-Bowl-era farmer. But until now, the threat has only been to sales of components and accessories. That's a significant chunk of a shop's income, but the NBDA points out that, on average, new bike sales account for nearly twice the revenue that component and accessory sales do. So, if online sales of complete bikes become as popular as those of aftermarket components, they will have at least double the impact on the bike dealers' collective bottom lines.

This threat is emerging at a tough time for bike retail. The number of individual store locations in the U.S. has been dropping steadily from more than 6,200 in 2001 to about 3,700 in 2016. Those numbers aren't quite as dire as they sound because the average gross revenue per location is rising while the herd is thinning, but not quickly enough to reflect healthy overall growth. Theories on what has put the bike industry in its current state are as numerous as theorists who are theorizing them. But consumer-direct sales is probably going to eventually be one of them.

The trend is catching shops so off-guard because shops have had a monopoly on high-end complete bike sales for a long time. Probably as long as high-end has existed. Mail-order bikes have been around for decades, but they've been second-rate at best. Think Nashbar. For years, there was little indication that high-end customers wanted in on that game, but that was long before Amazon had primed Americans into making 10 percent of our purchases online. Shops are welcome to come and play too, but many brands restrict them from selling bikes un-assembled and boxed up. They also tend to restrict shops from overtly selling current model bikes at below retail. These rules protect consumers by making sure bikes are delivered in a safe condition, and they protect retailers by limiting unfair competition. But like the regulations that kept the New York taxi industry so dominant for so long, they've left shops unprepared for when disruptive innovations show up.

The New Model

In late 2012, Commencal returned to the U.S. with a direct-to-consumer model that had already taken hold in Europe. German brand, YT crossed the pond in 2015, and Canyon just arrived in 2017. That same year, we saw Diamondback, Spot and Intense join the club.

YT has been consumer-direct since its inception. Markus Flossmann, its founder and CEO, is confident that our industry is capable of adapting. That's what industry does.  "Business models have changed over the centuries, even before industrialization. And every time there was a big leap, there were voices proclaiming the worst. But we have to find ways to use current developments to our advantage." YT acknowledges that consumer-direct sales are disruptive to bike shops, but it and brands like it aren't motivated to eliminate them as competitors. "Bike shops have a clear strength. They are individual and therefore cater to the individual. Who says we can't coexist and create business for each other?"

Intense is an interesting case study in a consumer-direct brand coexisting with bike shops. Its 'Rider Direct' model drops Intense's prices, but allows buyers to shop either online or at an Intense dealer and pay the same regardless. Having it both ways meant asking shops to accept lower margins. It was no doubt a hard pill to swallow, but Intense has already opened several dealers since introducing Rider Direct. Intense founder and CEO, Jeff Steber, sees the hybrid approach as more sustainable in the new economy, "We're seeking a future-proof model, not only for the brand but for the consumer and the dealer." The new approach offers a way for Intense, which has historically been considered niche, to reach a broader audience. "It would help the riders who wanted an Intense bike to actually afford it," explains Steber. "In the end, my biggest goal was to get the riders on our Intense product." This meant rebuilding their approach to sales. "We had to totally change our mentality. We had to create new positions within the company. We spent a good year just working out the details."

Intense finally made the switch soon after we were done testing its new Carbine at last year's Bible of Bike Tests. So soon that we were still in post-production on its Roundtable video when we got the news. Our $7,000 Carbine dropped to $5,000 overnight. We had to rethink our take on the bike. Suddenly, much that we were nitpicking about it became irrelevant. The prices that consumer-direct brands are able to achieve are so drastic, it's throwing off the scale by which we evaluate bikes.

There are too many examples to list, but put any of the new breed of consumer-direct bikes next to an evenly matched model from a bike shop, and you will feel the ground shake beneath you, especially if you happen to be inside that shop at the time. That's exactly why other brands are holding out … for now. Everyone is watching the 'big three' closely. Specialized has kept it classic, leaving its website to simply channel visitors to their local shop. Trek and Giant are teetering on the edge with their own hybrid models. Buyers pay full price online but pick their bike up at a local dealer, who will pocket a large percentage of its usual margin. Without needing to tie money up stocking a bike, dealers are able to take in some profit. But bike shop margins are already thin, and there's still controversy two years after launch.

Regardless, Trek and Giant's systems are a long way away from being truly consumer-direct. Andrew Juskaitis, global marketing manager at Giant Bicycles, explains why the world's largest shop-quality bike manufacturer doesn't just want shops to stay in the loop, they need them to. "Going purely consumer-direct takes the dealer out of the equation. For warranty, service and day-to-day sales support, Giant dealers remain the lifeblood of the Giant-consumer relationship." And he goes on to make a point that there's a reason that the consumer-direct trend started in Europe. It's different over there. "The reality of the United States being such a large market (both physically and population-wise) makes the real-world consideration of after-sales support and warranty a very complicated matter." But it's a perilous decision. It's not just their dealers, but these brands themselves who are facing competition from consumer-direct bikes.

Photo: Tyler Roemer

The New Wave

One solution you'll often hear is that shops will have to become more "service-oriented." The Path bike shop in Tustin, California, is the definition of a boutique destination shop. It is packed to the gills with high-end Pivot, Santa Cruz, Kona, Rocky Mountain, Transition and Intense bikes. Founder and owner Tani Walling invests heavily in his back room. "My goal with our shop is that our techs make over $20 an hour. You're trying to build a job that a tech will fight to keep, and that means paying them." Finding good help is difficult in the bike industry. In fact, dealers report it as their second biggest challenge next to competition from online sales.

It's especially difficult in an industry where service has long been undervalued, though Walling will say that's getting better. "Dropper posts are a great example. There isn't a price that was established in the '70s that we're trying to get out from under." But ask him if a shop could survive after losing the revenue it relied on from bike sales, and he will admit things would have to get a lot better. "If we can demand what automotive repair demands per hour. If we can get $80 and you pay somebody $20, that works." Currently, most shops charge $60 an hour, and the average hourly wage for a service manager is about $15. We will need to accept that, if shoppers move out of bike shops en masse, repair prices will need to significantly increase for those shops to stick around.

Mobile bike repair services like Beeline Bikes and VeloFix seem to be bracing for a change in the bicycle dealer ecosystem. Accell Group, which owns Diamondback, just acquired Beeline. And Velofix offers a premium service that will assemble and deliver your Canyon or Spot bike to you. But look at a map of the service areas this small army of Sprinter vans can reach, and you'll see just how small it is. They are in strategic, populated areas, but the mobile repair model has a lot of expanding to do before it approaches the coverage of the country's independent bike dealers. If it can, it will likely be a survivor in a post-worst-case-scenario scenario.

If purely consumer-direct sales gain much more market share, it's hard to say how many high-end buyers will still opt to support their local shops, especially if we expect support itself to be part of the motivation. Across most industries, consumers tend to make morally gray decisions if it means getting significant savings. Just look at garment and electronics production for a short study in ethical consumerism. The bike industry has faced this issue before, and on just as global a scale. Our demand for ever-higher-tech product has pushed nearly all of our manufacturing overseas. Not long ago, Santa Cruz, Intense, Yeti and even RockShox were made in the U.S.A. Factories were closed and jobs were lost. But carbon bikes have emerged and improved and aluminum bikes have become more affordable. The paradigm shifted in high-end mountain biking before, and riders are better off even though it wasn't painless.

The New Normal

However painful the advent of ridesharing has been for the taxi industry, it's hard to deny that its riders are better off. In fact, they're quantifiably better-off. In 2016, a handful of economists from the National Bureau of Economic Research were given access to data on millions of transactions in four large cities where Uber operates.

Researchers identified the maximum price people were willing to pay for a given ride when Uber's demand-based pricing structure was 'surging.' By watching would-be riders check pricing but then opt to wait until the surge passes, that maximum price emerges fully formed, like magic. They compared this price to that of the same ride when pricing wasn't surging. The gap between those two prices is what economists call a "consumer surplus." It's the difference between what we pay and what a product is really worth to us. The study estimated that UberX alone generated a nearly $7 billion consumer surplus in 2015.

This has a compelling parallel in the retail-bike industry. The opposite of a consumer surplus is a consumer deficit, and it's a logical impossibility. If a product isn't worth the price, people simply won't buy it. Or, in the case of high-end bike retail, people will bargain for it, which shifts that deficit to the dealer. Remember that NBDA survey that cited the No. 1 and 2 challenges facing bike retailers? The No. 3 is pressure to offer discounts. Dealers are regularly asked to knock off 10 percent, kick in the tax or throw in a riding kit and some pedals. Nearly all dealers already provide some period of free service with the bike, often worth hundreds of dollars in itself.

If we had no problem paying full price every time for our high-end bikes and gear, maybe the disruptive force of consumer-direct sales wouldn't have the momentum that it does. But that genie is out of the bottle.