Kopp's Cycle in Princeton struggling financially

[fiamme red]

It's one of the oldest bike shops in the country, open since 1891. I hope they can pull through.

http://www.nytimes.com/2011/06/02/business/smallbusiness/02sbiz.html?_r=1&pagewanted=all

http://boss.blogs.nytimes.com/2011/06/01/for-one-main-street-retailer-a-good-loan-is-hard-to-find/?ref=smallbusiness

In the intervening years, Kopp’s business has been battered. The effects of the recession have been intensified by online competition. Mr. Kuhn started noticing customers coming in with products bought elsewhere that they had browsed in his store.

“People come in with their smartphone and scan a bar code on a product that I have in my showroom, and what comes up on the phone is the three closest places and their price and then also what it is on Amazon,” he said. Revenue fell from a high of $485,000 in 2008 to $393,000 the next year. Mr. Kuhn kept himself afloat by borrowing on his credit card, mostly for personal expenses but also to buy inventory.

To rebuild sales, Mr. Kuhn cut prices on accessories, which — typical for a bike store — have provided most of his profits, Mr. Kuhn said. This lifted revenue to $473,000 in 2010, but profits fell sharply — Mr. Kuhn said his margin was just 1 percent last year, compared with 10 or 15 percent in 2008.

[cmg]

they need to open an on-line store.

[AngryScientist]

that's too bad. i work in princeton and have been to his shop a few times. bought a set of tires there last year actually. nice guy, lots of nice frames in the shop too.

[bumknees]

I thought most bike shops made their money from repairs and fittings

[redir]

It's a new world out there and has been for some time. Those that do not adjust unfortunately may die out. I do believe the pendulum will swing back towards customer service as people get tired of buying on line only to receive products that don't meet their expectations.

[oldpotatoe]

I thought most bike shops made their money from repairs and fittings

Best margin in bike shops?-Service. Worse?-Bicycles.

Unfortunately, many bike shops, when they get squeezed financially, let good people go(the ones that make the most $) and replace with people that are clueless...and the spiral continues.

Online sales isn't any kind of automatic solution. Along with the huge investment in order fulfillment(not gonna fill orders, pack, ship, take returns in you free time), you have to have volume to make up for lost margin. Volume goes down, you exit(Ultimate Electronics is a great example). Online sales is almost a completely different and separate business, different location, people, boxes, etc.

A successful bike shop finds it's market, and aggressively pursues that market segment. BUT even then it's hard.

[torquer]

I read the article this morning, and just went through the blog entries; like the article, most dealt with financial issues, as opposed to specifics around the retail bike biz. The advice sounded relevant to just about any retail storefront operation; my question would be, is this like soliciting advice for the buggy-whip trade? Is his best bet really selling the building, or opening a coffee shop?
Its been a long time since I was in Princeton, so I don't have a sense of what other shops he's competing with, what his product mix is, etc. But affluent Princeton should be just the sort of place that could support a shop like Kopp's despite the competition from the web and big-box stores on Route 1.

[AngryScientist]

I read the article this morning, and just went through the blog entries; like the article, most dealt with financial issues, as opposed to specifics around the retail bike biz. The advice sounded relevant to just about any retail storefront operation; my question would be, is this like soliciting advice for the buggy-whip trade? Is his best bet really selling the building, or opening a coffee shop?
Its been a long time since I was in Princeton, so I don't have a sense of what other shops he's competing with, what his product mix is, etc. But affluent Princeton should be just the sort of place that could support a shop like Kopp's despite the competition from the web and big-box stores on Route 1.

i'll tell you what, its amazing, there is only one other bike shop in Princeton, and they are terrible, with a capital T. Kopps is the type of shop where they'll fix college kids bikes for reasonable $$ and sell you a 700c tire for under $30 if that what you want. its a solid shop, i'm surprised they arent making it. there is a TON of money in the Princeton area, lots of yuppies who i would think would like to dump $ into nice bike gear too. hopefully they can revise their business model slightly - i would be sad to see them go.

[cmg]

they do have an on-line website http://koppscycle.net/product-list/bikes-1000/road-1001/ not real high end, catering to college students.

[flydhest]

they were a sponsor of Princeton's team when I raced there. Don't know if they still do.

:(

[veloduffer]

I read the article and he has a fundamental business problem that is causing financial difficulty. Getting a new loan does not solve the underlying business issues:

1) Develop more traffic and build customer base:
(a) the number one rule is to treat every customer the best you can. Don't differentiate between the first timer/newbie and the regular. Nobody likes being ignored or patronized.

(b) provide the best mechanical service in the area. Whenever a customer brings in their bike, show them what looks like is needed (and why it is necessary) and about how much it costs. And take their phone number and call if there is a more serious problem found. Most customers won't understand all that you are telling them, but they won't feel like the wool is being pulled over their eyes if you explain it.

Another way to improve service is simple deeds, like cleaning up a bike. Let's say the customer brings in a bike that shows some neglect but only needs a new chain. The shop could simply clean the entire bike without charging the customer. Yes, there is a labor cost but it should be looked at as an advertising cost. The customer will be astounded that the shop went the "extra mile" for no charge and he/she will feel like they are really being taken well cared for. For sure, this customer will recommend your shop to others and will continue to patronize your store (for accessories, bikes for their kids, etc).

(c) being actively involved in the cycling community. Beginner rides (mtb and road and children) are good for business. Most folks would bike more frequently if they were shown good routes and tips on how to avoid aches and pains. Shop rides are also popular and tend to bring riders from adjacent towns. In the winter, offer trainer classes in the early morning.

2) Simplify and reduce inventory costs: many shops carry too many lines of bikes and accessories. That's fine if you have lots of capital for inventory. But if you're struggling, winnow your lineup to one of the big box brands (Trek or Specialized). Not only does that reduce your bike inventory costs since these brands have a bike at every price point, but also your accessories costs since both have a full lineup of clothes and accessories (helmets, gloves, cages) that are quality products. Carrying more brands means more minimums that a bike shop must buy/maintain.

[chad_k]

I read the article and he has a fundamental business problem that is causing financial difficulty. Getting a new loan does not solve the underlying business issues:
....


My take is that the core of their troubles is the building. He bought the building at the peak of the market with a terrible loan. I'd guess one would have to repair a LOT of fancy bikes to pay off a $1 MM building.

[Vientomas]

My take is that the core of their troubles is the building. He bought the building at the peak of the market with a terrible loan. I'd guess one would have to repair a LOT of fancy bikes to pay off a $1 MM building.

Agree. Here is the real problem and it is not a problem specific to a bike shop:

In 2004, he bought the building for $801,000 with an adjustable-rate loan for $775,000, guaranteed by the Small Business Administration. By 2007, though, the rate had risen about three percentage points, to 10.75 percent. Moreover, Mr. Kuhn had grown tired of the paperwork that dogs an S.B.A. borrower. “I just didn’t want to dedicate hours of time putting together annual statements for them,” he said.

So Mr. Kuhn refinanced with Washington Mutual (“I sent them a copy of our tax return, and that’s all they wanted,” he said), signing on to a seven-year loan for $825,000, with interest fixed at 6.18 percent.

The loan is amortized on a 25-year schedule, however, so when it comes due in fall 2014, Mr. Kuhn will have to make a balloon payment of $775,000. (Balloon payments, typically refinanced at term’s end, are common in commercial real estate loans.) At the time of the loan, the store and its lot, the loan’s collateral, were appraised at $1.3 million.

[veloduffer]

I don't think the fundamental problem is the building. His business isn't producing enough cash flow, and he has used credit cards as working capital despite having low mortgage amortization. The owner needs to fix the business to get rid of the credit card debt, otherwise he'll be in the same situation even if he receives a new loan.

As a lender and credit officer, I would not lend to him as well. The loan-to-value is too high (even for a refi of a commercial property), particularly in this lending environment, and he shouldn't use the building as collateral for working capital. That's no different than a homeowner taking a 100% LTV mortgage to buy cars, vacations, etc. It would be different if the business was expanding and he needed the capital to fund the expansion.

By not having a business plan, it shows how poor of a business manager that he is. If you don't want to do it yourself, hire an accountant. Right now, he is his own worst enemy.

[chad_k]

I don't think the fundamental problem is the building. His business isn't producing enough cash flow, and he has used credit cards as working capital despite having low mortgage amortization. The owner needs to fix the business to get rid of the credit card debt, otherwise he'll be in the same situation even if he receives a new loan.

...

I agree that he has some business trouble. But in their best year ever (profit was ~15% of $500k sales) the shop made around $75k. Why does such a business need to own a $1 MM building?

How about this business plan: move out of the building and rent it. Sell/fix bikes out of home garage.

[Aaron O]

He has some really awesome vintage bikes up in the attic. I asked about acquiring a Cinelli he had there, but he never returned my calls. It's a shame...nice shop with nice employees.

[torquer]

Why does such a business need to own a $1 MM building?
Here's where this whole thing gets a bit murky; the business doesn't own the building, Mr. & Mrs. Kuhn do, "and rent it to the store at a rate that exceeds their mortgage payment."
That may not be sustainable, if the mortgage interest rate continues to climb, but selling the building, while possibly advantageous to the Kuhns in the short term, could leave them in trouble when their new landlord would rather have Starbucks as a tenant.
I realize this conflating of personal and business finances is par for the course with small businesses. The problem is that often "solutions" offered for one side hurt the other.

[fogrider]

I agree, this story is more about financing than it is about the bike shop business. seems like lbs in my area are doing pretty well in an era of 4 dollar gas. I'm sure every business is struggling these days, but the even if every guy and gal with a bike in the area with a bike went by an bought a pair of tires, it would not solve this guy's problem.

[Ken Robb]

Besides the business paying more than the mortgage in rent it is also paying him a salary. I don't know how many single location small businesses owners expect to show a profit for the business and the real estate plus a salary for the owner. It would be interesting to know how much the salary is wouldn't it?