Canyon Bicycles is a great example of a disruptor in this area and finding success engaging with consumers in a direct-to-consumer (DTC) format,” says Baird’s Andrew Martin in this Q&A with Mergers & Acquisitions. “Canyon has credibility globally, created relevance across categories, and capitalized on the shift towards e-commerce to grow significantly over the past seven years.”

The pandemic has made consumers more health-conscious than ever. Outdoor activities have become very popular, as they can be enjoyed more safely, with social distancing, than indoor experiences. Cycling has become especially popular. Mergers & Acquisitions spoke with Baird managing director Andrew Martin about trends in cycling and how they’re playing out in M&A.

Why are investors drawn to cycling?

Cycling is at the confluence of several key trends that investors have wanted to get behind. One is consumer focus on overall wellness and physical fitness, which has been a great tailwind for the market. Many fitness regiments include cycling as a key component, whether its outdoor biking or indoor cycling with a product like Peloton.

Another key trend is mobility. Cycling is becoming much more accepted in the urban and suburban environments as a way of getting around. This trend started in Europe and is now becoming more prominent in the US. From an urban mobility standpoint, cycling plays into that landscape quite well.

The implications of Covid-19 have also increased consumer interest in the cycling world. Now more than ever, people want activities that are good for them, close to home and that can be done individually versus in a team sport or group environment where there might be an infection risk. All these factors coming together at once has made cycling a very attractive category for investors.

How long will this popularity last?

When the pandemic eventually slows down, people will certainly diversify into different activities. However, some of the tailwinds we are seeing like the mobility and fitness dynamics will not change anytime soon. It’s also important to note that cycling has various subsegments. For example, competitive, high-end road cycling usually attracts a very small group of consumers, so that will likely not be a huge growth category and may return to more normal growth. However, other areas like the gravel biking world, which is a hybrid between road biking and mountain biking, is very much a growth segment. A lot of interest in the cycling category is also driven by e-bikes, which took off in Europe originally. When you think about the urban mobility dynamic, the e-bike does not have the full human-powered element to it and has become incredibly popular. It has now started to make its way into the US both on-road and off-road, and e-bikes are applicable to any consumer rather than just high-adrenaline consumers. That is a huge addressable market that will power growth going forward pretty heavily.

What role does cycling play in the broader fitness expansion?

It helps that fitness is a tailwind, but cycling has certainly played a key role in that expansion. It is a great crossover category. You might enjoy your Peloton indoors, but also want an alternative that takes you outdoors, which brings people into the sport. On the other hand, you might be a high-end outdoor cyclist that can train indoors with trainers that you park your bike in and have the same experience in a stationary way. It’s becoming more and more popular to have a fitness activity that is directly tied to a sport, which has been a very strong dynamic.

How has Covid-19 affected the cycling industry?

Covid-19 restrictions have accelerated the dynamic of people wanting activities that are good for them, solo and close to home. Cycling fits those restrictions and is a great activity to do in small groups or by yourself, whether indoors or outdoors. Bikes are not cheap, but if you are looking at a lower-end variety or you have the personal means, it’s a great activity in a Covid-19 environment.

This pandemic has also impacted the way consumers purchase bikes. Prior to Covid-19, online bike purchases were certainly growing as a channel, but there was a certain amount of intimidation buying a very expensive piece of equipment online without help. In many ways, Covid-19 forced consumers into an online purchasing environment and has made them much more comfortable buying bikes online. This has evolved cycling into an online category and will be a lasting change.

How have consumer preferences changed?

Consumer interest in cycling has broadened. To some degree, consumers are getting away from the high-adrenaline categories and moving towards activities that are more approachable to the average consumer. For example, the gravel category and e-bike segments show interest in cycling amongst a broader set of consumers that don’t want the risk of being hit by a car or being forced to go up a massive incline with mountain biking. That has brought more consumers into the category. Fitness has also brought more consumers into the category with the ability to cycle indoors and outdoors if someone’s motivation is primarily to get fit.

The push into online shopping is also a significant change in consumer preferences. Canyon Bicycles is a great example of a disruptor in this area and finding success engaging with consumers in a direct-to-consumer (DTC) format. Canyon has credibility globally, created relevance across categories, and capitalized on the shift towards e-commerce to grow significantly over the past seven years. They’re poised for further growth in the coming years and recently entered an agreement for Groupe Bruxelles Lambert (GLB) to acquire a majority stake. 

Who is investing in cycling?

There is a broad range of investor types that have been interested in the cycling market or want to be involved in it moving forward. We’ll continue to see consolidation amongst the corporate names, and there are plenty of larger strategics looking to do more in the cycling space. In the financial world, there are traditional buyout firms that are attracted to more mature businesses that are serving a large, addressable market. For example, Cerberus Capital Management recently took Dorel Industries private, and a large portion of that business is cycling. There are also larger private equity firms like GBL, who just acquired a majority stake in Canyon Bicycles, that have an appreciation of the cycling market and want further exposure to it.

Many new entrants are also coming into the cycling space. Whether it’s manufacturers of bike parts and components or companies focused on cycling apparel and gear. Because of these new players, you’ll see a lot of venture capital and growth consumer private equity firms highly attracted to the space.

The final pool of capital would be family offices, where the individuals behind the office have a passion for cycling and are proving to be very involved in the sector.

Outside of the bikes themselves, there are companies on the technology side that will continue to be interested in the cycling market. Platforms like Strava or Zwift are digital ecosystems where riders can interact, post their rides and share content with a community. These digital ecosystems are drawing a tremendous amount of interest from tech investors. A great cross over example is Wahoo Fitness, which is focused on enthusiasts who want to enhance their fitness experience with an ecosystem of connected devices for training, competing and simplifying exercise. Wahoo’s portfolio of products includes indoor cycling trainers, cycling computers and heart rate monitors, and they received an equity investment from Norwest Equity Partners in 2018.

How is cycling similar to other consumer enthusiast categories?

In terms of participants, cycling is broadening. It is going away from just high-end competitive cyclists to more of an accepted activity for everyday activities like commuting or fitness. Relative to a lot of other consumer or individual sports categories, cycling will become one of the larger segments and will be hard to ignore. It has a broad relevant, touching everyone from the high-intensity athlete all the way down to an average commuter.

Before Covid-19, the DTC evolution was less penetrated in the cycling category, but we’re now seeing that grow rapidly and it will be a lasting change. We expect that the DTC shift will take a larger percentage of total sales and be a challenge for oldline incumbent players that have been reliant on a brick-and-mortar presence.

The total amount of spending is also going to increase given the increased number of participants. It is clear that competitive or avid enthusiasts have a willingness to spend that is almost limitless. Amongst that group, bikes could sell for $10,000 or more, so there is an ability for business models to succeed at the ultra-premium level all the way down to the entry point, which is a good dynamic for the space.