9UNP1261HD_Richard_Schwinn_WordPress

- Today, we are pleased to introduce Richard Schwinn as part of the Wisconsin Historical Museum's History Sandwiched In lecture series. The opinions expressed today are those of the presenters and are not necessarily those of the Wisconsin Historical Society or the museum's employees. Richard Schwinn has been immersed in the bicycle world since birth.

 He worked at the Schwinn factory or bicycle dealers during high school and college. After a decade outside the industry, he joined Schwinn in a marketing and then a manufacturing capacity starting in 1986. He and Marc Muller co-founded Waterford Precision Cycles, a leading builder of custom bicycle frames, including the Schwinn Paramount. Waterford is an important repository of information about the history of the Paramount

 as well as other aspects of Schwinn history. Here today to discuss how Schwinn's distribution system contributed to its products, please join me in welcoming Richard Schwinn. 

(applause)
- Thank you.

Thank you very much, and thanks to the Historical Society for allowing me to make this presentation today. The topic today is about Schwinn's distribution system. Now, how many people here have read histories,

 accounts of the history of Schwinn? Rise and fall? A small number. That's good. 
(audience laughs)

 I can get away with all sorts of things. 
(audience laughs)
 I think everyone would agree that one of the secrets to Schwinn's success and the real foundation was the quality of its products

 and the fact that it had so many great up-to-date products and, in a few cases, products that changed the whole character of the bicycle industry. And we're going to talk about some of those. But the thing that really made a difference, and I think amplified not only its rise, but actually amplified its fall, is its distribution system. And so this is gonna be kind of a technical discussion about the nature of bicycle distribution.

 So if you're looking for real excitement, I'm afraid you should have brought a pillow. 
(audience laughs)
 But, that being the case, we're going to move on here. 

The company started in 1895, but our story is gonna start in 1932.

This is a map of bicycle distribution in 1932 across the board. You'll see a number of players there. At the very top are the parts suppliers.

 Now, these would be people who supply spokes, they supply hubs, they supply tires, other various parts that the manufacturers assemble into a bike.

The manufacturers, in turn, sell to a variety of people, if the mass merchants of the day would have a direct relationship with a manufacturer. And the mass merchants of the day would be people like Sears. Sears was basically catalog house that was building a network of stores.

 Montgomery Ward was another example of that. So these are the people who were the big box. 

They were the Walmarts of their day. Then you had a group called the chain stores. And chain stores were stores that all looked alike and were spread around the country. Stores like Western Auto, a tire store. Today, the remnants of that would be a hardware store like a True Value store or the Firestone stores, things like that.

 Those were chain stores. They started to emerge in the mid-'20s, in most cases either to deliver hardware or to help support the growing automobile industry. Then you had little bike shops. And there were a few good merchants of bikes in those days, but it wasn't a very strong part of the market. These are people who specialized in bikes, and in order to stay in business, well, they might carry locks, and they may,

 if they're up north, they'd sharpen skates. They'd do other little things to stay in business during this period of time, during the slow period. And to support both the chain stores and the bike shops are a group called jobbers. And jobbers today would be considered, would be distributors and wholesalers, and, in many cases, they had their own brands. Now, let's talk for a moment

 about what branding looked like. Almost nobody had a brand. In fact, Schwinn's brand, you could not find a Schwinn bicycle up to about 1938. Before that, you might see a name plate that said Arnold Schwinn and Company on it, but Schwinn's own brand was called The World. So if you're a Schwinnophile and you collect these bikes, you'll see every so often, these days, a more low-end bike that's called The World.

 Well, that's the root brand that Arnold and Schwinn had created back in 1895.

It was a tough business for several of the players in this area. The manufacturers had a difficult time because they were squeezed between the suppliers, who, in many cases, had monopoly positions, and the very powerful chain stores and mass merchants. The poor bike shops were squeezed because they had to compete

 with all these larger volume outlets. And essentially what they were is they were the place you get your bike fixed because you weren't going to get it fixed at Sears. The jobbers could get squeezed because, often, they had to deal with the dealers and provide financing to the dealers who sometimes got into trouble, and they'd get caught between, let's say, the manufacturer, the parts supplier, and the chain stores.

 So the people making out on the deal were the parts suppliers. And the other people making out in the deal would be the large volume retailers. Now, at this time, and the reason we start in 1931-32 is that's when my grandfather, Frank W. 

Schwinn, took over the business. And he's a second-generation, and he took over the business after a period of decline.

 Back in the First World War, Schwinn sales peaked at about 99,000 units. By the time we get to 1932, sales had dropped to 17,000 units. And the business was actually profitable all this time because Ignaz would simply tighten the screws, let the business slow down. They would shrink it down. It didn't matter to him because he was in the motorcycle business,

 and he owned a motorcycle company called Excelsior Motor Manufacturing, the number three motorcycle supplier in the country behind Indian and Harley-Davidson. So, that was the big business. So, actually, Schwinn managed to remain profitable, and it did so because it avoided the mail order and the mass merchants. 

It sold to one chain store, and the rest of its business went to bike dealers.

 It had a few direct accounts, but most of the time it went through jobbers. So that's how the structure of the business went. When Frank Schwinn took over the business, he brought with him the best talent from the motorcycle business, which had been closed down because of the Depression, and immediately set out updating the product line and hopefully transforming the business. He started with a product called the Schwinn Aerocycle,

 and this bike, in its day, was indeed a revolution. It was the first bike where styling, it was the first premium bike that had been produced in the bike world for probably 25 or 30 years. And it had styling that was art deco styling of the time. It was streamlined, and it was a premium product at a premium price, and it sold like hotcakes. Probably selling to the people who no longer had the money to buy a motorcycle. 

And company sales, because it and a number

 of other products, went from this 17,000 units to over 360,000 in 1936 and over 400,000 by 1937. Now, you'd think that you'd be able to keep that kind of dominance without, and a lot of people think that Schwinn was alone in this, and that's not true at all. This is an example of a bike called the La France. It could be one of 50 different terrific quality bikes that entered the market in the mid- and late-'30s.

 The La France is interesting because here is an absolutely beautiful bike that was made by Dayton Manufacturing. And those of you who are really steeped in history know that Dayton Manufacturing were the makers of Huffy, which are not known for building a great quality bike. But they could get it together for this, and you will see that there are terrific, beautifully styled bikes, and I could spend all day with examples of competitors that popped up in the '30s.

 In fact, if you go to a museum, only a few of the bikes would be Schwinn bikes, even though Schwinn had a very dominant position. You had all sorts of other competitors. 

Well, 1937, recession comes along, and my grandfather goes, "What do I do now?" Because the simple matter of product was not enough. So, he looked at three areas. One was he was going to attack cost. We're not going to talk too much

 about how the factory operates. I could spend a couple of hours on that whole topic. But he was able to get his father to invest a substantial amount of money to buy new tooling, update the paint system, and that gave him a significant advantage, both in reduced cost and improved quality. The second thing he did is he got into branding. Now, up until this point, even on the Aerocycle, you cannot actually find a Schwinn sticker on it.

 It is simply a model that says Aerocycle. By the time he finally introduced brands of his own in 1938, and it's subtle compared to today. Our bikes today are literally billboards for their brands. And you see a little Schwinn cross on the chain guard, and that constituted branding. The other topic and the one he put a lot of energy into and was only working on solutions for a while was how to deal with merchandising. And there were a couple of issues.

 One was the whole issue of pricing. A lot of games were played with bicycle pricing at the time. Everyone wanted to have a cheap price. Consumers wanted a cheap price, retailers wanted to have a cheap price, and so, there was all sorts of games played. 

Some games were games like, well, here's a bike that I want to sell for $50. I'm gonna mark it at $60, and I'm going to give it a $10 discount.

 And that was a very frequent practice, and you might even see a little of that today, if you're in the right spot. 
(audience laughs)
 The second problem, and one that caused havoc for the distributors dealing with mass merchants, was the notion of a loss leader. And the idea is a company like Sears would go, "Look, I need a $20 bike. "I don't care how you make it; it needs to be $20.

 "You get a $20 bike, I'll buy 'em. "If you can't get a $20 bike, "I might not buy anything from you." Well, you damn betcha that they went off and built themselves some kind of a $20 bike built with garbage components that came from the monopoly tire supplier, the monopoly spoke suppliers, and the monopolies that all controlled so many of the parts. 

And, of course, in some cases,

 that loss leader was a loss to the manufacturer.

And then, the goal was if somebody came in the store, they weren't gonna end up buying that $20 bike. They were going to get stepped out to $30 or $40 or whatever kind of bike that they could get away with selling. And in those days, even in a mass merchant setting like Sears, you ended up having sales help that we wouldn't see, let's say, if you went to a Walmart

 or a Target or someplace like that. So, that was another game that was played. A third one wasn't a game, it was a fight. It was a price war that might take place between two retailers in an area. What happens in a price war is, you start with price matching and then you accelerate the price matching. 

You start, "Oh, it's $50. Well, I'll sell it for $45."

 "Well, I'll sell it for $40. I'll sell it for $35." Pretty soon, these two warriors are not making any money on this bike. So what do they do? They stop trying to sell it. So what happens to the manufacturer? Well, they're not selling a perfectly reasonable bike because these two people are duking it out. So, these are problems that Schwinn faced

 and anybody in the bicycle business faced, and they did get relief in the form of the Robinson-Patman Act. And the Robinson-Patman Act was designed to help stabilize pricing so that you didn't end up with price wars. The world was facing the prospect of deflation. And that was the real problem with the Depression is that no prices could hold up because there was so much

 of this sort of, this type of competition.

The next thing that happened was World War II, and World War II brought a halt to all bicycle manufacturing, except for one company, which was Columbia. So, Schwinn had to put all its toys away and start building armaments to help bomb the family over in Germany.

This had a significant effect on a number of fronts. One is that a lot of the people,

 especially the small nameplates from the '30s, got out of the business because, for the first time, they actually had gainful employment. 

We had full employment during World War II. It was an economic miracle. We could blow things up and help the economy. The second thing is that my grandfather, who had no intention of getting out of the bike business, had time to reflect. And, in fact, a lot of the materials

 that I have here come from a treatise that he wrote. It's 50 pages long, double spaced, on the history of merchandising in the bike business. And he really, I got some choice quotes out of there, but time does not permit going through them today. But, what he did is he used it as an opportunity to reflect on what's going on and to develop a plan for the future. And even though Schwinn did a terrific job in developing the balloon tire bikes

 and Schwinn will be associated with some great innovations in the future, the real innovations that made Schwinn the household name it is come from marketing. So let's talk about what happened after the war. The first thing was what is known as a Schwinn Plan sales. Now, the Schwinn Plan, this is another distribution thing. Get your pillow out.

Remember how we had that map with the jobbers? You'd sell the bike to the jobber. The jobber would turn around

 and sell the bike to the retailer. Well, in California, before the war, one of those jobbers got into financial trouble. 

So Schwinn was faced with a choice: cut 'em off, send the bill collectors, and then not have people to service their accounts, or they could find an alternative. And the alternative they found was to say, "Okay, Mr. Wholesaler,

 "I'm going to sell the bikes direct to you, "you're going to continue to have your salesmen "service these accounts, "and I'll write you a commission check." And a relatively fat commission. It was a commission that a wholesaler could pocket a fair amount of money to help get their business back in order, and guess what? They didn't have to handle all of these bikes. And they also didn't have to handle the credit.

 So the result was Schwinn was able to get more dollars in its pocket because it didn't have to pay as much money to the wholesaler, the dealer didn't have to pay as much as they would otherwise have to pay if they were handling all the costs that the wholesaler had, and the wholesaler was getting money without having to dip into capital. And cash is king. 

Trust me. All day, all time, 24/7. So, this turned out, it was looked at very skeptically by a lot of the other distributors, but it turned out to be very successful. So once the war ended and they were starting to build things up, Schwinn started out by saying, "We're going to use the Schwinn Plan throughout the country.

 "It gives us a lot more control "over our relationships with the dealers, "and it allows us to add a degree of price competition "or favorable economics to our distribution system."

The second thing they did is what is known as selective distribution. If you went through the company's books in 1948, you found that the company had 12,000 accounts. Now, to put that in perspective today, in a market that sells

 probably seven or eight times as many bikes, there are probably only 7,000 bicycle dealers, and most of them are about to go out of business or just started in business. So you probably have about 4,000 or 5,000 that are really kind of functioning active bike shops. 

Schwinn cut down that 12,000 down to 3,000 in a two-year period, and, by 1960, they brought it down to 2,000, and, by 1970, which the company had been growing like crazy,

 it had, I think they were down to about 1,800 dealers, where they remained stable for a long time. The next step, and these last two steps are relatively radical. The first one was the notion of franchising. And franchising was just starting to appear on the market. I think it was like A&W Root Beer was one of the very early franchisers saying, "Okay, we're going to give you a whole kit to build a business up. "You plop it down in a spot.

 "Here, we'll supply you all the goods. "You're going to pay us fees, "and we're going to give you a business opportunity." And A&W Root Beer was one of the very early success stories. 

Schwinn looked at this and said, "You know, this could be a real gold mine for us." And they chased after it. So they set up, with the dealers that were left, they made them all sign dealer agreements,

 and the dealer agreements have evolved through the years and got more and more demanding. But they started out as something very simple. You're gonna provide, you're gonna sell our products and represent them well, you're gonna pay your bills, you're going to develop a, you're going to, you have the ability to use the Schwinn name in your store, you're gonna follow our fair trade pricing, and we'll let you be a franchiser for a year, and we'll take a look at the agreement then.

A number of dealers didn't buy into it. It's part of the way that Schwinn culled the herd. But a fair number did and a growing number, and it began to have a strong impact. Now, fair trade pricing is a very key component to how Schwinn operated, and I'll explain that in the next slide here after we walk through the Schwinn distribution map. 

Here you can see how Schwinn has now moved to supplying its shops directly.

 The chain stores, Schwinn had one chain store, BF Goodrich, and it phased out of that chain store in the mid '50s. So it was strictly a bike shop-oriented enterprise, and it still had the jobbers in place. Now, here's how franchising worked. Schwinn let you use the brand. So, you could have a Madison Schwinn store. And at first, not many people did it, but after a while they started.

 The second is Schwinn had money for promotions. So they would promote the brand very heavily, and I think if you follow Schwinn history, you'll see a lot of the tricks that Schwinn did through the years. Way before the licensing people figured it out, you could give a movie star a bike, take their picture, and you could use that photograph anywhere. 

And so a lot of the movie stars got photographs of them on Schwinn bicycles until their agents figured out,

 "Hmm, maybe I could get more than just a bike for that." 
(audience laughs)
 The second thing that happened is Schwinn figured out some media that were actually not all that expensive. Television wasn't all that expensive. So, Schwinn made friends with Captain Kangaroo, and so started advertising their kids bikes on the Captain. How many people remember that from their youth? There we go. You're dating yourself, but it's good.

 And, you know, Captain Kangaroo was the Sesame Street of its day, and a terrific show.

In addition, Schwinn was on the back page of every Boys' Life. So, if you were a Boy Scout, you had Schwinn in your face all the time. Schwinn published comic books. And so, you'd get a comic book that was a great promotional deal, and I think they worked with Disney on comic books that had big Schwinn ads in them.

 Schwinn also, and this is later in the '50s, added service school so that you could learn how to rebuild a complicated coaster brake hub or a three-speed hub. And that became a really handy tool as we go down the road. And they had a sales school using sales techniques. The whole, the big picture was to formulate a style of store that would be the foundation of the company's success. This is the prototypical example of it.

 This is a store named Valley Cycle and you'll see a little sign that says George Garner. 

Valley Cycle is in the North Valley area of Los Angeles, and it is a prototype of the store that really changed the face of bicycle retailing. And I'm sure that you've encountered a store that looks a little like it with the great open glass, you can see the white peg board all around there, great lighting, great merchandising. This set a new standard for retailing.

 And George Garner was very successful. He had three stores in the Los Angeles area, and then when people complained that he couldn't do it in a cold weather area, he opened up a very, very successful store in Northbrook, Illinois, which he still owns and operates.

But, you can see out front the Schwinn sign and how dominant it was. In many cases, people put the Schwinn name in their business, and you would call up a store

 and they would go, "Schwinn," and because that's how closely they associated with the name. And, literally, the idea was to key off of what McDonald's did. Very, very powerful tool. 

So, what happened when you had all these stores? You had an amazing share of mind. There was no other bicycle brand advertising at all in this period.

 The only bicycle ads you saw were bicycle ads by Sears for bikes you could buy at Sears, and they didn't even name the name. They named the price. In fact, I've been told by representatives of Huffman Corp., that if they dared to go and advertise, that they'd get tapped on the shoulder by their big mass merchant suppliers going, "You must be making too much money. "You can advertise.

 "We'd like that off on the price of the bike." So, the mass merchants literally discouraged them from advertising. 

Schwinn, on the other hand, was able to advertise nationally in relatively economical media. The second thing that they could do is they had all these stores with big billboards. So, from the consumer standpoint, there was really only one brand of bike out there.

The second thing that you could get out of having these franchises is you had committed dealers who had every reason to share with you anything they learned about the market, which we'll have a case study of that in just a second. You also had methods, like we saw with George Garner, that you could duplicate in other retail locations. And because they weren't in price competition, because Schwinn stuck with the fair trade laws, dealers didn't feel like spreading this knowledge

 would get in the way and that it would hurt their business. So, it was a great way to get information to move throughout the network and have great Schwinn stores throughout the country. Finally, it was an opportunity to disseminate new technology. And, at first, there wasn't a lot of new technology. 

The service school was used to do simple things like disseminate how to take apart a hub that had been around for 50 years or more.

 But, you'll see that it'll have a dramatic impact as we move into the '60s. The first case study is a Stingray. Now, many people think that Schwinn invented the Stingray. That is actually false. Not only did Schwinn not invent the Stingray, but Schwinn didn't sell more Stingrays than anybody else. Huffy sold more Stingrays than anybody else. Of course, they never had a name to it. They couldn't advertise it.

 But the guy who invented the Stingray went to Huffy first because he knew that they were the biggest bike company in the country. 

Now, unfortunately, the Huffy people don't deal that much with real consumers. They deal with mass merchants. They took this idea and they plugged it into their mass merchant network. And the mass merchants looked at that funny looking bike, and they go, "That's never going to sell.

 "Get me another cocktail." And instead, what happened is the Schwinn dealers found out about it. Now, Schwinn dealers are little family businesses, usually in neighborhoods. And I'll tell you something, if you want a great childhood, pick parents who run a small neighborhood bike shop. It's a wonderful experience. And you got cool things to play with and you'd be able to experiment with different parts

 and they go a hold of the monkey bars and they started building up these bikes. So, Schwinn got on to this thing. Now, one mistake Huffy made that cost it fame, if not fortune, 'cause I am convinced they sold boatloads of these bikes, was they named their first version of this the Penguin, the Huffy Penguin. 
(audience laughs)

I don't need to say

 that Schwinn found a little bit better name for that. But it's an example of the use of intelligence to make a new product go. Can you hold on questions here? 'Cause we'll be doing question and answer after we're done here, and I'll take as much time as anybody likes. The next case study is the 10-speed. 

And let me tell you something, for every Stingray sold, there were 10 or more 10-speeds sold.

 This was the real revolution. And, actually, I found out through some of my recent research that Schwinn attempted to bring out adult bikes before World War II, and it was a total flop. But, as the war ended, we started to see the English Racers. How many people know what an English Racer is? An English Racer is a tourist bike, not unlike what lot of people just like to ride around town. And they started to come on the market selectively chosen,

 and one of the other things that happened is, as people moved out to the suburbs, they actually had decent places to ride. You really wouldn't want to ride a bike in a city with cars flying all over everywhere, and you had far better ways of moving around. But once you got out in the country, it started to make more sense. 

So, the adult market started to build, but the key innovation that made a lot of this work

 was the invention of the derailleur by Tullio Campagnolo in 1931. Well, finally after the war, they start to appear, and in the Schwinn world, they started to appear on the Schwinn Paramount in the 1950s. And people who experienced them and saw how wide a gear range you had, said, "No, this has gotta get onto regular bikes." And so, there was a whole movement to do this, and the manufacturers in Europe

 were making more economical versions of it and the economies were starting to make sense. One of the limitations, though, is that derailleurs require a level of service and adjustment that you simply don't need with a coaster brake bike. So, where is Schwinn's advantage? It's got its service school, so now it could add a whole degree of training on how to service derailleur-equipped bikes.

 In addition, it went out and got Paul Dudley White to talk about the health benefits it had. 

It actually helped support a lot of the advocacy work they did. They started to expand their advertising to places like Reader's Digest and Sports Illustrated. So, again, they're the only people who have a face out there in public. And the 10-speed is an enormous success, and Schwinn's pinnacle was to see the 10-speed boom

 of the early 1970s. Now, there are clouds forming on the horizon, and these clouds have more to do with distribution than anything else. The first cloud, and it's a big one, is an antitrust case. Now, why would you have an antitrust case? Because Schwinn was enforcing fair trade laws, and dealers didn't like this. And not every state had a fair trade law. 

Wisconsin had a fair trade law.

 Illinois had a fair trade law. Missouri did not. So, the Missouri dealers were accusing Schwinn of forcing them to use fair trade methods. Now, I'm sure that Schwinn wanted them to use fair trade pricing, but they knew better not to violate the laws. But, nonetheless, they convinced the U.S. attorney in St. Louis to start an investigation.

 And it takes a long time for, in those days it took a long time for an antitrust case to filter up. And it went through the district court, and Schwinn won in the district court. It went to the appeals court, and they won at the appeals court, but they lost at the Supreme Court. 

Now, the good news for Schwinn is the Supreme Court said, "Well, there are no damages.

 "You actually haven't hurt anyone with this, "but the mere fact the title goes from you "to a wholesaler and that wholesaler is required to sell it "to a dealer and not sell it to anybody else "means that that's a per se conspiracy. "So you have to find another solution to this."

What Schwinn did to solve that was to create, to get rid of all of their jobbers and to create their own distribution system. Then they could control it all the way to the dealer.

 Now, I'm going to submit to you that was Schwinn's first major bad decision, and I'll explain that in a few minutes. But, what Schwinn did is they developed very nicely, organized, well-developed distribution centers. They did manage to get good talent out of the jobbers that were left, that were still in business, and they were able to start that distribution. But, that was only the first of many problems that crept up in this period.

 Now, remember, this is a period where the adult 10-speed market, the Stingrays are going, so Schwinn's general business is going on great, but these are the problems that came back to haunt it, especially in the late '70s. 

The second blow had to do with franchise regulation. Schwinn had said, "We're a franchiser." They started developing the methods, they looked more and more like the kind of franchiser you would get for a McDonald's.

 Then, because the states felt the need, and I think justifiably, to begin regulating these franchises, they started putting laws in place. And the laws basically said, "Look, franchisers, you are selling "what is in effect a security. "You are selling an investment. "You're not that different than a stockbroker. "So, you need to have the kind of infrastructure in place

 "that you would have for a stockbroker. "You have to have prospectuses. 

"You have to have disclosures. "You've got to follow through on all the stuff. "You need to disclose what kind of capital you have "so that you don't take this person's money, "go out of business, and leave 'em high and dry." So, that's fair enough. Schwinn was going to have no part of disclosures. So, what it said was, "We're going to move away from that.

 "We're going to transform, "since we don't actually charge a fee," and that was the only hook that kept them from being called a franchiser, "what we'll do is we are going to go back "to a dealer agreement that'll look just like it, "except we're going to make sure it says, "it doesn't say franchising "and we're going to be sure not to charge a fee." And you know what?

 It was the middle of the bike boom, so sales were continuing to sail along. So, the problems weren't obvious at that point. 

Now, the decade of the '70s had its ups and its downs. The first half of the '70s was terrific. It was the bike boom. The only problem with the bike boom, besides the clouds on the horizon, is that they had price control, so Schwinn didn't have the ability to raise prices

 nearly as much as they would have liked. But, at the same time, they sold bikes like crazy. They got up to almost a million and a half bikes.

Then the last half of the '70s came along, and when the bike bust hit, it was big time. The industry sold 15 million bikes in 1975, and that figure dropped down to 6.5 million in 1976. Absolutely devastating. 

Now, Schwinn could withstand that,

 but Schwinn sales went down very significantly as well. I think they went down by almost half. So, it was a big shock all the way around, but more things happened. First is you started to see a whole bunch of new competitors, and people go, "Where did those competitors come from?" Well, they came from the jobbers Schwinn fired. 
(audience laughs)
 You put all these jobbers out of business,

 Schwinn had been their exclusive bike line, and they needed to scramble for business. Well, they couldn't find any decent American manufacturers, so they started hooking up with the likes of Peugeot and Motobecane and the Italians and Europe. 

And on the West Coast, you saw people hooking up with the Japanese. So, you had all these new people in there and companies that had a really good reason to want to compete with Schwinn.

 The second problem that came up was the rise of what we call the vertical press. The vertical press is bicycle interest press. How many people are familiar with bicycling magazines? Okay. Bicycle Guide, you could go back and, in the day, they had two magazines that were competing. And these magazines were great because were great ways for people to learn about bike culture, and that's really terrific,

 but they didn't think the way Schwinn thought. I mean, if I were them, I would want them to say, "Oh, yeah, there are all these brands out here, "but all your needs can be solved by Schwinn." 

(audience laughs)
 "We've got something for everyone, and it's great value." That doesn't work for them because they need to sell content. Their incentive is to have more brands, more different advertisers,

 and to equalize the visual field. So instead of having Schwinn with being the only face in advertising, which it had on a national level, Schwinn was just another brand. Just like back in the 1930s, it was just another really nicely styled bike. Now, a big company behind that nicely styled bike, but you had choices of hundreds of alternatives. And that's one of the problems that Schwinn had to face.

 A third area is that bike racing started to come back. 

And a lot of people said, "That's great, we love bike racing. "That's going to help promote cycling." But the problem with bike racing is, number one, is it sucks a lot a of money. It was going to be a lot more expensive to play in than it used to. Not nearly as expensive as it is today, but that was another area

 that sucked capital out of the business.

And that made the environment much touchier. Then you get to the whole issue of the end of fair trade. And that was ultimately the straw that eventually broke the camel's back. It wasn't the last major distribution mistake Schwinn made, but it was really the major turning point because now it was the fair trade laws that allowed Schwinn to have a competitive retail price and enough money to be able to promote at the level

 that kept Schwinn's name out front. And, as a result, it immediately had pressure from its dealers to raise margins because all of these competing bikes from all of these foreign suppliers tended to have higher margins, so they could fit in underneath Schwinn. Schwinn, on the other hand, had all this very expensive promotion, especially national advertising,

 which was getting a lot more expensive. A page in Sports Illustrated went from $15,000 in the mid '60s, and it was now $60,000 to $80,000 10 years later. So it was a huge difference. They were having a boom. And what also happened is Schwinn eventually caved in and started to raise their dealer margins. They didn't reduce the company's cost, but they raised the dealers margins,

 and that had the impact of changing the gap between the cost of a Schwinn dealer-supplied assembled bike and a bike you bought at Sears. 

So, what happened is, in the old days, you're back in 1970, you could buy a Sears Free Spirit for $105 and you would buy a Schwinn Varsity for $120. For $120 you get assembly, you got all sorts of, you got lifetime guarantee. I could go through a whole list of things that you had that made that make sense

 and made it attractive. You go back, you now look at it eight years later, and that Schwinn Varsity is $180, and the Sears went up to maybe $125. Well, that's too big a gap, so Schwinn had to rethink its entire strategy and, really, without a lot of options. It was up a creek, and the paddle was already heading the other direction. So, eventually it started refocusing its advertising

 to the vertical press, which was cheaper, but not as effective at keeping the share of name. And it ultimately had to start pulling back its promotion. 

So, it was headed for tough times even on a good day. We get to the 1980s, and Schwinn is facing further issues. And we could talk about the fact that the whole issue of Schwinn's manufacturing and its factory is a whole other topic. But it closed its factory, and now Schwinn was importing almost all of its bikes.

 So now, its cost structure was the same as all of its competitors. It didn't have a Schwinn plan to work with. It was saved by two, it could have blast into oblivion in 1985 and might have suffered that but for two markets that appeared. One is the mountain bike market, and the mountain bike market was huge for Schwinn. Schwinn was actually one of the, Schwinn was the first big name to get into mountain bikes.

 In fact, they were a year before Specialized, they were three years before Trek. 

And by the time you got to 1988, Schwinn was selling more mountain bikes than Trek and Specialized and Cannondale sold all bikes combined. It was huge. The second thing that went on was Schwinn got into the medical equipment business. And that's our next case study,

 and it's the Schwinn Airdyne. How many people are familiar with the Airdyne? You're showing your age. But, the Airdyne was never peaked, was positioned as an ergometer. A scientifically, a way to provide measurable work.

And the value of it is when it was sold by a Schwinn retailer, it was often prescribed by a doctor, and the insurance company paid for 80% of it because it was medical equipment.

 So, it retailed for $600, but it only cost $120. Schwinn was able to use its sales school to teach people about selling medical equipment and how to service, and at service school, how to service medical equipment and to deal with how to deal with ergometry and all the sciences behind the Airdyne. It was a terrific machine. It was very successful. It saved a lot of lives.

 It was a great piece of medical equipment. What happened in 1988 was it was transformed. And Schwinn decided to change the name of the company because a couple of go-getters got in there. Schwinn hired them to help expand the market, and the assumption was the medical equipment business would continue and they could expand into fitness and they could expand the line. More is better, isn't it? 

Well, what happened is,

 in the course of becoming fitness equipment, now you got into a category that the National Sporting Goods Association pays attention to you. You're now suddenly on their radar. They were collecting statistics, they found out you sold a pile of these things, and guess what? Everybody looks at those statistics and goes, "Here's a market we can get into." So you had people coming up

 with cheap imitations that might be $300. And you say, "Well, that's great. "It's only going to cost $120," except for once you started repositioning the product as a piece of fitness equipment, it now cost $600. And even though it was twice as good as the $300 item, and then some, it really lost a lot of its competitive oomph. 

Now, that didn't go away immediately. Airdynes continue to sell, but not in nearly the same way.

 Another mistake in the late '80s is Schwinn attempted to expand the number of dealers. And I think that ended up, that was certain to backfire because it's very hard to add new dealers who are committed without pissing off the dealers that you already have. So, Schwinn had to find a way to, Schwinn attempted to do that. It didn't work, and then it also attempted to go into fitness chain stores.

 So, again, angering the dealers and creating less loyalty on their account. And as it lost its leverage, it became more and more vulnerable to general economic conditions, and, in Schwinn's case, the big problem ended up being the bank crunch of 1991, and it had to be financially reorganized, which is how I got a hold of Waterford Precision Cycles, in case you're interested in a custom bicycle. But, you know, I've had 20 years to contemplate, or more,

 and actually much longer than that 'cause I started this thinking while I was still at Schwinn, as to what sort of key decisions points 'cause most people think of Schwinn's problems as being product-related. 

And yes, if the product doesn't sell, you've got a problem. But, I think if you really think back to what really made Schwinn succeed and what it would have possibly allowed

 to survive until today, and having a business survive for 90 some odd years is a miracle in and of itself. It'd be like, you know, complaining and being scandalized because Aunt Elizabeth died at 92, and why didn't she live longer? But, I think if you really want to take a look at the key decisions, Schwinn probably could have lasted longer by sticking with the jobbers and finding a relationship, and there was a legal method called an agency agreement

 that would have allowed and it would have required less capital. It should have taken out franchising because it could have set up a fee system and it could have said, "You know what? "We're going to charge you a 6% or a 7% promotional fee "and you're a 100% Schwinn dealer "it's what we would have had, "and your margins go up to 38 points. "So, now you have a more profitable product,

 "and you're paying for the promotion, "and if you bring a brand X product in "because you like that better, "that's great because we're gonna still have the money "to promote your store." 

And that was actually, that was why that decision was so key. And then, finally, looking at, you weren't going to be able to control the rise of the vertical press.

 I mean, you weren't going, and eventually you were going to get competitors and you were going to get foreign competitors in. I don't know whether Schwinn could have ended the-- fended off the Asians. No one else has really been able to fend off the Asians, and the bike business would be more vulnerable than most. I could have a whole discussion about manufacturing strategy, like I say, and I worked on that side of the business.

 But, I think the key there, and it would be very risky to think that that could happen, but I do believe these other things have been the place if Schwinn had had the foresight to stick to the medical equipment business, maybe thought about new pieces of medical equipment to go after, it might have survived a lot of these things. And I think it's a little different story that you hear if you read histories of Schwinn,

 but I think it's a story that I'm sticking with. And I want to thank you very much for listening to me. 

(applause)