Introducing the Barbell Effect
Department stores were once the backbone of retail in America. Companies like JCPenny, Sears, Bon-Ton, Montgomery Ward, and Lord & Taylor once anchored malls throughout the country with high amounts of “mid market optionality”. These retailers were not built on the absolute lowest prices nor were they stocked with ultra high end luxury goods. Instead, these were retailers aiming to hit the middle of the market, a balance between “too expensive” and “too cheap. This was a winning strategy for a high number of years, from the dawn of the modern department store in the 1950s all the way until the 1990s. However, from the 2000s to present day, these types of retailers have gone through a notable period of decline with a high number of bankruptcies and distressed asset sales. Today, value-focused companies like Wal-Mart continue to grow sales alongside high end luxury brands such as Hermes whereas the likes of Target have been under pressure.
For the uninitiated, the above analogy is a real world example of the barbell effect, a phenomenon where resources, behaviors or outcomes are concentrated at two extremes while the middle becomes quiet sparse. Visually, this looks like a barbell. In our above example, using our X axis as average price of goods and our Y axis as some measure of sales growth, Wal-Mart would be on the far left with a nice healthy bar reflecting healthy sales growth, Target in the middle with absent sales growth and Hermes on the right, again looking healthy.
The broader idea of the barbell effect was popularized in the 2000s by both Nassim Taleb (Antifragile) and MIT’s David Autor (semi official; people credit The Polarization of the US Labor Market as an example of the barbell effect) Marc Andreesseen more recently used the above department store analogy to better explain what he’s observing with respect to venture capital fund size. Marc has also used it to explain the attention economy.
To the keen observer, we will find the barbell effect in everything from portfolio allocation strategy (very low risk married with very high risk) to endurance athlete training (very low effort mixed with very high effort). In all cases the middle should be avoided and instead one should allocate toward both sides of the extremes.
In this post, I want to explore the barbell effect in the cycling and outdoor industry specifically around product price point and company size. As I noted atop earlier, I’m not going to lean too heavily into data, instead letting this be more of an “idea” post. My hope is that anyone reading this – shop owner, buyer, product manager or CEO can scratch their head a little bit and consider that there are times to skew away from the “vanilla” or “baby bear porridge” approach, and instead skew to one (or both) extremes with respect to a particular decision.
Company Size
The past 24 months have been brutal in the bike and outdoor industry. Bankruptcies and shutdowns have piled up, and a pattern has emerged; the companies most vulnerable appear to be the mid-sized brands. (the middle)
These companies aren’t the bespoke, craft-focused builders like Moots, nor the global giants like Specialized, Trek, or Giant. Instead, it’s names like Nukeproof, Rocky Mountain, and YT. These companies have too big of a product mix to survive on niche customers or the uber high end, but too small to leverage true economies of scale the way a mega company like Giant might be able to.
This “middle squeeze” is accelerating, and I expect more hollowing out ahead. The driver? Well, in part its product pricing pressure against a backdrop of slowing technological change, which brings me to the next point…
Pricing: The Death of the Middle Bike
There was a time when the “smart buy” for a serious rider was a mid-range bike. Adjusted for inflation, the sweet spot was around $6–7K — the zone where you got the most performance for the money.
Today, that middle tier has collapsed. Even passionate riders (myself included) often settle around $3–4K for a complete bike, while only the lucky few — or the newsletter-goes-big version of me — shell out $10K+ for a bespoke Unno, Atherton, or Moots.
Why? Two forces. First, tech trickle-down: mass production and scale have made today’s $3K enduro bike far better than a $10K World Cup DH machine from the early 2000s. Second, diminishing returns: the performance of gear is hitting an asymptote. Each new technological increment delivers less real utility, narrowing the performance delta across the spectrum of gear options.
In other words, the power law is reshaping the gear market, and the middle often has no place left to hide.
I’d expect this trend to continue with a healthy “bottom end” like this very well spec’d Specialized Status 2 for $2,499 (link) as well as uber expensive premium gear like the Fox Podium ($2,000, sold out). Speaking of Fox, their management team is well aware how healthy the top of the market really is, noting on conference calls how much of a bright spot this remains.
Putting this to action
So what does this phenomena mean to you as a business owner, buyer, shop owner or product manager? Simply, be deliberate with how you are positioning a product in the market. Step back and consider your product mix against the reality you are seeing in the market. Don’t feel like you “need” to put out vanilla, middle of the road variant “because everyone else does”. Look at your financial and sales data, what do the trends show you? My guess is we’re entering into an era where fewer skus across more preciese product orientation on both extreme ends of the pricing paradigm will yield much the most success.
In a follow up post I’ll dive into more of the various moats at play within the industry and what that might mean for the underlying pricing dynamics. For the real nerds playing along at home, I’m going to borrow as much from my inner Micahel Moboussin as possible (my favorite finance professor) to see what kind of light we might be able to shine on our miniature part of the economic universe. Spoiler alert, I’m expecting most sales activity to cluster to the bottom end of the market against a backdrop of tightening margins. Conversely, the top end will stay healthy, withlower raw sales buoyed by more impressive margins and larger manufacturing and technological moats.
Cheers, and as always, thanks so much for reading. Also, as a shameless plug I’m currently building GPS racing app built for the sports and use cases Strava ignores. This includes real grassroots race management, serious attention to privacy (no heatmaps) and support for activities like dirt biking, enduro mtb, checkpoint snowmobile racing and more. The more people I get on the waitlist, the better the chance I actually make this thing happen → raliapp.com