Why do we even have dealer agreements in the bicycle business, and why are they so one-sided in favor of suppliers? Good question, and probably one every retailer has asked themselves from time to time.
Like a lot of things that are a part of the way we do business today, the annual dealer agreement stretches way back to the Bike 1.0 era. And like Bike 1.0 itself, it all started with the once-mighty Schwinn empire.
Here’s the backstory:
As part of a wave of trade law changes after Schwinn’s decade-long antitrust battle with the Department of Commerce, Congress created new regulations for what had formerly been franchise operations across all types of businesses, including the mandate that annual audits of the parent brand be made available to its franchisees.
This did not sit well with many captains of industry, not least of whom was Frank V. Schwinn, who had assumed the helm of the family business in 1963 following the death of his grandfather, Frank W. Schwinn.
According to Schwinn executives who were there at the time, Frank V.’s rage and horror at the prospect of making his family’s intimate financial details available to outsiders — basically, anyone who was not either a blood relative and member of the Schwinn Family Trust — was absolute. So much so, in fact, that Frank tasked the company lawyer John F. Baer with creating an entirely new supplier/retailer sales model rather than playing by the DOC’s new set of rules for the old one.
Ironically, after years of fighting a bitter and increasingly Pyrrhic antitrust action all the way up through the U.S. legal system, lawyers were about the only resource Schwinn had plenty of. As a result of the court battle, the company had amassed an arsenal of legal firepower that has never been equaled before or since in the history of the bicycle business. Even more ironically, the Supreme Court decision in United States v. Arnold, Schwinn & Co. would be reversed 10 years later. But by then, Frank V., the Schwinn company, and by then the rest of the bike business, had already moved on.
The model the lawyers came up with is now considered part of a larger strategy called selective distribution. Selective distribution had replaced the old Schwinn franchise agreements, retail price controls and independent distributors by 1979–1981. More importantly, it created an entirely new basis for wholesalers and retailers to do business together … not just for the bike industry, but across the entire breadth of American commerce. And the cornerstone of this selective distribution strategy model was something we’re only too familiar with in the bike biz: the authorized dealer agreement.
Similar to the familiar dig about politicians or attorneys, it’s the 99% of bike industry dealer agreements that give the rest of them a bad name.
How dealer agreements became evil
“Dealer agreements used in the independent bicycle dealer segment of the market are similar in style and content and very one-sided.” —The NBDA’s A Guide To Bicycle Dealer Agreements, 1998, John Baer, author
To learn more about the evolution of dealer agreements in the bike business, I reached out to industry guru Jay Townley. Townley started his career with Schwinn in 1966, fresh out of Hazel Park Cycle Center, a Schwinn dealer in St. Paul, Minnesota (which later morphed into Park Tool, a small company you may be familiar with).
Townley stayed with Schwinn through April of 1990 as VP for purchasing and logistics. But more important for purposes of this piece, he also held the post of VP of Marketing under Frank V. Schwinn as the first-ever dealer agreements were being developed and implemented in the early ‘80s.
“When it was first developed [by Schwinn], the agreement was very equitable,” Townley told me in a recent phone conversation, “and that principle was maintained. The one thing it didn’t do, and this came later, was the use of arbitration instead of litigation to resolve disputes between Schwinn and its retailers.”
No other bike company had dealer agreements (or selective distribution) until the mid-‘80s, Townley said. At the same time, interim changes to selective distribution trade law had made it possible for these agreements to become more favorable to suppliers. Other bike brands saw what Schwinn had done, and those brands had their lawyers draw up their own, ever more one-sided versions. In fact, back in 2022, I pointed out the introduction of dealer agreements as one of the defining traits of what I’ve chosen to call the Bike 2.0 era, when the current top four bike brands rose to prominence in the industry landscape.
The ability if those companies to increase their control of retailers through the use of Authorized Dealer Agreements may or may not have contributed to that rise, but they’re certainly an existential part of supplier/dealer relations to the present day.
In response to these changes, The NBDA’s A Guide To Bicycle Dealer Agreements (authored by the same John Baer who helped develop the whole concept of selective distribution in the first place) came out in 1998 and analyzed a typical ADA clause by clause. The Guide strongly cautioned dealers not to sign any agreement without consulting an attorney and renegotiating the entire document. With the NBDA’s permission, I have placed a PDF copy of A Guide To Bicycle Dealer Agreements here.
Here’s what Baer had to say in the introduction:
“Dealer agreements used in the independent bicycle dealer segment of the market are similar in style and content and very one-sided. Independent bicycle dealers have had virtually no input on the content of dealer agreements currently being used. Sellers (bicycle manufacturers or wholesale distributors) rarely negotiate or modify their standard printed forms of dealer agreement, perhaps because dealers seldom ask them to do so.” (Italics mine.)
Yet here we are, a quarter-century later, with the vast majority of retailers continuing to sign their agreements anyway, year after year, even as the ADAs themselves grow increasingly draconian. Notable among these draconian changes are some brands’ insertion of confidentiality clauses (also known as NDAs or non-disclosure clauses, although the two are technically different items) into their dealer agreements. These clauses literally prohibit the retailer from showing the ADA to anyone … including, presumably, the dealer’s own attorneys.
As one industry rep, who agreed to speak with me on condition of anonymity put it, “Every Dealer Agreement I've seen in the past 15 years has a section about Confidential Information and language about not disclosing the confidential information.”
(Now I’m no lawyer, but it certainly seems that such an NDA/confidentiality clause could only take effect after the dealer has already signed the Agreement. But what do I know? I’m just a cranky old guy who writes articles for BRAIN.)
For all this, there is still some light at the end of this tunnel for dealers, and for good reason: In the post-pandemic era, retailers have become more skilled at pushing back on suppliers. To borrow a phrase from the Reagan years, dealers have learned to Just Say No to supplier demands, initially that they carry more inventory than they really needed.
This trend first became evident earlier this year when data from PeopleForBikes showed dealer’s unit inventories had mostly returned to historic norms, while supplier inventories were still at catastrophic levels. Here’s what I said about the situation, quoting Patrick Hogan, who at that time was the senior researcher for PeopleForBikes:
“Regarding inventory on the retail side," Hogan said, "inventory levels have mostly corrected. However, brands are still holding about double the number of units compared to a pre-pandemic year."
So if dealers can successfully push back on suppliers’ demands to carry more inventory than is healthy for them, what’s to prevent them from pushing back on suppliers’ oppressive dealer agreements that are equally unhealthy?
Only time will tell the answer to that question.
