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The Curious Case of Bicycle Sports

Written by: Dan Empfield
Date: Tue Aug 10 2004

JOHN COBB'S SHREVEPORT EXPERIENCE

This is not an obituary. John Cobb’s Bicycle Sports is still in business. This is not the end, as Winston Churchill put it. Naysayers might contend it’s the beginning of the end. Bicycle Sports’ owner, Cody Smith, might prefer Churchill’s version: It’s the end of the beginning. And what a compelling beginning it was.

There are four hundred, two thousand, or seven thousand bicycle stores in the United States, depending on who’s counting and what you consider a bike store. However narrowly you construe this category, there are a lot of them. There is always an ebb and flow of market share. Stores open, others close, and they’re all expanding and contracting like a school of jellyfish. What’s especially newsworthy about the cycle of life of one such retailer?

John Cobb’s Bicycle Sports isn’t just any triathlon retailer. No such enterprise hit the ground with such force and its debut—only two years ago—was as noisy as it was big. Its ownership made a point of making noise. Triathlete Magazine made Bicycle Sports its centerfold one month, and this is not the sort of centerfold this magazine is famous for. As such, this shop’s ebb is as newsworthy as its flow once was.

John Cobb the person has been a multisport retailer for twenty-two years. His Shreveport, Louisiana, based store was plain old Bicycle Sports back then—his name wasn’t placed on the marquis until Cody Smith entered the scene as partner. Shreveport is not a hotbed of triathlon. Out of necessity Cobb developed ways to expand his customer base, chiefly through an expo presence at races and by selling mail order. Indeed, during the early 90s Cobb was without question the largest reseller of aerodynamic race wheels worldwide. Cobb would routinely ship out two thousand Hed wheels a year, and was among the sales leaders in Spinergy, Rolf, Mavic, and Campagnolo.
Cobb and Hed Cycling owner Steve Hed leveraged their business relationship in other ways. They spent thousands of hours together at the Texas A&M wind tunnel during the late 80s and early 90s. They gained a reputation as the most aggressive user of this technology in the cycling world, as both a research and a marketing vehicle. Cobb and Hed tested not only bikes and wheels, but riders as well. Mike Pigg, Ken Glah, and dozens of other triathletes and cyclists made their ways to Texas A&M, including a brash triathlete then in high school named Lance Armstrong.

All was not rosy in Shreveport, however, and Cobb found the Sysophean task of owning a tri store in Northern Louisiana difficult in the extreme. As he contemplated closing the doors, in stepped Albert Katzenstein. It was a chance meeting and Katzenstein’s entre meant a stay of execution after Cobb had already been strapped into the chair. Katzenstein made his fortune in the retail shoe store business. He was not a triathlete. Far from it. He was 63 years old at the time and, in retrospect, to say he went in partners with Cobb because he had nothing better to do seems as precise an explanation as any other.

This partnership lasted nine years. Near the end of their partnership Cobb found the going just as difficult, but in other ways. Cobb was used to carrying a large inventory of his best moving stock. Katzenstein’s health eventually began to suffer, and was less available to serve as both banker and co-decision maker. Also, Katzenstein faced an unsure future and he grew restless at having his capital tied up in wheels and bikes and wetsuits. Cobb became frustrated trying to keep revenues up while selling from an empty shelf. By the end of the 2001 selling season Cobb needed out, but he was stuck. He couldn’t just close the doors without cashing out Katzenstein. A price was fixed and Cobb commenced a Winter of selling in every means he knew how, including on E-Bay.

His friend Hed offered him a roadmap for the future. “Sell as much of your inventory as you can over the Winter,” Hed recalls telling him. “Whatever you’ve got left over, sell it to me and use that to pay Albert the money you owe him. Then, come to work for me.”

Cobb’s job would be to help generate new products—aero bars for example—and he’d work with the top category pro teams Hed was supplying in Europe, such as the Postal and Once teams. This appeared a dream come true, as it was just the sort of job Cobb had stated he wanted in past conversations with friends.

Cobb was busy over the Winter selling what he could, and Hed started writing payroll checks to Cobb that January. To explain what happened next it’s necessary to rewind several months, to the middle of the 2001 season, and introduce to the story one Morgan Nicol.
MORGAN NICOL AND OVAL CONCEPTS

John Cobb went on the Hed payroll in January of 2002. The Heds anticipated this and were prepared for it. However, Cobb wasn’t the only one who needed a fresh start and looked, at least in part, to the Heds to help make it happen. I don’t suspect the Heds could or did divine what would eventually occur. In retrospect, events that unfolded at Interbike three months previous foretold the breakup of business relationships and long held friendships.

I first met Morgan Nicol 15 years ago. He was Wen Hsieh’s right hand man at KHS Bicycles. I met him through Steve and Annie Hed. Nicol was a triathlete in the old days, and he introduced the Heds to each other. He and the Heds were part of the same posse, you might say, during triathlon’s adolescence.

Nicol was well respected for the job he performed at KHS, and Tom Ritchey apparently noticed this, as he hired Nicol in the early 90s to run his European operation. Nicol met and married an Italian beauty, Simona Braun, also in the bike business as liaison for the Italian Trade Commission. The two operated out of scenic Lake Como region, in Italy close to the Swiss border.

Things went well for Nicol. I’ve heard it said that Nicol’s European operation was responsible for better than half of Ritchey’s annual revenue in certain years. Nicol was not only Ritchey’s top employee in Europe, he owned a small stake in the European operation.

To an outsider looking in, Nicol might appear to have the perfect set up. However, some consider Tom Ritchey not the easiest man to work for, depending on what it is you want out of an employer. Ritchey has specific and entrenched views. One of them is his historic—though not necessarily current—reticence to use carbon in his bike components.

During or just prior to the 2001 season Nicol approached his longtime friend Hed and asked about the possibility of distributing Hed in Europe. “My European sales efforts, outside of England where we had a very good distributor,” recalled Hed, “were lukewarm. So I agreed to let Morgan have a go at it.”

Soon thereafter, Nicol had a brainstorm, recalls Hed. Since Ritchey wasn’t work with carbon, and since Hed is all about carbon, and since Nicol is well versed in getting components made in the Orient, why not expand Hed’s line to include carbon components made in Taiwan?

This all made perfect sense, however the devil is always in the details.

Problem one: Nicol wanted to get Hed going in Europe, and to do so meant a reasonably robust promotional effort. The Heds remember answering Nicol’s marketing queries by giving him authority to, “do what whatever [he] thought best,” or to “use [his] best judgment.“ Nicol had the green light, but to go how far, and using whose money? Not until several weeks after Interbike did Nicol present Hed a not inconsiderable bill for European trade show expenses. Hed maintains it did not intend, and was not warned, of such an expense.

Hed reminded me of the customary practice for distributors selling American products in foreign countries to pay their own marketing expenses. As one person engaged for a dozen years in a business similar to Hed’s, selling to many of the same foreign distributors Hed has sold to, I can attest to the Heds’ view. Rarely if ever do smaller, U.S. based, manufacturers pay expenses for trade show booths outside of America. I never did.

Nicol apparently saw things differently.

Problem two: Did Nicol omit informing Ritchey of his relationship with Hed? If so, it was only a matter of time before Tom Ritchey got wind of it. Nicol thought that it shouldn’t and wouldn’t matter—according to John Cobb—because Ritchey Europe was doing very well under Nicol’s oversight, and Ritchey wasn’t going to make anything out of carbon anyway. Ritchey, however, might have had a different view. Tom Ritchey fired Nicol during the Interbike show in October of 2001.

I went to dinner with Nicol and the Heds the day Nicol was fired. I remember it vividly. We ate at Battista’s Hole in the Wall, and discussed Nicol’s tactical possibilities over spaghetti, while being serenaded by Battista’s accordian player. After dinner Steve Hed and I spoke alone. “You’ve got to be careful,” I told Steve. “Morgan now has no income other than whatever he gets from you and from your products. You can’t afford to support an operation like that. You’re not big enough. No American wheel company is big enough to support an owned European office. Unless Morgan can figure out a way to make ends meet on his own, there’s trouble ahead.”

As of this point in history, the relationship between Hed and Nicol was fine. However, there was a crack in the hull of this ship, and water was leaking, but Hed didn’t see it. Nicol had already exhibited Hed’s products at Eurobike, Germany’s huge bike show that always happens three weeks or so prior to the Las Vegas based Interbike. And, yes, Steve Hed was aware beforehand that his wheels would be in a Eurobike booth. It wasn’t until months after Eurobike, however, that Nicol presented Hed a sizeable bill for Eurobike expenses.

Why would Nicol not mention these expenses to Hed prior to Eurobike, and not for several months afterward? I had my own theory, based on nothing but a hunch that neatly accommodated a variety of facts. During the weeks and months after Ritchey fired Nicol, it appears the two entities were engaged in what for lack of a better term might be called the divorce settlement. Files, records, legal status, contact information, orders, inventories, everything including the front door keys, all transferred from Nicol to the new Ritchey Europe team. Accounts had to be settled. Let us suppose in the course of this Ritchey discovered and brought up the fact that Nicol exhibited Hed’s products at Eurobike, and did so on Ritchey’s dime. Yes, the Hed booth was separate from the Ritchey booth. Yet, to this day, and after several requests, according to Annie Hed, she has still never seen a billing from Eurobike. Had Ritchey discovered this, he would have wanted Nicol to compensate him for this.

This would explain why Nicol never brought up trade show expenses to Hed before, during, or in the first months after Eurobike. If my theory was right, he never expected Hed to have to pay for it. However, now there was a bill due, and Nicol had to decide whose bill it was. Could Nicol claim it was now Hed’s bill to pay based on Hed’s okay to, “…do what whatever [he] thought best,” or to “use [his] best judgment?“

“You’ve certainly gotten to the heart of some sensitive issues.” was the reply I got from a senior manager at Ritchey, when I asked these questions. “I don’t know to what degree I can answer these things. I’ll get hold of Tom [Ritchey] and either he or I will get back to you.”

Twenty minutes later Tom Ritchey called. I read him the two paragraphs above explaining my theory, and asked for his comment. “The way you’ve pieced things together is representative of the facts. An employee from our European office called from the Eurobike show. He said, ‘Tom, there’s a booth that has Hed products next to ours, and Morgan and Simona are in it. They’re asking us to help with it, and I feel uncomfortable with this. I thought you should know.’

“Morgan and I had vague talks over the last couple of years about Ritchey doing the distribution for certain companies,” Ritchey continued. “Morgan had brought up the idea of distributing Hed, and also companies like Hayes and Avid. I’d ask Morgan from time to time what progress was occurring, and he’d always indicate there was nothing to report. So [when I got this phone call from Eurobike] this was a total shock. What really bothered me was how it was reported. The way we heard it described was, ‘Simona and I have worked really hard to build Ritchey, and we wanted to do something for ourselves.’”

“In other words, your assumption was that any foreign distribution would be done under the Ritchey umbrella,” I asked Ritchey, “not as someone’s separate business?”

“Yes. We’d worked hard to build the Ritchey team, we had a really great group of people coming together, and to have this happen was such a blow. This wasn’t Ritchey business. It was his and Simona’s personal business.”

“Would I be right or wrong,” I asked, “in assuming this is the reason Morgan was fired?

“This is the reason Morgan was fired,” was Ritchey’s answer. “As we were performing our own discovery, we found a lot of stuff—trips to Spain and different places—all without our knowledge.”

“Was it just the traveling and the distraction of a separate company that bothered you,” I asked Ritchey, “or was he also doing all this on the company nickel?”

“It was completely on the company nickel,” Ritchey answered. “He was utilizing company resources and employees to do all this.”

Several telephone calls and emails to Oval Concepts have as of yet not been returned and I have not spoken to Morgan Nicol to get his version. However, it seems Nicol’s recollection of events is destined to put him at odds with both Tom Ritchey and Steve Hed. “Morgan told me that Ritchey was aware of his distribution of our products,” offered Steve Hed. “I would never have agreed to allow Morgan to distribute Hed if it was otherwise.”

As I cast about for all possible explanations for the disagreement over Eurobike trade show expenses, there are possibilities that bear mention. Maybe Nicol always meant for the trade show booth to be paid separately, not ultimately with Ritchey funds. If the Hed booth was part of the Ritchey booth buy, maybe that was just to get the best Eurobike rate on both booths, and to make sure the booths were proximate to one another. And, in Nicol’s defense, there was vague talk emanating from Hed’s then partner in the Spanish wheel factory (Hed now has total ownership and control of this factory) that the Spanish government might help pay for the marketing expenses of Spanish built wheels. Perhaps Nicol was relying on government grants to get the Hed trade show bills paid. I do not know.

Several things of import happened during the Winter of 2001 to 2002. First, Morgan Nicol wanted John Cobb to meet him in Taiwan in December, two months after his separation from Ritchey. He would pay Cobb’s way. This was curious to the Heds, and a little disconcerting. Upon Cobb’s return, Annie Hed recalls Cobb saying, “I saw Joseph Chao write out a $1 million line of credit for a new parts company headed by Morgan.”

Chao was Ritchey’s Taiwanese agent up to October of 2001. He and Ritchey parted ways at the same Interbike where Nicol got the axe—but for different reasons. Chao was part of the existing Taiwan bike company paradigm. Ritchey wanted Chao to implement a new system of doing business as a Taiwan agent, one that Chao was unwilling to adopt. “Morgan knew well before Interbike that we were going to make changes [as regards Ritchey’s Taiwanese agency operations],” Ritchey said. “And Morgan was in agreement.”

Now that Chao and Nicol were both out of a gig, it was only intuitive that they’d find each other. Chao’s alleged payment to Nicol in December meant a couple of things. First, Nicol was obviously going to start a new brand, and keep for himself the category of carbon components. This did not bother the Heds, and was a bit of a relief. They didn’t much care for the idea of OEM Hed stems or seat posts, and though they were willing to let Nicol make these, they were quite happy to have him make them for his own firm. That firm would be called Oval Concepts.

However, the Heds did want to know for whom it was Cobb preferred to work. This was December, and he was due to start on Hed’s payroll the following month. They report giving Cobb the opportunity to work for Nicol instead, yet Cobb preferred designing new products with and for the Heds.

Two months later, John Cobb, now in the employ of Hed, traveled to Spain in order to look in on Hed’s Spanish wheel factory (where Hed3s and Alps are made), thence to meet Lance, and show him a time trial bar design Cobb had been working on in conjunction with Hed.

The fate of his own retail shop, Bicycle Sports in Shreveport, must have been weighing on Cobb’s mind at the time. Albert Katzenstein—Cobb’s Shreveport store partner—had given Cobb a window during which Cobb must cash him out. However, Katzenstein’s health again began to fail and, according to Cobb, Katzenstein moved that window up. The Winter of inventory selling hadn’t produced the revenues Cobb had hoped, and Cobb needed to secure a loan to cash his partner out. According to Steve Hed, Cobb certainly should have had some angst about the shop. “John gave us certain assurance,” remembers Hed, “that he’d be out of that shop ‘one way or the other’ by January 1. There is no way I could employ John if he still had a shop. What would my other retailers think?”

Meanwhile, the seeds were sown for a parting of the ways between Hed and Nicol over Eurobike trade show expenses. This disagreement still brewing, Nicol was to meet Cobb at Hed’s Spanish factory. Nicol was still Hed’s distributor, but now only for wheels. He was interested in seeing how that factory could provide him Hed wheels for the European market at a palatable price. Cobb also wanted to talk to Nicol about the fork he’d designed and handed to Nicol in Taiwan during their December trip two months previous.

This Spanish meeting was the furtherance of an association between Cobb and Nicol, a partnership of sorts that would last only a very few months, or the better part of a year, depending on whom you talk to. According to both Cobb and Hed, Nicol took the fork back to his home on the Italian-Swiss border and patented the fork under his own name. Cobb found out about this and, Cobb said, told Nicol to place the John Cobb name on the patent as well or else that was the end of any relationship between the two. This would all have occurred during late Spring and Summer of 2002. Cobb reports that Nicol failed to do this, and Cobb called it quits between the two.

However, it was apparent that Cobb, Nicol and a third party not yet introduced to the story proceeded in some fashion together through the Summer and into the Fall. That relationship was in existence during and after October, which incorporates the trade show season. That this is true will be developed in future installments of this story.
CODY SMITH, THE MONEY MAN

As February of 2002 rolled into March and April John Cobb was a busy man. He had no fewer than three duties for Hed that had him spanning the world: occasional overseer of Hed’s Spanish wheel factory; designer of new products in new categories; and aero guru liaison between Hed and various sponsored athletes, most prominently the U.S. Postal Team.

As to that latter job, Cobb was building a solid reputation. Lance had won his third consecutive Tour de France and was preparing for a fourth. Trek was less than thrilled, one assumes, by Lance’s proclivity in earlier Tours to time trial on a Litespeed Blade, and sought Cobb’s help in testing time trial bikes Lance would agree to ride. Cobb was also the designer of Lance’s Giro time trial helmet. It seemed like Cobb had the magic touch. Everybody wanted a piece. The Rabobank Team flew him over to help with their riders’ TT positions. People were lining up to pay $2700 for a slot in his wind tunnel camp.

Yet there were worries. He still had a retail store in Shreveport, and he had to split his time between his full time job with Hed and the always full time job of owning a bike shop. One might also wonder, though such presumptions amount to no more than idle speculation, whether Cobb thought there was a better destiny out there for him, considering the upward trajectory of his reputation. When Lance singles you out publicly as one of the five people who got him to his pinnacle, how do you leverage that to your benefit?

As Spring gave way to Summer, a Texan named Cody Smith had as his personal triathlon coach Scott Tinley. Smith wanted to be a recreational triathlete, and in choosing his coach Smith went right to the top. That was Cody Smith’s style.

Problem was, Smith was blessed with the genes to be a Dallas Cowboy lineman. Tinley, though no mechanical engineer, surmised that the gravitational force applied downward to Smith’s wheels required more than your average attention to strength and fatigue life. So he had Smith call the Hed wheel company.

Cody Smith is an affable guy, a terrific salesman, and a person fun to be around. He and the Heds struck up a bit of a telephone friendship. Smith was favorably impressed by the Hed3 wheels he’d received, and inquired about getting into the business of selling them. The Heds told him they knew of a shop for sale, the one still owned by Cobb. That is how the two primary partners in John Cobb’s Bicycle Sports met.

Cody Smith made an immediate and conspicuous impression on John Cobb, when they met in the Summer of 2002. I remember a very few months later, as John was still trying to plumb the depths of the resources of his new partner. “He flew in on a private jet,” Cobb told me as we were both in Las Vegas for the 2002 Interbike bicycle trade show. “He went to the twenty-one tables and was betting $8000 a hand.” Cody Smith was a player by nature. Within a very few months of finding triathlon, he was a player in this sport as well (though the degree to which he was a player is in question; he maintains to me, "I have never played more than 500 a hand at blackjack.")

What Cody Smith was before his entre into triathlon is known. There were GNC franchises in Florida, World Gym franchises in Nebraska and Florida, and most notably an investment in Tyler Jet, headquartered in Smith’s hometown in Tyler, Texas. In some cases Smith's holdings were and are in partnership with two others, and in other holdings his business partner is his father, by all accounts a well-respected and successful attorney.

Tyler Jet was once the world’s largest reseller of business aircraft. It’s owner, Tim Beverley, is a personal friend of Cody Smith, and has been for ten years. Tyler Jet is now in bankruptcy according to a person answering Tyler Jet’s phone. The exact cause of Tyler Jet’s woes may never be entirely known. The most frequently repeated story is that its problems emanated from the economic downturn following Nine-Eleven.

Others say that Tyler Jet’s problems predate Nine-Eleven, and derive from the financial drain of owning a top car racing team. Tyler Jet’s Beverley purchased Darrell Waltrip's NASCAR team in 1998, renamed it Tyler Jet Motorsports, and then sold it in July of 2000, more than a year in advance of Nine-Eleven.

Whatever the cause of Tyler Jet’s financial problems, business was bad at Tyler Jet in recent years. Beverley, its president, along with Tyler Jet’s CFO, resorted to corporate fraud, according to the U.S. Attorney’s office. They both pled guilty to one of the 34 counts with which they were charged. The plea agreement with Beverley says that the value of the funds involved in the offensive conduct was more than $10 million, but less than $20 million. Beverley is awaiting sentencing, and could serve as many as 10 years in jail. His sentencing date is currently in September, said Beverley’s lawyer, Van Hilley, though it may be delayed in order to allow the U.S. Supreme Court to consider a case currently before it on mandatory sentencing guidelines. (I should mention, Van Hilley states he never heard the name Cody Smith in conjunction with Tyler Jet, and I've discovered nothing to indicate Smith was anything but a victim of Tim Beverley's financial wrongdoing.)

Though Tyler Jet was founded in 1986, Smith didn’t invest until 1999, not long before Tyler Jet’s collapse. Cody Smith knew that Tyler Jet was having cash flow problems in the late 90s, and "after a lot of due diligence" Smith, his father, and his partners felt their $5 million investment was safe. When Tyler Jet went into a tailspin, the loss to Smith was extreme. Bad events cascaded one onto another. Smith’s net worth fell from many millions to what it now is. He does still maintain ownership, along with his partners, in most of his franchises.

By all accounts, Smith's current worth appears to be a fraction of what it once was. The possibility of Smith's financial meltdown was known, or it seems should have been known, to Smith when he negotiated with Cobb for Bicycle Sports. “Whatever bad thing might happen,” Cobb remember's Smith telling him in the beginning of their relationship,” I’ve got enough money to get us out of it.” If Smith did not know what kind of trouble he was in, Beverley was very good at conceiling from Smith the fragility of Tyler Jet's situation.

In any case, it was apparent that Smith didn't have much ready cash. His actual financial investment into Bicycle Sports was not significant, considering Smith's visible and stated wealth. The size and scope of several stores, a tractor trailer filled with a giant trade show booth on wheels stocked with hundreds of thousands of dollars of merchandise, and large advertisements in the big triathlon magazines, seems to have been largely financed by trade terms, operating revenues, and the cash infusion of a third partner, Chicago triathlete and businessman David Varwig.

And this wasn’t the end of Smith’s vision. He wasn’t simply interested in the retail end of the business. He proposed becoming the sole distributor of all U.S. sales for Hed’s wheels. The Heds declined. He then set his sights on becoming the U.S. warehouse for Oval Concepts.

This created a point of tension. On the one hand, Cobb was peeved over designing an aero fork and then losing his rights to it just as quickly. However this doesn’t seem to have kept Cobb, apparently with Cody Smith’s urging, to continue designing products for Morgan Nicol’s new company. According to Cobb, the fork, aero bars Cobb had been co-designing with and for Hed, an aluminum version of that aero bar, and additional consulting work on a road race bar, are all designs for which Cobb isn’t receiving a penny (though there is, via convoluted math, a degree of consideration given in lieu of cash payments for the fork).

Meanwhile, Morgan Nicol was proceeding full speed on a comprehensive line of Oval products. He tells a different version of how things transpired during 2001 and 2002. “Tom Ritchey was aware of all my plans to distribute Hed Cycling. I kept him abreast every step of the way.”

Nicol was also afoul of Hed at this point. “I tried to do business with Hed, and I just couldn’t get it done. We’d agreed on pricing, and over the Winter [of “01 and ‘02] Hed was my only source of income. I sold Hed’s wheels. I took the orders. Then, I couldn’t get any delivery out of them. How was I supposed to feed my family? What kind of person would do this to a friend?”

Cobb saw all of this. And so did I. So I put it to Cobb this way: “To hear Morgan tell it,” I told Cobb, “He and Annie Hed agreed on a wheel price, he showed the wheels in Europe, he took orders, and every step along the way he notated conversations, and sent confirming correspondence to the Heds saying something like, ‘As we spoke, the price of the wheels is so and so.’”

“Yes,” Cobb replied, “This is exactly as I remember it.”

“So, on the face of it, it would appear Morgan has every right to be upset with the Heds.”

“Yes,” Cobb replied, “On the face of it, it sure seems that way.”

“Further, when you hear Annie’s side of it,” I continued, “She agrees with all this. She doesn’t dispute any of what Morgan says. Except she adds that she’d reply to Morgan’s confirming notes, and say, ‘No, we didn’t agree to that price. We agree that’s the price you may need, but that’s not the price we can sell the wheels to you for.’”

“Yep, Cobb laughed, “That’s right also.”

This lack of common perception seems to have pervaded the business dealings between several of the parties. Morgan Nicol thought Ritchey Europe ought to be moving in a specific direction. He viewed his role as head of the European division to be take-charge. “Tom Ritchey might have spent five hours in the European office during the twelve years I ran the division,” said Nicol in justifying his affirmative approach. Ritchey obviously saw things differently.

Nicol no doubt felt that dealing with Hed was a lot like dealing with Ritchey. On Nicol’s side, there is the reality that he was in Europe, fighting the battle on the front line, while Tom Ritchey and Steve Hed were in America and less in tune, thought Nicol, with the realities on the ground.

The roles were reversed, however, when it came to Oval Concepts and Bicycle Sports. Cody Smith was stymied in his attempt to grab Hed’s U.S. distribution, so turned his sights onto Oval. I asked Cobb how this went. “You must have been a bit torn. On the one hand here was Morgan who, in your own view, swiped your fork. On the other hand, here’s Cody, who must have been saying, ‘Johnny, I know you’re raw over this, but just eat it for the good of the company. If we become Oval’s U.S. warehouse we’ll be making money out of your designs, just in another way.’”

“Yeah, that’s just about how it was,” Cobb replied.

But the roles were reversed. Cody Smith thought “U.S. warehouse” meant one thing. Morgan Nicol thought it meant another. “Certainly we talked about Bicycle Sports warehousing our product, but we never meant that to mean the sole point of distribution to other shops,” explained Nicol. “No way are other shops going to buy from a distributor who was their competitor in retail, especially because of their plans to open stores in all the big markets. When I told Cody we still planned to open Quality, and SBA [companies who distribute products to bicycle retailers], he couldn’t understand that. By giving him the ability to warehouse our products, this meant he’d always have a ready supply. But no, we wouldn’t give him sole distribution rights.”

It seemed 2001 and 2002 was the era, at least in this small milieu, of people taking past each other. In all these cases, however, one thing becomes clear. When you own the brand, you own control of that brand, and its distribution, regardless of whether you’re smart, or right, or engaged, or in tune, or whether you’re none of these things. Morgan Nicol believed he was on the bad end of that deal with Ritchey and Hed. With Oval, however, he found out the only thing worth knowing. It didn’t matter who was right. The only thing that mattered was who was boss.

If Nicol had hopes of building both sales and equity in a Hed Europe operation, only to see those hopes fall to nothing, Cobb had hopes of building a reputation as designer of Oval Concept products. After negotiations broke down between Bicycle Sports and Oval Concepts, John Cobb asked for his name to be entirely dissociated from Oval’s products.

Not that Bicycle Sports didn’t have a full plate of other ideas to execute. Cobb and Smith had a retail empire on which to embark. But they needed money. Smith apparently had his tied up, and David Varwig—who in retrospect was more the money man—wasn’t yet entirely in the picture (that is, his money wasn’t yet in Bicycle Sports’ bank account).

This was John Cobb’s world during the Summer of 2002, though triathletes only saw him through the prism of Lance Armstrong’s fourth Tour triumph.
THE RETAIL JUGGERNAUT

As Interbike approached in the Fall of 2002 Steve Hed had what appeared at the time a reasonable expectation he’d be exhibiting an aero handlebar to the world. His expectation was based on three things. First, he’d been paying John Cobb to help him design these bars since January. Second, Steve made each successive prototype with his own hands, in his own factory. And third, he’d sent money across to the Taiwanese manufacturer for mold charges, money which was accepted.

It was an understandable surprise when Steve Hed discovered that the handlebar he’d promised his dealers they’d see was instead mounted on bicycles in ABG’s and Kestrel’s booth with Oval Concepts decals.

By 8PM the night before the Interbike show opened, however, these bars had been deOvalized, and were again aero bars by Hed. The deal between Hed and Oval was brokered by Cody Smith, whose father, an attorney, wrote up the contract. A cash payment was made by Hed to Oval, this consideration representing the unfair treatment Morgan Nicol believed he’d suffered at the hands of Hed over the past year, as outlined earlier in the story.

There was not much else the Heds could do. They were naïve to the world of Taiwanese bicycle manufacturing. They were introduced to their first and only agent by Morgan Nicol. This agent was Joseph Chao, the ex-Ritchey agent and partner in Oval Concepts. The Hed’s had to scurry to find a new agent as Chao, a partner in Oval Concepts, clearly represented a conflict of interest.

In brokering the deal, however, Cody Smith deftly positioned himself as everybody’s good guy. Whatever goodwill he engendered did not, however, appear to last. Within a very few months both the Heds and Morgan Nicol would deny Bicycle Sports what it wanted—the chance to act as U.S. distribution and sales agent. Plan B became the new Plan A. Having been foiled at their attempt to make their money on the buy, they’d make it on the sell. They set their sights on retailing.

I remember standing atop the parapet above the “Big Red Truck.” The date was April 4, 2003, and this was the expo in Oceanside preceding the Ralphs Half Ironman in that town. The truck was indeed a phenomenon. It housed a custom built—by Cobb—set of cabinets to store all the bikes, inventories, workstands, and expo tents. Out the side of the truck was a tent that effectively created a separate room, perhaps covering upwards of 1500 square feet, and inside was an entire bike shop.

Most impressive to me was by far the largest stock of Continental tires I’d ever seen in one place. All those orange boxes had to represent an investment—somebody’s investment—in the tens of thousands of dollars. And, I met Cody Smith the retailer for the first time that day.

John Cobb and I went up to the parapet and I asked him about Bicycle Sports’ plans. “We’re opening stores here in North San Diego County, and in Chicago and San Francisco, to go with the stores in Tyler [Texas] and in Shreveport. We’re working on opening stores in Atlanta and in Minneapolis, and then we’ll see.”

“That’s a lot of inventory,” I said. “That’s millions of dollars in bikes and accessories.”

“Our plan is to warehouse most of the inventory in Tyler, and ship it out as needed. We’ll only put a small, representative stock in each store. We feel the customer won’t mind waiting a couple of days for his bike, and we’ll keep the Tyler warehouse fully stocked.”

I would later quiz Cody Smith about this, and he’d reply, “This is an already proven model. This is retailing in which we’ve engaged in other industries.”

He explained the extent of his plan for management and information systems, and in my brain I calculated that the development, software cost, and telecommunications lines and equipment would alone would cost in the neighborhood of $150,000 just to set up.

While still on the truck talking to Cobb over Oceanside’s harbor, I continued: “Why open stores in places there are already very good competitors? Why San Diego, where Craig Turner [Nytro Multisports] already has this thing down to a science? The best you’ll do is draw his sales down a bit, yet not enough to meet your expenses. Why not open stores in underserved markets, like Indianapolis, or Cleveland?”

“Cody believes if we’re going to make ourselves a player we need to take on the big guys on their home turf.”

But I had a silent question. Well, not so silent. I wrote it here on Slowtwitch during the 2003 season, as I summed up the Bicycle Sports’ plan: “Here's the wager. Whereas now a local, independent pro tri shop in each location might have twice the inventory of a Bicycle Sports regional location, Tyler will in theory have twice the inventory of any such regional competitor. So, while you might find a somewhat smaller likelihood of walking out the door that day with the bike of your dreams, the two- or three-day Bicycle Sports wait would be better than the two- or three-week (or month) wait that might be the case if your other LBS was the sales agent for your bike. Clear on that?”

Was there much difference between a prospective bike buyer and a customer shopping in a GNC? Yes, you can restock the shelves quickly from a central warehouse, but the operative word is restock. The GNC is fully stocked, just not necessarily deeply stocked. How many shoppers require their bicycle to be right there on the floor when they buy it?

Then, there was that red truck. I’d had my own “traveling road show” when I owned QR. We sent something much smaller around the country, just a large pick-up truck and a utility trailer. Our route was carefully scripted, no wasted miles, no back and forth, and it still cost us a fortune.

The next big race at which the truck and I again met was Wildflower. There were also three rented RVs for the Bicycle Sports crew. Again I did the math in my head. Flying everybody out to work the expo, renting these 30-foot houses on wheels, the cost of the booth, the per diems, the truck and its driver, the gas, the opportunity cost of having all these people here instead of at their regular positions in the company. It seemed to me one would have to sell well over $100,000 in order just to break even. After having expo’d at this race for better than 15 years, I know what Wildflower will yield. In a normal year the Big Red Truck, extraordinary vehicle that it is, would stretch to do $50,000 for the weekend. And this was no regular year. It rained cats and dogs the entire four days. This truck was going to cost a fortune.

And yet there was no doubt the Tyler operation was executing its plan. Stores opened in Leucadia, San Francisco, Tyler and Chicago. These were going concerns. But there were some underperformers. The Minneapolis location was open, but much too anemic to compete with hard-hitting tri stores like Gear West. Atlanta never got off the ground and, even if it did, faced stiff competition from tri specialist All-3-Sports and the traditional retailers like Free Flite and Roswell Bike.

And there were problems in certain other locales. Tyler was a bit off the beaten path. San Francisco had a very problematic location on Haight Street, where it was better known for the place to score heroin than Kestrels.

Then, of course, there were the really big competitors. It would be foolish to think a retailer like Mission Bay, with two stores in Chicagoland, would roll over without a fight. Likewise Nytro Multisport in Encinitas, two or so miles from Bicycle Sports in Leucadia. Among other things, you can be sure stores like this would pressure suppliers. I can attest to the power of these two stores. They would each routinely spend at wholesale better than a quarter of a million dollars per year from me. Certain suppliers took heed. Cervelo was one who did. Others, like Aegis and Griffen, did not.

Kestrel split hairs. It chose not to open the San Diego location. It did open Bicycle Sports as a retailer in Chicago. “We didn’t appreciate the nature of the personalities involved,” said Kestrel’s president Kevin Kenney. No doubt. Anyone who knows Mission Bay’s Bill Linneman knows that a specialty triathlon brand needs to walk softly when considering opening a competitor in his area.

“We routinely bought big numbers from Kestrel,” said Linneman. “We’ve been one of Kestrel’s biggest dealers in the country for years. But our purchases from them are down by about two-thirds, because we show loyalty to those who show it back to us. Therefore, our sales of Cervelo and Felt have doubled in the same period of time. Now, Kestrel's salesmen appear to understand they made a mistake in Chicago. They’re working to rebuild the relationship with us, and we’ll honor that. We’ll see how it goes.”

Kestrel is owed money by Bicycle Sports, and is struggling to get its debt paid, an amount in excess of $20,000 according to source inside Bicycle Sports. On the flip side is Griffen. “I got a call from John Cobb some months ago,” remembers Griffen’s owner Tony Free. “He said, ‘I don’t know when or if I’m going to be able to pay you. I want to do what’s right. So, I’m going to send back to you any bikes we have that we owe you for, and if we’ve already sold them I’ll send you payment.’ John did so. We now send him bikes C.O.D. He behaved utterly honorably to me, and I have nothing but respect for him.”

The current debt owed by Bicycle Sports to industry suppliers seems not to be large, excluding a very few vendors who are not really owed that much (between $5,000 and $25,000), considering the large inventory volumes that are routinely fronted to average-sized bike shops. The debt seems mostly consolidated into a few large entities—a bank, and venture capitalist, and the like. That established, the fact that there are those Bicycle Sports could not easily pay, or so far did not pay, is testament to the distance between a company’s vision and its execution. Cody Smith’s gaze exceeded his grasp, you might say. In retrospect, there were several problems with the Bicycle Sports enterprise, but not those I would have suspected.

On the face of it, you’d anticipate several very expensive categories of start-up costs. Full page ads in Triathlete Magazine, for example. Several hundred thousand dollars to purchase the Big Red Truck, and thousands more to outfit the truck and its rolling expo tent. As explained earlier, hundreds of thousands for M.I.S., telecommunications, tenant improvements, and lease payments and deposits for the retail locations.

However, Bicycle Sports appears to have fed the multitudes with a few fish and loaves. The Red Truck was bought at a cut-rate price of $250,000, expo tent included, painting and logo art included. Plus, it was financed.

Triathlete Magazine ads were largely abated by cross-advertising. Most of the inventories were financed by vendors. Park Tool outfitted the truck’s rolling service department for no charge.

The M.I.S. did cost about $70,000, but that was about half what I'd anticipated. This included an inventory control system sold by Quality Bicycle Supply. Bicycle Sports appears to have done an admirable job of implementing this, and this state of the art system was functional quite quickly. However, this was not a complete accounting system, just a way to track things on the supply side.

One big problem with Bicycle Sports appears to have been non-adherence to its budget, according to Cobb. Yet there was something more problematic that kept this lack of budget discipline from visibility. Bicycle Sports seems to have lacked a functional bookkeeping system allowing it to successfully account for its profit and loss in anything close to a real-time basis. “We did have an accounting package,” said Cobb, “and from time to time I’d come back in from the road and ask to see a profit and loss. But I never did see one.”

Getting meaningful data and information out of any bike shop is notoriously hard to do. The number of purchases is legion. The rate at which a shop goes through small tools and parts, the degree to which brands and categories must be tracked, how much of your inventory is paid for, what you need to order and when, how much margin you’re making in sales, and on labor—it’s an accounting nightmare. Multiply this times seven, and for a brand new enterprise run by a person who’d never worked in the bicycle industry.

Then add an eighth store on wheels, and wind tunnel camps, and factor in juggling a million dollars worth of various kinds of debt right out the gate. And do it all without a functional accounting package, necessary not only to track overall corporate profit and loss, but the performance of each store. Bicycle Sports was flying by the seat of its pants. Or not flying, as the case may be.
THE POST MORTEM

It has been my experience that every growing, vibrant organization requires two elements in order to achieve success. These elements may not be mandatory, but without them any business faces an uphill struggle. Each of these elements is expressed in the form of a person.

The first is that officer whose job it is to say Yes. It is almost a requirement for any young company that its vice president of sales, or sales manager, embody this ethic. Such a person must have hard-wired into his or her genetic structure that every effort be made to say Yes to a customer.

The other required entity is that individual whose favorite word is No. Any good chief financial officer is comfortable with this word, and wields it with regularity.

These twin virtues live in tension with each other, like justice and mercy, or free will versus predestination. Any really good CEO understands this. He or she must decide when the CFO is correct in urging No, and when the VP of sales ought to be given the rope requested. When push comes to shove, the CFO ought to outrank the VP of sales. Most properly functioning companies imbue their CFOs with a power superceded only by the CEO.

A very small company has to be careful, because its sole owner has to wear both hats, and each of these hats requires opposing approaches. The faster a small company grows, and the more debt it intends to incur as a down payment on its future, the more the urge to say Yes needs to be tempered.

As of this writing, Bicycle Sports is down to one retail location. The Big Red Truck is gone, replaced by a small, white trailer. There are no imminent growth plans for Bicycle Sports—the plan is now to survive and rebuild. Two weeks ago Bicycle Sports filed for Chapter 11 bankruptcy protection.

Its co-owner, Cody Smith, is at home recuperating from a bicycle crash that came within a whisper of costing him his life. As a result, John Cobb is currently running the operation. The organization is back on its heels, but it’s also preparing for eventual prosperity. There is no other way to couch it than to say Bicycle Sports, though a hopeful operation, is now downsized. It is lo-carb and lo-fat. If it was United Airlines, it’s desperately trying to be Southwest. If you’re going to shop at Bicycle Sports, you’ve got to bring your own meal on board.

How did the plans expressed to me, as I stood atop the Big Red Truck in Oceanside, California, fall to earth in a span of sixteen months? In my view, it is primarily because the organization had only one voice operating—the one that by training and temperament only knew how to say Yes. That Cody Smith is an extraordinary salesman is disputed by no one. That he is an exceptionally hard worker, willing to do both the dirty work and the clean, is evident. “Cody is no stranger to hard work,” John Cobb told me. “He’ll stand by your side and match you effort for effort.”

I don’t believe The Vision for Bicycle Sports was necessarily bad. The expertise to execute it was not lacking. The ability to cut a good deal with vendors was there in spades. The personnel hired to fulfill the mission were, by and large, top grade. In casting about for a reason to ascribe to the decline of Bicycle Sports, a lack of fiscal discipline fits as well as anything.

If anyone wants a VP of Sales, give Cody Smith six months to learn your industry and he’s your man. I do not write this with any sense of irony or jaundice. I’m entirely sincere. In the case of Bicycle Sports, Smith was the perfect fit for a sales and marketing manager. I don’t believe, however, there was anyone in the organization with the strength or presence required to stand up and say No to him. Coupled with the apparent lack of a paper trail to follow the performance of each of Bicycle Sports’ revenue streams, there was no ammunition allowing anyone to say No.

David Varwig, the third partner in Bicycle Sports, could’ve been that man. A triathlete, adventurer, and private financier, Varwig had the business sense, level of investment, and personal mien to make the hard call when necessary. “Varwig’s problem was two-fold,” Cobb told me. “First, he couldn’t get hold of enough financial data. And second, he was up in Chicago, and we were down here. You can’t easily exert control of a business when you’re that far away from it.”

I don’t know whether any sort of financial post mortem will be performed on Bicycle Sports beyond this cursory one. What would such an investigation turn up? To the best of my ability to generate any numbers (and my estimates might be far off) it seems about $600,000 more was spent than was earned during the 18 months in which seven stores were in operation. You could probably place a third of that amount at the feet of the Big Red Truck—the behemoth that zig-zagged North America without earning the revenue necessary to offset its tens of thousands of miles of operation.

Another $150,000 or so would’ve been spent in telecommunications, leases, tenant improvements and other start-up costs for the stores. That leaves $250,000 in storefront operational losses to account for, more or less.

“Our biggest problem was simply our propensity to spend money,” Cobb said. “If we needed a computer we wouldn’t just get something cheap from Best Buy, we’d go out and get the plasma screen model.”

But that can’t account for $250,000. “We were growing so fast,” continued Cobb, “we were hiring people and putting them into management faster than we could teach them the bicycle business.”

According to Cobb, this lack of careful planning caused successful stores to have their gains more than offset by the badly managed stores. “San Francisco was our biggest loser,” said Cobb. “I went up there and stuck my head in the door for the first time, and said, ‘We’ve got to close this.’ Then came Chicago, we lost a lot of money there.”

On the flip side, San Diego was a success, and the Tyler and Shreveport locations held their own, according to Cobb. But Atlanta and Minneapolis were also money drains. Cobb defends some of the locales as smart choices. “Some of these stores would’ve been successful if we’d been able to keep them open. Atlanta would’ve done very well in time.”

The stores have all been sold or closed except for Tyler. Bicycle Sports retreated from the gains it made behind enemy lines, but now that it’s back on its own soil the Tyler, Texas store is thriving, according to Cobb. This store seems to have been the beneficiary of whatever experience Cobb and Smith have gained in their adventure in retailing. “I hope people don’t get the impression Bicycle Sports is defeated,“ said Cobb. We’re doing good things here—new things. Tyler is doing very well.”

John Cobb will always have a following, and partly as a result of the Bicycle Sports experiment his reach is no longer regional, but nationwide. The Tyler store regularly hosts customers who’ve come from other parts of the U.S., and his plans include new business paradigms to increase that dynamic. He’s even building his own wind tunnel in Bicycle Sports’ “back yard.” In the works is a destination location—a sort of Disneyland for triathletes who want to improve performance.

While Cobb is upbeat about the future, there is no doubt he is humbled by the Bicycle Sports experience, and on several levels. If someone would’ve asked me two years ago who were Cobb’s best friends, I’d have said, “Steve Hed, Scott Warren, Mark Miller, Mike Corbin and Bob Maule.” Perhaps I’d have listed these because they’re all attached to triathlon in one way or another, and that’s how I got to know them. Cobb tends to like to engage his friends in business opportunities, and I understand that. I did much the same at Quintana Roo. My national sales manager was previously my chiropracter. My international sales manager worked at the same restaurant I did as I waited tables in the mid 80s—I worked at night to buy rubber for new wetsuits I designed during the day.

The problem is, when you invite those in your personal life to be part of your business life, difficult times in business take a toll on personal relationships. Cobb’s friendships have been strained. “You’re exactly right about that,” he told me. “I’ve always been good about keeping a big distance between myself and my employees. However, I needed store managers, and I found it hard to trust someone off the street. So I relied on those I knew and trusted personally.

“I think I’m doing pretty well now with most of these guys. Mark Miller, Mike Corbin, I talk with them, and I spent three days in Taiwan with [Javelin Bicycles co-owner] Scott Warren. But I really miss working with Steve Hed.”

After a steep rise and fall it appears things have flattened out and settled down for Cobb and Bicycle Sports. “People tend to forget it was only two years ago Cannondale filed Chapter 11. They’re on their way back, and we are too.”

The question I still ask is, how close was Bicycle Sports to succeeding? “At one point we were $150,000 away from making it,” Cobb pleads. “We just needed the money and couldn’t get it.”

A part of me thinks that’s true. The systems were in place, the ability to buy right, a lot of great buzz in the air. I suspect Bicycle Sports was 80% rational and functional in its approach. Another part of me believes the extra cash wouldn’t have been enough—no amount would ever have been enough—and that a style of business properly executed would’ve yielded an environment in which that $150,000 would never have been needed. I keep coming back to Wildflower of 2003. Three rented RVs, the Big Red Truck, all that money spent on the one expo.

Maybe if they’d all slept in tents things would’ve turned out differently.

  

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