• Günter Kast

The dealer scare.

(Reading time: 8 - 15 minutes)

Bicycles. Canyon Bicycles GmbH from Koblenz is the most successful direct seller of high-quality bicycles - not only in Germany, but throughout Europe. Now company founder Roman Arnold wants to conquer the US market with his special business model.

No matter what the future holds: Roman Arnold will probably remember the years 2015 and 2016 even when he retires. At first, things didn't run smoothly in the new production hall, which cost 20 million euros. The bikes arrived at the customers too late. Massive protests followed. Arnold apologized in a public letter printed in trade journals. When in 2016 the company finally returned to peace and quiet and the entrepreneur wanted to deal with the topic of US expansion, the next blow came: prostate cancer - the company boss had to take a break.

In the meantime Arnold has recovered from the illness, even if he still has to step back a little. But he has time to talk about the turbulent years of growth, which made him the boss and majority shareholder of a very special company with a turnover of 185 million euros (2016);

The Arnold saga is the story of a great passion for cycling: "I was three and practiced with a used Puki wheel," he remembers. "When my brother Lothar let it go and I drove alone for the first time, it was a feeling of complete freedom." Shortly before his 15th birthday, he then sees racing cyclists on a journey with the family at the Brenner Pass, who fight their way up higher and higher both dynamically and elegantly. "Then instead of a moped, I wanted a Peugeot PY10 racing bike." With this he will soon be racing himself. "As the middle of three brothers, I was of course also an ambitious guy. I liked that I was on my own. I didn't want to rely on others, like in football."

His father accompanied Roman to the races, often in Italy. But the senior doesn't just want to stand on the street and wave to his son. So he starts to buy Italian bike components for cheap lire, in order to sell them from a trailer to other athletes during races all over Europe. In 1985, it became Radsport Arnold, a classic mail-order company.

Roman Arnold likes to look back on this time: "We had a lot of fun together." He might even have become a professional driver, a professional team had already shown interest. But shortly after his Abitur Arnold's father dies. The junior stops racing and concentrates on the business together with his younger brother. "That was right because I would have been too big and too heavy for the big successes anyway."

Instead of racing dates, Arnold now studies wholesale strategies and export licenses. He also completes a crash course as a bicycle mechanic.

Soon it was not enough for Arnold to sell only wheels and parts from other manufacturers. He no longer wants to be just a dealer, but a producer: "I wanted to see my own bikes at some point as a team sponsor for the Tour de France. They should be simple, precise and dynamic. I wanted my brand to be associated with these catchwords." The first racing bike is assembled by the tinkerer from third-party components. The first Canyon brand two-wheelers were launched in 1996.

So far the story of the entrepreneur Arnold is rather unspectacular and not unusual for the bicycle industry. But this changes abruptly in 2001. Arnold takes the step from dealer to pure manufacturer and renames his company Canyon Bicycles GmbH. Sales are exclusively carried out directly via the Internet. It's a little revolution back then.

Because at this time "online" is far from mature. And those who still bet on it will immediately become the Public Enemy Number One of cycling retailers. After all, they no longer play a role in Arnold's business model. Who orders the first model, a mountain bike called FX1000, gets it delivered in a box to his home and has to build it himself. But the wheel is unbeatably cheap. Bad luck only comes to those who overestimate their technical abilities and have to pay the penalty to a specialist retailer: some refuse to provide their services. On principle. According to a survey by the trade magazine "RoadBike", eight percent of dealers today still refuse to wait or screw together such a "machina non grata". Sender-Bike - for some this is a promise, for others a swearword.

Canyon's rise to become the market leader for high-quality racing and mountain bikes throughout Europe cannot be stopped by its critics and opponents. Because Arnold is obsessed with building not only inexpensive, but also technically high-quality wheels. "If we do, we do it right." This slogan becomes the company philosophy. Today Canyon has its own laboratory in which bicycle parts are tested in continuous use. New wheel models have to prove themselves in a wind tunnel. A computer tomograph checks frames for hairline cracks that are not visible to the human eye - a service that no other manufacturer can offer.

In the beginning Arnold had only road bikes and hardtails - only mountain bikes with front suspension - built, because they are technically easy to produce and primarily stand out from the competition because of their price. But soon he also offers his customers products that meet very high demands. After a flop with the first mountain bike frame made of carbon, the Photon, Arnold brings Michael Kaiser from the renowned Institute for Composite Materials (IVW) in Kaiserslautern on board as development manager. Now it's working. The F10 carbon fibre road bike frame is a real hit, praised by the trade press as the lightest and stiffest frame in the world. It now pays off that Arnold consciously relies on the best employees in the best development department. After all, they are supposed to build the best bikes in the world at Canyon.

When the wheels are technically mature, Arnold is able to realize his dream: to finally have big names in the stable as a sponsor. It's about his passion, of course, but it has to pay off. Sponsoring only for personal fun is out of the question. So he weighs up: Can he still offer the best bike at the best price even if he spends a lot of money - how much, he doesn't say - on athletes? How high is the return on investment from brand building? Can it even be measured? How much can the feedback of the drivers stimulate the technical development? Arnold is convinced of a positive balance and signs the first drivers. The successes are not to be missed. The Fumic brothers are mixing up the mountain bike scene, the Australian Cadel Evans becomes world champion on a canyon racing bike in 2009, Nairo Quintana wins the Giro d'Italia in 2014. Jan Frodeno even manages the feat of triumphing twice in a row at the Ironman in Hawaii in 2015 and 2016. And at the Tour de France, Joaqim Rodriguez from the Katusha team takes two daily stages. Arnold says: "Jan Frodeno has been proven to ride our bikes faster than ever before. And all our customers benefit from it." The fact that the suspicion of doping is always present doesn't scare the company boss: "Of course, we can't guarantee that our drivers are clean. But we'll cover ourselves in the contracts. At the latest with the second suspicion a cancellation without notice is possible."

Canyon is now growing rapidly, keeping followers such as Rose, Bulls, Radon or YT, who have also discovered direct sales, at a distance. Year after year, sales climb double-digit. In 2013 it will still be 85 million euros, then 119 (2014), 159 (2015) and finally 185 million (2016). The bikes - 82,000 in 2015 - will be shipped to 104 countries around the globe. 31 percent of buyers live in Germany, 56 percent in the rest of the European Union, 13 percent in the rest of the world.

The auditors of Ernst & Young nominate Arnold "Entrepreneur of the Year 2015". The jury's reasoning reads: "The entrepreneur literally built an international production and trading company around cycling out of his garage. Today, Canyon Bicycles not only offers bicycles, but also smart services that help avoid polluting traffic."

But it is at this very moment that Canyon is confronted with the risks of rapid growth. The huge new production hall, costing 20 million euros and supposed to spit out 350 wheels every day, will be completed as planned. But in the beginning the processes do not run smoothly with the platform strategy copied from the automotive industry. The introduction of SAP, a new, proprietary merchandise management system and new production software are overtaxing the employees. Customers have to wait far too long for their bikes. The reputation of a reliable provider is scratched.

Arnold. He publicly apologizes to customers in a letter that is printed in trade magazines. And gets external help from BMW and Opel. "We had a know-how gap that we had to fill quickly. The reactions of the customers were violent. As a direct seller

you can keep this unfiltered. But I think the public 'Sorry' was right and important and didn't damage our image."

When production is up and running again, Arnold can devote himself to the next major project. In the saturated, mature European home market, further growth is difficult. So he wants to stir up the huge US market, where there is still no comparable direct supplier like Canyon. After all, the Americans have known Canyon as a brand for a long time thanks to international sponsoring. In addition, the online bicycle trade in the Amazon motherland USA is far from being exhausted. In Germany, direct sales currently account for 25 to 30 percent of bicycle purchases. In the USA this is only in the single-digit percentage range.

The fact that US private equity houses have been interested in Canyon for a long time now benefits him: "Every year we received ten to 15 inquiries. They had been sticking to our heels." But so far the offers had always ended up in the file. In June 2016, sole shareholder Arnold then sells a minority interest to the Californian holding company TSG.

"This is the perfect partner. They know their territory extremely well thanks to their extensive experience in the consumer sector. And, for example, we have better control than we over the sensitive product liability issues in the USA. Also better than German PE companies, with whom we were also in contact."

Arnold is concerned with three things: firstly, obtaining capital for expansion, secondly, obtaining a know-how partner and thirdly, no longer having to put everything on one card with every strategic decision. The proceeds from the sale can be invested elsewhere and thus spread more widely. After all, Arnold has family, a wife and four children.

No TSG manager will enter operational management. But they work closely together, with the new shareholders there are three to four meetings a year. There are currently 30 colleagues working in the California office. Soon there will be its own production hall in the USA, so that US customers will obtain their bikes from there and have their own contact persons. US production is expected to start in the fourth quarter of this year at the latest. The goal: to conquer ten percent of the entire US bicycle market in five years, from mountain bikes to high-end racing bikes. "It's a big adventure," says Arnold. "We are setting an example in the USA, pioneering rapid change in the industry because there is no comparable direct mail company. This is hotly debated in specialist forums. And it's also a big challenge for us, because we know that the service expectations of American customers are very high."

And then Arnold thinks about something that would almost amount to a revolution once again: he seeks contact with his arch-enemies, the merchants. To date, the company advises to have maintenance and repair work carried out at the Canyon Service Center. "We have trained two-wheel mechanics there, who are constantly trained and educated. When purchasing the bike, our customers receive a voucher for a 50 point inspection at a special price. For the transport of the bike we can send you a return ticket on request or the bike can also be brought to our service centre."

In the future, it will also be possible to have the bike serviced by a local dealer. "This will be in 2017," Arnold promises. "We will provide our customers with certain highly qualified dealers who will enter into a service contract with us. This is a win-win situation for everyone. We offer our customers a fast service. And the dealers are happy about additional sales and the chance to sell accessories on the side. We pay in canyon dollars, which we then charge internally."

The boss also wants to slaughter other sacred cows. He used to say: "We only sell what we enjoy, not e-bikes". Now he announces a "sporty mountain bike with electric drive" for 2018. He has also invested more than a million euros in the development of specific women's frameworks because this target group is still neglected despite all claims to the contrary. On the one hand, there are product freaks and very ambitious athletes who want the right bike for every situation - training, competition - on the other hand. And then there are the universal cyclists who want a single bike for all situations. These include, for example, so-called gravel wheels, which roll like a racing bike with minimal resistance, but can also take gravel. They might be a big deal soon enough."

There's no question about it: At 53, the man is still full of ideas. But the cancer diagnosis last year made him think a little more about it. He wants to spend more time with his wife and four children between the ages of four and 19, and has bought a VW bus that they sometimes use spontaneously on weekends.

However, he does not yet want to worry about the succession: "The best precaution is to position the company in such a way that it can survive in competition, or better still, that it is the leader. Then passing it on is not an issue, to whomever." Would he wish that one of the children would take over the steering wheel? "My little son calls out, "Dad, when I grow up, I'll buy the company from you.

Emergency plan for company owners.

"It is almost a characteristic of owners of family businesses that they consider themselves invulnerable," says lawyer and tax consultant Michael Maßbaum, tax partner at Deloitte. Accidents? Only pass others. Serious diseases? I can't afford it anyway. "But if it does happen, the company is suddenly robbed of the one who would otherwise hold the reins alone. This can threaten the company's very existence." What should family entrepreneurs do to prevent?

"What is important first is an emergency testament for the worst case of a fatal accident. This must make it very clear who the company's heir is," explains Maßbaum. According to his experience, many entrepreneurs would still think of this precaution. However, measures to ensure the company's ability to act in the event of a mental or physical impairment lasting longer are much rarer. "That's fatal. Because usually it is about a partnership in which the founder and owner alone is entitled to act. Wages and taxes must be paid, investments must be completed and balance sheets drawn up. Every day there are decisions to be made where someone has to say: We'll do it or we won't."

The emergency plan must therefore not only designate the successor, but also regulate what happens if the decision-maker is absent. "In this case, it is important to appoint a representative with decision-making powers. Firstly, this must be a person of trust who also has the competence to make decisions. I would even always try to name two people who would then act in the way of a four-eyes principle. And a third person to succeed in case one of the representatives fails." The emergency managers should be inaugurated as well as the family members. "I would advise you to set this down in writing in the articles of association or in supplementary representation rules. In individual cases, this can become quite complex if it is a group of companies - with many minority and majority shareholders. But family entrepreneurs have to face that."

"Ordering the representative", Maßbaum continues, "means then in the next step also restricting the power of attorney: What is he allowed to do, what is not? The powers should apply only to the operation of the ordinary course of business. "Land sales, area closures or even company sales are not included.

At some point, of course, the question arises as to how long such a transitional state should be maintained. "It makes sense to define a period after which regular succession begins. I would advise you to appoint a committee - advisory board or supervisory board - which, after a certain time, makes a proposal as to which of those who are entitled in the private sphere on the basis of a living will or precautionary power of attorney may also decide at shareholder level".

According to the consultant, the situation could be particularly tricky if a private equity house or a VC partner held shares in the company. "Then the contracts often contain exit clauses with a minimum repayment price or the condition of the sale of the company. I would consider signing something like this very carefully," concludes Maßbaum: "Irrespective of what emergency arrangements are made: In any case, they should be established in time, because in the end, family entrepreneurs, like all of us, are vulnerable."


Author: Dr. Günter Kast

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