Speculation about the EPIC TEAM

What follows is a theory about what the EPIC TEAM merger/relationship is about.

The company we all call Specialized was at first called Specialized Bicycle Imports. When Mike Sinyard founded the company he drove an old Volkswagen bus bike store to bike store trying to build advance orders for the original Touring Tire that SBI made its name from. These tires were made by Mitsuboshi in Japan as a number of present day Specialized tires still are.

That was 20 years ago. The tire popularity lead to the importing of other goods largely from Europe. This included Huret derailleurs and Campagnolo and Cinelli parts. In the early 80's after noticing the use of hand crafted frames by the the Koski family among others in Marin County Mr. Sinyard made an arragement with the 3 Rensho frame factory in Japan to have them build frames in the likeness of the ones used Marin County as what would become known as "mountain bikes"

These early frames were sold as "complete bikes" but shipped in two boxes. The frame was sent in one using the carton it was shipped from Japan in and the other box had a wheelset and all the necessary parts to build a complete bike with. These early bikes had Huret then Suntour parts. A race that was co-ordinated by James Mc Lean and called the Rockhopper was held in Sonoma County. It became an annual race and after it had been held a few times Specialized used the Rockhopper name as a bike model name.

As the Japanese import relationship grew Specialized used more Japanese drive parts on their mountain bikes. They were now importing complete bikes in a single carton largely pre-built in Japan by Miki Industries in Osaka through Marui Limited

During this same time (1983) Specialized began to have manufactured in Japan, parts that would go on their complete bikes with their "S" logo on the side. In most cases these were goods that the Japanese companies were already making for broad sale to any export/import company. The parts with the "S" logo gave Specialized a larger than life appearance to consumers.

As the models of the bike line increased the amount of money that Specialized could devote importing these goods and gloves, shoes and tires fell. They needed to concentrate their financial resources into the bike line only, to establish it firmly. Failure to have a model on hand at the wholesale level leaves the selling retail store uncertain about the future of supply and they emphasize the brand less in their store. So Specialized tried to make sure they had all models an hand and ultimately had little or no inventory of "hard goods". Elsewhere at this site you will learn that Specialized B/B's were made by White and later TNT. American makers tie up less of their foreign lines of credit, but ultimately they have pretty much dropped their interest in cranks, stems, B/B's, handlebars, wheels (once made by Wheelsmith), rims, all the parts of a bike and don't sell these any longer.

Ritchey on the other hand has a great involvement in parts and hasn't attempted to make their name in any other arena. In general they have been faithful to the retailer by keeping the necessary goods on hand. They have no manufacturing of their own at all and make contracts with factories capable of making goods competently with the Ritchey name on them. Ritchey however has a small to tiny warehouse and doesn't have the infrastructure to grow properly. Specialized has a good phone system and good computer system that runs a good distribution program capable of keeping all elements of the business with all the retail stores they serve in order.

A year and a half ago Tom Ritchey bought hundreds of acres in a good deal at auction near the town of Cazadero northwest of our town, Santa Rosa. By all accounts he spends a great deal of time their as he is establishing with an architect how his future estate will look. It has not been a secret that his interest in running Ritchey Designs has diminished since the property aquisition, and more than a few in the industry think his interest in bike part design has dropped as well.

Ritchey Designs is now actively intent on relocating. I was told by someone in the industry that Ritchey bought a building in San Jose that they will move to. This was denied by Ritchey Designs saying they were looking in the San Jose area for a building but had made no decisions yet.

The distance between San Jose and Morgan Hill (where Specialized is located) is marginal. I believe ultimately Ritchey will be located in the Specialized building. It is my perception in speculative discussions with others that Tom doesn't want to run a business at this point but would rather live out his years at the coast looking out over the Pacific Ocean, ( and I can't blame...so would I! there have got to be more creative things to do and think about).

Specialized, I believe, will come to take over distribution, warehousing, sales and marketing of the Ritchey logo merchandise.

A few months ago Specialzed introduced another brand name for bikes they sell to sporting goods stores like Target, Costco, Price Club and Wal-Mart called "Full-Force". Specialized is very intent on making their sales grow by selling through all reasonable outlets. With Ritchey in tow their gross sales will be larger still. Gross sales are one of the measures of a company performance and assist in establishing credit worthyness cashflow is used as a means to pay off loans and liabilities. Higher gross sales, (though not necessarily profilable) are viewed positvely in establishing the value of a company.

I believe that all of this is preparatory to a Specialized IPO. That they will float a stock offering sometime in 1996 (rather likely) or 1997 (much less so).

I should tell you that I'm on record as saying the Dow average will reach at least 5700 in 1996 and will likely reach 6000 by the end of December. The Fed will also lower interest rates by 3/4 of a point in 1996 because Congress and the White House will form a plan to reduce the deficit that will require an infusion money to offset job loss. And because it's an election the economy will explode, (but not overheat of Mr. Greenspan is reading)

What does Specialized have to gain in this merger/team thing? Well at the very least cashflow which will increase the value of the stock when offeres to the public. Once the Ritchey Designs business is reeeled in under the Specialized tent and all Ritchey sales are facilitated through the Specialized organization, the Ritchey sales will add cashflow to Specialized. Cashflow is just one part of it though, the increase in gross sales will make Specialized look much larger than it is at the moment.

Ritchey you must remember makes most of its money from sales of bike parts to bike factories to be used on complete bikes coming from Asia. The is referred to OE Spec which is short for Original Equipment Specification which is the technical way of saying the people who designed and market the bike insist this specific part be used in building this model of their bike. Ritchey Designs sales are estimated by former employees who should know to be in the region of $36 million to $50 million. About 85% of this is OE Spec sales.

Now I don't want you to get the impression that these goods all pass through the Ritchey warehouse. Bicycle designers are people who set the specifications for how a bicycle is to be built, what parts go on it and what its appearance will be. The designers are implored by bike parts makers to specify their parts and designers establish relationships with parts makers that are frequently used each year. Ritchey has slowly developed that type of relationship with many designers. Let's say a bike designer specifies that a certain Mountain bike model will have Ritchey Cro-moly clipless pedals. If there were to be 100 of the bike built, they contact Ritchey and explain that the factory that will build that model will require 100 sets of pedals. Ritchey quotes them the price and the bike maker pays Ritchey (frequently in the form of a domestic letter of credit). Ritchey then contacts the pedal maker in this case Wellgo in Taiwan and has them deliver to the bike factory building on behalf of the maker/designer the 100 sets of pedals. Ritchey pays them using a foreign letter of credit backed by the domestic letter of credit from the maker/designer. Notice that Ritchey never had to touch the pedals physically while money for their purchase passed through their hands. That is how Ritchey "sales" are as high as they are.

Let's assume that you are a bike designer that has used Ritchey parts on your bikes historically. You might be KHS, Bianchi, or have been Bridgestone and you've put together the design for a let's say the road bike for road racing to sell for $600. If you elect to use a Ritchey seatpost, headset and tires on the model you've pretty much revealed your strategy when you place the order with Ritchey.

For delivery, they will have to know what factory you will have building the bikes ..... which is a general indication of the quality of workmanship you require and hence sales price, (in the industry we all know what factory builds for who and their relative levels of quality). They will also know by the diameter and length of the seatpost what its purpose is. A short 235mm post with a 27.2mm diameter is likely a road bike, where a longer 350mm in 28.6 is likely for MTB use. The headset chosen will reveal the sales price of the bike, a cheaper headset puts it in the $200 to $400 range, a better one moves it up the scale. The diameter of the headset also will tell Ritchey what the purpose is ..... a 1" headset we know will be used on a road bike only. If it's threaded and inexpensive it will be a cheaper bike. If it's threadless and pricey a somewhat better bike. Now the tires if you use a 26" narrow tire like the Crossbite 1.1 or 1.4 then might be a hybrid or city bike. If the tire is a Crossbite road Kevlar (700 x 38c) we know it will an up-scale hybrid/city bike. If its a Road Force Kevlar (700 x 20c) then we know it's going to be a more expensive road bike not a hybrid or city bike. The quantity of each of the parts needed, what factory they are sent to and time of arrival reveal .....what type of bike is being built, how many, the quality they are being built to, the approximate retail price and by the scheduling of the parts delivery to the factory when they will be in the United States (usually 6 1/2 weeks after parts delivery).

Now, if you were a bike designer working for KHS, Bianchi, or any other bike brand and you know Specialized is one of your largest competitors, would you on a long term basis continue using Ritchey parts knowing that Specialized has a extremely chance of evaluating your market strategy in advance of the manufacture of your bikes? Have you noticed that bike makers don't use Tioga brand parts on their bikes anymore? Now you know how that probably came to be.

If you were a bike designer, would you continue using Ritchey parts knowing that any profits Specialized/Ritchey generate from your sales will come back as added fire power against your organization, even if profits from your sales only help them offset their expenses?

If you were a competitor of Specialized, with this "Team Epic" in place you've got to be looking at alternatives ... and you know that you can't change the 1996 bikes because they are already built and being delivered to the US at this moment. So might think we are talking about the 1997 models ... only they are scheduled to have the specifications finished by the 3rd week of March in 1996 so the part factories can make the parts and deliver them to the bike factories by June so the early (inexpensive) 1997 will be available in stores by mid-July/August. The 1997 models are all decided on already at this time which is December of 1995.

What we are really discussing is how the 1998 model year bikes are going to look. Those are going to be in the beginning of the design stage in October of 1996 with prototypes arriving in January of 1996. Final Specifications will be set in March of 1997. Deliveries of 1998 model year bikes will be in July of 1997

So, if you were a bike designer and felt un-comfortable enough with the "Pooling" of Ritchey and Specialized and wanted to get out from under it, the soonest it could be practical would be August of 1996. And if you to choose to do so, the earliest that Ritchey would see a decrease in sales would be March of 1997. That's the window for the stock market flotation. Sales will be highest any time before March of 1997 and could start to erode slightly even sooner.

Naturally, there would be some business gained by Specialized choosing to use Ritchey parts.

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