What's Cool In Road Cycling

Interview: CEO Of 3T, Rene Wiertz, Gets PEZ’d

I am lost in nostalgia reading an old magazine review of the best bikes of 1988. These machines filled the dreams of many in my day; SLX tubes and C Record gruppos. Wait a second, these dreams topped out at $3,500! Today’s are almost triple. My inflation calculator says something’s amiss. Before succumbing to populist outrage, we’ll get Rene Wiertz, CEO of 3T, to explain a thing or two.

Part I: Background
Could you give us a little background info on why & how you decided to buy 3T from SPA (Cinelli/Columbus)?
I had a pretty successful career of 12 years in a big multinational (Philips), where my last position was Vice President of Corporate Mergers & Acquisitions. At the age of 32 I did an Executive MBA at INSEAD, where I started to ask myself: what’s next… continue my career in a big company, or use my business experience to grow a small company internationally? I started to look around for small companies to acquire, in Holland, France and Italy, mainly in the boat and the bike industry. I investigated about 100 companies with some degree of interest. 3T offered the best opportunity for me: a strong brand, a global industry, with a lot of potential to make a difference quite quickly. It presented a great opportunity to do things better in terms of engineering, marketing, and business management.

One of the first decisions you made was to keep the design in Italy while transferring the manufacturing to China. What are the differences in production costs between these two countries?
Like almost all bike companies, our production is in the Far East. We are unique, though, that with the F1-software we use in our Intelligent Production Lifecycle, we can control how our products are made significantly better than any competitor. I have looked and will continue to look to bring production back to Europe, but right now the difference in production costs are simply too high. My estimate would be a difference of 4–6 times.

Is it no longer possible for any medium to large scale operation to be profitably Made in Italy?
I think it is, with a high degree of automation, and for the premium products. I continue to look at this. Producing in Italy /Europe certainly has some advantages – shorter lead times is probably the most important.

Your products clearly state where they are made, while many Italian companies dodge this issue. Was this a hard decision?
I want 3T to be an open company, in which people can trust. What does 3T stand for? Trust in a brand, trust that we properly engineer our products, trust that we deliver quality, performance. On our website we also try to disclose a lot more information than our competitors, to build that trust with our end-customers. So it was not a hard decision to disclose where we produce!

Part II: Some Transparency in Economics
Could you explain a little about the economics of the bike industry (in general)? For every dollar spent at the local bike shop, how much goes to the shop, to the distributor and the manufacturer?
The largest value-add is in the supply chain. From production cost to end-consumer pricing, you can multiply by 3–5 times. Each part in the chain gets more or less an equal part of the value-add.

Are these ratios the same for components and bikes? Are they the same for the US vs other markets?
For bikes I don’t know, no experience! But it would surprise me if it would be very different. The ratios are pretty much global, with local twists obviously.

How does 3T determine the price of their products?
We work with the ‘market-minus’ principle. This means we always start at the market: what price could a product carry, looking at our brand, the product features, and the competition. From that price, we work backwards to determine our pricing towards our customers, and leaving attractive margins for our business partners.

Over what period of time does 3T try to recover its investment costs?
That depends on the product and market segment. If we enter a new segment like MTB, the time to recover investments can be longer than in a market where we already have a strong position, as we do in road or triathlon. It also depends whether a product is a ‘standard product’ like a dropbar, or an image builder like the VENTUS. But in general you need to recover investment on a product in less than 1 year.

Many people are under the impression that bike companies gouge consumers, especially the higher end gruppos and parts. Could you talk about average, industry profit margins? And 3T’s…?
I think that pricing in the bike industry is pretty much fair. You can’t fool the consumer, so the companies that can sell at a premium price to competition because they make better products, are able to do this ONLY because they actually DO invest more in their product development cycle. One (the premium image and pricing) doesn’t go without the other (the investment in engineers and tools to make better products). As mentioned, the largest part of the value-add is in the supply chain, ie distributor and dealer. If they perform a good job, they clearly add value.

Carbon parts are significantly more expensive because the material and labor cost to produce a carbon part are significantly higher. I don’t think that 3T is more expensive than any other premium brand with comparable engineering skills on board.

Despite outsourced manufacturing, technology and productivity gains, prices for bikes and parts have substantially increased over the past 20 years, whereas other industries like consumer electronics continually reward consumers with more powerful products with constant pricing pressure. Your thoughts?
I disagree. Bike prices of standard alloy bikes have gone down, now you can buy a MTB in the supermarket with a Shimano groupset for Ђ 50! That was not possible some years ago. In electronics, prices of standard products like TVs have gone down in pricing for the reasons you mention. You now can buy a flat-screen TV for less than Ђ 200. At the same time, high-end electronics have gone UP in price, for example the latest cinema screen TV from Philips costs Ђ 5.000, the price of a car these days. For high-end bike parts, which are made using significantly more expensive materials to make them lighter and stronger, prices have gone up with increased performance. There is just a much larger gap between entry level and high end. People are willing to pay for innovation, both in electronics and in biking.

The UCI’s rules that maintain the bike and riders’ position the same as 1900 (more or less) have caused some issues for 3T, right? Do these limitations on innovation really keep prices down and the sport more accessible?
The changing rules of the UCI have clearly impacted our business negatively in the short term. We had to redesign our products, buy new moulds and provide all the teams with new equipment. I am not against introducing new rules, but as an industry we need to get enough time to be able to adjust ourselves. But thanks to our fast product development cycle, our product range is today fully in compliance with the UCI rules.

In terms of keeping prices down, I think the impact is completely the opposite. We will continue to develop products that improve the performance. Within the limits of the UCI, this becomes indeed harder. Hence we need to invest MORE in development to make better products. That means the better stuff will be more expensive.

Part III: Marketing 3T
Could you briefly explain the importance of pro team sponsorship deals?
Pro team sponsorship is crucial for us, but not only for marketing purposes. All our products are developed in a very exacting 5-step product development cycle that we call the Intelligent Production Lifecycle. After all the high-tech development on our screens and the mechanical testing, the last step is pro rider testing. This feedback from pro riders and their mechanics is very important for us, and helps us to develop ‘ultimate-performance’ products. On the marketing side, it boosts our credibility and exposure for sure, but as I said before, you can’t fool the consumer! Team sponsoring purely for marketing exposure, without the investment on the product development side, doesn’t work mid to long-term. They go hand-in-hand.

I assume that about 90% of your total marketing budget is spent on sponsoring pro teams and obviously these costs are factored into the products. More or less, how much does this add to the cost of 3T’s products?
It’s indeed a significant investment and a large part of our marketing budget. The question is, does it cost more per product? If we make better products, and become the preferred brand for high-end performing parts, with the corresponding revenue of such a position, it would not increase the cost of a 3T product, but would decrease it. Volume also counts!

As you’ve stated before, no Pro Tour exposure means no shelf space for your products. Are sales more affected by mere sponsorships or results? For example, comparing your sponsorship of CSC and their amazing palmares 2 years ago vs. last year’s group of Garmin, Cervelo and Milram? Is sponsoring 3 teams better than one from a return on investment perspective?
I have always wanted to work with a limited number of the top teams. It doesn’t make sense for 3T to sponsor mediocre teams, we want to work with the best so we can make the best parts for the consumer! You can’t really support more than 3–4 teams the way we do it, which is not just sending some parts. We actively work with the riders and mechanics. And it’s important to get input from more than one philosophy, so we can pick the best ideas that actually make sense!

From a business perspective it’s better to work with more than one team, to reduce the risk not to be present one day at the pro level because the team you work with chooses another partner. I like to see us working with 2–3 top teams in each of the 3 market segments we operate in: road, triathlon and MTB.

Cameron Meyer rode 3T’s new bars to huge success at Track Worlds: 3 Golds.

3T has an online store, yet it isn’t a very persuasive effort. Since buying online is mostly about price, as long as 3T’s own site doesn’t offer any discounts, why bother? How important are direct sales?
3T indeed has an online store. But we sell at suggested retail pricing plus shipping, so we are never cheaper than a dealer. Plus from the local dealer, you always get service like installation of the product. The reason why I have an online shop is to ensure that every consumer that wants a 3T part, wherever he lives in the world, has access to our components. If our distributors do a perfect job, we wouldn’t sell anything via our online store. In addition, it’s hard for dealers to stock all spare parts and upgrade kits. This is something existing consumers from 3T can easily get via the store, without having to spend a frustrating time to find the dealer that actually has that Ti bolt upgrade kit! Customer service, that what it’s all about, and all our business partners profit from that in the end, ie the online store is very complementary and not in competition with my customers.

What, if any, changes would you like to see in the Manufacturer + Distributor + Local Bike Shop system?
I would like to see bike shops improve in quality just as electronics stores have improved. 15 years ago, a high-end electronics shop was owned by a fanatic audiophile who stuffed his shop with as many products as he could ‘store’. So his shop became a warehouse. Today, a high-end electronics store supports a few brands, allows people to evaluate the products in a relaxed and comfortable environment, and employs professional staff to help customers reach the right purchase decision for their individual lifestyle. I’d like to see that same change in bike stores: focus on a few brands, and add value by knowing the brands you carry and helping the customer choosing what fits him or her best. I already see that happening in a few places.

How has the recession changed the marketplace? Has it shaken up the playing field? Or changed 3T’s way of doing business?
Despite the recession, 3T has encountered a significant growth over all areas we operate in. That is due to a clear product-marketing approach (we sell products at 3 levels: good-better-best), high-quality products, solid marketing, and good customer service. In that sense the recession hasn’t impacted 3T. But from a business perspective it strengthens what you already know from the past: to survive in today’s competitive landscape, you need to excel in every single aspect of your operation: products, marketing, logistics, service. And you have to be ready for the bad times, even when things are going well. 3T is back in the game, and we’re here to stay!

Thanks Rene!

• See their website at TheNew3T.com

A Disclosure
Two years ago, I did some consulting work for 3T. Also last year, I taught a course at Rocky Mountain College of Design where students redesigned the 3T logo – a purely educational exercise. The following interview is 100% motivated by a quest for some answers and the knowledge that Rene Wiertz is a smart guy with an insightful perspective (even though he seems to have artfully dodged a pointed question or two). No money or other favors were given or received (damn!).

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