Anna Anagnostopulu, Business Insider Polska: When we talked in April we were all still alive in the war in Ukraine. Inflation was 12.4% and you were in the middle of the cycling season. Now the war is the “new normal”, inflation exceeds 16%, energy prices are soaring and the cycling season is over. What has changed in the company since then? Where are we meeting today?
Filip Wojciechowski, president of Kross: Our fiscal year runs from September to August and has just ended. It was an incredibly difficult, but strongly growing season for Kross, despite the slowdown in consumption at the start of the war in Ukraine and rising inflation. Consumers were buying bikes en masse, and we expanded our market advantage – according to our analysis, Kross has as much as five percent more market at the end of this season than twelve months ago. It is thanks to a good product mix, expansion of the sales network and consistent brand strengthening.
The situation on wholesale markets is different – there, in recent months there has been a clear decline in orders. The bosses of companies that buy bikes from us in bulk reduce their warehouses – they choose cash, not warehouses full of goods. This situation will last a few more months.
Ultimately, we realized much more sales than in the previous season and our revenues increased by a third compared to 2021. However, we had an appetite for more and now we are in a bittersweet situation. A very good season is behind us, but 2023 will be a very difficult year for the bicycle industry and we are getting ready to do so.
Our estimates say that the Polish bicycle market will shrink by 25 percent next year. It will vary in different segments – the scale of the reduction will be large mainly in cheap bikes. Fortunately, we have a different product mix. The situation can be compared to a hurricane. When you know it’s coming, people get their homes ready for it, and we’ve done the same. The market will be smaller, but we assume that our market share will be as strong as in the ending season. Kross is prepared for the impending hurricane – we stand on strong foundations.
How did you prepare for the crisis?
Throughout June, July and August, we prepared and updated forecasts showing how the market will change and contract and how we can maintain Kross’s shares. As a result, we rebuilt our strategic plans for the period of the most severe crisis, changed the product mix, made many cost optimizations, including, unfortunately, reduction of employment in the entire company.
How big were the layoffs?
They spread to all companies from the Kross group and, depending on the part of the company, even reached double-digit values.
The layoffs are of course the last thing we would like to do, but we assume that regardless of the scale of the market, Kross must be a healthy, profitable company. We have been operating for 30 years and we have overcome more than one turn on the market – we have agility and speed, which make Kross a stable company and a leader in the industry. We are not changing our strategy, we are still talking about increasing market shares, and we want to keep them at the minimum next year. We aim to increase brand recognition, develop sales through professional bicycle stores and develop in Central and Eastern Europe. However, we assume that due to the shrinking market, the pace of achieving these goals will be slower in the coming season.
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How much have your costs increased? What new electricity tariffs have you received?
Like other companies, we are experiencing increases in gas and electricity pricesbut the production of bicycles is low-energy. It is largely manual production, which is why the rising energy costs are not as painful for us as for other companies. Our main problem is the weak zloty against the dollar. The industry operates with components from around the world and the profitability of business is determined by the strength of the Polish zloty against other world currencies, primarily the euro and the dollar. Of course, transport costs are also important.
In the face of problems with the delivery of components from Asia, you focused on the development of warehouses and heavily stocked up in parts. Even in the previous season, it constituted the market advantage of the company. Now full warehouses are a burden.
Not only us, but all the world’s leading bicycle companies are heavily stocked in parts. This means that such enterprises have capital working in commodities and not in cash, which weakens their financial liquidity. And of course, in the face of the upcoming crisis, every company wants to have healthy parameters when it comes to cash flow. On the other hand, inflation causes component prices to rise steadily. In addition, there are rising commodity prices and the rising euro and dollar exchange rates. Due to the fact that we have large, but healthy warehouses of bicycles and parts retrieved at a better rate and lower prices, we can offer customers a lower price increase than it would result from the current market situation. Thus, more working capital, and especially its cost in times of high interest rates, is compensated with cheaper parts. We assume that thanks to this, the scale of price increases for our bicycles will be smaller than that of some of our competitors.
What will be the growth?
I assume that it is a few percent on average. Of course, the models will be four percent more expensive. and those that will become more expensive by 10 or a dozen or so percent. However, the raises will certainly not be by a dozen or so percent everywhere. That is why full warehouses are not an unequivocally negative picture of the situation. Yes, it is difficult from a cash flow point of view, but we assume that thanks to the predominance of cheaper components, we will be able to survive the peak of inflation and currency turmoil with healthy bicycle manufacturing costs.
We expect this year’s fall as well as winter and spring to be the most difficult period for the economy. Unemployment will increase, the cost of living will increase, and mortgage loan installments will increase. Our advantage is that we are a very agile company, we quickly sense trends and respond to them with changes within the organization. This was the case during the COVID-19 pandemic, and it is now. We feel the entire market is approaching the corner, but we are prepared to come out of this corner safely and at full speed, ready for the next season.
Is the upcoming crisis manifested by a drop in demand also in retail sales? All industry analyzes show that it will only grow.
Wholesale markets are already preparing for the crisis and sales in retail markets remain high. And it may be that the drops will mainly concern wholesale. Now all wholesalers are striving to have smaller inventories. However, if the demand is similar to the current one, sooner or later they will return to the producers, which will help in a quick rebound in the industry. I assume the bicycle industry will suffer less than others. When people stop spending their weekends in hotels or car trips outside the city, they will switch to bikes. And that’s why consumer demand may not change as much as in other industries, where we hear about large negative trends. What will suffer will be the bottom of the market, the cheapest bike segment targeting the least affluent consumers. For the rest of the market, demand may remain very similar to the current level.
You have been the President of Kross since July 2021. You have had a difficult task to run your company from crisis to crisis.
There will probably be no more easy years in the coming decade. The volatility of economic conditions will be very high and the winners are companies that will be able to adapt and use this volatility to achieve their own goals. Now it’s agility and speed that counts. The economy grew over the years, and so did all the businesses: both more and less well-thought-out. It is over now. I am observing an ever greater fragmentation of the market – into companies that are developing and those that are shrinking. Therefore, we assume that concentration in the bicycle industry will soon take place and that those players who have good strategies and efficiency of their implementation in changing market conditions will remain.