BAIRD PERSPECTIVES Cycling Industry Outlook How the micro-mobility and fitness revolution is impacting the bike industry.

In This Report Important trends impacting the cycling industry The competition is mobilizing Winning brands will break away from the Peloton Executive Summary

There is a micro-mobility and segments, especially indoor fitness revolution millennials, unfolding. On the surface, • The rise of Direct to these appear to be separate Consumer (“DTC”) revolutions, but they are oriented models with interrelated and have inherent competitive important implications for advantages, the bike industry. The way • A pronounced wealth consumers transport “multiplier themselves, the way they phenomenon” driving experience purchasing and above average growth in using a bike and the way the high-end / premium they train on a bike is segments of the outdoor undergoing a radical market, and

• transformation. As a result, An increasing perception consumer perceptions and that fitness, wellness, the definition of a “bike” will access and connectivity likely never be the same. As are the new luxury. Given the rapid pace the bike industry undergoes of industry change, tectonic shifts, new and Given the rapid pace of innovative entrants will industry change, there will there will emerge and consumer undoubtedly be winners and undoubtedly be preferences and losers. While it will be winners and losers. expectations will change, difficult to determine how which will redefine the things unfold, several competitive landscape. industry actors will likely emerge big winners, Key factors impacting the including Specialized, Trek, bike industry are the Canyon and Wahoo. following: • The rise of the indoor For the winners, there will bike training and electric likely be multiple options for bike (“e-bike”) adjacent strategic categories, partnerships or exit • A growing need to opportunities. We will reduce purchase explore several potential experience pain points options at the end of this for all consumer report.

2 Important Trends Impacting the Cycling Industry

1) INDUSTRY The traditional (human profitability. For now, the CONSOLIDATION IS powered or “acoustic”) bike market appears stable, at market is essentially flat to least for the top players. So, LIKELY TO ACCELERATE declining, and there are what is next? To paraphrase

limited ways any one brand author Joseph Heller: The Big Four U.S. bike brands can increase sales and profit: — Trek, Specialized, Giant • Make the pie bigger by and Cannondale are increasing the size of the “Things right now are currently represented in consumer base, more than half (52 percent) about as good as they • Expand product of U.S. independent bike can possibly be offerings, either by dealers (“IBD” or “IBDs”), without getting a entering new categories according to Georger Data or creating new niches whole lot worse than Services, and likely account within existing they already are.” for a much higher share of categories, sales. These Big Four brands • Bypass the traditional There are several important have forged a dominant supply chain, by end- unfolding dynamics that market position by running retailers and could disrupt the industry, establishing exclusive or selling products direct to accelerate consolidation and, semi-exclusive positions with consumers, perhaps, unseat the select IBDs which limits • Win market share from incumbent players. The consumers’ brand and competitor, and / or, upcoming contraction and product choices at retail. • Increase the retail consolidation in the supplier However, they do not footprint, a difficult and side of the industry will be behave collectively (invoking expensive move given defined by five important antitrust issues) and fiercely how power is balanced in factors: compete among themselves the supply chain. • A finite and declining and with numerous smaller number of IBDs, performance bike brands. None of the above options • The rise of direct e-bike This status quo competitive are possible without competitors and the dynamic has been ongoing significant investment or electric bike dealer since the late 1990s. impacts to long-run 3 (“EBD” or “EBDs”) demands. This will include undeniable and significantly channel, advanced e-bike features decrease the barriers to • The rise of internet that ensure a high-quality cycling and create commerce, outdoor experience; longer opportunities to explore for • Increasing product battery life, more power and a much larger population. In complexity, and improved acoustic-like ride the past, a 20 to 30-mile ride • A shortage and fierce feel will be critical factors. In may have seemed daunting fight for intellectual addition, e-bike suppliers are and unattainable, but now a talent. adding integrated cutting- much longer ride is possible. edge GPS and proprietary E-bikes also allow older 2) E-BIKES ARE COMING software, including artificial cyclists to join their local “In five years, ten years intelligence (“AI”) capabilities group rides and remain customers will come in (our that balance remaining engaged in cycling stores) saying ‘I’m looking for battery with mapping and communities, helping to a bike’ and they’ll mean an e- topography capabilities to promote the spirit of cycling bike.” — Noel Kegel, resident ensure ride completion prior and open longer more of Wheel and Sprocket to battery life expiration. For adventurous rides to more Group the e-bike segment, the old people with disparate acoustic gold-standard abilities and fitness levels. For more than twenty years attributes of lower weight the primary factors driving and increased stiffness will the premium traditional bike no longer be key consumer market segment have been drivers since greater power increasingly lighter and and battery life are the more higher performing bike prominent differentiators. frames and components. This This shift is also impacting trend is expected to hold for micro-mobility with the foreseeable future and companies like Cake, continues to be an important founded by POC founder driver of differentiation. Stefan Ytterborn, creating However, a significant shift in unique electric motorcycles consumer perceptions and that blend the best of e-bikes technology in the e-bike and trail motor bikes. segment is changing the There are also added conversation. How and why Advancements in e-bike benefits for the avid cyclist, bikes are marketed and sold technology are rapidly including the ability to to consumers has been changing consumer complete a great workout impacted and former perceptions of e-bikes and while moving faster, strengths are now the total available market. meaning more ground vulnerabilities for both No longer are e-bikes clunky covered with the same manufacturers and IBDs and devoid of snappy road or physical benefit in an wedded to the acoustic only trail feel. Instead the latest increasingly busy and hectic bike segment. The key to crop of e-mountain, road and world. They also serve as a future success will be gravel bikes are virtually great form of physical innovation and design that indistinguishable from their therapy and recovery. For addresses changing acoustic counterparts. The example, pro freeride consumer needs and advantages of an e-bike are mountain biker Paul 4 Basagoita, who was doubts in some IBD circles. Intelligence. The growth and paralyzed after a crash at the However, the e-bike market scale of the e-bike market 2015 Red Bull Rampage, has has already built access for has caught the attention of turned to e-bikes to help consumers to the products the Big Four bike brands, with therapy and give him they want to buy through the with Trek President John the freedom he once felt e-bike only dealer network, Burke addressing it in his riding trails. Although there and e-bikes represent a open letter to the bike may always be select places much-needed growth business in February 2019: cyclists cannot ride an e-bike opportunity for IBDs. Given due to legislation, category these many advantages and “America is just at the growth has become a trends, according to Rick beginning of its E-Bike virtuous cycle. As usage Vosper of Bicycle Retailer, e- Revolution… In good retailers increases, so does demand bikes are not the “Next Big in the U.S., e-bikes now for more places to ride. Thing” they are the “Right represent more than 10 This Minute Big Thing” and percent of total sales. We Broader non-cycling trends gaining momentum quickly. could be looking at a are also creating a perfect The U.S. is at the beginning business in the near future inflection point for the e-bike of the e-bike revolution that where e-bikes represent 30 segment. Generations of represents a potentially percent or more of sales. It is casual enthusiasts and enormous market safe to say that e-bikes could competitive amateur opportunity. represent a greater growth athletes are changing the opportunity than mountain way they think about Currently, China is the most bikes did in the late 80s and exercise and the long-term dominant market for e-bike early 90s or carbon road impact on their joints. The sales, representing bikes in the early 2000s.” popularity and boom in approximately 90 percent of running participation has the global market, while the recently leveled off as older U.S. represents between 1 generations deal with and 2 percent, per Deloitte. injuries from years of While the global e-bike constant pounding and market is large at younger generations become approximately $16 billion, more attune to the potential the U.S. e-bike market is still toll. Given the reduced small and fragmented, based physiological impact of on Allied Market Research. cycling, the category is However, the U.S. market is experiencing increased beginning to heat up. indoor and outdoor According to NPD data, U.S. consumer participation. e-bike sales jumped more In addition, e-bike growth is than 91 percent from 2016 largely incremental, meaning Despite these positive to 2017 and then another 72 access to a larger consumer secular trends, including percent from 2017 to 2018. base and new sales growing consumer Even more, in 2023, e-bike opportunities for all players acceptance of e-bikes and sales are expected to top 40 in the supply chain. Except strong product offerings million global units, for Specialized, Trek and from reputable bike brands, generating about $20 billion Canyon, the dominant there are still lingering in sales, per Mordor traditional bike brands are 5 far less dominant in e-bikes 3) KEEPING PACE WITH skeptical of marketing and as compared to their CHANGING CONSUMER advertising. According to a traditional bike share recent study by the PREFERENCES position, and that could stay McCarthy Group, more than that way for the foreseeable 80 percent of millennials do Over the last decade, the future. This means top bike not trust traditional way consumers interact with brands could lose control of advertising. Therefore, user brands has rapidly changed floor space at IBDs as e-bikes generated content is critical and independent bike shops grow in popularity. to provide credibility: nearly are losing prominence with Additionally, competitors all millennials read online the rise of competing DTC from the motorcycle, reviews before selecting a platforms. This change has automobile and electronics product, and almost 90 accelerated and is fueled by industries are multiples percent trust those reviews, the growth of the millennial larger than the biggest bike according to a recent Bright generation who now companies and bring Local survey. These online outnumber baby boomers astonishing resources, R&D, marketplaces have enabled and are expected to soon quality and value to their customers to perform more outspend them. This products. However, they lack research and determine transformation in spending a clear understanding of how perfect price transparency. power and preferences is to reach and connect with forcing brands to radically consumers which gives rethink product creation, incumbents an advantage. distribution, marketing and

customer connectivity and While the category is service. growing nicely, it is just the tip of the e-bike iceberg, and Today, online shopping is a there is substantial upside lifestyle and growing quickly. growth floating just beneath Consumers are impatient the surface. Based on and more demanding, and industry surveys, 84 percent Cycling enthusiasts are many incumbent cycling of Americans have never typically wealthier than the brands are scrambling to find ridden an e-bike, which average consumer, highly ways to reduce pain points represents enormous upside competitive and willing to for consumers. DTC for discoverability. spend more to access the companies like Canyon are See Exhibit 1. most advanced equipment leapfrogging ahead by available to improve providing compelling performance and the riding products and value experience. In addition, less propositions, including price affluent but still aspirational- transparency, highly minded consumers who have effective fit solutions and a fierce passion will happily efficient last mile customer save up to purchase service. premium performance bikes and components. This trend In addition, consumers desire of increased spending on a more personal dialogue performance enhancing with brands and are more equipment started in the late 6 1980s and has forced brands move from low single digits inconsistent customer to continuously invest in today, to 10 percent or more service. R&D and expand into new by 2025. As the e-commerce and adjacent categories. experience continues to The Big Four bike brands’ Today, bike performance improve, including the strategy has been to increase (primarily focused on weight integration of 24/7 chat market reach by simply and componentry) is no tools, sizing solutions, selling into more retailers in longer the only factor as sophisticated video, product any given geography. The consumers explore reviews and return / money IBD strategy was to sell as alternative cycling forms back guarantees, consumers many bike brands as possible including e-bikes and bike will increasingly shop online to increase consumer sharing. Cyclists also expect when they have free time. options and better compete the ability to customize and Limited store hours, subpar against other bike shops. personalize their equipment, retail staffing and few display However, the model relies on which is increasing demand models combined with rapid steady growth of IBDs. Since for custom paint jobs from expansion of flexible at home 2000, the number of IBDs boutique artists and driving customer service options, has declined significantly. larger brands like Trek to like Velofix, a mobile bike See Exhibit 2. At the same offer custom options through repair service, further time, the rise of e-commerce programs like the Trek eliminate the need for store sellers gutted the average Project One. visits. As the consumer gets shop’s most profitable more comfortable revenue stream, aftermarket All of this suggests that bike purchasing larger ticket equipment and accessories. brands and retailers must items like automobiles stay nimble to compete. (Tesla) and other high-end Native DTC brands like products online, DTC bike Canyon have a built-in sales have the potential to advantage to more quickly grow. address changing consumer demands and preferences. The Big Four bike brands This puts the Big Four and have a strong foothold with smaller bike brands in a the majority of the IBD weaker position, forcing network and have secured them to play catch up to stay floor space in store. Given relevant with modern this position, they have been consumers. cautious to pursue an aggressive DTC strategy Bike brands were forced to 4) DTC CHANNEL IS without risking their look for new strategies and WARMING UP entrenched market position shifted focus from the most retailers per market to U.S. e-commerce sales are or alienating their IBD deeper relationships with the now more than 10 percent of partners. Until recently, they most successful retailers. In total retail sales and have not been pressured to parallel, the most successful expected to reach $1 trillion shake things up since they retailers strived to be allied by 2025, according to FTI were secure in their position with the most successful bike Consulting. Similarly, we with IBDs. The net result was brands. The name of the expect DTC bike sales to reduced consumer choice at brick and mortar retail and game was controlling the 7 most floor space at the best new products at a faster “The associated equipment shops, effectively locking cadence. Unlike the legacy has improved dramatically competing brands out of bike manufacturers, who and never were riders able to premium stores and forcing rarely retain an active train so targeted in such an them to marginal dialogue and relationship easy way and use time far alternatives. Given the close with the end consumer, DTC more efficiently.” — Bas ties between bike brands and bike brands can better Holtkamp, Author of Tacx IBDs, the brands have been control the customer blog cautious to pursue DTC experience, including direct strategies to avoid alienating contact and transparency The at-home training their IBD partners. with consumers through segment is in the beginning Consequently, instore service every stage of the sale of a long-term, upward quality, breadth and depth of process. Importantly, by trajectory. One of the biggest product offering and cutting out the bike shop motivators for the migration shopping experience has middlemen, DTC brands can is time — as consumers’ daily declined, increasing deliver a compelling value lives have gotten consumer pain points. proposition to consumers progressively busier, they while maintaining superior have turned to more However, despite the margins. In addition, convenient forms of exercise. shrinking number of IBDs and proprietary in-house The growth in indoor bike pressure from e-commerce, production enables greater training reflects this trend. there is still a subset of product customization and highly successful shops that lower inventory risk. are investing in both the It also creates the acoustic and e-bike opportunity to provide categories and finding compelling personalization success. They are doing this options for the consumer by providing exceptional while tracking who is buying, customer experiences, what they are buying and cutting edge fit services, how often they are buying, offering high-end custom enabling customized options from brands like engagement. Finally, without Moots, Parlee and Seven and the millstone of legacy IBD creating a sense of relationships, the DTC brands community through group can pursue attractive rides and trips. strategic collaborations and

partnerships including In contrast to the category expansion While no one debates the conventional bike brands, opportunities and last mile idea that riding outside is like the Big Four, DTC bike partnerships. generally preferable, indoor brands are not encumbered training is a more strategic by legacy operating models 5) INDOOR TRAINING way to improve bike fitness and are able to embrace an SEGMENT IS GROWING in order to be better entrepreneurial culture that EXPONENTIALLY prepared when riding is more agile. They can move outdoors. Today, an indoor through ideation, design and cyclist can ride and feel a implementation to launch 8 realistic pedaling action and experience, and there is a Garmin). Cyclists increasingly even experience the bike wealth of choice on both the seek out the best and most move under them to reflect hardware and software side. reliable equipment, valuing actual road grade changes. Zwift, a virtual world that features like software Safety is also an important mimics outdoor riding, is the compatibility and ease of factor driving the indoor obvious industry leader on setup. The most closely training market. While the the gamification front, but watched category, however, overall number of bicycle other training platforms — is arguably the dedicated accidents in the U.S. is where the software actively indoor smart bike. These are declining, the number of controls the resistance on high-end machines similar in fatal bike accidents is the smart trainer — such as theory to Peloton and other expected to rise by 10 The Sufferfest, FulGaz, traditional exercise bikes but percent, according to NHTSA TrainerRoad, Rouvy, designed to feel more like an data. TrainingPeaks, Stages Link outdoor machine with and others provide a quality customizable touch points, There is also an increasing of training that cyclists could realistic gear shifting and social aspect to the rise of only dream of a few years dynamic resistance, intended indoor cycling. Consumers’ ago. Zwift raised $120 million to pair with your choice of desire to participate in social in Series B growth equity in virtual training platform. activity feeds such as Strava late 2018 and since its launch These dedicated indoor bikes and MapMyFitness drives has gained over 1 million can be expensive, rivaling the community engagement, registered users. Zwift users cost of a good acoustic bike, increases training frequency have also clocked more than owing to the advanced and fuels the competitive 200 million miles of riding technology used. The new spirit. These dynamics are and more than one thousand Wahoo KICKR Bike driving increased consumer races were hosted in 2019 ($3,499.99 MSRP), Tacx willingness to pay for alone. Despite its growing NEO Bike ($3,199.99 MSRP) technology and subscription popularity and intuitive and Stages Bike ($2,600 services that track progress, gamification of exercise MSRP) are dynamic and structure workouts and through cycling, Zwift exciting to ride and, despite provide nutrition guidance. remains virtually unknown the high price tag, are Not only do virtual training outside cycling circles. But, expected to increase sales platforms engage the eyes increased consumer both indoors and outdoors. and mind to further immerse discoverability through social a rider into their workout media and word of mouth is and nutrition, but also allow rapidly heating up demand in virtual rides with friends and the category. cyclists from around the world. This has spawned the The indoor training era of social riding and racing experience, like the outdoor indoors, which is a powerful segment, is powered by force helping drive growth in technologically advanced the indoor cycling category. smart training products dominated by brands like There is no denying the Wahoo (Norwest portfolio power of virtual platforms to investment) and Tacx enhance the indoor (recently acquired by 9 In addition, Wahoo, Stages that goes on them exceeds supply. As the and Tacx (through parent significantly changed in a industry consolidates, Garmin) offer a growing very short period. An companies at the bottom assortment of high-quality advantage of the rapid lack the resources to hire outdoor GPS cycling advancement was an ability skilled staff, broadening the computers. Although Garmin on the part of bike brands to gap between the top brands is currently the undisputed command higher prices from and the rest. The juggernaut of the GPS cycling the consumer. This sophisticated operators at computer world, Wahoo’s simultaneously created an the top — larger and often innovative and user-friendly expanded class of more agile players — are product offering is quickly performance-oriented sourcing talent from outside challenging Garmin’s enthusiast cyclists willing to the traditional industry supremacy. pay for new technology if it recruiting pool. Given how engaging and meant going faster. But as realistic the experience can the evolution of frames and be on these new high-end components continued, and indoor bikes, it could have a the market for them evolved positive effect on the linearly, the R&D time and demand for outdoor cycling expense necessary for as these indoor riders decide innovation increased to capitalize on their exponentially. Given the improved fitness to explore level of advancement across the outdoors by bike. There the spectrum, the days of is little doubt that the indoor back-of-envelope product bike category trend is real design are over and the and becoming a more number of players with prominent component of an sufficient resources to meet 7) WELLNESS IS THE outdoor cyclist’s product and the new R&D requirements training experience. Finally, has shrunk. This has further NEW LUXURY the category lends itself well empowered the largest and to a DTC strategy, including strongest brands and “Today’s customers want to price transparency, last mile increasingly squeezed be healthy and happy, no setup and customer service smaller brands. matter who they are. Owning and connectivity. the most expensive or the These advancements in latest goods has taken a back 6) INCREASED PRODUCT materials and components, seat to looking good and feeling good, and consumers COMPLEXITY AND A particularly electronic shifting, hidden brake cable are showing an increasing SHORTAGE OF TALENT routing and e-bikes, have preference for participating FAVORS MORE caused bike maintenance to in activities and indulging in SOPHISTICATED ACTORS become increasingly labor experiences that promote intensive. As the installed their well-being—and With the rise of composite base of sophisticated sharing those experiences materials and new products in different with their friends.” — Jack component standards, the proprietary formats grows, Ma, Chairman and Founder relationship between bicycle the demand for skilled labor, of Alibaba frames and the equipment especially mechanics, 10 Modern consumers are consumers want to enjoy fitness, community and placing more value on health and flaunt. See Exhibit 3. connectivity, as well as and wellness than on “escape value” for material objects, and the According to the Global consumers to avoid definition of health and Wellness Institute, the global destinations overcrowded wellness has evolved. wellness economy was $4.5 due to tourism, urban The phrase no longer refers trillion globally in 2018, and congestion and increasing simply to a lack of illness, but the physical activity economy traffic. Cycling elevates focus to a more holistic state of is expected to grow by more from being experiential to being, where one’s mental, than 6 percent annually, being transformative, this is physical and emotional significantly faster than especially true for the gravel, health are in sync. And in an global GDP. This secular mountain bike and e-bike era where so many people trend has multiple positive categories, which promote continuously catalog and “halo” implications for the personal exploration and display their lives on social bike industry, too many to drive consumer motivation media, looking great, feeling discuss in this report. Biking and demand. good and sleeping well are provides attractive the new luxuries that opportunities for improved

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8) “WEALTH activity access, like dedicated product R&D, fueling strong MULTIPLIER” up-mountain activities, new growth. Based on Baird trails and forest roads are estimates, Specialized, PHENOMENON IS REAL driving niche segmentation Canyon and Trek all

and expanding demand for generated double digit We believe that the global the “right” equipment within revenue growth in consumer market is in the each specific activity. In the 2019. early stages of a pronounced bike category, many avid “wealth multiplier” cyclists own three or four phenomenon, which is bikes, each for a specific expected to accelerate purpose like road rides, growth for high-end and cyclocross races or doing premium sports and outdoor loops at a local mountain equipment across categories. bike trail. Most recently, One striking analog is the growth in sales of gravel rapid growth in private jet grinders like the Canyon Grail ownership which has grown are exploding as cyclists seek in both the new and used out long fire road rides and categories. According to the bike-packing adventures. In General Aviation 2019, sales of Specialized’s Manufacturers Association, flagship S-Works road bike private jet sales were up 15 were eclipsed for the first percent in Q4 2019 over the time by its S-Works gravel same period last year. While product line, based on Baird private jet ownership estimates. If this Specialized’s growth was represents the pinnacle of phenomenon is multiplied driven by its successful e- the consumer market, we out over a similarly large bike and gravel bike believe the same consumer base of affluent consumers categories. Specialized CEO drivers trickle down to the in the U.S., it does not take a and founder, Mike Sinyard is outdoor and sports leap of faith to foresee a bike industry visionary, and equipment markets, continued growth at the high he is more energized and including hard and soft good end of the bicycle market. open-minded to ideas and products. In the outdoor and strategic opportunities than sports equipment markets, ever. Specialized is consumers increasingly seek The Competition Is proactively pursuing out the latest products and Mobilizing partnerships and new ideas technology to enhance their especially in the electronics / user experience, for both As these industry changes digital, e-bike and smart themselves and their family. unfold, the sophisticated and trainer categories.

innovative operators will get Specialized has also Affluence, technology and stronger and gain share, successfully partnered with increased accessibility are all creating risk and Zone 5 Ventures, an converging to create a opportunity. Specialized, investment vehicle designed perfect storm of increased Canyon, Trek and Giant to help identify and invest in consumer demand. In continue to invest heavily in new cycling technology. Chris addition, improved outdoor talent, infrastructure and Yu, Zone 5 co-founder, also 12 heads technology and generate mixed results in II. Developed trust and innovation for Specialized. terms of revenue loyalty with the Finally, John Rangel, CFO, performance and consumer, rejoined the company in profitability and are III. Sophisticated and rapid early 2019 and is helping to struggling to maintain R&D capabilities and reignite Specialized’s M&A market share. This is partly expertise with a initiatives. due to a lack of focus on R&D reputation for high investment and issues with quality engineering and Canyon’s DTC business the breadth of their product reliability, continues to gain portfolios. Meanwhile, the IV. Superior value momentum and the brand, smaller niche players are proposition, best-in-class product offerings and value undergoing various stages of customer service model proposition are rapidly consolidation, but despite and ongoing end-user winning consumer adoption. the influx of investment connectivity, Importantly, Canyon’s capital and increased velocity V. Sophisticated and DTC model and strategy are of transactions, some of sustainable last mile not encumbered by channel these recent acquisitions capabilities, and industry relationships, have not worked out relative VI. Support from top allowing it to pursue a wider to initial expectations. In athletes, range of strategic options to short, the incumbent leaders VII. Employer of choice for advance competitive are not going to relinquish recruiting and retaining differentiation and improve their entrenched market industry talent, market share. share positions without a VIII. Proprietary production fight, and a few are capabilities and Trek continues to invest beginning to move away sophisticated heavily in innovation and from the pack and create infrastructure, and building its e-commerce competitive separation. IX. Multiple growth program enabling consumers opportunities. to purchase online and pick Winning Brands Will up their assembled and tuned bikes at a local Trek Break Away From dealer. Based on Baird The Peloton estimates, Trek and Electra branded e-bikes continue to The bike industry is at an achieve low double-digit important inflection point revenue growth. and the traditional bike, e- bike and indoor training Although Giant continues to segments are colliding and invest substantial resources disrupting the status quo — in engineering and winners and losers will production, its marketing emerge. We believe the and distribution strategy winners will possess the remains unchanged. following qualities:

On the other hand, some I. Global brand legitimacy large and medium sized and authenticity, competitors continue to 13 POTENTIAL given virtual training built in customer base of an platforms and smart trainer / industry leader. STRATEGIC bike producers, like Wahoo, OPPORTUNITIES Tacx (acquired by Garmin) and Stages, a closer 1) Acquire Or Partner connection with the end With A Cycling consumer and a broader opportunity to track and Technology Company engage with cyclists.

Cycling technology — like Cycling technology GPS computers, smart companies that make both trainers and bikes, virtual smart trainers / bikes and training platforms, power GPS computers, like meters and aero sensors — Wahoo, Garmin (through its continues to play an acquisition of Tacx) and 2) Forge Partnerships important and ever-evolving Stages have a unique With Leading E-Bike role in how cyclists explore advantage and create and train on their bikes. In Technology Innovators compelling acquisition, particular, the smart trainer / investment or partnership bike category is in the early The bright line between opportunities. For instance, stages of long-term growth, traditional bike and e-bike smart trainers complement driven by consumer segments is blurring quickly bike manufacturer offerings demands for flexibility in as e-bike technology by creating opportunities to how and when they train. As improves, frequency of use form stronger and stickier daily lives get progressively expands and e-bikes gain relationships with busier in step with consumer acceptance and popularity. consumers. In addition, GPS desires to stay active and Currently, there are a dozen computer technology can be project wellness, cycling or more e-bike competitors integrated into acoustic bike enthusiasts are demanding originating from the cockpits, creating an ever- better and more engaging automobile, motorcycle and sleeker bike profile. ways to train at home. electronics industries, But GPS computer This is happening as virtual including General Motors, technology is most training platforms, like Zwift, Toyota, Ducati, Porsche, compelling when integrated The Sufferfest, FulGaz, Yamaha and BMW. If they into the e-bike cockpit to TrainerRoad, can create workable provide riders better data on Rouvy, Stages Link and distribution channels, they how long the battery will last others are offering have the potential to based on GPS and increasingly engaging and significantly disrupt the topographical data, effective ways of training current bike supplier and prompting the rider to indoors. This has spawned an retailer markets. But, so far, reroute if they are in danger era of social riding and racing they have not been of running out of battery. indoors, which is a truly successful. Each of these Finally, technology provider powerful force helping drive companies represents a growth can be supercharged growth in the indoor cycling formidable e-bike competitor once plugged into the category. This social aspect and they will go head to distribution network and to indoor riding has also head not only with

14 traditional bike companies developing around e-bike form of riding. For example, but also with the established motors. a mountain bike purchaser e-bike only brands like will need different Pedego and Rad Power. 3) Take Advantage Of accessories than an e-bike These companies also bring Channel Convergence commuter. This would astonishing resources, include specifically designed R&D, quality and value to While the IBD channel has helmets, gloves, racks, their bicycle products, but continuously contracted over locking systems, clothing they are not adept, at least the last 20 years, many options, packs and many not yet, in selling bikes to consumers still rely on bike others. consumers. In addition, they shops to provide have enormous channel maintenance and advice on resources through their aftermarket modifications or dealership networks, but components. Depending on their dealer base has yet to the complexity, much of the jump at the opportunity routine maintenance a bike despite e-bikes having higher requires is better done by a margins than some small trained mechanic. While sedans. there are pockets of enthusiasts that enjoy doing Similarly, there are several their own maintenance, they industrial motor companies are the minority. Far more that have entered the e-bike common are consumers that motor and battery market, Concurrently, the rise of the would prefer to spend time DTC bike channel, with leveraging their expertise in riding their bikes than fixing designing efficient and companies like Canyon or maintaining them. The rise leading the way, creates a powerful motors in a small of popularity of e-bikes is package. Major players unique set of services DTC contributing to the growth of consumers need. While include Bosch, Yamaha, e-bike focused bike shops Panasonic, Shimano, FAZUA, much of the maintenance a that are experts in e-bikes bike needs has historically Brose and TQ Group, all of models and the maintenance which are dedicating time been done at bike shops, that e-bikes require. unique business models like and resources to improving power and the e-bike Velofix, a mobile bike repair Up until now, the traditional service, are offering experience. Display and bike shops and e-bike shops remote capabilities are consumers a very convenient have been separate and alternative that comes right critical with most major distinct, but we expect them manufacturers offering to their door. This is to increasingly become one especially attractive as more dedicated smart phone apps and the same. The that allow cyclists to adjust consumers buy frames, convergence of these components, wheels or full the motor characteristics to channels will create unique their preferences. This bikes online and need help and valuable opportunities assembling them, or when a creates a further opportunity for bike and accessory to combine technology consumer does not feel companies. It will also impact comfortable taking a DTC expertise in GPS computers the actual accessories that with the technology brand bike to a local shop cyclists need for their chosen because of antiquated

15 stigmas about where bikes increased in all bike industry while providing should be purchased. This segments, especially if a consumers the could change the way all bike target provides a compelling personalization and companies market to and approach to providing a customization options they interact with consumers solution to a problem, desire. through DTC channels. enables access to unique know-how and / or an Shareholders Will attractive growth opportunity. As a result, we Have Attractive Exit expect potential robust Options strategic buyer interest including from some We expect the industry adjacent categories like: winners to have exit and capital raise options that are • The established e-bike attractive and diverse. The only brands (Pedego, winners will generate Rad Power), and considerable competitive • The leading “heat” within the private automotive, equity community for both motorcycle and minority and majority electronic e-bike transactions. Private equity competitors (GM, firms will be excited about • Toyota, Ducati, short-to-medium-term value- Porsche, Tesla, Polaris, creation opportunities, as BRP). well as attractive downstream exit options, Conclusion including a potential IPO. In addition, the relevant post- As the bike industry IPO performance success of undergoes significant Fox Factory, Yeti and changes and disruptions, Peloton, among other winners and losers will aspirational and enthusiast emerge. We believe the brands, will increase this winners will have brand category’s visibility and authenticity and the trust of interest from traditional consumers through leading private equity firms and innovation expertise. family offices but also Consumers will increasingly potentially with a finite seek to deal with the group of public institutional companies that offer best-in- investors and late stage class customer service and venture firms, similar to the provide transparency on Peloton pre-IPO Series E products and pricing. consortium. Another key attribute will be

the flexibility and agility to Over the past 4 years, react to a rapidly changing strategic buyer interest has 16 BAIRD TEAM: 2019 IN CYCLING

Joe Pellegrini Robert Rosenfeld +1-704-553-6612 +1-312-609-4971 [email protected] [email protected]

John Bastian Joseph Calavenna +1-312-609-7067 +1-312-609-7032 [email protected] [email protected]

Note: Activity levels from Strava and Zwift.

OTHER BAIRD CONTRIBUTORS Consumer Hardlines Lifestyle Consumer

Kevin McGee Andrew Martin Matthew Tingler +1-312-609-5483 +1-704-553-6615 +1-312-609-4470 [email protected] [email protected] [email protected]

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