Case study A New Spin on Cycling: What is the Market Value of a Name? Cycling presents a great number of advantages over other forms of transportation. The advantages of cycling include, for: Society, inexpensive infrastructure requirements and environmental sustainability, and Individuals, benefit from cycling as a healthy exercise as well as an inexpensive mode of transport that, in some urban areas, can be faster than other transport modes (e.g. it often allows cyclists to avoid traffic jams and other obstructions). St. Kilda Bikes is a small to medium sized enterprise (SME) situated in the CBD of Melbourne, Victoria, Australia. The firms specialises in distributing the worldrenowned Spanish brand “Orbea” bikes and their own design bike models, which are manufactured in China under the firm’s brand-name and sold in the Asia Pacific region. During 2008-11, the firm doubled its sales, even though the global financial crisis had dramatically eroded consumer purchasing power. Vincent Hong, the 25 year old owner of the business, learned from reading a popular magazine (Business Review Weekly) that much of the firm’s recent success may be attributable to cycling becoming a trendy and popular sport in Australia. Browsing the Internet, he decided to briefly cross-check the article with the Retail Cycle Traders Australia Website (RCTA, 2008), from which he found that the trend has continued for at least a decade and that: “Bicycle sales in Australia averaged 795,000 per year for the four years 1998-2001. In the four years since then, bike sales averaged 1,133,000 per year. By comparison, car sales have never reached one million in a year”. This information raised

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Vincent’s interest in researching the trend further. Perhaps, the car dealer next to his store may cast more light on the trend, he thought. Discussions with the car dealer confirmed the website assertion. Furthermore, the dealer noted that some popular iconic-European-cars (e.g. BMW, Mercedes, Mini Cooper, Porsche, etc.), despite being very popular, have all lost sales in Australia due to falling consumer credit and confidence. The drop in car sales is expected to deepen also because relatively lower-cost, quality Asian cars increased their market presence around the world and in Australasia. The big problem appears to be that, while people love European cars, fewer and fewer can afford them. “People just do not want to spend that much in hard times, particularly when there are so many lower-cost, quality options in the market”, the dealer argued. On the way home, Vincent was thinking: “ASUS Computers has changed what is essentially a commodity product (laptop computers) into a luxury good by linking one of their top-end laptops with Lamborghini (e.g. the VX1-5E004P Laptop Computer)—can I do something similar with bicycles by linking them to luxury cars? Many people here love European cars, admire their engineering and design, and desire to own prestigious vehicles, but few can afford them—especially, these days”. Vincent remembered hearing from somewhere that during an earlier severe recession in the 1980s, Wally Amos founded Famous Amos Cookies against the advice that a recession was the wrong time to establish a luxury cookie company—Mr. Amos, correctly surmised that if people could not afford the best cars, houses, and travel, they could be tempted to satisfy their desire for luxury with the best cookie in the world. “Thus, in the current extended recession, if fewer people can afford prestigious cars and bicycling is becoming trendy, maybe we can

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satisfy their desire for luxury transportation by selling them bikes with design and logos of quality European cars? We can negotiate with the European car manufacturers and get licenses to design and manufacture bicycles under their logos”. Of course, he thought, there are well-known racing bicycle brands and we cannot compete with them. Yet, it seemed possible to enter the conventional bike market with road bicycles. Thinking about his idea, Vincent realised that he needed to conduct research on a number of aspects relating to it. First, he wanted to better understand what other factors, apart from the ones he was already aware of as a bicycle-store owner, may influence or increase bicycle usage and how. Second, he wanted to be certain the trend is sustainable and is not a flash in the pan. Finally, he decided to make sure that European-designed brands are really as popular in Australia as the dealer assured him even though their sales may be declining due to the economic meltdown. So, when Vincent got home he started looking for answers to these questions. First, he came across a source that helped resolve some of these uncertainties (Heinen, et al. 2010). From this, he learned that cycling for utilitarian purposes, such as commuting, is likely to be influenced by factors that differ somewhat from those influencing other forms of cycling, such as sports, tour, or leisure cycling. In the article, he found five classes of factors that determine commuting by bicycle and its frequency. Briefly, his study suggests the following: Distance between activities, infrastructure (bicycle paths, lanes, etc.), and facilities at work Vincent found that shorter distances, a mix of functions and access to good storage facilities are all factors that increase cycling share. Having a denser network layout

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and higher densities appears to have a similar effect. The effect of the presence of more cycling infrastructure and the extent to which it continued also seems to have an effect on the decision to cycle. Natural environment The natural environment has a large influence on both the decision to cycle and its frequency. Hilliness was found to have a negative effect on cycling. Weather has a tremendous influence on the cycling frequency. Rain, low temperatures, darkness, all result in people choosing to cycle less. However, commuters are less influenced by temperature than other cyclists which implies that some people chose to cycle for leisure purposes when the weather seemed pleasant.

Socio-economic and demographic factors Analysing these factors, Vincent also learned that commuting behaviour is strongly linked to personal and household characteristics. Relationships exist between cycling and gender, income, vehicle ownership, a person’s employment situation, household structure, and a few other socio-economic factors. For instance, men cycle more than women and higher income enables people to spend more money on a bicycle. Moreover, relatively wealthy people pay greater attention to their health and therefore tend to cycle more. However, having a very high economic status can reduce the probability of cycling. In other words, as it appeared to Vincent, those who can afford a Porsche or BMW, may not find cycling appealing, unless they are offered something else along with just a bicycle—perhaps a status bicycle.
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Cost, travel time, effort needed, and safety The cost, travel time, effort needed and safety of a trip are important, particularly for cyclist. All four factors affect the use of bicycles as transportation. Not only the real value, but also the perceived value of cost, time, and effort are important for people’s decisions with regard to mode choice. Also, cyclists gave cycling a higher safety value than non-cyclists. Attitudes, Social norms and habits In general, if a person has a more positive attitude towards cycling, there is a higher probability they will cycle. The study argues that attitudes and norms are influential, particularly when it comes to cycling to work. The existence of habits, on the other hand, means that people do not always select modes of transport once they have rationally evaluated all of the potential outcomes. Habits can affect mode choice: if a person is used to using a certain form of transport, they are unlikely to search for new options. Therefore, other transport modes (such as the bicycle) are not considered. It appears, however, that individuals in similar socio-economic groups, being in the same situation, choose to commute using different transport modes. This implies that individuals may base their choice not on an objective situation but on their perception of that situation. Furthermore, Vincent was surprised to learn that cycling is the fourth most popular physical activity for Australian adults and, even more surprising to him, it remains more popular than golf and tennis. Table 1 below further elaborates on the participation rate in top six adult physical activities.

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Table 1: Top Physical Activities in Australia
Activity NO of Participants ‘000 Participation Rate% Walking 6,508 39.2 Aerobics/Fitness 3,901,9 23.5 Swimming 2,414,3 14.5 Cycling 1,929 11.6 Running 1,649 9.9
Adopted from Cycling Promotion Fund 2008/09

Another source, the CPF report (2009), highlights factors that encourage more people to cycle on a more regular basis and not just for commuting purposes, for example: New bicycle infrastructure The infrastructure development necessary to support a major modal shift towards bicycle transportation was rapidly taking place in Australia. Changing laws and regulations Participation in sports used to be considered an activity only for young upper-class males. Thanks to the changing laws, regulations, and, once again, social attitudes, women’s participation had also significantly increased. Popularity of exercise vacations Exercise vacations particularly bike touring, have become very popular. Medical community advice to exercise Medical authorities are urging everyone to exercise more to mitigate a growing variety of health disorders. Furthermore, studying the above source, Vincent also found that there are several factors exerting pressure on the Australian health system and on health care services (e.g., burden of disease). Increasing rates of chronic diseases in Australia, for instance, (partially associated with ageing of population) will increase pressure on health
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expenditure. This, along with increasing fertility rates and numbers of migrants, might eventually significantly increase the cost of health care services (CPF, 2009). “So if this is the case and we should eventually pay more for the health care, will people be more inclined to exercise more?”, thought Vincent. “Strengthening interest in cycling is very encouraging news for me,” Vincent noted: “but it may be a significant concern as well— as it seems to me that I really should hurry up to catch the trend”, he concluded. Already high oil prices, he went on thinking, may further increase if political problems in the Middle East and North Africa, we hear all the time on the news, spread to other oil producing countries which, according to the news reports, could lead to global inflation, higher interest rates, and economic stagflation. This suggested to Vincent that relatively expensive European cars might eventually become prohibitively expensive for the middle class consumer and demand for them may further erode despite their popularity. Consequently, it became apparent to Vincent, that he should do more research on the topic and perhaps widen it towards other factors that may affect bicycle sales in Australia. He also wanted to know if the dealer’s prognosis is correct and Australians were opting for cheaper substitutes to the European cars. This impelled him to search for data on European car sales in Australia and some other developments emerged from his research. Vincent learned that the European car sales on Australian shores (before the decline associated with the latest economic meltdown) had been substantially greater than he had imagined. A million-of Australia’s 14.9 million drivers are driving European cars. Top spot goes to Renault and BMW. Also, nearly two-thirds of the European cars on Australian roads were made by German firms. Distance from Europe, which made these cars more expensive could have added to the popularity of European cars (Mycar, 2011).

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However, car ownership among younger people in developed countries is becoming less popular than it used to be, making more people look for a healthier substitute (The future of driving, 2012). Furthermore, further research undertaken by Vincent, indicated that the effects of the slowing economies worldwide had been further compounded by the oil effects of the Arab Revolutions of 2011 (Alhajji, 2011), the revolving debt crisis in Europe (Featherstone, 2011), and periodic bouts of weakness in the US dollar (Lobo, 2011) and, more recently, the Euro (Arestis and Sawyer, 2011). Continuing his research, Vincent also came across another publication (Smith and Kauermann 2011) suggesting a positive relationship between petrol prices and the willingness to use a bicycle for commuting. More specifically, the researchers found, as a response to high petrol prices, a significant substitution into cycling as a transport mode in the inner downtown, wealthy neighbourhoods and in the downtown overall. That, in Vincent’s view, could negatively affect the sales of European cars in Australia as they are more expensive than locally made cars and imported cars from Asia of a similar class. Bicycle sales, on the other hand, as he found out, continued to outstrip motor-vehicle sales and proved surprisingly resilient in the face of a slowing economy. Table 2 below illustrates the trend. Table 2: Bike sales v motor-car sales
Year 2008 2007 2006 2005 2004 2003 2002 2001 Motor Vehicles 1,012,164 1,049,982 1,273,781 988,269 909,811 909,811 824,309 772,681 Bicycles 1,203,648 1,427,738 962,521 1,168,601 1,247,991 1,003,844 1,109,736 774,938 Bikes lead 19 % 36 % 32 % 18 % 31 % 10 % 34 % 0.30 %

Adopted from Cycling Promotion Fund 2008/09

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Summarising his findings, Vincent clearly realised why his sales were going up and up without going down. “Obviously we are going to do just fine in the foreseeable future, perhaps even better in the long run, he was thinking. Under these circumstances, should I really burden myself with that new venture? Should I be investing my time and effort, let alone the money into something that does not completely guarantee success?”

Case Questions 1. What developments and why have made cycling so popular in Australia? 2. Do these developments affect all types of cycling in the same way? Please discuss and explain why or why not. 3. In your view, what are the major marketing obstacles to the success of the project? 4. If the project is a success, what are the possible outlets for sales of this product, in addition to conventional bike stores? 5. Discuss the profile(s) of the potential target market(s). Explain why they are considered as potential customers. 6. Does Vincent’s idea of selling European car brand bikes in Australia seem doable? Why/why not? 7. So far, Vincent has collected some secondary data. What primary data (if any) does he need to collect in order to continue with the project? 8. What is the relationship between high petrol prices, high cost of health care, positive attitudes towards cycling and possibly growing demand for bikes with renowned European car logos?

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9. Table 1, illustrates a surge in bike sales compared to car sales in Australia. What are the reasons for this surge? Is it possible to interpret these data as a trend that allows a marketer to make inferences about the demand for bikes and motor vehicles? 10. Vincent came across two sets of factors that can influence people’s decision to cycle. What are the differences between the two sets of factors? How can you differentiate between them in terms of their effect on the forms of bicycling (commuting, sporting, touring)? 11. Table 2, lists the most popular physical activities in Australia. Based on the data contained in the table and the trends that Vincent discovered while doing his preliminary research on the internet, what inferences can you make about popularity of cycling compared to other three activities? 12. “Strengthening interest in cycling is very encouraging news...” - Vincent noted while looking at these figures - but it may be a significant concern as well. Why can this be of concern to Vincent’s business? 13. Comment on the four P’s strategy Vincent may employ to market the products. Specifically, please mention possible product features, benefits the product can deliver to the customer, possible price range, promotional strategies appropriate for the product. 14. Vincent’s business is relatively small—it is a SME (small/medium sized enterprise). What are particular problems that may arise in implementing his project due to the size of his business?

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