The Great Distribution Experiment is Over

04/12/2011 @ 1:27 pm, by Jensen Beeler12 COMMENTS

As we write the timeline on the evolution of the electric motorcycle, the bullet points for 2011 will note a few key events, and one of them surely will be the adoption of a traditional sales distribution scheme. It’s not a sexy event, but it’s an important one in the growth of this side of the industry. You see when resourced-backed electric motorcycle manufacturers entered the scene, the idea was that a new drivetrain meant a new set of rules, and from that a new playbook was drafted. The idea of selling electric motorcycles at traditional motorcycle dealerships was abandoned, and in its place these companies tried new approaches — some clever, and some not so much.

Direct-to-consumer sales approaches, online purchasing, ad hoc customer sales leads, and even Best Buy all entered into these new models of how to get a motorcycle into a purchaser’s hands…and they all failed. It is no small feat to start a motorcycle company, and it is an even taller order to make an electric one. Not only do you have to sell your would-be-buyer on the features of your motorcycle, but you then also have to sell them on why their purchase should be an electric motorcycle, and not its ICE equivalent.

The undertaking of proving out a new method of selling motorcycles is a burden in its own right for an established motorcycle manufacturer, let alone a startup, so its failure should come as little surprise to those in the industry with this experience. It is therefore not surprising that we get news that both Zero Motorcycles and Brammo have abandoned their previous sales distribution schemes, in favor of adopting a more traditional dealer network approach.

When I first went on my traveling show of the various prominent electric motorcycle manufacturers, putting together what would be come the “Tradition is not a Business Model” series, one of the questions I asked each manufacturer was how they were going to deal with the distribution problem. One of the hardships a new company has to deal with in the motorcycle industry is how they are going to actually get their bikes into customers’ hands. Just the American market alone is geographically daunting, and it takes a tremendous amount of capital to cover it well.

Capital is of course something startups have in limited supply, and conversely we saw some creative solutions to this problem. One of the novelties we’ve seen is a direct-to-consumer model, where purchasers are buying motorcycles directly from the manufacturer itself. This model looks great on paper, as presumably the buyer is saving some money in the process, and the manufacturer makes a little bit more margin for itself, as both parties take some of the pie that would have otherwise gone to the dealer.

With the advent of the .com boom, the internet played its role in this endeavor, with online configurators and ordering forms replacing the dealer buying experience. Of course you can’t sit on a motorcycle while you are at your computer, you can’t take the bike for a test ride (not that some dealers will let you do that, but that’s another topic for another day), and perhaps more importantly, when you’re motorcycle breaks, you can’t stuff it back in your disk drive and have it repaired by the OEM.

Zero learned this lesson the hard way, in what one of my colleagues calls “a couple bricks short of a pyramid scheme sales strategy.” Maybe that is some good hyperbole, maybe there is more truth to it than there seems, but Zero’s sales strategy was predicated on sales leads coming from the internet (it is amusing to click “Add to Cart” on the company’s site when looking at a DS or similar model), supported by the idea that virtually every customer of Zero’s would be empowered to make sales of their own.

Again on paper this idea sounds great. Zero was bucking the costs of a growing dealer network, and they were getting savvy with online tools. Knowing full-well that their prime consumer was likely computer savvy as well, Zero was also taking its biggest advocates, Zero Motorcycle owners, and making them salesmen for the brand. What’s not to like about this arrangement, right?

The problem was that this arrangement inevitably had Zero MC competing with Zero consumers for sales (putting the company squarely in conflict with its core advocacy group). If you take a page from the traditional side of the industry, the one thing motorcycle companies do not do is compete with their dealers (or alienate their consumers, for that matter). In a traditional arrangement, there is margin given up by the OEM to dealers that’s essentially payment for facilitating a sale, and in Zero’s plan it was in the company’s best interest to keep that profit for themselves — hence the rub.

Allegations of poached sales have arisen, and then of course there’s the issue of dealer territory laws, as buyers of Zero Motorcycles clearly don’t have to be a certain distance from each other, as is the case with established dealers according to state and federal law here in the United States. How this issue hasn’t ended up in court is beyond my comprehension, and would be a terminal legal liability for the company.

The other issue with the absence of a real brick and mortar sales strategy is what happens when something goes wrong with the machine. Where does the customer go when they have a problem? Where do they go for regular maintenance? We don’t really think about these problems when we are buying motorcycles because we are firmly wearing our rose-colored glasses with giddiness of buying a new motorcycle, but these are real issues. In the case of Zero Motorcycles, seemingly almost every bike that left the Scott Valley company’s door had some sort of issue that warranted repair.

Cracked frames, melting gauges, bicycle components, these are all items that had to be replaced by Zero, and with no dealer network in place, the company had to send out teams to facilitate their repair. A privately held company, we’ll likely never know how much sending these repair teams to the thousand or so customers who had issues actually cost Zero Motorcycles, but it suffices to say that if there was any profit leftover on the sale after these repairs/replacements were completed, it was minimal at best.

Having a brick and mortar operation doesn’t instantly solve these problems though, as we’ve seen with Brammo. The Ashland, Oregon based company came up with the clever plan of using Best Buy retail stores as its distribution method (with online supplementing its sales where Best Buys were not located). With Best Buy investing a substantial amount of money into the company, and hoping to build out its E2W offering, the match seemed perfectly mated. The problem here though was two-fold: 1) motorcycle buyers don’t want to purchase their bikes where they buy their toasters, and 2) Best Buy was entirely unprepared to start acting like a motorcycle dealership.

With the Best Buy plan rolled out over various Oregonian and Californian stores, it quickly became apparent that the stores were not ready for their role. Some of the issues involved were that Best Buy stores were not licensed with the DMV to sell on-road vehicles (remember most of their other units were technically bicycles or mopeds), the sales staff had to be specially trained (Best Buy doesn’t exactly rank highly on the customer service reports), and there were even fundamental issues with the design of retail outlets with government regulations (for example in California you have to have a ten foot door leading out of the building).

While Best Buy provided buyers with a physical place to go see, touch, smell, and ride a Brammo motorcycle (bonus points for that last sensation) the buying experience at a Best Buy superstore is less than confidence inspiring. We know from consumer research that the dealer experience factors heavily in a consumer’s purchasing decision. If you’ve never bought something from a Best Buy store, you owe it to yourself to spend an hour on a Saturday shopping for a television…and then imagine a motorcycle dealership acting like that.

You’ll stand around for a bit before a specialist comes over, and while they deal with TV’s day-in and day-out, you’ve likely gleaned as much information on the products in your own research as they have. As you hem and haw over different models, you’ll be fighting over the stores internal incentives for certain models, as well as the sales metric based bonus structure for the sales staff.

We’ll overlook the fact that Best Buy has internal versions of its website that show different prices than the ones you saw at home (“Are you sure you saw it at that price, let’s check the website…”), and just imagine what the full-court press warranty purchase experience must be like once you’ve committed to buying the consumer appliance, I mean motorcycle. For kicks I spent a Saturday doing this very process, except I have to add in the extra hour or so I had to wait while the only “EV Specialist” showed up at the store to handle my questions and potential sale. Sadly, I was not persuaded to purchase a motorcycle that day.

For all its detriments, Brammo adopted this plan because it wanted to sell to the allusive non-rider segment, that is to say that Brammo wanted to make previous non-riders into motorcyclists with its Enertia and subsequent models. No one really knows how big this market is, but presumably if gasoline prices get high enough, it could be a sizeable portion of the population. That’s big money in venture capital terms, but like many things in economics, the propensity to buy isn’t a directly proportional proposition.

Even with gas over $4/gallon nationwide, Brammo sold only several hundred of these units, showing that this market is much smaller than everyone thinks (at least for electrics that are 2-3x the cost of a scooter), and that the energy situation is going to have to get far worse before meaningful sales occur. Gasoline at $6/gallon or higher brings its own set of unique problems that would also affect sales, further compounding the issue.

If we talk frankly, chasing the non-rider demographic is a smokescreen for saying that you can’t build a motorcycle that appeals to current motorcyclists. While Brammo has debuted the Empulse to cater to the already established riding group (an available market size whose quantity we already know), Zero Motorcycles still says its aim is to appeal to the non-riders. Why anyone would want to admit to that is beyond me, but it must sound nice during investor pitches for the above mentioned reasons. The truth though is that if your motorcycle appeals to non-riders, it likely doesn’t appeal to current riders. One of these groups takes a massive amount of effort to on-board into buying a motorcycle, the other does not…which group sounds like the lower hanging fruit to you?

Many Bothan Spies died to bring us news that Brammo is secretly recruiting a dealer support staff, with its exclusive sales agreement with Best Buy either already at end of term, or nearing completion. Similarly, Zero Motorcycles has made no secret about its massive recruitment of talent from inside the motorcycle industry, clearly trying to amass experience in how to act like a traditional motorcycle company. Our sources suggest that current Zero distributors are getting letters saying their services will no longer be needed in the coming months, as the California company also seems ready to try things the established way.

I won’t begrudge either company for trying a new approach to distributing and supporting motorcycles, lord knows I love people that live outside of the box, but the jury is in, and these approaches haven’t worked. It took a company like Vectrix hundreds of millions of dollars to learn this lesson, and it took Zero and Brammo tens of millions of dollars to repeat the same folly. Hopefully we can put these ideas to bed, and not see another company waste millions of their investors’ dollars in further proving out how difficult this proposition is in achieving. It will be interesting to watch these companies re-cross the bridges they burned while setting up they’re non-traditional distribution routes, as they now have to solicit the help of the same dealers they alienated and enraged by their previous actions.

  • Other Sean


    Make mine Mission Motors. Their first effort was horrific to behold, but their latest is divine.

  • Interesting! I have to say that, years ago, when I first met with the Brammo guys I was skeptical of the Best Buy proposition — but I came to think that it might actually work. I hear your critique of Best Buy sales practices, but have you been in the average motorcycle dealership? Customer service is no better or more informed overall in bike shops than in big-box appliance stores.

    Way back then, I warned the Brammolians that if they wanted to sell in such a setting, to ‘non-riders’, that the big hurdle would _not_ be convincing them this was a motorcycle that their wives would let them buy/wouldn’t intimidate them/wouldn’t get them ostracized in suburbia. Rather it would be converting those non-riders into licensed, safe motorcyclists. Now that Brammos’ll be sold in motorcycle dealership settings they’ll _perhaps_ be closer linked to people who’ve helped other newbies meet that challenge. (MSF course for e-bikes, anyone?)

    I guess one way to read this story is, “Look at those neophyte e-bike nerds, and how little they knew about the motorcycle industry.”

    Another way to look at it is, “At least they identified something they were doing that was wrong, and are trying something else.”

    The ICE motorcycle industry could do that more often.

  • Really?!!

    No sympathy. If anyone had spent any time at all researching the sales side of the motor vehicle business or had spent the time to hire some quality staff to research and address all the questions related to vehicle sales, from DMV paperwork to service and warranty, this would have been stunningly obvious.

    It’s not just that the motorcycle business’s old guard experience was ignored but the opinions and experience of younger more technologically savvy industry professionals was ignored as well.

    I have talked to the Brammo guys as an industry professional in a group of industry professionals while they were out showing the bikes off and, save for one engineer (keep that one he and others like him will be the ones to build the business on), all our questions were universally written off. The attitude in general, towards us and towards people walking up, was not the kind of attitude that brings customers in. Much to much of “look how cool we are” and not nearly enough “how do we take these opportunities to build relationships that lead to sales?” A surprising lack of business understanding about how to build a customer base for the long term.

    It’s not that her isn’t room for improvement or new ways of getting the job done, but sometimes you use the wheel because it is the right thing to use. Could you invent a square wheel? Sure, it has been done and it rides like a round one but it has no practical application.

  • Tom

    Business is like running the military – its all about logistics and distribution. If one does not understand this then there is no real long term hope for a would-be manufacturer (domestic or even outsourced in China). Think of a horizontal hourglass. On one very large end is the large number of parts coming in from suppliers that bottlenecks at your factory then opens back up to a very large end of distribution. Manufacturing is a very small part of building something as a viable business.

    You take a large number of parts, organize and change them as necessary, then send the finished product out in as wide a profitable area as possible. Really, people don’t need MBAs to succeed in business. In many ways, its not that complicated. We’ll see how Motus tackles the hourglass issue with the ICE creation.

  • All this dealer business is as obvious as the nose on your face, once you get out of Northern Cali and into the rest of these United States. You can’t test drive one over the Internet, nor can my laptop fix anything. You can’t ship one back like a broken iPad. And BestBuy is as hopeless as WalMart when it comes to any expert advice or customer service.

    The real problem remains (the same as purely electric cars): If I leave Nashville to ride to the Barber Musem / Track in Birmingham (roughly 225 miles up and down hilly terrain), it’s a two day (maybe three!) trip via electric, four hours by ICE, which I can ‘recharge’ instantly. Until a big leap in battery tech comes forward, these are not a choice for me.

  • “I guess one way to read this story is, “Look at those neophyte e-bike nerds, and how little they knew about the motorcycle industry.”

    Another way to look at it is, “At least they identified something they were doing that was wrong, and are trying something else.”

    Exactly Mark.

  • Jim

    Of course a larger reason might be that electric powered motorcycles lack market acceptance, regardless of the distribution model. Enthusiast blogs are loaded with comments that if such and such product were available the commenter would buy it, with qualification of course, and the qualifications typically end up as deal killers.

    Frankly I believed the internet/Best Buy/WalMart distribution models were failures waiting to happen and setting up a dealer channel was inevitable. Now we’ll find out if electric powered motorcycles are a failure waiting to happen.

  • Really?!!

    @Jensen You are more charitable than I am. This wasn’t a matter of choosing the right line through the turn, it was missing the turn entirely and in my mind speaks to many of the common planning failures that we see everywhere in the current U.S. business environment. Simply put it was a really bad business decision and when I see such obvious bad decisions it make me wonder what other previous bad decisions are hiding in the closet.

    Meanwhile in a market with limited investment capital, money that could have gone, now or in the future, to other companies with better plans may have been sent into a black hole. In much the same way Tesla became the black hole of investment capital in Silicon Valley. While they may have pushed the technology envelope (and good on ’em for doing so), it could be argued they still do not have a viable product and yet they have hoovered every available penny from government and private sources alike.

  • I don’t really buy into your last part there Really?!!

    There’s a plethora of investment firms. Zero is backed by Invus, almost exclusively, Tesla has really only a handful of investment firms in its coffers (pre-IPO). You might have an argument for public funds being used, but those are drop in the bucket compared to the private investments involved.

    I don’t think any of the “next big ideas” in motorcycling aren’t getting made because VC firms have already been taken, I think it’s because most people trying to start a company in motorcycling either have no idea what they’re doing, or don’t develop their idea enough to even meet basic investment criteria (i.e. didn’t even make a business plan).

  • Really?!!

    @Jensen You could be right, Tesla as an investment capital black hole is only the word on the street. Although after having given them some of may hard earned tax dollars, I do wonder what Tesla’s financial position in Tesla Monaco is…….

    As far as Brammo goes, however, you said it yourself:
    “most people trying to start a company in motorcycling either have no idea what they’re doing, or don’t develop their idea enough to even meet basic investment criteria”

    I think not spending more time investigating and developing a viable backend as a part of their overall plan meets your criteria.

  • Zerofan

    There are some interesting points in this article and I would not claim, that Zeros sales model had no chance. The problem has been fulfillment and service. One can run the service network independently from the dealers network, but only if it is superior. Zero failed on this and their sales director has never understand the customer or the partners.

    By the way: as Max Blackwell from Polaris / Victory has joined the board now, I do expect that Polaris is preparing a kind of investment in Zero.

  • Good points, right up until you gave away my post for tomorrow. ;)