Schwinn Cycle and Fitness L.P.

1690 38th Street
Boulder, Colorado 80301–2602
U.S.A.
(303) 939-0100

Wholly Owned Subsidiary of Scott Sports Group Inc. Incorporated: 1895 as Arnold, Schwinn and Company
Employees: 180
Sales: $250 million (1995 est.)
SICs: 3751 Motorcycles, Bicycles & Parts; 3949 Sporting & Athletic Goods, Not Elsewhere Classified

For most of its century-long history Schwinn Cycle and Fitness L.P. has been a leading manufacturer of bicycles and bicycle accessories. Founded at the beginning of the biking craze in the 1890s, Schwinn became the most recognized name in the U.S. industry and maintained at least a 25 percent market share for decades. Schwinn dominated the U.S. bicycle market until the 1980s, when the company failed to follow the trend toward more highly engineered, lightweight bikes in the growing adult market and failed to take the new interest in mountain biking seriously. After filing for Chapter 11 bankruptcy in 1992, the company was bought by the Scott Sports Group, who brought back most of the glory of the tarnished but venerable name.

Early History

Ignaz Schwinn, an immigrant from Germany, joined the biking craze sweeping the nation by founding a bicycle manufactory in Chicago in 1895. Although bicycling was a relatively new sport, the company Schwinn founded with his partner, Adolph Arnold, was by no means a solitary venture; Chicago was home to approximately 90 other bicycle companies at the time. Arnold, Schwinn & Company proved to be the only enduring one, however.

That first year Schwinn introduced the World Roadster and manufactured about 25,000 cycles. The company grew steadily in its first decade, moving from rented facilities downtown to a larger space on Chicago’s northwest side in 1900. The next year, the company relocated yet again, to a building on North Kostner Avenue that housed both the corporate headquarters and manufacturing. Schwinn made its first acquisition in 1899 (and slightly thinned the ranks of the Chicago bicycle army) when it bought competitor March-Davis Bicycle Company.

Over the next several decades, Schwinn remained a familyrun business. That stability did not translate into stagnation, however. The company incorporated numerous functional advancements into its models. Such innovations as balloon tires, coaster brakes, forewheel expander brakes, and handlebarmounted gear changers were introduced by Schwinn. Some famous bicycle designs by Schwinn include the early Aerocycle, Cycleplane, and Autocycle. The Paramount line was introduced in 1938 and the Sting-Ray in 1963.

Schwinn held 25 percent of the market by the 1950s, a distinction it maintained through the 1970s. These years as the top bicycle manufacturer in the United States represented a high point for Schwinn. With phenomenal name recognition and consumer loyalty, Schwinn dominated the market.

Slipping Market Share in the 1980s

By the time the fourth generation of Schwinns were running the company, however, Schwinn was sliding from its top position. Several factors contributed to the company’s troubles. In an effort to cut costs, Schwinn moved production to Mississippi, Hungary, Taiwan, and mainland China. These mostly overseas suppliers had problems delivering their products on time, and those products they did deliver were generally of a lower quality than customers had come to expect from Schwinn. Unable to keep up with its commitments to dealers, Schwinn lost floor space to competitors. In the mass merchandise market, which represented 70 percent of all bikes sold, competitors Huffy Bicycles Co. and Murray Inc. began to take over market share.

A more fundamental problem prevented Schwinn from recovering from its supplier problem: The company had grown complacent and arrogant, certain that it could rest on its laurels. Tom Stendahl, Scott Sports Group’s chief executive, told Business Week in 1993, “When they were asked who were their competition, they said, ‘We don’t have competition. We’re Schwinn.’ “ Because of this attitude the company did not follow several trends that would prove to be enduring and profitable, allowing other companies to push it aside. Caught up in its traditional market of children’s bikes, Schwinn did not take notice that adults were buying bicycles for themselves in greater numbers or that buyers desired lighter weight bikes. By the time sales of adult bikes reached 50 percent of the market in the mid-1980s, Schwinn had lost the chance of transferring its impressive name recognition to this new area. Not having invested research and development into high-tech bikes, Schwinn was perceived as “merely” a children’s bike manufacturer, not a company adults trusted for their more sophisticated needs.

The company also failed to enter the new BMX (sporting) bike market and the burgeoning mountain bike market. Schwinn dismissed mountain biking as a fad and lost its chance to secure that market to several new companies in the 1980s: Trek Bicycle Corp. of Waterloo, Iowa; Giant Bicycle Inc. in Rancho Dominguez, California; and Specialized Bicycle Components Inc. in Morgan Hill, California. By 1991 these three companies made up one-third of all bicycles sold through independent dealers, the primary venue for Schwinn bikes.

By the late 1980s these problems had translated into serious losses. Bike sales fell from one million in 1987 to 500,000 in 1991 and to approximately 275,000 in 1993. By 1992 Schwinn held only about five percent of the U.S. bicycle market and had lost $50 million in the previous three years, including a $25 million loss in 1992 alone. Having lost the confidence of its dealers, fallen behind in research and development, and given up market share to new companies with aggressive distribution, the company filed Chapter 11 bankruptcy on October 7, 1992. At the time, Schwinn’s debts totaled $82 million.

Turnaround in the 1990s

Despite the company’s serious problems, it held some appeal to those wishing to salvage it. Schwinn’s name recognition remained high in the U.S. sporting goods market, and its dealer network was extensive, comprising 1,800 dealers throughout the nation. Reversing the family’s policy of not bringing in outside investors, Edward Schwinn Jr., the last Schwinn to run the company, sold the company in January 1993 to Scott Sports Group Inc. Scott USA, the world’s foremost ski accessory manufacturer, already had a successful bicycle business, Scott Holdings, which was the number two seller of Asian-made bikes in Europe. Scott USA hoped the acquisition of Schwinn would be a good way to expand its bicycle business to the United States. Scott, with the investor group Zell/Chilmark Fund LP, formed Scott Sports Group and acquired Schwinn for $43.75 million.

Scott Sports Group focused on turning the company around. It immediately invested another $7 million and trimmed the work force from 400 to 180. Schwinn then set about redesigning every single bike in its 48-model line. Correcting the company’s stodgy image to reflect its new direction was also a priority. As part of that effort, Scott Sports Group moved Schwinn to Boulder, Colorado, a town where mountain biking is common-place and many of the world’s top racers come to train. “We decided to move to Boulder because we thought it was a way to change the whole appearance of Schwinn,” Tom Stendahl, president of Scott Sports Group told the Boulder County Business Report. Stendahl and approximately 50 employees moved to Boulder. In another attempt to change the company’s image, the advertising budget was doubled to around $10 million. The company then leapt feet first into the trend toward irreverent advertising with its first ad in the bike magazines since the buyout: “Schwinns are red, Schwinns are blue. Schwinns are light and agile too. Cars suck. The end.”

Ensuring the company’s new direction required other drastic action. Charles Ferries, chairman of Scott Sports Group, fired top management and promoted the second tier. The new management’s first task was regaining the confidence of its dealers and recapturing lost floor space. The new president of Schwinn, Ralph Murray, told Boulder County Business Report in 1993, “This dealer network has been punished by Schwinn’s failure to supply. The arrogance of the old management was enormous; they just thought that people depended on them. We’re trying to regain their confidence right now by front-loading the system with inventory so we can perform up to their expectations.” Management also traveled across the country, meeting personally with 800 of the company’s 1,400 dealers. The message they brought could be summed up in the company’s new slogan: “Established 1895. Re-established 1994.”

The new owners’ efforts saw some immediate results. The company returned to profitability in 1993, although sales were lower than the $150 million in 1992. But all of these changes did not come without some snags. Early in 1994 two top executives who had been with the company before the buyout chose to leave the company. Ken Lesniak, Schwinn’s national sales manager, and Byron Smith, vice-president of marketing and sales, resigned in January 1994. Their departure left a void in upper management that the company tried to downplay. However, John Graves, the top Schwinn retailer in 1991, said to the Denver Business Journal, “It’s going to be a nightmare. The only guy there with a brain at all is Ralph Murray, but he can’t do it by himself.... It’s still a good enough line that I will wait, but they don’t get the priority they used to get at the store.”

New Products Drive Recovery in the 1990s

Schwinn’s fitness division made a significant contribution to the recovery of the company. Schwinn had entered the fitness equipment market in the 1960s with its introduction of the Airdyne stationary bike. By 1994, Schwinn was making 20 fitness products for a number of uses. Its value segment line, priced at $300 to $1,500, included the Easy Tread, a non-motorized treadmill; an Airdyne; the Recumbent, a seated bike; and the Stepper, a step machine with adjustable shock absorber resistance. Schwinn also produced two other higher-priced lines: the Home Trainer line, which included products for home and institutional use, and a commercial-institutional line, which featured a stair stepper and several weight-stack machines. Fitness equipment accounted for $29 million, or 30 percent, of total sales in 1994.

The fitness division’s real contribution came in 1995, however, with the start of a new fitness craze: spinning. Highly popular at health clubs, spinning took the form of instructor-led classes set to music that imitated a bike ride, with riders turning a tension knob on an ultra-sturdy Schwinn exercise bike to simulate going up a hill. The bike, the Spinner, was created through collaboration with cross-country racer Johnny Goldberg. Goldberg had modified a Schwinn DX900 stationary bike in the mid-1980s to use in training for the Ride Across America, but kept breaking parts because of the intense use to which he put it. Kevin Lamar, dismayed at the number of replacement parts for which Goldberg was asking, went out to meet him and a partnership developed between Goldberg’s company, Mad Dog Athletics, and Schwinn. The agreement stipulated that Schwinn control the manufacture of the bikes and Mad Dog Athletics develop the programming—the various techniques that help riders get the most efficient workout. Schwinn agreed not to sell the bikes without Mad Dog’s programming and to pay an annual royalty fee on the concept and trademarked name. After a $1 million investment, Schwinn began selling the stationary bikes for $650 apiece or leasing it to fitness centers with two days of training for instructors. By February 1996 Schwinn was taking orders from two to three fitness centers a day. This product alone had helped raise fitness equipment to 35 percent of Schwinn sales, or $40 million.

“The key to getting Schwinn back was the product redesign,” Chuck Ferries told the Boulder Daily Camera in May 1995. “Schwinn was not making a top-quality mountain bike. We wanted to drive the company through product.” Schwinn’s new American-made, top-of-the-line mountain bike, the Homegrown, retailed at $1,750. The company still had its image to overcome, however. Bicycle salesman Rob Kramer told the Boulder Daily Camera, “Most of the people are lured in by Trek or Raleigh, and it usually takes a comparison with Schwinn and a test ride. That’s when it changes their mind.” In 1995 Schwinn further committed to mountain bikes by acquiring Durango, Colorado-based Yeti Cycles Inc., a maker of highend mountain bike frames. The ten-year-old company produced bikes in the $2000 to $6000 range for downhill racers and serious enthusiasts, a market separate from that for Schwinn’s Homegrown. Yeti was lured to the merger by the financial boost it would provide, whereas Schwinn gained a respected name in a niche market. The company’s bike lines would remain separate, and Yeti would keep its name and continue to control the direction and image of the company. “We’re responsible for our own direction,” said Brett Hahn, the general manager of Yeti, to the Boulder Daily Camera in 1995. “Schwinn has no desire to blend images.” The acquisition also gave Schwinn a manufacturer near its headquarters, which the company hoped would improve its research and development by allowing the company to build and test prototypes in Durango.

100 in 1995 and Still Going

Schwinn celebrated its 100th anniversary in 1995 by introducing a new line of bikes, sending dealers various small gifts, and putting on a show in Las Vegas called the “SchwinnDig,” with 100 cycling Elvis Presley imitators. The company also offered a limited edition of the classic Black Phantom bicycle for $5,000, some of which sold to celebrities like Jerry Seinfeld and Hugh Hefner. The real celebration, however, was for Schwinn’s reentry into the mainstream of the bicycle market; in 1995 the company was selling high-performance off-road bikes, knobby-tired cruisers, and BMX children’s bikes. Fitness equipment accounted for 25 percent of sales that year and parts and accessories accounted for another ten percent.

By 1996 Schwinn had climbed to second in the industry for product shipment, behind Trek. In an effort to get to the number one position, Schwinn announced in April 1997 that it was looking for a new strategic or financial partner or would be willing to sell the company or certain divisions to gain the financial backing it needed to move ahead. “I don’t think we’re comfortable being number two in the marketplace,” said Gregg Bagni, vice-president for marketing at Schwinn, “I don’t think we will be satisfied until we’re number one. To get to that next level, strategic or financial partners are important for us right now.” Scott Sports Group enlisted the help of Smith Barney Inc., a securities firm, in their search for a buyer.