A Bicycle Built for You

For his second entrepreneurial act, Vermont Teddy Bear founder John Sortino is counting on an unorthodox marketing strategy to sell his high-end cruiser bikes to the over-40 crowd

In the fall of 1992, a disgruntled John Sortino wheeled his new bicycle back to the shop. He'd ridden the 21-speed mountain-style hybrid only twice, and already the derailleur needed adjustment. So did the brakes. His $900 machine, the shop mechanic informed him, would require frequent maintenance and mechanical adjustment.

Sortino was annoyed -- but also inspired. "I love to manufacture things," he says. "And I figured I could build a bike that didn't need all that maintenance." He could even picture it: a high-end cruiser with a comfortable seat, upright handlebars, and fenders; rugged, yet smooth-riding; no derailleur but perhaps a hassle-free, internally geared hub; and not a retro look exactly, but something timeless. Above all, he wanted a dependable bike, fun to ride and low on upkeep. "I studied the industry and was amazed that nobody made anything quite like that," Sortino says. "I thought there would be a big market for people over 40 who don't like mountain bikes and can't find anything else."

Convinced he had spotted a promising niche, Sortino moved quickly. He hired a technician to design the bike and then sank $1 million of his own cash into development. By mid-1994 he had put together a small manufacturing crew -- machinists, welders, painters, and assemblers -- to begin crafting the prototypes.

Although Sortino lives in Burlington, Vt., a college town on Lake Champlain, he chose downtown Chicago for his production operation, leasing 20,000 square feet in a former printing plant. He liked Chicago's bicycle heritage. Decades ago, before they decamped for the Pacific Rim, more than 60 manufacturers operated along Lake Street, then nicknamed Bicycle Alley. "Chicago used to be the bicycle-making capital of North America," Sortino says, "and we want to rebuild that industry."

With Sortino most often in Burlington, home to the company's design center and marketing department, the factory is under the direction of George Gregoire, recruited last year as chief operating officer and treasurer. At 58, Gregoire has been a certified public accountant, a controller for a major unit of Continental Can, and a software developer. He was also chief financial officer of Cannondale Europe BV, a $40-million division of Cannondale Corp., itself a $150-million Connecticut company best known for its mountain bikes.

Gregoire's experience in the huge and lucrative European bike market prompted Sortino to broaden the company's reach with an assembly center in the Netherlands. Using frames supplied by the Chicago plant, the European operation builds bikes for distribution mainly in Holland and Germany, where high-end American bikes have great sex appeal. If the European venture meets sales projections, it will contribute roughly half the company's total earnings.

Sortino himself is an amiable guy with a taste for microbrewed beer and the live bands in Burlington's night spots. With his shaggy hair, he looks more like a Woodstock veteran than an entrepreneur. But his credentials are solid. Until last year he ran the Vermont Teddy Bear Co., which he started from a pushcart in Burlington and built into an Inc. 500 company. By 1994 Vermont Teddy Bear was the world's largest stuffed-animal mail-order house, with more than 300 people making bears, generating $20 million in sales. Sortino took the company public in 1993, retired from active management in 1995, and is using his equity stake, worth about $4 million, to fuel the bicycle venture.

Sortino's strong suit is marketing, and at Vermont Teddy Bear, he sidestepped normal retail channels. He promoted the bears heavily on radio, spending more than $15 million over the years for ads on the shows of such big-name personalities as Don Imus, Howard Stern, and Rush Limbaugh. Customers ordered the product directly through an 800 number, eliminating the normal middleman. Direct selling was key to the teddy-bear company's success.

It's one thing to sell a $50 teddy bear direct and quite another to sell a $900 bike that way. Even so, Sortino thinks he can. Circumventing the retail-dealer channel is a renegade and risky approach that sets his new venture, the Chicago Bicycle Co., sharply apart from industry norms. But there is a method to Sortino's madness. If it works, he could realize the fattest margins in the bicycle business.

Thanks to Gregoire's input, Sortino's business plan sports an insider's feel for competitive advantage -- as in, for example, electing not to buy key components from Japanese giant Shimano, as most bike makers do. Shimano dominates the market for derailleurs, crankshafts, brake sets, and other key components, and from that catbird seat it demands strict terms about, for instance, how and when it gets paid.

Most bike sales -- 60% of them -- occur in the spring, which can create huge cash-flow issues for manufacturers. "When you deal with Shimano," Gregoire explains, "you not only must pay cash up front; you have to order the parts 30 days before they are run. After 30 to 50 days in transit, the parts spend another month in your production system. You build the bikes and ship them to dealers, but most dealers can't afford to buy the inventory outright. The manufacturer ends up financing the receivables, often for four months or more. "

So it might be 200 days from the time a typical manufacturer pays for its parts until it sees any cash from sales. "And," Gregoire adds, "when you have to make the bikes that far ahead, you can only guess which colors and styles will be hot. By August leftovers are deeply discounted because you're getting into your next season." Obsolescence and finance costs together can take 10% to 15% off the top line, the industry veteran says. The dealer takes another 30% to 35% for its margin.

By building bikes strictly to order and running Chicago Bicycle on a cash basis, Sortino thinks he can capture the 50% of the top line that other bike makers give up and can move most of it to Chicago Bicycle's bottom line. Although his company imports some components, nothing comes from Shimano. His vendors allow 30-day terms; the parts spend an average of 15 days in inventory at the Chicago plant, which requires less than two weeks to make and deliver a bike that's been ordered. "We collect our money, based on credit cards, when the bike is shipped," says Gregoire. "We actually get the cash from the customer before we pay our suppliers, which makes for healthy cash flow."