Patagonia Bikes Company: Performance Report

Business Overview 

Patagonia Bikes Company is a bike manufacturing company with operational stores in New York City, Rio de Janeiro and Amsterdam. Patagonia Bikes produces high-quality mountain bikes using state of the art technology. The target segments for the bikes are the mountain and speed category. The mission statement for Patagonia Bikes is "We have the lightest, cheapest and best quality mountain bikes in the market. The strategic directions for Patagonia Bikes include focusing on smaller, high margin markets, focusing on geographic markets in the middle of the cost/size continuum, and being the highest service provider in the market. Patagonia Bikes also aims at being the profit margin leader, being the leader in all things, being the market share leader and attacking the competition in their home ground. 

Patagonia Bikes' produces different mountain bike brands that are designed for either rough terrains or speed. For the rugged terrain bikes, Patagonia Bikes uses the rugged, agile frame design, mountain tires, standard disk brakes, comfort straight handlebars and polymer gel all-purpose seats. The wide mountain tires ease navigation through rough terrain (Hurst et al., 2017). The speed bikes are made with a sleek aerodynamic frame, racing tires, precision brakes, basic drop-down handlebars and polymer gel racing seats. All these bikes have either 7-speed, 14-speed or 24-speed gears. Low gear ratios ensure that the riders can easily climb slopes, which is a requirement for mountain cycling. The brands manufactured by Patagonia Bikes are x-1000, x-50, x-200, s-100, copy of s-50 and C-100. 

All these brands are manufactured using 3-D printed carbon fiber frames. By using carbon fiber frames, the bikes are lighter and easier to pedal than metal bikes. Carbon fiber frames also make the bikes more comfortable, meaning that the users experience less fatigue. The 3-D printing technology enables streamlining of production, reduction of labor and material costs, and reduction of debt and equity. Also, the technology enables Patagonia Bikes to have much smaller shops. 

Patagonia Bikes is an all-integrated company. Besides manufacturing, the company also does marketing and human resource management. 

Financial Analysis 

Marketing (advertising and internet marketing). Patagonia Bikes focused on social media marketing. In addition to the conventional mass media advertisements, Patagonia Bikes created Facebook and Twitter accounts, through which it shared advertisements and paid for sponsored ads. Besides posting ads, Patagonia Bikes directly engaged customers and potential clients via social media platforms. A look at the income statement shows that Patagonia Bikes initially spent no money on internet marketing. However, by the fourth quarter, the amount of money spent on internet marketing had increased to $44,000. Between the fifth and sixth quarter, Patagonia Bikes reduced spending on advertising. However, internet marketing expenses remained constant, indicating how the company was preferring internet marketing over advertisements. The company’s income statement for the last six quarters is attached below. 

Income Statement
Report Item	Quarter 1	Quarter 2	Quarter 3	Quarter 4	Quarter 5	Quarter 6
Gross Profit
Revenues	0	179,700	966,500	1,515,190	2,277,660	2,288,370
- Rebates	0	540	2,140	3,980	5,820	6,045
- Cost of Goods Sold	0	87,646	404,664	669,034	934,314	900,824
= Gross Profit	0	91,514	559,696	842,176	1,337,526	1,381,501
Expenses
Research and Development	30,000	90,000	30,000	1,450,476	425,317	30,000
+ Advertising	0	66,492	90,492	161,050	133,955	115,955
+ Internet Marketing Expenses	0	0	9,000	44,000	33,000	33,000
+ Sales Force Expense	0	23,640	59,200	70,818	135,537	180,067
+ Store Expense	90,000	217,000	79,000	215,000	123,000	207,000
+ Marketing Research	0	20,000	20,000	20,000	20,000	20,000
+ Shipping	0	2,157	9,011	15,068	21,263	21,263
+ Excess Capacity Cost	0	124,609	19,277	0	0	0
+ Depreciation	0	10,000	20,000	20,000	30,000	30,000
= Total Expenses	120,000	553,898	335,980	1,996,412	922,072	637,285
Operating Profit	-120,000	-462,383	223,716	-1,154,237	415,453	744,216
Miscellaneous Income and Expenses
+ Other Income	0	0	0	0	0	0
- Other Expenses	0	0	0	0	0	0
= Earnings Before Interest and Taxes	-120,000	-462,383	223,716	-1,154,237	415,453	744,216
+ Interest Income	16,500	16,500	0	0	0	0
- Interest Charges	0	0	5,969	0	0	0
= Income Before Taxes	-103,500	-445,883	217,747	-1,154,237	415,453	744,216
- Loss Carry Forward	0	0	217,747	0	415,453	744,216
= Taxable Income	0	0	0	0	0	0
- Income Taxes	0	0	0	0	0	0
= Net Income	-103,500	-445,883	217,747	-1,154,237	415,453	744,216
Earnings per Share	-7	-21	8	-23	8	15

Table 1. Income statement. 

Income statement verification link: https://game.ilsworld.com/mpl/web6/export.php?token=eyJ0eXAiOiJKV1QiLCJhbGciOiJIUzI1NiJ9.eyJpc3MiOiJodHRwczpcL1wvZ2FtZS5pbHN3b3JsZC5jb21cL21wbFwvd2ViNlwvZXhwb3J0LnBocCIsImF1ZCI6IkFOWSIsInN1YiI6MTEwMDA5MjMsImlhdCI6MTU5MTY1MzI3MywiZXhwIjoxNTk0MDcyNDczLCJqdGkiOiJiMTBlY2JhY2RmZDkxYWQ5NDQzMDQ4Nzc0MTRlYTg3OCIsInJlYWxHYW1lSWQiOjI2ODE0MSwidGVhbSI6NDgsInF1YXJ0ZXIiOjYsImRlY2lzaW9uIjoiSW5jb21lU3RhdGVtZW50In0.xVLO7hctqnsBPe6V7jgFkDZQl6lLSTQaL_3Re1gf6fc 

The decision to focus on social media marketing was informed by the numerous benefits attached to it. First, social media marketing is a cost-effective marketing strategy. Creating accounts and signing up on social media sites is free. Also, paid advertisements on social media are cheaper as compared to television or newspaper advertisements. By using cost-effective marketing strategies such as social media marketing, Businesses may attain higher returns on investment and hold bigger budgets for making other business and marketing payments. By using social media marketing, businesses only need to spend little time and money on advertisement. As a result, they can substantially increase their conversion rates and finally get returns on investment in the funds initially invested. 

Besides the cost-effectiveness, social media marketing improves brand awareness. Social media is a profitable and stress-free digital marketing platform that businesses can use to increase their brand’s visibility and recognition. According to research, more than 91% of marketers who used social media marketing reported heightened user experience and increased brand visibility. Indeed, social media can create a wide audience for a brand in a short time. 

Also, social media provides an excellent platform for a business to engage with its customers. The more a company communicates with its customers, the more its chances of conversion. Social media marketing enables two-way communication between a business and its target population; thus, the business can easily address their interests. Moreover, engagement with customers makes a business win their attention. Thus a brand with social media presence will establish itself with ease. Customer engagement also promotes customer satisfaction. Customers appreciate the receipt of feedback when they post comments on a social media page. They view this with a positive light. 

Finally, social media marketing can increase a business’s website traffic. By sharing content on social media, companies give customers a reason to visit their websites. 

By using social media marketing, Patagonia Bikes increased its market share of mountain bike customers. 

Store expenses and sales force. From the first quarter through to the sixth quarter, Patagonia Bikes increased the number of sales personnel. Consequently, the sales force expenses increased. A look at the income statement reveals that the sales force expense in the first quarter was $23,460. This expense rose steadily, and by the sixth quarter, it had escalated to $180,067. 

The rising demand for mountain bikes dictated the decision to increase the number of sales personnel. Initially, the demand for mountain bikes was low because the brand was relatively new to the market. As time went by, the brand became more recognizable in the market. Therefore, the demand for bikes continued rising. Thus there was a need to hire more salespersons to meet this demand. 

Also, there was a need to increase revenues to meet other costs. For instance, the company needed to pay high advertisement costs. This necessitated the recruitment of more salespersons. Also, the company needed to market the brand. Hiring more people to conduct more sales was one of the strategies adopted to increase brand awareness. As a result of increased salesforce, the total salesforce expense increased. 

Due to the increased demand for mountain bikes, Patagonia Bikes also increased the number of stores. Initially, Patagonia only had a few stores in Utah. However, in the sixth quarter, there were stores in almost every metropolitan area in Utah State. The company initially spent $90,000 on store expenses. Due to the increase in the number of stores, this expense was$207,000 during the 6th quarter. 

Use of loans and cash. Patagonia Bikes opted not to use conventional bank loans. Patagonia Bikes only used an emergency loan once, during the second quarter. As a result of this decision, the company stayed largely out of debt. However, the company still had large amounts of common stock, which made the company’s retained earnings negative throughout the entire period. The balance sheet below presents this information. 

Balance Sheet
Report Item	Quarter 1	Quarter 2	Quarter 3	Quarter 4	Quarter 5	Quarter 6
Current Assets
Cash	56,500	1	1,718,363	2,844,127	3,289,580	4,063,796
+ 3 Month Certificate of Deposit	1,100,000	1,100,000	0	0	0	0
Long Term Assets
+ Net Fixed Assets	240,000	470,000	450,000	670,000	640,000	610,000
= Total	1,396,500	1,570,001	2,168,363	3,514,127	3,929,580	4,673,796
Debt
Conventional Bank Loan	0	0	0	0	0	0
+ Emergency Loan	0	119,384	0	0	0	0
Equity
+ Common Stock	1,500,000	2,000,000	2,500,000	5,000,000	5,000,000	5,000,000
+ Retained Earnings	-103,500	-549,383	-331,637	-1,485,873	-1,070,420	-326,204
= Total	1,396,500	1,570,001	2,168,363	3,514,127	3,929,580	4,673,796

Table 2. Balance sheet. 

Balance sheet verification link: https://game.ilsworld.com/mpl/web6/export.php?token=eyJ0eXAiOiJKV1QiLCJhbGciOiJIUzI1NiJ9.eyJpc3MiOiJodHRwczpcL1wvZ2FtZS5pbHN3b3JsZC5jb21cL21wbFwvd2ViNlwvZXhwb3J0LnBocCIsImF1ZCI6IkFOWSIsInN1YiI6MTEwMDA5MjMsImlhdCI6MTU5MTY1MzM1MCwiZXhwIjoxNTk0MDcyNTUwLCJqdGkiOiJkYTQ1YjA4ODI0OWVhNWJjN2ExZTczNDUzNmJlZWZiMSIsInJlYWxHYW1lSWQiOjI2ODE0MSwidGVhbSI6NDgsInF1YXJ0ZXIiOjYsImRlY2lzaW9uIjoiQmFsYW5jZVNoZWV0In0.OMkRc6-QNdL_w2fR5cH1A7t4UBuKcVl1HCcn6AXKSFQ 

Patagonia bikes avoided the use of loans for several reasons. First, loans come at extra costs. Banks give loans to companies and require them to repay with significant interest rates. Patagonia bikes considered this additional cost unnecessary. Secondly, loan repayments can strain an already tight profit sheet and reduce a company’s liquidity significantly. Money used to pay back loans could be used for other expenses. Hence Patagonia Bikes considered not to borrow any loans from banks. Lastly, acquiring loans from banks can be hard. Most banks require businesses to be profitable or have records of profits or sales for two or three years. For new startups like Patagonia Bikes, these requirements were almost impossible to meet. This was the reason why Patagonia Bikes looked into alternative methods of funding instead. 

SWOT Analysis 

SWOT diagram. 

STRENGTH  Production of Bikes for all market segments.	WEAKNESS  Carbon fiber frames are expensive and less durable (Bicknell, 2016) .
OPPORTUNITY  Use of aluminium to manufacture cheap lightweight bikes.	THREAT  Stiff competition from other bike manufacturers.

SWOT justification 

Strength.  Patagonia Bikes manufactures high-quality bikes for all the market segments. It produces bikes for the mountain, speed and recreation categories. By ensuring that it satisfies the demand of all the segments, Patagonia Bikes stands an upper edge in the market as compared to companies such as Bright Cycle, which do not produce bikes for all segments.  

Weakness.  Carbon fiber bikes are less durable and expensive as compared to bikes made of other materials (Bicknell, 2016). Carbon fiber frames are costly since the complex shapes and molds require significant tooling costs, which welded aluminium or steel frames do not require. Also, carbon fiber is less durable. Since it is very stiff, it can be brittle too. As a result, carbon fiber frames may be prone to rapid crack propagation.  

Opportunity.  Aluminium presents an alternative to carbon fiber. Though aluminium is slightly heavier than carbon fiber, it is durable and less expensive. Manufacturing aluminium frames only involves simple welding, which cheaper as compared to the complex processes involved in the construction of carbon fiber frames. Yet aluminium is still lighter than steel. Therefore, Patagonia Bikes can use aluminium frames to produce cheap and durable bikes as an alternative to carbon fiber.  

Threat.  In the mountain bike market, there is stiff competition from other mountain bike manufacturers. From the strategic graphs, Bolt Bikes and Joy Ride are leading in the market share. In the mountain and speed segments, Bolt Bikes has the largest market share. Therefore, Bolt Bikes presents stiff competition to Patagonia Bikes in the segments which it targets. Thus, Patagonia Bikes needs should how to improve its bike quality and customer service to dominate the mountain bike market. 

Competitive Analysis 

Strategic graphs. 

Total Demand. 

A Strategic graph showing Total Demand for Different Bike Companies 

From this graph, it is evident that the demand for Patagonia’s mountain bikes has steadily increased over the quarters. This increase in demand can be attributed to several reasons. First, Patagonia has invested in manufacturing quality bikes, which has ensured that more customers prefer Patagonia to other bike manufacturing companies such as Velocity Bikes and Bright Cycle. However, there is still a need for more quality to increase the demand for Patagonia’s Bikes. This is because Bolt Bikes and Joy Ride manufacture bikes with much more demand than Patagonia. 

Another reason for the increased demand for Patagonia’s mountain bikes is an extensive marketing strategy. Patagonia Bikes focused on comprehensive advertisements and social media marketing, which increased the awareness of the brand. Thus more people were willing to purchase Patagonia’s bikes as time progressed. Patagonia Bikes extensively marketed its products via Facebook and Twitter. These two social media platforms have the potential to reach thousands of potential clients. I believe that social media marketing, coupled with advertisements of television and print media, made the brand known to more people as compared to brands such as Bright Cycle and Velocity Bikes. 

Market Share. 

A graph showing the market share for different bike companies over time 

Patagonia’s market share increased steadily between the first and fourth quarters. However, the initial stages saw Patagonia Bikes have a low market share as opposed to other companies. The little market share was attributed to the high costs of bikes, which made customers opt for other brands. For instance, Patagonia had the lowest market share during the second quarter, as opposed to Bolt Bikes, whose market share was much higher than any other company. Over time, Patagonia Bikes reduced its prices and increased its market share. This steady increase in market share was also attributed to strengthened customer relationships, which prevented customers from purchasing bikes from other competitors. However, the market share dropped between the fourth and fifth quarters. The drop was attributed to a decrease in internet marketing and advertising expenses, which saw the company weaken its customer relationships. Nonetheless, Patagonia’s market share was significantly higher than that of Bright Cycle and Velocity Bikes. 

Between the fifth and sixth quarters, there was a slight increase in market share. This increase occurred due to an increase in sales force expenses. Patagonia Bikes hired more sales personnel. This move contributed to the marketing and increased awareness of the brand, besides directly capturing a significant proportion of the market. 

Market Share in Segment- Mountain. 

A strategic graph showing the market share for the mountain segment 

Between the first and fourth quarters, there was an increase in Patagonia’s market share for the mountain segment. This steady increase in market share occurred due to Patagonia’s endeavor to manufacture mountain bikes. From the beginning, Patagonia’s mission was to produce high-quality mountain bikes. Patagonia Bikes was mostly successful, since, during the fourth quarter, it had the largest market share for the mountain bike segment. Nonetheless, this share dropped between the fourth and fifth quarters. During this period, Patagonia reduced its spending on advertisement and internet marketing. Patagonia also significantly reduced its spending on research and development, meaning that it made little improvement to its bikes. Though the market share increased between the fifth and sixth quarters, the increase was small. Patagonia should have focused on more research and development to make its bikes more appealing to mountain biking enthusiasts. 

Recommendations 

SMART goals. 

Goal 1. By the ninth quarter, Patagonia Bikes should replace the carbon fiber frames with aluminium frames. The company will have to alter its manufacturing process slightly, inform the raw material suppliers to supply aluminium instead of carbon and inform its target market of the change. 

Explanation for goal 1. Patagonia’s objective is to manufacture lightweight bicycles. Though carbon fiber bicycles are light, they are quite expensive as compared to aluminium or steel bicycles (Newcomb, 2016). Also, mountain bikes require some flexibility, which carbon bikes do not offer. In fact, carbon fiber bikes feel more damped and harsh. 

Aluminium presents an excellent alternative to carbon fiber. First, it is almost as light as carbon fiber. It also offers more flexibility than carbon fiber (Vervisch et al., 2018). Secondly, the fabrication of aluminium bike frames is easy, which makes them cheaper (Walia, 2019). Therefore, by replacing carbon fiber frames with aluminium frames, Patagonia can manufacture, more efficient and less expensive bikes that are still light. 

Goal 2. Over the next three quarters, Patagonia should increase funding for research and development. In the 6th quarter, only $30,000 was allocated for research. This amount should by progressively increased by $20,000 per quarter, over the next three quarters. The finance team should allocate $90,000 for research and development in the ninth quarter. 

Explanation for goal 2. Given the stiff competition in the bicycle sector, Patagonia needs to know how to increase its market share. One of the ways to achieve this objective is to determine what emerging technologies can be employed to produce more efficient bikes. Also, there is a necessity to research determine emergent customer needs that the company should satisfy. Therefore more research is necessary to win more customers and maintain existing customers. Through conducting intensive research, Patagonia can potentially discover new technologies than can revolutionize mountain biking and give the company an upper hand over its competitors. 

References 

Bicknell, K. (2016). Technology, equipment and the mountain biker’s taskscape. In  Women in Action Sport Cultures  (pp. 237-258). Palgrave Macmillan, London. 

Hurst, H. T., Sinclair, J., Atkins, S., Rylands, L., & Metcalfe, J. (2017). The effect of mountain bike wheel size on cross-country performance.  Journal of sports sciences ,  35 (14), 1349-1354. 

Newcomb, B. A. (2016). Processing, structure, and properties of carbon fibers.  Composites Part A: Applied Science and Manufacturing ,  91 , 262-282. 

Vervisch, T., Christiaens, Y., & Detand, J. (2018). The design of a composite folding bike to improve the user experience of commuters. In  MATEC Web of Conferences  (Vol. 167, p. 01001). EDP Sciences. 

Walia, K. (2019). Carbon Fiber Bike Market| Industry Analysis, Size, Share and Forecast Report, 2026.