Note: The catalog in 1992 was the last one published by the Schwinn family business.
The Schwinn family business was teetering on a financial precipice at the beginning of the 1990s. The company still had many popular bicycle models, but its business was faltering. At the corporate headquarters in Chicago, the managers of Schwinn were still in disbelief that their company could no longer sustain itself as a viable business. Afterall, this was Schwinn, the biggest bicycle name in the USA. How could the company fail?
Decline of the Air-Dyne and Exercise Bikes Increases Financial Pressure
In the late 1980s, Schwinn’s profits from its traditional bicycles had evaporated. A sign of trouble was that the exercise bicycles were keeping the company financially afloat. Schwinn had a virtual monopoly on stationary exercises and the Air-Dyne in particular had very high profit margins.
Unfortunately for Schwinn, in the early 1990s Sears, Roebuck and Co. came out with a comparable model at a lower price. The result was that sales of Air-Dyne plummeted by 35%. Schwinn said goodbye to 8 million in profit. Without the Air-Dyne and exercise bicycle sales, Schwinn was in trouble.
The decline of the Air-Dyne and other exercise bicycles was a symptom of Schwinn’s larger financial problems. In the early 1990s, the company lost $2.9 million with outstanding debt $80 million. The caused Schwinn to violate one of its bank covenants. Schwinn’s bankers called a meeting to see if something could be worked out.
Despite being deeply in debt, Schwinn took a hardline position against its creditors. Edward Schwinn figured that the bankers wouldn’t want to lose their equity in Schwinn if the company declared bankruptcy. Unfortunately, for Schwinn this was a miscalculation. Frustrated with Schwinn’s excuses, the Banker’s increasingly began playing financial hardball.
Schwinn Family Pride Didn't Help
The confrontation with the bankers in the early 1990s had been set up by an earlier decision not to raise money in the private capital markets. The Schwinn family did not want to have outsiders controlling the fate of Schwinn. This decision to rely on bank loans had the opposite of the desired effect. Instead of being dependent on outside investors, Schwinn became overdependent on the banks.
In the early 1980s when Schwinn had struggled financially. The decision ws made to take out bank loans. The wary banks put in place strict covenants on the loans. The covenants were still in place during the early 1990s. The violation of the financial covenants meant that the banks were in the driver’s seat. They insisted that Schwinn prepare a financial recovery plan.
Some of the bankers began to send the loans to the workout department to see how much money they could recover from Schwinn. This was not only meant to put pressure on Schwinn to come up with a reasonable financial workout plan, but also was to hedge their bets on a company financial failure. The pride of the Schwinn family in its outright ownership of the company had come back to bite them.
The Family Trust
The Schwinn family Trust indirectly played a role in the demise of Schwinn. The Trust was originally set up to share a modest amount of Schwinn’s profits among a small group of heirs. Most heirs either were discouraged or had no interest in working for Schwinn.
Still, the fourteen beneficiaries of the trust gladly accepted dividends from Schwinn. They also played a role in not wanting Schwinn to take on public investors.
To be fair, the payments to the Trust stopped after Schwinn experienced financial difficulties in the 1980. When the good times started rolling again, the dividends were reinstated in 1987.
With growing financial pressures, the final payments to the family trust were made up until 1990. The family knew that a Schwinn bankruptcy could wipe out their payment for good. They were prepared to received nothing unless Schwinn survived the new crisis.
Predictably, the family members were hopping mad at the demise of the Schwinn business. They expressed themselves in no uncertain terms and the focus of their fury was Edward Schwinn.
The Schwinn family also was partly to blame. The company had passed up several offers for private investors to bail out Schwinn. On the insistence of Schwinn family--including Edward Schwinn--the company declined all offers. This was a mistake that would haunt the company until its very end.
Schwinn Competitors Smell Blood
Meanwhile, Schwinn’s competitors were not sitting by idly. The Schwinn problems came at a fortuitous time for Trek. They were in the process of trying to strengthen their balance sheet and began to take sales away from Schwinn.
Some of Schwinn’s dealers saw the writing on the wall and they began to carry Trek and other bicycle brands. For Trek, this strategy began to work and during 1990 and 1991. During that period, Trek moved from fourth to second rank in the bicycle industry.
With all the financial constraints, Schwinn finally pulled the plug on the money losing Greenville plant in 1991. The early 1980s decision to not modernize the Chicago factory came back to haunt Schwinn.
The closing of the Greenville factory combined with the globalization of the bicycle industry meant that Schwinn would never again be making bicycles in the USA.
The fabled Schwinn was beginning to teeter. Schwinn had taken a hit on its balance sheet in the early 1980s with the closing of the Chicago factory. The Greenville closing virtually wiped out its balance sheet.
Suppliers Turn into Competitors
The main producers of Schwinn bicycles in China and Taiwan were not being compensated for shipping their products. The banks were swooping in and taking any cash from the business to hedge their possible losses. In essence, the Bank loans were taking away any possible way for Schwinn to pay its suppliers.
Making matters worse, these were not just ordinary suppliers. They were producers of strong competitive bicycle brands such as Giant. The Asian suppliers even talked about taking over Schwinn and assuming its debt, but the deals did not pan out.
The suppliers saw the writing on the wall and quit sending bikes to Schwinn. This caused a death spiral for Schwinn. The banks were calling in their loans. The dealers were screaming for inventory. The family was carping about Schwinn leadership. The Schwinn Family Trust recipients were irate over a cessation of payments.
Ed Schwinn is often blamed for the Schwinn family business failure. Despite his calm demeanor during difficult times, he was in the unenviable position of being hit from all sides.
Things Get Messy
Edward Schwinn also knew that his company was running out of options. He decided in October 1992 that the company had to file for bankruptcy to keep creditors at bay. Consequently, the storied family bicycle business filed for relief from paying its debt under Chapter 11.
In the US, Chapter 11 allows for a company to stay in business while restructuring its debt obligations. Edward Schwinn’s hope was that he would be allowed to make changes necessary to emerge from bankruptcy as a stronger company. However, he was rolling the dice by putting Schwinn in the hands of a bankruptcy judge.
Things didn’t go well for Schwinn. Trying to reduce costs, the company laid off many employees, including a handful of Schwinn relatives. Key employees also were jumping ship if they found another job. The mood within the company was bleak.
The Schwinn bankruptcy also froze payments to many small businesses which were owed money by Schwinn. The small companies knew they would be at the end of a long line of creditors asking for compensation. They had to move on to other brands and would not wait for a new Schwinn to emerge from its financial difficulties.
China Bicycle which was one of Schwinn’s bicycle suppliers made a bid to acquire the company. Schwinn had previously purchased large amounts of China Bicycle stock. The Chinese company was wary that a competitor such as the Taiwanese company Giant might purchase Schwinn. They had no desire for their competitor to own any of their stock.
Another wild card was the Schwinn Family Trust. The Trust was the legal holder of the family business name. The main value for a company wishing to purchase Schwinn would be the Schwinn name. The lawyer for the Trust played hardball and stated that the family wanted compensation for the name.
The request for compensation for the Schwinn name caused a great deal of turmoil in bankruptcy court. Other companies would not want to acquire Schwinn without having legal right to use the family name. The right of the Schwinn Family Trust to the name could be challenged in court, but this would lead to significant delays. Without the family name as part of the deal, acquiring Schwinn could become a messy affair.
The 1992 Schwinn Cross-Series
In 1992 I bought my tall 12-year-old daughter a Schwinn Crosscut. It was a bit pricey for a pre-teen, but the bike was well-built. I knew it would last for many years. The Schwinn catalog description of entry for Crosscut revealed that it was a well-designed bike.
“Crosscut is Purebred performance featuring double-butted True Temper frame, quick handling geometry, and fast tracking 38 Special tires. It also has a new Shimano 500CX/400LX 21 speed Cross package and user-friendly Grip-Shift indexed shifting.” (slightly reworded from 1992 Schwinn Consumer Catalog)
My daughter was in middle of a growth spirt and she outgrew the bike in one short season. However, this mistake was fortuitous. My wife was riding a 1970s 10-speed. Now with two kids, the drop handlebars did not suit here. I asked her to take the bike for a ride to see if it fit here.
She came back with a smile on her face. She liked the idea of moving from drop handlebars to riding a performance “cross” or “mountain style” bicycle with straight handlebars. After 30 years she is still riding this bike. This is a testament to the durability of Schwinn bicycles made overseas.
Note: This was among the last bicycles sold by the Schwinn family business.
Attesting to the quality of the bicycle design, I have made very few modifications to this Schwinn. As expected, it was necessary to keep the bike in good working order by replacing its tires, chains and rear cogs. The original Grip-Shifters were a bit awkward to use, so I replaced them with the modern thumb shifters.
In all likelihood, the bike probably was manufactured for Schwinn by Giant in Taiwan. This 1992 Crossfit was one of the last bicycle models produced for Schwinn family bicycle company.
The quality of these cross series bikes indicated that if Schwinn had played its cards right, they could have been a viable company. Schwinn clearly had the ability to produce quality of bicycles in Asia.
The Vulture Capitalist Makes a Move
The vulture capitalist Zell -Chilmark ventured into the fray. The fund was worth $1 billion and was well known for purchasing troubled companies. Sam Zell, one of the funds owners, was often called the grave dancer. Zell-Chilmark was quite attracted to the economic potential of acquiring the Schwinn name at a fire sale price.
Zell-Chilmark made its move in December 1992 and gave a hard deadline for the completion of the deal to purchase Schwinn out of bankruptcy. The firm did not want the transaction to drag out because this would mean the company would miss the Spring bicycle selling season.
Zell-Chilmark first tried to buy Schwinn’s $30 million debt from the banks. They thought that this would put them in good stead to succeed in acquiring Schwinn during the bankruptcy hearings. They were wrong. The banks were first in line of about 1200 creditors to get payments from Schwinn and they wanted to get the full value of their investments back.
In the smoke filled rooms, deals for Schwinn were churning. China Bicycles asked to join the Schwinn bid by Zell-Chilmark. The logic of working with a supplier did not fit well with Zell-Chilmark’s plan so they declined the offer. As the number two creditor, Giant also wanted to cut a deal. But Zell-Chilmark was not thrilled with working with a Schwinn supplier and brand competitor.
With deals flying in all different directions, China Bicycle Company finally hit on a solution. They would waive their 18 million debt claim on Schwinn in exchange for stock in the new company. Further, they would sell a limited amount of that stock and provide the proceeds to the Schwinn Family Trust.
China bicycles offered $2.5 million to the Family Trust and it was grudgingly accepted. After nearly 100 years of sweat, tears, and bicycle innovations, the family received a paltry sum. The bright side was that the deal would mean that the Schwinn family name would be kept alive adorning bicycles for many years to come.
The deal was virtually complete for a Zell-Chilmark takeover of Schwinn. A deal that included the elimination of the China Bicycle Company debt was attractive to the other creditors because this raised the value of the remaining company assets. This increased the chances that they would receive higher payments for their debt. The total Zell-Chilmark deal including the debt waiver by China Bicycles was valued at $61 million.
The last catalog produced by the Schwinn family company also was in 1992. Bicycles coming after that date have the Schwinn nameplate but had no other relationship to the original family company.
Zell-Chilmark firm knew nothing about running a bicycle company. Consequently, they decided partner with Scott USA, a burgeoning sports company with strong ties in Europe. Another youth movement was about to begin at Schwinn bicycles.
The first act of Scott USA was to move the corporate headquarters to Boulder, Colorado. Scott had a diverse product line but their main brands were sold in Europe.
For Scott USA, Schwinn was a good fit for them to be able to sell bicycle in the USA without making the substantial investments necessary to start a new company. The company revamped the bicycle line and ended the long tradition of building bicycles in the USA.
None of the Schwinn Chicago employees were seen as a good fit for the new company. This was the end of the road for the Schwinn family bicycle company. The Schwinn name would live on adorning the tubes of bicycles made in Asia.
The Fate of the Schwinn Paramount
In 1993, Richard Schwinn, the great-grandson of the company founder Ignaz, and Marc Muller made a deal with Zell-Chilmark. They were able to purchase the Schwinn Paramount design group and production facility in Waterford, Wisconsin from Zell-Chilmark.
Zell-Chilmark had no use for the Waterford plant which specialized in high-end bicycles. The investment group had decided to focus on the wider markers of less expensive bicycles.
Zell-Chilmark did contract to purchase Paramounts from the new company created by Richard Schwinn. Sales turned out to be disappointing and after a few years the new owners of Schwinn discontinued the arrangement.
Note: The first Schwinn Paramount Contracted by Zell-Chilmark and produced by Waterford.
Waterford Precision Cycles continues to build high quality bicycle under the direction of Richard Schwinn. Due to the bankruptcy agreement, Richard Schwinn is not allowed to use his last name or the Paramount brand.
The new bicycles Richard Schwinn produces in the iconic Waterford bicycle facility are mostly called Waterford bicycles. Today, his company still makes top-of-the-line bicycles in the old Paramount factory under the name of Waterford Precision Cycles and some other selected brands.
The Honeymoon for the New Schwinn Didn’t Last Long
Zell-Chilmark got off the line quickly. Along with Scott USA, the company developed new models and created a retro brand to cash in on Schwinn nostalgia. The company also was fast to adapt to new trends in both cycling and technology. However, the Scott USA and Schwinn combination was never a comfortable fit.
Just four years after purchasing Schwinn, in 1997 Scott Sports Group and Zell-Chilmark sold Schwinn to Questor Partners Fund for $80,000. Questor tried to breath new life into Schwinn again developing an updated line of historic models.
Questor also purchased GT Bicycles and merged it with Schwinn. This resulted in the production of the Schwinn homegrown series and mountain style bikes. The Schwinn bikes were among the best quality sold in the big box stores.
This new strategy by Questor was not enough. In 2001, Schwinn/GT was once again in bankruptcy court staving off creditors. During the court proceedings, Pacific Cycle outbid Huffy Corporation to purchase the Schwinn/GT bicycle brand from Questor. The amount of the purchase was $86 million.
In Pacific Cycles, Schwinn was finally owned by a stable partner. Pacific Cycles moved the Schwinn headquarters to Madison, Wisconsin. They focused on selling Schwinn branded bicycles at low prices in companies like Sears, Kmart and Target. The Pacific approach for selling Schwinn bicycle combined with several other major brands worked quite well.
The corporate maneuvering saga wasn’t quite yet t over for Schwinn. In 2004, Dorel Industries of Canada sensed an opportunity to strengthen its bicycle business. The company purchased Pacific Cycles and this meant that in 11 years Schwinn had changed hands four times.
Finally, Schwinn was in a corporate partnership that would last for many years. Pacific remain as a subsidiary of Dorel for more 15 years. During the period from 2004 to 2021, Pacific would accumulate many brands of bicycles by 2021 that include Cannondale, GT (included in Schwinn purchase), Iron Horse, Mongoose, Murray, and Roadmaster.
The 1990s and the Globalization of the Bicycle Market
The story of Schwinn can be seen as a reflection the new business climate of the 1990s. Gordon Gekko famously said in the movie Wall Street, “Greed is good.” The vulnerability of Schwinn was on clear display in this new age of financial wheeling and dealing accompanied by outsourcing of bicycle production to Asia.
Schwinn went from a family-owned bicycle company in 1992 to being purchased for $67 million by vulture capitalist Zell-Chilmark in 1993. In 1997, Schwinn was sold to the investment group Questor Partners Fund for $86 million making a nice profit for the vulture capitalist Zell-Chilmark. This purchase by Questor did not work out well and the Schwinn/GT brand was sold for $86 million to Pacific Cycle during a bankruptcy hearing in 2001.
The identity conferred upon Schwinn by Pacific Cycle was the antithesis of the vision of its founders during the early part of the 20th Century. The purveyor of high-quality American made bicycles sold through dedicated retailers was replaced by Asia-produced Schwinns marketed by Walmart, Kmart and Target.
Schwinn was not alone in this fate. The company was joined iconic brands such as the English Raleigh and the French Motobecane. The high-quality American and European bicycle makers from the 1970s and 1980s all were impacted by the globalization of the bicycle market. The three major bicycles companies that would prove their mettle in adapting to the new business climate were Trek, Giant and Specialized.
No comments:
Post a Comment