High Inventory Levels Pose Threat to Stable Netherlands Market

According to reports from hundreds of IBD clients in the Netherlands by H&L Accountants, the average gross profit margin of bicycle sales in the country was at a normal level in the first half of this year. However, there was an extremely high level of inventory. By the end of June, the average year-on-year increase in inventory for H&L Benchmark Group was 30%, with over 25% of the members indicating that their inventory levels had exceeded 50%.

Challenges of High Inventory Market

The Dutch market has been struggling with high inventory levels, a fact also confirmed by the news of a sharp increase in inventory value for retail supplier Accell Group. In the second half of 2022, the inventory value of Accell Group grew by 70%, reaching 936 million euros. Before the bicycle boom, the company’s inventory value was roughly between 300 million to 350 million euros. Meanwhile, Accell Group’s credit rating from Fitch was downgraded to B- twice this year. Fitch reports stated that ongoing supply chain disruptions have put pressure on Accell’s cash flow, leading to additional debt reductions to meet operational working capital needs. This further delays the prospects of deleveraging. It is now predicted that the EBITDA leverage ratio will soar to 15 times in 2023 and 6.9 times in 2024. Coupled with extremely tight liquidity, Accell Group no longer matches the ‘B’ level IDR.

Slow Decline

Apart from high inventory, the slowdown in economic growth has also affected the industry. The Dutch market is currently experiencing a slow decline, with reduced consumer spending due to high inflation. Suppliers are also facing the challenge of high inventory, putting significant pressure on businesses. Low-priced sales for inventory clearance pose a threat to market stability, leading to a decline in both profits and profit margins. Adjusting price levels has become a major concern for businesses.

In the first half of this year, the retail sales gross profit margin in the Netherlands was at a normal level. However, compared to the first quarter of 2022, revenue dropped by over 10.3% in the first quarter, although sales started to rebound in the second quarter, especially in June. The final statistics showed a minor year-on-year decline of 2.9% in turnover for the first half of 2023. Whether growth can be sustained in the second half of the year remains uncertain.

Low Profit Margins

The major expenses for electric bicycles lie in the motor and battery components, controlled by leading manufacturers. Other bicycle manufacturers focus on designing and marketing bicycles assembled in their own factories, using parts produced by specialized suppliers. This compression of profit margins is a challenge faced by Accell Group as well.

Despite the downgrades, Fitch remains optimistic about Accell’s future. Fitch stated, ‘As Accell reduces its inventory, trade working capital outflows (TWC) should gradually ease, which should improve liquidity space and restore free cash flow to mildly positive territory from 2024 onwards. Accell is taking steps to enhance control over procurement and improve operational processes, coupled with recent discounting policies, which should alleviate liquidity pressures from increased inventory and receivables. We expect trade working capital outflows of approximately EUR 90 million in 2023 and anticipate some reversal from 2024 onwards, although its magnitude remains uncertain.

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