The Pro's Closet: A Lesson in the Importance of Coherence

September 30, 2024

Introduction

Businesses, at their core, are not always rational entities; they are composed of people making decisions based on imperfect information. While decisions may seem logical in the moment, the outcomes can be unpredictable, particularly in complex markets. This article explores the rise and fall of The Pro’s Closet, a company in the cycling industry that many believed could become the CarMax of pre-owned bicycles. Despite initial promise, the company's closure highlights important lessons in business strategy—specifically, the importance of maintaining coherence in growth and operational plans.

The Pro’s Closet provides a case study of how strategic missteps, especially in response to external pressures, can lead to the downfall of an otherwise promising business. Why did The Pro’s Closet fail to transform the pre-owned bicycle market in the way CarMax reshaped the used car industry? And why did investors lose faith in the company, especially as similar businesses like Carvana weathered similar storms? These are the questions we will explore.

The Certified-Pre-owned Business Model

At first glance, The Pro’s Closet’s certified pre-owned business model seemed similar to that of successful auto industry companies, particularly CarMax and Carvana. All three companies shared a common value proposition: providing customers with an accessible, trustworthy way to purchase high-value pre-owned goods.

It’s easy to see why investors found The Pro’s Closet to be attractive. After all, CarMax was a successful business that changed the used car industry. Carvana was a pandemic-era unicorn that soared to prominence when many companies struggled.

Using a common business model framework to break down each of the businesses, we can see just how similar the certified pre-owned models of Carmax, Carvana, and The Pro’s Closet look at a high level.

	CarMax	Carvana	The Pro’s Closet
Customer Value Proposition	Bring the big box retail customer experience to used cars—providing US-based, enabling customers to buy a quality used car with upfront pricing	Create a seamless, transparent, used car buying and trade-in experience, giving US-based customers the ability to find and afford the right car at the right price	Enable customers to confidently buy their dream bike at a price they can afford—without the hassle and unknowns that come from shopping on Facebook or eBay
Delivery Model	· Vehicle Inventory on lots · Multichannel used inventory purchasing (e.g., auctions, trade-ins) · OEM-quality parts for repairs and refurbishment · Mechanics to enable quality · Data for fair pricing · Website front end for consumers	· Vehicle Inventory on lots · Multichannel used inventory purchasing (e.g., auctions, trade-ins) · OEM-quality parts for repairs and refurbishment · Mechanics to enable quality · Data for fair pricing · Website front end for consumers	· Bike inventory in a warehouse · Multichannel used inventory purchasing (e.g., purchases from bike shops, trade-ins) · Quality parts for repairs and refurbishment · Mechanics to enable quality · Shipping · Data for fair pricing · Website front end for consumers
Profit Formula	Buy low, sell high enough to cover the cost of repairs/refurbishment and the costs of carrying inventory	Buy low, sell high enough to cover the cost of repairs/refurbishment and the costs of carrying inventory	Buy low, sell high enough to cover the cost of repairs/refurbishment and the costs of carrying inventory

Table 1: High-Level Analysis of Primary Business Models

With new high-end bicycles approaching the prices of cars, even the transaction sizes were within the same order of magnitude. However, The Pro’s Closet needed to address three significant challenges in order to succeed.

There were no established channels for used inventory purchasing, and customers would need to be willing to accept the notion of trade-ins
Bicycle mechanics qualifications are less professionalized and largely based on apprenticeship rather than formal technical training—and there is a lack of certifications
The bike industry lacked established data sources for pricing

A Good Plan Isn’t a Good Strategy

At first glance, The Pro’s Closet appeared to have a solid plan to address the challenges in its business model, especially when compared to counterparts in the used car industry. The company established a B2Bpurchasing team and developed a consumer-friendly trade-in process to source inventory. Their pricing model was gradually refined, and partnerships with high-end brands allowed customers to customize purchases, while a staff of in-house mechanics ensured the quality of the pre-owned bikes.

However, despite these operational improvements, The faced two significant challenges in the broader business environment: the global pandemic’s disruption of supply chains and a macroeconomic climate of rising interest rates.

The Unexpected Challenges

1. Pandemic-Induced Market Fluctuations

The COVID-19 pandemic created an unprecedented demand for bicycles, followed by supply chain disruptions that left retailers scrambling for inventory. Like other industries, the cycling market suffered from production delays and inventory shortages. When manufacturers eventually ramped up production, the market was flooded with an oversupply just as demand began to dwindle. The result was a highly saturated market with excess inventory and falling prices—a situation that heavily impacted retailers in the bike industry.

2. High-Interest Rates

Simultaneously, rising interest rates and borrowing costs placed additional financial strain on the industry. Retailers, distributors, and brands were forced to carry higher levels of inventory, which became increasingly costly in the new economic environment. For a company like The Pro’s Closet, which relied on maintaining pre-owned inventory, these factors created a financial burden that became difficult to manage.

Were these two things enough to cause The Pro’s Closet to shut down, or was there more to the story?

The Response

In response to the supply chain disruptions, The Pro’s Closet sought to mitigate pandemic-induced fluctuations by expanding its selection of new parts inventory. This shift allowed the company to secure deliveries and gain leverage over distributors. However, in pushing for scale, the company’s model evolved. What started as a niche player focused on certified pre-owned bikes slowly transformed into something that resembled amore traditional bike shop. Recognizing the opportunity for growth, The Pro’s Closet added apparel, accessories, and even new bicycles to its offerings.

As rising interest rates became a long-term reality, the broader bike industry began experiencing a wave of shop closures and brand bankruptcies. The pandemic’s shortages had led to a massive oversupply of bikes, and the high cost of carrying inventory, exacerbated by interest rates, crushed many retailers. By transforming into a traditional e-commerce bike retailer, The Pro’s Closet found itself exposed to the same risks as other bike shops, diluting the distinctiveness of its original business model.

This choice starkly contrasted CarMax’s historic and Carvana's contemporary choices regarding the secondary business models they built to support their growth. CarMax invested in financing to drive transactions and reduce the risk of the primary business model, while Carvana expanded its business by offering services like home delivery, improving customer access.

	CarMax	Carvana	The Pro’s Closet
Customer Value Proposition	Create a company-specific lending platform to ensure the affordability of our products and mitigate the effects of interest rates on our balance sheets	Expand access to our services via home pickup and delivery	Expand the selection of products and our customer base by selling new components, accessories, and apparel
Delivery Model	· Balance sheet strength to take on the risk of financing · Finance expertise to understand risks and upside · Sales models that could incorporate financing into the purchase structure	· Trucks for vehicle pickup and delivery · Expand trade-in and sales policies to cover for customer returns and variability in quality	· Inventory in a warehouse · Quality parts and products for sale · Shipping · Website front end for consumers
Profit Formula	Drive sales in primary model through financing terms, mitigate effects interest rates, make money from interest	Drive a higher volume of transactions through their primary business model	Traditional e-commerce retail

Table 2: High-Level Analysis of Secondary Business Models

The key difference between these companies lies in their strategic approach to their secondary business models. CarMax and Carvana invested in building new capabilities that complemented and enhanced their primary business models, effectively doubling down on their original investment theses. In contrast, The Pro’s Closet expanded its business based on operational synergies—diversifying its product offerings to attract new customers. While this may have seemed like a rational choice and a good plan given their existing investments, it ultimately led them away from their initial business model and strategy, which may have been the critical misstep that undermined their business.

Synergies vs. Coherence

When it comes to building a winning strategy, synergies can often be a misleading concept. Pursuing synergies tends to anchor businesses in the past, focusing on sunk costs rather than forward-looking opportunities. Amore effective strategic approach starts by understanding why investors, employees, and other stakeholders believe in the business and making choices that resonate with them.

A successful strategy should be simple and coherent. As longas it’s relevant, the original investment thesis—the fundamental reason the business was attractive in the first place—must remain at the core of the strategic message. If the initial thesis proves incorrect, the entire organization must pivot toward a new, cohesive strategy. In the case of The Pro’s Closet, the company's half-transition from a focus on certified pre-owned bicycles to a more generalized e-commerce bike shop exemplified a breakdown incoherence. The resulting lack of clarity likely contributed to the loss of investor confidence.

Before The Pro’s Closet, platforms like eBay, Craigslist, and Facebook Marketplace dominated the used bicycle market, with little to no assurance of quality or authenticity. The Pro’s Closet had clear Disruptive Potential: it created a new market for Certified Pre-Owned (CPO) bikes, applying principles and technologies from the automotive sector, particularly those pioneered by companies like CarMax. In our view, this rare type of business represents the highest-risk, highest-reward scenario.

Our former colleague, Clayton Christensen of Harvard Business School, defined this in his book Innovators Dilemma as a phenomenon that occurs when you recognize your customers buy more than they need because they lack access to the right solution. Counterintuitively, the first adopters of these innovations often aren't the core customers of established businesses. However, as the disruptive offering gains traction, it can draw revenue away from incumbents focused on Core Growth, eventually disrupting and replacing them in the market.

*Figure 2: Upside Analysis Framework for evaluating growth potential*

Figure 2 shows a framework we use to characterize growth potential and risk. Higher growth potential exists as you move up and to the right. By creatingtheir secondary business, The Pro’s Closet shifted its focus away from thishigh-potential, disruptive space and toward a lower-potential, more traditionale-commerce model—akin to existing retailers such as Competitive Cyclist, whichwere seeking turnaround capital to survive. This strategic shift reflected aretreat from the company’s original disruptive ambition.

In essence, The Pro’s Closet made a partial bet against itself. Moving away from its disruptive roots toward operational synergies resulted in a lack of strategic coherence. This change fundamentally altered the investment thesis, creating a business that was only partially attractive to venture capitalists and partially appealing to turnaround investors but not compelling to either. The result was a business that ultimately became unattractive to both groups, leaving The Pro’s Closet in a precarious position.

Conclusion

It’s easy to critique from the sidelines, but businesses operate under immense pressure to adapt, grow, and respond to market conditions. The closure of The Pro’s Closet reflects a broader challenge many companies face in maintaining strategic focus amidst external pressures. The key takeaway here is that coherence is essential for success. Businesses must carefully align their strategic initiatives with their core value propositions, resisting the urge to pursue opportunities that may compromise their original vision.

As we look forward, there is hope that another company will rise to professionalize and streamline the pre-owned bicycle market. The Pro’s Closet may have failed, but the potential for disruption in the cycling industry remains largely unfulfilled.

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