1424 lines
62 KiB
Markdown
1424 lines
62 KiB
Markdown
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created_at: '2016-08-11T19:05:13.000Z'
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title: The Fall of Schwinn (1993)
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url: http://www.chicagobusiness.com/article/19931009/ISSUE01/100018007/the-fall-of-schwinn-pt-1-of-2
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author: chrissnell
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points: 67
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story_text:
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comment_text:
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num_comments: 50
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story_id:
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story_title:
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story_url:
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parent_id:
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created_at_i: 1470942313
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_tags:
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- story
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- author_chrissnell
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- story_12270819
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objectID: '12270819'
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---
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Like the Chicago summer of 1992, Schwinn Bicycle Co.'s negotiations with
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prospective buyers had turned cold.
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On Aug. 26, Chief Operating Officer Ralph Day Murray delivered the
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prognosis to an advisory board that included several Schwinn family
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members and three outside businessmen.
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No savior was coming, Mr. Murray reported. Schwinn was $75 million in
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debt. It was losing $1 million a month. Suppliers were demanding cash
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for bikes. And the banks were squeezing harder and harder.
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Keck Mahin & Cate attorney Dennis O'Dea — a familiar face lately at
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Schwinn's West Loop headquarters, where employees had morbidly dubbed
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him "the Angel of Death" — added his grim assessment: A Chapter 11
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petition already had been prepared, he told the gathering. Bankruptcy
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was not an if. It was a when.
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Keck Mahin & Cate attorney Dennis O'Dea — a familiar face lately at
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Schwinn's West Loop headquarters, where employees had morbidly dubbed
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him "the Angel of Death" — added his grim assessment: A Chapter 11
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petition already had been prepared, he told the gathering. Bankruptcy
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was not an if. It was a when.
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Schwinn's outside board members glanced at one another, then asked for a
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brief caucus. Mere advisers, they were powerless. Moments later, the
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trio announced their joint resignations, effective immediately.
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Tears welled in the eyes of Schwinn cousins Betty Dembecki and Debbie
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Bailey. A century-old family company was dying as they watched. A proud
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name and business tradition soon would be the province of $200-an-hour
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lawyers, bankers and other vultures of commerce.
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They looked at President and CEO Edward R. Schwinn Jr., the man
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ultimately responsible for this mess.
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As usual, Ed just sat, stone-faced and impenetrable.
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"We are where we are," he'd answer matter-of-factly when family or
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Schwinn executives criticized the company's deteriorating performance.
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For his part, Ed had endured many emotional meetings in the past year,
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Schwinn executives say. Ugly bouts filled with machinations and
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recriminations from Betty, Debbie and other cousins and in-laws who
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lived off the business but didn't know how to run it any better than he
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did.
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Ed had struggled for more than eight months as the company's fortunes
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faded, trying to find some way to preserve the Schwinn dynasty. Maybe he
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couldn't maintain the family's control. But at least members might hold
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onto a minority stake.
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It still could happen, he told colleagues.
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It never did.
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Six weeks later, Schwinn Bicycle Co. was in U.S. Bankruptcy Court,
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pleading for federal protection from creditors who seemed ready to slice
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up the company.
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By year's end, most of the company was sold for $43.3 million in cash to
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a partnership headed by Chicago financier Sam Zell. The 14 members of
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the Schwinn family trust pocketed a paltry $2.5 million from the deal.
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And Ed was sitting on the sidelines. For the first time in its 97-year
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history, Schwinn Bicycle Co. would not be headed by a Schwinn.
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What went wrong?
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Ed Schwinn declined repeated requests to be interviewed for this
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article, as did most Schwinn family members who had worked for the
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closely held company or owned shares of it.
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But six months of research, including interviews with more than 100
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sources inside and outside the bicycle industry, reveals for the first
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time exactly why and how Schwinn self-destructed.
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It is a saga of spectacular failure. Of management blunders that
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stretched across the globe. Of vengeance wreaked by former executives
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and Asian suppliers. Of a family's insistence on retaining control and
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rejecting outside capital until it was too late. Of two corporate
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cultures — good old boys living in the past, MBAs flow-charting the
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future — clashing while competitors raced by them both.
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Most of all, it is a tale of a young CEO who wanted to save his company
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but blew it. A man who ultimately alienated just about everyone he
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needed — from relatives, employees and longtime dealers to lenders,
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suppliers and bidders — with a world-class combination of arrogance,
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carelessness and flawed judgment.
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The Schwinn drama deepens when one considers that Ed might have had the
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stuff to save the company, for he had saved it before.
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Outside a small circle of company managers and bankers, no one knew that
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a financial crisis in the early 1980s had wiped out most of the Schwinn
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family's equity and brought the company to the brink of bankruptcy.
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In fact, Schwinn hocked its name and patents to Harris Bank and Northern
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Trust Co. in 1983 to preserve its borrowing power.
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But when the company turned profitable again — the family regained
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ownership of the Schwinn name in 1988 — Ed and his senior managers
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breathed too easily too quickly. They embarked on a spending spree,
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sinking too much time and money into ill-advised ventures with overseas
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suppliers and domestic entrepreneurs.
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Suddenly, they were dealmakers, not bikemakers. And the arrogance
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returned.
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Like so many family-owned companies, Schwinn faltered as its third and
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fourth generations assumed leadership (see story on Page 33).
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While the Schwinns aren't Rockefellers — their company's profits peaked
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in 1986 at a modest $7.0 million — the family name is one of America's
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most famous.
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And Ed was born with a silver spoke in his mouth. He carried himself in
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the Schwinn tradition: proud, stubborn, comfortable with his celebrity
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status in the bike industry. But he possessed neither the drive of his
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great-grandfather, company founder Ignaz Schwinn, nor the genius of his
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grandfather, Frank W. Schwinn.
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That's not uncommon for the later generations in any family company. Yet
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Schwinn never was your typical family business.
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It is a corporate rarity: a Great American Company, one that transformed
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an industry and, at its height in the 1950s, commanded 25% of its
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market. It also is something even rarer: a fond and wistful memory for
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generations of children who pedaled, or pined for, its Excelsiors,
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Phantoms, Sting-Rays and Varsitys.
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"Schwinn is a company apart," says Stuart J. Meyers, publisher of the
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New York trade magazine American Bicyclist and Motorcyclist. "Schwinn
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has roots in every child's memory . . . every child up to a certain
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age."
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And therein lays the problem.
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Schwinn was used to being the big wheel. It was a Chicago manufacturer
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that produced some of the best bikes in the world. An R\&D leader that
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innovated first or fastest. A marketer that sensed what Americans
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wanted. A maker of merchants that set the highest of standards and, in
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the process, built itself the strongest and smartest dealer network in
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the business.
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"Working for Schwinn, you were playing for the Yankees," says Allen
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Singer, former president of Schwinn's Midwest sales operation.
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"It was the pinnacle," says Jim Burris, a Sunnyvale, Calif., bike dealer
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who in 1972 took a 60% pay cut to join Schwinn's West Coast salesforce.
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"I wanted to work for Schwinn so bad. They were like IBM. You got
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prestige. You got respect. You commanded respect."
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But some top executives grew sloppy and complacent in the 1970s and
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'80s, living high on swollen expense accounts and spending more time on
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golf carts than bicycles. They stopped looking over their shoulders,
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instead coasting on their reputation for innovation and quality just
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when younger and more active consumers began demanding lighter and more
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adventurous bikes.
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Some dealers flagged warnings — they were the front lines, after all —
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but too often, management failed to respond.
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"We figured because it said 'Schwinn,' people would buy it," says Brian
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Fiala, former vice-president of human resources.
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"Schwinn fell into the same trap that the auto industry did: They
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thought they knew the pulse," says Marin County, Calif., cycling guru
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Gary Fisher, widely credited with inventing the mountain bike in the
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1970s — a bicycle that Schwinn's engineers literally laughed at.
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This was no time to get uppity.
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The rise in the 1960s and '70s of Asian-based parts manufacturers and
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bikemakers — especially Japan's Shimano Inc., which today dominates the
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market for bike components the way Intel Corp. dominates computer chips
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— was turning U.S. bicycle companies into mere assemblers of
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increasingly standardized parts.
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To his credit, Ed Schwinn embraced the global marketplace. Under his
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administration, the company became an enthusiastic customer of the new
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manufacturers. Its margins were fatter, the globe-trotting and
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deal-making headier.
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But Schwinn was inexperienced in the world arena, and botched its Asian
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relationships.
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For instance, Ed Schwinn found an efficient and accommodating supplier
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in then-tiny Giant Manufacturing Corp. of Taiwan. But he handed over
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four-fifths of Schwinn's bicycle production to Giant without gaining an
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equity stake.
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By the time Schwinn wised up and diversified sourcing in the late 1980s,
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it had created a formidable competitor that was selling its own
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attractively priced brand of bikes in the United States. When Schwinn
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went into Bankruptcy Court, Giant was one of its largest trade
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creditors, and President Tony Lo may have had more motive to kill the
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beleaguered company than to save it.
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"They expected to get in bed with the Chinese," Mr. Fisher says of
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Schwinn, "and the Chinese ate 'em for breakfast."
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Even as Schwinn went offshore for bikes, Ed maintained the company's
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heritage as manufacturer to ensure control over product quality and
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pricing. He would buy stakes in overseas factories in China and Hungary
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and invest in a high-tech plant in Mississippi, so as not to abandon
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Schwinn's made-in-America tradition.
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The problem was not so much the strategy as the execution. Schwinn
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heaped too much on its plate and diverted attention from its core
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mission — designing good, marketable bikes.
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For much of this century, Schwinn produced bikes from a Northwest Side
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factory complex that, during its peak in the early '70s, employed 1,800
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people and cranked out more than 1 million cycles annually.
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But like too many Midwest metal-benders, Schwinn didn't invest enough in
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new technology. Union organizing only stiffened the family's resolve not
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to sink more money into its aging plant.
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A 1980 strike sealed the factory's fate: It would be closed three years
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later. Today, the Kildare Avenue site is a vacant lot of weeds and
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broken glass.
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Wanting to maintain domestic production, Schwinn launched a plant in the
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union-free but remote town of Greenville, Miss. The move proved
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disastrous. The poorly managed plant never made a dime, racking up
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losses of more than $30 million in 10 years.
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And dealers shuddered at the inferior bikes shipped from Greenville each
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season. "You found yourself repairing the bikes as you were assembling
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them," says Terry Gibson, a veteran dealer in Downstate Normal.
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Meantime, youthful new American brands came on the scene, challenging
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Schwinn's control of the independent bicycle market.
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Trek Bicycle Corp. of Waterloo, Wis., appealed to affluent adults and
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proved it was possible to manufacture successfully in the United States.
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And Specialized Bicycle Components Inc. of Morgan Valley, Calif.,
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commercialized Gary Fisher's mountain bike ideas and ultimately
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dominated the pricier market niches.
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"A lot of people were carving the turkey," says Bernie Kotlier,
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executive vice-president of Long Beach, Calif.-based Lawee Inc., which
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markets Univega bikes. "Everyone got their piece."
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Except Schwinn. Its marketshare dwindled to about 12% in 1979 — Ed's
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first year as president — only to sink further during the 1980s, to 5%
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by 1992.
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Schwinn could have overcome its obstacles. Its name maintains a grip on
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baby boomer imaginations. And Schwinn could have gone public or taken on
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minority investors to ensure growth and financial security.
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More radical voices in the industry called for Ed to reinvent the
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company, casting off some dealers if necessary and selling the famous
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Schwinn name in the Sportmarts or Kmarts of the world.
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But in the end, Ed never articulated a broad vision that could keep his
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troops pedaling in the same direction.
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He launched bold initiatives. But the moves were too grand for a company
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the size of Schwinn, whose annual sales never exceeded $212 million.
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He lacked the attention to detail needed to make his ambitious projects
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succeed. And because of executive turnover, the onus kept returning to
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him.
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Some colleagues and dealers find him charming, unpretentious, capable —
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an articulate spokesman for Schwinn and the cycling industry.
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But others saw a different side.
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Ed, they say, just couldn't gut it out. He hated to hear bad news. He
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was buffeted by competing management agendas. And he was known to slip
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out of important meetings or never show up at all.
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To the banks, Ed seemed dangerously flip. As tensions rose in 1992,
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lenders' confidence in him declined, and they made no bones about their
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desire to see Ed step aside as chief executive.
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"I'll do that before I let this company go down the tubes," he told COO
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Mr. Murray in the summer of 1992.
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He never kept that vow.
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Now, with the family tie severed, Schwinn has lost its last reason to be
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in Chicago. New owner Scott Sports Group — run by Idaho sporting goods
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entrepreneur Charles T. Ferries but controlled by Chicago's
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Zell-Chilmark Fund L.P. — is relocating Schwinn's headquarters to the
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fitness mecca of Boulder, Colo.
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Most bike industry observers say Schwinn has a strong shot at
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rebounding. Tougher and more experienced management is in charge now.
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And Sam Zell's participation ensures that Schwinn will be well-financed.
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"An extraordinary nameplate with an extraordinary franchise that was
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allowed to deteriorate," says Mr. Zell, explaining his attraction to the
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company.
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It was a long and tortured deterioration, one with lessons for many
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businesses, large and small. What follows is the story of that decline.
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And how a Great American Family failed to stop it.
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**THE BEGINNINGS**
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If one word defines the Schwinn clan, it is headstrong.
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That can be a compliment, when the headstrong man knows what he is
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doing.
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It is something else when he doesn't.
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Company founder Ignaz Schwinn always knew what he was doing. At least,
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he always seemed to. When the 88-year-old died of a stroke in 1948,
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condolences from customers and even competitors approached veneration.
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Ignaz was the "dean of our industry," wrote the CEO of Huffman
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Manufacturing Co., maker of Huffy bikes.
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The "Henry Ford of the bicycle industry," mourned the leader of a cycle
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parts association.
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No false praise. Ignaz was a German immigrant who had turned a small
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Chicago bike factory into one of the best-known businesses in America. A
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demanding chief executive who, with his son, Frank W., had resuscitated
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a lifeless industry in the 1930s with innovations that captured the
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imaginations of American children and made Schwinn a synonym for
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bicycle.
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And he did it the old-fashioned way: his way.
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"Ignaz was a typical Schwinn: hardheaded and stubborn," says Niles
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resident Rudolph Schwinn, a retired Schwinn engineer whose grandfather
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and Ignaz were brothers.
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He was a gruff little bulldog of a man.
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Schwinn old-timers tell a tale, perhaps apocryphal, of a production
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worker in the 1920s who wanted to buy a stripped-down bike frame from
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Ignaz.
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"How much?" the worker asked.
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Ignaz quoted the price of a complete bicycle.
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"Why so much?" the worker wondered.
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"Because you had to have stolen the parts if all you need is a frame,"
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Ignaz answered, "so I'll charge you for the entire bicycle."
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Frank W. once told trade magazine publisher Stuart Meyers: "My father
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was a stern man of the old school. He did not spoil his children."
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So, the young Schwinn was stupefied when his father gave him a raise
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soon after he joined the company, then pointed to a new car in front of
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the plant. "That's for you," Ignaz barked. "If you're going to make a
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fool of yourself, I'd rather know about it now."
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Ignaz was tough, but then, so was his background.
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He was born April 1, 1860, in Germany's Baden province, the bourgeois
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boy of a piano factory owner. His father died when Ignaz was 11,
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however, and money for vocational school soon dried up. He was forced to
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apprentice as a machinist, then wander the country as a migrant factory
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worker.
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Bicycles were the hot new technology in the last quarter of the century,
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attracting such mechanically minded men as Henry Ford and the brothers
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Wilbur and Orville Wright.
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And young Ignaz Schwinn.
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He rode to higher and higher positions in German cycle factories —
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usually leaving, according to Schwinn Bicycle Co. lore, when his bosses
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wouldn't embrace his ideas for improving parts or production.
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At 30, he emigrated to America with his wife, Helen, arriving in the
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manufacturing magnet of Chicago in 1891.
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Still more restlessness: A short stint with a local bikemaker was
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followed by several apparently unhappy years designing and opening a
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bicycle factory for International Manufacturing Co.
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"The enterprise was not managed to his liking," reports an official
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Schwinn history, "and in 1894, he severed his connection."
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Later that year, Ignaz found his angel in Adolf Arnold, a successful
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Chicago investor, banker and meatpacking executive.
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Mr. Arnold knew an opportunity when he saw one. The bike business was
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booming, with the nation in the grip of a cycling craze spurred by the
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recent invention of easy-to-ride two-wheelers (see story on Page 24).
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By the mid-1890s, the building of bicycles had become a $60-million
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industry. Annual production surpassed 500,000 units. Then 700,000 . . .
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800,000. One million. "Bicycle men today assert that theirs is the
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largest specific manufacturing industry in America," reported Munsey's
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Magazine in 1896.
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Heady stuff. And Chicago was its hub: Fully two-thirds of all bikes and
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accessories were made within 150 miles of the city, according to the
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1898 Chicago Bicycle Directory.
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More than 30 factories bustled along Lake Street west of the Loop during
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the late 1890s, their 6,000 workers churning out cheaper and cheaper
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product for such major merchants as The Fair department store — which
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sold up to 1,000 bikes a day from its colossal store straddling State,
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Adams and Dearborn streets — and Chicago-based mail-order giants
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Montgomery Ward & Co. and Sears, Roebuck and Co.
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Into this frenzy jumped Messrs. Arnold and Schwinn, who incorporated
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their Arnold Schwinn & Co. in 1895 and rented a building at Lake and
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Peoria streets.
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Mr. Arnold let his expert run the venture. It proved a wise decision.
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Ignaz was a master manufacturer. He built both his own World brand and
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bikes for retailers that slapped on their labels — including Sears, one
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of Schwinn's earliest customers.
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And he had a flair for marketing. The company sponsored a World team of
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racers who smashed speed barriers around the globe — and earned ink in
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the many cycling publications of the era. At an 1896 race in Garfield
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Park, Bearings magazine reported, "Mr. Schwinn took the liveliest
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interest . . . and hoped that records would be broken in the home city."
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Initial sales hardly were out of this world — about 25,000 units
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annually at first. But Schwinn's star was rising.
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Not so for most of the rest of the industry, where a too-crowded field
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of 300 cycle makers hacked one another into oblivion.
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Between 1897 and 1898, the price of a top-of-the-line bike snapped in
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half — to $50 wholesale from $100. Cheaply made bikes were fetching $20
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retail.
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Worse, adults stopped cycling as the automobile age revved up. By 1905,
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national bicycle production had plunged to 250,000 units annually from a
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dizzying high of 1.2 million units just six years earlier. Only a dozen
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factories survived the shake-up.
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Schwinn fared well through the turmoil. It even expanded and relocated
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its headquarters in 1901 to 1856 N. Kostner Ave., its home for the next
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85 years.
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Key to Schwinn's survival was its relationship with Sears, then the
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largest peddler of Schwinn-made bikes. In fact, Sears accounted for up
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to 75% of Schwinn's sales in some of the years before World War I.
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(Later, Ward's was a major customer, with volume reaching one-third of
|
|
all Schwinn sales in the early 1920s.)
|
|
|
|
Despite such patrons, the automobile made the bike business a bust for
|
|
the next 30 years.
|
|
|
|
Adolf Arnold bailed out — Ignaz bought his partner's shares in 1908,
|
|
making the Schwinn family sole owner (although no one bothered changing
|
|
the name until the late '60s.)
|
|
|
|
And Ignaz turned his attention to the new field of motorcycles with his
|
|
purchase in 1911 of Excelsior Motor Manufacturing & Supply Co. Chicago
|
|
telephone books from the 1920s list Ignaz as "president-treasurer,
|
|
Excelsior Motor" — no word on the family bike business.
|
|
|
|
Frank W. shared his father's passion for making motorcycles. "You will
|
|
have to get up early in the morning if you get to the Excelsior factory
|
|
in Chicago before Frank Schwinn is at his desk," reported American
|
|
Bicyclist and Motorcyclist magazine in 1921, "for Frank is the son of
|
|
his father when it comes to being on the job."
|
|
|
|
Excelsior motorcycles had a reputation for engineering and pizzazz —
|
|
especially the trade show models, accented in sparkling white enamel.
|
|
But as the market for motorcycles waned in the late 1920s, Schwinn
|
|
squeezed the brakes.
|
|
|
|
Ignaz and F. W., as Frank was now called in executive circles, shut down
|
|
the sputtering motorcycle operations and ordered their engineers to
|
|
focus on bicycles. Their first order of business was to reinvent a
|
|
product that hadn't changed much in a generation.
|
|
|
|
Children were the primary market now. But their choice of products was a
|
|
few brands that looked alike.
|
|
|
|
In the depths of the Great Depression, Schwinn's plan was to reap new
|
|
profits by making bikes bigger and flashier — by making something swell,
|
|
something that Junior would weep for, something that Ma and Pa would
|
|
have to buy this Christmas or they'd never ever hear the end of it.
|
|
|
|
Thus, the balloon-tire bicycle — rolling on a whopper of a tread more
|
|
than two inches wide, with thick nobs that pinched pavement and lasted
|
|
lots longer than those piddly, 1½-inchers all the other kids rode.
|
|
|
|
Introduced in 1933, the balloon tire was an instant hit. And Schwinn
|
|
shipments ballooned 137% to 107,200 by 1935, the year the new tire
|
|
became the standard in the industry.
|
|
|
|
A string of styles and gimmicks were introduced, all chased by
|
|
double-digit sales increases.
|
|
|
|
In 1934 came the Streamline Aerocycle — "built like an airplane
|
|
fuselage," read the trade ads.
|
|
|
|
In 1935, the Cycleplane, with its sweeping lines, rounded tank,
|
|
chromium-plated headlight and electric horn button on the handlebar.
|
|
|
|
Chastened competitors like Huffy and Murray soon began introducing new
|
|
designs, too. But Schwinn was on a roll.
|
|
|
|
It introduced the built-in Cyclelock (with cheaper theft insurance via
|
|
Schwinn), the front-wheel brake, the cantilever frame (another future
|
|
industry standard) and the Paramount line of exquisitely designed
|
|
European-style racing bikes.
|
|
|
|
All told, the company was awarded more than 40 patents during the '30s.
|
|
Annual production hit 346,000 by 1941.
|
|
|
|
Schwinn had led the bicycle industry out of the Depression.
|
|
|
|
It also had led another portion of the bike industry: the upper end that
|
|
was moving toward the independent dealer and away from the mass
|
|
merchants.
|
|
|
|
As early as the 1920s, Schwinn was growing disenchanted with its major
|
|
retail customers. Sears, especially, had been leaning on Schwinn to use
|
|
cheaper suppliers.
|
|
|
|
"Sears supposedly told F. W., 'Your bike is too good,'" says former
|
|
Schwinn marketing chief Ray Burch. "The Old Man blew his stack: 'Don't
|
|
tell me how to build my bike\!'"
|
|
|
|
Whatever happened, the relationships with Sears and Ward's were over by
|
|
the 1930s. After World War II, Schwinn's only major chain store customer
|
|
would be tire dealer B. F. Goodrich.
|
|
|
|
By 1948, the company would make its last private-label bike. Henceforth,
|
|
F. W. told workers proudly, Schwinn would sell only Schwinn. And it
|
|
would create the nation's strongest network of independent bicycle
|
|
dealers, all selling premium-priced Schwinns at a premium profit for
|
|
him.
|
|
|
|
F. W. was firmly in charge now. In fact, he'd been running the operation
|
|
for years. After all, Ignaz was in his 80s — a widower growing feeble,
|
|
old-timers recall, a blind man with a cane who'd pinch a nurse's behind
|
|
one moment and ramble unintelligibly the next.
|
|
|
|
Still, when Ignaz did shuffle into headquarters, it often was at his
|
|
customary early hour. And he always was escorted by F. W., who tended to
|
|
his father at work and at the family's Humboldt Park home.
|
|
|
|
An American Bicyclist correspondent once told F. W. he was impressed
|
|
with the son's show of devotion.
|
|
|
|
"I love that old gentleman," was F. W.'s unadorned response.
|
|
|
|
Apparently, so did many others. And if not love, then at least respect.
|
|
|
|
When Ignaz died in 1948, hundreds of floral arrangements flooded the
|
|
funeral home — bountiful offerings, including a full-size bicycle made
|
|
of flowers, from competitors, customers, cyclists.
|
|
|
|
Yet one tribute was most heartfelt. Draping the casket was a blanket of
|
|
lilies bearing the single word "Father."
|
|
|
|
**THE HEYDAY**
|
|
|
|
Frank W. Schwinn flung a pair of pliers on his desk, smashing its glass
|
|
top. Following up a complaint about defective pedals, he'd taken them
|
|
apart and found they indeed were flawed.
|
|
|
|
The boss buzzed for General Manager Bill Stoeffhaas, demanding that he
|
|
summon the factory's chief inspector.
|
|
|
|
"The Old Man was shaking, he was so mad," recalls Mr. Burch, sales
|
|
promotion manager at the time.
|
|
|
|
"You let this stuff in with my name on it," F. W. yelled at the hapless
|
|
inspector. "Get out, before I say something I shouldn't."
|
|
|
|
F. W. was demanding, to say the least. At the Schwinn Bicycle Co. of the
|
|
1950s, he ran a tight ship.
|
|
|
|
Schwinn was capitalizing on postwar prosperity and revved-up demand for
|
|
consumer goods. And this was its heyday — the era of the Black Phantom,
|
|
the top-of-the-line balloon-tire bike introduced in 1949 that gripped
|
|
many a young heart for the next 10 years.
|
|
|
|
The Phantom was an instant American classic. Priced high, $80 to $90, it
|
|
was a beauty swathed in chrome, its fenders gleaming as you opened the
|
|
garage door. And it was built like a truck, confidently taking
|
|
subdivision curbs head-on.
|
|
|
|
"It was like the '57 Chevy convertible," says James L. Hurd, curator of
|
|
the Schwinn family's substantial collection of bicycles and memorabilia.
|
|
"Upon looking at it, you just wanted one."
|
|
|
|
The crush for Phantoms and other Schwinns had the Northwest Side factory
|
|
producing more than 400,000 bikes a year. Marketshare peaked in 1950,
|
|
when Schwinn made one of every four bikes sold in America. Afterward, it
|
|
maintained a share in the mid-teens but rode a steadily growing market.
|
|
The outlook was rosy.
|
|
|
|
"35 million kids by 1960\!" exclaimed a 1951 edition of the in-house
|
|
newsletter, The Schwinn Reporter, citing expanding birth rate forecasts.
|
|
"Everyone engaged in the bicycle business is bound to gain."
|
|
|
|
F. W., however, had his worries. Foremost was his company's unwieldy
|
|
distribution system.
|
|
|
|
Schwinn was selling to almost anyone — some 15,000 retail outlets of
|
|
varying ilks, including pool halls, gas stations, barber shops and
|
|
funeral parlors. Yet Mr. Burch, hired from motorbike maker Whizzer Motor
|
|
Co. in 1950 to tame the merchandising monster, found that 27% of
|
|
Schwinn's retailers accounted for 94% of sales.
|
|
|
|
The problem, as Schwinn saw it, was that too many bikes were being
|
|
handled by people who didn't know or care much about them. That led to
|
|
faults in assembly or repair and a chorus of customer complaints —
|
|
disastrous for a company touting a "no-time-limit warranty."
|
|
|
|
During a training session at Marshall Field's, for instance, the sales
|
|
people "would sit and gab," recalls Mr. Burch, now retired and living
|
|
near San Diego. "They were toy department people interested in dolls and
|
|
toy trains. You can't make bike people out of them."
|
|
|
|
Even worse was "Joe's Bike Shop," the catch-all name that Schwinn
|
|
executives used to describe the back-alley dealer. Scratching his
|
|
T-shirted gut, drinking beer with his buddies while a kid fixed flat
|
|
tires in the dirt, ol' Joe wouldn't attract the new suburban family
|
|
willing to pay a premium for Schwinn bikes.
|
|
|
|
The solution, as fashioned by Mr. Burch, was to certify a corps of
|
|
several thousand credible bicycle dealers and weed out undesirables.
|
|
|
|
Schwinn executives called it franchising, although the parent company
|
|
never collected fees or royalties. The Department of Justice, however,
|
|
called it restraint of trade and waged a 10-year antitrust suit against
|
|
the company. It ended with a Supreme Court loss for Schwinn (see story
|
|
on Page 28) that spurred the company to cut loose its independent
|
|
distributors and spend heavily to set up its own warehouse network.
|
|
|
|
The retail winnowing of the '50s and '60s mainly involved cutting off
|
|
the hardware distributors, who handled about 15% of Schwinn's volume,
|
|
and dealing only to middlemen geared to the bike business.
|
|
|
|
Paul Oberlin, Schwinn's imposing but genial sales manager, reluctantly
|
|
broke the news to many longtime clients with his lip quivering: "I can't
|
|
sell you anymore."
|
|
|
|
"That's all right, Paul," one jobber consoled him.
|
|
|
|
"The guys almost felt sorry for us," recalls William P. Chambers,
|
|
Schwinn's veteran dealer relations manager.
|
|
|
|
But the strategy also required something else: developing a loyal dealer
|
|
infrastructure — the strongest in the business, even to this day.
|
|
|
|
In the '50s, '60s and '70s, Schwinn made merchants out of mom-and-pop
|
|
shops with training and assistance that no other company offered — from
|
|
traveling mechanics schools and budget and marketing analysis to
|
|
advertising co-ops and assistance in relocating and designing not just
|
|
bike shops, but "ultramodern Schwinn cycleries."
|
|
|
|
The goal was 100% Schwinn sales. And the company often succeeded:
|
|
Approximately 75% of its 1,700 dealers sold Schwinn exclusively by the
|
|
late 1970s.
|
|
|
|
Not all dealers would be — or could be — 100% Schwinn, especially in
|
|
sophisticated East and West Coast cycling markets.
|
|
|
|
Still, the minimum requirement was 50% of floor space devoted to
|
|
Schwinn, according to the dealership agreement. And the company's sales
|
|
and marketing forces religiously pressed dealers to up their Schwinn
|
|
counts — mostly through persuasion, but sometimes through bullying.
|
|
|
|
The prototype of what the company came to call its "total concept store"
|
|
was established by George Garner, a top-selling Southern California
|
|
dealer who moved to Northbrook in the early 1960s to open several North
|
|
Shore cycleries and consult for Schwinn.
|
|
|
|
Mr. Garner was Uberdealer, the kind of man a good Schwinn dealer should
|
|
strive to be. Fit, friendly and faithful to all things Schwinn, Mr.
|
|
Garner was the company's No. 1 seller for 19 years. In a row.
|
|
|
|
"My heart and soul was with Schwinn," he says today at age 70, still
|
|
running his Northbrook store. "I always said, 'If you cut open a vein,
|
|
the word Schwinn would come out.'"
|
|
|
|
Schwinn repeatedly trumpeted Mr. Garner's recipe for success: big,
|
|
brightly lit stores on the main drag of town; spotless, organized and
|
|
stocked with row after row of sparkling bikes beckoning passers-by to
|
|
come on in and give 'em a ride.
|
|
|
|
No grubby mechanics here; they wore white lab coats. No digging for oily
|
|
spare parts; they were polished and encased in glass, like jewels at
|
|
Tiffany's. Mr. Garner's standard offer to less-than-satisfied customers:
|
|
"What can I do to make things right?"
|
|
|
|
Basic merchandising by today's standards, but almost unheard of in the
|
|
bike business 40 years ago.
|
|
|
|
Mr. Garner regularly offered his merchandising wisdom in a monthly
|
|
column for The Schwinn Reporter.
|
|
|
|
The sprightly house organ and marketing tool was filled with news and
|
|
advice, horror stories about the evil chain stores and inspirational
|
|
dealer success stories. Read the legend on one 1952 article: "Put 'em on
|
|
the bike, feed 'em with the info, watch 'em buy . . . is the sales
|
|
technique employed with zest and honesty by Scotty's Bike Shop, Compton,
|
|
Calif., a 100% Schwinn dealer."
|
|
|
|
The formula worked, judging by the rising ranks of dealers making a
|
|
middle-class living selling Schwinn — and the growing number of wives
|
|
wearing furs in photos of regional dealer meetings.
|
|
|
|
Just as F. W. worked to strengthen the independent dealer, he kept the
|
|
factory on a tight leash.
|
|
|
|
"You couldn't change the nuts, screws and bolts on a bike without his
|
|
approval," recalls Al Fritz, who began his 40-year Schwinn career in the
|
|
factory and rose to executive vice-president, the No. 2 post.
|
|
|
|
As with the defective pedals, any flaw would make F. W. cranky.
|
|
|
|
"The Old Man walked through the factory, looking at parts," Mr. Fritz
|
|
recalls. "If he found a defective piece in a 50-gallon drum, it would
|
|
hit the fan. He'd catch my eye or press a buzzer. The riot act would
|
|
go."
|
|
|
|
Although he cast a long shadow in the factory, F. W. was slight, frail
|
|
and something of a hypochondriac.
|
|
|
|
"His drawer was full of pills," recalls Mr. Chambers, the dealer
|
|
relations manager, "and he had thick books on medicine."
|
|
|
|
F. W. lived comfortably but not ostentatiously. He was chauffeured daily
|
|
to the factory from his Humboldt Park home. He spent weekends at a
|
|
second house on Lake Geneva and wintered near Palm Beach, Fla., mailing
|
|
to Chicago envelopes stuffed with designs drafted on the lightest of
|
|
tissue paper.
|
|
|
|
He never cut a wide swath in Chicago society, preferring low-key
|
|
pastimes like fishing in Lake Geneva.
|
|
|
|
As F. W.'s health worsened in the early 1960s, Mr. Fritz became more
|
|
active in design work.
|
|
|
|
He got a call one Saturday morning from a West Coast sales manager.
|
|
"Something goofy is going on," the manager told Mr. Fritz. "The kids are
|
|
buying used 20-inch bikes and equipping them with Texas longhorn
|
|
handlebars."
|
|
|
|
"Send me the handlebars." Mr. Fritz said.
|
|
|
|
The result was the Sting-Ray, with its distinctive high-rise handlebars,
|
|
banana seat and elongated sissy bar.
|
|
|
|
Mr. Fritz was working on the prototype when F. W. died of prostate
|
|
cancer in April 1963. He had combed the dictionary looking for a name,
|
|
and was struck by a picture of a stingray. "It reminded me of the bike,"
|
|
he says.
|
|
|
|
On the morning of F. W.'s funeral, Mr. Fritz invited three visiting
|
|
distributors to look at a model. "They laughed at me," Mr. Fritz says.
|
|
"They thought it was a joke."
|
|
|
|
But the bike, which mimicked the era's hot rod craze, turned out to be
|
|
hot stuff among kids, who snapped up nearly 2 million Sting-Rays between
|
|
1963 and 1968.
|
|
|
|
"I dig the crazy styling," a Milwaukee bike buyer scribbled on a Schwinn
|
|
comment card in 1964.
|
|
|
|
"You're not cool unless you have a Schwinn," another wrote in 1965.
|
|
|
|
Cool? And how. Here was a vehicle made for popping wheelies, perfect for
|
|
carting a pal on the handlebars — or a girl on the back of the banana
|
|
seat. (For girls, Schwinn soon introduced the smooth-tired Slik Chik.)
|
|
|
|
Again, the industry followed Schwinn: During the mid-1960s, the
|
|
Sting-Ray style, generically called a "high-rise" by competing
|
|
manufacturers, accounted for more than 60% of bikes sold in the U.S.
|
|
|
|
And again, Schwinn held its lead among independent dealers by presenting
|
|
variations on a theme: the Fastback five-speed stick shift attached to
|
|
the frame, the Fair Lady, the Little Chik and the wildly popular Krate
|
|
series — the Orange Krate, Apple Krate, Lemon Peeler, Cotton Picker and
|
|
Pea Picker.
|
|
|
|
In 1968, nearly 250 Schwinn dealers sold 1,000 or more bikes — earning
|
|
membership in the venerable 1000 Club — up from fewer than 50 in 1963.
|
|
|
|
The Sting-Ray fad faded by the late '60s, but Schwinn had its sturdy,
|
|
10-speed Varsity to pick up the slack.
|
|
|
|
The Varsity was the first mass-produced multispeed bike in the U.S. At a
|
|
relatively affordable $70, it appealed to kids between 11 and 18 and,
|
|
slowly at first, to an adult market whose interest in cycling was
|
|
bubbling.
|
|
|
|
Schwinn would crank out 400,000 Varsitys a year by the early 1970s.
|
|
Because it was built for older children, the company made the 10-speed
|
|
durable and dependable — not like those skinny European models you
|
|
occasionally saw whizzing down the street.
|
|
|
|
"They overbuilt it to withstand abuse, and people (of all ages) loved
|
|
it," says dealer Chris Travers of La Mirada, Calif.
|
|
|
|
Schwinn quality was legendary, and rightly so. A Colorado customer wrote
|
|
the company in 1975, "Just wondering whether to replace the tires on my
|
|
wife's 1940 Schwinn New World bike."
|
|
|
|
Mr. Fritz tells of a Southern Illinois dealer who stood on the chain
|
|
guard of a child's bike to show that it wouldn't crumple. An effective
|
|
sales tool, yes. But competitors soon complained: Customers were doing
|
|
comparative shopping and experimenting on their bikes, and the chain
|
|
guards were collapsing.
|
|
|
|
That reputation ensured steady growth — production rose an average 10%
|
|
annually in the 1960s — and generated satisfying enough profits.
|
|
|
|
In prosperous times, say informed sources, annual dividends to the
|
|
Schwinn family trust that owned the company ranged from $800,000 to $1.2
|
|
million.
|
|
|
|
Best-remunerated was Ignaz "Brownie" Schwinn II, F. W.'s colorful and
|
|
high-living nephew, who owned a full third of the trust by the 1970s and
|
|
earned an additional salary traveling the country to golf, drink and
|
|
schmooze with dealers.
|
|
|
|
Presiding over all this prosperity was F. W.'s oldest son, Frank V., who
|
|
was about as different from dad as a son could get.
|
|
|
|
Studious and introverted, Frankie, as he was called by colleagues,
|
|
"showed some of the marks of being the son of a very strong father,"
|
|
says American Bicyclist Publisher Stuart Meyers. "He had a slight
|
|
stammer. He was quiet — very serious, and very serious about the
|
|
company."
|
|
|
|
For years, Frankie shared an office with his father, making finance and
|
|
marketing his specialty. He maintained copious records of Schwinn's
|
|
volume and profitability stretching back to the 1890s and hand-colored
|
|
maps of the United States — county by county — to determine which
|
|
Schwinn dealers and distributors did their jobs and which didn't.
|
|
|
|
Like F. W. and grandfather Ignaz, Frankie could be a tough executive.
|
|
|
|
In 1971, he threatened to cancel a dealer's franchise following several
|
|
customer complaints. "I must tell you most frankly," said a letter from
|
|
Frankie excerpted in The Schwinn Reporter, "I will not tolerate
|
|
discourtesy in the sale of a Schwinn bicycle under any circumstances by
|
|
any Schwinn dealership, regardless — I repeat, regardless of volume of
|
|
business."
|
|
|
|
But compared to his father, old-timers say, Frankie just couldn't
|
|
measure up.
|
|
|
|
"He was a cold fish — a terrible public speaker," says retired dealer
|
|
Robert J. Letford of Pinole, Calif.
|
|
|
|
Under Frankie's tenure, which began in 1963, when he was 43, most
|
|
management powers were ceded to the outgoing Mr. Burch and the polished
|
|
Mr. Fritz. Some observers credit the third-generation Schwinn for
|
|
recognizing his limitations. But there would never again be a Schwinn as
|
|
chief executive with F. W.'s drive, stature and intensity.
|
|
|
|
Like his father, Frankie was unpretentious. He drove an Oldsmobile,
|
|
freeing up the Cadillac and the company's chauffeur for his mother,
|
|
Gertrude, and his sister-in-law, Mary.
|
|
|
|
He married once, in 1964, but the union lasted less than six months. "He
|
|
didn't say much," recalls Mr. Chambers, "except that it cost him a pile
|
|
of money."
|
|
|
|
Under Frankie's watch, new rivalries developed at Schwinn.
|
|
|
|
His only brother, Edward (father of Edward Schwinn Jr.), also had toiled
|
|
in the shadow of his domineering father. But Edward was younger,
|
|
gregarious and, most important, ran the factory from an office separate
|
|
from F. W.
|
|
|
|
Edward came to resent what he saw as lavish budgets of the sales and
|
|
marketing units.
|
|
|
|
"He complained the marketing department had money to spend, and he
|
|
didn't have money for machines," Mr. Chambers recalls.
|
|
|
|
The complaint largely was justified: The factory got short shrift during
|
|
the tail end of the '60s, when the company spent more than $1 million
|
|
fighting and losing the Justice Department's antitrust case.
|
|
|
|
"They didn't keep manufacturing up-to-date," says former Schwinn
|
|
distributor Harry Manko, now president of Service Cycle Supply Co. in
|
|
Commack, N.Y., which markets the competing Mongoose line.
|
|
|
|
Edward was a jovial fellow: He owned a beaver-skin coat, was fond of
|
|
performing vaudeville numbers in an ersatz German accent and once drove
|
|
an Army vehicle downtown. But he wasn't taken seriously by many at the
|
|
company, although "Frankie always treated him with affection," Mr. Burch
|
|
recalls.
|
|
|
|
Edward developed leukemia and died in 1972 at age 48, leaving his wife,
|
|
Mary, Ed Jr. and four other children. Yet his mistrust of the
|
|
high-flying sales and marketing types simmered within his family — and
|
|
it stuck in the craw of his oldest son when Ed Jr. succeeded his Uncle
|
|
Frankie as president in 1979.
|
|
|
|
If sales and marketing executives let the good times roll, well, that
|
|
reflected the way much of America did business in the 1960s.
|
|
|
|
Schwinn executives caucused with suppliers at posh settings like Pebble
|
|
Beach, Calif., or Greenbrier, W. Va., at confabs that usually included
|
|
morning business sessions, afternoons of golf and long evenings at the
|
|
19th hole.
|
|
|
|
Regional meetings to honor dealers who sold 500 or 1,000 Schwinn bikes
|
|
in a year always featured steak dinners, plaques and diamond or ruby
|
|
lapel pins.
|
|
|
|
The rallies bloated as more and more dealers prospered via Schwinn. In
|
|
1973, the company produced a lollapalooza for dealers and their spouses
|
|
at the Fontainebleau Hotel in Miami Beach. One beguiling evening, Mr.
|
|
Chambers recalls, Schwinn hosted cocktails and a dinner-dance for 1,990,
|
|
with entertainment by singer Anita Bryant. The tab: more than $35,000.
|
|
|
|
Schwinn could afford to be lavish. It — and the rest of the industry —
|
|
was in the middle of a nationwide boom that saw annual production more
|
|
than double to 15.2 million bikes in 1973 from 6.9 million in 1970.
|
|
|
|
Sales had been heating up since the late 1960s: Schwinn's Chicago
|
|
factory cranked out 1 million bicycles in one year for the first time in
|
|
1968.
|
|
|
|
By the early 1970s, almost everyone wanted bikes — not just kids or
|
|
college students, but adults young and old.
|
|
|
|
Explanations range from the influence of the ecology movement to the
|
|
first OPEC oil embargo to an increased interest in fitness among adults
|
|
with more leisure time on their hands.
|
|
|
|
Whatever the reasons, crowds lined the streets before stores opened.
|
|
Inside, "it was like sale day at Macy's — people fought over the same
|
|
bike," says Mr. Travers, the La Mirada, Calif., dealer.
|
|
|
|
"You didn't have to know how to sell a bike," says Normal dealer Terry
|
|
Gibson. "All you had to do was have one."
|
|
|
|
Larry Parker of Pasadena, Texas, recollects working in his family's
|
|
store when a customer who'd just bought a Varsity returned for another.
|
|
|
|
"What happened?" Mr. Parker says he asked.
|
|
|
|
"I tied the bicycle to a tree," the customer answered, "and someone cut
|
|
down the tree."
|
|
|
|
Although the good times were rolling (in 1974, the company earned a
|
|
record $6.2 million on sales of $135 million), ominous signs pointed to
|
|
some of the troubles to come.
|
|
|
|
Schwinn for decades had told its dealers that the company could supply
|
|
all their needs. And it had been the standard-bearer in quality, with
|
|
little domestic competition in the independent dealer market.
|
|
|
|
Now, its dealers were on allocation and begging for more bikes. Frankie
|
|
had to tell them, Get bikes wherever you can.
|
|
|
|
To some extent, that's something many Schwinn dealers on the East and
|
|
West coasts had always done. But for 100% Schwinn dealers, especially
|
|
those in the Heartland, it was a first taste of forbidden fruit.
|
|
|
|
"They brought in Raleigh, Japanese brands, anything," says Allen Singer,
|
|
former president of Schwinn Sales Midwest. "They found there were other
|
|
bikes out there, and that the other bikes were not all that bad."
|
|
|
|
Then, the boom ended. In 1975, nationwide bicycle sales cracked in half,
|
|
to 7.3 million units.
|
|
|
|
"It took (only) four years to get our garages full of bikes," says Pat
|
|
Murphy, former vice-president of Schwinn Sales Midwest.
|
|
|
|
But the genie was out of the bottle. During the boom, Made-in-America
|
|
Schwinn itself started importing its first bikes from two Japanese
|
|
factories.
|
|
|
|
"That legitimized us and others," says Michael L. Bobrick, president of
|
|
competitor Western States Imports, which got its start importing
|
|
Japanese bikes. "And took away the Schwinn mystique."
|
|
|
|
**THE COMPETITION BEGINS**
|
|
|
|
The '70s bike boom revolutionized the industry in at least one way: It
|
|
brought new blood-investors and cycling enthusiasts lured by the call of
|
|
manufacturing profits or the sight of mom-and-pop shops suddenly making
|
|
50-, 60-, even a hundred-grand a year selling bikes.
|
|
|
|
"Everyone thought we were geniuses," recalls Villa Park Schwinn dealer
|
|
Jeff Allen.
|
|
|
|
Schwinn executives thought they were pretty smart, too, judging by the
|
|
back-slapping in photos documenting corporate outings to golf and beach
|
|
resorts. "We had the world by the tail on a downhill pull," says former
|
|
Marketing Director Ray Burch.
|
|
|
|
Yet something else seems clear in the pictures of middle-aged men
|
|
filling out kelly-green slacks and Banlon sport shirts: It had been a
|
|
long time since some of these guys had been on a bike.
|
|
|
|
Leaner and hungrier competitors already were developing and marketing
|
|
new styles and technologies that — just like Schwinn's Sting-Ray —
|
|
sprang from the garages of California kids.
|
|
|
|
In the San Fernando Valley, a bustling cottage industry was making
|
|
motorcross-style cycles with cast aluminum wheels that could survive the
|
|
muddy poundings of an off-road BMX race.
|
|
|
|
The craze attracted frame makers and welders from the motorcycle and
|
|
auto racing fields. Designer Skip Hess was one of the first to
|
|
commercialize the BMX bike, founding Mongoose Bicycle Co. in 1976, and
|
|
Gary Turner's GT brand later would become the biggest force in the BMX
|
|
market.
|
|
|
|
And in Marin County, 10-speed bike racers and mechanics were
|
|
reconfiguring 1930s balloon-tire bikes — including Schwinn Excelsiors —
|
|
with longer-lasting motorcycle brakes and gears so they could tear down
|
|
local mountain trails at speeds topping 30 mph.
|
|
|
|
Imported bike parts salesman Michael Sinyard was the first to mass
|
|
produce these so-called mountain bikes. It was a coup that helped turn
|
|
his Specialized Bicycle Components (corporate motto: "Innovate or die")
|
|
into a major force in top-of-the-line bikes. By 1992, his company's
|
|
sales would hit an estimated $140 million.
|
|
|
|
Schwinn engineers and executives initially scoffed at the California
|
|
fads.
|
|
|
|
"It was puzzling to me to see a company that wasn't moving" after such
|
|
markets, Mr. Sinyard says in retrospect. "I thought, 'Maybe this is the
|
|
way a big company acts.'"
|
|
|
|
Truth was, Schwinn was nearly oblivious to the West Coast bike culture,
|
|
concedes Pat Murphy, former sales manager of the company's Midwest sales
|
|
arm. "Schwinn didn't know there were mountains west of the Rockies."
|
|
|
|
It wasn't watching its backyard, either.
|
|
|
|
In Waterloo, Wis., Richard A. Burge and Bevil Hogg were building a
|
|
lighter-weight road bike for affluent, fitness-minded adults.
|
|
|
|
Its starting price, $279, was $100 more than Schwinn's least expensive
|
|
model. But the co-founders of Trek Bicycle Corp. — 1992 sales: about
|
|
$175 million — correctly calculated that the upper end of the market was
|
|
untapped.
|
|
|
|
"We caught the baby boomer who wanted something different and was
|
|
willing to spend more," says Mr. Burke, now president of Trek parent
|
|
Intrepid Corp.
|
|
|
|
To the consternation of many Schwinn dealers during the 1970s and '80s,
|
|
customers started asking for lighter road bikes and off- road BMX and
|
|
mountain bikes. They weren't in the Schwinn product line at first, so
|
|
the more ingenious dealers started reconfiguring what they had.
|
|
|
|
"We took Sting-Rays and changed the handlebars," says San Diego dealer
|
|
Michael H. McKittrick.
|
|
|
|
CEO Frank V. Schwinn had made a deliberate decision in the early 1970s
|
|
to stay away from the BMX market. He was worried that Schwinn would be
|
|
the target of personal injury lawsuits as the result of racing
|
|
accidents.
|
|
|
|
The fear was not unfounded: The Consumer Product Safety Commission had
|
|
just published a study of accident injuries that called bicycles "the
|
|
most dangerous consumer product" in America.
|
|
|
|
Schwinn soon found itself on the defensive as younger bike buyers
|
|
embraced the competition. It was an inexplicable situation to many in
|
|
the company. After all, executives had long believed, Schwinn was the
|
|
market.
|
|
|
|
When a dealer at a sales and management session during the early 1970s
|
|
criticized the company for the lack of lightweight bikes, the Schwinn
|
|
representative retorted, "Are you gonna ride it or carry it?" says
|
|
dealer Chris Travers of La Mirada, Calif.
|
|
|
|
Reps later suggested that dealers use scales to weigh their bikes in
|
|
front of customers and show that Schwinns weren't significantly heavier
|
|
than the new competition.
|
|
|
|
If that failed to impress, "they always had the excuse, 'Well, once you
|
|
got that bike rolling, weight didn't matter,'" says John Pelc, longtime
|
|
owner of Lincoln Cycle Center in Downstate Lincoln.
|
|
|
|
The customer wasn't fooled.
|
|
|
|
"When people thought 'Schwinn,' they thought 'tank,'" says dealer John
|
|
Lewis of Mill Valley, Calif. "They've never been able to shake that
|
|
image."
|
|
|
|
As dealers diversified and brought in new lines, Schwinn tried to throw
|
|
its weight around, rather than adapt and meet the competition.
|
|
|
|
Gary Sirota's Brands Cycle in Wantaugh, N.Y., for years had been one of
|
|
the nation's 10 biggest sellers of Schwinns, although the name accounted
|
|
for only 30% of bike sales at his bustling Long Island store.
|
|
|
|
In the middle of the 1978 season, Mr. Sirota says, Schwinn stopped
|
|
shipping him bikes. When he called to ask why, "I was told they'd yanked
|
|
my dealership."
|
|
|
|
Mr. Sirota says Schwinn offered him an ultimatum: "'You have to sell a
|
|
minimum of 80% Schwinn next year.' I said, 'Okay,' and signed on the
|
|
dotted line. And the next year, we kept our word."
|
|
|
|
But the experience left a sour taste. "They thought beating me up was
|
|
the way to sell more bikes here. I knew in my heart it was wrong — and I
|
|
mean that businesswise. You can't keep that up."
|
|
|
|
If Schwinn was lagging, much of the lapse could be blamed on the aging
|
|
Chicago factory, where the company simply had not invested in new
|
|
technology for lighterweight bikes.
|
|
|
|
In Chicago, the Varsity 10-speed was manufactured by electro- welding to
|
|
seal joints under high heat. That required relatively thick-walled steel
|
|
tubes and resulted in a heavier bike.
|
|
|
|
By contrast, Japanese firms had developed the lug-frame technology in
|
|
which the joints were connected by a separate fitting. This method used
|
|
brazing. accomplished at lower temperatures, and opened the way for
|
|
thinner-gauge steel and other metals — and, ultimately, a lighter bike.
|
|
|
|
Schwinn had expanded its manufacturing complex during the bike boom,
|
|
adding a new rim mill and warehouse. But it was a hodgepodge, and
|
|
production was inefficient. Workers ferried parts to a satellite station
|
|
on Ohio Street for welding into a frame. Then, the frame was sent back
|
|
to the main Kildare Avenue plant for final assembly and painting.
|
|
|
|
The central building dated to the turn of the century — and looked it,
|
|
with wooden floors and leaking roof. In the summer, temperatures inside
|
|
were so hot, "the chrome on the wheels would burn your skin," says Mary
|
|
Jones, a 12-year veteran of the plant.
|
|
|
|
"It was run-down," says Mr. Pelc of Lincoln, recalling a dealers' tour
|
|
in the 1970s. "It looked like a factory I worked in in Detroit right
|
|
after World War II. And I was on a tour — they were showing us the good
|
|
parts\!"
|
|
|
|
Even management cringed at the factory's condition. In early 1980, new
|
|
President Ed Schwinn asked his just-recruited vice- president of
|
|
finance, John Barker, to name the first thing he needed. Mr. Barker
|
|
joked, "An arsonist."
|
|
|
|
Schwinn had pursued the idea of building a new plant in the mid- 1970s,
|
|
spending $700,000 to buy 140 acres in an industrial area near Tulsa,
|
|
Okla., and hiring New York's Salomon Bros. Inc. to sell bonds to fund a
|
|
factory (it even had a prospectus printed in 1975).
|
|
|
|
The idea had been conceived during the bike boom. And its No. 1 advocate
|
|
was young Ed, who'd joined the company in late December 1972 and was
|
|
named vice-president of corporate development in November 1974.
|
|
|
|
Ed was bullish on Schwinn sales, predicting they'd grow to 2 million
|
|
units from the peak 1.5 million unit sold in 1974.
|
|
|
|
Instead, business was rolling to a halt. Recalls Mr. Burch, marketing
|
|
director at the time: "I made a conservative (sales) estimate and Ed was
|
|
incensed. He thought I was trying to kill the (Oklahoma) deal."
|
|
|
|
(Schwinn brass also considered ways to refurbish and expand the Chicago
|
|
plant. One tactic: Win tax breaks from Illinois officials eager to
|
|
preserve local jobs. In 1977, the dark-blue Checker car of then-Gov.
|
|
James R. Thompson frequently was parked in front of the corporate
|
|
offices on Kostner Avenue, and his daughter rode a pink Schwinn Pixie in
|
|
the building's halls, recalls former Vice-president Jay Townley.)
|
|
|
|
The Oklahoma initiative ultimately died. President Frank V. Schwinn and
|
|
other old-timers, such as cousin Brownie Schwinn, weren't eager to leave
|
|
Chicago.
|
|
|
|
When the board formally nixed the Oklahoma project in 1978, "Eddie went
|
|
ballistic," Mr. Burch recalls. "He came flying down the hall. 'Tulsa is
|
|
dead,' he said. 'You better get off your ass and sell bicycles.' He
|
|
never forgave me for it."
|
|
|
|
The price tag of the move — an estimated $30 million to $40 million —
|
|
proved too daunting for the closely held company. Frank V. wouldn't
|
|
consider taking on minority investors to help fund this kind of project.
|
|
|
|
"We got letters from people offering to buy the company, or a stake,"
|
|
says Al Fritz, then the No. 2 executive. "If we sold 25%, we could get
|
|
$20 million. But Frankie said, 'I'm never going to sell . . . . I don't
|
|
want anyone looking over my shoulder.'"
|
|
|
|
Selling a minority stake so Schwinn could build a modern plant and
|
|
control its destiny might have been prescient. But plans for the
|
|
Oklahoma factory called for using the fading welded-frame technology.
|
|
The plant would have become a dinosaur as soon as it opened.
|
|
|
|
So, Schwinn was stuck — for the moment — in its Chicago location, where
|
|
the family faced a changing workforce.
|
|
|
|
During the 1950s and '60s, management style had been paternal. The 1,200
|
|
or so factory workers were represented by in-house committees rather
|
|
than outside unions.
|
|
|
|
"Before, it was like a family," says worker Henry Mahone, who headed
|
|
Schwinn's independent shop union. "Everyone knew everybody's business."
|
|
|
|
But the relationship changed during the bike boom, as employment rose to
|
|
a peak of 1,800 workers.
|
|
|
|
From management's perspective, there were fewer familiar faces. The
|
|
ethnic mix in the neighborhood shifted from Polish and Irish immigrants
|
|
to black, Hispanic and Korean. The factory was cranking out bikes around
|
|
the clock, and during the second and third shifts, English wasn't
|
|
necessarily the primary language heard on the assembly lines.
|
|
|
|
From the workers' point of view, management became adversarial.
|
|
|
|
"Before, the supervisors were nice, considerate; they thanked you," says
|
|
Ms. Jones. "Then, management changed . . . a bunch of dogs. There wasn't
|
|
that kindness for the people."
|
|
|
|
Though there had been several unsuccessful attempts to organize the
|
|
factory, the issue that would make Schwinn workers receptive to the
|
|
organizing efforts of the United Auto Workers (UAW) was the lack of a
|
|
pension plan.
|
|
|
|
By September 1979, 70% of hourly workers had signed petitions in favor
|
|
of holding an election. Schwinn fought the union at every step with
|
|
legal maneuvers.
|
|
|
|
"The family had an attitude about bankers and unions," says Mr. Murphy
|
|
of Schwinn Sales Midwest. "They didn't want people telling them what to
|
|
do."
|
|
|
|
Management waged a campaign during the spring 1980 election to have no
|
|
union representation at all, not even the old committees.
|
|
|
|
"The old-timers didn't like that," says Mr. Townley, the former
|
|
vice-president. "If the company had supported the old shop union, it
|
|
would have won."
|
|
|
|
The UAW eked out a narrow victory. Workers elected Mr. Mahone president
|
|
of Local 2153. But management, he says, stonewalled when it came time to
|
|
negotiate a contract.
|
|
|
|
"They were not serious," Mr. Mahone says. The union called a strike in
|
|
October 1980.
|
|
|
|
The action surprised management, especially since Schwinn's labor
|
|
attorneys had predicted there wouldn't be a walkout, says Mr. Townley.
|
|
|
|
Before the strike, Schwinn had been importing 20% of its bikes — mainly
|
|
from Japan — and was buying a small number from an upstart Taiwan
|
|
company, Giant Manufacturing Corp.
|
|
|
|
When the union walked out, Schwinn asked Giant if it could rev up
|
|
production. Giant President Tony Lo had an answer for Mr. Townley within
|
|
24 hours: "A friend in need is a friend indeed."
|
|
|
|
Giant agreed to pump out bicycles for Schwinn — it shipped about 80,000
|
|
units over the next five months — with the understanding that the gravy
|
|
train would halt when the strike was over.
|
|
|
|
It was a smart move on Mr. Lo's part. Giant impressed Schwinn with its
|
|
quality, service and delivery. Schwinn would be back.
|
|
|
|
The strike was settled in February 1981 and the union got a modest
|
|
pension plan. But if the union won the battle, it lost the war, because
|
|
the strike laid the groundwork for the closing of the Chicago plant.
|
|
|
|
The presence of the union virtually ruled out future investments there,
|
|
says Peter Davis, former director of corporate planning and Ed Schwinn's
|
|
brother-in-law.
|
|
|
|
Yet Ed, elevated to the presidency in October 1979, was emotionally
|
|
committed to manufacturing, reflecting his father's bent. In the months
|
|
after the strike, the marketers who favored importing, led by Mr.
|
|
Townley, struggled with the factory loyalists. And the factory started
|
|
to die a slow death.
|
|
|
|
Managers boosted production to shrink the average cost per bike and make
|
|
the plant more profitable. (Schwinn had barely broken even in 1980, and
|
|
it would lose more than $5 million in 1981.)
|
|
|
|
Unfortunately, no one wanted the Varsitys the factory was cranking out
|
|
at the rate of more than 3,000 a day. Schwinn still was mired in the
|
|
mindset of manufacturing dictating to marketing.
|
|
|
|
By 1981, Group Vice-president John Nielsen, who had built Schwinn's
|
|
parts business into a substantial moneymaker, had replaced Mr. Burch in
|
|
the top marketing post. Mr. Nielsen soon realized that the 3,000 bikes a
|
|
day were piling up unsold.
|
|
|
|
"He had the office next to mine, and he had an intercom," says Mr.
|
|
Townley. "He buzzed me: 'Jay, get in here. You're right. We can't sell
|
|
these bikes.'"
|
|
|
|
When the imposing Mr. Nielsen presented his bleak assessment to Ed
|
|
Schwinn at a managers' meeting, the president flew into a rage.
|
|
|
|
"Ed shouted, 'If you can't sell them, I'll get someone who can,'" Mr.
|
|
Townley says.
|
|
|
|
No human could. But tempers escalated, say sources who attended the
|
|
meeting.
|
|
|
|
"Don't talk to me that way here," Mr. Nielsen responded to Ed. "I'll see
|
|
you in your office."
|
|
|
|
Mr. Nielsen stormed out of the room. Days later, he resigned.
|
|
|
|
Today, the retired Mr. Nielsen notes that the issue of unsold bikes
|
|
merely contributed to his decision to leave Schwinn.
|
|
|
|
More frustrating, he says, was the cultural change sweeping the company,
|
|
as Ed recruited brash MBAs who clashed with the old-timers.
|
|
|
|
"They were long on theory, short on reality and practice." Mr. Nielsen
|
|
says. "This was not what Schwinn was all about."
|
|
|
|
He was replaced in September 1981 by Bill Austin, a masterful schmoozer
|
|
who'd been vice-president of marketing and sales at Aladdin Industries,
|
|
a Tennessee maker of lunch boxes and thermos bottles.
|
|
|
|
Schwinn "had four warehouses full of merchandise," Mr. Austin recalls.
|
|
"I pulled the sales and marketing people together for a two-day meeting
|
|
and asked them, 'What do we need?'"
|
|
|
|
The bikes Schwinn needed, attendees answered, couldn't be produced by
|
|
the Chicago factory.
|
|
|
|
"Don't worry about the factory," Mr. Austin told his troops.
|
|
|
|
In this instance, time was on his side. As the plant's limitations
|
|
became increasingly obvious, Ed and other stalwarts began examining the
|
|
facility more critically.
|
|
|
|
The new Asian suppliers also strengthened the case against Chicago.
|
|
Having missed the BMX craze, the company asked Giant to produce a line
|
|
for spring 1982. The result — the Predator BMX — was a success.
|
|
|
|
"Once the strategy was determined, it was a matter of time," Mr. Austin
|
|
says.
|
|
|
|
Between the second half of 1982 and the third quarter of 1983, Mr.
|
|
Townley headed a task force charged with closing sections of the plant
|
|
and sourcing production elsewhere.
|
|
|
|
"As early as February 1981, at the bargaining table, I began to get the
|
|
sense they would shut Chicago," says the UAW's Mr. Mahone, noting that
|
|
after the strike, Schwinn called back only 65% of the hourly workforce.
|
|
"They made comparisons between what they could import and what they were
|
|
paying Schwinn workers here."
|
|
|
|
During the strike, Schwinn had formulated plans to open a second
|
|
factory, far from Chicago and its union woes. A task force selected
|
|
Greenville, Miss.
|
|
|
|
The site was puzzling. Greenville sits about 75 miles from the nearest
|
|
interstate. Getting there from Chicago required a flight to Memphis,
|
|
Tenn., then either a connecting commuter flight or a nearly three-hour
|
|
drive. And few managers wanted to relocate to Greenville.
|
|
|
|
But there was one prime attraction: Mississippi, as a right-to- work
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state, wasn't hospitable to unions.
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After years of debating where to invest in a new factory, Schwinn had
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finally found its spot. A Greenville plant with up-to- date bike-making
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technology opened in 1981.
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Back in Chicago, workers watched more and more production transferred
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elsewhere. The end was inevitable. Soon, there were just 200 workers.
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Then, 92.
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"When I left, there were four to five maintenance people," Mr. Mahone
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says.
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Ed Schwinn had beaten the union. But he couldn't have devised a more
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Pyrrhic victory. The closing of Chicago and opening of Greenville
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ultimately proved a disaster — a black hole that swallowed the family's
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equity, sucked in millions of additional dollars and spat out bikes of
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astoundingly poor quality.
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"My mechanics didn't like putting together a Schwinn," says dealer John
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Lewis of Mill Valley, California's mountain bike capital. "A dealer's
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salesforce is also the mechanics and assembly force. If they don't want
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to put together a Schwinn, they won't want to sell one, either."
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It was a vicious downward spiral — one of several crises that would spin
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the company to the edge of insolvency in the early 1990s and, finally,
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into Bankruptcy Court in 1992.
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Ed was in charge now. And he was shaking up Schwinn. Out would go the
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old-timers, like Messrs. Fritz and Burch. In would come his own
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management, a younger crew who thought they could regain Schwinn's lost
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reputation in bicycles and return the company to the top.
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Ed had the right destination. But the great-grandson of Ignaz and
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grandson of F. W. was steering Schwinn in the wrong direction.
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*Journalist Drew Wilson contributed to this article from Hong Kong.*
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© Crain Communications Inc.
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