Hung Over, Jet Lagged, and Sleep Deprived; A View of the Industry from 37,000 Feet

The specialty shop in Vienna was all snowboards and snowboard products. It was mostly last year’s stuff and was all on sale. Word was that financial problems were preventing them from getting new stuff.

Over at a big Intersport store, there was just as much space devoted to snowboard products and the deals were just as good. I’d estimate that roughly the same amount of space was devoted to snowboarding. Thought under construction for the upcoming season, it appeared well laid out, and the people I spoke with seemed knowledgeable.  New product was arriving, and it seemed that only Burton had any hope of holding high price points. New product board pricing for many brands was either at the high or the low end. Last year’s product is apparently taking over as the mid-price product, and there were a couple of boards of almost any brand you could imagine (Heavy Tools lives!)
 
I’m crammed in this tourist class sardine can with circulation to my butt cut off, and for reasons explained by the article title, only half my neurons are firing, but I don’t think the retail situation in the US is much different from what I observed in Vienna. And it’s consistent with what the textbooks and my own experience tell me happens in a maturing industry. Brands either become specialty players with clear market niches or they are larger volume, lower cost producers. If you get stuck in the middle, you’re, well, last year’s board in perpetuity.
 
The Good, the Bad, and the Ugly
 
Apologies to Clint Eastwood, but sometimes when an analogy fits, you just have to steal it. In no particular order we’ve got four classes of snowboard companies right now. Morrow, Ride and Sims are one class- the three companies that are arguably large enough and have enough brand recognition to survive all as specialty brands.  Burton is a class by itself. Third are the brands owned by large companies; K2, Salomon, Rossignol, Nitro and Mervin. Apologies to anybody I missed. Finally, there are the smaller brands that I won’t list. In my judgment, most of them are looking at the same fate at Lamar or Silence. They have enough brand equity to be milked, but the time when they could hope to grow and prosper independently is past. A couple have always focused on being small niche brands, and may be succeeding at that.
 
Morrow, Ride and Sims (place politically correctly in alphabetical order) have all had well publicized financial, management and brand positioning issues. During the feeding frenzy of a few years ago, they all sought to increase their market shares by rapid expansion of distribution. In the process, either by use of multiple brand names or sales through the wrong channels, they got some volume but reduced their brand strength. The impact on their brand’s market positions didn’t become apparent until growth slowed and the torture of consolidation set in. They tried to get big and they tried to be specialty brands. It turned out to be hard to do both.
 
Burton is both large enough and well enough established as a brand that it’s fairly secure as the industry leader. The word “fairly” is thrown in there in recognition of that the fact that although Burton is by far the biggest snowboard brand with the most brand equity, it’s still tiny compared to some other companies involved, or trying to be involved, in snowboarding.
 
Burton did a lot of things right, but two things stand out. First, they were well capitalized when most of their competitors were struggling to find enough dollars to print a decent catalog. Second, the expanded their franchise quickly into soft goods and are shielded, as a result, from some of the hard goods pressures even they aren’t immune to.
 
The smaller brands I didn’t list fit into one of two groups. The ones with a problem are those who use to be more visible in the market, but tried to grow and compete- to be a Morrow-Ride-Sims you could say. Now, they don’t have the money to market their brands and grow. It may be too late to succeed at that strategy anyway. At the same time, price pressures have pushed down their margins, and they have to increase volume to be profitable. They are caught between the proverbial rock and hard place.
 
A couple of smaller brands, like maybe Never Summer and Glissade, have always been focused on being smaller niche players. With a connection to a particular kind of rider or a geographic area, they never tried to be big and so don’t have to be. Consistency in your approach to the market continues to be critical for success.
  
Being a snowboard brand owned by a larger company offers both some opportunities and some challenges. On the one hand, you have the “security” of being part of a larger organization. You share overhead. You don’t need your own warehouse and computer system. You can earn lower margins and still be successful. You have access to some distribution channels that may help make it a little easier to increase sales.
 
On the other hand, you are not one hundred percent a snowboard company and are, to a greater or lesser extent, subject to the ebbs and flows of the overall company’s fortunes. Snowboard brands owned by ski companies have been directly impacted financially by the declining fortunes of the ski business. At least they are still here as snowboard brands. But they aren’t snowboard companies, and it’s likely that there will continue to be some “creative tension” between the snowboard and ski sides of the business. Skiing and snowboarding still seem to be separate changes that don’t entirely understand each other. Some things never change.
 
Which gets us, happily, to the point of the article. As an aside, I’d just like to say that it’s always gratifying to get towards the end and find myself somehow wandering towards the point I started out to make.
 
Snowboard industry evolution is not going to go the way of the ski industry. That is, I don’t expect the industry to work its way down to only half a dozen brands. Snowboarding may have become part of the winter sports business, but it still has some uniqueness to it. Unlike skiing, it’s still driven by lifestyle issues. Music, clothing, attitude are all part of snowboarding. Companies that have ignored that have gotten their asses in a sling. Witness the rise of Forum. Theoretically, it shouldn’t have been able to get started against all the large players in the industry. It is apparently adequately capitalized, is growing at a manageable rate that insures some artificial scarcity, and has a focused market strategy. Confusion, chaos and mistakes by other companies created a market niche for Ride when that brand was created a few years ago. Trying to grow too fast, in my judgment to meet the demands of wall street, cost it momentum and legitimacy in the market it had originally succeeded in.
 
Now other company’s mistakes have created an opportunity for Forum. It will be fun to watch and see if they have learned anything from history- like not to get too greedy. Brand success in snowboarding seems to require meeting the market’s expectations, but not exceeding them. You have to leave the customer just a little hungry.
 
The other reason there is room for more than a handful of companies is demographics. In spite of crossover, in spite of the increasing age of the average snowboarder, this is still a youth driven business, and the demographics suggest it will stay that way for at least the next five to seven years.
 
Retailers probably have to not get too comfortable with the brands they are carrying. What’s hot and what’s not will keep changing. Brands have to keep focused on snowboarding no matter who owns them. People who write columns for trade magazines will have lots to write about.
 
Over the last couple of years, the term “core” is perceived to have lost some of the passion, importance and legitimacy that was once associated with it. But the sport still has its roots there. And it looks like it will for the foreseeable future. Successful companies will have to sell beyond that core, but always have a focus there. That’s our biggest challenge and the reason snowboarding won’t become the ski business.

 

 

Reality Bites; The View from ASR

There was a keg at the IASC hospitality suite at ASR the first evening of the show, and I was drinking a beer with Miki Vuckovich of Transworld Skate and Jim Fitzpatrick of IASC. Into this fairly typical trade show experience walks the comedian Gallagher with his entourage of one. He sits down with his own beer and ten minutes later we’re talking about his new line of educational toys for children based on sub atomic particles and meant to teach them about nuclear physics, or something.

 
I thought the toy line was a good idea, but there was a certain sense of unreality to the encounter and discussion I guess because of the venue and circumstances. And I guess that’s how I’m going to segue into making that chance meeting relevant to ASR and the skate industry; good ideas with a sense of unreality.
 
What They Said
 
Almost every skate company owner/manager I talked with at the show had basically the same things to say. They were concerned with the state of the industry and overall competitive conditions. Specifically,
 
1.     Growth seems to be slowing and profits are harder to come by.
 
2.     Deck margins especially are declining due to blanks and oversupply.
 
3.     There are too many companies with no business reason to exist.
 
4.     There are too many wood shops with too much capacity.
 
5.     The companies that are investing in team and marketing and benefiting the industry are giving a free ride to the companies that don’t.
 
6.     The top five to ten companies in the industry ought to cooperate to stabilize and rationalize the industry, but probably won’t.
 
7.     Differentiating your brand is getting harder. You are faced with the need to spend more marketing dollars exactly when it’s toughest to afford.
 
What’s Been Said Before
 
What they said was pretty much the same thing that’s been said in every industry that has experienced fast growth followed by a period of maturing and slower growth. For example, Harvard Professor Michael Porter in his 1980 book Competitive Strategy said it.
 
Professor Porter who, I am quite sure, hasn’t spend much time skate boarding, took a whole chapter to talk about the transition from fast growth to industry maturity. He noted the following tendencies, and that they are more or less the same in every maturing industry.
 
Slowing growth, he said, means more competition for market share. Because fast growth is no longer supplying opportunities for growth, the focus becomes on attacking the market shares of others. Competitors can become more aggressive, because they realize their survival is at stake. There are lots of misperceptions and irrational retaliations for the perceived and real attacks of others.
 
New products and applications become harder to develop. Don’t look now, but basically a skateboard is a skateboard. My money is on the companies who are continually finding small ways to differentiate their products.
 
International competition increases, according to Dr. Porter. I recently talked with a French snowboard factory that’s started taking shop orders for decks. Easy business he says. He can make money doing as few as fifty decks for a shop.
 
Dealer margins, according to Dr. Porter, will fall. But at the same time their power increases. Kind of makes sense when there are more companies, more products, and less perceived difference among product. Companies looking for a survival strategy will offer retailers lower prices, discounts, maybe some increased dating on orders to try and generate cash flow. Great for the consumer. Not so good for brands and retailers trying to sell a specialty product at higher margins.
 
Industry profits will fall during the transition period, and the fall can be temporary or permanent. Cash flow declines when it is needed most due to lower margins and greater expense incurred in trying to provide better customer service and differentiate “me too” products. Raising capital becomes very difficult. Companies with the smallest market shares are the most affected.
 
There is a danger of over capacity as more and more manufacturers rush in to meet the seemingly endlessly growing demand for this hot product. Over capacity accentuates a tendency towards price warfare. The result I’ve seen with the snowboard is that it became something of a commodity. And there’s a lot more technology and actual product differentiation in a snowboard than in a skateboard.
 
At the end of all this, the whole basis of competition in the industry has changed permanently. The euphoria that can characterize a company’s management style during the fast growth period has to change. Doing more of the same won’t work anymore. When you could grow quickly, raise prices and have high margins you could get away with anything. Hey, cash flow can hide a lot of mistakes.
 
I don’t want to belabor the point, but you might also pick up a copy of the March-April 1997 issue of the Harvard Business Review and read Professor George S. Day’s article called “Strategies for Surviving a Shakeout.”
 
Now I know it sort of stretches the bounds of reality to talk about the Harvard Business Review and the skateboarding industry in the same breath. I talked with professor Day and I think I can assure you he’s never been arrested for skating the railings at city hall. I also know he’s not Richard Novak or George Powell writing under an assumed name.
 
So how come he’s managed to write an article all about the evolution of the skateboarding industry (even though he never uses the word)?
 
What Needs to be Said
 
There’s one, minor, inconvenient, sort of annoying, little fact that has to be faced. Please pay attention. That fact is that skateboarding is no different from any other industry in how it will go through its growth cycle. The companies in the industry will respond to changes in the competitive environment just like companies in any other industry.
 
Every company in the industry will do what it perceives to be in its own best interest. Each will create a projected scenario explaining how it will be a successful survivor while its competitors succumb to changing competitive pressures. Failing companies will resist closing their doors even when every objective analysis of their risk and potential return indicates that they should. Ultimately, only companies with a clear competitive advantage under the new market conditions will survive.
 
Each will truly want to support the industry, but won’t be able to agree with other companies exactly what that means. As a result the “you first” principal will tend to prevail and each will wait for somebody else to step up to the plate as the leader. That is probably inevitable in an industry where there is no clearly dominant company.
 
What Should You Do?
 
My suggestion is that you start by accepting two facts:
 
1.     The basis for competition has changed and is changing in predictable ways. The “good old days,” if they ever existed, aren’t coming back.
 
2.     Fact one is really important.
 
If you accept this, then it’s time to start recreating your business to succeed in the new competitive reality.
 
Begin by not chasing market share. Not that market share is a bad thing, but blindly chasing it in a competitive frenzy often leads to a financial disaster. Remember that any company can get one hundred percent market share- all they need to do is give away the product. Unless, of course, somebody else does the same thing, in which case I suppose you’d have to pay the customer to take your product. But hey, you’d have a big market share!
 
Which is a somewhat sarcastic way of saying that your competitive strategy has to be tied to your financial capabilities. Try this. Realistically, what can you expect your gross profit margin to be? What are your general and administrative expenses for the year? What do you need to spend on sales and marketing to have a chance at a viable marketing position? What other money do you have to spend on interest, taxes, commissions, etc? Now add twenty percent to your total estimated expenses for stuff you couldn’t have imagined would happen in your wildest dreams.
 
Given your gross profit margin and these expenses, how much do you have to sell to earn a reasonable profit? Figure it out right now, on the nearest available piece of paper. It shouldn’t take more than twenty minutes. Given the risk you are taking and how hard you’re going to have to work is your business a good deal? Can you sell that much? To give you some perspective, recognize that if you’re earning five percent before taxes, you could be doing just as well in thirty year U. S. Treasury bonds with basically no risk. And no effort on your part.
 
So make some hard decisions. Some business decisions. Don’t let the hype of a trade show substitute for sound business judgment.