Snowboarding the Internet; Taking the Tour at 26.4

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Slow connections suck. So while we wait for my 56k modem to connect at 26.4 kbs, consider this.

All the dotcoms with money (typically from an egregiously successful public offering) are advertising like mad. On TV, on the sides of buses, everywhere.
 
Why?
 
Because there’s not much difference between Barnes&Noble.com and Amazon.com if you want to buy a book. There’s no price difference, at least on the books I bought last week.
 
So entry barriers in this business are low, especially if you’re already doing fulfillment. Admittedly, the cost of maintaining a quality site is often underestimated. Price comparisons are easy to do. Similar sites are selling products that are often absolutely identical.
 
Under these conditions, prices should tend to move down, and consumers are more likely to view the product as a commodity. Spending increasing advertising and promotional dollars is critical to building brand awareness and keeping market share. Homegrocer.com will deliver an order free if it’s seventy-five dollars. New entrant Albertson’s.com will deliver for free if the order is sixty dollars. And so it goes.
 
Lower gross margins, too many competitors, high advertising and promotion costs, competition based too much on price. Hmmmm…….
 
He had to think for a minute. Hadn’t he seen this happen in another industry? Which one could it have been? How did it all shake out (so to speak)? Perhaps he’ll remember later.
 
Meanwhile, the computer has finally connected. Let’s go hunting for snowboards on the internet.
 
Brands on Line
 
I checked out the web sites of most of the significant brands. Some were good and some bad. Some fast, some slow. Several under construction. None were selling product. All referred you to dealers. Hardly a surprise. Brands have worked hard to build relationships with dealers. I can’t imagine anything that would make a retailer scurry to a competitor quicker than a supplier competing directly with it.
 
So brands aren’t selling boards directly on the web, through their own web sites- yet. And that’s where clarity on the issue ends.
 
I used a couple of search engines and searched under different brand names, and under snowboard or snowboarding. I went directly to some retail sites. Certain ones were sports specific. Others weren’t. The by no means complete and certainly not scientifically selected list included Performance Snowboarding, Fusion, Costco, OnSale, REI, FogDog, Gear, WorldwideSports, and OutletZoo.
 
They all had some snowboards. OutletZoo had a couple of Kemper 2000 Strike 151’s with bindings for $199. Costco was offering K2 Electras and Futuras for $359.99 (plus $18.57 shipping). FogDog had boards from Palmer, Salomon, Libtech, Option, Ride, World, Rossi, Santa Cruz and Hyperlite. I don’t know if they were all at manufacturers’ suggested list prices, but these were not heavily discounted boards. Sometimes there was just one model, sometimes damn near a whole line. Gear had what looked like nearly full lines of Arbor and Option, again at full or nearly full price.
 
I don’t suggest that my search was either indicative or all-inclusive, but the only major brands I couldn’t find at least some of were Sims and Burton. It’s interesting to note that if you do a search under either Sims or Burton, you find lots of references to places selling those brands, but the only ones who actually seem to have them are retailers.   If I were trying to attract snowboarders to my site, I’d certainly include “Burton” as a key word whether I had any product or not.
 
It’s the wild, wild west out there. You never know what brand, what model year, what quantity and what prices you’re going to find. Right now, it looks like most of the major brands selling on the web are doing a pretty good job keeping the prices at or near to what they would sell for in a quality retailer. 
 
What isn’t clear, of course, is how these boards are getting to these sites. Some brands I assume are legitimately placing product with sites under agreements to maintain pricing. Product may also be finding its way to sites through traditional, if I can call them that, gray market channels. I’m also wondering what will have happened to prices on the internet by the time you read this, well after Christmas.
 
The Internet Financial Model
 
Early financial discussions about the internet model postulated a cost structure that would allow internet merchants to make an attractive margin, but still give the consumer a better deal than he could get through conventional retail channels. The thinking was that total costs would decline dramatically with the elimination of “brick and mortar” and the associated expenses.
 
Certainly some costs are eliminated. But my sense is that they are basically replaced by others. Fulfillment (getting the product to the consumer, handling returns, warehousing, packing) is the same whether you are a traditional mail order retailer relying on a catalogue, or an internet merchant. It’s interesting to note that some internet merchants also offer a catalog- either through the mail or downloaded. That’s what Performance Snowboarding does. It’s also true that creating and maintaining a really good web site, and having adequate telephone customer service, costs a lot of money.
 
Irrespective of what costs are added or eliminated by selling over the internet, internet retailers are going to be competing against each other as much as against traditional retailers. That competition is going to result in the same business cycle for internet retailers as we saw with snowboard companies. A lot are going to disappear. A few larger, well-capitalized ones will have the bulk of the market.
 
A True Retail Story
 
The other day, I wandered into the Garts in Bellevue, Washington. For some reason, I gravitated to the snowboard section. It was a foreboding sight. The overall impression was like a snowboard junkyard. Boots of various brands were stacked in their boxes up to my eyes, with no apparent concern for brand or size. The stacks were leaning over, the boxes on the bottom being crushed by the weight of the ones on top. Boards of all brands were leaning against the wall many deep. Burton was mixed with Vision. Parts from Morrow Exchange step-in bindings spilled out of their boxes.  The clear message was that Garts didn’t care. It was all the same to them. If you wanted to buy some snowboard stuff, great. If not, they’d mark it down or sell it again next year. Whatever. There was clearly no concern for the product and no pride in being a dealer.
 
I’m not critical of Gart’s for taking that approach to snowboarding. If that’s the retail model that works for them, fine.
 
If, however, your question is what is the future of snowboard product sales on the internet, then we have to be concerned with the Garts model, because product that is treated that way is a candidate for internet sales. If it’s just another thing you buy, if no assurance comes from buying a specific brand, if the purchase process isn’t worth spending any time on because the stuff’s all the same and you don’t need the advice of a knowledgeable retailer, then buy it on the internet to spend the least possible time and use a bot to find the best price.
 
A Glimpse of a Possible Future
 
Get on the internet. Go to www.eshop.msn.com. In the little box in the upper left hand corner, type in “snowboards” and hit go. On the next page that comes up, under “matching categories,” click on “Snowboards.” On the next page, in the left hand column under “Related Links” click “Search for snowboards.”
 
Okay, now we’re to the part where it gets a little scary. You can, if you choose, specify one of something like 110 brands. Some of them aren’t even in business any more as far as I know. Maybe they’ve got closeout inventory out there. If you don’t choose a price range, model year, length, waist width, sidecut radius, or board style, you’ll have 3,758 boards to choose from, the page tells us. But you can select by any of those features, and I may have left a couple out.
 
Let’s pick a board in the $350 to $400 price range from the current model year. I want a freeride board that’s from 161 to 164 cm with a waist width of more than 25 cm (big feet). There are 42 boards available that meet those specifications. Let’s sort them by price (cheapest first of course) and list the models for sale on the internet ahead of others. I’ve selected all brands.
 
Okay, there’s the Lamar Hetzel Lite Freeride at 163 cm. Obviously, that’s a core brand. Clicking on that board, I get a list of its stats. I’ll add it to my wish list. When I do that, I get another screen, with a picture of the board and one of my choices under “Online Store” is to click on “Where to Buy.”
 
When I click there, the screen comes up blank. The product is not available online anywhere this site is aware of. It offers to help me find a retail store where I can buy. It comes up with a list of local sporting goods stores, but doesn’t tell me which carry the product I’m looking for.
 
The Microsoft site has been launched within the last month or so. Its format seems excellent even if the product availability isn’t too great yet. It’s going to be scary when it can really match buyers with the product they want to buy.
 
I recently bought a graphic card for my kid’s computer. I went to cnet.com. I clicked on sound and graphic cards. I clicked on graphic cards. It gave me a list with reviews and specifications. I picked one. It gave me a list of places I could buy it sorted by price. I went to the place where it was cheapest and bought it. It showed up in two days. I didn’t pay any sales tax. I was happy.
 
Is that the future of snowboard equipment on the internet? To some extent, that’s up to us. If we nurture our brands and control distribution, maybe giving up some immediate sales for longer term success, it doesn’t have to be.
 
But you know what? That would be good advice even if there was no internet. 

 

 

Competitive Challenges; Four Things You’ve Got to Do Better

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In the August 1999 issue of SKATE Biz (Volume 11 Number 1), I wrote about two hypothetical skateboard factory owners, Dr. Jekyll and Mr. Hyde. Dr. Jekyll’s production was strictly OEM. Mr. Hyde had a successful brand and built his product at his own factory. They both made a bunch of perfectly logical and rational business decisions, but things kept getting worse financially. I suggested that their business models just didn’t work under emerging competitive conditions, then ended the article with the promise to suggest some fixes next issue.

            It didn’t happen “next issue,” but better late than never.
            The skateboard industry (including apparel and shoes) is highly competitive, with many competitors and little meaningful product differentiation. In this kind of environment, margins tend to drop while advertising and promotional costs stay high or increase. It can be hard times for many participants, even as the industry grows
.
            Well, you didn’t need me to tell you that, so I’ll get on with it. Sorry, I can be a little pedantic at times.
            You’re stuck with the business model. No individual company can influence significantly how the industry evolves because there is no dominant company. What can you do to succeed given the model? I want to suggest four things.
1. Growth Management
            The set of skills required to run a company with revenue of two-million dollars is completely different from what’s required to run a twenty-million-dollar company. When the company is smaller, you do everything. As it gets larger, you set the direction and supervise people who are doing everything. Those are two completely different skill sets. The faster the growth occurs, the harder it is to make the successful transition. Even if you do make it, there won’t be enough hours in the day to get it all done. You may be the best person at your company to do everything, but there isn’t time.
            You can become a huge bottleneck in the way the business operates. Everybody will be waiting for you to make decisions. I’ve seen it happen too many times.
            Some of the most successful entrepreneurs  hire their own bosses—if their egos will allow them to, that is. Usually, they aren’t willing to take that step until things are tough, and at that point, it’s hard to find people willing to step in.
            The person running a successful skate-industry company with over twenty-million dollars in revenue should ideally have fifteen-plus years’ experience in brand management and marketing (not just advertising and promotion). He or she should have managed growth and run a company larger than your company. It would be nice of they can read a balance sheet.
            There’s no reason management structure has to reflect ownership. If you’re an entrepreneur who has started and built your business, and you’ve made the transition to management, congratulations. If you’re not there yet, remember that a higher net worth and a business card that says “Founder” or “Creative Genius” seems preferable to a lower net worth and a business card that says “President.”
2. Systems
            Computer-system upgrades are a hassle, but do it now. Build it for what you want the company to become, not for what it is now. Get the latest (but not the bleeding edge) technology. Staff the function properly. Plan, plan, plan. Spend, spend, spend.
            What, all this for an accounting system? No. To control inventory. To put the right stuff in shipments. To manage cash efficiently. To make life easier for your customers. To make good advertising and promotion decisions. To gather critical marketing information.
            To spend money efficiently.
            Oh, and I guess you will end up with timely, accurate, detailed financial statements as a result.
            Recently, I got a close look at one skate-shoe company’s computer system. They’ve spent two years installing it—so far. The upgrades, customizations, and improvements never really end. It cost six figures already, and it’s still growing. Hardware is upgraded regularly. They’ve got around 10,000 SKUs (stocking units) available and are actively utilizing around half of that. If the size of the company doubled tomorrow, the system wouldn’t even be stressed.
            They didn’t need to spend all that, at least not right now. What a waste of money!?
            Not hardly. It’s almost physically impossible for them to ship the wrong stuff to a customer. They know immediately what sizes and styles are selling or not selling. Management can get almost any permutation of any report they need almost as soon as they ask for it. The reps know exactly what’s available to sell. Backorders are handled seamlessly as are calculation of discounts. Retailers get a packing list that tells them what’s in each box. The system is almost never down.
            What are the hard costs, not to mention the costs of customer and employee aggravation, of dealing with one pair of shoes shipped in the wrong size or color?
            How valuable is making it painless for your customer to buy from you and receive the inventory when every month the real differences between your product and that of your competitor are declining?
            The hard costs of buying and implementing a computer system show up as an expense on the income statement; the soft benefits of problems avoided and customers made happy don’t, but I’ll bet you they are more than the costs.

3. Brand And Distribution Management

            If there are competitors out there with a product that’s comparable to your product in quality and price, or is perceived to be comparable, then your success is ultimately going to depend on where you sell your product and how you protect and promote your brand name. Growth tops out if your only customers are ’core skate shops. But the market legitimacy of your brand goes to hell if it shows up at Costco, and ’core retailers will desert you.
            Between obvious ’core shops and Costco are all the shades of gray that make deciding whom to sell to such a critical management and marketing challenge. The challenge is made tougher by the fact that the industry financial model (more on that later) requires at least enough growth to get you to critical mass.
            How do you determine what are and are not appropriate product and distribution channel extensions?
            You’ll know them when you see them. I know that sounds like B.S., but it’s that simple and that complicated. It comes from good marketing, which I remind you not to confuse with advertising and promotion.
            Who are your customers and why do they buy your products? In a branded consumer-products business, the president and all the senior executives should be striving to improve their answers to those two questions all the time. Then it’s clear, as a result of your hard work and focus on the issue, that it may be okay, for example, to sell to Pacific Sunwear, but it’s not necessarily time for Garts. If you’ve done your marketing, you will literally know your customers when you see them.
            A good example of a product and brand extension in the skate-shoe business is DC’s all-terrain shoes. I have no idea how they came up with it, but it just makes sense. It has the following characteristics, which you might want to keep in mind when managing your own brand:
          · It capitalizes on the brand name.
          · It doesn’t require a change in distribution channels, but it may position them for some expansion in the future.
          · It puts them in a new category, but it shouldn’t cause any confusion among existing customers.
4. Managing Financial Reality
            As industries mature, larger companies tend to be the more successful ones. Why? If gross margins fall, but you have to spend the same or more dollars on advertising and promotion, you have to be larger. Otherwise, there just won’t be enough gross margin dollars around to adequately support the brand.
            I don’t look at that as my opinion. I don’t see it as a subject for discussion. It just is. How do you mold your company to conform to this fundamental financial law?
            At the risk of repeating myself, you make sure you have management personnel who know consumer-product brand management, have been through growth, and understand marketing. It costs money to do it wrong, and it could threaten the company’s survival.
            Utilize good marketing because it helps you spend your advertising and promotional dollars more efficiently and gives you a factual basis with which to make distribution and brand-extension decisions.
            You have the best systems you can get, and you lavish resources on them. They will give you some of the critical marketing data you need, and they will save you money because they will make your customers dependent on your systems and provide a point of differentiation when products aren’t all that different.
            Dr. Jekyll and Mr. Hyde can both be successful. They just have to change the basis on which they compete to conform to existing market conditions and financial laws.

 

 

Numbers, Numbers Everywhere And Who Knows What They Mean

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I do confess it. I was trained as a finance guy. I have an MBA, started out in international banking (Ask me about Carnival in Brazil sometime!), and did some corporate treasury and investment banking kind of work. Given the way things have changed, I decided it was okay to come out of the closet. Please don’t throw me out of the industry.

Using this experience to get a handle on the snowboard industry isn’t an easy thing to do. With the acquisition of Ride and Morrow by K2, there is no snowboard only company left that provides public financial information. What is available is not all prepared in the same way. Canadian accounting standards are different from French accounting standards, are different from United States accounting standards are different from German accounting standards. Details on the snowboarding parts of business are typically unavailable.
Nevertheless, phone calls, internet searches, and rummaging through some file folders produced public information on K2, Far West, Adidas (Salomon), Quicksilver, Vans, and Rossignol. What trends, or confirmation of trends are visible from reviewing this data? How much small print can I read before going crazy or blind?
As required, I’ve converted numbers to U. S. dollars based on exchange rates on November 3, 1999.
Size Matters
The first thing to note is that, with the exception of Far West, the owner of Concept Outerwear (revenues of $7.4 million in 1998), there are no small companies in this group. Vans, at $205 million in its last full year, is next in size. Quik and Rossi were $316 and $338 million respectively. K2 comes in at $575 million and Adidas wins the heavyweight division at $5.3 billion.
It’s easier to compete in a highly seasonal, very competitive market where margins aren’t that great and products are, for the most part, only differentiable by marketing if you’re big enough to spread your overhead and have year around cash flow. Even Far West, by orders of magnitude the smallest company in this group has some of those things going for it. Without diversification, having a viable financial model in the snowboard business is a struggle unless you’ve got Burton’s market share.
These numbers represent each company’s total revenues. The snowboard portion is much smaller.
In some ways, then, it’s good to be big if you’re going to be in the snowboard business. It can also be seen as bad, if you believe that the sport derived its energy and success from the commitment of people who were 100% focused on snowboarding, risking everything they had, and were as much concerned with snowboarding as with the business of snowboarding. If snowboarding is just one of your lines of business, and sometimes a small one at that, it may not always have your full attention.
How Big Is It?
The people at Rossi were great. They sent the English language version of their annual report Fed Ex. It tells us that 8.4% of their revenue, or $28.4 million is from snowboarding.  Their snowboard business grew by 13 percent over the prior year. They sold 143,000 boards.
They also estimated worldwide board sales at 1.45 million units in 1998/99. They thought it had grown 5% over the prior year.
I don’t know if that estimate is at the wholesale or retail level. It really doesn’t matter. What’s interesting to note, based on my own estimates of board sales four or five years ago, is that the rate of growth in board sales hasn’t exactly been spectacular. Probably not much more than the five percent Rossi estimated over last year. Makes you wonder about some of the estimates of growth in the number of snowboarders we see. Could be that a lot more people are renting. It could also mean that a lot of people try it and get counted as “snowboarders” but don’t go very often if at all.
For all I know, the culture has been so furiously marketed and the style so widely accepted that people who have never snowboarded consider themselves snowboarder and get reported as such in the surveys.
Just kidding, I hope.
Boards, boots, bindings and accessories made up $10.7 million of Quiksilver’s sales in 1998- approximately 3.4% of total sales.   That includes Mervin and the late, lamented Arcane step-in binding system. Quik also sells some snowboard apparel, but the amount isn’t identified separately.
Vans snowboard sales come from a number of sources. They sell the Switch binding and boots that work with it. They also sell traditional strap bindings. Vans has a line of snowboard apparel. They also earn some amount of revenue from licensing Switch technology to other brands, including Nike, North Wave, and Heelside. Finally, the company now owns the High Cascade Snowboard Camp. There’s not a number anywhere that indicates how many dollars this all comes to,
K2 is no help either. All their annual report says is that the “Sporting Goods” segment of their business had sales of $405 million in 1998. That includes inline skates, skis, bikes and fishing tackle, not to mention snowboards.
Well, it’s time for some creative estimating. Somewhere around here, I’ve got some carefully prepared, hand scrawled estimates of relative market shares for snowboard brands.   Go with me on this, and we’ll assume that those estimates are valid worldwide and not just in the US. I know what Mervin’s and Rossignol sales were. If these market share percentages are at all reasonable, a seat-of-the-pants guesstimate for K2 snowboard hardgoods sales would be (drum roll please) $65 million, or eleven percent of their total sales. That’s before the acquisition of Morrow and Ride, of course. Those two deals should more or less double K2’s snowboard hard goods sales.
Adidas reports that Salomon doubled its snowboard sales to $42 million. It doesn’t indicate if that number includes Bonfire. $42 million is about three-quarters of one percent of Adidas’ total sales for the year.
It just doesn’t look like anybody is going to live or die by snowboard related sales, though with the addition of Morrow and Ride, K2 is going to have an even greater focus on it. It’s more like companies are having a hard time figuring out how to grow and be profitable in sporting goods, and winter sports especially, and think snowboarding can help them figure it out, beyond what it contributes to sales.
The Bottom Line
Soft goods are good. Hard goods are bad. Winter sports are tough. Summer activities bring diversification and hope. And there you have it.
Quiksilver and Vans are both growing and making money. They have limited exposure to snowboard/ski hard goods and sell product all year around. Other soft goods players we haven’t talked about are doing well too.   They are riding the demographic crest and the culture snowboarding and other so-called extreme sports have created.
Rossignol has seen its sales shrink over the last two years. It’s also lost money in the last two years. 72.5% of its sales came from ski related hardgoods (skis, boots, bindings, poles, cross country skis) and 85.8% came from winter sports. They hope to double their snowboard revenue over the next three years.
Adidas lost a little money in 1998, the first year in which Salomon was consolidated into their financial statements. They had earned a profit in each of the previous four years. Salomon’s overall winter sports business grew only one percent. Eighty percent ($364 million) of Salomon’s total sales were from winter sports. The Adidas annual report described Salomon’s overall financial performance this way: “The operating result improved due to a number of measures to enhance earnings and almost reached break even.” YeeHah!!
The good news was that twenty percent of Salomon’s business was summer related, up from eleven percent the previous year.
K2’s sales have grown in each of the last four years. They have been profitable in each of the last five. But in 1998, their net income fell to $4.8 million from $21.9 million the previous year. This was largely due to increases in their product costs and selling expense out of line with the sales increase.
K2 divides its business into three segments; sporting goods, other recreational and industrial. Sporting goods include snowboard hard goods, as well as skis, bikes, fishing tackle, and some other stuff. Sporting goods did $405 million in sales, down from $411 million the previous year. This represents 70% of the company’s total revenue. It earned an operating profit of $5.3 million and, after a reasonable allocation of interest expense and corporate overhead, probably lost a little money.
Mountain bike and ski sales fell. K2 snowboard product sales increased, though we don’t know by how much. They do say the following:
“Although also feeling the effects of poor weather conditions in late 1998, snowboard products benefited from strong demand for its Clicker step-in binding, related boots and snowboards.”
Other recreational includes apparel, skateboards and shoes. Industrial is mostly monofilament line. It earned them $18.4 million in operating profit on sales of $125 million. There’s a lesson there somewhere. Screw snowboarding. Sell line for weed trimmers.
The Bottom, Bottom Line
The hard good guys slug it out with each other to get a bigger share of slower growing markets with lower margins and high marketing expense- an impossible financial model. Mean while the shoe and apparel guys, who can appeal to a broader demographic because they aren’t tied to a particular sport, clean up.
It’s not a pretty picture, there’s not a happy ending, but that’s what the numbers show.

 

 

Changes in Market Focus; The New Snowboarding Reality

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Most of us are in a different business than we were a few years ago. Retailer, brand, manufacturer, or even consultant, our customers have changed. There are only a handful of companies out there that can say they are snowboard companies. Others have adjusted their strategies, or aren’t around anymore.

 Remember the “C” word? Consolidation wasn’t just about a bunch of brands going away. It was about companies pausing, taking a deep breath, and recognizing that the opportunity represented by snowboarding went beyond selling boards, boots and bindings.
 
What is the snowboard market now? Who’s succeeding in it and why?
 
It’s the Culture, Dude
 
We’ve been over this before, so let’s keep it short. Hard goods have tended to become a commodity with lower margins. This has been especially true with boards but increasingly applies to boots and bindings as well. The days of rapid advances in quality and technology are nearly over.   
 
Young people represent a big demographic bulge everybody wants/needs a piece of. The lifestyle is what a lot of people are into whether they participate in the sport or not. There are more similarities than differences among the snow/surf/skate/BMX cultures. That’s hardly a surprise given the number of people who participate in more than one.
 
The term “participant” has to be viewed differently by hard and soft goods companies. Somebody who snowboards three days a year is a participant just like somebody who snowboards a hundred days a year. The hundred dayer probably spends more on equipment than the three dayer, but both need shoes and clothing for all one hundred days and probably want to look good wearing them.
 
Someone who perceives himself as a member of the culture is always a candidate to buy soft goods. But they may not buy any hard goods.
 
The sports have become the foundation of the lifestyle market. Nautica, ESPN, Mountain Dew and Tommy Hilfiger can make their money and grow their businesses as long as snowboarding ET. Al. is cool. Growth in the sport of snowboarding would be nice for them, but cool is more important than big.
 
It would actually be to their detriment if they were thought of as snowboard companies.   They wouldn’t be able to go after the broader market. Their potential wouldn’t be nearly what it is if they had a sport, rather than a lifestyle, focus.
 
Limits on Growth
 
Existing snowboard brands pretty much have their market niches. Those who are still standing and have been around a while are probably secure in those niches, but have a hard time figuring out what to do next. Let’s take Burton as an example just because they are far and away the most successful snowboard company.
 
Burton’s sitting there with, say, forty percent of the market. No doubt they’d like to grow. Their percentage share of the market is unlikely to grow much. They will get their share of general snowboard market growth, but that’s not what it use to be.
 
Real growth, if it’s going to happen, has to come from some new directions.    Skateboarding? Surf? Bikes? Bet they’ve looked at every action sport category there is to look at. But they haven’t done much.   Why?
 
Because of the danger of diffusing the strength of the brand and confusing people about what Burton stands for.
 
Think of a skateboard with the Burton name on it. “Why are they doing that?” you would wonder. It’s confusing and somehow disturbing. It’s a gratuitous new product with no meaning.
 
Apparel is different from hard goods. Burton has announced an initiative in brown shoes. They already sell a lot of apparel. We aren’t offended or confused if somebody who doesn’t snowboard wears some Burton clothing, but has chosen it because it’s stylish and functional.
 
But a Burton skateboard might get some strange looks from other skaters and, more importantly, from snowboarders.
 
Apparel, then, opens up a bigger market, and can be managed so as not to damage a brand’s credibility.
 
Moment of Clarity
 
It’s not a new thought that differentiation among hard goods is tough to achieve, and that margins are better in soft goods. But it was last March, from my perspective, that the market officially changed and the link between hard and soft goods largely severed.
 
It was the day Nike announced that they would not introduce a snowboard line. Their thinking, I imagine, had three basic components.
 
First, that they couldn’t introduce a snowboard that was any better than what everybody else was already making. Second, given that fact, selling snowboards wouldn’t help them sell soft goods. Indeed, if the board was received with a yawn or worse, it might even damage soft goods sales.
 
Finally, like all the other big players, Nike wants to capture some of the energy and legitimacy of the action sports culture, but they don’t want to be too closely associated with any one sport, less it restrict their broader sales prospects.
 
I didn’t think of it this way at the time, but that was the day the new market officially arrived in snowboarding.
 
And the Winner Is……
 
There isn’t one winner. But there does appear to be a single characteristic of companies likely to succeed in the lifestyle/action sports/youth culture market. Come with me now while we visit the Securities and Exchange Commission’s Edgar web site to see if we can distinguish that characteristic of success.
 
Listen to how Vans, Pacific Sunwear, and Quiksilver talk about their customers in the first paragraph or two of their most recent 10Ks (annual reports). By most measures, these are three successful companies. PacSun is a retailer that doesn’t sell any hard goods, possibly excluding some accessories. Van owns Switch and Quiksilver owns Mervyn, but neither Switch nor Mervyn contributes dollar sales, which, as a percentage of total revenue, are critical to their respective companies.
 
Vans characterizes itself as
 
….a leading lifestyle, retail and entertainment-based company which targets 10-24 year-old consumers through the sponsorship of Core Sports,(TM) which consist of alternative and enthusiast sports such as skateboarding, snowboarding, surfing and wakeboarding, and through major entertainment events and venues….
 
The retailer Pacific Sunwear says it is
 
selling everyday casual apparel, accessories and footwear designed to meet the lifestyle needs of active teens and young adults. The Company’s customers are primarily young men aged 12 to 24, as well as young women of the same age, who generally prefer a casual look.
 
Quiksilver
….designs, arranges for the manufacture of, and distributes casual
sportswear, swimwear, activewear, snowboardwear and related accessories
primarily for young men, boys, young women and girls….
 
 
All three are focused on the lifestyle market. All three are focused on the same age groups. None is associated with only one sport. All, if you read further in their annual reports, are concerned with staying close to trends and their markets.
 
They all start out by telling us not who they are as companies, but who they think their customers are.
 
There is, then, a new model for companies that want to grow quickly in the youth lifestyle market, as opposed to the snowboard market. Be compulsive about staying close to trends and be prepared to turn on a dime. Don’t be too closely associated with only one segment of the market. Focus on products that permit you to make a margin that’s high enough to fund the required advertising and promotional expenses. And finally, be big.
 
What To Do
 
If you’re a snowboard retailer……wait a minute. I guess what I’m suggesting is that there aren’t many snowboard retailers in the sense there use to be. There are retailers who sell snowboards. A growing percentage of their sales profit are coming from soft goods, and they probably sell skateboards, or wakeboards, or surf boards in addition to snowboards. Are you limiting your growth by focusing too much on only the snowboard market? Maybe you are, and maybe it’s what you should be doing. But please make sure it’s a conscious decision.
 
Choose the brands you carry with an eye towards the company’s ability to stay on top of the trends. Welcome customers who aren’t necessarily snowboarders. Maybe you can convince them to try the sport.
 
With the consolidation largely completed, growth for most brands is more or less limited to the market’s rate of growth. Unless you have a lot of capital to work with, and even if you do, you try and change your existing market position at your peril.
 
K2’s recent acquisition of Morrow and Ride seems to suggest they believe, given the prices they paid, that they can get a better return on investment through new brands than by investing similar resources in further building the K2 snowboard franchise. I think they are probably right.
 
If fast growth is no longer an option, and you not longer have sky rocketing capital requirements it imposes, then maybe it’s time to settle down and just run the business. Make incremental improvements in how you operate that improve you return on investment.
 
Control your distribution to encourage sell through. If you do that, you have the opportunity to raise prices a little and reduce end of the season discounts. Resist at all costs the urge to accept the 3,000-board order from Bulgaria. You know they will show up in either Japan or the U.S.
 
Negotiate with your supplier for better prices. With continued excess production capacity that should be possible.
 
Take a hard look at who your customers are. Do all your advertising and promotional activities really reach them? Can you cut back or redirect any of those expenses?
 
The pace of market change has been phenomenal. Not long ago, it seemed that demographic changes and endless snowboarding growth made the sky the limit. Now retailers have to be cautious about being too closely associated with one sport, and brands need to operate efficiently rather than prepare for fast growth. Large soft goods brands not closely associated with one sport seem to be the beneficiaries of our hard work.
 
Looks like resistance was somewhat futile, and we’ve been partly assimilated, maybe changing the assimilators in the process. Oh, the hell with it. I hope it snows soon.

 

 

What I Learned at ASR: Products, Movies, Cooperation, Culture and Hype

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I spent three days walking and talking. I suffered through the usual distraction and traffic jam at the Reef booth (why is it that no matter which way you try and go, you end up there?). In no particular order, I noted the following things:

 
  • No major new products
  • Snowboarders trying to do skate tricks in the new movies
  • A focus on culture that goes beyond individual sports
  • The industry’s continued inability to cooperate in its own best interest
  • Some hype from companies that look big but probably aren’t.
  • Shoes- lots of shoes.
  • My favorite company name
 
Is there some common theme here? I hope so, or this is going to turn out to be a really lousy article.
 
New Products
 
There was the Expedition Insert, the new Powell rubber washer, (Help Mik!- What’s that thing called?) and a few incremental improvements or at least points of hoped for product differentiation like there are every show. Brands should strive to create these points every chance they get, but they won’t provide a significant strategic advantage.
 
Aircraft had its aluminum skateboard that now really looks like a skateboard and has replaceable wooden tips. How will it be accepted? I don’t know, but I do know that its success is likely to depend only partly on its functionality and durability.
 
Look, I’ve heard it works fine (makes a cool sound I’m told) and is durable. But skaters are at heart, a conservative crowd. Trying something new brings with it certain social risks. I seem to vaguely remember being willing to do almost anything to prevent any such risks when I was a teenager.
 
Aircraft’s success will depend on their ability to make the product cool. If the right opinion leaders give it the thumbs up, others will adopt it. If not, no amount of technical superiority will make it take off. I almost think I’d rather start a new skateboard brand with a traditionally constructed board and the right team and marketing budget than with a product that’s too different from what’s already out there. 
 
I’m reminded of Forum Snowboards in their first year. The boards had the reputation of breaking but the kids didn’t care because the team was so cool. I’ve characterized Forum as a skateboard brand that happens to sell snowboards because of how they have positioned themselves in the market. Hopefully, Forum takes that as a compliment.
 
Skate Tricks on Snow
 
A few years ago, jibbing was hot in snowboarding. Then it kind of went away. Last season, it was back and at the premieres of the snowboard movies at ASR, I saw not only more jibbing, but also kids trying to do skate tricks on snowboards without their feet in the bindings. It would be easier if there weren’t bindings in the way.
 
Focus on Culture
 
This kind of crossover seems consistent with a market that’s become, and is becoming, much broader. And much more confusing. People (a lot of people) who don’t participate in the sports belong, or think they belong, or want to belong, to the culture. In shoes and apparel, I wonder what percentage of purchasers are regular skateboarders? Not a majority I’ll bet. Hey, I love my skate shoes and their teched out look, but while I’m still willing to take a tumble on snow, I’m too old to fall on concrete.
 
I’ve had occasion, recently, to read the public Security and Exchange filings of Vans, Pacific Sunwear, and Quiksilver. When they talk about why they are successful, and about risks associated with their businesses, they talk about understanding the lifestyle, spotting the trends, and being part of the culture. These are three companies that are successful by most measures. Their success is almost completely outside of hard goods, though of course they support the sports.
 
No hard goods company has the chance to grow as fast as these companies have grown, and to the size they have grown. The hard goods market just isn’t big enough to allow it.
 
Industry (Non) Cooperation
 
But hard goods are the engine that drives the growth of the culture and sales of apparel and shoes. They are what drives Mountain Dew and the U. S. Marines, etc., to pay lots of money to promote their products at the X-Games. Everybody needs apparel and shoes. Not everybody needs a skateboard. Apparel and shoes typically offer higher gross margins along the whole food chain.
 
Various mainstream soft goods companies have figured this out. They are thrilled to allow the core hard goods skate companies (and some soft goods companies) to support the sport and the riders while they try and reap the benefit.
 
We, as an industry, feel just the smallest bit used. That’s only because we are. I trust none of us are surprised.
 
We think that our support of the sport and longevity in the industry entitles us to a piece of action. Entitles is a pretty lofty word- and it gets us nothing. Anybody who thinks that ESPN is going to just hand the industry a piece of their action or promote IASC (International Association of Skateboard Companies) at the risk of pissing off an advertiser who’s paying them some millions of dollars is unrealistic.
 
Getting that piece of the action requires, as strange as it sounds, that we work with the big organizations that we are concerned will destroy our sport. Because they aren’t going to go away.
 
In the first place, the industry has to speak with a somewhat unified voice. I don’t know if that’s possible. It doesn’t seem to have been so far.
 
The rest of the process is conceptually simple and basically the same that lots of groups have used to create influence/leverage with organizations they want to influence.
 
First, reach an internal consensus as to what we want the target of our efforts to do. Second, present these requests/suggestions/demands in a way that tells the target why we want these things to happen, what, exactly has to be done, what the benefits to the target organization are and how we can help them. Finally, let them know the cost of not seeing things at least partly our way. Do all this in such a way that the “person of influence” we are working with at the target organization looks like a hero to their boss. Make that target organization dependent on our input and support to accomplish their goals. 
 
I left myself an out by saying this was “conceptually simple.” It’s a lot of work under conditions of uncertainty. The end result will never be exactly what we want. But I’m certain that unfocused complaints about tactical issues won’t win us the respect of the people we want to influence.
 
Hype and Glory
 
I remember the year at the snowboard show when Morrow had a helicopter on its second story, and the average size of a snowboard booth was just south of a football field. Okay, maybe a tennis court. Advertising and promotion expenses as a percent of revenue were completely out of control. Companies who were smaller than they wanted anybody to know struggled to get enough market share to be players.
 
I saw a bit of that at ASR.
 
Shoes
 
I especially saw it in the shoe and apparel companies. When somebody tells you that their revenues are growing hundreds and hundreds of percent over last year and refuses to tell you what percentage of revenues their advertising and promotional expenditures represent, you know they are smaller than they want you to know. Why?
 
The smaller you are, the easier it is to get big percentage revenue increases. If you’ve only sold one $10 dollar t-shirt, selling two the next year doubles your revenue. Big deal. If on the other hand you sold $100 million in t-shirts, or whatever, and double it the next year to $200 million, for the same percentage increase as from one to two t-shirts, it’s a huge accomplishment. Percentage sales increases decline precipitously with revenue growth.
 
Spending a bunch of money and incurring big losses to get market share isn’t necessarily a bad idea- you just have to have the balance sheet to finance it and a strategy to eventually become profitable. In other words, it can’t just be a fear driven, defensive response to your competitors.
 
Favorite Company Name
 
And the winner is……Red Ink. I started laughing so hard when I saw the name that I don’t remember what they do- some kind of apparel I think. My money is on those guys to be survivors, because I have a hunch they understand how their financial model has to work.
 
Which brings me back to shoes. There were a lot of beautiful shoes. New materials, cool features, broader selections, more colors. And prices that I thought were generally tending lower. Great for the consumer. Not necessarily so good for the company that has to support a big advertising and promotional program with a lower gross margin. Unless of course their volume is growing quickly. In which case maybe that volume gets some of the margin dollars, if not percentage points, back. So better pump up the marketing budget and get that volume up.
 
Which is of course what all your competitors are thinking and doing. You know, maybe if the booth was the size of a football field…….
 
And in Conclusion
 
Oh god, I promised to tie this all together somehow. The skateboard industry, as traditionally defined, is in danger of being the engine that fuels somebody else’s growth with no benefit to itself. I suppose that’s the common message from all the vignettes above. In our little corner of the world, competitive pressures are reducing margins, product is over supplied, and advertising and promotion is the only way to differentiate brands.
 
Skateboarding and the skate culture may be a huge commercial success. But many core focused companies may not share that success. We’re competing with each other instead of focusing on the real threat.

 

 

Good News And Bad News; Ride Reports Third Quarter and Preseason Orders.

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            It must suck to be the only public, pure snowboard company left standing. All the other snowboard brands are suffering from some of the same industry issues as Ride, but they can equivocate about it with impunity.

 
            But Ride’s management wouldn’t want to do that anyway. Like the title says, there’s good news and bad news. The good news is the improvement in the income statement and the preseason orders (up 26 percent). The bad news is a weak balance sheet and a capital structure that needs, well, restructuring.
 
            The income-statement result and preseason-order growth is all the more impressive given the balance sheet Ride has had to work with and the constraints placed on what the company can do. A weak balance sheet means the CEO spends all his time managing cash, assuaging banks, and trying to raise capital. Who knows what Ride—or any other snowboard brand for that matter—could accomplish if the management team could actually focus on running the business?
 
The Income Statement
 
            Sales for the nine months ending March 31, 1999 are up 14.2 percent to 38.1-million dollars over the same period last year. Ride’s loss for those nine months was 1.389-million dollars compared to 14.645-million dollars last year. The improvement isn’t as spectacular as it seems at first glance. Last year, the company took an 8.6-million-dollar write-down for impairment of goodwill. In other words, given market conditions at the time of the write down, it had some assets that were worth a lot less than what Ride paid for them.
 
            Nine-month selling, general, and administrative expenses have been more than cut in half, but that includes the 8.6-million-dollar write-down. If you take that out of the equation, the expense reduction is still 19.7 percent—which is pretty impressive. According to Ride, and excluding the impact of the 8.6-million-dollar write-down, the expense reduction “ … was primarily due to staff reductions and lower executive salaries.”
 
            Gross margin over nine months was up to 27.4 percent, an increase of 1.3 percent. May not sound like much, but 1.3 percent of Ride’s nine-month sales is half-a-million bucks, which would buy a lot of beer at Vegas. Perhaps you recall, many years ago, when having your own factory was the Holy Grail of the snowboard industry because “it would let you have a really great gross margin.” Numbers like 45 percent were once thrown around. Too bad everybody had the same idea.
 
The Balance Sheet
 
            Ride’s receivables at March 31 were 6.5-million dollars net of a bad-debt allowance of 750,000 dollars. That would be bad if those receivables represented uncollected accounts from last season. But according to Ride President Robert Marcovitch, those receivables represent early 1999 sales of last season’s product that will be collected this fall.
 
            The 10Q confirms this, stating, “The company made the decision to move our closeout inventory at prices lower than would normally be the case in order to gain quick sales and hence borrowing availability.” Translation, we needed the cash!
 
            If it isn’t getting paid until fall, how does that get the company any cash? The bank line from CIT allows Ride to borrow a percentage of eligible inventory and receivables. Ignoring the issue of what’s “eligible” and what’s not, the percentages for Ride are 55 and 85 percent respectively. Let’s say you’ve got a million bucks in inventory. You can borrow 55 percent of that, or 550,000 dollars assuming it’s all eligible. If you’ve got a million in receivables, you can borrow 85 percent or 850,000 dollars. Because I went to business school, I know that 850,000 dollars is better than 550,000 dollars, so Ride sold at lower prices to create receivables. 
 
            Inventory of 7.3-million dollars on March 31 gives you pause for a moment. But the footnotes in the 10Q tell us that 2.5-million dollars of that is raw materials and work in progress. That will turn into next season’s product. The remainder is finished-goods inventory. According to Marcovitch, almost all of the finished goods are product for the coming season. Not only do we know from this that the inventory is good, but it suggests that however tight cash is, Ride is finding enough dollars to run its factory efficiently. That is, it’s getting materials from suppliers and not having to start and stop the plant because of material or cash shortages. The major liquid assets then—inventory and receivables—are more or less worth what the balance sheet says they are. And, in the normal course of business, when Ride ships that inventory to customers it will turn into receivables (and, hopefully, someday cash), that will be worth substantially more than the current inventory value.
 
            Meanwhile, down on the liability side of the balance sheet, we find current liabilities of 15.1-million dollars broken down as follows:
 
            Accounts Payable: 4,247,000 dollars.
            Accrued Expenses: 2,383,000 dollars.
            Short-term Borrowings: 8,484,000 dollars.
 
            The short-term borrowings include three million dollars owed to U.S. bank and a note for 1,725,000 dollars payable to Advantage Fund II, Ltd. The remainder is owed to CIT Group/Credit Finance, Inc. under Rides’ revolving line of credit. Accounts payable and accrued expenses are moneys owed to the phone company, materials suppliers, insurance agents, employees, and everybody else Ride needs to get goods and services from to operate its business. Ride’s current ratio (its current assets divided by current liabilities) is 0.98. The current ratio is a standard financial measure of a company’s ability to meet its ongoing operating expenses. The lower
the number gets, the tougher things are. You can’t continue to operate with a current ratio under 1.0 for too long.
 
            Let’s put that in a little perspective. In a highly seasonal business, in the part of the season where the cash is drying up (like the end of March for example) no snowboard company has a great-looking balance sheet and is rushing to pay all its bills. Nevertheless, Ride’s current ratio is symptomatic of the need for a balance sheet restructuring and additional working capital.
 
Preseason Orders
 
            Up 26 percent to 43-million dollars. Wow. Any other snowboard company that had a bigger increase, step up and claim it. I won’t be holding my breath. The only category that’s down is “OEM, wakeboards, and other.” That’s only down, according to the press release, because it chooses not to accept certain OEM orders, which is probably a correct strategic move.
 
            What I like even better are the categories the increases came in. Boards are up nineteen percent. However, boots, bindings, and apparel and accessories (excluding SMP) are up 38, 33, and 58 percent respectively. That is, higher margin products represent an increasing percentage of total sales, which should bring the whole margin up.
 
            Some of these sales may get shipped before June 30. But just for fun, let’s say Ride sells that 43-million dollars, and nothing more, in the nine months of their next fiscal year. Let’s assume the company’s gross margin stays the same. Its gross profit will be 11.78-million dollars.
With the preferred stock dividend eliminated, that increase in gross profit by itself will bring Ride to break-even. A restructuring should reduce the company’s interest expense from 798,000 dollars, if only because Ride is paying punitive interest rates right now. Margins should go up a point or two just based on the change in the product mix. Obviously, the quarter ending June 30 isn’t a strong one, but for the twelve months ending June 30, 2000 Ride ought to earn a few bucks just from what’s in place right now. That is, if Ride management can get the restructuring done.
 
Restructuring
            The U.S. Bank facility is a term loan for three million dollars that is due and payable August 31, 1999. That loan, according to the 10Q, “ … is secured by promissory notes from Global Sports, Inc. in the original aggregate amount of 1.8-million dollars. Additionally, the facility is secured by the personal guarantee of one of the Company’s outside directors, including certain real-estate property owned by the director.”
 
The note for 1.725-million dollars, also according to the 10Q, “ … has a term due date of June 30, 1999 which date is automatically extended to September 30, 1999 in the event the company has executed a letter of intent for a transaction which would raise capital sufficient to fully redeem the note.”  The note’s interest rate is ten percent, but it has a default rate of
eighteen percent. The CIT line of credit expires August 30, 1999.
 
            So, there are a lot of critical deadlines coming up, and the 10Q is replete with the usual statements companies in these circumstances make about dire consequences if Ride can’t meet some of these deadlines.
 
            My guess is that there will be a successful restructuring. The improvement in operating performance and increase in preseason orders makes me believe that. Its likely shareholders will be hit by additional dilution as a result of the restructuring. Concern over that dilution is probably the reason the stock price didn’t go up significantly in the wake of Ride’s healthy preseason order numbers.
 
            Ride has hired Ladenburg Thalman & Co. “ … as its financial advisor to provide advice regarding potential strategic alternatives available to the company,” says the 10Q. Negotiations are ongoing.
 
The Bottom Line
            If Ride had paid maybe two-million less for its factory, not hired quite so many people so quickly, and had paid some of them less, and not built the Taj Mahal in Preston, Washington, I suspect the managers at Ride would be smiling and looking forward to closing out their fiscal year June 30 with a twelve-month profit. But that’s not how it happened, and Ride was hardly the only snowboard company seduced by perceived endless growth.
 
            Ride’s market position seems sound and the product line complete and well received. Management and employees are industry experienced.          I still have some trouble with the financial burden of owning a factory, but Ride management has made its a marketing asset. So, strategically the brand seems positioned to succeed. By the time you read this, we’ll probably know if Ride’s managers pulled off the financial restructuring that will allow them to do it.

 

 

Chasing the Demographics; Pacific Sunware Focuses on Youth

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There’s got a way to make this story exciting. Oh the injustice of making me write about a company with a strong balance sheet, growing revenue and earnings, no meaningful litigation, and an experienced management team with a clear strategic focus. I’ve got to stir up some drama somewhere if there’s to be any hope that people will make it all the way to the end of the article.

The drama is in the execution of the strategy. Pacific Sunware started out as the store where young, white males could get the trendy, casual brands they wanted. Now, twenty two percent of their sales are to females. The new d.e.m.o. stores are focusing on cross cultural trends. Pacific Sunware sells snowboard clothing. They are selling their own private label brands.
 
Can they expand their target market, but keep their focus and their niche? Can they keep the loyalty of a notoriously finicky customer group? Inquiring minds want to know. But first, the boring stuff.
 
SIDEBAR
 
Pacific Sunware: A Snapshot
 
As of the fiscal year ended January 31, 1999, Pacific Sunware (PacSun, as they seem to want to be known) had 342 stores in 42 states. Their customers are young men, and increasingly women, between the ages of 12 to 22 who prefer a casual look. Revenues have grown from $85 million in 1994 to $321 million for the year ended January 31, 1999. Net income has climbed from $3.9 to $23.5 million during the same period. They had 4,058 employees of whom 3,822 were store employees. Of the store employees 2,700 were part time. Management is mostly in their 40s. Most of the team has been with the company since 1994 or before.
 
END OF SIDEBAR
 
 
PacSun by the Numbers
 
At May 2, 1999, the balance sheet was, well, boring. There’s eleven million dollars of cash and a current ratio of 3.16. There’s basically no long-term debt, and the total debt to equity ratio is 0.25. The piece of information I would like but don’t have is a way to judge the quality of the forty six million dollars of inventory. Obviously, when you’re selling trendy goods to young people, you’d better be right on your inventory selection. On the other hand, even if a chunk of that inventory were obsolete, this balance sheet would still be strong.
 
One caveat on evaluating the balance sheet of any fast growing retail business- comparisons from one balance sheet date to the next are difficult due to both growth and seasonality. Ratios will tell you the strength of the balance sheet, but getting a handle on operational efficiencies using the balance sheet is tough when, for example, inventory goes up a bunch, but so did the number of stores.
 
For the thirteen weeks ending May 2, 1999 sales were $81.4 million, up 33 percent from the same period the previous year. Income grew forty percent to $4.04 million. Gross profit margins were essentially constant in these two periods at 32.1%.
 
Similar trends can be seen in comparing the two years ending January 31, 1999 and February 1, 1998. Sales grew 41.4% to $321 million. Net income was up 43.7% to $23.5 million. Gross margin fell two tenths of a percent to 33.7. Operating expenses as a percentage of sales fell from 22.5 to 21.9 percent, largely as a result of the rapid growth in sales.
 
Also important to note is that the average inventory between these two dates was $37.3 million. They did $321 million in sales. So they turned their inventory 8.6 times, and that is a great place to move into how the PacSun’s market strategy and how it dovetails with their financial and operational strategies.
 
Setting the Stage
 
PacSun either figured out or fell into the fact that it’s not just surfers that buy surf wear, snowboarders that buy snowboard clothing and skateboarders that buy skate clothing anymore. The specialty markets are crossing over each other. Fashion and lifestyle are as important as participation in the sport that originally spawned the apparel. If it were just surfers who wore surf apparel, the company wouldn’t be planning to increase its square footage by forty two percent this fiscal year.
 
So Pacific Sunwear has positioned itself, it hopes, at the cross roads where everybody passes through but nobody is confused or put off by seeing surf/skate/snow in one place. The theory is that you aren’t selling out anymore as long as you’ve got the cool stuff to sell.
 
Trouble is that somebody keeps changing the road signs at the crossroad. Fashions come and go as fast as commemorative postage stamps. Faster, probably. How does Pacific Sunwear hope to keep its road map accurate?
 
Real Marketing!
 
It’s my personal observation that most action sports companies think advertising and promotional tactics are marketing. Pacific Sunwear doesn’t seem to suffer from that delusion. Chief Financial Officer Carl Womack described the two-hour focus groups they do each year in half a dozen cities and have been doing for seven or eight years. He explained that their on-line inventory reporting allowed them to see what was selling and what wasn’t on a daily basis.
 
“Not only does this allow us to manage our inventory on a day to day basis, but it helps us anticipate trends so we can respond on a timely basis.”
 
He emphasized the close relationships they had with suppliers as a critical source of market trend data. They share ideas regarding fashion trends and merchandise self through with their vendors. “We always pay our suppliers on time- sometimes even early if they need it,” he indicated. That ought to go a long way towards creating good working relationships.
 
They experiment with new colors, styles and items by ordering small number (maybe twelve dozen) and seeing how they sell.
 
To sum it all up, it seems that marketing (that is, figuring out what the customer wants) is institutionalized at Pacific Sunware. Everybody thinks about it all the time and is required, as described below, to react to what they learn.
 
Running the Business
 
So PacSun’s success depends on their ability to respond to the dynamic fashion whims of young people aged twelve to twenty-two. How do they run their business to accomplish that?
 
All the stores of a given class are the same in terms of size, fixtures and inventory. Nobody has to do a study to figure out how build out and stock a new store. It’s a good thing, since they plan to open 108 new stores in fiscal 1999. Sixty-seven are planned to be Pacific Sunwear stores, sixteen Outlet stores, and twenty-five d.e.m.o. stores.
 
Though stores have the same inventory selection, the timing of inventory receipt will vary according to store locations. It gets colder some places earlier in the year than in others.
 
The company manages inventory through what CFO Womack called “permanent markdowns.” Every two weeks, based on the daily sales data, the store managers get to work to find the markdowns already downloaded into their store registers. All they have to do is put up the “On Sale!” signs. No slow moving inventory is allowed to linger in the hope that it will suddenly become hot. The inventory turns quickly, and the customer doesn’t wait for big sales promotion before coming into the store.
 
Stores have daily, weekly and monthly sales goals against which performance is measured. Feedback is immediate, as are bonuses for meeting monthly goals. Yet the store managers have no involvement in the actual selection of merchandise, though of course their input and ideas are solicited.
 
So what’s going on here? Pacific Sunwear’s systems and operating procedures dovetail nicely with their marketing imperatives. Need to have the right inventory? Better have the systems to know what selling so you can move what’s not. Want to grow quickly? The stores better be more or less the same. Want to be on top of trends? Better get along with your suppliers. The financial results are good expense control, minimizing writedowns and inventory levels, and high margins.  And a strong bottom-line.
 
Notice how all the pieces work together. There seems to be a company wide strategic focus that makes it immediately clear to management when something is “right” and when it is “wrong.” I’m usually not this gah-gah over a company. What could go wrong?
 
I’d focus on three things. First, management could lose touch with trends. Age does that no matter how good your systems and marketing are. Second, defections from a management team that has been together this long could be a problem. I hope the golden handcuffs are reinforced with titanium, and I hope the district and regional managers have a lot of input. Finally, fast growth can cause problems all by itself, but that’s a risk it looks like we’ve going to have to live with.

 

 

Beset by Opportunities; How Can We Take Advantage of Them?

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There are sixty million kids people in the United States between the ages of 5 and 20. Over half of them haven’t entered adolescence yet. It’s the biggest demographic bulge since the baby boomers.

 
Every large, mainstream company in this country from Levis, to JC Penney to Fidelity Mutual Funds needs credibility and brand recognition with at least some piece of this generation. It’s not an over dramatization to say that their future depends on it.
 
They are struggling to figure out how to reach this generation. Some are doing better and some are doing worse. Some are screwing up unbelievably badly but don’t even know it. However well they are doing, they are changing skateboarding right long with other pieces of the action sports business. The resulting broader, growing market isn’t just about selling skateboards to skateboarders. It includes a growing number of customers, or potential customers, interested in the lifestyle, fashion, culture and attitude that’s being toned down and homogenized for this larger market.     
 
Is this an opportunity, an inconvenience or a big mess? Since it’s not going to go away, and many of these behemoth companies wouldn’t have a significant financial event if they suddenly controlled 100% of the skateboard market, I guess we better make it into an opportunity.
 
Marketing
 
Not running ads. Not going to trade shows. Not promoting team riders. Not sponsoring events. Those are promotional tactics. Maybe they are good ones. In the past, in most segments of action sports including skateboarding, they could pass for marketing because customer identification was simple. Anybody who bought skate product could reliably be assumed to be a skateboarder. It was an enthusiast market where your customer segmentation was done for you. You sold skateboards and skateboard products to skateboarders. There was nothing to figure out.
 
Now there’s a lot to figure out. It’s not only skateboarders buy skate shoes anymore, to use what’s probably the most obvious example. Who are your customers now if they are not all skateboarders, and why do they buy from you if it isn’t just to skateboard? Now we’re talking real marketing- something the industry has never had to do before.
 
“Figuring all that out sounds expensive, time consuming, like a pain in the butt and generally no fun,” you say. “It is,” I agree. “Well, I’m not going to bother,” you announce. “I’m going to sell what I’ve always sold to the people I’ve always sold to.”
 
No doubt that’s a viable strategy for some people. Why might it be right for fewer and fewer?
 
Competition by the Numbers
 
I guess this is either everybody’s fault or nobody’s fault, but hard goods have become a commodity. That is, they are easy to make, more or less the same, there’s too much product and manufacturing capacity, quality is generally high and uniform, and the customer knows it. Barring a major strategic breakthrough in how the industry functions or a technical breakthrough in how product is made, neither of which seems to be on the horizon, I don’t see that changing.
 
Soft goods have some of the same issues, though it seems to be easier to differentiate shoes and clothing because of distinct visual differences and new materials than it is with boards, trucks and wheels. It use to be conventional wisdom in the snowboard business that you sold boards first, and boots, bindings and soft goods would follow the boards right into the customer’s hands. When that changed- when the board became something you just needed to sell because you were in the snowboard business after all, then it was time to manage differently in the snowboard business. That’s where the skate board business is right now.
 
If you do business the same old way, you will be competing by the numbers. Here’s how the numbers can get you if you find yourself in that position. If you are perceived to be selling the same product everybody else is selling to the same people everybody is trying to sell to, then you’re competing strictly on price. Your gross margin will fall. To achieve the same level of profitability, you have to increase your unit volume. But the only way to do that in this kind of competitive situation is to reduce your price. It’s an ugly, vicious circle that ultimately forces a lot of people out of the business.
 
You may, of course, be determined to differentiate your product to avoid margin deterioration. If your product is actually not different from your competitors, the only way to differentiate is through advertising and promotion. Hype, to coin a phrase. But hype costs money. Lots of money. You may maintain your gross margin, but higher operating expenses will leave you with the same depleted bottom line, everything else being equal.
 
Sounds hopeless, but it’s far from it. Like I said in the title, we’re beset by opportunities if we just know what to do with them.
 
Marketing Again
 
Typically, competition by the numbers works only for one or two large players in each industry. So it’s a condition to be avoided- especially in an industry where there are no large players. What’s the choice?
 
Your only choice (other than to count on being lucky, which will work from time to time) is to be able to answer the following questions:
 
·         Who buys my product?
·         Why do they buy it instead of another brand?
·         What are the attributes of my product and, given those attributes, who besides my current customers might buy it?
 
What a pain in the ass. It’s such a pain, in fact, that I’ve heard executives of larger companies who have to find a way to deal with the emerging demographics say they have to earn their revenues from the baby boomers while positioning themselves with the kids.
 
It’s a great idea. But I anticipate the execution, if that’s as far as the analysis goes will leave something to be desired. If you try to appeal to everybody, you often end up appealing to nobody. It’s a seductively simple sounding solution. “There- I’ve done my market research.”
 
In skateboarding, the similar rationalization may be “My customer is the 13 to 17 year old male who hasn’t discovered girls or cars yet.”   That may be true for many companies and no doubt represents successful customer segmentation for some. But it can’t be valid for everybody and if you don’t remember why reread the Competition by the Numbers section and reflect on the overall profitability of the industry.
 
What to Do?
 
Retain a team of students from the local university MBA program to do a market research project for you. They may work nearly free, will get credit for the project, and they will be guided by a faculty member. Read some books on marketing. Get your team riders asking the people at skate parks some focused questions. Have employees canvas customers. Work with a shop to get fifteen of their customers together for pizza and ask them what they bought and why. Call up the brand managers or marketing people at Levis, Pepsi, Proctor and Gamble or another large consumer products company. Have lunch or a long phone conversation with them. You could help them figure out what’s up, and they could maybe help you structure your marketing research or even supply you with some data. I suspect you might uncover some mutually beneficial opportunities to work together. There’s a lot of that going on.
 
Once you’ve taken a shot at answering the questions posed above, be prepared to step out of your comfort zone. If selling the same stuff to the same people in the same way doesn’t represent a good business opportunity anyway, what do you have to lose?
 
Doing your marketing, and answering the questions above (or similar questions that seem more appropriate for your circumstances) will typically identify both opportunities and inconsistencies in your current market approach. Imagine being able to identify your most profitable customer groups and the marketing tactics they respond to. What’s that worth not only in incremental sales, but also in more efficient use of advertising and promotional dollars?
 
There was a time when straying outside the core specialty market threatened your credibility with that customer group. Maybe it still does, though to a lesser extent. In any event, if focusing on that core specialty market exposes you to competitive conditions where you can’t make any money, who cares?
 

Demographic changes, market homogenization caused by a fashion/lifestyle/cultural focus independent of actual participation in the sport, and the financial resources of large corporations are expanding your market. The catch is that you have to figure out what piece of that market you can compete in. Do your marketing

 

Fat Lady Sings. K2 Buys Ride

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K2’s purchase of Ride, announced on July 22 and expected to close within 100 days, is as close as we’ll ever get to a capstone on consolidation.

We all were intellectually aware of consolidation, but this makes you aware in your gut. Burton and K2 now control what I’d estimate to be 65 percent of the U. S. snowboard hard goods market. Add Salomon and Rossignol and the number jumps to north of 75 percent. The number two, independent, snowboard only brand in North America is now Sims
Three questions:
 
·         What the deal?
·         What does it mean for the industry?
·         How is K2 going to manage it?
 
The Deal
 
The only info we’ve got on the deal comes from the press release and Ride’s 8K filing with the Securities and Exchange Commission. K2 is buying the common stock of Ride. That is, it’s buying the whole company- not the assets like in the Morrow deal and so many other snowboard deals.
 
So K2 gets all the assets and all the liabilities, known and unknown. If a two-year-old Ride binding blows up, somebody is hurt, and Ride is sued, K2 will be responsible. In an asset deal, they typically would not be- which is one reason asset deals are often popular.
 
Ride’s stock will be acquired in exchange for K2 common stock. Ride shareholders will receive K2 shares “with an approximate value of $1.00 for each share of Ride stock owned.” Given the number of Ride shares outstanding, that means a purchase price of around $14.3 million. Both boards of directors have approved the deal. One of the reasons it will take so long to close is that Ride shareholders have to approve the deal as well.
 
The deal is being structured so it’s tax free to Ride’s shareholders. Ride’s directors have already agreed to vote their shares in favor of the deal.
 
To get Ride from the July 22 agreement date to closing, K2 has agreed to extend $2 million in interim financing to Ride in exchange of a promissory note that can be converted into Ride stock. The note’s initial interest rate is eight percent. That rate increases one percent every 180 days up to a maximum of eighteen percent on the unpaid portion of the note and any accrued interest, however the notes is payable in full on November 19, 1999.
 
The note is convertible by K2 at any time into Ride’s cumulative convertible preferred stock and is automatically converted under certain circumstances if the merger agreement between K2 and Ride is terminated. K2 would get one share of the convertible preferred stock for each dollar that is still owed from the principal and unpaid interest of the note.
If somebody else buys Ride, or agrees to buy ride, before the note is repaid or converted, K2 can demand to be paid in cash for up to a year based on the price of Ride’s stock (which could go up if a better deal comes along).
 
Ride, as a public company, has an obligation to consider any better offers that come along. This note is structured not only to give Ride working capital to get it through the period until closing, but to make it less likely that any such deal will come along. If the deal with K2 closes, there’s nothing but intercompany debt that gets eliminated in consolidation and doesn’t much matter.
 
As another step in keeping Ride operational until the deal closes, the two companies have agreed that K2 will acquire Ride bindings with an approximate cost of $700,000 and assume Ride’s obligations to ship Ride customer orders of approximately $8.4 million in bindings and apparel. K2 will purchase approximately $4 million in inventory from Ride’s vendors to fill these orders.
 
What’s it all mean? The two companies are getting so far into bed with each other before the deal closes that it’s unlikely it won’t close or that another buyer will come along.  
 
The transaction will be accounted for as a purchase rather than a pooling, and now I’ve put my foot in it because I have to explain the difference.
 
First, if you buy assets, you assign values to the assets based on what they are really worth. So is you’re buying accounts receivable for $100,000, but know that only 85 percent are collectible you’d “allocate” $85,000 of the purchase price to those receivables. After you’ve allocated as much of the purchase price as you can to the assets, the rest is allocated to goodwill. Goodwill sits on your balance sheet and has to be amortized (taken as an expense some at a time) over a period of many years, but isn’t deductible for tax purposes.   In addition, no bank ever thinks good will is worth anything when considering whether or not to lend you money.
 
Allocation of purchase price in an asset deal also has a major impact on who pays what tax when the deal closes, but since this isn’t an asset deal and I hate it when readers fall asleep, we’ll skip that. You’re welcome.
 
A pooling is a straight exchange of stock where the values on the two company’s balance sheets are added up. No goodwill is created. No assets are written up or down and there’s no allocation of purchase price. The only adjustments are the netting out of any inter-company debts (amounts the two companies owe each other).
 
K2 is buying Ride’s stock with its stock, but it’s not a pooling because Ride shareholders are getting a certain value per share- not just K2 shares with a value completely dependent on the market. It’s a purchase. That’s what the Financial Accounting Standards Board says, so that’s the way it is.
 
Once K2 knows exactly how many shares it’s exchanging for Ride, and the market price of those shares at closing, it will know how many dollars it paid for Ride by multiplying the market price of each share by the number of shares they are giving Ride shareholders. The accounting interpretation of the deal is that K2 is buying Ride’s equity, a balance sheet number. At March 31, that number was 16.1 million dollars. I’m sure it’s lower now. I wouldn’t be surprised if it’s around 14.3 million dollars.
 
To the extent that the purchase price is higher or lower than Ride’s actual equity at closing, other balance sheet items will be adjusted to reflect fair market values. For example, if the purchase price is $100,000 higher than the value of Ride’s equity at closing, the value of other Ride assets will have to be increased, to a maximum of $100,00 if what they are really worth justified such an increase. To the extent that those adjustments don’t account for the difference between Ride’s equity and K2’s purchase price, goodwill is adjusted. It looks in this case like the purchase price will end up being somewhere close to Ride’s equity, so adjustments should be minor.
 
That’s enough of that. This article is in serious danger of turning into a lecture on acquisition accounting.
 
So what’s the deal worth anyway? The easy answer is that it’s worth the approximately $14.3 million in K2 stock Ride shareholders are receiving. That’s not a bad answer, but let’s go a little further, keeping in mind that there’s rarely a right answer when you value companies.
 
Ride’s March 31 balance sheet showed thirty two million dollars in assets and sixteen million dollars in liabilities. K2 gets all those as part of the purchase. The assets include $8.5 million in goodwill and $5.4 million in net plant and equipment. If I were K2 trying to figure out the value of Ride, I’d call the goodwill zero. I’d write down the plant and equipment. How much would depend on what use I was going to make of the factory. Let’s say they cut it in half, making the realizable value of the Ride assets around $20 million. The liabilities, as usual, are all real.
 
Let’s say that K2 could liquidate the assets for $20 and pay off the liabilities for $16 million. It doesn’t work that way of course, but if it did K2 would have $4 million in the bank. So they would have paid stock worth $14.3 million less $4 million in net assets, or $10.3 million basically for Ride’s trade name and order book.
 
But you can’t realize the value of that trade name and order book unless you operate the business. To do that, you have to invest a certain amount of permanent working capital. Ride didn’t have the working capital it needed. In a nutshell, that’s why it had to sell. My guesstimate, depending on the expense reductions K2 can find to reduce overall operating costs, is that K2 is going to have to invest maybe more than$10 million in Ride in additional to the $4 million in net assets that’s already in there. My guess is that Ride’s bank (owed $8.5 million at March 31) is going to want to be paid off and certain unsecured creditors who have been waiting a long time for their money will also have to be paid. 
 
K2, therefore, may look at it’s cost to buy Ride as not only the value of the equity it gave up, but as the additional capital they have to invest to normalize the balance sheet- $24 million in total or maybe higher. If Ride had been capitalized normally, that whole amount, and probably more, would have accrued to Ride’s shareholders. But K2’s offer was based on what it would cost them not only to buy but to operate Ride regardless of whether it went to the shareholders or not.
 
Good deal or bad deal? K2 got a good deal. Did Ride shareholders get screwed? Not given the alternative. My sense is that Ride’s management found the buyer to whom Ride has the most value. Furthermore, Ride’s balance sheet and recent public information suggest that cash flow issues were severe enough that scenarios where shareholders got less than one dollar per share were possible. Like a whole lot less. Like the big goose egg.
 
All of the web whiners who are bitching and moaning about this deal ought to give Ride employees credit for performing some operational miracles under impossibly difficult circumstances not of their making.
 
If you want to blame somebody, check out the nearest mirror. The person you’re looking at bought an over priced stock in an industry facing an inevitable and predictable consolidation. 
 
Industry Impact
 
Ride and Morrow are gone as independent snowboard companies. Atlantis, Division 23 and Type A are, in my judgment, unlikely to resurface as strong specialty brands. To Forum, Sims, Palmer, Never Summer, Option and maybe a couple of other brands this could be an opportunity depending on retailers’ perception of the deal. One brand I’ve talked with is already getting calls from retailers who were prepared to buy Ride but are reluctant to buy “another K2 brand.”
 
The strategic line between the niche players and the big companies are as clearly drawn as you could ever expect to see. If any single action can be said to mark the end of snowboarding’s consolidation phase, this deal is it.
 
Specialty brands can exist in their niches and maybe grow a little. But it’s financially unlikely that anybody will start another one. Those niche brands that exist don’t have the economies of scale, distribution leverage, and marketing dollars they need to chase the big players. And as independent companies, they probably never will.
 
Then there’s Burton with something like forty five percent of the U.S. market. They are left standing alone with the cache of a niche brand, but on an international scale, and the leverage of a large company. Ain’t nothing to analyze there. My guess is that they are thrilled with this deal.
 
As I indicated, some retailers may have some resistance to putting more eggs in the K2 basket. But if the consumer wants Ride boards, and K2 offers good terms, prices, service, quality and promotion, the retailers will pretty much get over it. They have before.
 
I would expect the complete programs from Morrow and Ride to improve as a result of being part of a larger, financially stable organization. And the production of boards in China is going to produce some price points that retailers aren’t going to be able to live without.
 
Sean- I don’t really want to add here what you added. I think I ask and answer the question you raise in the next section.
 
K2’s Decisions
 
What I think was the opportunistic purchase of Morrow (it was too good a deal to turn down) seems to have transformed itself into a strategy with the purchase of Ride. Of course, we don’t know exactly what that strategy is yet. K2 now has five snowboard brands, with K2, Morrow, Ride, Liquid and 5150. How do they get positioned against each other? How many of those brands can you imagine one retailer buying? If I were doing it, I’d make K2 the ski shop brand. I’d retain Brad Steward (between movies, of course) to consult on repositioning Morrow as the quirky brand it use to be. Liquid would be for the mass-market channel, and Ride for specialty shops, but with a more mainstream profile and higher volume than Morrow. I’m fresh out of market positions and have no idea what I’d do with 5150. Whatever the positioning decisions are, I’ll be interested to see if all five are retained. I wonder what Cass would pay for Liquid? I’d really like to leave this in. Let’s talk.
 
Even excluding the distribution issues, managing five brands against each other in the same organization is tough. I’m reminded that one of Bob Hall’s first pronouncements on becoming CEO of Ride was that the company had too many brands.
 
Of course, some of the brands he eliminated didn’t have enough volume to justify the required advertising and promotional expenditures, and I don’t think K2 faces that. Still, there are some obvious conflicts as K2 works to restructure its organization to manage the five brands.
 
For instance, you just know that the financial guys at K2 are sharpening their knives to slice expenses and walking around muttering stuff about synergies. And certainly K2doesn’t need two warehouses, credit departments, computer systems, purchasing departments, etc.
 
Maybe they don’t need two factories. Yet maintaining brand integrity means keeping sales and marketing separate. Will they have separate customer service departments with people dedicated to brands or will the temptation to have one group that answers the phone “snowboard customer service!” win out? Will all the invoices the retailers receive look the same except for the brand name?   How many brands will be made in the same factory? Will the T-shirts and beanies all be the same but with different logos? In a thousand ways, none of which, by itself, probably matters, the identity of the brands can be subverted in the perfectly reasonable pursuit of operational efficiencies.
 
I’m not saying it will happen, but making sure it doesn’t is a hell of a challenge. It’s not easy to be passionate about five brands at once.
 
SIDEBAR
 
Things to Watch
 
1)             Who’s going to run what brands?
2)             What will happen to Ride’s factory?
3)             What will be the fate of the Device step-in system and the lawsuit with Vans (Switch)?
4)             How will be product development be managed among the different brands?
5)             I’m sure we’ll figure out some more to add.

 

 

I Feel a Whole Lot More Like I Do Now Than I Did a Little While Ago; My Take on ASR

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I’m not entirely sure what the title of this article means, but I’m pretty certain it applies to the skateboard industry. Conditioned as I am by the snowboard industry consolidation, I went to ASR expecting to observe a similar process. Subjectively, it seemed like the show wasn’t quite so crowded, and things were more business like, but there weren’t dozens of companies missing and multiple unused booths. And there were some small companies saying and doing the kind of things that made me think they might be around a while.

 
Don’t get too excited. Not for a moment am I going to suggest that skateboarding is in any way immune to typical business cycles. But there may be some forces at work that will allow the process of industry maturation be a little less painful, or at least draw out the agony over a longer period of time. I’m not sure if that’s good or bad.
 
So here’s the plan. Let’s decide what we mean by “the skateboarding industry,” review how consolidating industries change, look at a couple of industry trends that may make it easier to deal with, and then, to conclude with a happy feeling, look at some of the positive things I think I spotted at ASR.
 
Who Are We?
 
This use to be easy to answer. A company in the skateboard industry was any brand or retailer that sold skateboards and/or any other hard goods. Probably they also sold some soft goods but, at least in the case of the brands, those tended to be promotional and if they happened to make money on them, great. Now you’ve got skate shoe companies and skate clothing companies and shoes and clothing are an important component of any retailer’s sales. Are they still skate companies?
 
When you sold a skateboard, you could reliably assume it was to somebody who was going to actually go skateboarding. That’s not so clear when you sell a pair of skate shoes or some skate clothing. I’m going to guess that an increasing percentage of non-hard goods sales are going to people who don’t skateboard. Are companies who don’t sell hard goods and who sell a bunch of product to non-skaters industry companies?
 
Have a great time arguing over that. Since I seem to have a 5,000-word story I have to write in 1,500 words, I’d better move on. The point I’d like to make is that the industry has evolved so that, for better or worse, it’s no longer just defined by people skate, but by people interested in the image, attitude and lifestyle of skating. And by companies with a lot of money who are having a hard time understanding the sport. I’ll get back to this when I talk about industry trends.
 
Trends in Consolidating Industries
 
I’ve said this all before. Just check out the sidebar to refresh your memories, think about it for a minute or two, and we can move on.
 
SIDEBAR
 
Changes in Consolidating Industries
 
·         More competition for market share. Competitors become more aggressive because they realize their survival is at stake.
·         New products and applications become harder to develop.
·         Dealer margins fall, but dealer power increases.
·         Industry profits fall during the transition period. Cash flow declines when it is needed most. Raising capital becomes very difficult.
·         There is the danger of over capacity and turning the product into a commodity (Repeat after me- “Blanks are sure swell!”).
·         A new basis of competition is required for successful companies, but past industry euphoria makes changing difficult.
·         There’s a bunch of irrational competitive behavior. “It won’t happen to me” is an idea frequently expressed by companies waiting for their competitors to falter.
 
Industry Trends and Circumstances
 
Not all the changes in consolidating industries happen at the same time to all companies. Nor do they all occur with equal strength. In skateboarding, there are a number of reasons consolidation doesn’t seem to be occurring in a textbook way.
 
The industry is not extremely seasonal.   Retailers aren’t being offered 120-day terms by manufacturers. There are no long lead times on making and delivering product.   Inventory turns, let’s say, four to six times a year (my guess). Manufacturing technology is simple enough, or well enough established at least, that no huge investments are required and yield is high.
 
All those things mean that the working capital investment required in skateboarding is comparatively easier to manage than in some other industries. So the financial pressures on marginal players is less. It also means that it’s easier to get in, and to get out, of this industry. Due to extreme seasonality and the timing of the product cycle, there was never a good time for a company to exit snowboarding.
 
I’m not suggesting that things are easy financially. Low hard goods margins, blank decks, and difficulty differentiating one company’s product from another’s means you have to spend more on advertising ad promotion exactly when margins are declining. That creates a bias in favor of larger companies that move more volume because it gives them more gross margin dollars to work with.
 
But maybe financial pressures will be increasing. I talked to one large company that sells skate shoes (among other things) at the show that mentioned how they were starting to offer 60 day terms to select retail accounts. And so it begins.
 
There is no leading, clearly dominant company in the industry. My guess is that the single largest hard goods company sells no more than $15 million annually in decks, wheels, and trucks. In snowboarding, Burton, with a market share in excess of 50% a few years ago, had the market leverage to set the bar for successful competitors. An awful lot couldn’t get over it. Nobody can set that bar in skateboarding at this time. It’s interesting to note that some of the larger shoe and soft goods companies appear to be at least double the size of the hard goods leaders based on revenue.
 
Skateboarding is operating in a roaring economy, with income and spending growing, interest rates low, lots of wealth created in the stock market and jobs for anybody who wants one. Now add to that 60 million young people between five and twenty born between 1979 and 1994. Levi’s, Converse and Nike aren’t cool any more. But their long-term success requires that they make an impression on this group, whose spending habits aren’t formed yet and the largest chunk of who are still ten years or so away from adolescence. So they are interested in skateboarding and other activities that are part of this group’s culture. Not because they want t sell skateboards- they could take the whole skateboard hard goods business and it wouldn’t have a material impact on their bottom lines- but because they want their involvement with the sport/lifestyle/attitude to give them credibility with this group.
 
The (Probably) Good News
 
So we’ve got a strong economy, favorable demographics for the next ten years or so, and big money interested in the sport.   For the reasons I mentioned above, the financial environment could be a lot more difficult than it is right now. That’s especially true if you define the skateboarding industry to include clothing and shoes- which, to answer the question I raised earlier, I think you have to do.
 
Some smaller companies seem to be making some good decisions. At ASR I heard people talk about cutting teams to get costs in line with measurable financial benefits. There were comments like, “I’m not going to run an advertising campaign that drives me into the hole financially.” People were acknowledging the similarity of products from company to company and being thoughtful about how to differentiate themselves from their competitors.
 
I suppose you’re only surprised by such common sense ideas and comments if you were around at the peak of the snowboard feeding frenzy, when it was grow at any cost, take market share, find money for just one more ad. The perception was that if you didn’t “establish your position” you were dead meat. That was true. But the cost of establishing your position was as likely to kill you as not establishing it. Turned out it didn’t matter how you died- only that you were dead.
 
Pay attention to the trends in consolidating industries, but recognize that the rapid growth, maturity, and consolidation cycle is more typical of emerging industries. Skateboarding has been around a while. Hard goods, clothing and shoes are all part of skateboarding, but each seems to be at a different point in the cycle. I’d look at them separately. The lack of a dominant company in the industry and the fact that the business isn’t extremely seasonal suggests that more players can survive.
 
In the past, the attention of large companies caused a severe decline in skateboarding. Given the demographics we’ve got, and assuming that skateboarding doesn’t become “uncool” who’s to say that the industry can’t continue to grow at a rate that lets it at least keep its existing percentage share of adolescent males? That doesn’t mean a hundred new hard goods companies. That could only happen if some product innovation lifted margins on hard goods to the point where new, smaller players could compete. I don’t see that happening and expect the lion’s share of any growth in skateboarding to accrue, at least in hard goods, to the existing, larger, companies.
 
Interesting stuff. Let’s talk about it at the Industry Conference in April.