Snowboarding the Internet; Taking the Tour at 26.4

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

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.