Watching the Big Box Selling Process; Thoughts for the Specialty Retailer

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Store One

 
I would guess the girl was 14. She was at this big box sporting goods store with her parents picking out a board, boots and bindings. She didn’t say much and was following her parent’s lead. Their credit card I suppose.
 
It isn’t easy, you know, to hang around through the whole sales process- close enough to hear what’s being said but far enough way so that the sales person doesn’t call security.
 
In this particular case, security should have been called. Not for me but to hold the sales person until the police could show up to arrest her for impersonating somebody who knew something about snowboarding.
 
I didn’t hear any discussion about whether the girl had snowboarded before. I don’t think she had. The first criteria for selecting the board was length, determined by the girl’s height. Her weight was never asked. There was no discussion of flex or where she might be riding and how she was going to learn.
 
The second criteria was color. Blue seemed to be the mother’s preference, so blue snowboards was what the sales person showed them. She seemed to be able to distinguish blue from other colors, so at least she wasn’t color blind.
 
It was at this point I started to get a little antsy. My growing disquiet didn’t decline at all when they started talking about bindings. The mother took the lead on this. Arguably, she was the most knowledgeable one in the group- including the sales person. At least Mom knew what she wanted and why.
 
And the major criteria for selecting a binding was? You guessed it. It had to coordinate with the board. So without a word, the sales person started showing them bindings that looked good with the blue board.
 
Well, that was easy. The parents looked relieved. This was obviously going very well. Their daughter just stood there.
 
Next, the sales person asked, “Are you going to mount these yourself?” Suddenly, the father looked troubled. It was clear where even semi-mechanical duties lay in this family. After an uncomfortable pause, the sales person came to the rescue, if you insist on calling it that, by saying, “We can mount them for you for $10.00. Looking relieved, the father readily agreed.
 
“Which foot do you want forward?” asked the sales person. “Can’t you ride either way?” queried the mom.  “Yes, but most people have a preference,” was the reply.
 
There was an uncomfortable silence. Showing her great knowledge, the sales person said, “Well, most people ride with their left forward, so how about we mount them that way?” That was agreed to, and represented the end of the mounting discussion. No talk of angles or stance width. Granted, the girl probably didn’t know what angle or width she wanted, but the concept that it could make a different might have been mentioned.
 
Now, onto boots. Though I’ve never sold a snowboard in my life to a consumer, I would have started with boots, but what do I know.
 
However, I would not have started with these boots, by which I mean any of the boots in the whole store. Everybody reading this knows the kind of boots I mean. No support, a lousy lining, cheap construction.
 
This is the end of my story. I don’t know what happened with the boots, or if the sale was consummated. Though I’d seen it before, I never react very well in these circumstances. My frustration and stress level goes so far through the roof that I either have to get out of the store, or rush over to the family and beg them to let me help. That’s what I should have done.
 
There were good Oxygen boards there from last season that would have worked. They even had some blue in them. There were some perfectly serviceable bindings, but they didn’t go with blue. Oh well. Boot wise, I would have told them to flee into the night. I don’t think that would have gone over very well with store personnel.
 
I should have jumped into the middle of it. I should have fed them information until I was thrown out of the store. But I chickened out. And though she’ll never see it, I want to apologize to that poor girl who is going to have something less than an ideal experience when she goes to learn to snowboard and to her family, who think they got a good deal but really got something else.
 
Store Two
 
In a second chain retailer, arguably a step up from the first, the couple told the sales kid (who had told me he was a snowboarder) they were looking for a board, boot and binding for their 14 year old daughter who had been snowboarding a couple of years. Something not too expensive. The sales kid’s immediate response was, “Well, these are the setups we have on sale.”
He cued off the “not too expensive,” perhaps assuming if they were in his store, price must be the most important thing. That’s why you’d come into his store, right? Much of the rest of the conversation was in generalities and was driven by the customer. The sales kid responded in generalities to customer assertions like, “We want something that’s kind of medium quality.” “How about this one?” he’d ask, reaching out to pick up a binding.
I left before the conversation ended. The kid was sort of starting to wonder why I was hanging around and watching out of the corner of my eye. I don’t know if he sold anything or not. If he did, I have no reason to believe it was a good fit for their daughter.
 
What I Learned
 
Let’s do a little customer segmentation work here. Look at the admittedly oversimplified grid below.
 
                                                            NOT
KNOWLEDGEABLE           KNOWLEDGEABLE
 
 
PRICE SENSITIVE
 
PRICE INSENSITIVE
 
                                                                                                                                  
 
 
Just to save me some typing, let’s call these “ideal type” customers NKPS, KPS, KNPI, and KPI. NKPS, for example, refers to customers who fit in the box with Not Knowledgeable on top and Price Sensitive on the left.
 
Obviously, most customers don’t fit perfectly in one of these boxes. They are not, for example, knowledgeable or stupid. There are a variety of levels of knowledge and of price sensitivity. Nobody is completely price insensitive. But they give us a way to think about the customer base.
 
The KPIs are the ones that specialty shops tend to own. They will find you, appreciate your product knowledge and know they could buy cheaper somewhere else but not really care. God bless ‘em, I wish there were more.
 
The biggest challenge for the specialty retailer is the NKPS customer. The customers I’ve described above are examples of them. In the first place, they are the least likely to show up in your shop. If they do show up, they are the hardest to convince to buy because they start off knowing the least and have a predilection to spend less anyway. You can spend a lot of time educating them only to have them buy somewhere cheaper.
 
You have the same problem with the KPS types, but at least you can hope to spend less time educating them before they buy somewhere cheap.
 
The NKPI customers are the ones where you can best spend your time and hope to make your knowledge a real competitive advantage.
 
What I suggest is that your sales staff be armed with questions to determine how each customer could generally be characterized. If you’ve done your sales training, they already have most of those questions- they just need to think about the answers in terms of this classification.
 
In the first place, it would be interesting to see how many of your customers fell, more or less, into which category. I also suspect you could provide information, guidance, and help in product selection to the customer more efficiently based on how they were categorized.
 
I think what I might have just said is that you can do a better job of creating value for the customer. It is a matter of faith that the specialty shop competes by “creating value.” What I think that means is providing the most useful information in the most efficient and understandable way. I’m suggesting that this classification of customers might help you do that.
 
I’ve also visited a number of specialty shops and I think I spotted a couple of things that the successful shop does way better than the chain- and a couple they have to do as well. More on them next article.

 

 

Chop Chop, Fizz Fizz, Oh What a Morass It Is!

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Apologies to the Alka Seltzer people for bastardizing one of their old advertising slogans. It just sort of sprang into my head the moment I saw Dwindle’s announcement on their Chop Chop Wood Shop. I assume it occurred to somebody that the name might be offensive to the Chinese, but this is probably just some form of obscure skateboard humor. Hope it turns out to be good business.

Last issue, I offered up my opinion on how the industry might evolve. That was written before Dwindle’s announcement. Dwindle may have validated the scenario I laid out, so you might want to go back and read it if you haven’t already.
Let’s not waste time being pissed at Dwindle, and let’s not be surprised by their actions either. It’s not like they are the only skate company making or planning to make product in China- they’re just the only one that’s made a big formal announcement. They should get credit for standing up and saying it. This is just kind of standard industry evolution stuff.
But that’s not to say it isn’t important. The announcement marks a symbolic divide between how the industry use to be and how it’s going to be. That sure sounds pompous, but I really, really, really, believe it.
If it’s that important, what are you going to do about it?
Break Out the Spreadsheets!
At the end of the day, how this affects your business is going to have a large financial component, whether you’re a retailer or a brand or a manufacturer. With your computer on and your budget (you do have one, right?) on the screen, decide the following things:
  • To what extent will it be possible for an established brand to maintain higher prices in the face of Dwindle’s price cuts without giving away much or most of their volume?
  • How much of these price cuts is going to filter down to the consumer? That is, do you think retailers will hold prices, or pass the lower prices on to the skater?
  • What will be the impact on sales and margin of hard goods prices besides decks?
  • What’s going to happen to the pricing and sales of blanks?
  • To the extent that retailers choose to pass on their savings to skaters, what will happen the number of decks sold? Will it go up enough to compensate for making fewer margin dollars on each deck?
  • Is there going to be any kind of backlash against decks made in China? If so, how long do you think it will last?
  • What’s going to happen to distributors? If price cuts get passed through to consumers, will there be enough margin dollars to go around?
  • What’s going to happen to brand value? That is, how will lower prices impact the consumers’ impression of a brand and its desirability to them?
Say, these are all cheery questions, aren’t they!
Make your best guess and plug the resulting numbers into your budget. What does your new financial model look like? Are you making money? If not, what are you going to start doing differently?
For Retailers
Interestingly enough, retailers may be less impacted than anybody. Most retailers have already gotten use to the idea that hard goods aren’t necessarily the biggest profit maker in the store. They have allocated more and more space to shoes, apparel and accessories because they know that’s where they make their money. Many to most are selling blanks and shop decks. Largely, they are not just skate shops either. Obviously, the more skate focused you are, the bigger the potential impact. Tactically, the most important thing retailers may have to worry about is how the profitability of their blanks and shop deck sales could be affected.
Strategically, it’s a different thing. A few years ago, Burton Snowboards expanded its distribution dramatically. Pretty soon Burton, like most of the other major brands, was available in most distribution channels from specialty shops to big chains like Garts. I thought the message this distribution by the major snowboard brands sent to the consumer was, “It’s just a snowboard. No reason not to buy it where it’s cheapest.” If Burton wasn’t special in snowboarding, then nothing was.
That was the moment when the “race to the bottom” began in snowboards in earnest, though price competition was already pronounced before then. I hope skate hard goods aren’t doing the same thing.
For the retailers, the future can probably be seen in a Zumiezs or BC store, both of which I’ve visited in the last few days. They carry skate and snow hard goods, but I wouldn’t call either one a skate or snow shop. They are either lifestyle or action sports stores, or some other name I haven’t thought of. The hard goods are there, but they are casually displayed and don’t take up all that much room. I’m sure it’s not that they don’t want to sell them, but hard goods do appear to be a badge of credibility among the racks, stacks, and piles of shoes and apparel.
They have a year around business model that doesn’t just cater to skaters and snowboarders, but to the much broader market interested in the fashions associated with the lifestyles. If, as I think, we’re sending the message that “It’s just a skateboard” like it’s been sent in snowboarding, this is where I expect skate retailing to head. I’d note that this has happened in snow in spite of big team programs, promotions, and advertising campaigns by the major snow brands.
For Brands
Tactically, of course, brands without their own factories now have some ability to get lower prices either by getting their own product from China or using the threat of doing it to get better prices from their domestic suppliers. They won’t get as good a deal locally as they can get from China no matter how well they negotiate.
The strategic financial question is the more interesting one.
When Chinese production (not just from Dwindle) works its way through the system, will a brand be selling more or less decks at higher or lower margin? I’m not concerned about the gross margin percentage as much as about the total number of gross margin dollars available. Given the total gross margin dollars the brand has available, will they be able to support their team and marketing programs (the only real source of brand differentiation) at the level they have supported it at in the past and still make money? If marketing programs suffer for financial reasons, it gets even harder to support the argument that there’s any reason to buy a skateboard based on anything but price.
For Manufacturers
In the late 80s and early 90s, there was no snowboard manufacturing capacity available. Factory after factory opened in the US. Then the big Austrian ski factories and, later, the Chinese, stepped in. Most of the US factories disappeared. Mervin Manufacturing, the producer of the Gnu and LibTech brands, survived the transition by being bought by Quiksilver. Now, even they are starting to make some low end product in China.
Due partly to a managed foreign exchange rate that keeps the Chinese currency ten to forty percent undervalued against the dollar, the Chinese have eaten the lunch of various wood products manufacturers in the United States. I hope it’s different with skateboard manufacturers.
If it is, it will probably have to involve consolidation and a highly efficient, large player. Maybe something along the Mervin model will happen, though it’s unclear to me why anybody would buy a skateboard manufacturing facility right now.
Speaking of the Mervin model of course, they also make their E-Maple skateboards with the plastihide tops that are suppose to last longer and offer more pop. Technology has been the traditional defense against low cost manufacturers. We could sure use some more right about now.
Don’t Panic, At Least Not Too Much
No doubt everybody, including me, would feel a whole lot better if I’d painted a rosier picture. Unfortunately, I have the really bad habit of saying what I actually think. Maybe I have exaggerated the potential changes just a little to encourage everybody to take a hard look at their business model and plan for how they are going to react as things unfold. Bottom line is that the Dwindle announcement and associated price cuts shouldn’t be that big a stunner because anybody who hasn’t been playing at being an ostrich knew this was coming from somewhere, though of course we hoped it wouldn’t happen. Industries change. You change with it.

 

 

Snowboard Company Business Models and Core Retailer Problems; A Basic Incompatibility?

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“They may put me out of business and they can’t even put a wax on a board!” said the snowboard retailer about the Zumiez down the street.

I talked to him enough to know that he wasn’t kidding and he wasn’t being sarcastic and he wasn’t just trying to make a point. After a bunch of years as a successful, core, snowboard retailer, he may find himself history. Gone, done, toast, road kill, finished.
 
And he’s not doing anything fundamentally wrong that I could pick up on.
 
The brands will all tell us, have told us, that the core specialty retailers are critical to their businesses and to the future of snowboarding. And they know that, as a group, those retailers are having problems. Granted, they are trying to give some focus and support to those retailers. But it’s my point of view, given the market characteristics we are faced with in snowboarding, that it is difficult for the major brands’ given their inevitable, justifiable, and reasonable competitive actions and strategies to support the core retailers in the way they need to even though some of their tactics do provide such support.  
 
Well, here I go making myself popular again.    I really need to get over this personality quirk that seems to require that I say what I actually think.
 
Industry Conditions
 
As an industry, we aren’t growing so fast any more. Generally, everybody makes good product in hard and soft goods. Quality snowboard product has become ubiquitous. That is, it can all be bought at lots and lots of places. People don’t buy new stuff as often as they use to. There’s no reason to unless you just have to have the latest and greatest. Price is more important in the purchase decision.
 
Mostly, you already know all that. You also know that, in general, the major brands want to grow. Some apparently at any cost. Some are a bit more cautious, or maybe I mean a bit more realistic.
 
K2 Sports Division President Robert Marcovitch puts it like this. “Sure we want to grow, but we are also focused on our gross margin. We want to make money- not just sell.”
 
Salomon National Sales Manager Greg Keeling pointed to the brand’s long standing and consistent strategic focus on technology. “Salomon has always been about the technology,” he said. “That means our average customer is maybe a little older than that of other brands.”
 
It may also means that maybe they lose a few sales to people not quite so interested in the technology, but Greg believes it means they gain in loyalty and maybe in margin as well.
 
That’s a lot the same as what K2’s Marcovitch is saying. Growth, yes- but not at any cost.
 
But still growth for all the top five companies. Four out of the five are public, which creates pressures of its own. The fifth, Burton, isn’t, but seems at least as committed to growing revenue as the others.
 
With the market conditions outlined in the first paragraph of this section, however, growth can be hard to come by. Your product isn’t really better than your competitors. You’re running out of new retailers. The existing ones can only take more in total to the extent snowboarding is growing.
 
So you try to find new places to sell- online, retail stores, retailers you wouldn’t have given a second thought to a few years ago, better deals. You fight to take shelf space from your competitors. They fight back. But lacking real product differences the consumer believes in, those fights can get ugly, though great for the consumer.
 
This is hardly a new story. We’ve watched it evolve over years now. The point is that a requirement for growth, lacking a real competitive advantage, turns into “beggar thy neighbor” tactics that kind of overwhelm any real strategy you might be trying to execute.
 
Meanwhile, Back at the Specialty Retailer
 
It is obvious, I think, that no specialty retailer can have any meaningful influence over the situation I’ve described above. Yet the whole specialty retailer business model requires exactly the things that the competition for revenue growth makes difficult to achieve.
 
First, they need higher margins. But they often, and maybe always, get higher product prices than the chains get. They don’t buy as much and they don’t have the same leverage. So to get those higher margins, they have to price higher. But it’s hard to make higher prices stick when all the product is so good and so much the same and the consumer knows it. It doesn’t help that the same stuff is available in nineteen places within a radius of two miles. Okay, I might be exaggerating there- let’s say three miles.
 
It follows that the second thing they need is more controlled distribution. Higher prices come from scarcity and differentiation. But controlled distribution implies less growth. There doesn’t seem to be much willingness to give up sales for the benefit of smaller core retailers who would rather sell what they have at full margin in season than buy more and have to put it on sale after Christmas.
 
So you can see the contradiction between what the brands are driven to do and what the specialty retailers need.
 
The Brand Financial Model
 
Are there any circumstances under which that contradiction might at least be diminished? Maybe. From the comments above, you can see that K2 and Salomon are not just interested in growth at any cost. Though I haven’t seen their numbers, I suspect their thinking goes something like this.
 
They have a certain percentage of snowboard industry sales. At this point, their market share is unlikely to change much. That doesn’t mean they can’t grow sales as a company. They may start new brands or acquire companies. And they’ll get their share of any market growth that does occur. Maybe a stream of new products with incremental improvements will give them a short-term opportunity. Certainly, they will take advantage of any opportunity that comes their way.   But fundamentally, they won’t change their market share- at least not profitably.
 
Sure, they can undercut their competitor’s prices and spend big bucks on marketing. But that won’t make money. So instead, what if they kind of acquiesced to their existing market share in snowboarding? They stop selling to some accounts that they hadn’t really wanted to sell in the first place. They cut back a bit on advertising and promotion. They work to make the product just a little harder to find. They don’t produce quite as much. They don’t try to pressure the retailers- all the retailers- just to buy more. The focus becomes helping the retailer sell through at full margin.
 
The benefits to the brand may include:
 
  • Fewer collection issues
  • Lower financing costs
  • Less close out and returns to manage
  • Lower marketing costs
  • Retailers who are more successful with the brand
  • Consumer willingness to pay a little more for something that’s not quite so common
  • Improvement in consumer perception of the brand
 
Where the rubber meets the road, as usual, is at the issue of profit. If you lose some sales, but have lower costs and maybe a better margin and market perception, will you make the same profit, or more or less? I’m not sure. I’ll leave it to the brands to crunch their own numbers and tell me. Note how this approach begins to align the interests of the brands and specialty retailers.
 
Of course, it’s hard for one brand, with the possible exception of Burton, to take this approach if others aren’t. Still, competition for market share based on price and big marketing budgets is nothing but a rush to the bottom of the pricing structure- for both the brands and the retailers.
 
A Suggestion
 
The section above presents one approach to aligning the interests of the brands and retailers. I’d like to suggest one specific thing the brands might do. And again, whether this can work depends on your specific numbers. Give the specialty retailers the same pricing as the big chains. Not the same pricing structure- the same actual prices. What I’m saying is consider giving them the same prices for lower volume.
 
Well, now I’ve put my foot right in it. I know- you’d be giving up too many margin dollars. The chains would demand even lower pricing based on their volume. We can’t do it, it won’t work, you’re crazy, blah, blah, blah.
 
Maybe. But I know we all say the core retailers are critical. I know we all recognize they are in trouble. I suspect that total sales to core retailers as a percent of total sales is not that large for the major brands. It wouldn’t hurt to figure out what it would cost and discuss the impact with retailers would it?
 
Look, I’m open to anybody else’s crazy ideas as well. How about a if the brands run retail 101 classes for retailers or maybe help them finance and install good accounting systems?
 
What I’m suggesting major brands do is look at their snowboard businesses as cash cows- not growth engines. If we do that the interests of the retailers and brands can be aligned to everybody’s interest.

 

 

Now What? The Established Shop Owner’s Dilemma

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You started it because it was going to be fun. You were younger- a lot younger. And perhaps just a bit naïve and optimistic. You didn’t know what it was about margins that made everybody think they were gross, but what the hell. If you could hang with your friends, do what you loved and have a few beers at trade shows, starting a retail shop obviously made sense.

A bazillion years later, your stop is still here and successful. You’ve gotten some of the things you wanted out of it. Along the way, you’ve become something of a businessperson. You’ve got good systems and know your numbers, are involved in your community, know your customers and why they buy from you, have managed to have some competent and semi-stable employees, and are actively involved every day in running the shop.
 
As is typical of most small businesses, you and the shop have become synonymous and therein lies the rub. Somehow, working six or seven 12 hour days doesn’t seem quite as attractive as it use to. There’s children, a spouse who for some unknown reason wants to spend time with you, some actual interests outside of action sports and, frankly, you just don’t have the stamina you use to have.
 
What use to be the thing that kept you going has the potential to become something of an albatross if it hasn’t started to already. What can you do? What are the choices, and how are some people in this situation thinking they might manage it?
 
I talked to some shop owners who, if they aren’t all in this situation already, are sure starting to think about it. I expect to quote some people, but I’m not going to identify them. Some of the things they said, that I want you to hear, are just a bit too personal for attribution. 
 
Choices
 
Most of your assets, a lot of your time, and a piece of your self-image are tied up in the shop. Someday, maybe now sooner than later, you are going to want or have to sell it, or at least make a management transition happen. You have basically four choices. Sell it all. Sell part. Don’t sell but get some management help. Or close it.
 
Selling it is easy to say, and seems an obvious choice. But you’re likely to run up against some significant roadblocks. 
 
 
Having partners who share the shop’s equity with you can be it’s own interesting challenge. What happens when you and your partner (s?) don’t agree about something important?
 
Just bringing in management and continuing to own it 100 percent kind of makes sense, but how comfortable will you be with somebody else making decisions with what’s still your money?
 
Closing the shop solves the issues of partners and management, but why would you shut down a perfectly good shop?
 
As we look at each of these, remember that these kinds of decisions lifestyle as well as business decisions, and must be viewed from both perspectives.
 
Sell!
 
“For the 150 to 200 thousand dollars I could get, I can work really hard and maybe make that much in two years.”
 
The statistics suggest that you haven’t necessarily gotten rich owning a specialty shop. I forgot which retailer it was who told me, “Hey I paid the bills and snowboarded a hundred days this season, so I guess it was a great year!”
 
The sad truth is that from a strict financial point of view, a specialty shop isn’t usually worth that many dollars. “I tried to sell a shop I owned years ago, but all they offered was half the fixture value,” was one comment I got.
 
Much of its value to the owner is in the flexibility and lifestyle it offers. Financial buyers won’t focus on that. They will see how hard the owner works and how relatively little they pay themselves. They will recognize how critical the owner is to the business and know it’s at best difficult to replace them. It’s likely they will conclude that while some modest growth is possible, it’s not likely the business will double in the next few years.
 
To the extent you have more than one shop, this changes a little. Multiple shops suggests some growth potential and indicates you have made some progress developing management that might fill the hole left by the departure of the owner.
 
One owner has a plan to expand the number of shops and put management in place with the goal of having the option to sell for a reasonable price some day in the future. “That’s it,” he says, “That, or I work until I’m seventy.”
 
Partner Up
 
Yeah, but with who? And just what does it mean to have a partner?
 
“As far as I can tell, I’m kind of stuck here,” the owner said. “I took five weeks off and things got kind of sloppy.”
 
Did they really get sloppy, whatever that means, or were things just not being done the way the owner wanted? Could he stand it if somebody was making decisions differently from how he had always made them? Where and how do you find somebody you trust?
 
If you are truly sharing the equity in the business in a meaningful sense, then this is somebody whose judgment you are comfortable with. That means two things- they have been in action sports business for a while and you have known them long enough (measured in years) so that you have a high level of confidence in them. Even then, once you are both owners of the business, the relationship will change. Now, it’s their money too.
 
Sharing the company’s equity with a partner requires a lawyer. Sorry, no choice. You need a buy/sell agreement and a dispute resolution procedure not to mention the paper work by which the actual equity sharing occurs. And how, exactly, is that going to happen? Is your new partner going to pay you cash? Do they have any? Are you willing to take a note collateralized by the equity, which of course may not be worth shit if they screw up? How are you going to work together? Who’s responsible for what?
 
It’s not to say that it’s impossible, but equity sharing agreements can be damn tough and this is probably my last choice for an owner unless it’s part of a longer-term exit strategy where the new partner eventually becomes the one hundred percent owner.   
 
Management Help
 
How many hours a day do you work? I asked. “Fuck!!!” was the beginning of the answer. When the smoke cleared, he allowed as how he’d like to get down to twelve. A second owner estimated 200 to 250 hours a month. A third just moaned. A fourth, when asked how you got off this treadmill, said, “You don’t.”
 
Not surprisingly, all four of these owners are focusing on developing competent management for their businesses. One already has two good people he thinks/hopes might be buyers of the store in the future. Right now, he’s just glad there are there to take some of the load off his shoulder.
 
A second is “Waiting for somebody to step up to take over more responsibility.” He’s willing to give up some equity or more money when he sees that happen.
 
The person on the treadmill said he’s “delegating stuff that doesn’t matter as much” and “Not trying to do everything anymore.”
 
It’s my opinion that there’s nothing you can do that’s more important than develop some management. In the short term, it can take some of the load off of you. In the longer term, it may be the single most important thing you can do (besides make sure the business makes money) that will position the business to be sold someday- either to those managers or an outsider.
 
Close It Down
 
Somehow it isn’t very psychologically satisfying to talk about closing down a perfectly good shop. Yet, if there are no buyers at a reasonable price, for the reasons described above, it might be the most financially sensible solution. Are you better off selling for “half the value of the fixtures” or liquidating the inventory through a big sale and then selling the fixtures? Who knows, but it’s worth thinking about
 
Not Just for Old Owners
 
Or maybe, rather than having to contemplate closing down some day, you should start to think now about what you’re going to do with your shop. How are you going to make sure you have some options in the future when you need them?
 
We learned at least two things above. First, the single most important thing you can do to give yourself options and flexibility is to develop management. Second, we learned that it takes time- years in fact.
 
So even those of you who aren’t old enough to be worried about an end game for your business should start thinking about it now. If you’re lucky, some day you’ll get old enough for it to be an issue. And in the meantime it will make running your business a lot more fun, unless you just love spending every waking hour in your shop.

 

 

One Possible Future; An Industry Model for Skateboarding

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Last month, I wrote about surviving a downturn, suggesting that this wasn’t just a downturn but a fundamental change in industry structure, requiring a change in the way successful companies competed. This month, I’d like to be more specific about how I see the industry evolving.

It’s perhaps a bit pompous to do this, because my crystal ball is no better than yours. But my recent study of China’s fixed exchange rate and the September 21 cover of the New York Times Magazine made me decide to give it a shot.
 
Perhaps that needs some explaining.
 
Chinese Exchange Rates
 
I took a whole column in SnowBiz to write what I’m summarizing here. It should be out by the time you see this, so for more detail refer there. Basically, China keeps its exchange rate fixed at 8.3 Yuan to the US dollar. Most currencies are managed from time to time and to some extent, but the major ones change against each other daily based on interest rates, trade, general economic conditions and other factors. The Chinese government makes sure its exchange rate doesn’t change.
 
The result is that the Yuan is between 10 and 40 percent undervalued against the dollar. That is, stuff we buy from China is between 10 and 40 percent cheaper than it should be. Great for consumers and companies that import from China. Not so good for U.S. manufacturers and people who want to sell to China.
 
And there’s not much you, as a US manufacturer can do, given the artificial undervaluation of the currency. It may be, as some have claimed, that you can beat low labor costs with technology. But add the artificial exchange rate advantage and you’re screwed.
 
It’s unlikely that the undervaluation of the Chinese currency will go away in the short term. Among other reasons, we need them to invest a chunk of their trade surplus with us in U. S. Treasury securities so we can finance our budget deficit.
 
We all know that more and more skate hard goods (not to mention soft goods) are being made in China. Lacking some kind of meaningful technological change in skateboards, expect that to continue and grow. If the quality of Chinese made skate hard goods is still an issue, and I’m not sure it is, it won’t be for long.
 
So the stuff gets made a lot cheaper, and the quality is fine. Lacking product differentiation, those lower prices eventually, through normal competitive dynamics, get passed along to consumers. Good for the consumers, and perhaps for the general growth of skate. Bad for manufacturers and retailers.
 
Because even if sales of hard goods grow (unless they grow an awful lot) and even if percentage margins remain the same, the total number of margin dollars realized from hard goods sales declines.
 
Margins dollars are the dollars available to pay for team, marketing, rent and telephone, salaries and bunches of other stuff excluding product. Whatever left is profit, more or less.
 
I am not suggesting that there will be no skaters left willing to pay higher prices for branded decks, but I expect the number of such skaters to decline as percentage of the total. And, at the end of the day, there’s no reason higher end branded decks can’t and won’t succumb to the same competitive pressures as any other deck.
 
So if you’re a seller of skate hard goods, manufacturer or retailer, your financial model may change. In hard goods, you’ll have to sell more to make the same money.
 
Boy, I’m just full of good news today, aren’t I?
 
The Kid on the Cover
 
I think he was four. He was a skateboarder and he was on the cover of last Sunday’s New York Times Magazine. The story was about how really young kids are becoming sponsored and managed.
 
Seeing him there didn’t tell us anything we didn’t already know about the mainstreaming of skateboarding, but it sort of galvanized me into saying the following:
 
The skate market will increasingly be driven by the apparel (including footwear) brands. They can sell product to anybody who thinks that skateboarding is cool. Hard goods brands can only sell to people who skate. The apparel market, which I suppose includes everybody who needs shirts, pants, and shoes and is over four and under 50, is simply a couple of orders of magnitude bigger than the hard goods market. And, for successful companies, margins are and will be better in apparel than in hard goods.
 
They will influence skateboarding, to put it bluntly, because they will be bigger and have a lot more money than most hard goods companies. Hard goods skate companies already know everything I’ve said here. They have the following choices:
 
1)            They can try and use the strength and remaining cash flow of their established brands to transition into soft goods and, ultimately, make those soft goods the bigger part of their business. You saw that process already going on with some brands at ASR. Soft goods are tougher to do well than hard goods, and skate brands that take this approach will (for the most part) be competing with companies that are larger and better financed than they are. They will also have to decide whom they are trying to sell to- the core skaters who buy their branded product, or the larger mainstream market. Obviously, it starts with the core and has the possibility of being extended from there. The art is in figuring out how to expand distribution without damaging the brand’s credibility.
 
2)            They can sell their companies. But if they wanted to do that, they should have done it two years ago at the peak of the frenzy. Element is the only brand I recall that really did that. Companies selling now won’t get near the prices they would have gotten. Still, it may turn out to be the only financial choice for some and certain brands may have more value as part of a larger organization than as stand alone companies.
 
3)            They can remain as independent “core” skate companies. Whether there is a financial model that can support that strategy is unclear to me.
 
If you want some confirmation that this kind of industry evolution is a reasonable possibility, look no further than the surf industry. It’s dominated by a handful of soft goods companies. Mainstream sales, for both brands and retailers, are where the sales volume and profit is. Many to most industry customers don’t surf. Hard goods are having problems with cheap product from China, and nobody seems to make any money on them. Hard goods have hardly been discussed at the last two surf industry conferences.
 
Under the scenario I’ve suggested here what, exactly, is skateboarding? Fairly clearly, it’s not the kind of urban, underground, at the fringe activity it use to be. Time was when it was in the interest of the major hard goods brands to position it like that and hell, that’s how it was anyway. But if the picture of industry evolution I’ve painted here is valid, that no longer makes sense at least in terms of the business strategy. Because, as I’ve tried to explain above, the sales, growth and margins are in the other, much, much larger part of the market- the mainstream, if you will.
 
You can be a successful, profitable $20 million company with a significant marketing and advertising program if your margins are 45%. If those margins fall to 25%, I’m not so sure that works. Okay, I’m pretty sure it doesn’t actually.
 
More and more of my articles could be written for any of Skate, Snow or Surf Biz. There’s a lesson there somewhere about how the industry is evolving. In line with that, I want to suggest that skate retailers who haven’t seen it get hold of the September 2003 issue of TransWorld Surf Business and read the “When It’s Time to Change” article on the cover. It’s an interview with K-Five Boarding House owner Jurgen Schultz. He’s much smarter than I am because he started reacting, as a retailer, to the changes I’ve described here a couple of years ago. He took some risks to do it, but he saw doing nothing as a worse risk.
 
That’s a good way to think in this market.

 

 

How to Survive a Downturn And Take Advantage of the Opportunity It Represents

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In previous articles, going back to when skating was growing like the proverbial weed, I’ve talked about issues related to a downturn. Things like expense control, if you should sell your business, characteristics of a maturing market, cash flow management, the impact of a recession, and the potential impact of foreign competition. Given the continuing, current conditions in the skateboarding industry, it’s kind of time, and probably well past time, to bring it all together.

 
This isn’t necessarily a completely cheery subject-companies do go out of business in downturns- and I’ve learned over the years that the practice of shooting the messenger is alive and well. Still, I know from my consulting practice that denial and perseverance in a period of change is what gets good companies in trouble in the first place. Getting them to recognize that continuing to do what they’ve always done successfully when the business climate changes is more of a risk than doing new and apparently risky things is hard.
 
This is important, so I guess I can deal with a little hate email.
 
The Good News
 
Let’s recognize that downturns are opportunities for companies with sound competitive market positions and strong balance sheets. As weaker competitors go into crisis mode and spend all their time managing cash, cutting back on commitments, not delivering well and scurrying around looking for money, solid player can, and will, and do, move in.
 
That’s not to suggest that the soft market isn’t impacting even solid brands. But at the least they can continue their ad campaigns, deliver product when promised, pay their team on time and service customers better than their weak competitors. If others can’t, that puts you ahead of the game even in a soft market.
 
Now consider taking the next step. If you have confidence in your market position and branding, this might be the time- when your weaker competitors can’t respond effectively- to take that next step. Come out with that new product. Introduce new POPs. Go aggressively after those retailers who’ve been carrying other brands instead of yours.
 
Established skate retailers have for sure taken a sales hit- especially in hard goods. But some established stores have watched competing newcomer retailers disappear, and they’ve found some better deals available from brands.
 
Do I know that from careful market research and talking to dozens of retailer? Nah. I’ve talked to a few, and what I’ve heard has been pretty consistent. But this is what happens in every industry after a big growth spurt. As the industry matures, margins decline (temporarily or permanently), retailers have more power, consumers get smarter (so marketing may not work as well), product differentiation gets harder to come by, overcapacity can be a problem, competition shifts to a greater emphasis on cost and service, and international competition increases.
 
Aside from that, nothing changes.
 
These structural changes are different from industry to industry, but they are always present. Think of how each can be applied to skateboarding and I think you’ll see my point.
 
Retailers, even if they are skate focused, are usually not just skate retailers. They also sell surf, snow, bike and/or others in some combination. Surf, of course, is hot right now and taking up some of the slack of a soft skate market for retailers.
 
The decline in skate hard goods sales isn’t as traumatic for retailers as it would be if those were high gross margin items. Obviously, any sale with any positive margin contributes to overhead. But if you could pick where sales were going to suffer, you’d pick the lower margin items. In skate, that’s typically hard goods. Besides being diversified across sports, retailers have the added advantage of selling shoes and clothing to people who don’t participate in the sport but still needs soft goods.
 
Bad News
 
Companies are almost organic is their single-minded focus on survival. Even when any objective analysis of risk versus potential return suggests they should go quietly away, they don’t. Well, people who are pessimists don’t start businesses or rise to lead them so maybe that’s inevitable.
 
If you’ve got a few spare minutes, go to the Harvard Business Review web site (www.hbr.com) and buy a copy of an article in the July 2003 issue called “Delusions of Success; How Optimism Undermines Executives’ Decisions.” What the authors say is that “In planning major initiatives, executives routinely exaggerate the benefits and discount the costs, setting themselves up for failure.” That consistent with what I’ve seen in my practice.
 
During the kind of fast growth and seemingly endless product demand that skateboarding recently experienced, managers could do no wrong. The truth is that growth and cash flow cover up a weak balance sheet and lack of a sustainable competitive advantage admirably. When the cash flow and fast growth goes away, so does the illusion that everything is working fine.
 
I can’t think of a single company owner who, recognizing that the ride was over said, “Say that was fun. Let’s pick up our chips and get the hell out of Dodge.”
 
They believe that what they were doing before can still work, so they try harder. But more of the same is rarely the answer. Some succeed. But many, and perhaps most, just prolong their agony. In the process, and this is why it’s bad news, the market actions they take hurt other companies better positioned to succeed. They discount product. They extend terms. They sell into discount channels. They don’t pay suppliers. They flood the market with product that devalues all brands’ products. In their attempt to return to the glory days they take action which encourage the industry structural changes I allude to above that make their survival unlikely. The HBR article referenced above specifically mentions competitors’ response as one of the things executive tend to underestimate the impact of.
 
What’s a “Downturn?”
 
The implication of “downturn” is that there will be an “upturn.” Fair enough. I guess there will be. Soon would be good. But lurking in that thought process is the suggestion (or the hope) that the upturn will take us back to skateboarding growth rates of a year and a half ago. I don’t expect that to happen, though I would be thrilled to be wrong.    .
 
I don’t expect it to happen because of the structural changes in the industry I refer to above. They don’t have to be permanent- but they often are. What is going to change about skateboarding that’s going to take us back to the days when it was a small, underground, sport? Is there some technology out there that won’t just make skateboarding easier or better, but will fundamentally change it? It has to be something like what the invention of the microprocessor did for the computer.
 
If you are concerned that we aren’t going back to the “good old days” then your job isn’t to survive the downturn, but to succeed in the new skateboard business environment. What does that mean?
 
I guess it depends what you think the skateboard business environment is and is going to be. There’s no reason to believe I can see the future any better than you can, but if you feel that a return to fast industry growth is unlikely, even when the economy improves, then you might consider the following in creating a viable business model.
 
Control your expenses better. Duh. As far as I can tell, most skate industry brands and, to a lesser extent retailers, are already doing a pretty good job at it.
 
Understand clearly and specifically why your customers are buying your product. Adjust your spending to conform to that understanding. For example, if price should turn out to be critical, maybe you should look hard at your marketing budget since you might end up with a better bottom line by reducing some of those expenses and cutting price a bit more.
 
Or maybe it’s your team, and you should be promoting the hell out of them and raising prices. But when you do that, of course, you’re making a decision to limit yourself to that segment of the market that’s highly team influenced. How big is that market?
 
Build a financial model that tells you what volume you need at what gross profit to succeed. No denial and perseverance please. Look at it hard and without the rose colored glasses. When you project growth, have really good reasons for expecting it. May I suggest again the Harvard Business Review article mentioned above?
 
Look for brand extensions that won’t damage the quality of your brand. In this business, that brand is all you’ve got.
 
Retailers, don’t stop taking chances on carrying some new product. But at the end of the day if it doesn’t check and it doesn’t have a good margin be ruthless in your pruning. And make sure you have the systems to give you the information. Skate retailers no longer have the ability to screw up their buying and survive.
 
Consider the possibility that you may need more volume, as a retailer or a brand, to succeed. With a lot of product, hard and soft goods, that’s all high quality and pretty much all the same, and smarter consumers who are no longer quite as likely to be swayed by marketing, you may not have a choice.
 
This new skate industry structure may be temporary- or not- and it may suck. But if you manage your business starting right now for the new conditions, you can succeed and even prosper. Get to it. Your job isn’t to wait out a downturn but to succeed in it.

 

 

Product Line Size; The Impact on the Way We Do Business

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It began, I suppose, a couple of months ago when somebody at Burton sent me their complete catalog, buying book, whatever you want to call it, including prices and terms. Damn near five pounds it weighs according to my handy, dandy bathroom scale including colorful blue binder. It contains all of the Burton Company’s brands and certain product for international distribution that won’t be seen in the States, so sure it’s big.

Ride’s catalog isn’t as big by weight, but it comes with two CDs full of product images and photos.
Well, you get the picture. Big product lines and lots of information to digest. I wouldn’t be surprised if there were more products to choose among than when there were 250 snowboard companies.
Big product lines aren’t new, and at least for the larger brands, no retailer buys everything the brand offers. But what struck me like a blinding bolt of the probably obvious is how much the business of snowboarding has had to change just because the product lines have become so large. Over the last eight or ten years in snowboarding we’ve studied changing competitive conditions, discussed diversification as a way of overcoming seasonality, the impact of foreign production, the role of chains, and “fixing” the buy sell cycle. I’ve been in the middle of some of those conversations.
Imagine my chagrin when I considered the possibility that a simple thing like the increased size of product lines may have been as or more important to industry evolution than the other apparently more important and more complex business factors we’ve taken so much time and energy to discuss and try to manage.
There is the chicken/egg factor to consider. I’m arguing that certain industry changes happened because of the increased size of product lines. You might also argue that product line increases were largely a response to the other changes mentioned above. I’ve previously suggested that to some extent increases in the size of product lines were a response to what competitors were doing rather than an attempt to meet identified customer needs. To the extent that is true, I am comfortable suggesting that large product lines have changed the way the industry functions.
Where are these changes? In general, the process of getting a specific order takes more preparation, a more cooperative and business oriented relationship between the company’s rep and the retailer, and more time if only because there are more factors to consider. Specifically, the role of trade shows, the selling process, and the reps function and relationship with the shop are all different. Let’s see how.
Trade Shows
How long, exactly, do you think it would take one of the major brands to present its whole product line to a retailer? Three hours? A day? After that presentation, assuming you can still hold your head up, how much do you think you’d remember? How long would it take to figure out your order and get it written? No retailer should be allowed into a product presentation meeting without first chugging two Red Bulls and presenting a notarized affidavit that they got a good night’s sleep.
For many brands it’s difficult at best (Impossible for most brands in my opinion) to show what they need to show to all the retailers they need to show it to, at Vegas alone. Mervin Sales Manager Greg Hughes says that the SIA show has become more important for them because it’s a preview show. “But we have a hard time showing all our product to all the retailers who want to see it at the show, and we’re smaller than a lot of other guys.”
If you think about the sheer time commitment, and logistics of getting an order together from a major brand it’s pretty clear why SIA adopted the “See it, try it, buy it” approach for the buy sell cycle and why Vegas is more “See it” than “Buy it.” If you do complete your buy there, it’s likely that a lot of preparation went into it before the show.
Burton National Sales Manager Clark Grundlach says Vegas is not about writing orders any more. “It’s an opportunity for dealers to review previous decisions and maybe see some late stuff. Sixty percent of our dealers will have seen the line before Vegas. We can’t show the line any other way given its size. The six weeks between Vegas and when everything has to be wrapped up just isn’t enough time.”
Clark didn’t say, but I’ll bet sixty percent of dealers means north of eighty percent of total sales.
The regional shows seem to be either more or less important, depending on who you are. For Burton, with eighteen territories and its own showrooms, the regional shows are a good place to sell accessories and to see some smaller dealers who didn’t get to Vegas. According to Mervin’s Hughes, on the other hand, “Mervin gets a lot of solid orders at the regionals. We can show our whole line there.”
Rossignol Marketing Manager Christine McConnell sees it a lot like Hughes. “They see it in Vegas, and buy it at the regional shows,” she says, but notes that around forty percent of accounts have seen at least some product before Vegas.
Selling Process
Remember the days when your whole product line (nine decks, one binding and some ts and hats) fit on a trifold? Assuming the retailer had decided to carry your brand, you could show the line and get the order in about twenty minutes. Then you both just had to pray the stuff actually showed up somewhere near when promised and that the quality wasn’t too bad. Some of you are smiling as you read that, remembering a very different snowboard industry. Some of you (your loss I’d say) don’t know what I’m talking about. God, it was more fun then.
Sales meetings tend to be in early to mid December now. Especially with soft goods, which typically have to be delivered before hard goods, an early start and on time delivery is more critical than ever. Limited showing of product lines seems to take place in December. According to Rossignol’s McConnell, smaller retailers have their hands full trying to sell everybody’s current product. “The reps have their samples in December and are ready to go, but don’t really start showing product until January. They don’t want to get in the retailer’s way.”
For chains and large accounts, where the selling and buying isn’t done by the same person, I suppose you can do a December presentation without disrupting the selling process. Still, if I were a retailer, big or small, I’d like to know what my sell through was like before I talked about new buys. And that doesn’t happen until the holidays are over, at least in hard goods.
Role of the Rep
More and more, it seems to be the rep’s role to consult with and recommend to shops what product they should carry. Armed with a lot more detailed information then they use to have on last year’s purchases, sell through and the retailer, they can and often do propose a buy for the customer that fits their size, open to buy dollars, and customers.
Mervin’s Hughes put it this way. “Good reps suggest what to buy. They know the shop, and they know what’s going to be highlighted in ads and videos, and that drives sales.”
In hard goods, I suspect retailers, especially smaller ones, are inclined to listen to a well-prepared rep. These days, all hard goods are highly functional. Brand choices are a lot fewer than they use to be, and brand switching, as a result, less common. Hell, what are you going to switch to that’s going to make any difference?
A decline in product differentiation from brand to brand means the reps can be an important competitive tool in placing product with a retailer. The quality of the business relationship between the rep and the shop buyer may have a lot to do with the brand’s success in the shop. Rossignol’s McConnell puts it succinctly: “Between the rep and buyer, they know what’s up in the shop. Their combined efforts go a long way towards insuring the right purchasing strategy.”
This relationship helps the process of getting the order together. There should be broad, early agreement on what parts of a large line are or are not appropriate for a given retailer. In some cases, the brand simply isn’t prepared to sell certain product to a retailer. The retailer’s size and open to buy for the brand may also dictate where to focus the buy in a product line they can’t possibly carry all of.
Finally, the rate of change in snowboard product simply isn’t as great as it use to be, and that takes some of the angst out of trying to pick the “right” product and reduces the difficulty of working through a huge line. Inertia can be seductive, though dangerous.
I suppose the possible downside for the brand comes at the end of the season if the rep recommended product didn’t sell through which, at the end of the day, is what it’s all about. “Hey, your rep told me to buy this stuff, which is still sitting here, and you’re pushing me to pay this bill?! Back off.” I’ll bet that conversation is the basis for a deal or two in the annual snowboard industry rite of spring- settling accounts.

 

 

China’s Fixed Exchange Rate; What It Means for Snowboarding

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My very first article for TransWorld, which became Market Watch, was on foreign exchange. I guess in some sense we’ve come full circle. But it’s never much fun ending up where you started, so I want to ask your help in keeping Market Watch valuable to you and occasionally controversial.

It use to be, when the pace of change and general dynamism of snowboarding was greater, that my problem was picking among a bunch of topics I felt should be addressed. Now, for better or worse, the industry is a little less dynamic than it use to be. What are the issues that Market Watch should be focusing on now? Is there a continuing need for the column? Leading edge topics seem fewer and farther between. Got any ideas? Want me to just shut up and go away? I don’t want to write Market Watch just because I’m in the habit of doing it. Email me at jeff@jeffharbaugh.com. Thanks.
 
Meanwhile, back on China and its exchange rate. Maybe a month ago, somebody emailed me about an article I’d written in SkateBiz on production in China. They said, “Hey, what about the fact that the Chinese currency (the Yuan) maintains a fixed exchange rate of 8.28 Yuan to the dollars?”
 
They have a point and I really wish I could find that email to thank them by name.   I also wish I’d thought of it first.
 
Fixed Exchange Rate
 
Most major currencies (the Japanese Yen, Eurodollar, British Pound to name a few) float against the dollar. That is, the amount of foreign currency you can buy for one U.S. Dollar changes daily based on productivity, interest rates, economic growth, etc. Not so with the Yuan. By buying and selling currencies on the open market, the Chinese government maintains a stable exchange rate against the U.S. Dollar. So what?
 
Estimates are that the Yuan is as much as 40% undervalued against the Dollar. So What?
 
Let’s imagine for a minute that the Chinese suddenly allowed their currency to float and that over some period of time, it revalued by 40%. That is, your crisp greenback would, at the end of that period, buy 40% less from China for the same number of dollars than it had before. Another way to look at it is that the Chinese could buy 40% more U.S. goods for the same number of Yuan. Would that be a good thing or a bad thing for the snowboard industry? Would you be surprised to learn that the answer is, “It depends?”
 
The Chinese like this arrangement. It has been critical to the growth of their economy. Their exports to the U.S. doubled between 1997 and 2002 from $67 to $125 billion. During the same time period, U. S. exports to China have grown only from $13 to $19 billion. It means that Chinese capital tends to stay in China, rather than be used to purchases various foreign products, and that additional investment flows to China.
 
The general consensus, however, seems to be that floating exchange rates promote the efficient allocation of capital. Over the long term, it makes things better for everybody.
 
But in the words of the economist John Maynard Keynes, “In the long run, we are all dead.” He has a point, and he should know ‘cause he’s dead. Most currencies are managed to some extent by open market operations, tariffs and/or quotas. The U.S., the world’s greatest proponent of free trade, is no exception, so let’s not be throwing too many stones here. Well, let’s face it; it’s not always the role of a national government to make things better for the whole world. And imagine the outcry from consumers when everything they had bought from China was suddenly 40%, or even 20%, more expensive. Politicians aren’t necessarily great at dealing with stuff like that.
 
At a time when more and more snowboard product (hard and soft goods) is coming from China, who would be the winners and losers in a revaluation of the Chinese currency? Let’s look at a couple of specific examples.
 
Winners and Losers
 
I don’t think there’s a company in the industry that doesn’t get some product or product component from China. But to me there are a couple of companies that make for an interesting comparison.
 
K2 spent a whole lot of money and put forth a lot of effort to move their snowboard production to China. I didn’t necessarily like seeing it happen, but I thought it was probably the correct business decision given that they already had an established facility there. If the Yuan was suddenly revalued by 40% (which I don’t see happening as I’ll discuss below) what would be the impact on K2’s Chinese production? Assuming they kept the same price structure, their price in the U. S. would have to go up by 40%. Actually, I guess a little more than that, since the duty would go up based on the higher import price.
 
I don’t know what they’d do- move their production back to Vashon Island maybe? Kind of doubt it. To use the international technical financial term, they’d be shafted.
 
In obvious juxtaposition (god, I love that word) to K2 is Seattle based snowboard manufacturer Mervin Manufacturing. Mervin has used every technique of technology, waste reduction, process engineering and a generally positive attitude to keep making snowboards in the U.S. “Made in the USA” has been the major focus of their advertising. Now, even they are looking at bringing in a price point, Chinese made board. They don’t much like it, but they feel like it’s a necessary competitive move.
 
A 40 percent revaluation of China’s currency maybe wouldn’t solve all their problems, but it would sure make them more competitive, at least against Chinese made snowboards. I mean, if they are making ends meet now, what could they do if other companys’ products suddenly cost them 40% more? Assuming a substantial part of that cost increase was passed on to retailers and, ultimately, to consumers, Mervin’s products would look pretty attractive.
 
Yes, I know that China isn’t the only cheap place to buy product. Yes, I know that just because your costs go up doesn’t mean, especially these days, that you can raise your prices by the full amount of the cost increase and expect consumers to swallow it. But it’s pretty clear that the undervalued Chinese currency had a lot to do with K2 moving production to China and Mervin moving to get some boards from there.
 
And the interesting thing is that everybody has always focused on low Chinese labor costs as the driver of production moving to China. What I’m saying is that it ain’t. I recently read about another company (not in the snowboard business) that said, “Hey, we can beat their labor cost advantage with technology, but we don’t have a chance against that artificially undervalued currency.” My guess is that the guys at Mervin might echo their sentiments.
 
Kind of puts a new spin on things doesn’t it?
 
Don’t Hold Your Breathe
 
Waiting for the Chinese to revalue their currency to make competition “fairer,” that is. In the first place, they’re kind of happy with the way things are. In the second place a lot of American companies love buying cheap stuff from China. A lot of consumers (including all of us I imagine) like buying cheap Chinese stuff. The issue of the value of China’s Yuan is actually getting quite a bit of press these days. The consensus is that there might be some gradual revaluation, but nothing quick and dramatic.
 
One of the reasons is that the Chinese, as they like to remind our government, is the second largest buyer of United States Treasury debt securities. With our record deficit approaching $500 billion this fiscal year, we’d kind of like them to keep buying them, so we should back off, thank you very much. To buy them, they need all the dollars they get from selling us stuff cheap and not buying much in return, which requires a week Chinese currency. So snowboards are made in China.
 
Kind of a complicated, mercantilist, financial house of cards isn’t it. Didn’t work for the Dutch or the English or, come to think of it, for the Romans. Guess I’d better move on before it starts to sound like I’m taking a political position.
 
Floating exchange rates really do help level the competitive playing field, more or less. But in snowboarding don’t hold your breath.

 

 

“Say, That Sounds Like a Good Idea!” The New Board Retailers’ Association

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Like the web site (www.boardretailers.org) says, the idea for the Board Retailers’ Association (BRA?) goes back to the mid eighties and has been discussed annually. But for the past year, Roy Turner, the owner of Surf City Surf Shop in Wrightsville Beach, North Carolina, and Mike Duncan of Sage Corporation, a web applications firm with roots in action sports, have been making it happen. Roy’s been in the surf industry for 25 years. He’s been a snowboard dealer for over ten years.

And yes, I know this is Snow Biz, not Surf Biz, but I wanted to make a point, which I try to do from time to time, so bear with me.
 
If the organization had its genesis among some surf focused people, it quickly became clear that the issues they felt needed addressing were universal to snow, skate, surf and wakeboard retailers. The web site reflects that and this article could be appearing in Snow, Skate, or Surf Biz and would be just as relevant. .
 
If only because of production and seasonal considerations, manufacturers/brands tend to focus on individual sports and the associated lifestyle. But among retailers, as Roy and the Association’s impressive advisory board of retailers found out, few make their living on just one activity. Even where the focus of the shop is clearly snow or surf or skate or wake, sales of soft goods, including shoes, to people who don’t participate in the shop’s core sport or, indeed, in any board sport, are necessary for survival. Most retailers sell more than one activity to manage seasonality.
 
So the perspective of the retailer is perhaps different from that of the manufacturer/brand and inevitably there’s some normal conflict of interest if only because there’s only so much margin to go around (less than there use to be) and it’s expensive to be in business (more than it use to be). The small “core” retailers (I hate that term, but haven’t thought of a good replacement) are acknowledged by pretty much everybody to be critical to the market, but at the end of the day, their orders aren’t, and won’t ever be, what make or break the major brands.
 
Wouldn’t it be great if there were an association that could bring the concerns of these shops to the attention of the brands in a professional, constructive way?
 
The first thing Roy told me was that BRA is not and won’t be a buying group. It was formed, he said, with four basic goals.
 
·         To save retailers money
·         To help insure the success of small, new shops
·         To educate shop owners and promote good retail practices
·         To give the industry a cohesive voice from the retailers on a grassroots level.
 
“The business environment made it the right time to do it,” said Roy. “The mass merchant influx, over distribution, rising costs, the dominance of a comparatively few brands and lack of product differentiation mean that your margin for error is way smaller than it use to be. I can’t afford to make a 10 percent open to buy error anymore.”
 
Let’s turn to the organization’s goals and take a look at each of them in turn.
 
Save Money
 
This should be fairly noncontroversial. Like all trade associations BRA will use its buying power to get its members discounts on services, including shipping, various forms of supplies, insurance, lower bank card rates, etc. You get the picture.
 
The association’s fee structure is straight forward- annual membership is $125.00 per storefront. It’s essentially mathematically impossible not to recoup your membership fee at least quarterly. I would expect many member shops, and maybe most, to do it monthly. BRA is a 401C nonprofit corporation, which means that any board sports retailer is qualified to join. Who knows- if the Zumiez of the world step up, maybe BRA can reduce its annual dues even further.
 
Just for fun, let’s say your shop has annual revenue of $750,000 and that 60% of that is done by credit card. If the association can get your bankcard rate down half a percent (a reasonable goal) you’ll save $2,250.00 a year. I don’t have a degree in mathematics, but I’m pretty certain that $2,250.00 is greater than $125.00. If BRA does nothing but that, you should all be breaking down the door to join. What’s the impact on your bottom line if your association can do half a dozen other things with similar impact on your costs? There is absolutely no reason they can’t. Trade associations do it every day.
 
The specifics of the discounts aren’t all known yet. The ability to offer really meaningful insurance discounts nationwide is awaiting the likely passage of a law by Congress. But check out the web site and do some rough calculations you. Bet that $125 a year membership fee looks pretty damn good to you.
 
Insure Small, New Shops Success
 
Roy’s old. He told me so. I’m old too. We try to be cool without looking stupid and to figure out what’s up, but there’s a limit to that as my fourteen year old constantly and pitilessly reminds me. “Nice shirt Dad. Why are you wearing it?” was his most recent comment.
 
“No tattoos and no holes in my body other than the ones that God gave me,” is the way Roy put it.
 
The people running the surf companies, the snow companies, the skate companies, the winter resorts and the successful core retailers are also sort of old compared to their customers.         

Mikke Pierson, owner of ZJ Boarding House in Santa Monica, California, is a member of the Association’s Advisory Board. His shop sells snow as well as surf and skate. He’s been a snowboarding dealer since 1989.  He shares Roy’s concern about the aging of existing retailers. “There’s no new blood our there,” he says. “Too many existing boardsport retailers are ‘specialty dinosaurs’.
 
Both Roy and Mikke are confident their shops will be successful no matter what happens. But longer term, they see the board sports industry’s strength and growth depending on new blood. It’s one of BRA’s goals to help that new blood emerge and thrive.
 
Part of how they will do that is by educating shop owners in best retail practices. That will start with a series of articles in TransWorld Business publications on specific best practices. “The first one will be on hiring,” says Mike. “You’d be stunned how much bad hiring practices can cost you.”
 
There’s also a “rookie buyer” seminar scheduled for Surf Expo this coming September. 
 
Roy talked about helping shops with “balance sheet management.” “There isn’t the room for mistakes there use to be,” he says. Issues of inventory control and cash management require good data and a certain level of management sophistication. “When I came along, you learned everything by showing up,” says Mikke. “Those days over.”
 
Both Mikke and Roy emphasized the importance of knowing and managing a shop’s gross margin. BRA expects to offer assistance, both in terms of education and discounts, in installing and using good financial systems that will strength a shop’s balance sheet management.
 
A Cohesive Voice
 
Over distribution, lower margins, rising expenses, insurance, mass merchants, and increased customer expectations are some of the key issues impacting all board sports retailers. BRA will address them as an industry.
 
“Manufacturers are looking at their market place from the point of view of what their competitors are doing and sometimes forget their customers,” says Roy. “We want to be able to talk in a constructive, cooperative way about issues that are of concern to both retailers and manufacturers and to have them take us seriously.”
 
I guess it takes tougher business conditions to make something that seems, in hindsight, to be such a good idea actually happen. The board sport retailers, especially the so-called core shops, have compelling common issues and interest no matter where they are located. They are competitors only when they happen to be located near each other. The immediate financial benefits should make joining a no-brainer. The Board Retailer Association’s other activities may be more important in the longer term, but for the moment saving money should be enough of an incentive to sign up.
 
There is, of course, strength in numbers and no trade association starts up without thinking that it will gain some leverage over constituencies it wants to influence. A prime constituency for the board sport retailers is obviously the manufacturers. I suspect that manufacturers are just the slightest bit concerned about the association’s proposed activities for just that reason even though it isn’t a buying group. Can’t blame them. As noted earlier, there’s only so much margin to go around.
 
Still, both the core retailers and the brands recognize that if all the snowboards are sold at Garts and all the surf boards at Costco, it’s going to be damn tough to influence people to pay prices that reflect the value of the brands and the cost of the marketing campaigns that convince those people they want to share in our lifestyle, even if it’s only through the t-shirt they wear.

 

 

Strategic Planning; Questioning Our Most Cherished Assumptions

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This article sort of popped full formed into my brain at the TransWorld Snowboard Industry Conference at Whistler in April. It happened in an elevator. A kid carrying a skateboard got in (Shows you what kind of lousy winter it was in Whistler). As the door closed, I asked him how often he replaced his deck. He said, “I’ve been skateboarding eight years and this is my fourth deck.”

 Let’s hope he’s not our average customer.  I don’t believe he is. Still, how do we really, really, know and prove, for sure, that he isn’t? What percentage of our market does he represent? Hopefully, he replaces his shoes and clothing more often than his deck. Should we be marketing to him differently? Is he really what we mean by a “skateboarder?” Does he care about all the marketing we do?
 
No doubt somebody is reading this and saying, “Well, the answers to those questions are obvious!” Maybe. But I’m reminded of H. M. Warner at Warner Brothers in 1927 saying, “Who the hell wants to hear actors talk?” Or Digital Equipment President Ken Olson, in 1977, saying, “There is no reason anyone would want a computer in their home.” Or the Yale professor who wrote, “The concept is interesting and well-formed, but in order to earn better than a ‘C,’ the idea must be feasible” while critiquing Fred Smith’s plan for an overnight delivery service (Fred went on to found Federal Express, which is showing signs of being feasible).
 
I’m sure all these guys thought what they were saying was “obvious.” 
 
Strategic planning, I’ve learned, is the process of using the same information your competitors have to make better decisions than they make. You do it, in my experience, by questioning cherished assumptions, rigorously collecting good information, and looking at that information from a different perspective. 
 
In a difficult market, the industry’s general response seems to have been to cut expenses, including marketing, and discount to get orders and keep volume up to the extent possible. I’m all for good expense management- in any market conditions- and wrote about it here some issues ago. Still, we’ve lived by marketing, and I wonder if we can’t hurt ourselves by not marketing lacking any real product differentiation among brands.
 
But marketing what to which customers? When everybody was fat and happy and selling everything they could make, we had the luxury of not worrying about that. Now, companies who prosper are going to take some risks and do some things differently. What things? Depends on the company, but let’s look at some “Cherished Assumptions” and see if we can get a glimmer. 
 
“Core Shops Are the Foundation of the Industry!”
 
 Hold the hate email please. I recognize the importance of shops and I’m not saying that statement is inaccurate, but I’ve got a couple of questions.
 
What, exactly and specifically, is a core shop? What are its attributes? It probably doesn’t sell skateboarding only, so can it be both a core skate and, say a surf or snow shop at the same time and still be “core?” Is core then not a function of what a shop sells? As the industry has involved, have others “foundations” emerged? Like televised skateboarding, the skatepark movement, the contest circuit? What’s their relative importance to individual companies? How has it changed? How is this different for apparel and shoe companies compared to hard goods companies?
 
“Riders Are the Key Influencers of Skaters.”
 
If so, why are there so many blanks and shop decks sold? It appears that price is also a key influencer. Obviously, riders don’t influence all, or even most, skaters to buy a certain brand of deck, though hopefully their prominence promotes skating in a general sense. From a company’s perspective, then, how has the relative influence of pro riders changed? How strong is the association between the brand and the rider? How strong is the tendency of kids who like a rider to buy his pro deck and how has it evolved? Or do they just buy a blank and slap a sticker on it? Interesting questions to ponder when considering issues of budget and marketing.
 
"Chain Stores Suck"
 
Well, I doubt the shoe and apparel companies would put it quite that distinctly. Chains- not all chains, but chains- move a lot of product for them and make them a lot of money. There also seems to be a certain level of conventional wisdom that says chains, by selling cheap completes, are important in getting new skaters involved in the sport. That would be interesting to research.
 
At the end of the day, though, chains are neither good nor bad- they just are. And they are more all the time. My opinion is that the Zumiez and Pac Suns of the world are going to make it increasingly tough on core shops. I hope to be wrong. No company can grow very big without an increasing percentage of its sales being to chains. That’s not an opinion, and it shouldn’t be controversial. It’s just mathematics. In a market with little or no product differentiation, where price matters, volume becomes an important survival strategy. So companies- including hard goods- need strategies for working with certain chains if they want to prosper and maybe just if they want to be around given the evolving financial equation.
 
Of course, it may be a viable strategy for some companies to not work with big chains, and to constrain their growth. But the companies that do that won’t ever be big. By way of definition, I don’t believe there are any “big” companies in skating. My information is that the shoe companies are the largest, but I still see them as pretty small. And note that getting to even that size required sales to chains. 
 
“A Skateboard is 7 or 9 Ply Laminated Canadian Maple- Period.”
 
What a remarkably conservative industry we are, and isn’t it funny to hear that? Granted, laminated hard rock maple has worked great. But it’s also true that the industry has encouraged the idea that anything not made of Canadian maple couldn’t be a skateboard, wouldn’t function right and, worst of all, might get you laughed at. For a long time, all that was true. But industry growth and visibility, coupled with advances in composite materials, engineered resins and manufacturing techniques, along with the acceptability of blanks, suggest that this may change. If it does, I hope the charge to adopt new technology is lead by the current industry leaders.
 
Lots of questions. No solid answers, though we’ve all got lots and lots of opinions. But opinions, even tried and true and generally accepted opinions, can’t be the basis for a business plan when the industry is changing. And I’m pretty certain that doing “more of the same” isn’t going to work for at least some companies. I’ve always thought that doing the same old things when the market was changing was riskier than trying something new that might not work out. The companies that feel that way, and that go through the process of questioning their assumptions, will most likely emerge as the leaders.