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.