The Impact of Consolidation; Wasn’t That Over Years Ago?

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Yes. And no. The snowboard industry consolidation that started around 1995 or 96 could probably have better been called extermination. Literally hundreds of brands went away either because their founders got tired of losing money or because the Japanese stopped paying cash in advance for snowboards. Though there were exceptions, these brands didn’t get subsumed under the multi-brand umbrella of a large corporation. They just ceased to exist.

A Business Week article in September talked about the fact that prices on recent acquisitions of apparel makers have been at cash flow multiples 20% higher than what companies were purchased for just a few years ago. Some of the recent, richest deals have closed at multiples of cash flow that are twice what public apparel makers trade for. A graph in the article shows the value of mergers and acquisitions in the apparel sector were around US$ 6.5 billion in 2000 and are projected to be nearly US$ 40 billion in 2005.
 
Quiksilver has announced that it’s earning for the year ending October 31, 2006 are expected to be US$ 0.87 to US$ 0.88 cents a share. Analysts had been expecting US$ 0.98 per share. Earnings are expected to be US$ 0.86 to US$ 0.87 for the year ended October 31, 2005.    They said the integration of Rossignol, acquired in March, the strengthening of the dollar and higher interest expense were responsible for their projection of essentially no earnings per share growth in the coming year.
 
These two things got me thinking. Sometimes that leads to an article.
 
The 90s snowboard consolidation was largely confined to the small world of the snowboard industry itself. And as I said above, consolidation maybe wasn’t the right word for it. This consolidation is different. It’s not confined to snowboarding, or even to what we have called action sports. It’s taking place in the context of the much, much larger lifestyle/fashion/apparel (pick your favorite term) market. It’s big companies buying companies that we in action sports use to think of as big, but that are turning out to be small compared to the companies buying them and the markets the acquirers are in. Hurley bought by Nike, Quik bought DC and Rossignol, VF Corporation bought Vans, Addidas bought Salomon (and has now sold it to The Amer Group). I’ve forgotten all the brands K2 has bought. I don’t mean to suggest this is new, but I expect it to continue. It has ramification for brands and retailers.
 
Let’s see what they might be.
 
Stuck in the Middle
 
The conventional wisdom is that you either need to be a niche brand, or a big company with a low cost structure. If you’re stuck in the middle, you’re screwed. We could talk, I think, about how that may have changed or be changing due to the role of brands, how marketing has evolved, and the internet and the leveling of the information playing field, but that’s a topic for another day. For the moment, let’s go with the conventional wisdom.
 
We continue, thank god, to see the regular emergence of new action sports brands. Some of them get some traction in the market. We all know why. Committed snowboarders, for example, who think of snowboarding not just as a sport but a lifestyle are interested in buying brands different from the ones anybody could buy pretty much everywhere. I’d argue that this group of committed snowboarders, as a percentage of total snowboarders has shrunk, but it’s still a basis for a new brand to get a toehold.
 
I look at these companies as niche brands who, due to their small size, flexibility, limited availability, coolness factor, and cost structure control, have a way to compete. Remember when one of these brands ran the ad telling kids how to fake lift tickets or something like that? Boy were the resorts pissed off and you couldn’t hardly blame them. But it generated a lot of talk. Can you imagine a large snowboard brand with close ties to resorts using that kind of marketing?
 
At the other extreme are the big players. But if I try and list the big snowboard only companies (or the big surf only companies, or the big skate only companies) I end up with a damn short list. Not even Burton, even with the leading position in the snowboard market, is a snowboarding only company any more. Quik’s’ certainly not just surf with acquisition of Rossignol.
 
The big players are increasingly multisport, year around businesses with a significant and growing presence in the apparel/lifestyle market. K2 Corporation, Amer Sports, VF, Nike, Quiksilver come to mind. There are others you might name. I think the companies stuck in the middle are those with revenue of, oh, let’s say under $1 billion who don’t have defendable and competitive lifestyle/fashion/apparel brands.
 
Got your attention with that number did I? Good. That was the idea. Want to say $800 million? Okay with me. But whatever the number it’s at least one order of magnitude bigger than what we usually think about when we say “big” action sports companies.
 
The idea I want you to come away with is that many of the companies with the potential to be “stuck in the middle” are now much larger and the revenue range of such companies much wider. In this much larger market, you can be stuck in the middle at $25 million. Or at $400 million.
 
Remember action sports- especially in hard goods- is an industry where you have to do everything right just to be in the game. And, in contrast to how it use to be, doing everything right doesn’t give you a long term competitive advantage (I’m not sure there are any of those anymore unless they are related to brand)- it just gives you a chance to compete and make it to another season.
 
A further factor in catching companies in the middle is the squeeze on hard goods prices and margins that has resulted from wide distribution, lack of product differentiation, and the availability of cheaper, quality, manufacturing. Downward pressure on prices can mean less margin dollars even if the margin percentage remains the same. Nobody is immune to this.
 
So What?
 
Because of the encroachment on action sports of the lifestyle/fashion industry, and the fact that there seems to be more money to be made in soft rather than hard goods, companies in the middle face a tough competitive challenge. Much (most?) of their growth potential is in selling soft goods to the lifestyle market. But their competitors in that much larger market have resources and advantages that the pure action sports companies can’t even come close to matching. What can they do?
 
Well, they can sell. For many, that will be by far the best financial decision they can make. So we will see this continuing wave of consolidation. As usual, there will be those companies who will have been mismanaged and need to find a deal. But even solid companies, looking at their market position and circumstances, will rationally decide it’s time to sell.
 
They’ve grown steadily, are profitable, and respected in the core market. They are a trend leader with a serious cool factor. The next step in growth requires them to begin to expand their distribution into the broader market. Potentially, they may begin to erode their image. They will begin to run right into the much larger competitors who have them out resourced by ten to one. Even if they are successful, they may not have the working capital they need to follow through.
 
Typically it’s right at this point where the company’s value will never be higher. The Business Week article suggests that might be right now. It’s not easy to recognize, and there are damn few successful entrepreneurs who don’t think next year will be better than this year. But making a deal right then, with your market aura in tact and your financial statements pristine and before you start to run head long into the 500 pound gorillas who will be your competitors is where the deal needs to be made. And that’s why I think we’re going to see more deals.
 
But who to buy? If, as I’ve suggested, the core market of actual participants who define themselves and their lifestyle by their participation is shrinking then the niche brands, while they may be successful, don’t have the room to grow they use to. So why would they be attractive to a larger company if they can’t contribute substantially to growth and profitability? They probably aren’t. So the number of attractive acquisition candidates shrinks, and the price, as seen above, gets bid up.
 
And the Retailers?
 
Four things. First, we seem to have been through, and maybe we are still going through, the extermination phase with retailers. I have no numbers, but I think we all share the perception that a lot of individual retailers have gone away and comparatively few have opened.
 
Second, I expect the “stuck in the middle” analysis above for brands to apply to retailers as well. We’re already seeing some consolidation and I’d expect more. As I’ve written, the only financially attractive exit strategy for a core shop run by the founder/owner seems to be to open enough additional stores to create a size, management structure, and ”proof of concept” that makes the mini-chain attractive to buyers. This is consistent with the discussion above of why a brand would sell.
 
Third, I can imagine that purchasing inventory is going to get interesting for shops as the companies they buy from have more and more things to sell them. Remember that the days of the single sport/activity shop are long gone. I wonder if K2 will want you to buy both your snowboards and your football equipment from them. Okay, granted I don’t know of a snowboard shop that sells football equipment in the summer, (and I don’t know if K2 sells it) but there must be one. What kind of incentives might they offer you to consolidate your buying for various activities with them? Hmm. Maybe I should ask them.
 
Fourth, are you sure you’re still an action sports retailer? I mean, a lot of you are selling an awful lot of soft goods that aren’t really sports functional to people who don’t participate. Maybe, for some retailers at least, it’s time for you to reconsider how to redefine yourself to take better advantage of the whole lifestyle/fashion/nonparticipant thing. Could be there are some opportunities you’ve been scared to look at that make sense? 

 

 

Doing Marketing; What, How and Why?

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At the Skateboard Industry Conference earlier this year and in these hallowed pages, I’ve argued:

 
1.     That advertising and promotional tactics like running ads and hiring teams pass for marketing in this industry but aren’t.
2.     That marketing (maybe better called market research) is the process of finding out who your customer is and why they buy your product.
3.     That few people in skateboarding (or in action sports) do marketing well if at all.
4.     That favorable demographics and large company interest in the skate vibe are creating opportunities that we aren’t taking advantage of.
5.     That good marketing will make you more efficient in the use of your advertising and promotional dollars, a good thing at a time when this is a tough business financially.
 
Marketing costs a little money, takes some time, and will leave you with as many new questions as answers if you do it right. It isn’t a one shot deal. Its value increases as you continue it over time and, indeed, as you institutionalize it within your organization. How might you do some marketing in your organization? Here’s one general approach. Not by far the only one. Not necessarily the best or the right one for your organization, but one I think you can implement and get some value out of.   
 
The Right Questions
 
It’s easy to come up with a list of questions that, on the surface, seem relevant. General questions like “Who’s my customer?” You could create a list of good, general questions like that in about twenty minutes and walk away thinking, “Yes sir, there’s not much to this marketing stuff.”
 
Instead, begin with the goal in mind. Let’s say the goal, as mentioned above, is to make more efficient use of advertising and promotional dollars. Ask questions that help you do that. Go through each of your advertising and promotion expenditures and develop specific questions- questions that will help you know where to spend your money and what you’re getting for it.
 
One such question might be, “Do people buy our boards because of the team?” Well, duh, yes of course they do. Or at least that’s always been your assumption. Ever tested it? In several industries I’ve been amazed at the number of once true assumptions that have been institutionalized in industry lore even when they were no longer valid.
 
Among winter resorts, for example, the current assumption seems to be “If we build it, they will come.” My guess is that snowboarders would come regardless of whether or not the resorts build new trails, facilities and lifts and the number of skiers will continue to decline in spite of all the capital investment.
 
I’m not suggesting teams aren’t important to skateboarding, but if I had to prove it in a rigorous way, I couldn’t. Not unless I’d done some marketing. Use marketing to test your traditional assumptions. If you find something has changed, it’s a potentially huge opportunity.
 
Based on a specific statement of what you are trying to accomplish, get more specific in the questions you ask. “Do people buy our boards because of the team?” is too general. No answer you’re likely to get will help you do anything better or differently unless, I guess, everybody says no.
 
Maybe “Whom do you know that rides for Brand X?” would generate some useful information if your goal is to focus your team spending on the riders who create the most brand visibility. If nobody knows a rider you’re spending serious bucks on, or if lots of people know somebody who only gets product, you’ve got a chance to spend your money more efficiently, or maybe just to spend less. Or to spend more but feel good about it.
 
Marketing’s biggest challenge is in asking the right questions based on specific goals.
 
Gathering the Data
 
I’m a big believer in quality and consistency over quantity. I’d rather have 200 thoughtfully and consistently completed surveys than 2,000 incomplete warranty cards where there was no contact between the customer and the company. Send team riders or employees to skate parks on weekends. Make a deal with some of your retailers to approach customers in their store in exchange for sharing some of the data with them. Let the retailers add a few questions they’d like answered. Give every consumer who works with the interview to complete a questionnaire a T-shirt and turn the collection of market data into a promotion.
 
Do some training before you send people armed with good intentions and clipboards out to talk to customers. Make sure they understand why you’re asking the question, what you expect to learn, and what the benefit of having the data is. Get them to practice a little with other employees or friends so that their lack of experience doesn’t skew the data collection.
 
Exercise some common sense. It might not work to ask team riders to collect data about team performance. A rider isn’t going to be anxious to report that nobody ever heard of him. Consider the possibility that young males might consider this as an opportunity to do something besides collect market data and return surveys predominantly from the best looking girls at the skate park that day.
 
The data doesn’t all have to be collected in one massive effort. A couple of people in a couple of shops for a couple of hours a couple of times a months will build you a big data base faster than you think.
 
The experience the data collectors have can be as important as the information they come back with. They’ve just spent some serious face time with customers or potential customers. Sit down with them right after the session. What did they feel/see/think? What interesting comments did they hear that didn’t make it into the survey? What questions appeared to have been a complete waste of time? Did they hear gripes? New product ideas?
 
Most people from companies don’t spend enough time with the customer. Take advantage of people who are. In fact, spread the wealth- get as many employees as possible to take a turn gathering market data.
 
Your data collection is going to be biased in some way no matter how hard you work to collect it in a consistent and dispassionate way. The way the interviewers dress, the locations you select, the time of day, the different ways interviewers approach the customer and a bunch of others we can’t even conceive of will all affect the quality of the data. You strive to minimize these influences in the way you develop the survey, train the interviewers and select the locations. At the end of the day, with enough good interviews completed, you recognize, or at least hope, that the biases will have been statistically reduced to background noise. That brings us to what to do with the data.
 
Analysis
 
If you’ve gone through the process correctly, data analysis should be almost an anti-climax. From the process of designing the survey, you know specifically what you are trying to find out and what kind of decisions you hope to make from the data you collect. You know before collecting the first piece of data exactly what the analysis process is going to be. It will have become clear in the hard work you did establishing goals and developing the right questions.
 
Responses will be counted, and percentages calculated. Maybe you will have asked the same questions in a couple of different ways and will want to compare the responses. But when the simple counting and calculating is done, there are a couple of statistical techniques that will help you get the most out of the data.
 
Not all the questions you ask will require this kind of analysis. But when appropriate, the concepts of “mean “ and “standard deviation” are powerful tools that are not tough to use once you understand them.
 
A standard distribution is represented by a bell curve. Bells can be taller or flatter depending on how the data points are distributed. The vertical line that divides the bell exactly in half represents the mean on the curve. The mean is the point where half the data values are greater and half are smaller. Simple so far.
 
The standard deviation is a statistic that tells you how tightly all the data points are clustered around the mean . When the points are pretty tightly bunched together and the bell-shaped curve is steep, the standard deviation is small. When the bell curve is relatively flat, you know you have a relatively large standard deviation. One standard deviation away from the mean in either direction on the horizontal axis accounts for somewhere around 68 percent of the data points in this group. Two standard deviations away is roughly 95 percent. Three accounts for about 99 percent of all the data points.
 
So who cares? Just for fun, say you ask 200 customers how old they are. Their mean age is calculated as 14 with a standard deviation of one year. So you know that 68 percent (one standard deviation away from the mean in either direction on the horizontal axis) of your customers are between 13 and 15. 95 percent 12 and 16.    You can see how this might help you focus your marketing efforts.
 
Mean and standard deviation are calculations that lots of cheap calculators can do. Excel will do it for you on your computer. So, as I started out by saying, you can do this yourself. On the other hand, time is money, and there lots of companies around that specialize in designing surveys, collecting data and interpreting the results.
 
Any masochists out there who actually want the formula for calculating a standard deviation should let me know and I’ll be pleased to provide it. 
 
Even if you get some professional help and trade some money for time and efficiency in the process, your customer and industry knowledge will still be required to make sure the right questions get asked of the right people.
 
Somebody once said that half of your advertising and promotion budget is wasted- you just don’t know which half. Marketing can help you figure that out. Just to pick a number, if you spend $20,000 to do a survey that helps you save only $5,000 a year, a return on investment of 25 percent, isn’t that a great deal? My guess is that you’ll do better between more efficient spending and better customer focusing. Do the marketing yourself or get help. But please do it.

 

 

Conversations with a Skate Retailer; A (Pretty Much) True Story

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Some month ago, I got a call from an actual skate retailer. “It said at the end of the article that you work with companies in transition,” he asked almost as a question. “It’s true,” I told him.

 
“Okay,” he said. “Help me with mine.”
 
The story unfolded like this. He’d been in business for a bunch of years, and loved the business. He was doing about $500,000 a year but increasingly it was a struggle to make ends meet. He seemed to be feeling a little run down and beat up from the constant pressure of making ends meet financially and working long hours without enough help. Anybody out there sympathize with him?
 
Breaking the primary rule of having a consulting business, I started asking questions to try and figure out his situation and help him before he’d agreed to pay me anything. Oh well, so I’m a pushover. He seemed like a nice guy.
 
The conversation revealed that his product mix was about 60 percent decks, trucks and wheels and 40 percent apparel and shoes. Margins were “good” on the apparel and shoes and “not so good” and declining on hard goods. He couldn’t be much more specific than that, and didn’t even want to hazard a guess about which brands gave him the best margins and what they were. Nor was he real clear with me on which products and brands were turning how quickly.
 
The finance guy in me perked right up. I started ranting and raving about his need for point of purchase registers, new computers and advanced accounting software, and revising his chart of accounts forgetting for a minute that this was a $500,000 retail store, not a chain or huge stores. The long pause on the other end of the phone line brought me back to earth. It was clear that a big investment in equipment and hiring a financial controller wasn’t going to happen.
 
“Let’s try it another way,” I suggested. “Ignoring the small stuff and what you don’t sell much of, so you know what you sell everyday by category and brand?”
 
“Sure,” he said.
 
“And you know what it costs you, right?”
 
“Of course I do,” he said a little frostily, beginning to think I was suggesting he was an idiot.
 
Then I asked, “And you can come up with a pencil and paper, can’t you.”
 
Before he could tell me to go directly to hell and hang up, I said, “Well, then you can figure this thing out!” He was still unsure what to make of me, but at least he was still listening.
 
Every Sunday evening, I told him, he should get his sales records, dealer invoices, the pencil paper, maybe a calculator and a cold beer and sit down at a table. “Get the beer first,” I corrected myself, “And don’t put the beer on the pad of paper. It’ll make a big wet circle.”
 
List your dollar sales by category and brand.
 
Get your costs for those sales from your supplier invoices. Pretty soon, you’ve got a neat, one or two or maybe three page document that shows you your sales and gross profits by brand and product category. Do what works for you. Might look something like this.
 
Week Ending:
 
 
 
 
 
 
COST OF
GROSS MARGIN
 
SALES
GOODS
Dollars
percent
 
 
 
 
 
Decks
 
 
 
 
 Brand one
 
 
 
 
 Etc.
 
 
 
 
Total Decks
 
 
 
 
 
 
 
 
 
Wheels
 
 
 
 
 Brand one
 
 
 
 
 Etc.
 
 
 
 
Total Wheels
 
 
 
 
 
 
 
 
 
Shoes
 
 
 
 
 Brand one
 
 
 
 
 Etc.
 
 
 
 
Total Wheels
 
 
 
 
 
 
 
 
 
Apparel
 
 
 
 
 Brand one
 
 
 
 
 Etc.
 
 
 
 
Total Apparel
 
 
 
 
 
 
 
 
 
Total Sales
 
 
 
 
 
 
 
 
 
 
Small business owners have a lot of this information in their head. But usually not all of it, not accurately, and not in a way where they can see the relationships. As your business gets bigger, keeping it all straight in your head gets, first, more difficult then impossible.   But with a weekly chart like this one, you can see which brands are moving, how your margins are, and how sales of one brand compares to another.
 
Consider the decisions you can make after you’ve been doing this for maybe a couple of months and have accumulated some data. Where are you actually making your money? Should you be carrying more of that product or brand? What is it time to discount and get rid of? What are the financial results of changing your product mix and increasing your gross margin by a couple of points?
 
If you want to get a little fancier, include columns for cumulative sales and margins from the first week you start doing this. There will be nothing to it if you’re doing it on a computer and using a spreadsheet. One last iteration might be to show the total inventory you’ve got in each brand and category. Obviously, sales have some relationship to what you’ve got in stock, and you wouldn’t want to condemn a brand for poor sales when you’re low on inventory.
 
Such an analysis isn’t just financial in nature, but is the starting point for evaluating some important operating issues. In the case of this particular retailer, we pretty quickly got around to asking how and if he could change his sales percentages from sixty percent hard goods and forty percent soft goods to the other way around. We knew, though we couldn’t be specific during the conversation, that the change would have a major impact on his financial situation.
 
I asked him some questions about his store layout and merchandising. It seemed like it had been a while since he’d changed some of his fixtures. His lighting, he acknowledged, might not be quite up to par or focused on the products he was most interested in moving. It sounded like some reorganization of his selling space was overdue and that product access could be improved. I don’t know a hell of a lot about merchandising and layout, but people who do know have told me that changes in these areas almost always result in sales increases and need to be done on a regular basis.
 
I wasn’t telling him to throw out all his fixtures and displays, trash his lighting, and redecorate his whole store. It wasn’t in the budget. But maybe some of those fixtures could be spray painted and put in a different place. Maybe the light bulbs could be changed to a higher wattage. Perhaps a coat of paint on one wall would help highlight some of his higher margin, but slower moving product. Couldn’t he use some of what he’d learn in the simple financial analysis described above to make some inexpensive but effective merchandising and marketing changes in places where they would do the most good? I mean, just changing things in your store from time to time is a good idea, but tying those changes to specific opportunities for financial improvement makes it an even better idea. 
 
The point, I guess, is that financial analysis doesn’t exist in isolation from other aspects of your business. The analysis isn’t difficult if you have some simple systems and doesn’t require a complex knowledge of accounting. It shouldn’t be looked at as forensic. That is, it’s not just something you have to do at the end of each month, quarter and/or year to satisfy your banker or the tax guy.
 
Besides, standard financial statements by themselves will not give you all the information we discussed above. But you need it to make day to day management decisions.
 
So improvise a little.  Get out the beer, pencil and paper and calculator. You live or die by your gross margin. Use the information about it that’s at your finger tips to make better business decisions that are responsive to the changing skate market.

 

 

New Stuff to Do More; New Strategies are Critical as the Snowboard Industry Evolution Continues

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I remember when this was a simple business. Or at least I thought it was a simple business. You had a pro team, ran some ads, built relationships with core shops, sold C.O.D. or on 30-day terms, and were thrilled if you could get enough product to fill orders.

With supply shortages, the fact that quality wasn’t always very good was less crucial. Margins were better anyway.
 
Your team is still valuable, but successful team riders have to do more than rip up the hill. Apparently, they also have to look good in their underwear. Riders have agents now, for god’s sake.
 
Your choice of where to run ads has expanded dramatically. We used to laugh at people who ran an ad anywhere but the usual places. Now we wonder if we’re missing an opportunity.
 
Thirty-day terms are pleasant memories and selling some product at a decent margin is tougher than climbing out of a tree well after a ten-day dump. You can’t just focus on ‘core shops any more. Hell, it’s getting hard to even find one if you define it the way we used to.
 
Not only does a snowboard company have to do the same old things better, but my contention is that it has to do a whole bunch of new things as well.
 
Endless Product Lines
 
 SKUs are getting out of control. Product lines have gotten enormous- largely as a competitive response to what other companies are doing. I’m not against responding to your competition, but recognize that such a response is strictly defensive in nature. Rather than differentiating you, it makes you look like you’re simply copying your competitor. 
 
This is yet another example of our talking and listening to ourselves, rather than focusing on the customer. It also costs money. Making and managing more SKUs is expensive. In some cases, it may even drive up costs of other products by shortening production runs.
 
The situation requires a little zero-based product planning. Don’t start by looking at your competitor’s product lines. Begin by looking at what your customers are buying and what you think the market trends are. Design your product line in response. Figure out all the hard costs of an extra product- molds, samples, employee time, short production runs, etc.
 
Now, what are the specific benefits of another length of one style of board or an extra color in a jacket? Will you actually increase sales or will you just cannibalize another part of your line? Are you making it even more difficult for the store to carry and merchandise your products? Will your reps really understand the whole line and will they be able to make a cogent and complete presentation to the poor retailer before that retailer keels over in confusion and exhaustion?
 
The hard costs are real. The soft benefits are tougher to quantify.
 
Public Relations and Co-Branding In Advertising
 
Snowboarding has been turned into the poster child of the cool, young generation every advertiser wants to reach. Snowboards and snowboard products are turning up everywhere. Are any of them your products? If not, you’re missing an opportunity.
 
Does a particular board’s base graphic turn up on a resort’s promotional brochure by accident? Did K2 team members just happen to be standing around in their Jockey underwear, boards in hand, when a photographer happened by, took a picture, and sold it to Jockey?
 
Most of this exposure is not accidental: taking advantage of all these opportunities is a full-time job for somebody. And the work that’s done now probably won’t have an impact until next year due to the lead times involved. So get started sooner rather than later. Prepare and distribute a press kit. Include photos anyone can use. Make contacts with companies that are interested in your customers and make it easy for them to get the images or the product they need. 
 
One note of caution: it’s easy to believe that free or inexpensive exposure is good, no matter where it occurs or in what association. Not true. Make sure the opportunity is appropriate to your brand and its market position. To use an extreme example, how many snowboard brands rushed out to have snowboarding’s furry Olympic mascot Animal seen on their boards?
 
Resorts Are Our Friends
 
I think we’re to the point where the director of resort relations is probably a full-time position for a snowboard company.
 
Ignoring rental possibilities for a minute (because they’re a whole separate issue), there are an almost endless number of things you can do to help resorts focus on snowboarding and the kids they want to attract and retain.
 
Are you maintaining a database of key resort employees and contacting them from time to time? Do you have a program to flow a little product to the right people?
 
Are you having a couple of team members spend a day at the resort and then sending an unsolicited letter to the appropriate resort executive telling them what a good time they had and maybe suggesting a few things they could do to improve the snowboarding experience?
 
Have you sat down and thought specifically about how the needs of resort shops are different from city shows and, besides giving different terms, how you can meet them?
 
I don’t think I’m even scratching the surface here. I’ll bet your new director of resort relations, a snowboarder who’s spent some years in resort management, would have a whole lot of ideas.
 
Rentals
 
The trouble with rentals is we don’t know why we’re doing them. Are they a loss leader that gets people on our product and ultimately selecting our brand when they buy? That is, are they justifiably part of marketing and promotion budgets? Or are rentals supposed to be moneymakers?
 
As long as I’m restructuring the sales and marketing organizations of snowboard companies, may I suggest a sales manager of rentals?
 
I know rentals are growing dramatically. I suspect they’re no longer just for people trying snowboarding for the first time. They have become a convenience, like takeout food. Done well, as it increasingly is, the equipment is always new and tuned and the boots are dry. All you have to do is show up.
 
Why buy if you’re a typical participant who’s only on the slopes for a few days each year?
 
I think the rental trend is going to catch us by surprise, at least partly because we in the industry spend too much time talking to each other instead of to our customers. This is an interesting problem. We sell rentals cheap, or offer ridiculous terms, or agree to take the product back next year. We do it because we believe that ultimately it helps sales. But by providing cheap, new product each year to rental shops we make it increasingly easy and economical for participants to rent. Aren’t we helping the rental shops to build their businesses and killing ourselves? Yet another example of irrational competition in a maturing market.
 
I wonder if any snowboard company really makes money in rentals. By embracing snowboarding, the resorts have given themselves tremendous leverage over the industry. I suspect your new sales manager of rentals and director of resort relations will be working closely together.
 
Wherever You Go, There You’ll Be
 
In a maturing industry, you either find a defendable niche, or become a low-cost producer. Considering the trends discussed above, it’s obvious this is true for snowboarding.
 
Margins have declined, but the cost of doing business has increased. There are too many things you have to do to succeed. Which means your break-even point has gone through the stratosphere. And the working capital investment required in this highly seasonal business has grown even more.
 
My perception is the entire business model is changing. Snowboard companies have to do things they haven’t done before. There is a new group of stakeholders who aren’t just the people who snowboard. The snowboard industry has lost a lot of the control it had over snowboarding. Getting that control back, if it’s possible, requires new organization and a new way of thinking.

 

 

The Dilemma of Being “Core;” Identifying and Managing the Conflict.

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A few years ago I wrote a column called “Are there Any Core Snowboard Shops Left?” It generated a good discussion, though I got burned at the stake by quite a few people. Happily, I was wearing my asbestos underwear.

The question, however, is still valid because of some of the problems core shops are having and how important they are to the industry. I want to talk today about why the snowboard business for a core shop is either easier or harder than other action sports businesses and why it may be a tougher business proposition to be “core” in snow than in other businesses.
I also think, much to my amazement, that I’ve come up with a working definition of what a core shop is and I’ll present that to you later. Only took me fourteen years.
Having a definition is important if we want to say anything meaningful about what core shops do, why it is meaningful, and how they might do it better. Like the resorts and the suppliers, they have a role to play in resisting the snowboarding business degenerating into a more and more price driven game and in continually finding new participants. In the long term all three groups have the same interests. In the shorter term, these issues are most important to the shops.
Easier and Harder
Extreme seasonality defines snowboard retailing. You get just one chance. So, if you’re a flinty eyed business person, you order cautiously, thinking that you’d rather be pissed that you didn’t order enough than if you had to pay for it and carry it over until next season. You buy mostly mainstream stuff that you think is likely to sell best, and your selection is heavily influenced by prices, terms, discounts, and other similar goodies. If it doesn’t snow, or doesn’t sell, you discount it ruthlessly and early. It’s got to be gone by the end of the season. Once the season is over, say the early part of February, that snowboard stuff disappears and the floor space is largely filled with whatever season is next.
That was easy, and as low a risk as you could make it. But it was hardly core. We’ll get to the official definition. Among other things being core requires that you carry enough stock in enough brands to really serve serious snowboarders even if they aren’t most of your customers and that you take some chances on brands that maybe aren’t mainstream or haven’t been around long. probably means some other things that increase risk and cost. Like having employees with enthusiasm for snowboarding and its lifestyle. And supporting the local community.
At the end of the season, even a good season, at least some of that snowboard stuff probably still sits there, gobbling up floor space and working capital. It generates some occasional sales, though not near what you could get with different product. But you’re core so you do it and it costs you money. That’s harder.
I’ve illustrated two extremes. The magic of successful retailing, of course, is finding the sweet spot in between those extremes that works for the customers and doesn’t blow your bank account.
Still it’s obvious that being a core retailer in snow is a lot harder than in a retail business where participation doesn’t stop dead for eight months of the year even if it slows down. Like skate or surf. But it’s not only harder because of the seasonality. People who don’t skate or surf still buy skate or surf brands to wear. Certainly some of that goes on in snow, but I suspect that most snow soft goods (or at least a higher percentage than in surf or skate) are sold to people who want to use them snowboarding. That makes for a much smaller possible market.
Which, we can probably all agree, is why shops don’t just do snowboarding anymore. There’s no business model that makes sense. Looking at a single season, it probably doesn’t make financial sense to try to be “core” in snow. It just costs too damn much.
The Definition
A core retailer is one that has a primary focus on customers who are drawn to the lifestyle and keyed intothe trends associated with the activity they participate in. This focus is shared by the shop owners and employees. Many of its customers tend to purchase more often and be less price sensitive than others. Though it is not necessarily true that core retailers are small in size, it is reasonable to say that being a core shop becomes more difficult as your size and number of storefronts increases.
What I’ve suggested above is that, due to being a one season business, and for other reasons, there are some risks and costs to being a core snowboard shop that don’t exist in the same way or to the extent they exist for skate or surf. That’s bad because we need the core shops, we all say. Just to refresh our memories, we say that because they are the first ones to spot trends, have a role in incubating brands, and in creating and maintaining a bedrock of excitement that supports the industry through good times and bad.
Where Do Enthusiasts Come From?
From the womb I suppose. Which is my way of saying that these lifestyle participants we, as business people, depend on tend to be younger. And as they get older, they begin to develop other priorities. What was a passion and a lifestyle becomes a sport. It competes with other uses of time and money and may no longer be the thing they find a way to do no matter what. We can market our asses off, but we’re seriously drinking the kool aid if we believe that any amount of clever marketing will change this inevitable evolution as people get older.
So that’s going to happen? We will lose participants, or at least frequency of participation and people will be less inclined to buy new stuff more often.    And they will have less propensity to buy soft goods if they are participating less. As I said above, I think surf and skate sell more broadly defined soft goods to more former or non participants than snow does. Participation is more important to snow than to skate or surf. Look at the percentage of total surf revenues represented by surf boards.
Well, okay, if snowboarders are inconveniently going to get old in spite of all our outstanding advertising and promotion, where are the new participants we need going to come from?
Like I said, from the womb. Well, this is hardly a surprise. SIA spent a whole lot of money having studies done that, in part, showed the importance of getting participants started young. Resorts and brands both have their parts to play in keeping new, young participants coming into and staying in snowboarding. But so do the core retailers. What should they do?
Action Items
First, it would be good if you stayed in business. That, by itself, would help a lot and is by no means an easy thing to do.
Second, stop agonizing over broader distribution and company stores. It’s here to stay and it’s unlikely you can do much about it, except of course take it into account as you consider how you run your store.
Third, get bigger. The numbers show that smaller shops have higher leverage (risk) and lower returns on net worth.
Fourth, even if your roots are in snowboarding, and you see yourself as a core snow shop, don’t use that as a reason to exclude other products that make sense. Try to limit your financial dependency on snow. You can be a “core” snow shop even when a lot of your total sales are from other products.
Fifth, have a cash flow that makes sense and build it with special consideration for your (I think) less predictable snowboard business. And in that cash flow, plan to pay your suppliers on time. I don’t know why, but they seem to like that. It’s also a big step in accomplishing point number one.
Sixth, though your roots may be in snow, I think retail business conditions require that you think of yourself as an action sports shop. It’s the financial model that works. Treasure the crossover customer.
Seventh, build relationships with winter resorts that help get new participants to the slopes. That’s worth another article. I can tell you from sending a few emails that some of the best stores are already all over that.
What writing this article has made me realize is that there is, in some sense, a conflict between being, thinking, and acting as a core snowboard shop and having a solid business model. Maybe that’s too strong, and I know there are some notable exceptions. Still if success requires, and I think it does, that you are active in areas besides snowboarding, can it be dangerous to think of yourself as a snowboard shop even if that is your focus? To put it in fancy business school-like strategic planning terms, if your mission statement isn’t aligned with your business model, you’re screwed.
Sorry, not allowed. We can’t have the core snowboard shops screwed if they are going to fulfill their role in developing new participants. Think about this possible conflict—we really need core snow shops, but being too core in snow alone may hurt a shop’s chances to grow, succeed, and influence new participants. Where’s the balance for your shop?

 

 

Hard Truths about the Action Sports Business; Use Them to Make Lemonade from Lemons

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As I said in the last issue of Boardsport Source, the way companies choose to compete in the action sports industry and, I suppose, in most industries, is largely responsible for the maturing and consolidation of fast growth industries. Ask the skate and snow people. People way smarter than I have acknowledged that surf’s time will come.

It wouldn’t hurt to read that last article before this one.  So if you’re one of the few people who doesn’t seal their copy of this mag in an air tight case of bullet proof glass filled with argon gas to prevent the paper from deteriorating, let me know and I’ll email it to you.
 
I have the privilege of looking at things at my leisure from the 10,000 foot level without the distraction of having to make a budget, ship a product, or figure out which brands to go how deep on. I guess what I want to tell you is just how much this industry has changed. Perhaps that seems obvious, though if we take it as a given it’s amazing how little we seem to try to manage our businesses differently to compensate. What can we do, anyway? Let’s think about some old habits we should consider breaking.
 
Hardgoods
 
Congratulations. Surfboards, skateboards, and snowboards are all well made, quality products that the consumer can rely on.   The brands have done an outstanding job of designing, sourcing, and manufacturing. So much so that the prices keep going down. In the industry’s incestuous world, we bemoan this, point fingers in various directions (usually not in the mirror, which is where we ought to be pointing at least some of the time), and discuss endlessly what we can do to increase margins to what we “need.”
 
Maybe, instead of wringing our hands over lower prices and margins, we should all be congratulating ourselves for making it easier and cheaper for the consumer to skateboard, snowboard, or surf. I’m not suggesting that cost is the only, or even the most important, determinant of participation. But as long as we, as an industry, seem determined to drive down costs and prices, don’t you think we should celebrate that service we’ve performed for our customers and figure out how to turn it into a good thing rather than complaining endlessly about something that doesn’t seem like it’s going to change?
 
Why haven’t I heard of a surf retailer giving a free surfboard ($95 ex-factory out of China) to a customer who buys a wet suit, baggies, wax, sun glasses and a surf trip from the retailer? “But we’re not a travel agent!” bemoans the retailer. Well, maybe you better consider becoming one. That’s how scuba diving retailers, in the US at least, make a lot of their money. Is there any reason a snow retailer couldn’t do more or less the same thing? Maybe skate retailers should be selling a deck at cost to a kid who buys wheels, trucks, grip tape and a pair of shoes at regular prices.
 
Brands, resorts (or skatepark owners) and retailers should be sitting and talking about how you can help the consumer rather than about who’s fault it is that it’s harder to make money. Ignoring the Japanese snowboard phenomenon of the early to mid 90s, consumers don’t want a surfboard, skateboard, or snowboard for its intrinsic value or artistic design- they want to skate, snow, or surf.
 
Rather than bitching about what’s happened in hard goods, why don’t you embrace it (since you’re stuck with it!) and do something positive with it? Don’t sell skateboards, surfboards, and snowboards. Sell skateboarding, surfing, and snowboarding. That’s what your consumer is interested in. 
 
And those margins you “need?” Zumiez, the very successful US action sports retailer with around 130 stores just launched its stock in an initial public offering and so far, the stock has performed pretty well. Zumiez gross margin in its last complete year was 31%. I guess that’s all they “need.” I know- they’ve got all those stores, and they’re a mall shop, and they get better prices from suppliers, and we’re way cooler than they are, and, and, and, and….. Guess what? It appears that quite a few of the industry’s consumers don’t care about that. They think Zumiez does a great job. So do I. If you’re interested, here’s a link to their public offering prospectus. http://www.sec.gov/Archives/edgar/data/1318008/000104746905013143/a2153924zs-1a.htm
 
Distribution
 
I don’t have the words to describe how tired I am of hearing people argue over whose “fault” our distribution problems are. Whenever you get a group of brands and retailers together, the issue is bound to come up. But no new information is ever exchanged, and nobody has any useful suggestions. Why don’t we just get over it?  Whether you’re a retailer or a brand, assume that most product, hard good or soft good, is going to be available all over the place. It mostly already is. Am I overstating that maybe a little? Maybe. But we can all agree that every brand of any size is available in many different size and quality retailers in many locations.
 
Retailers have three choices. First, if your margins are going to drop, then you have to sell more to make the same level of gross profit. Maybe you’re a brilliant retailer and can do it by increasing sales per square meter in your existing space. More likely, you’ll have to increase your floor space or open new locations or add products. Or all of those. That, of course, requires you to increase the working capital investment in the business.
 
Choice two is to carry more new, lesser known brands. Risky? Yes, but no more risky than doing nothing as your margin drops and your operating expenses stay the same or rise. Besides it fits right in with choice three, which is to do what smaller retailers are suppose to do to compete- differentiate themselves by brands carried, customer service, and expertise. At the end of the day, the best specialty retailers can sell whatever quality brands they choose to carry, because the credibility of the retailers is so high that it rubs off on whatever brands the shop has. The ability to give credibility to any brand it carries may be the best definition of the specialty retailer I’ve ever heard.
 
Actually, I suppose these three things aren’t really choices, but tactics that should be pursued simultaneously.
 
If I were a brand, I think I’d sharpen by pencil and ask what would happen to my gross margin, marketing expenses, and bottom line if I were to get a bit more cautious on my distribution and was satisfied with lower top line growth. The UK brand Animal is taking something like this approach. By being cautious about their distribution, they keep retailers happy by promoting sell through at higher margins. That exclusivity increases demand and next year’s preseason orders. It also means they can be more judicious in their marketing expenses because limited availability drives demand better than a whole bunch of paid ads. The bottom line is, well, a bigger bottom line than if they focused exclusively on driving sales.
 
Marketing
 
I keep turning back to the two page Globe ad in this mag’s spring issue. It’s an artistic rendition of a single wave breaking in a big ocean. There’s nothing else in the picture. Not a product or a team rider in sight. Nobody doing a trick that 99% of the people looking at the ad can’t do. It reminded me of what I really value about surfing- the peace of just being out there even if the surf sucked. Anyway, there was always the hope that the occasional, elusive good wave that comes through even when the surf was bad would be the next one.
 
Was it a good ad or a bad ad? I loved it, but that’s up to you to decide. At least it was different and I noticed it. And of course this was a trade, rather than a consumer, publication. Obviously if you can make your ads different so that they get noticed in a positive way that’s good. If in fact more of the consumers who buy your product are non participants interested in the lifestyle rather than the technical specifics of the newest trick maybe more of these ads are particularly appropriate.
 
The caveat is it depends where you are advertising. In core consumer publications, read mostly by core participants, (I think- that’s an interesting question! Who does read them?) I suppose tricks and pros will also be the staple of advertising, though it tends to leave everybody’s ads looking the same. But if you’re reaching to the mainstream and becoming more and more part of the fashion industry, your advertising placement may change, or at least expand, and a different kind of ad become appropriate.
 
Don’t find yourself directing too much of your advertising to the industry. Deliver an image and a message that your consumers- not your retailers or your competitors- think is cool.
 
In this article, I’m asking you to do three things. First, focus like a laser on your consumer and what they want. Don’t confuse your team riders, the industry, or the retailers for the people who buy your stuff. They overlap for sure, but they are increasingly not the same for most companies. I can guarantee you that the companies that do that will be the most successful.
 
Second, rather than bemoaning the trends in hardgoods and distribution laid out above, recognize that they are normal industry evolution stuff and figure out how to operate your business given that they are here to stay.
 
Third, do some things differently keeping the focus on the consumer in mind. Yes, they feel risky but I hope I’ve made it clear that not trying some new business approaches is even riskier. If you agree that the industry has changed, how can you possibly make the argument that you should be using the same old tactics to build your business?

 

 

Look! New Brands. That’s Great! Or These People Are Crazy. Or Both.

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Probably both. It’s not like brands haven’t been coming and going for years beyond count in skateboarding.

Historically, there have been two categories of new brands. The first was the truly new company started by some skaters who wanted in on a burgeoning industry that just happened to be something they loved. The second were the new brands that came from established companies where brands came and went as their popularity rose and fell with time and the popularity of the brand’s team.
 
Let’s look at who may be crazy and who may not be, and why.
 
The list I was sent of around fifteen “new” brands turned out to be mostly brands started by existing companies. Some of the ones not clearly associated with an existing brand I tried to contact, but in a couple of cases I either couldn’t find a phone number or email address on the internet, or I didn’t get an answer.
 
The reason I was hoping to reach some new brands not associated with existing companies is because when they are popping up, skating is prospering and dynamic. The level of enthusiasm and optimism that leads to skaters starting new brands or new shops is just what we need in this industry.
 
Brands being started by existing companies, on the other hand, may or may not indicate any market growth. They may represent just that ongoing brand rotation I referred to above we all know about.
 
Certainly the almost weekly phone calls or emails I use to get from kids who were going to start shops or brands are a thing of the distant past. I always tried to encourage them to go for it, but also to do it with a certain level of business realism. I wonder if any of them ever pulled it off.
 
Excuse me as I wipe a tear from my eye, sign deeply and bemoan the loss of “the good old days,” when men were men and margins and prices were high and you could sell everything you could get or make.
 
Was I suppose to say, “People were people” to be politically correct? Oh, the hell with it.
 
Anyway, in a desperate attempt to get back on topic, let’s look at how the business model of starting a new independent brand has changed.
 
Same Old New Business Model
 
The bad news, I suppose, is that the expense side hasn’t changed all that much. At first, when you’re very small and “underground,” building one shop and one order at a time, maybe you can get away without some of the usual expenses.
 
As you begin to grow, you will need team riders. You have to begin to advertise and promote. You will find yourself giving away more stickers and promotional product. iThere are magazines to be advertised in and trade shows to go to. My guess is that none of this has gotten much cheaper, though trade show booths bigger than my house (and with more floors) are largely a thing of the past in the core skate industry.
 
You’ll have to pay rent or a mortgage when you outgrow your garage, and it’s likely you’ll need employees who will, inconveniently, want to be paid. So will the phone company.
 
And while you do what you can to control expenses like any competent business person, a lot of these expenses are unavoidable. Especially, maybe, the marketing expenses since you’re product is the same as everybody else’s and without brand differentiation you’re ultimately toast. In fact, if skate isn’t growing as fast as it use to, maybe you need even more of those marketing expenses.
 
Let’s hope, of course, that you also have some revenue. More than expenses, eventually, would be nice. And of course you’d like that revenue to come from selling full price, high margin decks that kids buy because the brand, or skater, or both, are cool. You and every other brand.
 
But I suspect that part of the market, in both percentage terms and in total decks sold, is not as big as it use to be and may be getting smaller. And prices, at both wholesale and retail, are expected to come down in the broad skate market.   You know the drill; Shop decks, China, blanks, competition, fewer core shops, wider distribution, no real product difference, blah, blah, blah, blah.
 
We’ve been through that analysis enough, so let’s just recognize the danger of less revenue from the same number of products sold even if the percentage margin is the same. You are in general going to need to sell more decks to make the same total gross margin dollars. Those dollars are what you need to pay all those pesky expenses. So breakeven is a little farther away, in terms of sales, then it use to be. Financial risk is higher and more bucks have to be invested in the business.
 
And now that I’ve got anybody who was actually thinking about starting a new, independent brand standing in a puddle of their own making, let me tell you that you should go for it. But plan for it and recognize the changes in the business as a way to improve your chances of success.
 
Old New Brands
 
It’s not a surprise that of the 15 or so new brands on my list, no more than three or four are really independent new brands. And it may not be that many. We all know of cases where somebody has started their “own new brand” that is distinct from a marketing point of view but is supported financially and logistically by an existing skate company.
 
Which, by the way, makes a hell of a lot of sense. Starting from scratch is a pain in the posterior region. If you’ve already got a warehouse, accounting system, and product source, there’s not a reason in the world not to take advantage of it. Especially since the consumer will probably never know the difference and will be just impressed by a correctly marketed new brand supported by an old company as a new brand from a truly new company.
 
And many retailers, I suspect, would prefer to have a new brand from a company they know they can count on for quality, delivery, service, and marketing. For better or worse, they aren’t prepared to take the same risks on new brands they use to be.
 
Just to confirm that, I spoke with Craig Nejedly, President of the wheels and soft goods brand Satori Movement. Within the last year, the company has launched the new skateboard brand Creation.
 
“Some of our retailers had been asking for a deck for while,” he indicated. “Finally, we couldn’t see any reason not to accommodate them.”
 
But it isn’t a blow out the doors, grow at all costs kind of approach. Far from it. Unsold inventory is kept to a minimum. Growth, at this point, is determined by pull from the retailers, not by demand created by marketing. Between the terms he gets from the factory and the way the retailers pay, Satori hasn’t had to invest a whole lot of capital in the new brand to make it fly. And marketing dollars only go out the door based on sales dollars coming in. Marketing, at the moment, is based more on limited distribution and scarcity than on advertising and promotion.
 
I’ve always thought that was a good plan. Demand creation through some level of scarcity is probably better marketing than, well, marketing.
 
When Taking a Risk Isn’t
 
From the consumer’s point of view whether a new brand is independent or not may be irrelevant since the consumer doesn’t know. But when I see new independent brands, I know the market is more vibrant and optimistic and probably growing. So my advice to those interested into getting to the skate business is to listen, but not be intimidated, by people like me telling you how hard it can be. That’s true but it’s not the whole story.
 
As a new brand, you can do things the existing brands wouldn’t even think to do. In fact, if you come out of the shoot doing exactly what everybody else does but trying to do it a little better or differently, with your goal being to take somebody else’s market share, you reduce your chances of success and for sure you don’t do much to grow the market.
 
Why don’t you make a deal with the local skate park so that a pass to the park comes with each deck you sell? How about arranging a skate demo where people wouldn’t expect it? Include a coupon that’s good for a discount off a deck if you’re over 40. Okay, maybe that’s a retail strategy. Think of the parents that would get dragged into the shop. My point is that as a small brand, there are few rules about what you can do and can’t do.
 
Forget what all the other brands are doing. As a new brand, don’t benchmark yourself against your competitors. Figure out something new you can give the skater. It’s what the customer wants that matters. Create a new market instead of fighting over a crumb of the existing one. It’s your best, and maybe your only, chance.

 

 

The Basis of Competition; How Do We Sell More Stuff?

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It’s funny how the fundamentals of business never change. Three years ago at the Surf Industry Conference in Cabo, I facilitated a panel of people from the skateboard industry because skate was going off and the surf guys thought skate was going to have them for lunch or something. Then skate sales plummeted though, happily, they are recovering now.

Many of us were around when snowboarding was going to take over the world. It didn’t.  And last week at the first ever and hopefully annual Snowboard Industry Conference at Laax, there was a great gnashing of teeth and ringing of hands over the fact that snowboarding didn’t seem to be growing and might even be declining.
Business cycles are immutable and inevitable. That’s especially true because of the way companies in an industry choose to compete with each other. They bring those cycles on themselves. This article will look at how we bring this death spiral of competition on ourselves, how we compete, and finally suggest a general approach (there’s no room to outline it in detail) that describes how an individual company might change that and sell more stuff.
This article had its genesis on the last evening of the Snowboard conference, when Tim Petrick of K2 was kind enough to buy a couple of bottles of just excellent red wine.  We were talking about the snowboard market’s perceived stagnation. In a BGO (blinding glimpse of the obvious) I spewed out something like “We got to do some things differently!”
Well, everybody was kind enough not to say, “What the **** does that mean?” Still, it seemed they were waiting patiently (and reasonably) for me to explain what I meant and perhaps even to say something useful. I tried. I really did. But my thoughts were unformed. An attempt to expand on the idea just sort of died and the conversation moved on.
Still, the initial impulse was right. We do need to do some things differently so that our sales and margins can increase.
The Death Spiral of Competition
We’ve done it to ourselves you know. Declining prices, over distribution, some say stagnant participation, high marketing expenses, and the commoditization of the product. Inevitably there’s some search for blame. But at the end of the day we can all point the finger at each other and we’d be right. Every company does what it perceives to be in its own best interest. Of course. Me too.
 We all do things to try and grow the market, but at the end of the day we find ourselves battling each other for scraps from the other company’s table in a market that isn’t growing that much. And even if we succeed what have we accomplished? Probably just pushed prices down further or increased marketing expense. We’re left with the same circumstances and maybe we’ve made it even a little tougher to succeed. There’s no “sustainable competitive advantage” from anything we do. All we can think to do to grow is expand distribution, open retail stores, diversify or acquire somebody (often just a form of diversification).
It’s no wonder that maybe a little of the optimism has gone out of snowboarding. This is a hard business we keep making harder by our competitive actions.
How We Compete
Here are the things we all do to one extent or another: They aren’t listed in any particular order.
·         Sponsor contests and events
·         Teams
·         Advertising
·         Give away product
·         Prices, terms and conditions
·         Strategic alliances
·         Graphics
·         Product features
·         Distribution
·         Trade shows
·         Films
Are any of us really doing any of these things much, much better than our competitors? I’d say no, though some have the resources to do more, which doesn’t necessarily mean better.
And those larger companies seem to be applying more and more of those resources to diversifying or expanding into the larger fashion/lifestyle business.
Our competitive environment is largely a zero sum game. What one gets, the other loses.
When we’re not busy diversifying to reduce our dependence on this hard industry, we’re focused like a laser on what the other companies are doing. To some extent we go to trade shows because they go and make sure our displays are comparable. We price according to their pricing. We run similar ads in the same magazines. We benchmark our product lines against theirs.
We’ve expanded distribution so much that we’re putting the specialty shops, which we all seem to believe are a bedrock of snowboarding, at risk. We’re eating our young. Is this any way to run an industry? You bet it’s not.
 Has anybody noticed that my entire diatribe here hasn’t even mentioned the snowboarder? Kind of odd isn’t it?
The Consumer
You remember them. The person who actually buys the product and, hopefully slides down the mountain? The one without whom we would all have to get real jobs? How can I possibly have written two thirds of an article on how we compete and not have even mentioned them? Doesn’t that bother anybody? It sure bothers me.
The goal here, as I understand it in my simple way, is to create more snowboarders who snowboard more often so that we can sell more stuff (thanks Tim). Sorry to be quite so mercantilist about it, but that’s what we all want to do I think. Otherwise we’ll be working in industries that have their trade shows and conferences in Kansas City. I’m quite sure I like Laax better.
I’m not quite sure I think going to trade shows where we all talk to each other helps us sell more. I get concerned when companies say they only sell product their team riders approve, because I don’t think team riders, or riders of that caliber, make up a very large percentage of the customers to whom we want to sell more. I know that making stuff cheaper in China because everybody else is and so we have to do it (which is true) doesn’t help us sell more. I hate it when we make it cheap and convenient for people to rent equipment, make no money on it, and excuse that by calling it marketing. And end up selling less.
How Do We Sell More?
 
The first thing I’d ask you to do is stop focusing quite so much on your competitors. They aren’t the ones you need to impress. I know that sounds risky. But on the other hand, what’s more risky than trying to compete in an industry that, if you believe the people at the conference, is stagnant to declining and where the process of competing is apparently making things worse, if you think my analysis has any validity.
Second, I want you to figure out who your consumer is and why they buy your product. You already know that? Great. But if you were to explain it to me and it involved reps opinions, anecdotal evidence, and a discussion of the kinds of stores where your product is sold, I might think you didn’t really know, or at least that you weren’t really sure.
Third, look very, very closely at how you compete. Start by creating a list of the ways the industry competes. Include on the list things that you do that others don’t, if any. Which of these are more or less important? How does the way your company competes in these areas differ, if at all, from your competitors?
This is not quite so obvious at it seems.   You would put team riders on the list I’m sure. But sponsoring team riders is something you do- not how you use them to compete. “Why are they important?” I might ask. “They influence kids purchase decisions,” you declare. “Prove it,” I say. “How exactly do they do that?”
“Everybody knows” can not be part of an acceptable answer.
The slicing and dicing would continue. Do they just influence kids? What do you mean by “kid” anyway? What are the things they do that create this influence? What makes them successful at it? How do you measure that? How many riders do you need?
As you can see, the list of how you compete evolves pretty dramatically over the process and become more focused. Some things will come and some go. General competitive ideas will be broken down into a number of more specific ones.
And so would your sense of what was actually important. And what was not. When you were finished, and if you did it right, your spending would have become much more efficient.
That is a good thing, and it might even help you sell more stuff, but it doesn’t get your out of your competitive space and mindset.
The process of evaluating your competitive strategy in detail and of being forced to question sacred assumptions generally leads to new ways to compete. It also tends to eliminate unproductive ones and put more focus on those that really work. It changes your company’s strategic profile.
There was package delivery before Fed Ex. There was ocean shipping before somebody thought of containers. There were winter sports before somebody decided one plank might be more fun than two.
Overnight package delivery, containers, and snowboarding kind of seem like common sense now, don’t they? But they didn’t to industries that were focused more on their competitors than their customers and potential customers.
Want to sell more? Take a hard look at your customers, what they want, and why they buy from you. Just for the moment, forget your competitors. If the process leads to a new market space your issues with competitors will take care of itself.

 

 

Small Brands Are Cool! How Can They Stay That Way?

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Actually, the question is not how small brands can stay cool. It’s how they can stay at all. As in stay here- alive, in existence, solvent. Not toast.

I have been so encouraged by the number of small brands I’ve seen in snowboarding recently. I love them. There was a bunch at the SIA show in Vegas. There were some of the same ones at ISPO and some different ones that I’d never heard of. At ISPO there were some small brands with skis and snowboards with the same branding and graphics.
 
There were even a couple of new kinds of snowboards. I have to admit that I don’t think they have a chance in hell, but it was great to see somebody trying and may they prove me wrong.
 
If snowboarding is going to be something besides a sport, which is good for business, then we need the enthusiasm and excitement that these small brands represent. But, I wouldn’t want all this enthusiasm and excitement to overwhelm good business practice.
 
That’s the other thing I’m seeing that I like. When you talk to the people running these brands, they refer to balance sheets and cash flow without being prompted and without their eyes turning brown from trying to bullshit you into thinking they know why that’s important.
 
Josh Reid, one of the founders of Rome Snowboards, demonstrated the benefit of a solid financial approach when he told me, ” Our close attention to our budget and balance sheet allowed us to come out with our binding a year early than we expected to.” 
 
So some of these smaller brands, partly because of a businesslike approach to financing, have a real chance to succeed. Here are some things they might want to consider doing to improve their chances and a few ideas about why that’s important to us. I can’t believe I missed the strippers in the Atomic Booth.
 
Normal Business Stuff
 
Just a reminder- building a quality product with great detail and finish, pricing it right, delivery it right, servicing accounts right, and supporting it with appropriate advertising and promotional programs gets you nothing more than the right to try. Market positioning and branding is what will make you successful. Along with having enough working capital to get through the year.
 
Adopt a Shop
 
If I were a small brand, I’d identify one, or maybe a handful, of really successful retail shops and I’d adopt them. By which I mean it would be just my first goal to have my product in those shops. Then I’d be all over them weekly or daily to figure out how my product was doing and why. I’d work like hell to learn from that shop or few shops. I’d watch their sales people sell my product. I’d try to talk to the customers who bought my stuff. I’d talk to the retailers about what they bought and why. I wouldn’t leave it only to my rep- I’d do it as the owner of the brand. I’d take these bits of information and develop a short manual about why the brand was successful in the shop, identifying anything that was unique about that shop’s situation. 
 
Then I’d take whatever I learned and develop it as training and selling tool for my sales force, doing my best to create a shop development approach that in some ways was the “signature” of the brand’s approach to working with shops. In the meantime, I’d probably try to convince the shop owner that he should be an investor in my brand.
 
I’ve heard too many retailers complain about this brand or that brand, their reps, and a general lack of attention once the products in the door. Here’s a chance to distinguish yourself in a way that maybe larger brands can’t and to learn a few things in the process.
 
The Buying Cycle
 
 Not the trade show buying cycle we all agonized about some years ago. The consumer buying cycle for snowboard goods. I’ve heard that skiers buy equipment something like every six years. Maybe it’s less or more. But whatever it is, I think (or maybe I hope) that snowboarders buy stuff more often. Or at least they use to. My guess is that they are moving towards the ski model. Products are all of solid quality right now. They just don’t wear out as quickly. Expansion of distribution, price declines and general product availability means there’s not quite the same urge or need among many snowboarders to get the newest thing.
 
If the number of snowboarders doubles, but they only buy half as often where are we as an industry? Do the math.
 
I see this as a big problem that nobody is really talking about. From a strict financial point of view the skateboard guys have it right. Make sure the product wears out pretty quickly and that it’s cool to break it. Of course, it’s also a lot cheaper to replace, so we can’t quite follow that model.
 
Small brands obviously can’t change this trend, but they have a role to play in resisting it by being cool and not quite so easy to get. It is, obviously, also a way in which they can differentiate themselves- at least for a while. So, small brands help themselves and the industry by restricting their distribution. It needs to be the big brands- who have encouraged retailers to buy with pricing and volume discounts and terms- whose product is left to be discounted after the holiday season. The small brands’ retailers need to more or less sell through at full margin if the small brand is going to differentiate itself and succeed. Further, the shops that carry the small brands need to be a destination for customers who want to buy that brand. What’s the value of the brand to the shop if the customer has to come to their shop to get the brand because it’s the only place in town that carries it and the shop has the chance to sell them some other stuff as well?
 
Obviously, the small brand and the shop have common cause here and it is a source of advantage for small brands. At least for a while.
 
Expectation Management
 
There’s never enough marketing dollars and there are always too many ways to spend what you have. If a new brand does everything right, and it grows in the correct way, it will create expectations on the parts of its customers, its retailers, its employees, its investors. But do too little, and you disappoint. Do too much, and you go broke. How to manage that? Well, my experience is it’s more an art than a science. But you can start by spending some time- actually a lot of time if you do it right- on developing a quality brand positioning statement for your brand. If you do it right, it will be a filter through which all your opportunities are passed, and you won’t waste time trying to figure out which one is right or money on the wrong ones.
 
Like Nikita’s “For Girls Who Ride.” Best one I’ve ever heard. I wish somebody would send me their brand positioning statements so I could plug them. I keep using the Nikita example and I’m giving them entirely too much free publicity.
 
Growth Problems
 
Someday, if you succeed, you won’t be a little brand any more. You will lose some of the possible competitive advantages I’ve described above. As every company wants to grow, those of you who prosper are likely to face this to some extent. So there you are- too big to be small and too small to be big. What are you going to do?
 
Interestingly enough, the answer is almost completely financially driven. I don’t care about marketing, I don’t care about distribution and pricing, I don’t care how cool you are. None of that will drive your strategic business decisions when you get to that point of being somewhere between big and small.
 
What you’re going to find is the extreme seasonality of the snowboarding business means that the risk return ratio is out of line if you are just in snowboarding. Most of you already know that because while you probably love snowboarding, you aren’t naïve kids who only want to be in the business because it is cool.
 
Working capital comes from either debt or equity. Okay, from retained earnings too, but that’s just another form of equity. In snowboarding it doesn’t make financial sense to finance with equity, because you don’t need it year around. But lacking all that equity and the strong balance it give you, debt that isn’t prohibitively costly can be damn difficult to find.
 
So you’re going to try and find a way to become, or become part of, a company with year around cash flow. Because for most companies, it’s the only solution that effectively balanced risk with return and makes working capital requirements manageable.
 
I would dearly love to get an email from some new small brand telling me I’m crazy and explaining what their financial plan is and how it will work differently. Because it would be great if that plan were out there. In the meantime, all you small brands keep up the good work but remember the wonderful problem of too much growth that you’re going to have when you succeed.

 

 

Living in the Past- Or Not; The New Old Skateboarding

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I can’t be the only one it’s occurred to that skateboarding seems to have dodged its historical cycle of disappearing and being reborn every ten years. I think that’s a good thing, though shrinking to nothing and more or less starting over had the advantage of letting everything be fresh and rediscovered.

True, sales fell from their peak by maybe a third. But a third is better than nine tenths. And sales are growing again though inevitably not at the rate of three or four years ago. And I suspect, though I can’t quite prove it, that they’d be growing even if it wasn’t for the BAM phenomena.
Somehow, skateboarding has broken through and is established and accepted in a way it never has been before. At the same time, at least for the moment, it’s still got a bit of an underground, urban edge to it.
Strangely enough, the fact that skate didn’t follow its pattern of completely cratering is both a good and, in some ways, a bad thing.  This article will expand on that (guess I better since it sounds a bit crazy to suggest that there are benefits to crashing) and look at some ways that maybe our business model has to change given that we didn’t crash. No doubt I will have thought of some before I get much further along here.
In The Beginning
The cosmologist, mathematicians and particle physicists tell us that the universe began in a “Big Bang.” Whatever that is. It started as a point particle of infinite density and temperature. Whatever that means.   It’s been expanding in all directions since then and if the string theorists can get their nine dimensional act together they may be able to unite electromagnetism and the weak and strong nuclear forces with gravity and tell us if there’s enough dark matter to ever stop the expansion and I’m sure you all understand that as well as I do.
Yikes, that sounded like something Jim Fitzpatrick would have written. I miss reading his stuff.
So anyway, in a few billion years we could have a real problem (I mean aside from the sun dying) but my point is that when you start from nothing, like skateboarding kind of has done in the past, you can create whatever you want and a lot of people won’t understand it. Or care. Or even know it’s there.
You can see why that might be kind of a good thing for a small industry. The people and companies who are the bedrock of the industry are in control.   The 800 pound gorillas don’t even know you exist or, if they do, they don’t care. Customers, retailers, and brands share certain common interests and perception. As competition emphasizes marketing, prices and margins tend to remain high.
Clubby little deal isn’t it? And it works great until people start to discover you, or somebody wants to grow.
Our Universe Expands
Skateboarding has had its Big Bang and there’s no going back. Skate parks, cheaper, quality hard goods, fashion focus, national media attention, maybe the Olympics, blah, blah, blah. You know it all. Good or bad? I don’t know, but apparently it’s irresistible. But, to continue the cosmological analogy, when Copernicus announced that apparently the earth went around the sun and wasn’t the center of everything, some people weren’t anxious to accept the new reality and the same may be true in skate,
To be honest, I’m not all that anxious to accept it either. I liked the business model where skaters controlled skating for skaters and, in the process, could make a few bucks themselves. I thought it kept the industry about the act of skating, rather than blowing it up into the echo of a fashion trend I’m afraid it might become. I don’t want skating to be just a sport.
On the other hand, I tend to be a bit of a green eye shaded kind of business guy and I’ve learned that sometimes when industries change you either have to go with the flow or go away. What does that mean?
Remember Snowboarding?
  • After a phenomenal period of growth, snowboarding consolidated down to the point where five or so large, multibrand companies sell most of the hard goods.
  • Hard good prices have fallen and continue to fall. Everybody makes good product differentiable only by marketing and most of them make some of in China, or somewhere like China, as a competitive necessity.
  • Sales of pro rider snowboards now account, I’m told, for only around five percent of total deck sales.   It use to be more.
  • Soft goods and accessories are an important- maybe the most important- source of income and potential growth for snowboard companies. Seeking opportunities for growth that hard goods won’t provide, some snowboard companies interested in moving into the much larger and more profitable fashion business. That means they are running into some heavy duty competitors with more resources and fashion industry knowledge.
  • Distribution was allowed to expand dramatically. Looking for growth, or with the rationale of building market share, brands became available at more and more locations, causing some decline in the perceived value of the snowboard product in spite of the brands’ marketing campaigns.
  • Snowboarding started as an outlaw sport, with some resort’s first action with regards to snowboarding being to ban it. In short order they embraced it and started building terrain parks all over the place.
  • Snowboard shops became multiactivity action sports shops. Hard goods were no longer as profitable as soft goods but were critical to the shops market position. Sales of apparel, shoes, and accessories to non participants interested in the lifestyle, or just in the trendy clothing, because critical to shop success.
I didn’t think I’d get seven items when I started the list. But the comparisons are compelling.   I don’t claim snow and skate are “the same.” Snowboarding is a highly seasonal, destination sport with generally older participants requiring a big cash outlay. Still the comparisons are obviously valid to some extent and we’ve been seeing those trends in skate to a greater or lesser extent.
So What?
Shit, I’m out of clever cosmological analogies. Oh well.
Most of this you already knew this stuff and probably didn’t really enjoy being reminded of it. Don’t blame you. But besides sit, suffer, and bemoan industry evolution, there are some things I think we should try and do.
Let’s agree that any brand, distributor, or retailer that starts arguing with another about how the other guy has screwed up distribution or pricing has to immediately donate $1,000 to IASC.   Elvis has left the building on this one. Cheap decks are going to keep coming in from China and retailers are going to carry blanks and shop decks if their customers want them. Every shop and brand is going to do what they perceive to be in their own best interest.
Cherish, identify and follow those customers who still buy branded decks at full (whatever that means) retail. Give them a discount they didn’t ask for because they come in so often. Be nice to their friends. Give them first shot at new products. The companies and maybe their pros should be contacting them and thanking them. Imagine the loyalty a single email might build. These kids are worth a fortune not just in what they spend but because they are the bedrock of what keeps skateboarding cool.
Go and look at your marketing budget from three years ago. How much have you cut it back and where? Were there some things you should have cut and didn’t, and some things you did cut, maybe because they were easy to cut, and wish you hadn’t? Which ones are working and how do you really know? Tough to figure out, but worth the effort. If you can’t do as much, at least make sure you’re doing the right things.
Where a brand is part of a larger company, try and insulate the brand from the larger corporate circumstances while stealing all the marketing resources and other forms of financial support you possible can. We aren’t starting from nothing anymore and inevitably the “larger corporate structure” is going to cramp your style a bit.
But what I know is that a hand full of relatively small companies have had an amazingly high level of influence and control over skateboarding. Because the people who ran those companies were skateboarders, they did good things for the industry and for their companies. As we grow, and get diluted by the 800 pound gorillas, that influence and control will be reduced to some extent.
On the one hand, no matter how much it’s fought, the cool/urban/underground factor in skate gets diluted by over exposure and mainstreaming. On the other hand, with growth and general awareness of skate, the industry acquires some strength and survivability it didn’t have before. What’s the net? I don’t know. But there’s some business opportunities in there if we don’t automatically stick to what worked before.