Opportunities for new Labels and Small Brands. What, Exactly, Should You Do?

I’ve been chanting for the last few months, and maybe longer, that our current economic environment represents a great opportunity for new and smaller brands. At an ASR seminar in September, somebody actually, finally, asked me, “What do you mean by that exactly?”

My answer was that if you were a specialty retailer, and were still standing, you weren’t likely to succeed by relying on big, national brands as much as you use to. I think I cited four reasons this was true.
 
First, a lot of that product has become available in different channels cheaper than you can afford to sell it. Second, a specialty retailer can’t differentiate itself (which it has to do) by carrying the same product everybody else carries. Third, the percentage of revenue large brands get from specialty retailers is declining and even though those brands may be supportive, specialty retailers are simply financially less important to them then they use to be. Fourth, the size of some of the offerings from the large brands makes it tough as a smaller square footage store to carry and effectively merchandise a selection from that brand that meets customer expectations. And of course, we’re not talking about just one brand.
 
I think I’ll add a fifth. If those big national brands are the focus of your store, then you risk being defined by the brands you carry, and I like to think it should be the other way around. The specialty retailer should give credibility to the brands they carry.
 
What Specialty Retailers Want
 If you’re a new label or small brand, and you agree with my above points, what should you do? First, consider this from the specialty retailer’s perspective. I think the ones I’ve talked with would mostly agree with what I’ve said. But that doesn’t mean they are ready to throw out the big national brands they have long term relationships with and make money on. The ones they don’t make money on are another issue, but that’s for a different article.
 
What do they get from, or at least expect to get from, the established, larger, brands?
·         An advertising and promotion campaign that, hopefully, creates demand.
·         Discounts and extended payment terms.
·         Maybe some POP and other kinds of in store support.
·         Reliable, though certainly not always perfect, delivery.
·         Some level of customer service.
·         Margins and a merchandise selection you can make money on. Hopefully.
 
And they also get a comfortable, long term relationship that has a certain momentum to it. I’m not quite sure if that’s a good thing or not.
As a new label or small brand, you might look at that list and think, “Well, I’m screwed. No way can I match that.” You are, I suppose, partly right. But if we cut to the chase, what does a retailer really require?
 
You have to be able to reliably deliver a quality product that offers the retailer some exclusivity and differentiation and that turns well at a good margin. That’s it. And if the retailer is sophisticated, or maybe has read an earlier column of mine, they might also be interested on the possible gross margin return on inventory investment.   If you can do that, I guarantee all the other stuff will fall into place.
On the other hand, if you can’t do that, forget it. You’re not in business.
 
A Checklist
Life’s a whole easier once you’re brand with a track record, so I’ll address my comments to people with new labels that they want to turn into brands. However, most of these items are appropriate to small brands as well.
 
First, we’re assuming you can make and reliably supply a quality product and have identified some trend or point of differentiation that makes the product relevant to the specialty retailer. You’re on your own as far as doing that goes. You also have to have access to some working capital. One of your advantages- maybe your biggest- is that unlike a large brand, you don’t have much to lose by trying something really innovative, creative, and maybe even a little controversial.
 
Second, you’ve got to prepare a business plan. This document will be important not just in clarifying your own thinking, but in building credibility with stakeholders. More on that later.
 
Third, you have to solidify your relationship with a supplier. A known, reliable one would be good. This is not a matter of a few emails and a phone call. It requires visits and takes some time. Show potential suppliers your plan. Explain to them the market opportunity you see. Make sure they understand how they will get paid, and what the longer term potential can be. A supplier can be a crucial source of support.
 
Fourth, figure out your initial target market. Are there three skate parks where you first want to show your product around? What local influential people do you know that can help you build a little credibility?
 
Gotcha founder Michael Tomson, in an interview in the last issue of Transworld Biz, pointed out that when you start, you don’t have a brand- just a label. “You become a brand once you develop equity in that name and label,” he said. That takes time. Maybe five years he suggested.
 
He’s right, and it’s a great distinction. But of course you’re not a label one day and suddenly a brand five years later. There are baby steps along the continuum of brand building. As a new label, you have to pick the place or places where you want to become a brand first. On a mountain, in a skate park, at a couple of local retailers in a club, or some combination of these and others. You aren’t a brand because you call yourself one. You’re a brand when people recognize the name and attribute certain characteristics to it and the product it’s on.
 
Now, it’s time to make some product, and because of all the work you’ve done educating and building your supplier relationship, that hopefully goes well. Or as well as production ever goes. I don’t mean you’re going to make three samples. That’s already happened. It’s time to make enough product to make a quality presentation to potential retailers (assuming you’ve decided you’re not strictly internet) and to begin to build some support and awareness in the local community you’ve chosen as your first target. If somebody says, “Okay, we’ll take it,” you need to be ready to supply and service your new account. “Great! I’ll have product for you in three months,” is probably not the answer you want to give.
 
The steps I’ve listed above don’t happen as independently and sequentially as I’ve listed them. But they all have to happen. Now comes the big moment.
 
Meeting With the Potential Customer
This cannot be a casual meeting where you talk in off the street.  And it cannot be with the second string, substitute, relief buyer. Because of all the work you’ve done, the owner/decision making buyer may have heard of you and your label. Maybe they’ve even had a few kids ask for it. You schedule half an hour or 45 minutes or maybe more and when they say, “I don’t have that kind of time for a brand I’ve never heard of,” you say, “Mr. Owner, we both know it’s a great time to look at new labels, but I have no idea how you’d decide to take a risk on one without spending that kind of time on it.”
 
And no matter what they say, you do not just “drop off a few samples” or let yourself be pushed down to somebody who isn’t in charge.
Now comes the hard work. You have to get ready for this meeting. Find all you can about the shop. Prepare a meeting agenda and send it to them in advance. Put together a folder or a power point for the meeting that might include, but is not limited to:
 
·         The executive summary of your business plan.
·         An explanation of your points of differentiation and the niche the product is going to fill. Why are you going to be competitive?
·         How you are financed and why that financing is adequate.
·         Information on your suppliers. Who they are, how long they’ve been around, who else they produce for. Perhaps a personal letter   to the owner of the shop explaining how you’ve been working with them and that they are prepared to provide product.
·         Personal and business references.
·         An explanation of your distribution strategy. Who else in the area will have the product and when?
·         A copy of your insurance certificate, business license, etc.
·         Brief biographies of the principals and investors.
·         A suggested order, terms sheet, and explanation of how you’ll support the shop in merchandising the product. If you’ve done your homework, you should be able to suggest where in the shop the product should go, and how much space it will take.
·         Your marketing and promotional program- what you’ve done, and what you plan to do.
 
This list isn’t all inclusive, and not everybody will be able to make equally strong presentations of all the items. But if you do this, and you’re making the presentation (which you have practiced for hours and hours) to a business person, I can pretty much guarantee you will blow their socks off. Because for some unfathomable reason, in this industry, they will generally not have seen this level of professionalism from a new label.
 
This whole discussion started with the premise that it’s a great time to be a new label or small brand. Here’s a link to an article in the New Yorker that talks specifically about why opportunities exist right now. http://www.newyorker.com/talk/financial/2009/04/20/090420ta_talk_surowiecki.

 

 

Inventory Risk and Inventory Management; Our Own Version of Musical Chairs?

Janet Freeman, owner of the small but well established women’s snowboard apparel brand Betty Rides, has a problem. On October 17th, she told me, “It’s weird but Betty Rides has ALREADY been getting lots of re-orders for snowboard jackets and pants. We cut to order, and are sold out on most things.”

Naturally, I was sympathetic to her terrible problem and said, “Which means that you are holding margins, selling through at good margins at retail, creating demand without running a big promotional campaign, being important to your retailers, and minimizing your (and the retailer’s) inventory risk?  I predicted some products shortages a while ago and I think, for the industry overall, it’s a great thing.  I think you are also seeing that small retailers are dependent more than ever on small brands that have not blown up their distribution and on which they can make good money.”

Better ringing your hands over sales you missed then inventory you can’t sell. Of course, I recommended this strategy for smaller brands especially years ago but, for some reason, it’s suddenly gotten popular. You can track the article down on my web site if you want.
 
What’s Inventory Risk?
I imagine most of you don’t need that question answered, but there are a few points I want to make and that seems like as good a subheading as any. Mathematically, I suppose your total inventory risk is the cost of everything you purchase or make for resale. If you want to eliminate that risk, you don’t make or buy anything. But that seems a little extreme. Instead, let’s define inventory risk as the potential decline in the value of your inventory from what you expect it to be; from the anticipated selling price, that is. Once you sell it, it’s no longer inventory risk. It’s credit risk if you weren’t paid before you ship it. Retailers, of course, are typically paid before “shipping.”
 
Inventory risk gets managed in two ways.  First, by buying well. Hopefully, that helps you with the second part of inventory risk management- selling well. My last article for Canadian Snowboard Business actually talked about that. Maybe they’ve put it up on their web site and could put the link HERE?  I’ve also written about using a concept called Gross Margin Return on Inventory Investment (GMROII) as a tool to increase your gross profit dollars and, incidentally, reduce your inventory risk and you can see that on my web site here. 
 
You can never get rid of inventory risk, but if you’re buying well and using GMROII, you’ve probably done everything you can reasonably do to minimize it.
 
Who’s Inventory Risk?
It’s impossible to completely eliminate inventory risk and be in business. In a perfect world, a retailer would love it if the brand could give them only the stock they need to merchandise their store and then have replenishments show up over night. Oh- and they’d prefer it if everything they got was on consignment. The brand, sitting on the other side of the equation, wants the store to buy everything all at once and pay cash in advance. Obviously neither is going to get their way.
 
The original premise behind this article was that inventory risk was a zero sum game. That is, it existed and somebody- the retailer, the brand, or the manufacturer- had to shoulder it. Zero sum means that you can pass it around, but not reduce or eliminate it. The only question is who takes the risk.
 
I’m not so sure that’s completely true. After some thought, and some conversations with some smart people, I’m beginning to look at inventory risk as an indivisible part of systemic business risk. You can manage it, but it’s just not independent of overall business conditions and your relationship with your customer or buyer. It’s not zero sum because you can work together to reduce it.
 
Some Real Life Examples
 
“One you find the demand line and are honest about it, and start producing under it, you really start building your brand,” Jeff says.
And of course both the retailer and the brand reduce their inventory risk because they aren’t kidding themselves about demand. You can see where I’m going with this. Good demand planning at all levels of the supply chain can reduce the inventory risk for everybody- not just transfer it from one player to the other.
 
Sanction is a snowboard and skate retailer with shops in North Toronto and the Kitchener/Waterloo area. Co-owner Charles Javier says he dropped a lot of the larger snow related brands or lowered the quantity he bought this year. He’s been bringing in smaller brands, and does better with them than with some of the larger ones. In fact, they upped their total buy this year. “How we manage inventory risk isn’t about how we put risk off on the brand, but about how we buy,” he told me.
 
And he’s not particularly concerned that his smaller preseason orders with some brands will keep him from having enough product later in the season. “There’s always going to be inventory available,” he said.
 
A consistent theme in my conversations has been brands warning that they aren’t making product much beyond orders, and that retailers who want it better have gotten their orders in, and retailers not quite believing them, or not quite caring, or thinking they could substitute another brand. I guess by the time you read this, we’ll know how it worked out. I hope to hell there are some product shortages that make some of this stuff a bit scarce and special again.
 
Darren Hawrish is the president and owner of No Limits Distribution. Located in Vancouver, it handles Sessions, Reef, Osiris, Capita, Union and other brands in Canada. He and Charles at Sanction would probably get along just fine, as Darren, like Charles think you manage your inventory risk by how you buy. He’s been more diligent on inventory this year, looking at it weekly instead of monthly.
“Inventory is the make or break part of your business,” he told me. “You can’t increase sales [which they expect to do, though not as much as in previous years] without it.” But posted on their walls is a sign that says, “Inventory Is Death” so it seems they have a healthy balance in how they handle it. “The discount doesn’t matter if you can’t sell it,” he reminded me.
 
He’s seeing tightness all along the supply chain. He thinks it’s a lot tougher to make in season buys than it was 18 months ago or so. His goal is to sell what he gets in. On the face of it, that sounds kind of obvious. But in his mind inventory and buying are closely tied to having clearly defined growth and margin goals, so there is a strategic component to inventory that a lot of people may not be thinking about. And that is another way that Darren works to reduce inventory risk.
 
I’m not quite sure the musical chairs analogy I used in the title holds up. Inventory risk can’t be isolated from general business risk, and it’s not a known quantity that just gets passed around. A brand that sells its product and gets paid for it still hasn’t eliminated its inventory risk. What happens when all that inventory doesn’t sell and the retailer has to dump it? What’s the impact if they go out of business and aren’t around to buy anything next year? What if the value of the retailer’s inventory goes to hell because of the distribution actions of the brand? What’s the brand suppose to do when a retailer grey markets stuff outside of normal distribution channels?     Seems to me that inventory risk exists all across the supply channel and we’re all in it together.
 
It gets minimized when the sales plan is realistic and consistent with the brand or retailer’s market position and strategic goals. Not to mention market conditions. It is further minimized when you buy based on your best estimate of demand regardless of terms, discounts and or other incentives.
 
Current economic conditions are requiring us to reduce our inventory risk and to pay closer attention to all the management accounting and operations management things that, frankly, aren’t much fun. But we’ll be a much better run industry as a result and might even bring back to at least some of our product the sense of exclusivity it has lost over time.

 

 

Zumiez’s Fireside Chat

Rick Brooks, Zumiez’s CEO and CFO Trevor Lang held a half hour question and answer session today at the Thomas Weisel Partners Consumer Conference in New York. Previously, Zumiez had announced on September 2nd that “…total net sales for the four-week period ended August 29, 2009 decreased 2.9% to $51.7 million, compared to $53.2 million for the four-week period ended August 30, 2008. The company’s comparable store sales decreased 12.1% for the four-week period, versus a comparable store sales increase of 0.2% in the year ago period.” Their comps for September were positive.

They started by defining themselves as an action sports lifestyle retailer (duh) and went on to explain what you had to do to be one. To Zumiez, that means you have to carry hard goods and all the brands (not only in hard goods) that you find in independent shops. They characterized their customer as “very smart” and as knowing what’s authentic and what’s not. Those customers are 12 to 24 years old and more male than female.

They focus on making their employees people who are living the lifestyle and they try to build a distinct culture that empowers these young people to localize product for their stores and create a vibe around it.
 
Their description of their business makes perfect sense. It also leads me to two questions. The first is what does it mean to be an action sports company? That’s a strategic question for every brand and retailer in this industry and one, I have to admit, for which I don’t have a good answer. That label, which has been around a long, long, time, might be seen to suggest that we are the same industry now that we were 15 years ago. But we’re not. If only because of the breadth of distribution and the number of non participants who buy our products we’re a lot different. I guess I’m not against the term as long as you don’t fall into the trap of thinking it means the same now as it did then.
 
The second question is more focused on Zumiez, but not only for them to think about. As they create this focused culture of cool kids who are committed to and invested in the lifestyle, are they defining themselves in a way that might restrict their growth or their attractiveness to certain consumers?
 
The answer, of course, is yes, they are. But every company decides who they want their customers to be and what they want to mean to them. Or at least they should. And any company that tries to be meaningful to everybody probably ends up meaningful to nobody. Unless, I guess, they are an electrical utility, for example. Interestingly, I wonder if Zumiez hasn’t helped themselves manage this issue by being mall based.   They can work to make their stores what they consider core while at the same time exposing themselves to a much broader spectrum of potential customers in an environment that is not intimidating to those customers.
Zumiez noted that their smaller brands are continuing to gain share and specifically that brands need to be careful with distribution and how quickly they grow. They indicated they hadn’t seen any bankruptcies from any of these brands and hadn’t had to do anything special for any of them because of financial difficulties.
 
I have been arguing for a while now that current economic conditions represent an opportunity for new and small brands. It appears Zumiez agrees with me.
 
One of the questioners noted that Zumiez use to talk about an operating margin target in the low to mid teens and asked if that was still a reasonable objective. Zumiez indicated it was, though not in the current environment. They said they were growing selling, general and administrative expenses at half the rate they had been before and spending $85,000 less on each store. Because of these adjustments, they think they can get to those margins with less sales per square foot, but not until sales turn around.
To me, that sounded like an acknowledgement that they have no expectation of sales returning to previous growth rates in the foreseeable future, an assumption I agree with.
 
Zumiez’s growth plans are somewhat restricted right now, and management pointed to the failure of landlords to be more realistic about the rents they could expect as a major reason for this. My belief is that the commercial real estate market is going to get worse before it gets better, and I expect Zumiez will eventually get the cooperative landlords it needs to open more stores. They seem to think so too, as they acknowledged the “capacity rationalization” (what a benign sounding term for something that can be so difficult) that was going on not just in action sports but in all retail sectors. In other words, we’ve got too many retailers and too much retail space
.
The last thing I’ll mention that really caught my attention was their description of how they were working with individual brands on strategies that were appropriate for them. They might, for example, ask a brand to explore a new product or category where Zumiez saw an opportunity. I don’t know how much of that they’re doing, but that guidance could be really useful for a smaller brand and might explain why Zumiez is having success with such brands.