Inventory Management and Customer Conversion/Retention in the Snow Sliding Business

SIA was kind enough to feed me a nice breakfast this (Friday) morning before the show opened. While I ate and drank coffee, people from the various industry organizations that are and have been involved in the industry’s programs to convert first time snow sliders talked to us about what they’ve accomplished and what more needs to happen.

I guess the headline number was that conversion of first timers has increased 2% over ten years to 18%. There was a sense of “that’s not so good and we can do better” in how it was presented. I am sure we can do better, but I’m not quite sure that’s such a bad result. When you talk about trying to change people’s fundamental behavior, ten years isn’t very long and I’m not quite sure that 2% is so bad. We’ve learned a lot over the last ten years (both about what to do and what not to do) and I expect more progress over the next ten.

One thing that didn’t come up was how our inventory management can contribute to conversion. One of the stories in the Snow Show Daily for Friday is called Sold Out and Stoked. It’s about how hard goods inventories have reached equilibrium.
 
If there’s one thing every retailer, resort, and brand has learned over the last couple of years it’s that having leftover snowsliding inventory at the end of the season sucks. When you’ve got to carry over or close out a bunch of inventory, it can easily mean you make no money on your snow business for the year. Not to mention the impact on your cash flow and balance sheet.
 
I’ve been arguing for years that you might be better off focusing on your inventory management and gross margin dollar generation than on getting every last sale you could. Now, in the midst of our little ongoing economic inconvenience, I feel even more strongly about that and I want to discuss how it ties into the conversion issue.
 
Every brand I talked to yesterday told me they were managing their inventories tightly and had next to nothing left. I’ve heard a couple of stories about retailers exchanging product with each other to meet customer requests because they couldn’t get any product from suppliers. This morning at breakfast one long time industry participant I chatted with bemoaned not being able to get a pair of boots he needed for himself.
 
I’m in favor of tight inventory management, but I sure hope it doesn’t come to us all having to pay retail for product.
 
So what does this have to do with conversion and retention? Suddenly, the harder to find product looks special to the consumer and finding whatever they need at a discount isn’t something they can take for granted. Under conditions of uncertain supply, price can’t always be the driving factor in a purchase. Retailers are making a good margin, which means they are better positioned to service their customers. Price increases are more likely to stick. The money the retailer would like to have to pay his suppliers isn’t tied up in inventory. There won’t be excess inventory that will keep him from ordering for next season and he won’t go out of business.
 
Brands will have happy, solvent retailers. I’d even suggest they might be in a position to spend a bit less on advertising and promotion because there’s no better marketing than customers and retailers who want more of a product and can’t always get it.
 
Want more people to go snowsliding? Or to do almost anything for that matter? Make the product just a bit hard to find and require that the consumer make a conscious, active decision to seek it out because if they don’t, it won’t be there. I think that’s an important step in creating commitment.
 
And now what’s happened? We go and have all this great snow (unless you’re from the Northwest like me where we have floods instead of powder) and I know that somewhere out there some management team at some brand is planning for next year. And they’re going, “Wow! We had a great year! We’re great managers [We always are when it snows]. We could have sold more if we’d had it!”
 
And some retailer is thinking, “Damn! I have got to make sure I don’t run out of product next year! I’m boosting the hell out of my preseason orders.”
 
Well, you can see where this is going. Not for a minute am I suggesting that “the industry” should control inventory levels. It won’t happen and isn’t legal. Every business will and should do what they perceive to be in their own best interest.
 
I know.   If you’re a retailer that it just felt awful when you didn’t have the product your customer wanted, though hopefully you sold them something else. But forget that bad feeling. Think of the good feeling when you had great margins and less discounting and closing out to manage. And look at your bottom line and balance sheet. What I’m suggesting is that it’s not in your best interest to boost those orders too much. Clean inventory and high margins may well give you a better bottom line result than a boost in sales. I talked about that a while ago in an article you can see here.
 
As a brand, when that wild eyed retailer comes to you with a greedy look in their eye and wants to books their order for next season 58%, try and calm them down. And you calm down too. Talk about how much it sucked when they couldn’t pay their bill, and you had to either take product back or they had to sell it for cost or through some ugly distribution channels you’d rather have stayed away from.
 
Both of you try to remember how nice it feels when inventory is clean, margins are high, and customers are clamoring for product they see as special. You just don’t want to return to the days of overbuilding and overstocking for hoped for incremental sales.
 
 If we can maintain the mentality that has led to just a bit of product scarcity we just might contribute to getting more people snowsliding. And we could make some more money besides.

 

 

Another New Retail Concept. Just What We Need.

Back in early December, I bookmarked an article I wanted to write about then promptly forgot about it with the holidays and other intriguing stuff going on. It was a short article in Stores News about Sports Authority starting to open stores called S. A. Elite.

Like the story said (read it here), Sports Authority has 450 stores of the 40,000 to 50,000 square foot size. S. A. Elite stores are supposed to be “high performance lifestyle shops.” They will be from 12,000 to 15,000 square feet in size. There are only two of them now (both in Colorado), but they expect to open another dozen in 2011. They will tend to be in city centers and high end malls.

The S. A. Elite web site says the following:
 
“S.A. Elite by Sports Authority carries top-of-the-line assortments and premium collections from elite global vendors. Our stores house performance and fashion-focused athletic apparel, footwear and accessories. If you are the athlete who requires specialized apparel and accessories to reach your goals, we’ve got you covered. If you are an individual who rocks an athletic aesthetic, we’ll outfit you in style.”
 
Sports Authority EVP Jeff Schumacher said in the article, “We’re not looking to create fashion statements. We’re looking to create performance statements…[with] products that consumers can’t find elsewhere.”
 
When you go to the web site and see featured brands that include Nike, Burton, Ray-Ban, Columbia and Adidas (there are only 15 brands listed in total) you kind of wonder what “can’t find elsewhere” means.
 
Still, I’d have a hard time disputing that the concept might be valid. Regular readers will have seen me suggest that a true “core” store is one that caters to participants in the sports and the first level of nonparticipants that closely associate themselves with the sports. That appears to be the group S. A. Elite is targeting.
 
There are, however, some differences. From the pictures on the web site, I’m guessing the stores will be a bit more boutique like and fashion focused than what we think of as core shops. I also expect that the target demographic is a bit older. Finally, it sounds like there will be a focus on performance and improving it; not just on participation like in a core store.
 
As our market gets sliced and diced by more and more people in the endless and inevitable hunt for a meaningful competitive advantage among products that mostly don’t offer one based on performance (because it’s all good stuff), the space left in the market for the traditional core shop gets smaller and smaller. I guess that’s why there are fewer of them.
 
On the other hand, that space seems to get more and more clearly defined all the time. Those who are left who feature new and lesser known brands, are part of their community, manage their inventory cautiously and have a solid balance sheet, have a quality internet presence (whether they sell or not), manage to keep at least a handful of committed employees, and are of size both in terms of revenue and square feet that make them viable, can still succeed.
 
I have to try and see this store when I’m in Denver for SIA.

 

 

Quiksilver Files Its 10-K for the Year

Last week, Quik filed its’ annual 10-K report with the SEC covering the quarter and year ended October 31, 2010. They announced their earnings by press release and held a conference call back in December. I’m not going to reanalyze their financials. I did that last month and you can read it here. But the north of 100 pages annual 10-K has a few additional details I thought might interest you. They aren’t presented in any particular order, except sort of from front to back in the 10-K.

Here’s a paragraph where Quik describes its average retail prices:

"We believe that retail prices for our U.S. apparel products range from approximately $20 for a t-shirt and $43 for a typical short to $190 for a typical snowboard jacket. For our European products, in euros, retail prices range from approximately €22 for a t-shirt and about €50 for a typical short to €162 for a basic snowboard jacket. In Australian dollars, our Asia/Pacific t-shirts sell for approximately $39, while our shorts sell for approximately $60 and a basic snowboard jacket sells for approximately $250. Retail prices for our typical skate shoe are approximately $60 in the U.S. and approximately €67 in Europe."
 
I don’t know that there’s anything of great import to deduce from that, but I thought some of you might like to see how it compares to what you know about retail prices. On to the next random piece of information.
 
Quiksilver branded products are sold in the Americas through about 11,500 store fronts. The Americas includes Canada, and South and Central America. Roxy is in 11,300 store fronts. The number for DC is 12,000. All three brands together are in a total of 10,800 locations in Europe and 3,360 in Asia/Pacific.
 
About 40% of revenue worldwide comes from what Quik calls “core market shops.” Interestingly, that number is lowest in the Americas at 28%. It’s 41% for Europe and 77% for Asia/Pacific. I’d love to know what their definition of “core market shop” is.
 
18% of consolidated revenues from continuing operations were from their ten largest customers. The largest single customer accounted for less than 3%.
 
Quiksilver has pretty much gotten away from seasonality, which is a good thing (take it from somebody who has had to manage cash in a snowboard company). Their biggest quarter last year was 27% of revenues and their smallest 24%.
 
At the end of the year, Quik had 540 stores worldwide. 116 are company owned outlet stores and 6 are licensed outlet stores. Quik had a total of 224 of what they call licensed stores. In these stores they “…do not receive royalty income from these licensed stores. Rather, we provide the independent retailer with our retail expertise and store design concepts in exchange for the independent retailer agreeing to maintain our brands at a minimum of 80% of the store’s inventory. Certain minimum purchase obligations are also required.”
 
I wonder what happens if those Quik brands aren’t the ones selling well, what flexibility they have with regards to that 80%, and what the purchase terms for that merchandise are.
 
Future season orders: $478 million as of November 2010 compared to $535 million at the same time the previous year. That’s a decline of 10.65%.
 
Number of employees: 6,200 full time equivalent; 2,600 in the Americas, 2,200 in Europe and 1,400 in Asia/Pacific.
 
Advertising and promotion budget: $106.9 million in 2010. It was $101.8 million in 2009 and $122.1 in 2008.
 
Allowance for doubtful accounts: It has risen from $31.3 million at the end of fiscal 2008, to $47.2 million at the end of fiscal 2009 to $48 million at the end of fiscal 2010.
 
I’ve got no great analysis to lay on you. I did that, to the best of my ability, when they announced their earnings. But I am very aware that a number of you heave a sigh of relief when I go through these somewhat arcane documents so you don’t have to. Anyway, I hope this was useful.   

 

 

Accidental Encounters with Two Magazines and Market Evolution

The other day I was reading Vanity Fair. That’s a little weird. But my wife gets it, and one of the highlighted cover stories was “Surfing the World’s Giant Waves.” I enjoyed it and learned a little more about surfing history. Still, I was a bit surprised to find the story there. The mag was full of high end fashion ads. Those ads weren’t a surprise.

Then, on another other day, I picked up Complex magazine while getting my oil changed. Actually, it was my car’s oil. Mine should be okay through trade show season.

There were five pages of Vans ads and Volcom had a two page spread. They were right there with the Smirnoff’s ad, the Puma ad, the video game ad, and the various car ads.   DC had an ad for the Rob Dyrdek collection.
None of the ads I notice in either of these magazines (I might have missed one) mentioned skateboarding, snowboarding, surfing, or any of the other sports that might be considered to be “action sports.” Not even the Vans, Volcom or DC ads.
Vanity Fair obviously believes that big wave surfing is of interest to its readers. That’s good news for surf companies. I’m guessing that most of Vanity Fair’s readers don’t surf. But all but the smallest surf companies sell a chunk to most of their product to non-surfers, and they are certainly pleased to see upper income non-surfers be exposed to surfing.
Complex represents a culture, attitude, lifestyle that I’d characterize as young, urban, sarcastic, and a bit in your face. It suggests a certain level of indifference to convention and norms and implies that if you adopt its standards you’ll somehow be self-confident and respected. Cool, if you will.
It is what and how the cores of skate, snow and surf began. Except that you actually had to skate, snowboard or surf to achieve this differentiation back then, and that was a simple distinction.
If our industry was all about, and only about, supporting people who surf, skate or snowboard, I doubt there would be any successful public companies. The participant market and its growth prospects are not large enough to interest Wall Street.
Vans, Volcom, and DC, public or owned by public companies, know this. So we find them running what I think I can fairly characterize as fashion ads (hell, maybe all ads in our industry are fashion ads) making no mention of their roots and the sports they are/were closely associated with. You and I, of course, know what those associations are and our perception of those three brands are influenced by that knowledge. And the people who read Complex? Some of them know, but I imagine a lot don’t. And apparently that’s fine or these brands would feature that association in their ads.
No ads in Vanity Fair yet, and maybe we’ll never see that day. The Vanity Fair sensibility (high style?) is a lot different from Complex (urban/trendy?). Still, though I don’t expect to see it, wouldn’t it be interesting if some brand decided to take a flier just for fun? I can see the Mervin Manufacturing ad now. “Some fool in the marketing department put an ad in Vanity Fair.  They’ve been fired but you can buy our snowboards anyway if you want to. They work good and besides, the ad’s already paid for.”
Yes, it’s easy for me to be cavalier with somebody else’s money.
But you can see a divide happening in the industry, whatever industry we’re in. On the one side are companies that service participants. On the other side are the ones who are more and more fashion based and have to decide how to position themselves with respect to their roots. Is it about trendy, stylish, comfortable product or about making the trick? Can it be both? Depends on your market and how you segment it.
It isn’t that black and white, and the discussion would be different for every brand. But if you make the fashion decision, then you are choosing to compete in a market that dwarfs the traditional action sports industry in resources and sophistication. And you probably need help. This is, and will continue to be, the rationale (a valid rationale) for consolidation and the acquisition of brands that want to “take it to the next level.” In fact, I think it will be the unusual company that gets to that next level without being acquired.

 

 

Surf Expo; The Report of the Death of Trade Shows is Greatly Exaggerated

Apparently, if you get a whole bunch of retailers who need to buy stuff together with the brands they want to buy from there’s still every reason to have a big old trade show.   Maybe, in fact, the bigger the better. The more brands and retailers, assuming they are the right brands and retailers, the more can be learned and the more business done in the most efficient manner.

Surf Expo struck just the right balance between a positive, upbeat environment and a focus on business.   Noisy, but not loud. You could talk. Active, but not frantic. Fun, but professional.  

Not that trade shows and the ways they provide value haven’t changed. Technology, the economy, and the way the retail environment is evolving have seen to that.  You don’t compete against other brands for the biggest booth prize any more (though that was sure fun!). Retailers tend to bring fewer people. Shows don’t need to be quite as long. More buying is done outside of the show environment. And brands from one industry don’t fret any more about having other industries at “their” show. We’re all in this together.  In our industry, we think of Surf Expo as surf, skate, and now, SUP.  But the resort and gift people are there too and that, I think, gives Surf Expo the size and resources to do some of the things they do. 
 
Internet at the show was free, which I really appreciated. I’m used to doing without given the simply unbelievable prices that have been charged at other shows. “Unbelievable” is a much kinder word than I first thought about using.
 
In terms of which brands exhibited, the surprise was the absence of Volcom. Still, I’m not certain that Volcom, as what I’ll characterize as an urban/youth culture brand, really fits at Surf Expo, though it’s certainly convenient for their East coast retailers to see them there. I didn’t talk to any brand that was sorry they weren’t next to Volcom’s booth. Maybe that’s a good decision by Volcom.
 
I thought one of the most consistently busy booth was Sanuk, though John Vance is a friend of mine and I probably spent too much time standing around his booth bullshitting with him. I’ve frequently written that the biggest risk for a business is to not take any risks. Sanuk is doing some management things that are not traditional for our industry. Some people might call them risky, but I think they’re responsible for a lot of the brand’s success.       
 
Traffic Thursday was deemed by most people I talked to as a little light, but it picked up nicely on Friday and I’d characterize the show as busy. I have to confess I left on Saturday. Show management tells me that Saturday was stronger than they expected, and that retail attendance exceeded last January’s show by 9.2%. Don’t quite know if that’s 9.2% more stores, more retailers, more days stayed, or more beer consumed.
 
The skate park was very well done. I’m not qualified to discuss its technical attributes but it was big enough to keep things moving, and located where it wasn’t in the way but was still part of the show. There was plenty of room to stand around and watch and you could move past it without getting trapped in the crowd.
 
But the undisputable highlight of the show had to be the Quiksilver sponsored All 80s All Day Vert Challenge with skating by Tony Hawk, Andy MacDonald, Christian Hosoi, and about 15 other skaters. It happened Friday evening after the show closed. They set up the huge ramp in a part of the convention center the size of the trade show, but where the trade show wasn’t. Basically, nothing in it but the concrete floor, ramp, the Quik van, and some crowd control barriers. The industry came in from one side and the public was allowed in from the other. No clue how many thousands of people were there. It felt a little like Quiksilver’s coming out party announcing that their problems were behind them.
 
In the past, there has been talk and some attempts to integrate the public with the trade at a show and it either hasn’t happened or hasn’t worked out. This worked spectacularly well. I managed to get in a little early (thanks Doog!) and could stand right next to the ramp and watch them warm up. If Einstein were alive, I’d let him know that a bunch of people were violating his laws of physics on a skate ramp. I look forward to Surf Expo thinking up new ways to involve our customers in the future.
 
My next challenge at the Vert Challenge, in the best industry tradition, was to figure out a way to get into the Quik VIP area where they had the free beer and food. I was stopped at the entrance for lack of a wrist band but some guy I didn’t know said, “Here Jeff, I’ve got an extra one.” Turned out to be Kevin from the Quik marketing department and am I ever glad I put my picture on my web site. Thanks Kevin.
 
I didn’t know much about the standup paddle market before this show, but I learned a bunch. There were, well, a lot of SUP companies and Surf Expo had installed a shallow pool where you could take a lesson. But the real eye opener was the SUP industry discussion group I went to Friday evening after the show closed.
 
The meeting was past standing room only. Those of you who have been around a while know that in the mid 90s I rained on the snowboarding parade by suggesting that it was possible all 300 or so hard goods companies might not make it and that the industry would go through the usual growth, maturity, consolidation cycle every industry goes through. Around 2004 I told the skate industry that Chinese product was coming, there wasn’t anything they could do about it, that distribution issues weren’t going to go away, and that shop decks and blanks were here to stay.
 
It seems that every eight years or so I piss off some segment of our industry and it must be time again.
 
What the SUP industry has going for it is that it’s a sport for the whole family with an easy learning curve. But that doesn’t make it immune to the usual industry cycle that snow, skate, and surf all went through. When somebody stood up to announce how “the industry” had to keep margins up and various heads nodded in agreement, I had a flashback to the IASC/BRA sponsored breakfast round tables at ASR. Those of you who have been to one of those don’t need me to say any more.
 
Here’s what I’d like to tell the SUP industry. First, the consumer is going to get what they want. If you won’t sell it to them, somebody else will. Ask the skate industry. Second, “the industry” is not going to keep margins up. It’s probably illegal. But more importantly, I guarantee you that every company in the business is going to do what they perceive to be in their own best interest. If there’s no meaningful product differentiation, margins will head to the point where marginal revenue equals marginal cost. There’s only so much advertising and promotion can do to prevent that. Ask the snowboard guys.
 
Like Boardworks’ Bob Rief put it during the meeting, “If you are in a low volume, low margin situation, you really don’t want to be because it’s a lethal combination.”
 
Please don’t kid yourselves SUP people. Make sure that many of the people you talk to aren’t your industry peers so you get some perspective. Run your businesses well and realistically knowing that you can succeed in spite of an inevitable business cycle if you do.
 
Strangely enough, I don’t think anybody complained to me about the show. Oh wait- one complaint about booth location, but they confessed they were late booking. The general attitude of the retailers and brands I talked with was:
 
·         Good show.
·         Things are better than last year but not good.
·         I’m still cautious and running my business that way.
·         We’re not going back to 2007 any time soon.
 
Except for the “Good show!” part we really can’t hold Surf Expo responsible for those sentiments. They’re doing everything they can to make their show easy to attend, functional, and valuable. Wonder what they’ll do next.

 

 

Gross Profit Margins; How to Think About Them for Brands with a Big Retail Presence

A friend of mine who wants to remain anonymous (I get quite a few of those) sent me an email the other day and had an interesting point to make about gross margin for brands who owned retail stores.

When a brand opens retail stores they do it at least in part because they expect to capture the margin that previously went to the retailers they sold product to. We all understand that. Just to pick some numbers, let’s say that brand earns a 35% gross margin when they sell their product to retailers they don’t own. And let’s say it’s 65% when they are selling the product in their own retail stores.

Of course, they incur all sorts of additional expenses by virtue of having to run and staff stores and some of those may be accounted for as part of the cost of goods sold, reducing gross margin. But let’s just go with my “accounting light” numbers for purposes of my example. The point is just that they get a much better product cost margin at retail then they do at wholesale.
 
Here’s what my friend said. I’ve paraphrased it a bit.
 
“When you see a sales decline with the margin rising, it could be that most of that decline is taking place in the wholesale rather than the owned retail sales. So the increase you see in gross margin would be, to a greater or lesser extent, just the mathematical result of selling a higher percentage of the higher margin retail product. It wouldn’t represent better inventory management, reduced product cost, or price increases or any kind of positive management action.”
 
Let’s say a brand is selling $1,000 of product (it’s a really small company). 30% of those sales are through their retail stores and 70% to other retailers. On the 30% they sell through their owned retail, they earn a gross profit of $195 (using the gross margin percentages I chose above). On the 70% they sell through other retailers, gross profit is $245. That’s a total gross profit of $440 on that $1,000 of sales, or 44%.
 
Let’s assume their total sales fall by $100. Let us further assume that the entire decline is in their wholesale sales. Now they are selling $600 at a gross profit margin of 35%, earning $210 in gross margin dollars. On the sales in their owned retail, they continue to earn $195 in gross margin. That means they earn a gross profit of $405 on sales of $900. Their gross margin percentage has risen from 44% to 45%, but not, as far as I can see, for any reason we should feel good about.
 
An independent retailer can reduce or eliminate the presence of a brand that isn’t selling pretty quickly. If you’re brand X, you’re probably going to be pretty reluctant to stop carrying brand X at your owned stores. This begins to get us into all sorts of interesting discussions about merchandising when you’re both a brand and a retailer. Will weakness in your wholesale accounts eventually translate to weakness in your owned stores? Or can your ability to merchandise your entire line the way you think it should be make a difference?     
Declining sales would typically go hand in hand with declining inventory levels. There are reasons you might not see that- like building inventory for a new brand launch- but overall if you see declining sales, higher margins and no fall in inventory from a brand with significant owned retail, it’s worth exploring.