I wrote about Quiksilver’s quarter maybe a month ago. In the conference call, CEO Andy Mooney had some really interesting things to say about how the market is changing. I set them aside to think about. I felt they were comments that were appropriate to a general discussion of market evolution, rather than the particulars of Quik’s situation, though obviously they apply there as well.
The first thing he says, talking about Europe, is that we’re seeing “…a transition from smaller independent operators to larger big-box formats.” He went on to explain that their management team in Europe saw the decline in the number of independent specialty retailers as normal during a down economy, and that they expected a recovery in their numbers as the economy improves.
But CEO Mooney doesn’t share that expectation. “I’m a little less optimistic than they are because of the impact of – largely of e-comm because I think e-comm in some ways is creating systemic pressure on those smaller independent retailers, which for us is actually somewhat of a blessing because it’s actually less expensive for us to service e-comm retailers – pure play e-comm retailers – than it is to service remote onesie, twosies sub-specialty shops, particularly ones that by definition are kind of undercapitalized, have problems paying their bills, et cetera, et cetera.”
He expects some rebound in the number of specialty shops, but not as much as in past cycles. I also think his analysis for Europe is relevant in much of the rest of the world as well and certainly in the U.S.
However, I don’t think pressure on specialty shops has come only from ecommerce, though certainly that’s a big issue. I’d remind you all of the (apparent) strength of the economy up to 2007 and of the length and depth of the (continuing) recession that followed. Because the good times were as good as we’ve ever seen them, a lot of independent specialty retailers opened that would probably never have gotten off the ground in less favorable economic conditions. That they’ve closed in historically bad economic times and won’t reopen unless things get fabulous again is hardly a surprise and isn’t only about the internet.
One analyst asks if he thinks the action sports market is shrinking globally. Mooney responds, “…It’s not necessarily a contracting market; it’s a transitioning market.” He talks about the impact of ecommerce again, and then goes on to discuss another piece of the transition.
“You’re seeing,” he says, “…fewer more professional players who are allocating their open-to-buy to fewer more professional brands…my viewpoint is that there will be consolidation both in the retail theater, but I think there’ll also be consolidation in the branded theater. It’s that the stronger, more professionally-run companies will continue to gain share in what has historically been a very fragmented industry…what occurs when you’re going through this type of phase is you’ll end up with 4 to 5 major players who will have significant footprints in the specialty channel, and we absolutely intend to be one of those players.”
I assume if he thought it was a contracting market and that Quik wasn’t capable of being one of those four or five major players, he wouldn’t have taken the job in the first place. And, of course, what else is he going to say?
Still, I find his answer incomplete as it ignores a couple of elephant in the room issues that impact all the larger brands in our industry.
First, as I’ve written, the real action sports market is a pretty small market and has always been a pretty small market. Right now, judging from the evidence I have in terms of participation, it is shrinking. So Quiksilver, and any other brand with its roots in action sports of any size, is already competing way outside of action sports in fashion, youth culture, urban or whatever we want to label it as.
The second is that I don’t know what he means by specialty channel. Can‘t believe some analyst didn’t ask that. My assumption is that it includes not just independent specialty shops, but chains up to and including Intersport, Zumiez, Journeys, Tilly’s, etc. It used to be so clear and now it’s not. Is Intersport really “specialty?” I am not sure PacSun is with its new positioning. Maybe it’s correct to say it’s specialty, but in a much broader market. How broad does a market have to get before retailers who serve it are no longer “specialty” retailers?
Andy doesn’t seem to be that concerned about the independent specialty retailers and I don’t entirely blame him from a strict operating and revenue point of view. But some of those shops would say, “Right back at you, Andy.” Quik’s brands are widely enough distributed that I’m not sure shops can really compete with them and certainly they won’t help differentiate shops.
But Quiksilver is certainly a surf based brand. Can you be a “surf based brand” and not be in core surf shops? Can DC not be in core skate shops? Maybe they need to have product in those channels even if they aren’t the fastest growing, most profitable, easiest to work with accounts in the world. It’s not, of course, that Quiksilver isn’t in those shops, but it doesn’t feel like an area of emphasis and it’s fewer than it used to be.
Meanwhile, even if a big action sports brand kills it in the specialty market up to and including the chains I’ve mentioned and their ilk, it’s not going to be enough- especially as a public company. Macy’s, Nordstrom’s, Dick’s, Sports Authority- you can’t decide not to be in them. You can only decide when, with what product, and try to make sure they present you well.
I think Quiksilver, Billabong, and Skullcandy, just to name three, would be much better off if they were private. They’d be able to be more discriminating in their distribution in ways that would benefit their brands and, as a result, I think they’d be more profitable.
From their public discussions, we already know that these three companies are taking steps to improve their operations and become more efficient. Good for them. I have no doubt it will improve their bottom lines. But that doesn’t impact brand positioning (unless it changes distribution?) and leads us to the next elephant in the room.
Who’s the customer? It wasn’t discussed in the conference call. Brands, we all know, have life cycles. As they grow and succeed, they resonate with a group of customers. If they are lucky enough to be around long enough – not an easy thing to accomplish – they age right along with that customer group. The customers’ lifestyle, shopping habits, priorities and lifestyle evolves. The company evolves with them.
As those customers shop differently, the brand distributes differently. I won’t bore you with specifics you already know, but distribution tends to become broader as brands age. And broader. And broader.
How do you accommodate those customers but be relevant and “cool” enough to attract new ones? Look at the winter resort business. They’ve built facilities and created experiences that appeal to their older, aging customers. But that customer group is only one who can afford that experience. Given the economy and existing resort cost/price structure, who do they replace current customers with as they age out?
When Andy Mooney says it’s “something of a blessing” that they don’t have to deal with so many small shops, I knows what he means. But if a brand doesn’t have product that those stores want to carry and can sell for margin, what does that say about its ability to attract new customers as the old ones “age out?” How, in short, do you follow your customers along their lifestyle curve while still attracting new ones?
CEO Mooney also talks about the product review the company is undergoing and how they are trying to focus on those products where they can differentiate and be a leader. We won’t see the results until 2014, which I’d say is about as fast as we could see the results. I’d expect that is part of their answer to my question.
At some level Vans is the poster child for a brand that seems to be accomplishing this transition. They’ve made their heritage a foundation of growth with new customer groups without, as far as I can tell, alienating the old ones.
It’s important to remember, however, that Vans didn’t manage that without some bumps in the road. They were a $400 million public company in trouble before they were acquired by VF in 2004.
Having the kind of success Vans is now having requires a steady hand, objectivity, and money. The “who’s the customer?” issue has to be addressed early and realistically before pressures from the inevitable market evolution lead to product and distribution decisions that compound the difficulty of making the required changes. This is particularly difficult in public companies, where the correct decisions don’t typically contribute to immediately improving quarterly results. This is why I’m such a fan of what Skullcandy is doing. I think they are doing the right things in spite of the short term impact on quarterly results.
Then there’s the whole ecommerce thing which is changing the playing field in ways we don’t understand yet. At least I don’t. I’ll just say here that I wonder if ecommerce accelerates the traditional brand life cycle- or, alternatively, maybe makes it irrelevant? Can it be that distribution will become less important, replaced by how you connect with your customers at all your touch points with them? Will it still matter if you’re in “specialty” distribution? We’ll all be finding out.
Finally, and still on the issue of who the customer is, Andy Mooney talked, as I noted above, about consolidation in the brands and ending up “with 4 to 5 major players who will have significant footprints in the specialty channel, and we absolutely intend to be one of those players.”
We’ve had a few conversations about consolidation over the years and the path he describes is certainly a familiar one. Snowboarding comes to mind when you think about consolidation. How’s that worked out as far as keeping customers and attracting new ones goes?
Operationally, I understand why CEO Mooney would expect the kind of consolidation he describes. But for me the strategic issue is how a company like Quiksilver, if it becomes one of four or five major players with broad and broadening distribution, positions its brands so that many of the specialty retailers want and need to carry them.
I don’t perceive that has been accomplished very often in the past. I hope in future conference calls (Not just Quiksilver’s) companies explain how they are going to do it with particular attention to who their customer is.
