Billabong and Quiksilver; Two Peas in a Pod

Billabong’s announcement last week that it was, among other things, conducting a strategic review of SurfStitch and Swell caused me to focus on the similarities of its situation to Quiksilver’s. It also made me realize that most of what has been discussed publically by both companies is what I’ll call mechanical issues. I want to remind you what those are and then move on to the way more important and difficult to manage strategic issue they both face but, understandably, don’t spend a lot of time talking about in public. 

We all know that both Billabong and Quiksilver got into trouble due to some acquisitions they paid too much for, their aggressive forays into retail and their tendency to allow units to operate independently, resulting in an unsustainable cost structure.
 
I think those things would have come back and bit them in the butt even if the economy hadn’t cratered, but the teeth marks wouldn’t have required as many stitches. With their balance sheets out of whack, both had to sell assets, raise expensive capital, change management, cut costs, push for revenue in ways they would (I hope) have preferred not to, rationalize their sourcing and reduce SKUs, consolidate and coordinate design and marketing, and revise and upgrade their information systems.
 
Now, I call those things mechanical. That’s not to suggest they were easy to do, or that exactly what to do was always obvious. But nobody doubted they had to happen (and outside stakeholders didn’t give them a choice anyway). That gives you the refreshing liberty to say, “Let’s get at it!” and start without too much analysis. There was, to use one of my favorite phrases, some low hanging fruit.
 
The process isn’t complete (it’s never really complete- it’s a long term way of thinking), but it’s well underway. Both companies will see significant improvement in their bottom lines as a result.
 
So let’s move on to the hard part. What brands should sell what product to which consumer? I’m sure I could figure out a more erudite way to say that, but why bother. They had to start to address the mechanical stuff before they could really focus on market segmentation (there- that’s a more erudite term) because some of it represented survival issues. It’s hard to care which way you’re rowing when there’s a big hole in the bottom of the boat.
 
Part of the process of keeping the boat floating through the restructuring was to press for sales in places and in ways they didn’t want to do. I assume it helped in the short run- perhaps not so much in the long run. Both companies have some recovering to do from distribution decisions they made while managing those short term survival issues.
 
In the long term, the ONLY THING THAT MATTERS competitively is their ability to figure out the market segmentation thing. The mechanical stuff is necessary but not sufficient. The what product to sell to which customer issue is existential. If they don’t do that well, they’ve got no business or at best a dramatically different business. “Dramatically different” is code for a brand that doesn’t do this well and finds itself milking its market credibility with cheaper product in broader distribution until there’s nothing left.
 
Both companies want to grow the top as well as the bottom line. (What?! Public companies focused on top line growth?!  Shocked! I’m shocked!) If they could, at least for a while, just worry about improving the bottom line (and the balance sheet) their jobs would be a whole lot easier. The mechanical issues, as I so blithely call them, are simpler to manage. And as I’ve written, market segmentation takes care of itself initially though distribution management which builds brand strength for future growth.
 
But you can’t do that for too long. You risk finding yourself stuck in a niche you can’t get out of. For some brands, that wouldn’t necessarily be a bad result. It’s difficult for Quik and Billabong because that market niche might tend to be a predominantly older customer group that has been loyal to the brand for a long time but will inevitably buy less.
 
Their challenge over the longer term is to continue to appeal to their traditional customer groups (if only for the cash flow) while also reaching the younger demographic they have to evolve towards. Not easy.
 
So that’s why I perked right up way back when Launa Inman became Billabong’s CEO and, in her initial presentation of her strategy, talked about the need to figure out what the brands stood for and how the customers and potential customers perceived them. Billabong proceeded to spend a lot of money on that issue. We never heard the results, but why would we? You can tell all your competitors that you’re cutting costs, improving systems, reducing SKUs and consolidating certain function. They’re doing it themselves and are probably wondering why you didn’t get on with it sooner. But I can’t think of any good reason (outside of a brain tumor or psychotic episode) why’d you’d share findings about what customers think of your brands, why they buy them, and how you’re planning to position those brands.
 
Part of that evaluation will determine product direction. It’s fair to say that when you’re trying to keep a company alive, you aren’t likely to take a lot of product risk if only because you can’t afford things that don’t work. But armed with their evaluations of who’s buying what product and why, I would expect to see both companies be more aggressive with product development and introductions. The consolidation of those functions from regional to worldwide should make that easier by making it more cost effective. It’s time to take some risks.         
 
Most of us think it’s important that Billabong and Quik do well because they are positioned to represent the surf industry in the broader market. It seems to be an industry article of faith, practically a mantra, but it has the ring of truth to it.
 
I’m not sure any more what “the surf industry” means. Don’t feel bad surf people. I feel the same way about other segments of action sports and, by the way, am not quite sure what exactly the action sports market is either.
 
But recognize that neither Billabong nor Quik is a pure surf company in the way they were years ago.   The “core” surf market is way too small to support much growth for either company. Anyway, that seahorse left the barn years ago when they both acquired non surf brands that represent significant percentages of total revenue.
 
I will always look at the numbers (I can’t help myself). But the numbers, by the time we see them, only tell you what has already happened. As I try and figure out how Quik and Billabong are going to do, I’ll be looking for clues to their product and market segmentations decisions, because at the end of the day, that’s mostly what’s going to matter. And not, you might consider, just for Quiksilver and Billabong.

 

 

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6 Responses to “Billabong and Quiksilver; Two Peas in a Pod”

  1. Jamie Meiselman says:

    Hi Jeff,
    Great seeing you last month, by the way…
    Quik has already signaled how they want to grow the top/bottom line: licensing. They are starting to license out the brand for other categories, even hotels. Near term, this is super low-risk, high reward: all revenue (license fees), no costs (licensees’ money). Straight from the Disney playbook. How this impacts the brand long-term, who knows, but one thing is for sure, these won’t be the Quik and Billabong we grew up with.

    • jeff says:

      Hi Jamie,

      You’re right, and I already knew they were doing that. As you say, straight from Disney.

      Great to see you too.

      J.

  2. Jb says:

    So is the hotel thing really in the works? I understand what this guy was brought in to do, but his methodology leaves a lot to be desired. Two of my kids worked for, Roxy and quik 15,11yrs. And this is really messy. Sure there was some fluff, but that was the culture. The culture is gone,the vibe is gone. I mourned the day they went public, and the core was lost,try as they might. The people the guy is bringing in, no clue,no fault on them. The thing that stunk the place up was the ski thing, and people knew it stunk. To late now. So it’s Nike and Disney here we come. So some of the others in industry are going down the same road, it’s sad but I guess all good things must come to an end.We won’t see the real quik any time soon, if ever.

    • jeff says:

      jb,
      All I know is what I read in the conference call and SEC filing. They’ve been approached about it. They’ve been approached about it before. Often and over some years I guess. I do not know if they are actually going to do it or not. So to say it’s “in the works” may (or may not) be putting it too strongly. Recommend you go read it and draw your own conclusion.

      Thanks for the comment,

      J.

  3. Jb says:

    Im wondering if you follow industry out side of the surf market? I thought the bro.system was only in that industry. I know very little about the corporate world, and always thought surf industry was a little incestious band of surf people hopping from brand to brand. So quik brings in a new guy, he brings in his bros. At least that what it appears. They or he eliminate teams, office space, available, he or they slice and dices, office space available, there is a plethora of office space available, the place is a ghost town. New guys bro. Comes in needs an office , they spend 1k maybe 2k on new office. Why not see what bro. Can do before he gets the new digs? Just saying. Man up and do the right thing. Would that make more sense? If your trying to cut every corner to save money. Just wondering, maybe I’m nieve . I really don’t know how it all works.

    • jeff says:

      Hi Jb,
      In a turnaround, it’s often the case that there are major changes needed. Typically, the former management team just can’t do what has to be done. Too close to the people, vested in the old ways of thinking, denial and perseverance in a period of change is how I’ve put it. The expense cutting that is going on is going on, or has gone on, at a whole lot of companies and I think it is necessary. There was a time when fast sales growth and good cash flow let some companies be a little more cavalier about how they spent money. For most, those days are over. There is a point, however, when cost cutting becomes counter productive. Ultimately, you have to stop cutting expenses.

      I don’t follow many industries outside youth culture, or action sports, or whatever we’ve become. We are a bit incestuous as an industry. I worry we spend way too much time validating for each other what we’d like to believe. I don’t think that’s unique to this industry.

      Thanks for the comment,

      J.