How a Brand Makes Money In the Snowboard Business

Don’t get too comfortable. This is a short article that won’t take long to read. It’s a direct result of that moment in Vegas when I finally decided I wasn’t dreaming and that there actually were a bunch of new snowboard brands and new factory capacity. What makes it even worse is that some of these companies appear to be backed by financially solid parent companies, and can afford to lose money for a really, really long time.

I had thought maybe we were making some progress in getting through the consolidation, but now it looks like we’ve got some new fodder for the irresistible business cycle and we can all be miserable a little longer.
 
To make money, do these things:
 
·         Realize that all you have is your brand name and do everything you can to build and protect it. If you don’t have a recognized one, you probably can’t expect to make any sort of reasonable return by starting to build it now.
 
·         Base your product orders on your preseason.  Don’t kid yourself about reorders. Business people I respect are ordering no more than 10% above their preseason bookings, and some are 5% below. If you have to count on reorders to break even, you might want to ask yourself if your company has a future in snowboarding.
 
·         Be clean at the end of the year. You’re better off agonizing over sales you lost than inventory you have left. Leave your retailers sold through at full margins and anxious to increase their orders next year. You aren’t giving up sales; you are just delaying them a year.
 
·         Don’t chase market share right now. I’m beginning to think market share is a code word for losing money.
 
·         Respect the fact that closed out, brand name product may be among your toughest competitors this year.
 
·         Sharpen your pencil when formulating your advertising and promotional budgets. If you’re ordering product based only on what’s already booked and you aren’t fighting for an increase in market share, aren’t there some things you can do without?
 
That’s it.
 

 

 

Hard Learned Lessons; You Can Do Everything Right and Still Get Screwed

This is the industry. Snowboarding. Some are in it to make a buck, some because they love the sport and just want to make a living doing what they love. Occasionally, the two collide and the golden rule prevails; the one with the gold makes the rules. When there’s a business lesson to be learned that might help some others, I get involved. My name’s Harbaugh. I carry a pen (well, actually a key board).

 I was working the day watch out of the precinct office when the phone rang. The boss’ name is Stouffer. My partner is O’Brien.
 
The story you are about to hear is true. The names, places and other details have been changed to protect the innocent.
 
Dum, Da Dum Dum……..Dum!
 
“The fact is I thought I had everything covered. I thought I was on the money with that letter of credit. I thought there was no way I’d get screwed with that letter of credit.”
 
Ralph thought he finally had it made. All he really loved to do was build stuff and when he learned to love to snowboard and found that he could make money building boards, it seemed like it was all coming together.
 
Not that it was easy. There were the usual startup/entrepreneur/cash flow challenges. It was 1994 when he took a salary for the first time; $25,000. The company did 4,000 boards that year with fifteen employees, one press and a simple production line. They produced for half a year. 1,500 were their own brand (let’s call the brand and the company “Burp”), and the remainder for other brands.
 
A 1995 order for $1.3 million and 8,000 OEM boards convinced him he was over the hump.
 
“I was completely ready for it. I had the process down and I knew where I wanted to go. All I needed was the volume to get up so I had enough machines. So I had a constant flow through the shop and I figured hey, get it to that point, get it running smoothly and then I can concentrate on Burp.”
 
The first 5,000 of the 8,000 board order were manufactured, shipped and paid for. The buyer called back with a problem with the inserts, which was fixed at Burp’s expense. Before making the rest of the boards, they created four samples with the insert problem corrected and sent them to the buyer for approval. They were approved, in writing, and Burp geared up to produce the boards to that newly agreed upon standard.
 
That’s when the buyer tried to cancel the remainder of the contract. But with the materials bought, that wasn’t really an option for Burp. It took the buyer around a month, until October, to determine that the boards would be produced under another label, and the order was upped to 4,000 from 3,000. A shipping schedule was agreed to and Burp began to produce.
 
The first 400 boards are shipped and paid for with no problem. The second 500 are ready to ship on time and on schedule and the buyer says “Hold it, we don’t have an address for you to ship them to.” A week later, Burp finally gets permission to ship them; to the buyer’s warehouse.
 
Ralph is starting to get nervous. He’s been shipping these boards, and getting paid, under a letter of credit. The buyer’s delays have meant that there are only fifteen or so days to ship the remainder of the product and present the documents before the letter of credit expires. It could only be extended with the cooperation of the buyer, and Ralph isn’t feeling too confident that they will be willing to do that.
 
Another thousand boards go out the door and at this point, the nameless buyer owes Burp $350,000. Another week goes by and another 500 boards are ready to go. His bank tells him he hasn’t been paid for an earlier shipment, and the buyer’s bank pleasantly informs him that their are discrepancies in the letter of credit.
 
A letter of credit is an agreement whereby a bank agrees to pay the beneficiary (in this case, Burp) a certain amount of money based on the presentation of very specifically prepared documents usually indicating the shipment by the specified means of certain goods. If any detail is incorrect, the account party (the entity that had the bank issue the letter of credit; in this case the buyer) can refuse to honor the letter of credit. Incorrect details are called discrepancies.
 
I can’t recall ever seeing a letter of credit without a discrepancy. Ralph was new to the letter of credit game and didn’t know about discrepancies.
 
“I called them (the buyer) up and asked what’s up. They drug it out for three or four days. I stopped manufacturing at this point because I didn’t have any money to pay my guys for two weeks and this is like three weeks before Christmas. Bad scene. ******* is the heroin user capital of the world. I’ve got some burley ass dudes working for me, 38 of them. And when you come to them and tell them they can’t get their pay check…..three days before Christmas, your talking about some pretty pissed off guys.”
 
The buyer claimed there were only two and a half instead of the industry standard three turns on the inserts. Ralph didn’t know what the hell the industry standard was, but he knew he was producing the boards to the standards they had all agreed to in writing. He put the extra half turn on the boards in the warehouse at Burp’s expense.
 
For the next few weeks, Ralph is the beneficiary of an education that’s not in the curriculum at any business schools. For reasons Ralph has a hard time figuring out, the CEO of the buyer gets involved. He pressures Ralph to ship the remainder of the product, but won’t pay what is already owed. He tells Ralph he’s going to take his house through some mysterious legal mechanism that was never made clear. Endless conversations, attempted negotiations, and confrontations go nowhere. People show up from the buyer with a truck on three separate occasions to pick up the product, but they have no authority to pay for it.
 
When December 31 comes around, the CEO suddenly disappears from the picture. There’s no resolution, and no decision maker for Ralph to talk to. He’s $550,000 in the whole, his business is on the verge of collapsing, and he’s got nowhere to go.
 
“These guys lied to me, straight up lied to me. This guy told me that a company check could not be revoked, a wire transfer could not be revoked, every time he’s telling me this I’d call my bank and say, listen, if a wire transfer comes from *************** how long does it take? They said it takes about four days. Okay, can it be revoked? Sure.”
 
Having run out of options, and with his company and personal assets on the line, Ralph filed a lawsuit against the buyer for $4.8 million. His attorney told him he’d win, but it would take something like three and a half years. Both he and his company would be in bankruptcy almost immediately.
 
His attorney went back to the buyer and made a deal. The buyer got the product, Ralph got some money, they signed mutual releases and walked away from each other. But the money wasn’t enough to cover all the debt.
 
Ralph’s only solution was to sell the company. There was plenty of interest, but when the smoke has cleared, there was only one buyer for the company remaining. Let’s call it the ABC company. ABC was willing to buy the assets and pay the creditors $0.45 for each dollar they were owed over three years. Ralph’s job was to convince them to take that. Overall, the deal was worth something like $400,000.
 
Ralph spent six months trying to bring the only three creditors who didn’t quickly agree to the deal into line. He couldn’t do it. Ultimately, it got too late in the year to make the season and ABC pulled out. At this point the major secured creditor, the bank, finally said they’d do it, but it was too late.
 
Ralph went back to ABC. The bank foreclosed on the assets, and ABC bought the assets, including the Burp name, from the bank for $85,000. The unsecured creditors got nothing and the bank got less than it could have gotten had it agreed to ABC’s original deal earlier.
 
Ralph works for ABC now. He’s running their factory, doing what he likes to do, and the business is well capitalized.
 
“At the end of the day, if everything had worked out, and I had made the product and shipped it and they (the buyer) accepted it, I would have been in the plus; not substantially, not like I thought I would be, but I would be in the plus. I would have paid back all my trade debt no problem and I would have been half way strong going into next year. Instead I was sitting there with $350,000 worth of debt.”
 
SIDEBAR:
 
Hard Lessons Worth Remembering:
 
1)    Letters of credit are gnarly documents
2)    Agreements are only as reliable as the people you make them with.
3)    Nothing ever works out quite the way you expect it.
4)    There isn’t always time to learn; know what you don’t know.
5)    A bank’s decision making process can be hard to figure out.
6)    When all is said and done, all you’ve got is your integrity, your ethics, and the relationships you build with people.

 

 

SIA Member Services; Run Your Business Better: No Charge

I think the first time I heard about SIA it was when somebody asked me to write a check for membership. “What are we going to get out of this membership?” I asked. “We have to be a member to go to the show,” was the less than enthusiastic endorsement. So I signed the check.

Turns out there’s more to it than that. SIA offers its members no charge services that, if utilized correctly, will add to your bottom line. The mystery is why so few members utilize them. Maybe a little publicity will help.
 
The Credit Services Program gives companies a picture of the payment status and credit quality of retailers they are doing business with. Produced seven times a year (January through May, August and October), this report shows the amount and status of all reported debt more than 60 days past due. It includes not only information supplied by SIA members, but by the credit associations of other action sports trade groups.
 
The report I received in August was about an inch and half thick. The only cost to participate is the time it takes to complete a form which shows the name and address of the account and the amount 60 days or more past due. There’s room for a short comment on the account status.
 
The information is reported by a member number. The name of the reporting company is not disclosed except to Riemer Reporting Service, which assembles the data.
 
Let’s say you’re doing about $2,000,000 in business annually (an estimate of the mean revenue of SIA members). Your business continues to be highly seasonal, and your customers are demanding better payment terms. SIA reports that overdue accounts represented 4.8% of sales at wholesale, or $96,000 for your typical SIA member.
 
Not all of that will ultimately be uncollectable. But after taxes, a lot of businesses are lucky to drop 4.8% to the bottom line. Better management of your bad debt expense can easily be the difference between a profit and a loss.
 
The in season cash flow affects are harder to illustrate, but may be more important. As I’ve said in this space before, companies pay their bills with cash, not with profit. A lot of snowboard industry companies live hand to mouth during the period between the arrival of product and collection of receivables.
 
What happens if, on average, your collection period goes from 60 to 90 days? How much more money will you have to invest in the business? Where will you get it? What will it cost?
 
Just for fun, let’s say you can borrow money at 10% annually.  To carry $2,000,000 in receivables an extra 30 days costs you about $16,700. The calculation is oversimplified, but you get the picture.
 
SIA’s Credit Services Program is part of an effective program to reduce your bad debt exposure. Checking credit references is important, as is your history with the account. But nobody ever handed out bad credit references, and conditions change from year to year. If by participating you can sell more product to accounts that pay, and pay on time, isn’t it worth the few minutes it takes to fill out and send in the form? You bet.
 
Often, public relations doesn’t make it on our radar screens, though when somebody says “advertising and promotion” we perk up and get out our check books. To paraphrase Clauswitz, public relations is advertising and promotion carried on by other means. Working with SIA, you can do some good public relations work that’s inexpensive to free.
 
Sort of my accident I got my hands on SIA’s New Products, Best Values publication. This annual publication, distributed to hundreds of media people and anybody else who wants it, gives each company a chance to briefly describe its latest products. Having a listing is free, but only 30 board companies participated this year. Since the show, SIA has distributed about 1,200 hundred copies.
 
We spend six or seven thousand dollars on a Transworld ad that we wonder if anybody is going to notice, but we won’t take the time to get some information in the hands of people who are specifically requesting it.
 
Call SIA and get their free booklet on press relations. Tell them you want to participate in New Products, Best Values. Then call them again and ask what you should be doing about public relations and how you can do it. The information and advice you can get for free would cost you thousands of bucks from a public relations firm.
 
Finally, there’s the Cost of Doing Business and Compensation and Benefits Survey. It’s just as expensive as all these other SIA services; you got to participate.
 
Inaugurated only in 1994, this survey is focused on developing accurate financial information on the snow sports industry. Only participants receive the report. The submitting company is known only to an outside accounting firm that receives the information. The tabulated data is released only in composite form. It shows expenses as a percentage of sales, not in hard dollar terms. In other words, participants are well protected from disclosure of proprietary information.
 
The data is broken down by small and large companies (with $5 million being the cut off) and by hard and soft goods. Right now, limited participation is making the information less valuable than it will ultimately be. Only 82 companies (out of an SIA membership of 850) are participating, but less than 20 are snowboard or snowboard related. SIA is prepared to run the data for snowboard companies separately as soon as there’s enough participation to make the numbers meaningful. 
 
There are two basic reasons to participate. First, it will let you know how you’re doing compared to other companies, highlighting what you’re doing right and where you can look to improve. Second, it can be very valuable in dealing with your bank or other financing sources.
 
For most industries, banks have “common sized” financial data that allows them to compare your company to others in its industry. Not so with snowboarding; until now. This kind of data is something of a security blanket for bankers unfamiliar with an industry. It will allow you to explain how your company is doing compared to similar businesses. The fact that you even have this data and have considered its implications will improve your credibility, giving you and your banker a common point of reference.
 
Using SIA’s services and information correctly will improve the way you manage and finance your business. Do yourself and the industry a favor; participate. Fill out the forms and send them back.

 

 

Where Have All the Snowboards Gone? The Apparent Imbalance Between Production and Sales

I seem to remember from my first economics class that if supply goes way up and demand doesn’t keep pace, prices can be, well, negatively impacted. When I look back at the 1994-95 season, I am disturbed because it appears that there were more boards produced than were sold to retailers; maybe a lot more.

Below, I try and estimate just how many more. With so little hard information out there, that’s a tough thing to do with any confidence. But because the answers will affect how we run our businesses and how successful we are, it’s worth the effort.
 
My information is based on what I’ve read, some third hand conversations, rumors, insights gained working with snowboard companies, and some educated guessing. My numbers are not precise, and I’d like nothing better than for somebody to prove me wrong. 
 
If I were to guess how many boards were sold to retailers during the 1994-1995 season in the United States, I might estimate 225,000. Conventional wisdom says that the U.S. is one third of the total market. If that’s accurate, there were approximately 675,000 boards sold to retailers world wide.
 
My instinct is that the number is over 800,000. Using that number for discussion purposes, let’s talk about how many boards were produced.
 
I’m pretty confident that Pale and Elan together produced over 400,000 boards. Let’s say that Burton, Morrow, K2, Lamar, Gnu/Libtech and Rossignol together made 450,000 in factories they own or control for their own brands or others.
 
That’s a total of 850,000, which would be consistent with my estimated sales number if I wasn’t ignoring Atomic, Spaulding, Blizzard, Carnival, Thermal, Surf Politix, ASM, Niedecker, Volkl, Dynastar and a host of others that make their own and/or other brands.
 
At a minimum, I think production for the 1994-95 season was 1,100,000 snowboards. One knowledgeable source said the number was closer to 1,500,000. That means there would be between 300,000 and 700,000 unsold boards out there, not counting what retailers still have.
 
That raises some interesting questions. Like, for example, where are all these boards?
 
Maybe a distributor has them all in a warehouse somewhere, waiting for a good time to unload them.
 
Japan. They got to be in Japan. That’s actually the opinion of some people, and if you accept the conventional wisdom that there’s enough pairs of skis in Japanese warehouses to satisfy the market in 1995-96 if not a single additional pair was imported, it at least seems plausible. Certainly the Japanese have the balance sheets to support holding that much inventory.
 
Maybe it doesn’t matter where they are if they exist. At some point in time, they will appear on the market. Are your brands so well positioned that customers will still pay full price rather than buy a new, one year old board with essentially the same construction for a huge discount?
 
Think on it. What do you need to do differently as the market changes?