PPR Earnings Release and Volcom- Exit Strategies for Core Brands

This article was occasioned by PPR’s release of its quarterly results, but that’s not really what it’s about. When PPR, or Decker’s or VF or Jarden releases earnings we’re interested in what happened mostly because we’d like to know what’s going on with Volcom, or Sanuk, or Reef, or K2/Ride. We never find out very much. 

Volcom is in PPR’s Sports & Lifestyle Division which includes Puma and Volcom (including Electric). Puma did 821 million Euro in the March 31 quarter and “other” brands in that division, which means Volcom, did 65.6 million Euro. That’s about $87 million at the March 31 exchange rate.
 
Maybe ten days ago, I wrote about Nike’s quarter, indicating it was kind of a waste of time for me to analyze Nike’s financials. Instead, I tried to focus on some comments Nike’s CEO made about sources of product innovation. The goal was to try and provide a little perspective that maybe helped smaller companies in action sports (or maybe it should be called active lifestyles?) think about how to compete and succeed in the eight hundred pound gorilla era. I think that approach is valid not just for NIKE, but for all the large companies that have bought up companies in our industry.
 
PPR management made clear in the conference call that they were disappointed in Puma’s results, and that they were working hard to improve them. At the time of PPR’s acquisition, there was speculation that Volcom might help Puma become “cool” and that we could see a Volcom shoe line created with Puma’s help.
 
At the time of the acquisition by PPR, Volcom was a company that was very strong in its market niche but, in my analysis, didn’t have anywhere to go. It was so closely identified with its niche it didn’t have the strength to break out of it. PPR, with about 4 billion Euros of revenue in the recently completed quarter, and the owner of such luxury brands as Gucci, Bottega Veneta and Yves Saint Laurent, didn’t buy Volcom for its 65 million Euros of revenue (1.6% of PPR’s total) and its growth potential in the “core” market. They didn’t buy it just to help Puma or to do Volcom shoes.
 
What do they have in mind? What do any of these behemoths have in mind?
 
At the most obvious level, PPR saw what VF has done with Vans and The North Face in its action sports segment and the associated growth rates and said, “We want a piece of that too.” If nothing else, you might expect that PPR will be interested in additional acquisitions in the space, perhaps in competition with VF.
 
Neither Nike, nor PPR, nor VF is interested in a brand that has no potential beyond the “core” market. It would just be too small to temp them. When the PPR/Volcom deal went down, I suggested, only partly in jest, that maybe PPR would expand Volcom into upper end boutiques. I (probably) don’t see any product collaboration between Volcom and Gucci. But I’ve watched brands like Nixon get some traction in that upper end market with some of their higher priced product, and I just wonder what’s possible. With PPR’s help, could Volcom open some stores that carried some new classes of Volcom product? Go and see what WESC is doing. 
 
A brand, like Volcom, that’s secure in its niche and roots has the potential to grow out of that niche without confusing its customers and destroying its market. It’s not a sure thing, and it’s not easy. It’s management’s challenge every day.
 
For better or worse, we created that opportunity when we chose to pursue growth across markets and expand distribution. We created a much larger market, but one we couldn’t take advantage of on our own.
 
Large, successful companies in action sports are small, inexperienced players in the broader fashion business. As Volcom discovered, even going public and shoring up your balance sheet doesn’t solve that problem.
 
I’m sitting here trying to think of companies who have smashed through that barrier without help. I’m not doing very well. Everybody who is thought to have the potential to go from core to fashion seems to be acquired.
 
That, I guess, is the strategic point I started to think about as I read PPR’s quarterly report and looked for information on Volcom. A successful exit strategy for an action sports brand owner, in general, will require a revenue size that is proof of concept and is big enough to be interesting to a possible buyer. There also has to be an indication that you can hope, with the right support, to move past the core market and into the much larger fashion space. You can see that’s an issue for hard goods brands.
 
In the future, then, when I review the reports of Nike, VF, Decker, Jarden, VF and any other big companies involved in our industry,  I’ll try and pull our trends and ideas that are more interesting than the change in the current ratio. More fun for me to write. Hopefully, more valuable for you to read.         

 

 

There Is No Action Sports Industry. Or Maybe It’s the Same as its Always Been

Sometimes I just can’t help myself. Many years ago, I wrote an article called “Are There Any Core Shops Left?” My good friend and editor at the time Sean O’Brien thought enough of it to put it on the Transworld web site for discussion. Without telling me. In hindsight, his instincts were good, but I was the slightest bit confused when I started seeing posts and getting emails that either told me how smart I was or hung me in effigy.
 
I think I might be about to do it again. What I want to tell you is that many of you who think you’re in the action sports business are wrong. And if you don’t act accordingly, things could become difficult. More difficult. I want our old economy back!
 
This has been in my head for a while in unformed ways. The launch of Nike’s Chosen campaign, their investment conference yesterday, an email I got from somebody who’s had a lot of success in our industry, and my evaluation of some of the recent industry deals including Volcom and Sanuk has caused neurons to fire and thoughts to coalesce. So let’s look at just what this industry is and has become, what I think are the major, long term, strategic trends, and the implications for how this industry, whatever it is, will change.
 
What Is the Action Sports Industry?
 
I’ve expressed an opinion about this before, but want to do it a bit more forcefully. The action sports industry is a small industry composed of businesses that sells products to participants in a number of individual sports and to the first level of non-participants that closely associate with the lifestyle and athletes. If that isn’t who most of your customers are, then you’re in the youth culture or fashion or some term I haven’t thought of business.
 
That doesn’t mean that your roots can’t be in action sports, and I’m not trying to imply any kind of criticism of a company that’s graduated out of action sports (we are way, way past any concerns about “selling out”. That almost sounds laughable now). But if you think you’re selling to action sports customers, as I’ve defined them and you’re not, you’ve got a challenge because you’re probably trying to punch outside of your weight class.
 
Why did we ever believe action sports was a bigger industry than it is? That’s easy; it’s due to 20 or 25 years of THE BEST ECONOMY EVER. With rising incomes and asset values, easy credit, and low inflation you can, as the saying goes, sell snow to the Eskimo. So any shop that sold hard goods could be known as a core store. But it wasn’t.
 
As I suggested in the title, then, the real action sports industry is a lot like it’s always been. We just thought it was different. What made it change?
 
Trends We Should Pay Attention To
 
How do you know when a successful brand has graduated out of the action sports market? That’s easy- they get acquired. Somewhere around $40 million in revenues, to pick a number, they start to get big enough to be attractive to a strategic buyer that makes it worthwhile to sell.  Hopefully, they also get smart enough to know that they don’t really have the resources, expertise, or competitive advantage to step outside the action sports market they came from without help. Expect more CONSOLIDATION as the trends I’m discussing here play out. 
 
Volcom pretty much said in their filings that industry conditions and difficulty growing meant it was time to sell while they could get a good price. Look at the deal Sanuk got. Notice that PPR’s CEO specifically said in an interview they didn’t pursue Quiksilver because they didn’t see the growth potential. Buyers want growth potential. Successful sellers know they have it, but that they can’t do it themselves.
 
And that means, if you try and grow out of the real action sports space, you’re going to face some big honking competitors. Bigger all the time. Nike’s almost its own trend. I’ll get to them. Think about Burton in the snowboard space a few years ago. Why did Burton own the hard goods market?
 
First, great product.  I’ve never heard anybody say different. Second, financial strength. That strength meant the best athletes and the biggest advertising and promotion program. So consumers wanted the product and it checked at retail at good margins as long as the distribution was well managed.
 
In its snowboard niche, Burton was like Nike in the athletic footwear market; unless they screwed up everybody was fighting over second place. But Burton has a problem Nike doesn’t have. Nike’s concern, they say, is about picking the best of their growth opportunities. Burton, as best as I can figure it out, hasn’t been able to grow much outside of its core snowboarding franchise. Even if it were for sale, Burton would not be attractive to a strategic buyer lacking that growth opportunity.
 
The lesson? Either plan to stay in the core action sports market, or be prepared to sell when you threaten to break out of it. 
 
Let’s talk about NIKE, THE ONE COMPANY TREND. At the start of this article were a couple of links to Nike that may interest you. Here’s another one to a press release on a conference they held last year. It’s worth a read. I actually have the transcript of that conference, though I can’t find it on line any more. It’s 75 pages long but worth reading. If you’re really interested, let me know and I’ll send you a copy.
 
Nike is $20 billion in revenue. As you’ve no doubt read, they are now taking the Nike brand directly into surf, skate and snow. They think they’ve now got the credibility to do that, having been somewhat cautious in their approach for a couple of years.
 
I have to say their timing surprised me a bit. For years, Nike flopped around the action sports space screwing up their attempts to get in it. Then they got a little realistic and decided to exercise some patience. They hired a few of the right people and used their unmatched product capabilities and financial strength to edge their way in cautiously. I thought they were doing fine. But it feels like they might have run out of patience sooner than they should have.
 
It will be interesting to see if the Chosen campaign is seen as authentic or arrogant.     
 
In its investment conference, Nike talked about its ability to market and merchandise a product or brand down to the city level. They pointed to their focus on customizing product for individual consumers (try it on line!). They discussed the process where an innovation from one product makes its way to other products and brands. They were very thoughtful about the integration of brick and mortar and digital and expect growth there. The analysis they’ve done about what kind of stores to put where is intriguing. And they had a good discussion of their integrated systems for managing costs and inventory, which I love.
 
Of course, it’s their investment conference, so you’d hardly expect them to highlight where things hadn’t worked out so well. Still, it was impressive. There was a clear analytic framework that I think gives them unusual flexibility for a company their size.
 
And that brings me to the email I received from the gentlemen with a lot of success in our industry who said, in part, “Based on how they [Nike] have single handedly destroyed the competitive brand environment in sports like Football, Tennis and Golf does this mean that Action Sports brands have to work on the basis that they will be relegated to being a fringe player in a culture and sport they created?”
 
Well, maybe. But let’s not over dramatize this. There’s nothing we can do about how Nike (or any of the other large companies) runs their business except, in this case, maybe learn some lessons from them based on the things they do well. I might have said this a time or two, but don’t worry too much about what the competition is doing- just run your own business well. If you adopt just a bit of Nike’s thoughtful, analytical approach to your market, you’ll be doing a good thing.
 
One thing you might think about is whether Nike is trying to ‘take over” the action sports market or just use legitimacy in that market to be credible with customers outside of what I’ve defined as action sports customers. See, this is why explaining what action sports is and being aware of how it’s changed is so important.
 
One way you need to do that is to FOCUS ON THE ECONOMY. I know it’s hard when you have to run your business on a day to day basis, but look beyond, the day, week, month, quarter and even the year. Recognize that, historically, the “good old days” were an aberration we’re not returning to in the foreseeable future. Want to know why? Go read this book so I don’t have to make a long speech. It’s a pretty easy read. The bottom line is that this is a financially caused, global recession and they last a long, long time. Always have. You must build your business around that assumption. Most of you, I hope, already have.
 
One of the economic things you’ve got to think about is inflation. You are going to see some product cost increases, and it’s not clear how much you will be able to pass through to your customers. Factor that into your financial model.
 
Next, we can’t forget VERTICAL RETAILING, which I expect will continue to grow and even accelerate. Vertical retailing is a financial and merchandising strategy that is viable partly due to changes in consumer perceptions and habits and because we’re selling a lot of product to a different consumer. You don’t have to be “core” anymore to be cool and most of our customers aren’t action sports consumers as I’ve defined them.
 
Where does this leave the “core” retailer? Well, kind of where they’ve always been if they are really core retailers; servicing the group of customers I’ve described above for whom community and expertise are the most important factors. That was never a huge market.
 
Specialty shops and small chains that really weren’t core retailers have mostly gone away. Even some really good retailers who have been around for many years are struggling. Partly that’s because we’re no longer in the best economy ever. But it’s also because they are dependent on customers outside the traditional action sports niche as I described it and don’t have an adequate advantage with those customers over the vertical retailers and large chains for the reasons we’re discussing here.
 
Some years ago, I created a list of things I thought core retailers had to do well to succeed. The list included good systems and financial data, close connection with the community, a reasonable internet presence, quality, trained employees to whom you could offer a career path, revenues in excess of $1 million and a willingness to take some risks in the product you carried as a point of differentiation.
 
It’s not a bad list, but when I wrote it I thought a specialty retailer who did all that would just kill it. Now it’s kind of a minimum bar to succeed. And doing all that isn’t enough if you’re trying to compete with the big, vertical brands for the non-action sports customer.
 
Price has become more of an issue than it ever was and (forgive this gross generalization) there is no financial model that makes sense for a specialty retailer that carries the same brands as the chains and vertical retailers and serves the same customers. This is going to be especially true as product costs rise.
 
Related to vertical retailing is distribution, or rather NOT DISTRIBUTINGHere’s a link to an article I wrote after SIA posted its sales report in March. Basically, SIA members reported higher margins and better sell through with lower sales. They sold less but earned more and created perceived value through scarcity. I’ve been beating the drum for focusing on gross margin dollars rather than sales or gross margin percent for years. It took the worst recession since the Great Depression to scare them into controlling inventories. I really hope they don’t screw it up next year.
 
Around 2000 when I took my first close look at THE INTERNET and its impact on the industry, I thought it was just another distribution channel. Maybe that was an adequate answer then, but it’s way more now.
 
It’s your most important point for customer contact and information. It’s a tool for managing and controlling inventory. There is no successful brick and mortar retail without a closely integrated internet presence. I could create a much longer list, but just imagine running your business without the internet and we’ll leave it at that. It’s no longer a choice and I guess it really hasn’t been for a long time.
 
So What?
 
Determining whether you are “action sports” or “not action sports” is obviously not as clear cut as I’ve made it sound. Most retailers and brands fit somewhere along a continuum. Yet determining who your customers are is critical (duh) and maybe the distinction I’ve made is a good way to start thinking about it. For most of you, it’s not the same customer you used to have.
 
For better or worse, big companies have learned to buy brands in our industry and support them without killing what made them special. Consumers won’t know that Volcom is owned by PPR. More importantly, if they did, they probably wouldn’t care anymore. 
 
The buyers of industry brands can’t justify their purchase prices unless those brands grow at a pace that means they take market share. So you, as an independent brand or retailer, are competing with businesses that were successful in their own right but are now backed by various 900 pound gorillas committed to growing them. Sophisticated, well managed gorillas at that.
 
Don’t despair. Just recognize the market you’re in and who you’re competing against. Then plan accordingly. Like the old saying goes, “Call on God, but row away from the rocks.”           

 

 

The Relationship Between Marketing and Business Risk; Do One and Reduce the Other

Have you ever noticed how often the group of people who create ads, run promotions, and manage sponsorships are called the marketing department? That’s always struck me as kind of odd. I think marketing is the process of figuring out who your customer is, or can be, and why they buy your product. Advertising and promotion are the tactics you use to reach and attract those customers after you’ve reached some decisions about your customer based on your marketing.

I suppose it’s so obvious it shouldn’t have to be said, but if your advertising and promotion isn’t based on solid marketing you can spend a lot of money and damage the only real asset you have in this business- your image. We’ve all seen retailers and brands do it.
 
The thesis of this article is that good marketing reduces business risk and the perception of business risk, perhaps helping you to think in a way that facilitates recognizing new customers and markets.  It’s critical if you’re shop or brand is going to stand out in a crowded and highly competitive market.
 
The Status Quo and Its Downside  
 
 Right now, in this industry, everybody pretty much does the same advertising and promotion stuff. You all know what’s on the list of the ways we compete and I won’t bother repeating it here. I recognize that sometimes somebody’s ad is cooler than somebody else’s, or a particular team rider breaks out from the crowd for some period of time. But at the end of the day if we’re all doing the same stuff, and our products are more or less all the same, how do you, as a shop or a brand, break out from the crowd?
 
Answer- you don’t. If you’re doing the same as everybody else, and your product is no better, the best you can do is to be as good as they are. The exception, of course, is that you can do more of what all the others are doing. It may not be better or different, but it has an impact. But to do more, you have to have more- dollars that is. Then it’s only the big guys who win.
 
It probably hasn’t escaped your attention that the big are getting bigger and controlling more and more of the market. I’m suggesting that’s inevitable- in any industry- if, lacking solid marketing, the only basis for doing better over the long term is to spend more on advertising and promotion and cut prices. That tendency is exacerbated by the fact that it’s the larger businesses that are most likely to really do good marketing.
 
The Perception of Risk
 
I suppose this article had its genesis over a year ago when I talked to Santa Monica based ZJ Boarding House co-owner Todd Roberts at ASR. In the course of talking about a whole bunch of stuff, we got around to the ongoing travails of smaller retailers and what they needed to do. Todd said, “Jeff, you can’t be afraid to take some risks.”
 
I thought he was right. Still do. But at the time, I didn’t know where to go with it. It didn’t seem useful to say, “Take more risks!” unless I could explain why the risk was worth the potential payback and how it could be controlled.
 
Still, it seemed an important point, so I put it in whatever the part of my brain it is that holds ideas to be thought about and addressed later. It recently popped out more fully formed.
 
In helping businesses in this industry manage transitions, I’ve known for a long time that we all, including me, like to do what we’re comfortable with and have done successfully in the past. It’s human nature. So we go with the flow in running our businesses, following the annual schedule for developing ads, sponsoring events, attending trade shows and all the other stuff. It feels low risk, doesn’t it? That’s because it’s what we’ve always done.
 
Conversely, from time to time, really new ideas for advertising and promotion come across our desks. But they don’t fit our frame of reference. There isn’t a place for them in the annual advertising and promotion schedule. Other companies aren’t doing them. Doing the new things seems risky. Doing the same old stuff doesn’t.
 
Granted, it’s also a matter of available funds. It’s much less risky to do something new when you don’t have to cut out something old to try it. Another advantage to bigger companies with strong balance sheets.
 
We tend to perceive low risk in doing what we’ve always done. We perceive higher risk in doing new things. I think it’s the other way around. Industry conditions and the difficult competitive environment require that you do some of these new things if you are going to succeed. If you don’t, you have no opportunity to be better than anybody else.
 
And that gets us to marketing as a competitive tool, a money saver, and a way to fix your perceptual problems.
 
Doing Marketing
 
Sometimes I just have good karma. I’d been working on a talk I had agreed to give on how we compete as an industry and how we can do it better. Before I finished preparing, I flew off to ASR. I walked into the room late, but managed to hear most of Mikke Pierson’s (the other co-owner of ZJ Boarding House) talk on how to utilize your data base effectively. I know this article is turning into a damned ZJ Boarding House promotional piece, but sometimes you just have to go with the flow.
 
So here I am, thinking about how the industry competes, why brands and shops need to take some risks, and why they often seem reluctant to do it. Having managed to put off my article deadline until after ASR, I was getting desperate for a good way to tie this all together in the real world.
 
And Mikke saved my ass.
 
To make a longer story short, he said, “We spent $4,000 with Customers First to clean up our mailing list and plot our customers on a map so we knew where they were coming from. We did our usual promotional mailing at a cost of $16,000 and it generated $135,000 worth of business. The cost of doing the mailing was a whole lot lower because we knew who we were mailing to and why. We didn’t have to pay the post office for returns, and we didn’t waste money on duplicates, people who weren’t interested, or who were too far away to come to the store.”
 
The $4,000 spent with Customers First is real marketing. And I want you to notice the following things.
 
  • It wasn’t some esoteric, company wide, long term, epic undertaking that produced a ream of data that nobody knew what to do with. It was practical, cheap, quick, and the return was immediate and measurable.
 
  • It reduced risk. They knew much better who they were doing a mailing to and why. Maybe just as importantly, it also reduced the perception of risk.
 
  • It generated additional sales- quickly.
 
  • It didn’t cost them money- it saved them money.
 
  • It wasn’t some change of direction, risk the company strategy. It was a fairly minimal, common sense sort of thing. If it hadn’t worked out they would have been out $4,000 and a little time and would have learned something.
 
  • It focused on their customers- not on their competitors and not on the industry.
 
What I said I was trying to do at the start of this article was demonstrate the relationship between marketing and business risk. The relationship is both perceptual and practical. Good marketing reduces your business risk. It also reduces the perceived risk because your actions and decisions are based on good data. That means you are more willing to try some new things.
 
And I don’t think you have much choice. Focus on your end customer and why they buy from you. Think of a dozen questions you’d like to have answers for and how those answers would make it easier to reach those customers. Answer just one and see what you can do with the information. The risk of not trying is just too big. Like Walt Disney said, “You don’t build it for yourself. You know what the people want and you build it for them.”

Action Sports; Are We Still in That Business?

Seems a silly question I suppose. Action sports are what we do. It’s what we’ve always done. It’s what we love. Our trade shows are more fun than anybody else’s. We get to take vacations and call them business expenses or, even better, product testing. Uh, not that I’ve ever done that, Mr. Tax Man, sir. But I’ve heard about it.

I’m not quite sure that’s the business we’re in any more. Or, to put it more precisely, I’m thinking that action sports is only part of our business. A smaller part for many of us. Maybe I’m just playing with words. “What’s in a name?” somebody once asked. Maybe a lot if that name determines how you think about who your competitors and customers are, how you need to do business, and the market where you position your product. Put like that, it’s a survival issue.
If you’re going to make money in this industry, you need to recognize how it has evolved and run your business accordingly. By reviewing that evolution, and talking about how you might redefine the business you’re in, I’m hoping some things you should be thinking about doing differently will become obvious. Or, at the very least, you can start to move in the direction of identifying those issues and opportunities.
Can It Be This Simple?
I thought this would be a nice easy article to write. Just sort of review some industry evolution. You know- how we use to sell mostly to participants and tended to be focused on a single sport, but now we’re selling across the sports, increasingly to non participants who just want to look good and maybe feel some connection to the lifestyle and account for the majority to most of our sales and even more of our profits. Then pronounce we’re in the fashion industry and be done.
Wouldn’t it have been great? “Wham! Bam! Thank you ma’am!” [good luck translators] and Boardsport Source would send me a check, and I could move onto my next project. But then I realized two things. First, that Boardsport Source pays by the word.  This was looking like a damn short article, and that wouldn’t do.
Second, and arguably more importantly, pronouncing that we are in the fashion business wasn’t much help to anybody. It was kind of like saying the goal of a business was making money. True, you need to do it, but it doesn’t say a thing about how to go about it.
So it appears I’m stuck at my computer a bit longer.
Still, my blazingly short description of our evolution as an industry- from participant to non participant as main customers and towards the fashion business- is generally accurate, though not adequate as I explain below.
Fashion Business- What’s That?
Are you thinking, “We all know what the fashion business is, so there’s no need to discuss it?” Well, you’re smarter than I am because I’ve decided I don’t quite know what it means, at least not in a useful way. Have you ever noticed that when the consensus is that “everybody knows,” you’ve probably got something worth digging into?
Here’s what I think characterizes the fashion business:
  • All product differentiation is created by advertising and promotion (branding) and design.
  • No functional product difference remains exclusive for long.
  • The fashion business is huge. The action sports business is tiny.
  • The fashion industry encourages product replacement. If we all wore our shoes and apparel as long as we reasonably could, the fashion industry would be a hell of a lot smaller than it is.
  • In a product we are encouraged to replace from season to season, function can become less important than form.
  • The customer base is no longer easily identified or segmented. Marketing (the process of figuring out who your customer is and why they buy from you) is critical. And challenging.
  • Your relationship with core participants is different. You want to sell to them, but they may be more important to you for the legitimacy and brand power they can give you with all the non participants who represent your biggest opportunity for growth.
If you think about these points, you may come to some of the same conclusions I came too. The one that sticks out like a day glow, skin tight orange/lime green ski suit on the slopes (Those aren’t fashionable again yet are they?) is that it is absolutely futile to say, “We’re in the fashion business,” because that business is too vast and varied and massive to tell you anything useful.
Which bring us to marketing.
Marketing- No Way to Avoid It.
 
Remember that we all use to be our customers. Market segmentation? If they boarded, they were a potential customer. If they didn’t they weren’t. Marketing done. It was easy, accurate and damn near perfect. It was seductive because it didn’t require any effort and didn’t generate any uncertainty.
Like an archeologist digging down through the layers of a civilization, we can find the remains of those days in some companies, where the people who manage the still critical advertising and promotions function continue to be called The Marketing Department. I have no idea why. If you accept my definition of marketing above, they don’t do any marketing. But somehow the name hangs on.
“What’s in a name?” I asked at the beginning of this article. Maybe a lot if you think you’re doing marketing, but what you’re really doing is running ads, supporting riders, and sponsoring contests. Lacking effective marketing, you have no way to judge if you’re running the right ads, supporting the right riders, and sponsoring the right contests.
If you agree with me that you’re now in the fashion business to some extent, your first job is to find out just what part you are in. You have to do some real marketing. You have to find out who your customers and potential customers are and why they buy from you.
Competitor Identification
As soon as you recognize you aren’t just in the action sports industry, but in some (clearly identified) segment of the fashion business as well, then the lists of companies you are competing against changes. Those non board sport participating customers that you are selling to are comparing your product to those of brands that have nothing to do with action sports.   Why might they buy your product? Why will a particular non skating customer buy Brand X of skate shoe rather than a Nike if they are just looking for a comfortable, casual shoe?
Obviously, if this wasn’t an issue skate shoe companies wouldn’t be making casual shoes less closely tied to actual skating.
So, you may have some different competitors. I wonder if those advertisements and promotions being churned out by your non marketing department are as relevant as they once were? You might wonder too. Are you spending all that money in the right place?
Then There’s the Customer
Just who is your customer? For most brands and retailers it’s not just core skaters, or surfers, or snowboarders anymore. It hasn’t been for quite a while. I think we’d all agree on that. If you want to grow your business to a serious size, there just aren’t enough of them around.
Look at your distribution and how it’s changed. There are a lot of clues about your customers there. Go ask your fifty largest customers to describe the person who buys your product. Don’t accept a vague answer. Work to collect some of that data if you don’t already have it.
Consider what you might learn. When you sell to a core participant, your customer tends to be  knowledgeable, function oriented, possibly less price sensitive, and knows about the competitor’s product. When you are selling to somebody who’s a lifestyle customers they are, well, not necessarily like that. They perceive themselves to have choice of brands beyond what the core customer may consider.
This has huge implications for how you advertise and promote your brand. Just as one example, the core customer may recognize and identify with specific sponsored riders and how they perform. The broader market “fashion” customer is less likely to recognize the rider or the trick, but may be attracted to their perception of that rider’s lifestyle and the places they go.
If that’s true should your ads be less technical? Does it change your choice of sponsored riders and how you compensate and present them? Etc.
For most brands and retailers, it’s no longer accurate to say only that, “We’re in the action sports business.” There’s an important and growing (maybe dominating) fashion component to your business, but describing your company as being, “In the fashion business” is too broad a statement to be useful, even though it’s true.
Chuck out the old habits. Recognize that your market is changing, and you have to do some work to figure out how and what that means. It’s no longer handed to you on a silver platter. And if you’re calling your Advertising and Promotions Department “Marketing,” will you please change that? You’re driving me crazy.

 

 

The Impact of Consolidation; Wasn’t That Over Years Ago?

Yes. And no. The snowboard industry consolidation that started around 1995 or 96 could probably have better been called extermination. Literally hundreds of brands went away either because their founders got tired of losing money or because the Japanese stopped paying cash in advance for snowboards. Though there were exceptions, these brands didn’t get subsumed under the multi-brand umbrella of a large corporation. They just ceased to exist.

A Business Week article in September talked about the fact that prices on recent acquisitions of apparel makers have been at cash flow multiples 20% higher than what companies were purchased for just a few years ago. Some of the recent, richest deals have closed at multiples of cash flow that are twice what public apparel makers trade for. A graph in the article shows the value of mergers and acquisitions in the apparel sector were around US$ 6.5 billion in 2000 and are projected to be nearly US$ 40 billion in 2005.
 
Quiksilver has announced that it’s earning for the year ending October 31, 2006 are expected to be US$ 0.87 to US$ 0.88 cents a share. Analysts had been expecting US$ 0.98 per share. Earnings are expected to be US$ 0.86 to US$ 0.87 for the year ended October 31, 2005.    They said the integration of Rossignol, acquired in March, the strengthening of the dollar and higher interest expense were responsible for their projection of essentially no earnings per share growth in the coming year.
 
These two things got me thinking. Sometimes that leads to an article.
 
The 90s snowboard consolidation was largely confined to the small world of the snowboard industry itself. And as I said above, consolidation maybe wasn’t the right word for it. This consolidation is different. It’s not confined to snowboarding, or even to what we have called action sports. It’s taking place in the context of the much, much larger lifestyle/fashion/apparel (pick your favorite term) market. It’s big companies buying companies that we in action sports use to think of as big, but that are turning out to be small compared to the companies buying them and the markets the acquirers are in. Hurley bought by Nike, Quik bought DC and Rossignol, VF Corporation bought Vans, Addidas bought Salomon (and has now sold it to The Amer Group). I’ve forgotten all the brands K2 has bought. I don’t mean to suggest this is new, but I expect it to continue. It has ramification for brands and retailers.
 
Let’s see what they might be.
 
Stuck in the Middle
 
The conventional wisdom is that you either need to be a niche brand, or a big company with a low cost structure. If you’re stuck in the middle, you’re screwed. We could talk, I think, about how that may have changed or be changing due to the role of brands, how marketing has evolved, and the internet and the leveling of the information playing field, but that’s a topic for another day. For the moment, let’s go with the conventional wisdom.
 
We continue, thank god, to see the regular emergence of new action sports brands. Some of them get some traction in the market. We all know why. Committed snowboarders, for example, who think of snowboarding not just as a sport but a lifestyle are interested in buying brands different from the ones anybody could buy pretty much everywhere. I’d argue that this group of committed snowboarders, as a percentage of total snowboarders has shrunk, but it’s still a basis for a new brand to get a toehold.
 
I look at these companies as niche brands who, due to their small size, flexibility, limited availability, coolness factor, and cost structure control, have a way to compete. Remember when one of these brands ran the ad telling kids how to fake lift tickets or something like that? Boy were the resorts pissed off and you couldn’t hardly blame them. But it generated a lot of talk. Can you imagine a large snowboard brand with close ties to resorts using that kind of marketing?
 
At the other extreme are the big players. But if I try and list the big snowboard only companies (or the big surf only companies, or the big skate only companies) I end up with a damn short list. Not even Burton, even with the leading position in the snowboard market, is a snowboarding only company any more. Quik’s’ certainly not just surf with acquisition of Rossignol.
 
The big players are increasingly multisport, year around businesses with a significant and growing presence in the apparel/lifestyle market. K2 Corporation, Amer Sports, VF, Nike, Quiksilver come to mind. There are others you might name. I think the companies stuck in the middle are those with revenue of, oh, let’s say under $1 billion who don’t have defendable and competitive lifestyle/fashion/apparel brands.
 
Got your attention with that number did I? Good. That was the idea. Want to say $800 million? Okay with me. But whatever the number it’s at least one order of magnitude bigger than what we usually think about when we say “big” action sports companies.
 
The idea I want you to come away with is that many of the companies with the potential to be “stuck in the middle” are now much larger and the revenue range of such companies much wider. In this much larger market, you can be stuck in the middle at $25 million. Or at $400 million.
 
Remember action sports- especially in hard goods- is an industry where you have to do everything right just to be in the game. And, in contrast to how it use to be, doing everything right doesn’t give you a long term competitive advantage (I’m not sure there are any of those anymore unless they are related to brand)- it just gives you a chance to compete and make it to another season.
 
A further factor in catching companies in the middle is the squeeze on hard goods prices and margins that has resulted from wide distribution, lack of product differentiation, and the availability of cheaper, quality, manufacturing. Downward pressure on prices can mean less margin dollars even if the margin percentage remains the same. Nobody is immune to this.
 
So What?
 
Because of the encroachment on action sports of the lifestyle/fashion industry, and the fact that there seems to be more money to be made in soft rather than hard goods, companies in the middle face a tough competitive challenge. Much (most?) of their growth potential is in selling soft goods to the lifestyle market. But their competitors in that much larger market have resources and advantages that the pure action sports companies can’t even come close to matching. What can they do?
 
Well, they can sell. For many, that will be by far the best financial decision they can make. So we will see this continuing wave of consolidation. As usual, there will be those companies who will have been mismanaged and need to find a deal. But even solid companies, looking at their market position and circumstances, will rationally decide it’s time to sell.
 
They’ve grown steadily, are profitable, and respected in the core market. They are a trend leader with a serious cool factor. The next step in growth requires them to begin to expand their distribution into the broader market. Potentially, they may begin to erode their image. They will begin to run right into the much larger competitors who have them out resourced by ten to one. Even if they are successful, they may not have the working capital they need to follow through.
 
Typically it’s right at this point where the company’s value will never be higher. The Business Week article suggests that might be right now. It’s not easy to recognize, and there are damn few successful entrepreneurs who don’t think next year will be better than this year. But making a deal right then, with your market aura in tact and your financial statements pristine and before you start to run head long into the 500 pound gorillas who will be your competitors is where the deal needs to be made. And that’s why I think we’re going to see more deals.
 
But who to buy? If, as I’ve suggested, the core market of actual participants who define themselves and their lifestyle by their participation is shrinking then the niche brands, while they may be successful, don’t have the room to grow they use to. So why would they be attractive to a larger company if they can’t contribute substantially to growth and profitability? They probably aren’t. So the number of attractive acquisition candidates shrinks, and the price, as seen above, gets bid up.
 
And the Retailers?
 
Four things. First, we seem to have been through, and maybe we are still going through, the extermination phase with retailers. I have no numbers, but I think we all share the perception that a lot of individual retailers have gone away and comparatively few have opened.
 
Second, I expect the “stuck in the middle” analysis above for brands to apply to retailers as well. We’re already seeing some consolidation and I’d expect more. As I’ve written, the only financially attractive exit strategy for a core shop run by the founder/owner seems to be to open enough additional stores to create a size, management structure, and ”proof of concept” that makes the mini-chain attractive to buyers. This is consistent with the discussion above of why a brand would sell.
 
Third, I can imagine that purchasing inventory is going to get interesting for shops as the companies they buy from have more and more things to sell them. Remember that the days of the single sport/activity shop are long gone. I wonder if K2 will want you to buy both your snowboards and your football equipment from them. Okay, granted I don’t know of a snowboard shop that sells football equipment in the summer, (and I don’t know if K2 sells it) but there must be one. What kind of incentives might they offer you to consolidate your buying for various activities with them? Hmm. Maybe I should ask them.
 
Fourth, are you sure you’re still an action sports retailer? I mean, a lot of you are selling an awful lot of soft goods that aren’t really sports functional to people who don’t participate. Maybe, for some retailers at least, it’s time for you to reconsider how to redefine yourself to take better advantage of the whole lifestyle/fashion/nonparticipant thing. Could be there are some opportunities you’ve been scared to look at that make sense? 

 

 

New Stuff to Do More; New Strategies are Critical as the Snowboard Industry Evolution Continues

I remember when this was a simple business. Or at least I thought it was a simple business. You had a pro team, ran some ads, built relationships with core shops, sold C.O.D. or on 30-day terms, and were thrilled if you could get enough product to fill orders.

With supply shortages, the fact that quality wasn’t always very good was less crucial. Margins were better anyway.
 
Your team is still valuable, but successful team riders have to do more than rip up the hill. Apparently, they also have to look good in their underwear. Riders have agents now, for god’s sake.
 
Your choice of where to run ads has expanded dramatically. We used to laugh at people who ran an ad anywhere but the usual places. Now we wonder if we’re missing an opportunity.
 
Thirty-day terms are pleasant memories and selling some product at a decent margin is tougher than climbing out of a tree well after a ten-day dump. You can’t just focus on ‘core shops any more. Hell, it’s getting hard to even find one if you define it the way we used to.
 
Not only does a snowboard company have to do the same old things better, but my contention is that it has to do a whole bunch of new things as well.
 
Endless Product Lines
 
 SKUs are getting out of control. Product lines have gotten enormous- largely as a competitive response to what other companies are doing. I’m not against responding to your competition, but recognize that such a response is strictly defensive in nature. Rather than differentiating you, it makes you look like you’re simply copying your competitor. 
 
This is yet another example of our talking and listening to ourselves, rather than focusing on the customer. It also costs money. Making and managing more SKUs is expensive. In some cases, it may even drive up costs of other products by shortening production runs.
 
The situation requires a little zero-based product planning. Don’t start by looking at your competitor’s product lines. Begin by looking at what your customers are buying and what you think the market trends are. Design your product line in response. Figure out all the hard costs of an extra product- molds, samples, employee time, short production runs, etc.
 
Now, what are the specific benefits of another length of one style of board or an extra color in a jacket? Will you actually increase sales or will you just cannibalize another part of your line? Are you making it even more difficult for the store to carry and merchandise your products? Will your reps really understand the whole line and will they be able to make a cogent and complete presentation to the poor retailer before that retailer keels over in confusion and exhaustion?
 
The hard costs are real. The soft benefits are tougher to quantify.
 
Public Relations and Co-Branding In Advertising
 
Snowboarding has been turned into the poster child of the cool, young generation every advertiser wants to reach. Snowboards and snowboard products are turning up everywhere. Are any of them your products? If not, you’re missing an opportunity.
 
Does a particular board’s base graphic turn up on a resort’s promotional brochure by accident? Did K2 team members just happen to be standing around in their Jockey underwear, boards in hand, when a photographer happened by, took a picture, and sold it to Jockey?
 
Most of this exposure is not accidental: taking advantage of all these opportunities is a full-time job for somebody. And the work that’s done now probably won’t have an impact until next year due to the lead times involved. So get started sooner rather than later. Prepare and distribute a press kit. Include photos anyone can use. Make contacts with companies that are interested in your customers and make it easy for them to get the images or the product they need. 
 
One note of caution: it’s easy to believe that free or inexpensive exposure is good, no matter where it occurs or in what association. Not true. Make sure the opportunity is appropriate to your brand and its market position. To use an extreme example, how many snowboard brands rushed out to have snowboarding’s furry Olympic mascot Animal seen on their boards?
 
Resorts Are Our Friends
 
I think we’re to the point where the director of resort relations is probably a full-time position for a snowboard company.
 
Ignoring rental possibilities for a minute (because they’re a whole separate issue), there are an almost endless number of things you can do to help resorts focus on snowboarding and the kids they want to attract and retain.
 
Are you maintaining a database of key resort employees and contacting them from time to time? Do you have a program to flow a little product to the right people?
 
Are you having a couple of team members spend a day at the resort and then sending an unsolicited letter to the appropriate resort executive telling them what a good time they had and maybe suggesting a few things they could do to improve the snowboarding experience?
 
Have you sat down and thought specifically about how the needs of resort shops are different from city shows and, besides giving different terms, how you can meet them?
 
I don’t think I’m even scratching the surface here. I’ll bet your new director of resort relations, a snowboarder who’s spent some years in resort management, would have a whole lot of ideas.
 
Rentals
 
The trouble with rentals is we don’t know why we’re doing them. Are they a loss leader that gets people on our product and ultimately selecting our brand when they buy? That is, are they justifiably part of marketing and promotion budgets? Or are rentals supposed to be moneymakers?
 
As long as I’m restructuring the sales and marketing organizations of snowboard companies, may I suggest a sales manager of rentals?
 
I know rentals are growing dramatically. I suspect they’re no longer just for people trying snowboarding for the first time. They have become a convenience, like takeout food. Done well, as it increasingly is, the equipment is always new and tuned and the boots are dry. All you have to do is show up.
 
Why buy if you’re a typical participant who’s only on the slopes for a few days each year?
 
I think the rental trend is going to catch us by surprise, at least partly because we in the industry spend too much time talking to each other instead of to our customers. This is an interesting problem. We sell rentals cheap, or offer ridiculous terms, or agree to take the product back next year. We do it because we believe that ultimately it helps sales. But by providing cheap, new product each year to rental shops we make it increasingly easy and economical for participants to rent. Aren’t we helping the rental shops to build their businesses and killing ourselves? Yet another example of irrational competition in a maturing market.
 
I wonder if any snowboard company really makes money in rentals. By embracing snowboarding, the resorts have given themselves tremendous leverage over the industry. I suspect your new sales manager of rentals and director of resort relations will be working closely together.
 
Wherever You Go, There You’ll Be
 
In a maturing industry, you either find a defendable niche, or become a low-cost producer. Considering the trends discussed above, it’s obvious this is true for snowboarding.
 
Margins have declined, but the cost of doing business has increased. There are too many things you have to do to succeed. Which means your break-even point has gone through the stratosphere. And the working capital investment required in this highly seasonal business has grown even more.
 
My perception is the entire business model is changing. Snowboard companies have to do things they haven’t done before. There is a new group of stakeholders who aren’t just the people who snowboard. The snowboard industry has lost a lot of the control it had over snowboarding. Getting that control back, if it’s possible, requires new organization and a new way of thinking.

 

 

The Basis of Competition; How Do We Sell More Stuff?

It’s funny how the fundamentals of business never change. Three years ago at the Surf Industry Conference in Cabo, I facilitated a panel of people from the skateboard industry because skate was going off and the surf guys thought skate was going to have them for lunch or something. Then skate sales plummeted though, happily, they are recovering now.

Many of us were around when snowboarding was going to take over the world. It didn’t.  And last week at the first ever and hopefully annual Snowboard Industry Conference at Laax, there was a great gnashing of teeth and ringing of hands over the fact that snowboarding didn’t seem to be growing and might even be declining.
Business cycles are immutable and inevitable. That’s especially true because of the way companies in an industry choose to compete with each other. They bring those cycles on themselves. This article will look at how we bring this death spiral of competition on ourselves, how we compete, and finally suggest a general approach (there’s no room to outline it in detail) that describes how an individual company might change that and sell more stuff.
This article had its genesis on the last evening of the Snowboard conference, when Tim Petrick of K2 was kind enough to buy a couple of bottles of just excellent red wine.  We were talking about the snowboard market’s perceived stagnation. In a BGO (blinding glimpse of the obvious) I spewed out something like “We got to do some things differently!”
Well, everybody was kind enough not to say, “What the **** does that mean?” Still, it seemed they were waiting patiently (and reasonably) for me to explain what I meant and perhaps even to say something useful. I tried. I really did. But my thoughts were unformed. An attempt to expand on the idea just sort of died and the conversation moved on.
Still, the initial impulse was right. We do need to do some things differently so that our sales and margins can increase.
The Death Spiral of Competition
We’ve done it to ourselves you know. Declining prices, over distribution, some say stagnant participation, high marketing expenses, and the commoditization of the product. Inevitably there’s some search for blame. But at the end of the day we can all point the finger at each other and we’d be right. Every company does what it perceives to be in its own best interest. Of course. Me too.
 We all do things to try and grow the market, but at the end of the day we find ourselves battling each other for scraps from the other company’s table in a market that isn’t growing that much. And even if we succeed what have we accomplished? Probably just pushed prices down further or increased marketing expense. We’re left with the same circumstances and maybe we’ve made it even a little tougher to succeed. There’s no “sustainable competitive advantage” from anything we do. All we can think to do to grow is expand distribution, open retail stores, diversify or acquire somebody (often just a form of diversification).
It’s no wonder that maybe a little of the optimism has gone out of snowboarding. This is a hard business we keep making harder by our competitive actions.
How We Compete
Here are the things we all do to one extent or another: They aren’t listed in any particular order.
·         Sponsor contests and events
·         Teams
·         Advertising
·         Give away product
·         Prices, terms and conditions
·         Strategic alliances
·         Graphics
·         Product features
·         Distribution
·         Trade shows
·         Films
Are any of us really doing any of these things much, much better than our competitors? I’d say no, though some have the resources to do more, which doesn’t necessarily mean better.
And those larger companies seem to be applying more and more of those resources to diversifying or expanding into the larger fashion/lifestyle business.
Our competitive environment is largely a zero sum game. What one gets, the other loses.
When we’re not busy diversifying to reduce our dependence on this hard industry, we’re focused like a laser on what the other companies are doing. To some extent we go to trade shows because they go and make sure our displays are comparable. We price according to their pricing. We run similar ads in the same magazines. We benchmark our product lines against theirs.
We’ve expanded distribution so much that we’re putting the specialty shops, which we all seem to believe are a bedrock of snowboarding, at risk. We’re eating our young. Is this any way to run an industry? You bet it’s not.
 Has anybody noticed that my entire diatribe here hasn’t even mentioned the snowboarder? Kind of odd isn’t it?
The Consumer
You remember them. The person who actually buys the product and, hopefully slides down the mountain? The one without whom we would all have to get real jobs? How can I possibly have written two thirds of an article on how we compete and not have even mentioned them? Doesn’t that bother anybody? It sure bothers me.
The goal here, as I understand it in my simple way, is to create more snowboarders who snowboard more often so that we can sell more stuff (thanks Tim). Sorry to be quite so mercantilist about it, but that’s what we all want to do I think. Otherwise we’ll be working in industries that have their trade shows and conferences in Kansas City. I’m quite sure I like Laax better.
I’m not quite sure I think going to trade shows where we all talk to each other helps us sell more. I get concerned when companies say they only sell product their team riders approve, because I don’t think team riders, or riders of that caliber, make up a very large percentage of the customers to whom we want to sell more. I know that making stuff cheaper in China because everybody else is and so we have to do it (which is true) doesn’t help us sell more. I hate it when we make it cheap and convenient for people to rent equipment, make no money on it, and excuse that by calling it marketing. And end up selling less.
How Do We Sell More?
 
The first thing I’d ask you to do is stop focusing quite so much on your competitors. They aren’t the ones you need to impress. I know that sounds risky. But on the other hand, what’s more risky than trying to compete in an industry that, if you believe the people at the conference, is stagnant to declining and where the process of competing is apparently making things worse, if you think my analysis has any validity.
Second, I want you to figure out who your consumer is and why they buy your product. You already know that? Great. But if you were to explain it to me and it involved reps opinions, anecdotal evidence, and a discussion of the kinds of stores where your product is sold, I might think you didn’t really know, or at least that you weren’t really sure.
Third, look very, very closely at how you compete. Start by creating a list of the ways the industry competes. Include on the list things that you do that others don’t, if any. Which of these are more or less important? How does the way your company competes in these areas differ, if at all, from your competitors?
This is not quite so obvious at it seems.   You would put team riders on the list I’m sure. But sponsoring team riders is something you do- not how you use them to compete. “Why are they important?” I might ask. “They influence kids purchase decisions,” you declare. “Prove it,” I say. “How exactly do they do that?”
“Everybody knows” can not be part of an acceptable answer.
The slicing and dicing would continue. Do they just influence kids? What do you mean by “kid” anyway? What are the things they do that create this influence? What makes them successful at it? How do you measure that? How many riders do you need?
As you can see, the list of how you compete evolves pretty dramatically over the process and become more focused. Some things will come and some go. General competitive ideas will be broken down into a number of more specific ones.
And so would your sense of what was actually important. And what was not. When you were finished, and if you did it right, your spending would have become much more efficient.
That is a good thing, and it might even help you sell more stuff, but it doesn’t get your out of your competitive space and mindset.
The process of evaluating your competitive strategy in detail and of being forced to question sacred assumptions generally leads to new ways to compete. It also tends to eliminate unproductive ones and put more focus on those that really work. It changes your company’s strategic profile.
There was package delivery before Fed Ex. There was ocean shipping before somebody thought of containers. There were winter sports before somebody decided one plank might be more fun than two.
Overnight package delivery, containers, and snowboarding kind of seem like common sense now, don’t they? But they didn’t to industries that were focused more on their competitors than their customers and potential customers.
Want to sell more? Take a hard look at your customers, what they want, and why they buy from you. Just for the moment, forget your competitors. If the process leads to a new market space your issues with competitors will take care of itself.

 

 

Small Brands Are Cool! How Can They Stay That Way?

Actually, the question is not how small brands can stay cool. It’s how they can stay at all. As in stay here- alive, in existence, solvent. Not toast.

I have been so encouraged by the number of small brands I’ve seen in snowboarding recently. I love them. There was a bunch at the SIA show in Vegas. There were some of the same ones at ISPO and some different ones that I’d never heard of. At ISPO there were some small brands with skis and snowboards with the same branding and graphics.
 
There were even a couple of new kinds of snowboards. I have to admit that I don’t think they have a chance in hell, but it was great to see somebody trying and may they prove me wrong.
 
If snowboarding is going to be something besides a sport, which is good for business, then we need the enthusiasm and excitement that these small brands represent. But, I wouldn’t want all this enthusiasm and excitement to overwhelm good business practice.
 
That’s the other thing I’m seeing that I like. When you talk to the people running these brands, they refer to balance sheets and cash flow without being prompted and without their eyes turning brown from trying to bullshit you into thinking they know why that’s important.
 
Josh Reid, one of the founders of Rome Snowboards, demonstrated the benefit of a solid financial approach when he told me, ” Our close attention to our budget and balance sheet allowed us to come out with our binding a year early than we expected to.” 
 
So some of these smaller brands, partly because of a businesslike approach to financing, have a real chance to succeed. Here are some things they might want to consider doing to improve their chances and a few ideas about why that’s important to us. I can’t believe I missed the strippers in the Atomic Booth.
 
Normal Business Stuff
 
Just a reminder- building a quality product with great detail and finish, pricing it right, delivery it right, servicing accounts right, and supporting it with appropriate advertising and promotional programs gets you nothing more than the right to try. Market positioning and branding is what will make you successful. Along with having enough working capital to get through the year.
 
Adopt a Shop
 
If I were a small brand, I’d identify one, or maybe a handful, of really successful retail shops and I’d adopt them. By which I mean it would be just my first goal to have my product in those shops. Then I’d be all over them weekly or daily to figure out how my product was doing and why. I’d work like hell to learn from that shop or few shops. I’d watch their sales people sell my product. I’d try to talk to the customers who bought my stuff. I’d talk to the retailers about what they bought and why. I wouldn’t leave it only to my rep- I’d do it as the owner of the brand. I’d take these bits of information and develop a short manual about why the brand was successful in the shop, identifying anything that was unique about that shop’s situation. 
 
Then I’d take whatever I learned and develop it as training and selling tool for my sales force, doing my best to create a shop development approach that in some ways was the “signature” of the brand’s approach to working with shops. In the meantime, I’d probably try to convince the shop owner that he should be an investor in my brand.
 
I’ve heard too many retailers complain about this brand or that brand, their reps, and a general lack of attention once the products in the door. Here’s a chance to distinguish yourself in a way that maybe larger brands can’t and to learn a few things in the process.
 
The Buying Cycle
 
 Not the trade show buying cycle we all agonized about some years ago. The consumer buying cycle for snowboard goods. I’ve heard that skiers buy equipment something like every six years. Maybe it’s less or more. But whatever it is, I think (or maybe I hope) that snowboarders buy stuff more often. Or at least they use to. My guess is that they are moving towards the ski model. Products are all of solid quality right now. They just don’t wear out as quickly. Expansion of distribution, price declines and general product availability means there’s not quite the same urge or need among many snowboarders to get the newest thing.
 
If the number of snowboarders doubles, but they only buy half as often where are we as an industry? Do the math.
 
I see this as a big problem that nobody is really talking about. From a strict financial point of view the skateboard guys have it right. Make sure the product wears out pretty quickly and that it’s cool to break it. Of course, it’s also a lot cheaper to replace, so we can’t quite follow that model.
 
Small brands obviously can’t change this trend, but they have a role to play in resisting it by being cool and not quite so easy to get. It is, obviously, also a way in which they can differentiate themselves- at least for a while. So, small brands help themselves and the industry by restricting their distribution. It needs to be the big brands- who have encouraged retailers to buy with pricing and volume discounts and terms- whose product is left to be discounted after the holiday season. The small brands’ retailers need to more or less sell through at full margin if the small brand is going to differentiate itself and succeed. Further, the shops that carry the small brands need to be a destination for customers who want to buy that brand. What’s the value of the brand to the shop if the customer has to come to their shop to get the brand because it’s the only place in town that carries it and the shop has the chance to sell them some other stuff as well?
 
Obviously, the small brand and the shop have common cause here and it is a source of advantage for small brands. At least for a while.
 
Expectation Management
 
There’s never enough marketing dollars and there are always too many ways to spend what you have. If a new brand does everything right, and it grows in the correct way, it will create expectations on the parts of its customers, its retailers, its employees, its investors. But do too little, and you disappoint. Do too much, and you go broke. How to manage that? Well, my experience is it’s more an art than a science. But you can start by spending some time- actually a lot of time if you do it right- on developing a quality brand positioning statement for your brand. If you do it right, it will be a filter through which all your opportunities are passed, and you won’t waste time trying to figure out which one is right or money on the wrong ones.
 
Like Nikita’s “For Girls Who Ride.” Best one I’ve ever heard. I wish somebody would send me their brand positioning statements so I could plug them. I keep using the Nikita example and I’m giving them entirely too much free publicity.
 
Growth Problems
 
Someday, if you succeed, you won’t be a little brand any more. You will lose some of the possible competitive advantages I’ve described above. As every company wants to grow, those of you who prosper are likely to face this to some extent. So there you are- too big to be small and too small to be big. What are you going to do?
 
Interestingly enough, the answer is almost completely financially driven. I don’t care about marketing, I don’t care about distribution and pricing, I don’t care how cool you are. None of that will drive your strategic business decisions when you get to that point of being somewhere between big and small.
 
What you’re going to find is the extreme seasonality of the snowboarding business means that the risk return ratio is out of line if you are just in snowboarding. Most of you already know that because while you probably love snowboarding, you aren’t naïve kids who only want to be in the business because it is cool.
 
Working capital comes from either debt or equity. Okay, from retained earnings too, but that’s just another form of equity. In snowboarding it doesn’t make financial sense to finance with equity, because you don’t need it year around. But lacking all that equity and the strong balance it give you, debt that isn’t prohibitively costly can be damn difficult to find.
 
So you’re going to try and find a way to become, or become part of, a company with year around cash flow. Because for most companies, it’s the only solution that effectively balanced risk with return and makes working capital requirements manageable.
 
I would dearly love to get an email from some new small brand telling me I’m crazy and explaining what their financial plan is and how it will work differently. Because it would be great if that plan were out there. In the meantime, all you small brands keep up the good work but remember the wonderful problem of too much growth that you’re going to have when you succeed.

 

 

Company Stores and Retail Consolidation; What’s a Core Store to Do?

At the Surf Industry Conference last May, I was the last one to ask a question of a panel of very successful specialty retailers. I acknowledged that I was sure they would all continue to be successful, though I doubted they were representative of most retailers out there. And then I asked them, “So what happens in let’s say five years when there are, just to pick a number, 5,000 company owned specialty stores in the United States?”

The panel grew quiet. The microphone was removed from my hand. One panel member finally volunteered the idea that in the normal course of business, some retailers come and some go. The meeting was adjourned.
You know, I have got to stop doing that. Asking people tough questions about real business issues with political overtones in a public forum is simply no way to build a consulting practice. Still, even if I have to say so myself, it’s a hell of a good question and worth exploring further.
Lest anybody be unclear, the question is not if there are going to be more company owned stores or if chains that target the same customers as the core stores will open more stores. There will be and they will. The question is how the role of core stores changes, if it does, and how they respond.
Why is This Happening?
Oh, the usual reason. To grow and make more money. Ho hum. For some reason (and this is worth another article), companies that don’t grow seem to have a hard time surviving in the action sports business. And, come to think of it, that’s true in any business. To grow, you can grow the market, take share from competitors, buy companies, start new brands, or go into new (but usually related) businesses like retail. Those are the only choices I know of.
Leading companies in snow and surf have learned that it’s hard to increase your market share past a certain point. You can get your share of any market growth, but not increase your share. Once you get to a certain point, there seems to be a backlash from your competitors, the retailers and, most importantly, the consumers, that keeps your market share from increasing.
Markets don’t keep growing fast enough to satisfy growth requirements. Acquisitions that make sense, especially if you aren’t a publicly traded company with well valued stock to buy them with, aren’t always easy to come by. New brands take investment, some time to succeed and, at the end of day, are often just another form of trying to take share from competitors- unless you’ve spotted a new market. But meaningful new markets don’t come along every day.
So if you’re a brand, you think about opening retail stores as a new, but related, business which you can maybe grow faster than your existing business. And you notice that while your cost structure is neither better nor worse than any other retailer, your profit structure is a hell of a lot better than core retailers selling your brand. This is simply because you are selling, to a greater or lesser extent, product you, as the brand owner, were already having made.  And you are selling it to your retail outlet at your cost. It’s for this reason that retail chains not owned by brands push their own brands- the gross margin is a lot higher.
It’s also why I expect to see more consolidation of retail stores. Higher margins through private label require a certain volume of business, and unit costs do come down with size as your ability to negotiate with brands increases.
Industry Dynamics
It’s funny, because no matter whom you ask in this business, distribution is an acknowledged issue. At some point, distribution becomes too broad. “It’s not good for the industry,” most will admit, “If you can find everything everywhere.” And margins- look, for sure margins have been under pressure and they need to be higher. Just ask, oh, anybody. Core retailers are for sure important to the industry, and we obviously need new brands to lead the way. “Everybody” thinks so.
But at the end of the day, every manager of every business is going to do what they perceive to be in the best interest of their company. You will. So will I. Every damn day.
We’re going to look for ways to grow and to increase our margins.   We’ll expand our distribution because there just isn’t enough growth in core shops for larger brands. We’ll get stuff made wherever it’s cheaper because all this “me too” product means that differentiation is tough and price is an important way of competing. We’ll open more stores. And as we do this stuff, we are legitimately and seriously and really going to be   worried about the core retailers.  Brands will do some things to help them. But we’re still going to do what we perceive we have to do given a tough, competitive environment.
I’m not saying this is a good thing, though maybe it has benefits for the consumer. I’m not saying I want it to happen. I’m just saying I’ve watched enough business cycles (in action sports and other industries) to be pretty certain this one won’t be any different. Don’t just shoot the messenger- think about the issues and how your business can benefit.
Position of Core Retailers
 
In its fiscal year ended January 31, 2004, Pacific Sunwear reported a gross margin of 35%. It stated that 32% of its business in the same year was private label. I couldn’t find anywhere what the gross margin on its private label business was. But even with 32% of its business being higher margin private label, its overall gross margin was only 35%.
Quiksilver, obviously a supplier to lots of retailers, in its year ended October 31, 2003, reported a gross margin of 44.4%. Now, there are some retail sales from some of its own stores in there, and probably some other sources of revenues from things besides its core business of making stuff and selling it to other retailers. But let’s just focus on that 44% number and recognize that most of it comes from Quik’s core business.
Retailers look at Quik’s 44% margin and ask themselves, “How can I get some of that?” The answer is private label.   Private label really is not a viable idea to a small, single store, retailer. Okay, you can do some t-shirts, stickers, and decks. But the bigger you are, and the more stores you have, the more valuable it can be to you- not just in terms of the additional gross margin, but in terms of brand recognition.
But remember that we’ve got an awful lot of companies selling an awful lot of product, through an awful lot of retail outlets that’s awfully similar to everybody else’s product. So price matters. And a retail chain (I’m not going to pick on Pac Sun anymore. I admire the hell out of what they’ve accomplished) is probably going to pass some of that extra gross margin they get from being larger and having private label to their customers for competitive and growth reasons.
If you’re a core retailer, and your competition is a big chain, you have a problem. You can not sell the same brands they sell, at the prices they sell, with your comparatively tiny annual turnover and have a financial model that makes sense.  We all know that’s accurate because we’ve seen so many small stores go out of business and so few open.
So if you are a core store, you better make sure you’re positioned so that you’re not competing directly with the chains. Because you can’t.
Well right, Jeff thanks a lot for that useless bolt of wisdom. How do we do that?
First, the days of just opening the store with a few bucks in the bank and your credit card are gone. If you really have a need to get rid of your money, have a big party and please invite me. Invite me? Screw that, just send me the money. You’ll save yourself a whole lot of effort and anxiety.
Second, you need a plan that gets you to a larger turnover quickly. You need the capital to fund that. You’ll need that plan and the capital just to convince the brands you want to carry to sell to you.
Third, from the day you open, you need a quality information system and the ability to use it. There’s not the room for mistakes like there use to be. Focus not just on gross margin, but on total margin dollars. If you don’t know why that is, don’t even think about getting into this business.
Fourth, you need at least a couple of committed and experience management people who can do this right. No learning as you go like you use to be able to do. And they need to like sleeping in the shop.
Fifth, however much capital your plan shows you need, you need more. The only thing we know about your plan is that it’s wrong. Either you will grow faster than projected, or slower. In either case, you’ll need more money. If you don’t understand that, don’t open a shop.
Sixth, you need the right location and strengthening community involvement from day one. If you come from the community and already have recognition in it, so much the better.
All the successful core shops I’ve ever seen that have been around a while have all these things, but they got started when it was easier by orders of magnitude.
So having said all these discouraging things, I’m urging with you to go out and open shops. But I’m urging you to do it right to maximize your chances of success. Shops have an important role to play in identifying trends, making it about the lifestyle and not just the sport, and taking a chance on new brands. They keep the industry from just becoming part of “sporting goods.”
My concern is that chains of smaller stores that look and act somewhat like core shops are going to replace the real thing.   And as a business guy, I’ll congratulate those chains on their success even as I recognize that their actions and motivations aren’t exactly what the industry needs to stay fresh.

 

 

One Possible Future; An Industry Model for Skateboarding

Last month, I wrote about surviving a downturn, suggesting that this wasn’t just a downturn but a fundamental change in industry structure, requiring a change in the way successful companies competed. This month, I’d like to be more specific about how I see the industry evolving.

It’s perhaps a bit pompous to do this, because my crystal ball is no better than yours. But my recent study of China’s fixed exchange rate and the September 21 cover of the New York Times Magazine made me decide to give it a shot.
 
Perhaps that needs some explaining.
 
Chinese Exchange Rates
 
I took a whole column in SnowBiz to write what I’m summarizing here. It should be out by the time you see this, so for more detail refer there. Basically, China keeps its exchange rate fixed at 8.3 Yuan to the US dollar. Most currencies are managed from time to time and to some extent, but the major ones change against each other daily based on interest rates, trade, general economic conditions and other factors. The Chinese government makes sure its exchange rate doesn’t change.
 
The result is that the Yuan is between 10 and 40 percent undervalued against the dollar. That is, stuff we buy from China is between 10 and 40 percent cheaper than it should be. Great for consumers and companies that import from China. Not so good for U.S. manufacturers and people who want to sell to China.
 
And there’s not much you, as a US manufacturer can do, given the artificial undervaluation of the currency. It may be, as some have claimed, that you can beat low labor costs with technology. But add the artificial exchange rate advantage and you’re screwed.
 
It’s unlikely that the undervaluation of the Chinese currency will go away in the short term. Among other reasons, we need them to invest a chunk of their trade surplus with us in U. S. Treasury securities so we can finance our budget deficit.
 
We all know that more and more skate hard goods (not to mention soft goods) are being made in China. Lacking some kind of meaningful technological change in skateboards, expect that to continue and grow. If the quality of Chinese made skate hard goods is still an issue, and I’m not sure it is, it won’t be for long.
 
So the stuff gets made a lot cheaper, and the quality is fine. Lacking product differentiation, those lower prices eventually, through normal competitive dynamics, get passed along to consumers. Good for the consumers, and perhaps for the general growth of skate. Bad for manufacturers and retailers.
 
Because even if sales of hard goods grow (unless they grow an awful lot) and even if percentage margins remain the same, the total number of margin dollars realized from hard goods sales declines.
 
Margins dollars are the dollars available to pay for team, marketing, rent and telephone, salaries and bunches of other stuff excluding product. Whatever left is profit, more or less.
 
I am not suggesting that there will be no skaters left willing to pay higher prices for branded decks, but I expect the number of such skaters to decline as percentage of the total. And, at the end of the day, there’s no reason higher end branded decks can’t and won’t succumb to the same competitive pressures as any other deck.
 
So if you’re a seller of skate hard goods, manufacturer or retailer, your financial model may change. In hard goods, you’ll have to sell more to make the same money.
 
Boy, I’m just full of good news today, aren’t I?
 
The Kid on the Cover
 
I think he was four. He was a skateboarder and he was on the cover of last Sunday’s New York Times Magazine. The story was about how really young kids are becoming sponsored and managed.
 
Seeing him there didn’t tell us anything we didn’t already know about the mainstreaming of skateboarding, but it sort of galvanized me into saying the following:
 
The skate market will increasingly be driven by the apparel (including footwear) brands. They can sell product to anybody who thinks that skateboarding is cool. Hard goods brands can only sell to people who skate. The apparel market, which I suppose includes everybody who needs shirts, pants, and shoes and is over four and under 50, is simply a couple of orders of magnitude bigger than the hard goods market. And, for successful companies, margins are and will be better in apparel than in hard goods.
 
They will influence skateboarding, to put it bluntly, because they will be bigger and have a lot more money than most hard goods companies. Hard goods skate companies already know everything I’ve said here. They have the following choices:
 
1)            They can try and use the strength and remaining cash flow of their established brands to transition into soft goods and, ultimately, make those soft goods the bigger part of their business. You saw that process already going on with some brands at ASR. Soft goods are tougher to do well than hard goods, and skate brands that take this approach will (for the most part) be competing with companies that are larger and better financed than they are. They will also have to decide whom they are trying to sell to- the core skaters who buy their branded product, or the larger mainstream market. Obviously, it starts with the core and has the possibility of being extended from there. The art is in figuring out how to expand distribution without damaging the brand’s credibility.
 
2)            They can sell their companies. But if they wanted to do that, they should have done it two years ago at the peak of the frenzy. Element is the only brand I recall that really did that. Companies selling now won’t get near the prices they would have gotten. Still, it may turn out to be the only financial choice for some and certain brands may have more value as part of a larger organization than as stand alone companies.
 
3)            They can remain as independent “core” skate companies. Whether there is a financial model that can support that strategy is unclear to me.
 
If you want some confirmation that this kind of industry evolution is a reasonable possibility, look no further than the surf industry. It’s dominated by a handful of soft goods companies. Mainstream sales, for both brands and retailers, are where the sales volume and profit is. Many to most industry customers don’t surf. Hard goods are having problems with cheap product from China, and nobody seems to make any money on them. Hard goods have hardly been discussed at the last two surf industry conferences.
 
Under the scenario I’ve suggested here what, exactly, is skateboarding? Fairly clearly, it’s not the kind of urban, underground, at the fringe activity it use to be. Time was when it was in the interest of the major hard goods brands to position it like that and hell, that’s how it was anyway. But if the picture of industry evolution I’ve painted here is valid, that no longer makes sense at least in terms of the business strategy. Because, as I’ve tried to explain above, the sales, growth and margins are in the other, much, much larger part of the market- the mainstream, if you will.
 
You can be a successful, profitable $20 million company with a significant marketing and advertising program if your margins are 45%. If those margins fall to 25%, I’m not so sure that works. Okay, I’m pretty sure it doesn’t actually.
 
More and more of my articles could be written for any of Skate, Snow or Surf Biz. There’s a lesson there somewhere about how the industry is evolving. In line with that, I want to suggest that skate retailers who haven’t seen it get hold of the September 2003 issue of TransWorld Surf Business and read the “When It’s Time to Change” article on the cover. It’s an interview with K-Five Boarding House owner Jurgen Schultz. He’s much smarter than I am because he started reacting, as a retailer, to the changes I’ve described here a couple of years ago. He took some risks to do it, but he saw doing nothing as a worse risk.
 
That’s a good way to think in this market.