Strategic Planning; Questioning Our Most Cherished Assumptions

This article sort of popped full formed into my brain at the TransWorld Snowboard Industry Conference at Whistler in April. It happened in an elevator. A kid carrying a skateboard got in (Shows you what kind of lousy winter it was in Whistler). As the door closed, I asked him how often he replaced his deck. He said, “I’ve been skateboarding eight years and this is my fourth deck.”

 Let’s hope he’s not our average customer.  I don’t believe he is. Still, how do we really, really, know and prove, for sure, that he isn’t? What percentage of our market does he represent? Hopefully, he replaces his shoes and clothing more often than his deck. Should we be marketing to him differently? Is he really what we mean by a “skateboarder?” Does he care about all the marketing we do?
 
No doubt somebody is reading this and saying, “Well, the answers to those questions are obvious!” Maybe. But I’m reminded of H. M. Warner at Warner Brothers in 1927 saying, “Who the hell wants to hear actors talk?” Or Digital Equipment President Ken Olson, in 1977, saying, “There is no reason anyone would want a computer in their home.” Or the Yale professor who wrote, “The concept is interesting and well-formed, but in order to earn better than a ‘C,’ the idea must be feasible” while critiquing Fred Smith’s plan for an overnight delivery service (Fred went on to found Federal Express, which is showing signs of being feasible).
 
I’m sure all these guys thought what they were saying was “obvious.” 
 
Strategic planning, I’ve learned, is the process of using the same information your competitors have to make better decisions than they make. You do it, in my experience, by questioning cherished assumptions, rigorously collecting good information, and looking at that information from a different perspective. 
 
In a difficult market, the industry’s general response seems to have been to cut expenses, including marketing, and discount to get orders and keep volume up to the extent possible. I’m all for good expense management- in any market conditions- and wrote about it here some issues ago. Still, we’ve lived by marketing, and I wonder if we can’t hurt ourselves by not marketing lacking any real product differentiation among brands.
 
But marketing what to which customers? When everybody was fat and happy and selling everything they could make, we had the luxury of not worrying about that. Now, companies who prosper are going to take some risks and do some things differently. What things? Depends on the company, but let’s look at some “Cherished Assumptions” and see if we can get a glimmer. 
 
“Core Shops Are the Foundation of the Industry!”
 
 Hold the hate email please. I recognize the importance of shops and I’m not saying that statement is inaccurate, but I’ve got a couple of questions.
 
What, exactly and specifically, is a core shop? What are its attributes? It probably doesn’t sell skateboarding only, so can it be both a core skate and, say a surf or snow shop at the same time and still be “core?” Is core then not a function of what a shop sells? As the industry has involved, have others “foundations” emerged? Like televised skateboarding, the skatepark movement, the contest circuit? What’s their relative importance to individual companies? How has it changed? How is this different for apparel and shoe companies compared to hard goods companies?
 
“Riders Are the Key Influencers of Skaters.”
 
If so, why are there so many blanks and shop decks sold? It appears that price is also a key influencer. Obviously, riders don’t influence all, or even most, skaters to buy a certain brand of deck, though hopefully their prominence promotes skating in a general sense. From a company’s perspective, then, how has the relative influence of pro riders changed? How strong is the association between the brand and the rider? How strong is the tendency of kids who like a rider to buy his pro deck and how has it evolved? Or do they just buy a blank and slap a sticker on it? Interesting questions to ponder when considering issues of budget and marketing.
 
"Chain Stores Suck"
 
Well, I doubt the shoe and apparel companies would put it quite that distinctly. Chains- not all chains, but chains- move a lot of product for them and make them a lot of money. There also seems to be a certain level of conventional wisdom that says chains, by selling cheap completes, are important in getting new skaters involved in the sport. That would be interesting to research.
 
At the end of the day, though, chains are neither good nor bad- they just are. And they are more all the time. My opinion is that the Zumiez and Pac Suns of the world are going to make it increasingly tough on core shops. I hope to be wrong. No company can grow very big without an increasing percentage of its sales being to chains. That’s not an opinion, and it shouldn’t be controversial. It’s just mathematics. In a market with little or no product differentiation, where price matters, volume becomes an important survival strategy. So companies- including hard goods- need strategies for working with certain chains if they want to prosper and maybe just if they want to be around given the evolving financial equation.
 
Of course, it may be a viable strategy for some companies to not work with big chains, and to constrain their growth. But the companies that do that won’t ever be big. By way of definition, I don’t believe there are any “big” companies in skating. My information is that the shoe companies are the largest, but I still see them as pretty small. And note that getting to even that size required sales to chains. 
 
“A Skateboard is 7 or 9 Ply Laminated Canadian Maple- Period.”
 
What a remarkably conservative industry we are, and isn’t it funny to hear that? Granted, laminated hard rock maple has worked great. But it’s also true that the industry has encouraged the idea that anything not made of Canadian maple couldn’t be a skateboard, wouldn’t function right and, worst of all, might get you laughed at. For a long time, all that was true. But industry growth and visibility, coupled with advances in composite materials, engineered resins and manufacturing techniques, along with the acceptability of blanks, suggest that this may change. If it does, I hope the charge to adopt new technology is lead by the current industry leaders.
 
Lots of questions. No solid answers, though we’ve all got lots and lots of opinions. But opinions, even tried and true and generally accepted opinions, can’t be the basis for a business plan when the industry is changing. And I’m pretty certain that doing “more of the same” isn’t going to work for at least some companies. I’ve always thought that doing the same old things when the market was changing was riskier than trying something new that might not work out. The companies that feel that way, and that go through the process of questioning their assumptions, will most likely emerge as the leaders.

Tackling The Snowboard Industry Buy/Sell Cycle Are We Trying to Fix the Wrong Problem?

The buy/sell cycle seems to be on everybody’s mind these days. The brands are concerned because the decline of in season orders means they have to take more inventory risk. Retailers, on the other hand, are thrilled to be able to get quality product in season at discounts, though are perhaps concerned that it’s tougher to hold their margins due to oversupply.

Everyone should be concerned; because if we follow this pattern we’ll turn into our old friend the ski industry with everybody struggling to differentiate their commodity products and nobody making much money. You should know at the outset that I’m not optimistic we can avoid falling into that same trap. There’s no reason snowboarding should be different from any other industry as it works its way through its business cycle. If we can it will be because we’re growing as an industry, are willing to ask tough, specific questions and can find some common ground between our individual competitive positions and the good of the industry.
 
The first thing we might do is to define what we mean by the buy/sell cycle. The term is thrown around pretty loosely. I’ve defined it as the process and timing of product purchases by retailers as it relates to the brands’ order and manufacturing schedule. If you don’t like my definition, please come up with one of your own. The point is that we should agree on what we’re trying to discuss and so far I don’t think we have.
 
Next, we have to make sure we’re attacking the right problem. As I’ll explain below, I believe the “problem” we have with the buy/sell cycle is really just a symptom of existing industry conditions and until those conditions change, the symptoms we call the buy/sell cycle won’t change dramatically.
 
I’ve talked about those industry conditions before and have said they are typical of any maturing industry. They include:
 
·         Overcapacity
·         Slower growth
·         Dealer margins fall, but their power increases
·         Product is viewed as a commodity
·         Competition emphasizes cost and service
·         Industry profits fall. Cash flow declines when it is needed most and capital becomes difficult to raise.
 
My guesstimate of industry board manufacturing capacity this year is three million boards. That’s not a theoretical, seven days a week, three shifts a day capacity. That’s two shifts a day, maybe five days a week. I’m not saying three million boards will be made, but that they could be. The fact that this capacity has been invested in creates a lot of pressure to put it to use. And to sell those boards to somebody. Cheap.
 
What’s being sold to retailers in the 1996-97 season? I don’t know, but I’ll put the number 1.2 million on the table. Could be higher, could be lower but whatever the number is, it’s a lot less than three million.
 
I remember waking up from my nap in an economics class when the professor said “Production increases and prices fall until marginal revenue equals marginal cost.” At the time I was pissed at him for waking me, but it seems he had a point. Each manufacturer is trying to beat out the others for market share and of course each is convinced that they are the one who will be successful. The more they invest to bring their costs down, the better price they can offer. But so can the other factory who is doing the same thing with equally blind faith that they will be the successful one.
 
Pretty soon there’s all this production capacity.   As they brought their manufacturing cost down, the price at which they could sell the board comes right down with it. Pretty soon they’ve competed their way to the point where they have to sell a lot more boards to make the same profit. And they keep cutting prices until, theoretically at least, they can sell a board for just one dollar more than it costs them to make it; just above the point where marginal revenue (what they earn from selling one more board) equals marginal cost (what it cost to make it).       
 
Each competitor has done what they perceive to be in their own best interest, and look at the fine mess they’ve gotten themselves into.
 
Basically, Pogo was right.
 
We Have Met the Enemy, and He Is Us.
 
So before we spend too much time and energy trying to fix the buy/sell cycle, let’s realize that we’re seeing in that cycle the symptoms of some more fundamental industry conditions. The buy/sell cycle problem will exist as long as over capacity exists.
 
I’ve heard basically four proposed solution to the buy/sell cycle problem. Some have been put forward seriously, and some tongue in cheek. Reviewing them offers us good perspective on how futile it can be to attack symptoms instead of the problem.
 
·         Establish a fund to purchase and close bankrupt plants.
 
The scary thing is that this may be the best solution of the four. Unfortunately, bankruptcy laws all over the world seem to start with the premise that jobs have to be saved. So factories have been like nerf balls. You can squeeze them down to nothing, but when you let them go they spring right back up.
 
·         Cooperation among brands to improve the order flow and restrict supply after the preseason.
 
Aside from being blatantly illegal, at least in this country, what I call the “You First” principal of business, where no company will do something first unless its competitor is willing to do it, makes it unlikely this can be done.
 
·         Convince the retailers to cooperate in the long term interest of the industry.
 
These get more and more unlikely as you go down the list.
 
·         Tell SIA to fix the problem.
 
They are trying with the on snow show in Salt Lake. If, as I believe, they are focusing on symptoms and not the fundamental problem, it’s not enough.
 
So far, most of this article has explained how we’re attacking the wrong problem. It has ridiculed the proposed solutions and expressed pessimism that we can do anything but suffer the fate of the ski industry. If, as a result, you’ve been persuaded to see the problem a little differently, maybe you are ready to consider a different approach.
 
First, I want to suggest that you support the show in Salt Lake. It’s not “the solution,” but it’s a start and right now it’s all we’ve got.
 
Second, nobody can measure in any meaningful way how big the problem is and how it has changed over the years. I asked maybe half a dozen snowboard companies “What percentage of your projected annual sales are booked in the preseason and how does that compare to three years ago?” Most didn’t have a specific answer or wouldn’t tell me. Some think it’s less, some more. At a middle of October in Washington State, Dave Ingemie, President of SIA, gave a presentation on sales for this season. He presented clearly the preseason bookings for skiing. When he got to snowboarding, he basically said “Sorry, we don’t have the data yet.”
 
Lacking good information and the ability to quantify the extent of the problem, it’s hard to see how we can try to manage it, or even say what it is. We’ve got to trust the company that collects data for SIA, or we’ve got to trust somebody else. It’s somewhere between sad and funny that some people are looking to SIA to take the lead but won’t help them collect the industry information they need to develop plausible options.
 
Third, companies have to look more formally at their volume versus margin assumptions. It may not be in their interest as brands to grab ever last unit of sales they can get in an endless battle for market share. If they can take that approach, then their interests and those of the industry can begin to approach each other a little.
 
It’s an up hill battle. I’m suggesting we try and do what no industry I know of has succeeded in doing. I don’t know the solution, but I am convinced that without good information we can’t hope to find one.
 
For example, saying “Let’s fix the buy/cycle” doesn’t lead us anywhere useful. But if knew what the average gross profit margins was by product for each of the last three years, at the wholesale and retail levels, and we knew what total sales by units were, then perhaps we’d begin to be able to have an intelligent conversation about how volume impacts profitability, again motivating a convergence of industry and company interests.  
 
Making broad generalizations about solutions to the wrong problem won’t get us anywhere. Carefully analysis of higher quality data may lead us to manageable opportunities to make incremental improvements that won’t seem quite so overwhelming.
 
There’s a lot at stake. I think it’s worth the effort.

 

 

Three Business Models That Might Work; Ideas From Vegas

You might have thought I could have gotten around to this before now, but there were no more SnowBiz issues after Vegas, and I kind of forgot about this for a while. Sorry.

As we’ve watched snowboarding evolve, we’ve noticed how closely products of different brands resemble each other. Differentiation is based largely on marketing and making a buck requires a strong brand, adequate financing, and solid operations.
 
Well okay, that’s basically what happens in any industry as it matures and no, I’m not going to make that speech again. Seems a waste of time at this point.
 
But, the bottom line is that companies that make money tend to have what’s called a “sustainable competitive advantage.” Sustaining it is typically a lot of work. Just because you have it doesn’t mean you keep it. At Vegas, I saw three brands (I’m not suggesting there aren’t others) that I thought had a potential competitive advantage. Whether it’s sustainable or not isn’t clear. That depends not only on what they do, but also on what their competition does.
 
I thought we might learn something by looking at them.
 
Head Snowboards
 
Two years ago, Head had the beginnings of a snowboard program. This year at Vegas, they had a complete snowboard program with a product line that looked as good and as complete as some better-known brands.
 
My more recent information is that their bookings have increased substantially for the coming season, but at the time I asked them, in my usual subtle way, “So are you telling me that the best you can do is to be as good as everybody else? Doesn’t sound like the basis for a competitive advantage.”
 
They smiled and showed me their rental product with a setup time of 59 seconds. Boot sizes are color coordinated with board widths. There’s an embedded microchip for inventory control and to get people in and out fast. The boards are delivered with premounted rental discs. The step-in bindings can be adjusted in two steps for stance and angle without any tools, as can the straps for boot size.
 
Okay, I liked that. Seemed like it would make life easier for everybody. Renters move through lines quicker and get a better setup. Instructors can change things for students on the fly. The resorts save a few bucks by improved efficiency and hopefully lose fewer newbies as they go through the hazing that has too often been lessons.
 
So where should Head allocate their resources? To selling a snowboard line that, at best, will be perceived as being as good as everybody else’s to specialty retailers or pushing their rental system, with some clearly identifiable advantages, to the rental shops at the resorts? Who knows, maybe they’ll both depending on the resources available. Well, you know what I told them.
 
It isn’t of course that easy. Company size, terms, price, relationships and momentum all make a difference. The best technology doesn’t always win. Ask Apple Computers.
 
Nikita
 
“Street clothing for girls who ride.”
 
Let’s just wallow in that tag line of theirs for a minute. Six words don’t create a competitive advantage, but my guess is that some thought went into creating it. When you read it, don’t you know exactly whom their customers are? Certainly the people at Nikita know.
 
At the same time, their potential customers know if Nikita is a brand they should be interested in. Are you a girl and do you ride? If so, how can you not check out Nikita?
 
They also have what’s called “first mover” advantage. That is, Nikita is the first company that I know of that has moved exclusively into this space. First movers often have lower cost of establishing and maintaining a brand name in their chosen category and they may build a reputation that later entrants will have a harder time overcoming. The company also may enjoy temporary early profits from its position and define the competitive rules in their niche.
 
Think of Clive and Nixon. They were early movers who defined their market niches. Sure, they already had competitors. As a result of their success, they attracted more. But they are more closely identified with their target niches than most other companies that sell similar products.
 
Clive and Nixon also share with Nikita the fact that they don’t just sell to snowboarders. Their businesses are less seasonal than they would be as snowboard only businesses and the target market, much larger.
 
Nikita’s positioning statement, and the focus it represents, also gives them some advantages in efficiency and resource allocation. In the fashion business, which we are all in to some extent, you sit at your desk and are bombarded by advertising, promotion, and product opportunities and ideas. Wouldn’t it be great if you spend no more than a micro second thinking most of them? The people at Nikita can do that I think. If it isn’t interesting to girls who ride, then they don’t have to think about it. And they don’t have to spend (or misspend?) money on it.
 
The downside, I guess, is that when you position your company so specifically, you give up some potential areas of growth. In my experience, that downside is largely illusionary. Nikita certainly has plenty of room to grow. Well-defined market niches aren’t necessarily small.
 
Volant
 
Yeah, I know it’s a ski, but look around the snowboard industry and you can’t take too much umbrage at that. The point is that the transition of Volant from an independent company making its own skis to a brand owned by GenX changes the whole dynamics of the brand. My expectation is that GenX will make money on the brand where Volant couldn’t make money as a stand-alone company. Let’s talk about why and the source of Volant’s new competitive advantage.
 
You remember the Volant story. They made steel skis at their own factory in Colorado. They had some ongoing production problems, expensive labor, and difficulty getting to the volume they needed if they were going to have their own factory. In an attempt to solve these problems, they tried an ill-fated internet venture that really pissed off retailers. That seems to have been the last nail in the coffin.
 
But Volant, with the only steel ski, had a ski that was really different from all its competitors and, according to Volant anyway, worked better.
 
Certainly GenX knew that, but they also had a different business model in mind.
 
They bought the production equipment for not so much money and moved it to a factory in Europe where they were already having some of their various brands made. In one easy step, they set up that manufacturer to make the Volant ski. They hired just a couple of key people from Volant, and moved them to the GenX headquarters where they could share facilities and expenses.
 
Since the factory was already making various other skis, the cost for each pair of Volant’s, I assume, went down. GenX didn’t have to worry about running a factory. Back at their headquarters, their overhead could be spread even more efficiently over more sales. The number of pair they had to sell to break even dropped.
 
True, they still have to run a marketing campaign, and I’m assuming you’ll see some Volant ads. But I wouldn’t be surprised if the most critical part of the marketing campaign was the part where the sales manager tells the retailers, “Yes, we’re going to deliver on time, the prices will be better, the ski is really different and works, and those guys who tried to hang you out to dry by selling on the internet are gone and we won’t do that.”
 
Sounds like really effective marketing to me. Winning retailers back will be a challenge, but with the lower breakeven point, I’ll bet they can work it out.
 
It’s not like having multiple brands, sharing overhead, and having somebody else make your product is a new idea, but it’s interesting to watch it be put into affect. It’s pretty much the GenX business model.
 
There you have three businesses with three different sources of potential competitive advantage. Head gets its from product improvements. Nikita’s comes from the market niche they have targeted and their early movement into it. Volant’s is the result of GenX’s usual operational efficiencies.
 
Which is best? None. But you’ve got to have some competitive advantage or another. 

 

 

China- Whether We Like It or Not. What’s to Do?

 Okay, let’s review the rules.

 
1)            The consumer eventually gets what they want to the extent the market is capable of providing it.
2)            Companies do whatever they perceive will give them a competitive advantage, or at least let them survive.
3)            The less real differentiation there is among products in the same product class, the more important price will ultimately be to the consumer. Marketing can delay and reduce, but does not eliminate, this tendency.
4)            Lots of people have lots of stuff made in China and it works fine.
 
Don’t get me wrong. I am for sure not sitting here saying, “Isn’t it great that there can maybe be a lot of high quality skateboards from China!” It would be great for skaters, I guess, that they could get a less expensive product (for some reason nobody is allowed to say “cheaper” anymore) that performs well.   But this industry is sustained by a fairly small number of companies that can afford to support and nurture skateboarding because they make a pretty good margin on the product they sell. What happens to those companies and to the skateboard industry if China uses its manufacturing cost structure (that is, cheap labor) to take a chunk of industry production?
 
A Few Realities
 
First, let’s dispose of the argument that the Chinese can’t make good skateboards. I have heard all the arguments about why it won’t happen. They can’t get good wood, there’s problems with humidity, lead times are too long, production quantities required for China are too high, etc. These, and others I can’t remember, may be valid arguments at the moment. But they are tactical, by which I mean they can be solved if it’s worth the time and effort to the off shore manufacturer to solve them.
 
Low cost, foreign manufacturing has gutted (I don’t think that’s too strong a word) various U. S. manufacturing industries including wood products. Last time I checked, a skateboard was a wood product. But my guess is that until recently the segment was perceived to be too small to attract the attention of the off shore manufacturers. Now it’s not.
 
Second, it’s already happening. You know it, I know it. There have been cheap “Chinese maple” skateboard being made for a while and sold through the mass markets. Most “core” companies I have talked to are at least looking into the idea of getting decks from China or trying to figure out how to deal with it if their competitors do it. I don’t know who is or is not actually getting them now. Nobody seems too anxious to discuss it in detail.
 
Third, lots of skateboarders are willing to buy lower priced decks. Blanks and shop decks make up a big percentage of decks sold in U. S. shops. Whatever that percentage is here, it’s higher in Europe, where skateboards imported from the U. S. are even more expensive then they are here.
 
Finally, it won’t ultimately matter to consumers that the product isn’t made in the U. S. It doesn’t matter for a host of products made in China, including snowboards and skate shoes.
 
The opportunity/threat analysis is obviously a bit different depending on whether or not a company is a manufacturer. Let’s start with brands that are not.
 
Brands With No Factory
 
On the surface, it’s conceptually easy. You buy boards from an OEM manufacturer for X dollars a board now and you can get them from China for one half of X.
 
Wish it were that simple. My own experience getting stuff from China is that shit happens, and your control of said shit diminishes by the square of the language, customs and distance barriers. A solid relationship with your manufacturer, your own people on the ground where the stuff’s being made, and constant focus is required. The price may start out half of what it costs to buy it made here, but by the time it’s late and you have to air freight it, the registration is off on the screening, and the voids in the glue make every 10th board breaks, a lot of that cost advantage disappears.
 
But see rule 4 above. People are going to figure it out because the cost difference is so compelling. Maybe it’s worth it to air freight some decks. Maybe you bring blanks over and screen here. Some brand is going to do it if they aren’t doing it already. 
 
Then the issue becomes, what does that brand do with their newfound money from the portion of decks they have made in China? They basically have three choices. They can put the money in their pockets, they can cut their prices to grab share or they can increase marketing. Obviously, they can do some or all of those. Other brands, either because they want some of that extra money or because they have to respond to the competitive threat, are likely to respond by getting some decks from China as well.
 
Sourcing from China, or any other low cost country for that matter, is not a disruptive technology. It does not confer a long-term competitive advantage on anybody. To the extent it confers an advantage at all, it confers it temporarily on the brands that do it quickest, but not so quickly that it’s screwed up as described above. Pioneers are often rewarded by having monuments built on their graves. 
 
Next, what probably happens is that some of this pricing advantage inevitably begins to ripple through the market and reaches the consumer level. I can’t quantify how that will happen, but remember that if prices are lower you end up with less total margin dollars to work with unless you raised your margin percentage. Maybe as an industry we will exercise enough self-discipline so that we hold margins. 
 
Of course, I’ve never seen that happen in action sports and am not holding my breath. If, in fact, total margin dollars decline, then the volume you have to sell to make the same profit rises, and that’s what puts small companies out of business. Our existing industry business model seems to allow quite a number of smaller brands to survive, if not thrive. I think they are critical to skateboarding and we risk losing some of our market advantage, energy, and legitimacy with core customers if they go away.
 
One other thing could happen. Maybe, as they say in economics, demand is elastic with respect to price. That is, cheaper skateboards mean that more are sold. I expect that’s true to some extent, but I doubt it’s enough to prevent the compression of total margin dollars for the industry as a whole.
 
Factories With No Brands
 
Will have a problem if and to the extent that the brands they manufacture for can work out the problems with Chinese described above. At the very least, brands will use the threat of China to negotiate lower prices. Size, for any factory, will matter. Factories doing bigger volume will have an advantage. 
 
Factories With Brands
 
Will have a chance to find out just how important their teams and advertising programs really are to skateboarders in product choice. I’m not suggesting for a moment that, in the current market, they aren’t critical. We all know they are. But if a product that somebody doesn’t think is quite as cool is suddenly significantly cheaper, that can be pretty cool.
 
To the extent that Chinese production becomes viable, I expect them to have the same problems with OEM customers as any factory. To the extent their margins and volumes are higher, they have some flexibility in dealing with pricing pressures that stand alone factories and brands may not have. I won’t be even slightly surprised when I see these companies continuing to run their factories, but getting some of their production from China.
 
What’s An Industry To Do?
 
The only credible argument I’ve heard so far as to why some variation of the Chinese production scenario I’ve outlined above won’t happen is that our product cycle and process of distribution makes it impossible. I haven’t quite decided if that’s an actual barrier to entry or just another tactical problem to be overcome like the others I’ve described above. I hope to hell it’s a barrier. Keep changing those graphics and shapes!!
 
Know any other reasons? Let me hear from you and I’ll share them. The only thing I don’t want to hear is, “The skateboard industry is different.” It’s never been true in any industry I’ve seen. The worse thing individual companies, and the industry as a whole for that matter, can do is delude ourselves into believing that the usual competitive dynamics don’t apply to us.

 

 

Potential Impact of War and Recession on the Snow Sports Industry; Relevant Statistics and Possible Strategies

We were looking at a recession before the September 11 attacks on the World Trade Center and the Pentagon and the tragedy raised the possibility (certainty in the minds of many) that the recession would be longer, deeper or both then it would otherwise have been. Economic activity has already rebounded since its nadir in the days following the WTC. But what’s a “normal” recovery from such an event? Who knows.

The snow sports industry may be as impacted by a recession as other sectors of the economy. As we represent discretionary spending, we have the potential to be impacted more. Add to that the “fear of flying” hangover and we can’t help but be nervous about the coming season, especially with the possibility of further terrorist attacks. Air passenger volume was down 50% for a couple of days after flying resumed and, as of October 4th, was still off 29%, according to the International Air Travel Association (IATA).
 
On the other hand, as you’ll see below, the last recession, with its very low resort visitor days, corresponded to the worst snow year in a long time, so it’s hard to lay that awful year only at the feet of the war and recession of that time.
 
Still, my feeling is that this recession, and the caution in traveling and vacationing precipitated by September 11 and subsequent events, will be worse than in 1990-91.   Rather than just be nervous and pray for good snow we should probably “do” something. What?
 
Where Are We?
 
Before I yield to the inevitable and start quoting economic statistics, I want to introduce you to the statistical concept of regression to the mean. Discovered in 1875 by the amateur mathematician Francis Galton, it’s the single biggest reason one might be cautious about predicting a short, shallow recession.
 
To dramatically oversimplify and avoid a really boring discussion of statistics, it says, “What goes up must come down.” And the further up it goes, or the further down it goes, the more likely and the faster, it is to go the other way. We haven’t had a recession since 1990-91, and it was mild.
 
Of course a statistical mean can move, and some of these trends can be over very long periods. Still, the economic rubber band looks stretched awfully tight, and a snap back is inevitable.
 
This is supported by the fact that Japan is going into its fourth recession in a decade. Parts of Asia haven’t gotten over the impact of the currency crisis that started in 1997. Other Asian countries depend on exports to the U. S. to support their economies, and those exports are likely to decline. Much of Europe seems on the brink of recession as well.
 
During recent U. S. recessions, some other part of the world was strong and could pick up some slack. This time, the rest of the world was counting on a U.S. that is weak itself. The last time Europe, Asia and the U. S. all experienced economic weakness at the same time was during the 1973-75 recession. It lasted sixteen months.
 
Consumer spending had started to weaken before September 11. September will be the 12th month of declining industrial production. That ties a record that goes back to just after World War II. The September employment report showed a decline of 199,000 jobs during the month, the largest decline in over a decade. Very little of that reflects layoffs that occurred after the attack.
 
September retail sales, reported October 12th, showed a decline of 2.4%, the biggest drop in nine years. Economists had expected a 0.7% drop. At the same time, consumer sentiment rose to 83.4% in October from 81.8% in September, compared to expectations of a 76.0% reading in the measure of consumer confidence.     
 
The consensus is that the fourth quarter statistics will confirm that we are in a recession if the September retail sales numbers haven’t done it already.
 
Regression to the mean, indeed. Any good news?
 
Some. Housing starts haven’t plummeted and, up to now, consumer spending has held up fairly well. The Federal Reserve has cut the discount rate from six percent at the beginning of the year to two percent now. The last time it was that low was 1958. There’s some concern that the impact of interest rate cuts may not be as powerful as it once was due to the globalization of the financial markets. However, conventional wisdom is that it takes six to nine months for the impact of interest rate cuts to be felt. The first interest rate cut happened January 3rd, nine months ago. The last was October 2nd. Obviously, we haven’t felt the full impact of all the cuts yet.
 
Another thing that tends to lead an economic recovery is the stock market. We’ve all had the pleasure of experiencing the worst bear market since the depression. The week when the market opened after the WTC looked like the capitulation week that’s normally required to find a bottom. There was high point loss on big volume. The put/call ratio reached a level not seen since 1985. The number of investment advisors bearish was higher than the number bullish (they are almost always wrong at extremes). The market broke out on October 24th, and followed through on the 28th. The follow through doesn’t guarantee a rally, but one has never started without it. Since then, the market has acted the way you want it to act, shrugging off bad news, going up on higher volume and declining on lower volume. Hope I don’t sound like an idiot by the time this is published.
 
That analysis and two bucks will get you coffee at Starbuck’s (a small one). But as I sit here writing this, I’ve put my money where my mouth is.
 
SIA’s Retail Audit, conducted by Leisure Trends Group, reported early in the week of October 8th that a sample of 277 storefronts showed September ski and snowboard sales up 19%. By the end of the week, when the sample size had increased to 376, the increase was at 6.1%. That’s still a lot better than the overall national retail numbers reported for September (see above) but I guess we better not breathe a sign of relief until we see results for the full 900 store fronts survey (due in early December).   
 
Finally, increased government spending in the wake of September 11th should make the recession shorter than it would otherwise have been.
 
We’re looking at a recession. Though there are some mitigating factors, there are reasonable arguments that it may not be as mild or short as recent (if ten years ago is recent) ones have been.
 
Right today, the winter sports industry doesn’t have to worry about its length so much as it’s impact on the season that’s starting right now. What does history tell us we can expect?
 
“It’s Déjà vu All Over Again”
 
A recession, a war, and a President Bush in the White House. The parallels are almost eerie.
 
Iraq invaded Kuwait on August 2, 1990. The air war began January 17, 1991. The ground war followed on February 23rd and lasted four days until President Bush declared a cease-fire on the 27th. The first U. S. troops began to leave on March 8th. We declared victory and went home.
 
Our current conflict began September 11. I’m sure none of us knows how long it will last or what exactly success will look like, but it’s not going to be as definitive as the Gulf War. 
 
In 1990, the economy started off pretty well. Gross Domestic Product (GDP) grew at a 5.1% rate during the first quarter. That declined to 0.9% in the second quarter and fell further to a negative 0.7% in the third. Fourth quarter GDP fell at 3.2% rate.
 
For the year, we ended up with a real GDP growth rate of 1.2%. In 1991, it was a negative 0.6%. Officially, the 1990 recession started in July 1990 and ended in March, 1991- eight months later. A recession, by the way, is technically defined as a decline in GDP for two consecutive quarters.
 
From a healthy 5.6% rate of growth in 2000’s second quarter, GDP has fallen each quarter. It ended the second quarter of this year with 0.2% growth. My guess is that the number we get at the end of October for the third quarter will be negative.
 
According to the IATA, airline traffic has fallen each month this year since February compared to the same month in the previous year. When was the last time airline traffic declined? It was during the 1990-91 recession.
 
1991 is the only year from 1983 through 2000 when world airline passenger growth was negative (by 5%). Obviously, it corresponded with the recession, but it also corresponded with the Gulf War. Revenue passenger kilometers (RPKs- the total number of kilometers paying passengers paid) fell 25% during the first month of the war. They were below 1990 levels from January through September of 1991. It took a year for traffic to recover to prewar levels.
 
As we all know, the 2000-01 season was a generally good snow year, and generated 57.3 million resort visits, the highest ever. The 1990-91 season saw only 46.7 million visits, the lowest of any season since 1978-79 except for the 39.7 million in 1980-81. Visits in 1989-90 were 50.0 and in 1991-92, they were 50.8 million.
 
The USIA End of Season National Business Survey for 1990-1991 reported that the average inches of snowfall per area, based on 173 reporting resorts, was 130 inches. RRC Associates in Boulder reports that for the 2000/01 season, with 187 resorts reporting, the average number of inches per resort was 185.34 inches.
 
Over the last eight seasons, according to RRC, the average number of inches per resort was 177.6. 1990-91 was by far the worst snow year for which I have data. Which is good news, because if the snow had been great in a year when visits were 46.7 million, we would have had to lay the bad year completely at the door of war and recession. So maybe we’ll find, with good snow, that people want to go do something fun with their families and forget about war and recession.
 
We are, as usual, left praying for good snow. Even with good snow, I expect to see a negative impact from war and recession. The similarity to 1990-91 is too great to ignore. It’s my judgment that the recession will probably be steeper than that of ten years ago. In addition, the war against terrorism won’t have the clear and glorious ending the Gulf War had. It started in this country with an act that has left a long-term scar on our collective psyche and potentially on our willingness to fly and take vacations. Any further acts of terrorism will only make it worse. 
 
Do It Now Rather Than Later
 
In twenty years of working with companies in transition, the last ten in action sports, I’ve worked with quite a number of financially distressed businesses. It’s a lot of fun for me when I walk in the door and am met with, “We can’t make payroll next Tuesday. What should we do?” because when you’ve got nothing to lose, you can try or suggest anything to anybody. Still, I wouldn’t wish that set of circumstances on anybody. By the time you get to that point it’s frequently too late to solve the problem except at a tremendous personal and financial cost. 
 
Without exception, and regardless of industry, companies who are so financially distressed that their survival is uncertain got there for the same reason; denial and perseverance during a period of change.
 
Universally, the owners/managers recognized the issues before they had become issues of survival. Universally, they resisted doing anything different in response to the new circumstances. Universally, they believed that doing “more of the same,” but doing it better and harder would be an adequate response to a changing business environment. For a while, this may have worked. Typically, it at least bought them some time.
 
But the business continued to decline because they simply weren’t addressing the new business conditions. As things worsened, their options, or at least their perceived options, declined. Soon, managing cash flow was taking up all of their time. They had to do it, but it still didn’t address the basic business issues. Finally, it’s typically an outside stakeholder- the bank, a supplier, a shareholder- who forces them to deal with reality. Hopefully, it’s not too late.
 
My crystal ball is no better than yours. I don’t know what this season is going to bring.    But whether you’re a resort, a supplier or a retailer, the winter sports business isn’t an easy one if only due to seasonality. Most of you, I’m sure, have already asked the question, “What if my business is off 10%? 20%? For those of you who haven’t started that process, here, in general, is how I might go about it.
 
If you were around in 1990-91, how did you fare? If you weren’t, talk to others in similar businesses and find out how they fared. What actions did they take and when?
 
Now pull out your cash flow. Cut revenues by 10%, or by whatever number you think more relevant or likely. What happens? Is your bank line still adequate? Can you pay your suppliers on time? Can you afford any capital expenditures you had planned? Does the cash in your cash flow, flow?
 
Obviously, this is also a balance sheet issue. Even when cash flow from operations turns a little negative, some companies have the financial resources, as reflected by their balance sheet, to support spending at current levels.
 
Whatever your cash flow projections show, now is the time to take any action you decide to take. Here’s why. If, for example, you need to reduce expenditures by $36,000 over six months, just to pick a number, that’s either $6,000 a month or $36,000 in the last month. $6,000 a month may be manageable through judicious expense control. $36,000 in that final month probably (typically, I’d say) damages the operational continuity of the company.
 
So whatever actions you think you need to take, if any, to cut expenses, improve efficiency, reduce inventory, or bolster sales, start doing it now. Early action is always the key to weathering hard times if they come.
 
As a retailer, you don’t just sell winter sports products- even in winter. The highest dependence on winter sports sales comes, I think, from retailers closely associated with resorts. From that point of view, I guess you’re better equipped to weather a slow season than many suppliers and resorts who make most of their money in only one season. But retailers have some problems that suppliers and resorts, which have already undergone some consolidation, don’t have. To put it succinctly, there are too many of you. I don’t think that will be a shock to most retailers. They deal with it all the time as suppliers open up competitors just down the street.
 
For most of the 90s, high personal expenditures, low interest rates, very low inflation, huge gains in net worth and low unemployment yielded high levels of growth in retail sales, averaging 6.55% annually between 1994 and 2000. Since sometime in 2000, weakening consumer confidence, slowly increasing unemployment, declining household wealth, and high consumer debt levels have begun to take their toll.
 
In the meantime, retail competition has never been tougher. There have been growing numbers of store closing. Various kinds of direct sellers are taking more business from traditional retailers.
 
As a winter sports retailer what should you be doing? Largely, what you’re already doing as far as I can tell. Watch your inventory and expense levels carefully. Focus on knowing whom your core customer is and on attracting and keeping them. Order to maximize your discounts. Have the kind of product customers are likely to want in harder times.
 
Resorts who sold lots of cheap season passes may look like geniuses if traffic does drop significantly, though I guess maybe the people who have already made the investment will be the ones who show up anyway. The issue at many resorts, in the event of a slow winter season, is financial leverage. This is an industry where extreme seasonality requires the use of borrowed money to get through the off season- often a lot of borrowed money. You have to be able to borrow enough and, inconveniently, you have to be able to pay it back and then borrow it again for the following season. Managing that debt is already the single biggest challenge some resorts have. If revenues decline significantly, it will become an even bigger challenge.
 
Suppliers have largely already ordered and/or produced for the season. They are in the middle of shipping to retailers. Some products coming into the country have been delayed by understandably more rigorous checks by U. S. Customs. Anecdotal evidence is of some cancellations from retailers, but they don’t seem very high. If I was a supplier, I wouldn’t be counting on a lot of reorders, and I’d be damn cautious about credit this year. I’d also plan my selling efforts on the assumptions that discounts will start early if retail traffic is slow.
 
Economically, the whole country has had a bunch of good years. Now, we may be in for one that’s not so good. In good times, cash flow and growth can cover up a lot of mistakes and competitive weaknesses. In bad times, the market takes no prisoners. Whether you are a supplier, a retailer, or a resort the quality of your competition position and the strength of your balance sheet are the two things (besides snow) that will determine how you do this year.
 
That’s true in any year of course, but in a recession year, you may not get another chance. My best guess right now is that this is not going to be an easy season even with good snow. Make it as good as it can be for you by starting to deal with it right now.
 
 SIDEBAR:
 
As an industry, especially on the resort side, there’s a consensus of the need to revitalize growth by attracting young enthusiasts to the slopes and keeping them coming back. Retailers, and obviously the suppliers on the snowboard side, are already on that program or, bluntly, they wouldn’t be around. Resorts recognize the same necessity, but have the understandable need to focus on the traditional customers who are older, but have lots of disposable income and provide much of a typical resort’s cash flow. In a recession, it will be interesting to watch who shows up. Will it be the young enthusiasts, who figure out a way to find money for a list ticket and some new equipment, or the older customer, who has a high enough disposable income and net worth that a little thing like a recession doesn’t change her spending habits?
 
Speaking of the kids, the most exciting new thing in snow sliding this year may be the snowskate. It has its genesis in skateboarding, which has to be as hot right now as any action sport has ever been. Skateboarding, of course, has entered the mainstream, with skate parks popping up all over the place and being funded by local recreation departments. Now, I’m hearing the first rumblings about snow parks for use, I guess, with either snowboards or snowskates being built at places other than resorts. Especially for snowskates, you don’t need that much room, and you don’t need much vertical. Gives the resorts something to think about. What if the kids don’t have to come to participate?

 

 

“Hey! How Come You’re Still Around?” Conversations With Survivors

It’s old news, of course, that we’ve gotten to the point in this industry where probably north of eighty-five percent of the snowboards sold come from a handful of brands, mostly made by ski companies with the usual exception. And if that concentration is not how we’d like it to be, it’s how it almost always is. Don’t worry; I’m not going to give you the lecture on consolidation again- it’s too late to help anyway.

 But there are a number of small brands still out there when hundreds of others aren’t. How have they done it? Have they found the proverbial “defendable market niche?” Or did they just luck out and find an investor with too much money and not enough common sense? Or maybe, at different times, both.
 
So I’m going to call some of them up and ask something tactful like, “How come you’re still in business?” If they don’t hang up on me, maybe we’ll all learn something.
 
My Guess?
 
Okay, not completely a guess, as I’ve talked to most of these people before over the years and have watched them build their brands and companies. We’re going to find a high level of continuity in management, and a lot of support from shareholders. These are brands that have been around a while.
 
None of them ever thought they were going to be “the next Burton.” They were balance sheet aware, and never tried to grow faster than their financing allowed. They’ve generally figured out how to make money, and are bemused and perplexed when they hear about brands doing 30,000 snowboards and losing money. Advertising, promotion and team riders? It’s a good thing- as long as you can actually afford it. Having happy retailers who sell through at full margin, call for more product, and then can’t get it seems to be their approach to marketing. Oh, and, for some reason, they seem to only want to sell to people who can pay them on time.
 
They have generally discovered a market niche, and it’s typically high end. In one case, they’ve discovered that they aren’t only a snowboard company. Here they are in alphabetical order.
 
Glissade
 
“We’ve been making snowboards for seventeen years,” says Glissade founder and president Greg Pronko. “I think we might be the sixth oldest snowboard brand in the world.”
 
But Glissade no longer sees itself as strictly a snowboard brand competing only against other snowboard brands. They produce a relatively small volume of a few thousand very high-end boards, and don’t want too much volume. What they’ve learned to love is working with materials and figuring out how to use new ones. They have evolved to the point where they earn revenues from materials research and development, and rapid prototyping for other companies in snowboarding and other industries.
 
In spite of these other activities, the Glissade brand is the founder’s true love. But the love that goes into these custom, low-volume boards has a price. One of their decks will set you back a bit north of $500 at select retailers. For a little more, they’ll be happy to make you a custom board. Or you might call them and see if you can get on the list to get one of only twenty-five 195s they make each year.
 
So what have we got? Year around cash flow, a redefinition of their market niche that allows them to compete, no warranty problems, and a product that doesn’t require a big advertising and marketing campaign to check at retail. Oh- and good margins for Glissade and the retailer. 
 
Heelside
 
Heelside started as a boot company before expanding into bindings and, more recently, boards. They are heading into their seventh season. President Jim Ferguson emphasizes the continuity in investors and employees they’ve enjoyed since the company was founded. “Consistency of ownership and management has been key for us,” he says.
 
They have also enjoyed a few other advantages. Jim’s background in making boots went a long way towards getting Heelside started without some of the startup and growing pains that other companies have typically experienced. When they did decide to make boards (interestingly enough, at just about the peak of the consolidation), they purchased high quality equipment for not much money from a factory going out of business and hired the manufacturing team to make Heelside’s boards. Good for cash flow, and good for avoiding mistakes in learning the manufacturing process.
 
Growth is a good thing, but “The numbers have to make sense,” says Jim. “We’ve always lived within our means,” he emphasizes. “We do as much marketing as we can, but keep a close eye on the bottom line.”
 
Evidently Heelside isn’t sure how much being cool will help if you can’t pay your bills.
 
Of the up to 15,000 boards they expect to sell this year (depending on the snow) most will be sold in North America. One thing Heelside has in common with many of the other brands being discussed here is no dependence on the Japanese market for financing. I’m sure we all remember when Japanese prepayment for boards dried up, and one hundred plus brands vanished in short order.
 
Never Summer
 
They were profitable when they were only making 7,000 boards. That was the plan. Now, they’re making more, but maybe not as many as you might expect from a brand that’s been consistently pursuing its plan for ten years. They’re still making money. “Clean distribution, limited supply, unmatched customer service and exclusive territories for retailers,” is the foundation of their market position, explains co-founder Tracey Canaday.
 
The average wholesale price is higher than most brands, but Never Summer uses a layered, precured, pretensioned fiberglass that, according to Tracey, costs about three times as much as the glass in a traditionally made board. They also make their sidewalls out of sintered ptex. The result, according to Tracey, is a construction that makes the board more durable and responsive and gives the retailer something to sell.
 
Never Summer, located in Colorado, doesn’t sell a single snowboard in Japan. Zero, zip, nada, the big goose egg. So clearly when the Japanese market crashed, it didn’t hurt them much. Might even have helped their competitive position. Would they sell some boards there? Sure, but they haven’t been approached by the right potential partner and don’t want to be distracted from their retailer focus.
 
There’s little discounting at retail, and typically few Never Summers left over at the end of the year. Scarcity does much of the marketing for them. Want to buy a Never Summer? Better go find one now (October 3) and expect to pay full retail.
 
There are only four or five managers at the company, and two of them are owners. They are careful where they spend their dollars. For example, all new accounts are COD, no matter who they are. “This is our retirement,” says Tracey.
 
I’d be careful too.
 
Option
 
“We’re modest in our goals and live within our means,” says Option President Geoff Power. “We have really good people who don’t have stars in their eyes.”
 
Option was started in August of 1992. Geoff gives a lot of credit to the company’s investors, who have always taken the long term view, don’t need a return to live on, and have been willing to help the company over some rough spots or to take advantage of opportunities. One of those opportunities was the acquisition of the snowboard apparel company NFA at a time when lots of apparel companies were available for purchase. NFA has been able to grow and transition nicely in the direction of the street ware/lifestyle market. 
 
There was never a big dependence on Japan, so when that market cratered, it didn’t have as much impact on Option as on its competitors.
 
Option has done many of the same things as the other smaller, successful, brands mentioned in this article. They are careful with distribution. Their product cost is above the average but also, according to Option, better made. Customer service is critical. They like to be paid by the people they sell to, and control their marketing expenses consistent with their overall financial plan and capabilities.
 
It seems to be working.
 
Silence
 
One of these days, I have to remember to ask BK Norman, the lead dog at Silence, what BK stands for. Silence is nine years old. Their story is a bit different from the other brands mentioned above, but BK has been there for the whole ride. Continuity seems to be important.
 
When Silence was started, it had the good fortune to be owned by a guy who, in terms of his understanding of the snowboard business, had more money than sense. He had a whole lot of money. Like a real lot. He spent it on Silence. After all, snowboarding was hot. So they could build up the brand in a few years, go public and all retire rich. Seems like I’ve heard that story somewhere else before.
 
Never mind. Anyway, BK kept going “Uhhhhh, I’m not quite sure we can sell as many boards as you want,” but who was he to turn down all this marketing money? It’s just too much to ask a snowboard guy to do. The marketing money got spent. As BK had foretold, not as many boards as the inflated corporate plan required were sold. It was a financial mess, but the literally millions of dollars spent on advertising and promotion created brand awareness.
 
Silence has changed hands twice. The first time, it was sold to A Sports which also bought Avalanche. Now, a new investment group has picked up both Silence and Avalanche, and is working closely with BK, Dale Rehberg and Maureen ter Horst to run the brands the right way. “I always managed to find a new investor before things really cratered,” was the way BK put it. “A lot of money was wasted on huge corporate business plans that never came true. Now, we are concentrating on building our business on a grass roots level working closely with our retailers all over the world.
 
So now, well financed and with a realistic business plan, BK uses the brand awareness created in Silence’s early “drunken sailor” spending period to make some money.
 
The Japanese distribution has been kept intact over nine years. The distributor didn’t go bankrupt and the market was never over supplied. BK has stayed focused on building and selling snowboards. Most of the business is to specialty shops, but that is changing gradually. Because of the wider awareness the brand has and the presence of Avalanche, he can expand his distribution a bit more than some other smaller brands without damage. “We’ll keep Silence true to its history as a specialty shop brand and expand the distribution for Avalanche,” he says.
 
I Think I See a Pattern
 
These brands have quite a bit in common. Continuity in management would seem to be high on the list. Financial acumen with a balance sheet focus is up there too. Growth was kept consistent with their financial capabilities, and an awareness of whom their customers were. They focused on the bottom line, not the top. They tend to have their own factories. They spend a lot of time thinking about their distribution.
 
Anything there that should surprise us? Nah. Any small company that successfully competes against much larger brands has to have an answer to all those issues.

 

 

Sell!? Maybe It’s Time to Think About It

Here we all are, back from ASR and boy are we excited. More brands, more excitement, hype, orders, deals, three page ads in Skate Biz. People can’t get enough of skateboarding There’s nowhere for business to go but up, and it’s got to be even better next year.

 
Unless, of course, it’s not.
 
As a business owner, you have (or you ought to have) some goals that go beyond running your business every day. They may include spending more time with your family, buying an island in the Caribbean, working less hours, diversifying your financial position, or just getting off the damn personal guarantee for the bank loan. Clearly, these aren’t all financial goals, but they have a big financial component to them. Someday, it’s going to be time to sell your business, though it may not be now. If you were to decide that this was the time, when, why and how do you do it?
 
It was August 1996 when I wrote a column for Snowboarding Business on selling your company. Given how long it takes to sell a company, and the timing of the snowboard industry consolidation, I was probably about a year late writing it. As I write this article, I have a high level of confidence that nobody (but me) has an issue of SnowBiz from August 1996 lying around, so I figure I can plagiarize the hell out of that article.
 
A Cautionary Tale of Success
 
Doug Griffith left K2 in the early 90s to start American Snowboard Manufacturing (ASC). Len Hall joined him a little later. ASC grew and prospered. Scott came and offered to buy the company. For a bunch of money. They were going to make snowboards and be cool and would need their own factory.
 
But Doug and Len hesitated. “If it’s worth this much money now,” they thought, “How much more will it be worth after another year of growth?”
 
Doug and Len had been around a while and knew something about business cycles. They knew enough to realize that their crystal ball was just the slightest bit cloudy. One of them, and I don’t know which one, had the acumen and perspective to step away from the euphoria of running a profitable, exciting, fast growing business and say, “Well, the truth is I’m not exactly certain how long this ride is going to last.”
 
They sold.   They took the money and ran. Skedaddled. Laughed all the way to the bank. Now, I’m sure they had a little seller’s remorse initially as they worried about how much money they might have left on the negotiating table. But their remorse no doubt went away as the snowboard industry went into the depths of consolidation hell. Scott stopped producing boards for the US. They sold the factory to A Sport. I have no idea if it’s still operating.
 
Their timing of the sale was prescient. If they could buy and sell stocks like that, they’d own the world. If they hadn’t sold when they did, they would probably have had some hard times before they sold the place for not much, or just had to close it down. There are a lot of people who are (or were) in the snowboard business who weren’t as insightful/lucky as Doug and Len. They either got a lot less money (or just got debt assumed) or they went out of business with nothing to show for a lot of hard work, except maybe some creditors chasing them around.
 
I’m not claiming that skateboarding is like snowboarding and is going to go through the same cycle. Nor am I saying that everybody who owns a skateboard, or skateboard related business, should try and sell now. What am I saying?
 
  • Business cycles happen.   Someday, skateboarding won’t be as hot as it is now and your company, even if it’s exactly the same, will be harder to sell and worth less.
  • Getting a business ready to sell, and selling it, takes time. Want to have a deal done in a year and get the best deal you can? Start now. Anybody can sell a good company fast if they are willing to sell it cheap.
  • Figure out what you want to do and what you are trying to accomplish. Then decide if and when you should explore selling. It’s true that you can just wait for a buyer to show up. But you won’t be in control of the process and probably won’t get the best deal.
  • Business is a risk. Money in your pocket today is worth more than money in your pocket tomorrow. That’s why we have interest rates, a measure of time and risk. Given that time and risk, and the difference between what you can sell for today compared to tomorrow, it might not make sense to wait. Especially if you expect valuations to decline. That is, a company might be worth more today than tomorrow even if tomorrow’s company was bigger and more profitable.
  • Supply and demand matters. If times should get hard, there will be lots of sellers and fewer buyers. If you sell, you want to do it when you’re the only one for sale.
 
If you’re going to sell your business, let’s make sure you do it right and for the right reasons. You can maximize your chances of success, and minimize wasted time, by focusing on what I call the five “Gets.” Get real, get a goal, get ready, get agreement, get help. 
 
Get Real
 
It’s as predictable as the sun coming up in the morning. The owner believes in his business so much that his perception of what it is worth to a buyer is, in my experience, almost always out of line. A sophisticated buyer won’t ignore your projections, but he will discount them. He will recognize the growth potential of your business, but balance that with a realistic assessment of the competition. He will want to know very specifically why you have been or will be successful. He will base his offer to you on the potential return he objectively thinks he can earn compared with other investment opportunities he has. He will value your business in ways that are standard for valuing companies in this or similar industries.
 
He will recognize that your growth depends on increasing working capital investment in the business and that he, not you, is the one who is going to have to take that risk. He will admit that there are some synergies in combining the two companies, but will believe (probably correctly) that his organization will be more responsible for achieving them than yours. Accordingly, he will be reluctant to pay you for them. He will understand that the business is dependent on you and perhaps a few key managers, and will be concerned with your motivation once the deal is closed. So if you expect to receive the value you perceive in your business you should expect to do it in an earn out.
 
He will look closely at your historical financial statements. They will frequently be the single most important (though not the only) factor in determining the price he is willing to offer and no amount of explaining, rationalizing, projecting or shucking and jiving will change that.
 
So, to begin, make a realistic estimate of the value of your company. There are many ways to value a company. None of them give a right or wrong answer. But when you are done you will have a reasonable range of value for your company. You may also want to value it under different scenarios. For example, your company may be worth more as part of a larger organization because your sales will no longer have to support, on a stand-alone basis, all the overhead expense you currently have.   Value it, in other words, as the potential buyer would to get insight into his thought process.
 
This knowledge is a powerful negotiating tool. Make sure you have it.
 
Get A Goal
 
What do you want to accomplish by selling (besides get money)? What do you want to sell; assets or equity? How do you want to get paid? Will you take stock? Cash at closing only? Is an earn out acceptable? What will be your role be in the business after the deal closes? For how long? How hard do you want to work following the sale? What is the minimum price you will accept? 
 
There is no way to know if an offer is a good one or a bad one unless you know what you are trying to accomplish by selling the business. You always want the other side to put the first offer on the table, but you never want them to be able to control the negotiating process because you haven’t thought long and hard about what a good offer looks like.
 
The converse is that you must also know when to walk away. If you are desperate for a deal, you’ll get a bad one.
 
Get Ready
 
From the time the first contact with a serious purchaser begin, it you can generally expect it to take six months or longer to close a deal. But preparations may begin literally years earlier, when the owner concludes that her best long-term strategy is a sale of the business.
 
Try and increase awareness of your company among potential buyers. You can do this, for example, by being active in the appropriate professional associations. Get articles about your company published in trade journals.
 
Have systems that prepare consistent, accurate financial statements and information that can be easily verified or audited. It’s a critical element in determining a purchase price and an important indication that you are a competent business person the buyer can rely on to operate the acquired business.
 
Clean up your balance sheet. Get rid of old inventory and write off uncollectable receivables. It’s never a good idea to fool yourself about the value of assets, and you won’t fool a potential buyer. But by not making these adjustments you may find your own competence and credibility questioned during the acquisition process. “What other surprises are hidden here?” wonders the potential buyer.
 
Have a current business plan that validates your strategy. Make sure the warehouse is brightly lit and painted. If there’s any tax issues, litigation or disputes with employees out there, settle them.
 
You can’t put your best foot forward if it’s stuck in the mud.
 
Get Agreement
 
This may seem a little obvious, but it’s a good idea if all the shareholders agree with the decision to sell the business and have a common understanding of what constitutes an acceptable deal. Legally, it’s possible to sell a business with the approval of less than 100% of the ownership. But in a private company, with only a few shareholders, it can be difficult. A buyer may be concerned about litigation by a minority shareholder. If a dissenting shareholder is expected to continue to work for the acquired company, an uncomfortable operating situation can result.
 
While you can’t please all of the people all of the time, it’s usually a good idea to try and get acceptance (enthusiasm would be nice) from other key stakeholders. These may include customers, suppliers and key employees. They will all be asking “How is this going to affect my relationship with this company?” and you need to have an honest and accurate answer.
 
Get Help
 
Sale of a company demands an accelerating time commitment from the owner. My experience is that as the deal gains momentum, you can either manage your business or work on the deal. There’s often not enough hours in the day to do both well.
 
Let’s look at a typical scenario. You’re selling the business you built. It’s your baby. You’re proud of it, and are far from objective. To make it more interesting, you’re entering into a process with which you have little or no experience. And this deal is potentially the most important and lucrative transaction you have ever entered into.
 
Let’s say that on the other side of the table is the representative of a larger company. He’s been through this before and knows what to expect. At the end of the day, whether or not there’s a deal, he gets paid the same and goes on to work on the next deal. He’s completely dispassionate and may not have any stake in the outcome.
 
Somewhere in the course of the negotiations he looks at you and says, “I assume you’re willing to warrant that there are no outstanding disputes with any federal, state or local tax authorities except as disclosed in appendix A of the agreement?”
 
Now, a good response, assuming it’s true, is something like “I’m willing to warrant it to the best of my knowledge,” but if you’ve never done this before, you might not know that. Happily, you’ve got an attorney sitting by your side to handle those kinds of issues.
 
But if he’s the attorney who drafted your will, helps you collect from delinquent creditors, or kept you out of jail after the IRS audit, he may be waiting for you to speak up. Your attorney must be experienced in representing sellers of business.
 
Right now, there are some skateboard industry companies that are a lot more valuable today than they will be in a year or two. I don’t know who they are, or whether their decline in value will be due to industry changes, competitive pressures, or operational mistakes. But right now, I’m not aware of a single successful skateboard, or skateboard related, company that is for sale. One that was might command a lot of attention and an attractive price. I’m not saying, “sell” but I do suggest you think about it. If you decide this is the right time, make sure you do it right. You may only get one chance.

 

 

I Think I See a Plan. News From the Ski Industry Summit

Okay, what was I doing at the Ski Industry Summit (formerly known as Ski Week) and why am I writing about it for Snow Biz?

Anybody got a problem with some early season turns in Vail when there’s hardly anybody here? Didn’t think so. Also, there was an open bar each night.
 
But aside from the obvious hedonistic reasons to show, the winter resort business has to do some things differently. Baby boomers are showing up less as they get older, and kids and younger people, overall, are either doing something besides coming to winter resorts or trying it, not liking it, and not coming back. The retention rates for beginners basically suck. If as an industry (and I mean the winter sports industry, not just the winter resort industry) nothing happens and demographic trends and retention/conversion rates continue on their present source, the National Ski Areas Association (NSAA) projects that total visits to resorts will drop 27.2% from 52.2 million to 38 million in 15 years. 
 
Forget the ski versus snowboarding, them versus us, “they don’t get it” stuff. If present trends continue, there will be fewer resorts around, less money to spend on half pipes, terrain parks, new lifts, and developing new runs. Snowboard hard goods and apparel sales will drop. So it’s not just their problem. We are part of the winter sports business and snowboarding’s success is related to the resorts’ success. As far as I know, nobody has figured out a way to snowboard without a mountain.
 
The Ski Industry Summit got three hundred people together to talk about this issue from December 3rd through 6th. This is hardly a new issue, but there was a sense of urgency and an attempt to focus on specifics that was positive, refreshing and to some extent overdue. People were interested in specifics.
 
In the same study that suggested what might happen if we do nothing, NSAA showed that if the industry can increase the number of beginners by 6% each year (subject to some statistical limits that keep growth rates from getting ridiculous) and boost the conversion rate of those beginners by 1% a year, we can have 69 million visitor days annually by 2015.
 
There was general agreement on the need for action, at least among the attendees. Obviously, this kind of conference is self-selecting for people who already recognize that need. And there also seemed to be a consensus that concentrating on getting more people on the slopes and working to make them stay was an appropriate focus.
 
Formally and informally, people had different ideas about exactly what should be done by whom and what the opportunities and obstacles to success might be. There wasn’t an overall program presented. Still, from the studies I’ve seen from SIA and NSAA, the comments made at the conference, and my own experience working with companies that had to change, there was an implicit program that came out of the discussion. Recognizing that I don’t know much about running a mountain resort, here’s what I think I heard the elements of such a program might be.
 
Every Mountain is Different
 
There are 300 or so people out there who use to own snowboard brands who would have killed for the competitive differences that exist among winter resorts. Each is unique, and can utilize its uniqueness in attracting and retaining customers. But how is it unique? Step one is to find out. I don’t mean from anecdotal evidence, informal surveys, or perceptions from 15 years ago. An ongoing program of carefully structured, unbiased, thoughtful market research is required.   I know it costs money, is a pain in the ass, and leaves you with more questions than you had when you started. But you still have to have that the information.
 
Marketing Schizophrenia
 
Male or female? Skier or snowboarder or neither? Day tripper or destination visitor? Young or older? Rich, or not so rich? Real estate buyer? As an industry, it seems hard for the resorts to know where to focus its marketing efforts, although, of course, individual resorts may and often do have a clearer focus. But it’s never as easy in the skateboard business, where north of 90% of the customers are male and between the ages of eight and seventeen. What can resorts do to get that kind of focus?
 
Teaching and Retention: The Customer Experience
 
My perception, reinforced at the summit, is that the winter resort industry generally agrees that the battle has to be won by getting beginners to the slopes and motivating them to come back and by attracting back lapsed participants. There’s no need to market to core participants. They show up no matter what.   What has to happen so that the others show up?
 
They have to have a good experience. Short lines. Rental boots that fit. No confusion about where to go. Warm and dry. Access to bathrooms. Minimal caught edges during lessons. There are, no doubt, 100 others I haven’t mentioned or don’t know about. What’s the magic of this? Rich or not so rich, male or female, skier or snowboarder, young or old, the visitor to a winter resort wants this kind of good experience. They want to have fun. There shouldn’t be a penalty that can border on a fraternity hazing to become or remain a snow slider.
 
Magically, this is a big step in managing the winter resort’s Marketing Schizophrenia. The confusion caused by the apparently irresolvable market segmentation problems and the conflicting demands of each segment is suddenly dramatically diminished. It may not be as conceptually simple as being in the skateboard business, but suddenly a resort can say, “All our customers want this!”
 
Ultimately, customers always get what they want- from somebody. How shall we give it to them?
 
Management Commitment
 
It starts at the top, and there’s never been a truer cliché. Well, maybe one. I’ll get to it in a minute. If you run or own a winter resort (or any other business for that matter) and you think that your future success, and maybe your survival, depends on doing some things differently, you better be leading the charge. If you don’t- if you aren’t involved and seen to be committed every day- the organization won’t change. The customers will get what they want somewhere else.
 
Andy Clurman, President of The Skiing Company, suggested that each resort should appoint a Director of Learning and Retention, or some such title. Great idea. I’d add that the new Director should report directly to the General Manager or President of the resort and have instant access to them.
 
Nuts and Bolts
 
ASC reported at the Summit that the conversion rate for beginners who participated in their new Learn To Ski program was 30%. That program emerged from a complete reevaluation and restructuring of every detail of their teaching program and from measuring the results. It had nothing to do with running ads or showing people jumping off cliffs or selling the latest and coolest technology. It required changing the compensation structure. It meant a two-day seminar where instructors were turned, initially kicking and screaming it sounds like, into sales people. It meant new facilities and processes. No detail of the teaching and conversion process was left unexamined.
 
Opportunities- Not Problems
 
ASC Chairman Les Otten, addressing the Summit, said, “We don’t have a problem- we have an opportunity.” That’s the even truer cliché I mentioned earlier.
 
I think perhaps part of the audience did take it as a bit of a cliché. I didn’t get a chance to ask Mr. Otten, but here’s what I think he meant.
 
When a company needs to change, it resists. Of all the company’s I’ve worked with, I can’t think of one where that wasn’t the case. Inevitably, in addressing the issue, they try to do what’s worked in the past to fix the problem. “More of the same,” no matter how rigorously applied, doesn’t usually work. It also grinds you down. Pretty soon, if all you do is deal with problems you can’t solve, life sucks. It’s depressing, demoralizing, and no fun. There’s no way to succeed. And the worse it gets, the harder it gets to change. You trap yourself in an endless downward spiral.
 
Unless you’ve got an opportunity. In which case, you can create a positive environment, move forward, have fun, give credit, do good things and celebrate a little bit. And by the way you may have accidentally taken a step towards solving that problem that just wouldn’t go away. Pretty soon, you don’t have to “step outside of your box” to use another cliché. You’ve created a new, bigger and more comfortable box to be in.
 
Mr. Otten and the ASC management team saw an opportunity. It just so happens that it helps solve a problem.
 
Finance and Factories
 
General Motors hates it when the production line slows down or stops. They don’t want to repaint fenders. They can’t stand sending back parts. It drives them nuts when a poorly trained employee connects a wire wrong. They moan with every warranty claim.
 
Because every one of these things costs them money.
 
People aren’t cars. Still, the process by which a resort moves a beginner, or any customer for that matter, through the process of getting to the resort, getting equipment, learning, getting on the hill, and committing to come back is a bit of a production line. And people yell louder then cars on an assembly line when you connect their wires wrong. Every customer who’s boots don’t fit, who can’t find where the lesson starts on time, who gets wet and cold in the middle of the lesson, costs you money due to the disruption of the process. Not to mention potentially a future customer.
 
I love it when the marketing and the financial strategy seem to dovetail. I’ve discovered that usually an indication that a strategy makes sense. The operationally oriented approach that the Summit suggested is required to attract and retain snow sliders seems to make financial sense. Not only because of the medium and longer-term impact on visitor days, but because it requires an efficient (i.e., customer friendly) operation that saves you money right now. I also wonder how it might impact your spending on advertising and promotion over the longer run. I note from SIA data that 87% of visitors to winter resorts have internet access. If you’ve better identified your customer, have made it easier for them to come and have fun and have their email address, perhaps some of your other marketing expenses can be reassessed.
 
I don’t want to underestimate the financial implications of some of the ideas presented at the Summit. It costs money to undertake some of these initiatives and cash flow is a hard thing in all parts of the winter sports industry. Still, I can probably guarantee that resorts that don’t start now will have a harder time starting later.
 
What can retailers and suppliers do? You share some responsibility for making sure people know how much fun we have on the mountain. If you can equip them right, and the resorts can make sure they have a positive experience, maybe we will be looking at 69 million visitors in 15 years.

 

 

Benefiting from Recent Industry Initiatives; It’s Up to Each of You

By now, you should all have seen SIA’s study “Growing the Snow Sports Industry” and NSAA’s growth model for the resort business. They don’t claim that any industry initiative by a trade association is the salvation of the winter sports industry’s issues of participation and profitability. They say, if not exactly this way, “It’s up to each of you.”

From the 20,000 foot level, where the oxygen is thin, here’s what they said, how you can use their work, (whether you’re a brand, a retailer, or a resort) and why it’s such a hard thing to do well.
Industry Initiatives
SIA commissioned Growing the Snow Sports Industry: Marketing Analysis and Strategy for Breaking Down the Barriers. NSAA created a growth model for the snow resort industry based at least in part the conclusions of the SIA study, which you should also make sure you see.
SIA and NSAA did not position their studies as “industry initiatives.” They didn’t make any claims that their programs offered industry wide solutions. They acknowledged that previous industry initiatives hadn’t worked, or hadn’t had the funding and support to be implemented consistently over a long enough time frame.
They said, and this is the most important thing they said, here are some facts and ideas-It’s all up to you. We can’t fix the industry’s problems, but we hope we can give you some guidance and support as you do it.   They are exactly right.
I think that industry initiatives only work, or appear to work, when you don’t need them. When there is lots of growth, lots of money and less competitive pressure, everything seems to be working. In fact what’s going on is that consumer demand and cash flow can cover up a lot of shortcomings in a company’s strategic position.    When that changes, focus often becomes internal and understandably a bit more selfish. Support for industry initiatives, both in terms of time and money, is harder to come by.
In any event, in a consolidating or mature industry there is no rising tide to lift all boats. It’s up to each company to find their market position and respond to the particular needs of their carefully identified customers. The individual companies in addressing their particular circumstances can almost certainly put the resources that might be committed to an industry initiative to better use. That’s just business- in any industry.
What They Said
NSAA proposed focusing on two things; getting a 6% annual increase in beginners and increasing the conversion rate of beginners from 15 to 25 percent with the goal of increasing skier [their word] visits from 52 million to 67.2 million by in 2015. In their words, “The success of this formula for growth…lies not in any national campaign, but rather in the dedicated efforts of individual area operators consistently implementing achievable trial and conversion goals that make sense for their resorts.”
They go on to say that, “…this was developed with input parameters that reflect the national environment. At the regional level and at the level of the individual resort, the underlying dynamics of the Model change and, therefore, the specific goals also change…The great strength of NSAA’s approach toward growing the industry over the next 15 years is that it encourages individual self-gain and entrepreneurial spirit to achieve collective benefits” (Quoted from the September 2000 issue of SAM magazine, page 10. NSAA’s Model for Growth: What It Is, and What It Is Not. By Nolan Rosall, RRC Associates and Michael Berry, President, National Ski Areas Association).
Good strategy is the process of defining where you are, envisioning where you want to be and when, and filling in the time in between with appropriate tactics.   That’s what NSAA is suggesting to each of its individual members.
The SIA study recommends that each member company take steps appropriate to its specific circumstances and opportunities. Like NSAA, the SIA study is meant to support its members, not kick off any national campaign.
It starts by stating that “We must:”
  • Develop a unified understanding of the marketing problems and opportunities
  • Identify the market segments that hold the greatest “acceleration potential”
  • Focus our marketing resources on those productive audience segments
  • Apply those resources in an integrated, efficient manner
All true. For any business in any industry any time and I wouldn’t expect anybody to be even slightly surprised by that. The devil, as usual, is in the details.
They went on to “explode the industry myths that bind us to the obsolete remedies of the past.” Simplified, the five myths are:
  • That participants aspire to be “extreme.” They don’t. They are in it for the wholesome, lifestyle activities.
  • That the dominant barrier to increased participation is increased cost. It’s more complex than that and involves time, quality of experience and proficiency.
  • That we have a big opportunity with underserved populations who have never been on the hill. Maybe not. They have to be lured to the slopes, sold on winter vacations and cold weather activities, and convinced to adopt an activity their peers don’t participate in.
  • There’s a single advertising message that will work for the whole industry. There isn’t. The consumer base is too diverse.
  • That awareness of various “make it easier” technologies like shaped skis and of the technology’s benefits are high. Nope. Most are unaware of its existence or benefits.
After that we’ve got six key findings.
  • There is a strong relationship between proficiency, enthusiasm, participation and sales.
  • The industry is bleeding new triers and participants of low proficiency.
  • The biggest opportunity is in reactivating lapsed participants and upgrading light and moderate users.
  • New technology can produce marketing leverage.
  • Children can be a barrier or a motivator to increased participation.
  • Introducing consumers to skiing/boarding young and keeping their loyalty can have an exponential impact on revenue.
Based on this, they suggested a “new” approach to the market that included:
·         Looking at snow market as the sum of many segments- not as a mass market.
·         Communicating the brand snow sports in terms relevant to each of these customer segments.
·         Allocating marketing resources based on the potential value of each segment.
They go on to suggest more specific strategies and tactics for retailers, suppliers and resorts.
I’m sure most of us recognize that this “new” approach is old. It represents a pretty traditional market strategy that is new to winter sports only because it was, historically, unnecessary for success or, more recently, resisted. Why is that?
Déjà vu All Over Again
It doesn’t matter what industry we talk about. In periods of difficult transitions, all companies tend to react the same way. Specifically,
·         They do what they perceive to be in their own (short term?) best interest. They don’t ask, “How can we help the industry?” when they are dealing with gut renching issues of change and survival.
·         They resist change and tend to do “more of the same.” Change is uncomfortable and most of us dislike stepping out of our comfort zones.
·         They have a hard time just recognizing the new environment they are operating in and frequently don’t until they are slapped upside the head.
·         They focus on tactics that are responsive to short term pressures rather than identifying and reacting to critical strategic issues.
·         Typically, an outside change agent (the bank, big customers, a consultant or new CEO) is required to motivate the change process.
Before I’d ever heard of a snowboard, I’d worked with companies in banking, pharmaceuticals, light manufacturing and retail where this was the case. I can assure you it’s true in snowboarding and in all of winter sports as well.
Many of the people making skis and running resorts have been doing what they do for a long time. There’s a tremendous amount of inertia and continuity in the industry. With such long histories, established relationships, and common perceptions firmly entrenched in a comfort zone, it can be difficult to make the kinds of changes the industry required.
Those of us who got into action sports through snowboarding have the same issues, though perhaps not to such an extreme if only because we haven’t been involved as long. Like skiing in another era, snowboarding could rely in its early years on the enthusiasm of its youthful participants to overcome issues of expense, poor facilities, lousy equipment and inconvenience. If, as an industry, we didn’t handle our consolidation as well as we might have, we can plead that it happened too quickly to react to, and we’d be partly right.
Now, we’re getting older (which is fine given the alternative). Larger corporations, most of who are also in the ski business, dominate snowboarding. The snowboard, ski and resort industries increasingly have common issues, interests, and relationships.
What You Can Do
One of those common interests is making money, which has been a hard thing to do for a lot of organizations. I know we’re also interested in the lifestyle, and the product, and the experience, and supporting the sport, but if there isn’t enough money made, we won’t be here to do that. Everybody reading this knows somebody who’s committed to snowboarding, use to be in the business, and isn’t anymore as a result of financial issues.
SIA and NSAA have now provided their members with a justification and a framework, rigorously validated through actual data, for changing the way they do business in response to new competitive conditions. But they can’t (and have learned they can only get in trouble if they try to) do it for you.
That’s all they can do. A basic blue print is in your hands.   Adapt it for your organization and go and do it. You can’t “fix” the industry anymore than SIA and NSAA can. But you can sure take a shot at fixing your piece of it. Bottom line? Marketing, and customer identification and segmentation, not discounted season passes, longer terms for retailers, and discounting at retail that starts in November are the answer if we have the patience and longer-term perspective to do it consistently. Step out of your comfort zone.

 

 

Building a Business; Issues for Would be Skate Entrepreneurs

When a market gets hot, people start companies.   Where the capital costs and entry barriers are low, they start more rather than less. When there’s enthusiasm for the industry and the lifestyle, they often start them for all the wrong reasons, and without adequate or any business planning. It looks like easy money, but it usually isn’t. 

 
Well, God bless naïve, enthusiastic entrepreneurs because if everybody understood the risks and stresses of starting new businesses, none would ever be started. I don’t want to discourage anybody from starting their business, but I’d like them to know what they are getting into, what’s going to happen if they have some early success, and why it’s too late to begin when the market is already hot. The genius of the entrepreneur is in starting his or her business before everybody else sees the opportunity.
 
Just for fun, let’s say you want to start an independent street shoe company. Now? Today? Okay, okay, stop laughing. Pretend it’s two years ago.
 
In the Beginning
 
You’re a sponsored skater with a good reputation, and a following among local retailers. You don’t like the shoes available to you. Conversations with retailers you know make it “obvious” they’d be receptive to some new colors and designs. Response to your color sketches and description is positive. “Cool! We’ll buy them for sure,” they say almost without exception.
 
“Kaching!!!” you think. Easy money, here I come. Not that anybody gets into the business for the money of course…….
 
Let’s make this simple. Magically, you’re through the product development cycle and are ready for production. You did all the work yourself.   A friend introduces you to a manufacturer who loves you and your shoes so much he agrees to produce a thousand pairs with no up front money and to give you 60 days after delivery to pay. Orders from some retailers materialize, though not from everybody who said they would buy and not always as large as you’d like. You successfully grovel, taking the “I’m just a poor skate entrepreneur” approach to your new customers, and they reluctantly agree to pay you cash on delivery.
 
Your shoes arrive on time (right). All the people who said they’d buy your shoes buy them (sure they do). They all pay you cash as promised (uh-huh). You put the money in the bank and earn interest until you have to pay the factory that made the shoes for you. The shoes all sell through great (of course). Reorders flow in like water over Niagara Falls during the rainy season. What a terrific business this is. Here’s what your income statement for this little business looks like after the first 1,000 pair.
 
Net Sales                                                          $25,000            
Cost of Goods                                                  $15,000
Gross Profit                                                      $10,000 (40 percent)
 
Operating Expenses                                          $2.000
 
Pretax Income                                                   $8,000
 
Remember that everything went perfectly. Also, you worked for yourself for free and did everything yourself. Your operating expense was almost all for travel and communications. At the end of the day, you’ve got yourself a nice little 32 percent profit margin. Isn’t that wonderful!
 
Having run a distributor that was selling imported product, I am here to tell you that everything working right is a full-on, drug induced, hit your head while skating without a helmet, hallucination.
 
But it’s a great hallucination to have, so let’s assume it continues except for a couple of little things. You’re so hot that your next order is for 10,000 pairs.
 
The Next Step Up
 
Your supplier still likes you but, hey, this is business. With an order that size, he wants a letter of credit or a deposit up front, and you’ll have to pay him the balance when he ships the shoes. Remember, though, that this is a hallucination, so he gives you a break and says you just need to pay him when the shoes ship.
 
Your retailers still like you but, hey, this is business (you’re starting to hear that a lot as your company grows). They want 45 -day terms just like they say they get from the other companies. The 10,000 pair cost you $150,000 including freight and duty.  Your supplier says, “I’m ready to ship, send the money.”
 
Details like this can really put a damper on perfectly good hallucination. The bank won’t lend you any money, your credit card limit isn’t quite that big and none of those lottery tickets you’ve bought have been winners. You need $150,000 or you’re out of business. Let’s assume somebody comes along and lends you the money for only an exorbitant interest rate and doesn’t want 50% of the equity in your company to do it. Remember, this is a pleasant hallucination.
 
The shoes are delivered to you and, in turn, to your customers. You’ve sold the shoes, you’ve got the same 40 percent gross profit that you had when you sold 1,000 pair, but this time it’s 40 percent of $250,000 or $100,000.
 
Inconvenient Realities
 
The expense side looks a little different though. You had to get some help warehousing and delivering the product. Retailers want some service so you need some phone lines and somebody to answer them. Some promotional product has to go out the door for free. The guy you borrowed the $150,000 from wants interest. You’re still making money at the bottom line, but that 32 pretax margin has evaporated. Maybe if you’re lucky it’s still as high as 15 percent but heading south fast as you become an established company.
 
Oh, and by the way, you’ve got no cash. You retailers aren’t paying you for 45 days and, strangely enough, not all the cash shows up exactly on the 45th day. But the people you’re hiring to man the phones and deliver the product don’t seem to want to wait 45 days to get paid. It’s the lament of the entrepreneur to their accountant- if I’m making so much money, how come I can’t pay my bills!?!?!?!
 
Now, awaking from our dreamlike state, we find that the supplier wants a letter of credit before he’ll produce any more, and the order isn’t really big enough to get his attention anyway. Retailers are asking about your team and your promotion budget. Some shoes sell and some don’t. Certain retailers you really want to be in want a credit for the ones that haven’t moved. There’s so much to do that you need to hire more people to help you. The government wants you to fill out a bunch of paperwork, and they want their piece too. You’ve got every cent you can find invested in the business and it’s barely enough-for the moment.
 
Congratulations- you’re no longer an entrepreneur, you’ve a manager. Overall, your income has increased. But your net margin on each pair of shoes sold has declined as the cost of running the business gets bigger.
 
You didn’t do anything wrong. This is all normal stuff. Every time volume increases and margins decline, more working capital has to be invested in the business. Working capital is nothing but the money you have to spend to pay bills, get product made and market your brand while you wait for retailers to pay you. Almost every successful, growing business I’ve ever seen has working capital crunches as a normal part of growth.
 
Managing by the Numbers
 
What can you do to avoid this financial hang grenade?   Nothing. It comes with being in business. But you can try and minimize its impact by a little planning. Do it on a computer or with a piece of paper. Here’s a format I’ve used with some success in a variety of businesses. Don’t get fixated by the categories I’ve used. Change them to work for your business.
 
                                                            Jan.      Feb.     March. Etc.
 
Beginning Cash Balance
Sources of Cash
            Cash Sales
            Collection of Receivables
            Borrowings
            Other
Total Sources of Cash
 
Total Cash Available
 
Uses of Cash
            Product Purchases
            Payroll
            Rent
            Utilities
            Advertising
            Phone/Fax
            Etc.
Total Uses of Cash
 
Ending Cash Balance
 
The beginning cash balance is probably whatever is in your checking account. The ending cash balance each month becomes the beginning cash balance for the next period. Depending on how quickly your situation is changing, your estimate of expenses can usually be based on your historical experience. But remember that just because you get your phone bill in July doesn’t mean you pay it that month. Typical many of your operating expenses will be paid in the month following receipts, and your cash flow has to take this into account.
 
Don’t get too caught up in the process of creating a perfect model. Get it done and work with it. Modify it as you learn more. Look at your projections versus what actually happens. Creating the model isn’t really where you get the benefit. Using it and watching the variables change with each other is.  It’s a lot like learning a language. You only get better with practice and as soon as you stop speaking it, you start to lose it.
 
Rules to Live by
 
Rule one, then, is don’t try to grow your business faster than you can finance it.
 
Rule two for the budding skate entrepreneur is to know the difference between starting a company and running one. Get the help you need.
 
Rule three is that it’s easy to sell when you’re new and small, and harder as you grow. Know how you’re going to compete.
 
Follow these three rules and maybe the glamour of having your own company won’t wear off so quickly.