I just found out I’d volunteered to facilitate the panel on distribution at next week’s IASC and BRA sponsored Skateboard Industry Summit. I had to spend some time getting my thoughts about distribution in order, and I know of no better way than to write them down.
Distribution has always been a bit of a contentious issue in the skateboard industry. I’d regularly go to the IASC sponsored breakfasts at ASR and listen to the participants agree that the industry should “do something” about distribution. Then came the implied blame and pointing of fingers as the brands, retailers and distributors all looked at each other. Needless to say, nothing much was accomplished.
“The industry,” of course, is never going to “fix” distribution. Every company, if I can recite for the umpteenth time what seems to be becoming my mantra, is going to do what it perceives to be in its own best interest- as it should. And, by the way, distribution isn’t and was never “broken” and doesn’t need fixing. As it does in every industry, it just evolved based on consumer requirements and competitive actions by companies. Distribution may be inconvenient and not the way we’d like it to be, but it’s not broken.
When concern about distribution is expressed, I usually translate it into “Where and how the other guy is selling his product is pushing my gross margins down and I need higher gross margins so they should change what they’re doing.” Another translation might be, “I need to run my business a little differently in the existing competitive environment, but I’d rather not.”
But of course eventually you will or you won’t be here. Let’s take a short look at how distribution evolved and what the drivers have been and are.
A Little History
Maybe ten years ago, skate hard goods distribution was pretty closely controlled. When it was still a smaller, underground activity the smaller number of skaters were content, or committed enough, to pay a high price for branded decks. Also, they had few options. This gave the companies enough margin dollars to support their team and marketing programs.
Then a handful of things happened. The Chinese learned to make quality decks. The internet market place blossomed. Skateboarding went mainstream. The industry was slow to innovate. Big companies with way, way more money than a skate company could even imagine got interested in skating. Skaters figured out that what the skate companies had been telling them for years was true- a skate board was seven or eight plies of laminated Canadian maple and anything not made like that wasn’t a skateboard. But they took it a step further then we in the industry might have wanted them to. Many of them decided that since all the decks were the same (as they perceived it), it would be nice to have an extra $25 in their pocket for a product that was going to wear out anyway.
My belief is that the number of skaters grew dramatically for a while. But of course somebody who identifies themself as a skater isn’t necessarily skating every day, or even every week in our new broader market, so how much product they buy is unclear. As with any activity, you can identify closely with it, but not do it regularly yourself. Maybe you buy shoes and clothes instead of hard goods.
In spite of the increase in the number of skaters, the market for branded, full price decks fell. There will always be a market for branded decks, but the overall number of skaters that feel it’s necessary to pay that price has fallen even as the number of skaters has increased. Please remember here I’m talking about the industry here- not specific brands.
We can’t talk about distribution without mentioning blanks and shop decks. Blanks are still out there, and those who want them can get them. But the shops, correctly I think, have decided that carrying blanks isn’t in their interest, and they’ve turned to shop decks. The margins are good, and those shop branded decks go a long way towards helping them connect with their customers and build the local skate community. And quite a few skaters, I gather, like belonging to the more tangible community revolving around their local shop than to the one represented by a pro skater they’ve only seen in videos.
Cary Allington at
Action Watch reports that in 2010 “shop deck” was the leading brand at the stores in his panel, accounting for something like 25% of short deck revenues. The second brand was about 6%. He further reports that the average price paid for a branded short deck (under 34 inches) was $47.34 in 2007 and $47.31 in 2010- essentially unchanged. Wonder what the cost of a deck did over that period. The average gross margin over the same period rose from 34.1% to 36. 2%.
The Distributors
Brands have two choices. They can sell in smaller quantities directly to retailers. They have to carry and manage the inventory to cover those orders, cover the associated overhead and, to the extent they extend terms, collect from the retailers. This ties up working capital. Or they can sell in larger quantities to distributors. If they take that approach they don’t have to collect, they get paid quickly, they don’t have to stock as much inventory and they save some operating expenses. It is, to put it succinctly, less balance sheet intensive.
In practice brands do both, selling to distributors and directly to retailers as well. I guess it’s pretty much up to the retailer to decide who they buy from. We could have a long and interesting conversation about the role of distributors in marketing brands. But let’s keep to the numbers part of things right now.
Distributors require discounts off the brand’s usual wholesale price- typically around 25% I’m told. At a time when margins for brands are already squeezed one wonders why brands haven’t stopped selling to distributors and gone direct. Nobody has shared their rationale for continuing to use distributors with me, but I suspect it’s at least partly a cash flow issue. Here’s why.
Let’s say a brand pulls out of a distributor. Immediately, the brand’s sales will fall to the extent of its sales to the distributor and assuming that all the distributor’s customers for that brand don’t turn right away to that brand to buy their product direct. And the distributor would continue to sell its existing stock of the brand’s product unless, maybe, the brand bought that stock back.
Over some amount of time, depending on the brands market strength, some of those sales would migrate from the distributor back to the brand giving the brand a higher overall margin. The question is how much and how fast? Once again, it depends on the brand. Would retailers that had been buying from a distributor just shrug their shoulders and say, “Oh well, I’ll buy a different brand” or would they say, “We’ve got to have that brand in our store.”
There would, then, be some initial decline in cash flow (hopefully temporary) and some permanent increase in expenses as a brand made the transition from the distributor to selling direct. My hypothesis is that business conditions have evolved for some brands to the point where they just don’t have the balance sheet to consider making that kind of change even if their analysis shows it would make business sense.
A Different Point of View
Snowsports Industries of America recently reported that February industry sales were down 1.5% for the month compared to the previous year. A bad thing? Nope, a great thing because gross margins had risen 8%. I
wrote about it on my web site and basically said, “You made more money by selling less.” Now, a great snow year didn’t hurt, but basically most of the snow brands were scared shitless by the recession into ordering and producing less product and the consumer, finding shortages, was willing to pay more and valued the brands more. And if the snow guys are lucky and not too many brands and retailers get too greedy, and if it snows some, the industry can expect customers who won’t have any closeouts available to them this fall and who will be anxious to buy at full margin to get what they want.
I think both these ideas are worthy of consideration by the skate industry. Selling more doesn’t necessarily make you more money if everybody else is trying to do the same thing. And, like Orange 21, some of the industry companies may simply not have the resources to effectively pursue the skate team pro rider strategy that’s been the anointed foundation of this industry forever.
That’s not to say that isn’t a great strategy for certain brands, but I suspect that with the growth of skateboarding it’s become less important to more skaters. And that’s before we even talk about long boarding.
Shops are becoming brands. Quality decks are available from a variety of sources and can be found in a broader retail environment. Price matters more than it used to. Some brands have become dependent, to a greater or lesser extent, on distributors who could easily become their competitors if they choose to. Large companies with massive resources want a piece of the pie.
As much as we might want to, we’re not going back to the skate brand and retailer friendly distribution and pricing scenario of some years ago. Let’s stop talking about “fixing” distribution and focus on competing in the environment we’ve been handed.
I’m hoping, by the way, that some of what I’ve written is just the slightest bit controversial and that some of you will take the opportunity at the conference next week to explain to me how it is that my head found its way into such a warm, dark place. The goal isn’t to be right or wrong but to exchange information and maybe get a new perspective that will help us run our businesses better and build the industry. I always learn a lot when people tell me why I’m wrong.
