Public Wisdom, Maybe; Comparing the 1999 and 2000 Buyers Guides

I hold in my hand the Transworld Skateboard Buyers Guides from 1999 and 2000. Everything you could possibly want to know about decks, trucks, wheels, and bearings are in these guides.

 Well, okay, Transworld exercises some discretion in which brands make it into the guide and which don’t.   All the product from each brand isn’t necessarily included. Not everybody has actual suggested list prices so the ones included may be a little suspect. Certainly, the prices don’t bear much relationship to what things really retail for, do they?
 
Still, there are a lot of data points, and when you’ve got a lot of data points something statisticians call “regression to the mean” takes over and you find that you may be able to glean some relavent information in spite of all the inaccuracies.
 
I’ve spent a lot of time figuring out average prices and price trends and comparing them from one year to the next and listing and counting brands to see who’s there and how it’s changed from one year to the next. My fingertip is raw from punching the calculator button, and I’ve damn near gone blind staring at the guides (nobody warned me you could blind from reading skateboard buyers guides). So caveats aside, what can we learn from the two Guides about how the industry is evolving?
 
After we’ve looked at the Guide data, we’ll travel to a major skateboard internet site and see how the data checks with retail reality.
 
Decks
 
The 1999 Guide featured 411 decks from 49 brands. The 2000 edition had 402 decks from 60 brands. The increase in the number of brands has more to do with who Transworld put in the guide than with the number of brands there really are. The numbers exclude longboards.
 
The average suggested retail price for a deck declined from $54.79 to $53.35, or about 2.6%. The overall range of prices also moved down. In 1999, decks were priced from $39.95 to $76.95. In 2000, it was from $33 to $67. In 2000, everybody pretty much dropped the cents from their prices, rounding them to the nearest dollar and, incidentally, making my calculations a lot easier. Keep in mind that blanks aren’t included here.
 
MIK-
 
Here’s the distribution of decks by price for 1999 and 2000. I suggest you do a chart that shows the number of decks at each price point for each year.   You kind of need to do it, because I’m going to refer to it.
 
1999
 
Price               Number of Decks
 
34              3         
40              20
45                  20
46              90
47              14
48                  11
49                  22
50                  106
51                  4
52                  2
53                  5
54                  1
55                  35
58                  8
60              11
70              137
77                  1
 
2000
 
Price   Number of Decks
 
33          1
35              1
37                  2
40                  2
45                  7
48                  7
49                  2
50                  115
51                  3
52                  33
53                  99
54                  2
55                  38
56                  4
59                  10
60                  63
65                  3
66                  7
 
The two charts show the distribution of decks by price for the two years. Check out how the distribution has tightened up. There are fewer decks at either the lower or the higher price points. In 1999, there were 180 decks priced under $50. In 2000, the number is 22. Similarly, 1999 included 137 decks at $69.95 (I call them $70 on the chart). There aren’t any in 2000.
 
The distribution of prices has gotten a lot tighter, and the average suggested retail price moved up because of the huge decline in the number of lower priced decks. Basically, what you’re seeing is that consumers can’t afford to pay $70 for a deck (or can’t be convinced that it’s any better than a $50 deck), and nobody can make money on full graphic, branded decks that retail for under $40.
 
This tightening of the price distribution is absolutely consistent with a market where there are few real differences among products. The consumer is price resistant, and the brands all find themselves on the same cost curve. That is, it costs them all more or less the same for a deck. It’s inevitable that prices move closer to each other.
 
Wheels, Trucks and Bearings
 
There were 208 wheels in the 1999 guide from 48 brands with an average cost of $31.25 per set. The 2000 guide featured 224 wheels from 58 brands with an average cost of $30.58, down two percent. Again, be cautious in concluding anything from the number of brands.
 
Sets of wheels were priced from $24 to $43.95 in 1999 and from $20 to $40 in 2000. Prices moved down about four bucks per set, but the spread between the lowest and highest remained the same.
 
Now if I was really diligent (read that obsessive/compulsive) and had nothing else to do with my life, and loved the feeling of calculator buttons moving under my fingers, I’d go back and create the same kind of chart for wheels I did for decks. My guess is you’d see the same trend towards a tighter distribution of prices, and for the same reasons.
 
28 trucks were available from 19 brands in the 1999 guide. The average price, excluding the product for $100 a set, was $38.50 per set. They ranged from $19.60 to $100 per set, but if you take out that $100 set, the top price was $55.50 for a set. 
 
In 2000, 21 brands offered 43 trucks. The average price was $40.56, up 5.3%, excluding the $100 product. Prices ranged from $22 to $52.
 
Happily, there are fewer bearings to count and calculate. In 1999, sixteen brands offered 26 bearings. The average price was $20.79 a set and they ranged from $9.60 a set to $36.50 a set.
 
The 2000 guide featured 22 bearings from 15 brands at an average price of $19.73 (five percent lower than the previous year) excluding the $120 ceramics. Prices ranged from $10 to $37- basically the same as 1999.
 
Trends Across Products
 
The number of brands was up in all product categories except bearings, where it dropped by one. The number of product offerings was up everywhere except in decks, where it declined by two percent. Prices fell except in trucks.
 
It’s hard to interpret the increase in the number of brands. I want to emphasize again that it is probably more how Transworld put the Guides together than how the actual number of brands changed. I guess there are some new companies, and new brands also represent new offerings from existing companies trying to find a marketing advantage. It’s troubling for the industry as a whole that such a maneuver is part of the basis of competition. It just confirms the similarity of product from brand to brand.
 
Prices are tending down, at least slightly, even in what I believe is the hottest market that’s ever existed in skateboarding. In snowboarding’s go-go years, you could raise prices each year. The implications for what the market and industry may be like when (not if) growth slows aren’t very encouraging. Right now, if I were a brand that was having trouble meeting demand I wouldn’t try to meet quite all of it.
 
Yup, you heard me right. When business isn’t so good, the companies that will get through it successfully will be the ones who have nurtured their brand’s market position, built their balance sheet, and controlled expenses. The skateboard industry’s consumers tend to lose interest in any product that everybody has. What better way to support your brand then to make it just the slightest bit harder to find? I think it may be better marketing than some of the things you spend advertising and promotional dollars on.
 
Another trend, obscured by the coming and going of brands in the industry, is the dominance of perhaps the five or seven largest players.  As I watch deck prices move towards each other, with every player on basically the same cost curve, I’m certain, for better or worse, that these companies will end up with the lion’s share of the market. I’m not saying there isn’t some room for smaller players, but every industry has this trend towards consolidation.
 
Back in the Real World
 
Because of my healthy skepticism about the picture painted by the Guides, my nimble fingers have taken me to a major internet retailer of skate products. I didn’t check out every brand in every category, but I looked at a lot. Decks, including grip tape were either $44.99 or $49.99. Add some shipping costs, but may be subtract sales tax depending on where you are ordering from, and the price isn’t too far from the average price of $53.35 in the 2000 guide. Then, of course, there are the store brand decks for $29.99.
 
Almost all the trucks were either $33.98 a set for plain metal, or $37.98 for painted. The average price in the 2000 guide was $40.56. That number included both painted and plane metal trucks. Again, not so far off from this site’s prices if you take account of shipping costs.
 
Wheels were $23.96 a set “unless otherwise noted.” I saw some at $31.96 a set and there were the store brand wheels for $15.96 a set. That’s quite a different from our 2000 guide average price of $30.58.
 
To nobody’s surprise, the Guide’s suggested retail prices are higher than street prices when compared to one very comprehensive web retailer. We also confirm the tendency to move towards a simpler pricing structure, recognizing the lack of real product differentiation.   But except for wheels these retail prices are not that much higher then the Guide average prices. 
 
It looks like, at the end of the day, the lack of product differentiation is pushing product prices lower, but high demand is controlling, though not eliminating, that trend. At least for the time being.

 

 

Snowboards from Afar; The Potential Impact on Retailers

In the early 90’s, when snowboards started pouring into the U.S. from the Austrian ski factories, there were claims that consumers wouldn’t accept boards labeled “Made in Austria.” Mostly, those claims were made by U.S. factories threatened by foreign production. If there was a marketing advantage to a board “made in the USA,” it didn’t last long, and smaller inefficient U.S. producers went out of business.

In our consolidated, mature industry, brands are taking the next and inevitable step of looking for ways to cut production costs while maintaining or even improving quality. Boards have and are coming in from China, Tunisia, and Spain, and we can reasonable expect to see numbers from lower cost countries grow.
 
In seeking lower cost product, what are the issues the brands have had to consider? What’s in it for the retailer?
 
The Cost Equation
 
There are four basic components to the cost of a snowboard- materials, direct labor, factory overhead and allocated overhead.
 
No matter where you build it, Tunisia, China or Tierra del Fuego (uhhh, there are no factories in Tierra del Fuego as far as I know) the materials that go into the board are the same. You have the same choices of where to buy them. If everybody buys their materials from the same suppliers, the material cost of making a snowboard will be more or less the same for everybody. Would it make sense to start your own factory to make, for example, cores in a low labor cost country? Maybe. If you have enough volume. If you can get the right wood. If you could actually make them for less than it would cost to buy them from an efficient, established source.  
 
Direct labor is often the major advertised justification for making a snowboard outside of Europe or the U.S. Let’s say that you’re paying somebody $13 an hour, including taxes and benefits in the U.S. to make snowboards. If they work, for example, eight hours a day, 25 days a month, labor cost is $2,600 a month.
 
For sure direct labor is cheaper in China. Jim Ferguson, the President of Heelside doesn’t make boards there, but he’s a thirteen-year veteran of China, lived there, and has a boot factory there. “You don’t pay an hourly wage in China,” he said. “You pay monthly and the cost includes room and board.” He estimates his average cost is $150 per worker per month, and indicates that he’s more generous than many employers. But from his point of view, he more than gets it back in continuity and loyalty.
 
 Well, even without a calculator, I can tell that $2,600 a month is more than $150 a month. A lot more. So clearly if you compare the cost of a worker in a less developed country with the cost of one in the developed world, you’ve got a savings that’s somewhere between significant and huge.
 
Hold on. It’s not quite that simple. There are two related issues. Training and productivity.
 
If it took 11.33 (2,600 divided by 150) workers in China to make the same number of boards that one worker in the U.S. could make in a month, then there would be no direct labor cost advantage to making boards in China.   Both factories would spend the same amount of direct labor money to make a given number of boards. And maybe, when you first open the doors in China, that’s the case. Don’t underestimate the labor training costs in a new manufacturing operation. It’s easy to find people to make skate shoes in Korea. They’ve been making shoes there a long time. Out in the fabled Isles of Langerham, though, they’ve never heard of snowboarding.
 
Let’s also dispose right now of a common delusion about labor. Just because it’s cheap doesn’t usually mean that if one worker isn’t doing the job you can throw ten more at it and fix the problem. It may be true in ditch digging, but not in snowboard manufacturing. Only one person can work a snowboard press at a time, and ten untrained people can’t resolve the problems caused by one who doesn’t know what he’s doing. 
 
Having said that, it’s important to recognize that a lot of complicated products are produced perfectly well in so called third world countries and making a snowboard ain’t rocket science.
 
Things start to get really interesting when you look at overhead. Here in the States, if we want to start a factory, we see either a contractor or a commercial real estate agent, tell them what we want, and they either build it or find it. Maybe we’ve got to make changes or improvements in a rented facility, but we can generally assume that the place will have a level floor that isn’t dirt, and that water and power is easily accessible. We probably count on a road. 
 
All the money you have to spend to get the place the way you want it is called leasehold improvements. It gets amortized over time on the income statement. It can be a huge number in a low labor cost country.   
 
What does it cost a brand to have managers live in third world country? Maybe it’s only temporary until things are up and running smoothly- like a year or two. Who will perform maintenance and repairs on complex machines? How long does it take to get parts? In the States, you get them by FedEx the next day. In a low cost labor haven, you may have the expense of keeping a big inventory to keep things going.
 
But then, there are those costs for workers again, so it doesn’t cost much to keep the place clean. Or maybe you don’t have too. No Environmental Protection Agency after all.
 
Putting It All Together
 
Obviously, there are cost savings in making many products in low labor cost environments. Everybody’s doing it. In making the decision to go for it, the brands are asking the following questions:
 
·         Is the product already being made in the country I want to produce in? If so there’s probably already some experience there, and it’s easier to get going.
·         Can I just buy from an established producer, perhaps helping them improve their technology and processes, rather than starting my own factory?
·         Am I in this for the long run, and can I build enough volume? There will likely be some surprises and additional costs, both ongoing and of the one time startup nature.
·         Are those seductive, loudly trumpeted, low worker costs enough to make up for the additional expenses and surprises? As much as anything, that comes back to the issue of volume. There has to be enough volume so that the direct labor savings per piece are greater than the additional overhead costs.
 
The Retailer Perspective
 
Assuming that, in fact, it turns out to be cheaper to produce a board (or other product) of the same quality in these new locations, what benefits can the retailer expect?
 
For a start, it should be clear from the above discussion that production in low labor cost countries is not the magic potion of higher margins. Obviously, the benefits are expected to be there. But one manufacturer I spoke with described the years it took to get it right.
 
Also, remember that the brands aren’t necessarily rolling in dough. It’s not easy to make a buck in the snowboard hard goods business right now whether you’re a retailer or a brand.
 
So what retailers shouldn’t expect is to see sudden, big price reductions on wholesale product prices.
This is especially true because not all of anybody’s boards are likely to be made in lower cost countries. Marketing and research and development considerations suggest that production at traditional sources will continue. I’m sure we can all hear it now. “Well, yes, we’re making a few boards in Nepal, but our high end stuff still comes from our hi tech factory in the states and all our R & D is done there.”
 
But retailers may benefit in other ways. If there is, indeed, more margin for brands, you could see some of that show up as better customer service and expanded advertising and promotion by the brand. Part of the extra income may just stay on their balance sheet as additional profit, making it easier for them to make and sell the retailer boards they often don’t get paid for until six or more months from manufacture.
 
Often, the relationship between the brand and the retailer, at least in terms of product wholesale pricing, seems like a zero sum game. One wins, one loses. In this case I don’t think that’s true.
 
Assuming that the brands did pass through all of their supposed cost savings realized from moving production to low labor cost environments, retailers would inevitably, in the normal course of competing with each other, begin to lower prices. Each would know they didn’t really want to do it, but would feel the competitive situation required it.
 
Do you think that such cost reductions would make your sales volume go way up if your competitors had reduced prices in the same way? My guess is no.
 
Would you rather earn your usual margin on a $400.00 board, for example, or a $300.00 board?
 
If you sell the same number of $300 boards as you were selling of $400 boards, your total margin dollars decline. That’s a bad thing.
 
Cost reductions from new production locations won’t happen overnight. When (if?) they do happen, I’d select certain select, gradual price reductions to be passed on to retailers because the brands compete with each other in the same way that the retailers do. Overall, my hope is incremental profit for the brands goes into supporting the sport and the retailers. Maintaining brand image is key to everybody making a few bucks.
 
 
Check out the table below, taken from U.S. government data, showing snowboard imports from selected countries in 1999.
 
Country                      Units                           Value                         Cost Per Unit
 
Austria                       198,535                      $14,587,818              $ 73.48
Spain                          39,679                      $   3,771,523             $ 95.05
China                          67,765                      $   3,379,457             $ 49.87
Taiwan                        39,676                      $      623,477             $ 15.71
Tunisia                           4,600                      $      581,826             $126.48
Canada                      230,326                      $12,033,129              $   52.24
 
Some caveats and warnings about these numbers. Call me naïve, but I just have a hunch that all those boards coming in from Canada aren’t made there. I also suspect, especially in the case of the product coming from Taiwan, that the goods aren’t all what we’d call snowboards. Just materials for a real board cost several times the unit cost of $15.71.
 
As a retailer, you should keep in mind that these prices include second qualities, closeouts, kids stuff, and snowboard like products you wouldn’t be caught dead with in your store. So don’t look at any of these unit costs as necessarily indicative of what you’re favorite brand is getting the new season’s first quality boards for.

 

 

Skateboards on the Internet; “You Can Get Anything You Want…….”

I girded up my loins (you’d think doing that would hurt) and sat down to research this story, fully expecting to have to visit dozens of web sites and to check each of them out utilizing my infuriatingly slow web connection.

My web connection is, indeed, infuriatingly slow, but it looks like there may be less research than anticipated. You can pretty much find any deck, truck or wheel you want at prices competitive to shops. Let me give you one example- the first site I visited.
 
The Ask Jeeves search engine sent me to MySimon’s skateboard buying page when I asked where I could compare product prices. There were 38 board brands listed and north of 300 decks available on line mostly through FogDog and N.A.G. Skate House. A couple could be bought from Sports Authority. Almost all the decks were priced at $49.95.
 
There were 150 trucks from 17 different brands available at 12 different on line sellers. The overwhelmingly common prices were from $14 to $19 (per piece). A mere 410 wheels from over 30 brands could be purchased from 12 retailers. Sets of four wheels were priced typically from $25 to $29. Note the same product was sometimes available from more than one on-line retailer so 300 decks, for example, isn’t necessarily 300 different decks.
 
I checked out Fusion, Earthsports and CCS to name just a few. I looked at some shop sites, and some brand sites. For the most part, the brand sites aren’t selling directly, but my initial conclusion stood up. You can, indeed, get anything you want. Not everything every place all the time. But pretty much everything someplace most of the time.
 
What are the implications for the industry?
 
Entropy and Palm Pilots
 
The idea of entropy as used in the second law of thermodynamics says, to use an example, that if you drop a hot rock in a bucket of cool water, the temperature of the rock will drop, and that of the water will rise, until they are equal.
 
When I bought my Palm V, I went to CNet.com. It showed me the list of 20 or more places where I could buy the product. I sorted the list by price, and bought from the cheapest place (after taking shipping costs and sales tax into account).
 
All the water molecules in the bucket, being identical to each other, become the same temperature. All other things being equal, Palm Vs should all be priced the same. Modern economic theory sort of mimics the second law of thermodynamics; prices will fall until marginal revenue equals marginal cost the textbooks say.
 
Of course in business, all things are never equal for either Palm Pilots or skateboards. Even where the products are effectively identical, various market “frictions” such as distribution, production efficiencies, advertising and consumer perception create points of differentiation that can justify some price differences among essentially identical products. Happily, skateboards aren’t water molecules.
 
On the other hand, they aren’t as distinctive as Palm Pilots.
 
The temperature of the rock and water in the bucket only fall and rise to a certain point on the assumption that the heat can’t get out of the bucket. That is, it’s a closed system. That’s not true with the skateboard industry. It’s an open system where companies and product come and go. If heat can go through the side of the bucket, then the temperature can drop further. In business, the comparable result might be irrational competition, where marginal revenue is pushed below marginal cost on the assumption that the other guy will fold first.
 
Happily for skateboarding, favorable demographics and the resulting market growth seem to be putting more hot rocks in the bucket and at least keeping the temperature from falling. Business seems good right now.
 
Elvis Has Left the Building
 
Where other industries are agonizing over how their products should be distributed on the internet, skateboarding has made its decision. I can’t say that every deck, truck, wheel and bearing of every brand is available on the net, but an awful lot are. My gut is that most are. Enough so that, as an industry, we are suggesting to the consumer, at least from a distribution point of view, that there’s nothing distinctive or special about the product.
 
“Here’s a bunch of decks-they’re kind of all the same,” we proclaim by our actions. Web sites show them all in rows like soldiers standing at attention with the prices the same or close to each other. Perhaps it doesn’t matter, and this is just an extension of a skate shop with decks lining the walls. It’s also the result of a distribution system where brands not only sell direct to retailers but to middle men who distribute the product further. For better or worse, distribution is simply not controlled as well in skateboarding as in some other industries.
 
Maybe Elvis left the building long before the internet became an issue. Skate hard goods have been awfully similar for a long time in features, pricing, functionality, and durability. Many of the online sites where you can buy boards are also brick and mortar retailers.
 
And there’s some good news. In spite of broad distribution online, product isn’t finding it’s way to the big discounters. There was no significant branded product, and mostly no skateboard product at all, on internet sites for Costco, Garts, Sports Chalet, GI Joes, Sports Authority and some others I now can’t remember.
 
Issues
 
Someday, if it’s not already out there, some web search bot is going to be able to find a particular brand and model at the lowest price like I did with my Palm Pilot. As that happens, skateboards (or any other product) become even more like the water molecules in the bucket and price becomes a bigger consideration- especially since we’re presenting the product on the web as all kind of the same anyway.
 
The tool we’re left with to buck that trend is the old, reliable advertising, promotion and team budget. Old and reliable, but damned expensive. If margins drop because of over supply and the product being hard to differentiate, and what differentiation we can do requires a big marketing budget, then this becomes an industry where only bigger players survive.
 
For retailers, the question is simple- at least simple to ask. If prices are more or less equal, can a web site create a “community” on line that will motivate somebody to buy on line rather than visit a shop? A good shop is a community too. More than any web site I hope and expect. Seems like a good shop with a good web site has a lot going for it. The question, simply put, is whether a customer would rather have the instant gratification of getting the product right away as opposed to the convenience of ordering on line but waiting a few days for it to arrive. An awful lot depends on the experience the customer can expect to have at the shop. But we already knew that, whether the competition is another store or a web site. 
 
It’s hard to see any problems on the horizon when the economy and industry is booming and factories can’t make enough decks. But we’ve got an inverted interest rate curve (short term rates higher than long term rates), and four interest rate increases with more expected. Historically three increases have often preceded a stock market correction and a recession. I’m not prepared to declare that the “new economy” has relegated traditional economic relationships to the dust bin of history. Some of you “elders” who actually remember what a recession in skateboarding and in the economy in general is like might share the experience with your younger colleagues.
 
Meanwhile, Back On the Internet
 
I started out pessimistic about how the skateboard industry was utilizing the internet, but given our target customers and the fact that products were already tough to differentiate from each other, I’ve decided we’re doing a pretty good job.
 
First, leading brands are being kept out of discount chains- both on the internet and in brick and mortar. That is a huge victory. It’s probably the single biggest reason why there’s any margin left in hard goods at all and why teams and other forms of promotion work as well as they do.
 
Second, lots of shops have embraced online sales as an extension of their existing business, rather than seeing it as competition. Used correctly, it’s a way to move close out product without damaging your shop’s image, collect customer information, expand sales, build your image and maybe reach customers. My parents were the TV generation. I’m from the PC generation. Skateboarders are generally from the online generation. Embracing reality rather than fighting it usually makes a whole lot of sense.
 
Finally, brands are using their internet to support their products and the sport but not to compete with other retailers. The future there has to be online ordering and accounting and seamless information exchange with your customers. Eastern Skateboard Supply is one example of a company already doing that.
 
Skateboarding’s customer demographics diffuses some of the issues usually associated with internet sales. We’re not trying to pull our customers on line- we’re following them.

 

 

Using Consumer Data for Marketing Decisions; “Yeah, We Ought to do More of That.”

It’s a bad idea to write something requiring you to talk to the marketing people at snowboard companies during the selling/tradeshow season. But the topic is a critical one. Most companies in this industry don’t do a good a job collecting and utilizing consumer information as they should. They understand that success in a tough market requires it, but don’t do it in a systematic way.   Why?

What are the barriers to doing it? Why is it important? What are some of the possible benefits in the snowboard industry? Let’s find out.

Why Do It?

Slower growth, margin pressures, a difficulty differentiating between product lines, and the resulting need for higher advertising and promotion budgets means it’s harder to make money in the snowboard b. Knowing your consumer keeps you focused and helps you run your business efficiently.
 
Think about the demographics. The average snowboarder is getting older. The female market, at least in soft goods, is taking off. Your distribution has changed and expanded. A growing percentage of young people are non-white. The SIA Customer Retention Survey shows that only ten percent of people who try snowboarding go back for a second shot- just like in the ski industry. 
 
 Are your customers the same they were three years ago? How do you know?    Has their motivation for buying and participating changed? How?
 
“Danger Will Robinson!” These are fundamental strategic issues that will affect everything about how you run your business. How can you even begin to make good tactical decisions unless you know your customer? What decisions might you make differently, and what would the benefit be?
 Dennis Jenson at Burton discovered through the brand’s consumer demographic data that more snowboarders were mountain biking. That research made him look at Burton’s advertising mix and think about what part mountain biking magazines should play. If a company stops advertising where it isn’t reaching its target customers and started advertising where it does, it saves money and reaches more buyers. That kind of focus is critical in this competitive environment.
   
  When you internalize the knowledge of who your customer is in your organization, you create a focus and a decision-making filter that
improves and simplifies much of your decision-making. For example, it should be easier to form a consensus on which retailers you should be in or not be in Around the turn of the twentieth century some mogul said, "I know half my advertising budget is wasted-I just don’t know which half." Knowing whom your customer is not only positions you to sell better-it saves you money.
 
But this isn’t just about your advertising and promotion budget. It’s about how you make decisions on product line breadth, pricing, staffing. To use an obvious example, how many race boards do you need in your product line when you sell very few? Are the people designing your graphics representative of your customer?    
Arbor Snowboards knows who their consumer is. It’s the older snowboarder. They figured that out before they started the company. They have never wavered from it. It’s the focus of the decisions they make every day.
That focus probably helps to explain why Arbor could start a new snowboard brand at the height of the consolidation and still survive. In
fact, while it’s a smaller brand, Arbor has continued to grow. "We’re focusing on who our customers are-not what our competitors are doing," says Carlson. "We’ve done that since the day we started the company."  Focus on the customer seems to be something of a mantra at Arbor. As they found out, the need for survival is a good reason to make sure you know who your customer is and what they want.
 
Standard Industry Practices
The marketing people I reached were generally consistent in their descriptions of how they collected consumer information and what they did-or didn’t do-with it. Here’s what I heard. Bare in mind that this is an amalgamation of what a "typical" company does. Some do it better, and some do it worse.
Companies check out some of the industry studies available (for example from SIA or BoardTrac). The information isn’t always brand specific. They tend to have looked at, or are at least aware of, general demographic data and trends.
They collect information from consumers who are interested in their products from warranty return cards, and from internet and telephone catalog requests. Consumer or retailer focus groups are pretty common and they seek out the opinions of their team riders-especially in product development. They further rely on the usual anecdotal evidence and their own experience as snowboarders.
In most cases, the information collected from consumers is limited to name, address, phone number, and age. In other instances, such as on warranty cards or on some internet surveys, different questions are asked.
 
The process of deciding what information to gather seems to be a little informal. That is, there isn’t typically a process by which questions relevant to the company’s strategy are discussed and selected. It’s more like the guy designing the warranty card has room for another question and asks the sales manager what they should ask.
Once the data is collected, most companies don’t think they make the effort they should to systematize and utilize it. It’s a lot of work to
create and maintain a database. So, the typical company collects some data, but doesn’t put all that much thought into what data they should collect, or what the goal is in collecting it. It isn’t collected consistently. Once collected, it’s often not analyzed or even systemized. Completed warranty cards can gather dust in a desk drawer.
I don’t think that snowboard companies are worse than companies in other industries of similar size in collecting and utilizing consumer information. But we could sure be better.

Why is This So Hard?

Given the almost universal consensus that market research is a good idea, why hasn’t it happened more? I can think of five reasons in
snowboarding.
First, in spite of the consolidation, snowboarding is still an industry with a lot of snowboarders in management positions. We believe-and correctly I think-that we’re pretty close to our customers and see that as a substitute for market data. But we’re all getting older. Our continued ability to be close to the market has to become more of a concern.
Second, collecting and utilizing consumer data is a pain in the ass. It takes a lot of time and costs money. When you’re done, you may have more questions than you started with. The costs are always hard costs that you see on the expense side of the income statement. The benefits are more touchy feely, and don’t show up immediately unlike the invoice for the data collection and computers to analyze it in.
Third, we’re a small industry, and, until recently, the costs may not have been seen as justifiable given the potential financial benefit.
Fourth, somebody has to have the responsibility and the authority to make it happen. It’s a full-time job. Getting the data from the catalog requests into the database can’t be seventh priority on the list of things the receptionist has to do. Burton’s Dennis Jenson put it this way, "Data is like produce-it tends to rot." So if you don’t use it in a reasonable amount of time, the cost and effort of collecting it is
wasted.
Fifth, the technology to make it easy and cost affective wasn’t around until pretty recently. That’s changing, but it’s usually a while after
the technology works that the benefit is realized. It was about 1982, for example, that the "experts" started prognosticating on the
improvement in productivity that would result from computers. It seems to have started to happen within the last couple of years, and only recently is it being generally recognized.

The Times, They Are A Changing

The computer, scanning, and database technology needed to actually make sense of consumer information is readily available and getting cheaper all the time. The process of consolidation also means that most of the surviving companies are larger and more sophisticated. They are more likely to have the resources and the awareness to collect and utilize the data. Finally, the new financial model I outlined above almost requires better consumer knowledge.
Mark Bujold at Rossignol sees consumer research as an important issue. He acknowledges that with budgets tighter across the industry, it could be hard to justify the hard costs by the longer-term soft benefit. However, "Rossignol is stepping up the effort [to collect and utilize consumer data] company wide," he says.
Hayley Martin at K2 Snowboards described her company’s efforts at consumer market research as progressing. This is the second year for the brand’s revamped consumer data collection program, which includes a survey attached to every product they ship, offering the consumer the opportunity to receive regular product information from K2 in return for completing the form. K2 has contracted with an outside agency to maintain and build the database, and expects to start making more regular use of it to reach consumers. "The dealers can utilize the same database," she says. "They can call us and get mailing labels for people in their area who are interested in K2 Snowboard product."
Recently, I heard about a conversation somebody who has been in snowboarding a long time had with a friend about his kids. “Are your kids snowboarding yet?” the friend asked. “Are you kidding?” he answered. “They’re skiing. Snowboarding’s what dad does.”
 
It would be dangerous to draw any conclusions from a single anecdote. But we all have some tendency to internalize as “the truth” things we hear often enough if they fit our mindset. Lacking good information, what else are we going to do?
 
Our winter sports cousin, the ski industry is a case in point. We’re damn close to being married to our cousin, and incest can produce some dangerous genetic conditions. Skiing has been in decline for many years. Aside from jumping on the snowboarding bandwagon, the ski brands have been slow to change their market positioning. I don’t know if the information wasn’t there, or they just didn’t want to look at it because of the inevitably unpleasant reality it represented.
 
Snowboarding has the chance to make the same mistake. Or not. Work hard to figure out who your customer is and how that is changing. Save money. Sell more. Have fun.

 

 

Thoughts From the Action Shoe Retailer Show; Opps- Did I Get That Wrong?

This article sort of took shape the Monday the show ended. In the first place, I was flying back to Seattle on an Alaska Airlines MD80, which didn’t exactly put me in a positive frame of mind. Second, thanks to the ticket to the Sunday evening Gallas party Jeff Cutler gave me, I was suffering from the residual affects of too much fun.

 
There were 42 companies listed as selling footwear. I trust they weren’t all skate shoes, but a lot of them were. Not only were there more companies with skate shoes- each company was showing more colors and styles.
 
I pulled out the article I did at the end of 1994 on the imminent consolidation of the snowboard industry. I actually toyed with the idea of taking that article, changing “snowboard” to “skate shoe” wherever it appeared in the article, and having Skate Biz run that article with the changes showing just to make a point.
 
But I changed my mind, deciding there were a couple of differences worth discussing, and I’ll get to them in a bit.
 
Shoes to the Right of Me, Shoes to the Left of Me
 
With one exception, every shoe company I talked with had increased the number of shoes they were offering. The walls were covered with skate shoes. Mostly high quality skate shoes. Even the price point shoes seemed well built. They didn’t have all the colors and different layered materials of the expensive models, but I was assured they were just as solid and functional.
 
Everybody’s shoes were solid and functional. Made largely from the same materials and with similar features. If there was a color that wasn’t used in somebody’s shoe, I don’t know what it was.
 
The increase in the number of shoes per company is a response to what each company’s competitors are doing. It is not meeting any need of the consumer, unless it’s a perceived need the industry hopes to create by marketing.   
 
Though I’m not a skater anymore, I enjoy wearing skate shoes. I find them comfortable, they give good support, and they look great. But I could be talking about any brand. Because the industry has done such a good job creating a quality product, the basis of competition is starting to inevitably evolve to price and marketing.
 
Charge for the Guns!
 
The price trend I heard about was down. My belief is that this decline in prices offered to retailers wasn’t accompanied by a similar decline in manufacturing costs. I recognize that not every style and color way exhibited at the show will be produced. But more styles and colors will be produced. Manufacturing efficiencies result not just from overall volume, but also from the volume by style and color. If you want to make 10,000 pairs of shoes, you’ll get your best price if they are all exactly the same. So increasing styles and colors has some negative affect on your cost per pair.
 
But the thing that really caught my attention was the first shoe company giving 90-day terms to some of its customers.
 
Let’s say that a skate shoe company starts offering its better customers 90-day terms. Just to pick a number, let’s say it’s a larger company, and they have $10 million in annual sales done with terms of 90 days, where before that whole amount was sold COD. If they’ve got a gross margin of fifty percent, just to pick a number, that means they’ve got an extra $5 million of working capital invested in the business for 90 days. What does it cost to borrow $5 million for 90 days? You do the math using your own cost of capital.
 
Of course, it’s even a little worse than that. In the first place, we’re making the assumption that the check for each sale with 90-day terms is deposited on the 90th day and you get immediate credit. Bet some take longer to pay. In addition, the thing about giving terms is that somebody ends up not paying at all.
 
Companies give retailers terms when they feel they have to in order to compete. The trouble, of course, is that like frequent flyer programs, once one company does it, most of the rest of the companies have to do the same.  If they can afford it. Instead of being a competitive advantage, it’s just a cost. But it’s a great thing for the retailers.
 
The retailers, of course, find it harder and harder to make a rational selection among the hundreds of colors and styles. How do they select? They pick the shoes that give them the best price and terms and check at retail. Best price and terms means lower margin and higher working capital requirements for the brands. Making a shoe check at retail when it’s more or less the same as everybody else’s shoes means big marketing programs. Talk about charging for the guns.
 
Boldly They Rode, and Well
 
Big booths. Two stories. Back rooms. At the end of the show, if you put some of those booths on a lot, added plumbing (they’ve already got enough electric) and put on a roof, you’d have a fair sized house.
 
We’ve got a market that’s growing quickly. All the competitors want their piece of it. This is the time to get it, and they are pulling out all the stops to do that. The typical argument is “Market share is more important than profitability while the market is growing this fast.”
 
Guess what? I agree with that. The time to establish your position in a market is when it is growing quickly. If you’ve started recently, you better either have a big balance sheet and lots of money to lose for a while, or a clear picture of your market niche and a way to compete against the big guys.
 
The Good News
 
Okay, I’ve had my fun. I think the cautionary analogy of the Charge of the Light Brigade is worth thinking about in the skate shoe business. Will you care how glorious your charge was if you die in the process, no matter how many flags you had waving? And the chance to see a classic poem written 150 years ago printed in Skate Biz is just too good to pass up.
 
The skate shoe business is evolving to the point where it isn’t really just the skate shoe business. It’s the lifestyle casual footwear business. That opens up a big market. A really big market. I won’t give the favorable demographics speech. I’m sure we’ve all heard it too damn many times. That’s why there were 42 footwear companies at the show. But the fact is that more and more young people are going to be looking for casual, comfortable, stylish casual shoes. Everybody needs shoes. And they need them all year around. The market should be growing for a while.
 
Piece of good news number one, then, is that the market is growing, and should continue to grow. Number two is that it’s a year around business, though it has some seasonality. Year around sales means year around cash flow. Which means it’s easier to finance growth. Not easy, but easier.   
 
The financial model I’ve described in this industry- declining gross margins and higher marketing expense due to normal competitive pressures when product differentiation is difficult- usually has only one solution. That solution is to be big, or for your skate shoe line to be only one product line in a company that sells other product as well. 
 
At some volume of sales, your general and administrative expenses, and your advertising and promotion expenses, can decline as a percentage of sales even as their absolute dollar amounts go up. Obviously, companies like Adidas and Converse can afford to invest in the skate shoe business.    But there are a number of “core” skate shoe companies who already have the sales volume and/or balance sheet to compete in the market as it’s going to be and make money. There greatest challenge will be to transition to broader distribution without losing their legitimacy.
 
That there are core companies solidly positioned is good news, because I want to see the companies who understand skating continue to support and influence it. To me, that lessons the chance of another skateboarding recession. 
 
Please remember the lessons of every other industry. Growth eventually slows, and the conditions of competition change. Retailers gain power, size becomes important, the financial model becomes tougher, and entrepreneurs have to become managers.
 
The charge of the heavy brigade under General Scarlett, which preceded that of the Light Brigade, succeeded in reaching its objective at very little cost. They were prepared for their battle.           
 
The Charge of the Light Brigade
 
Half a league, half a league,
Half a league onward,
All in the Valley of Death
Rode the six hundred.
‘Forward the Light Brigade!
Charge for the guns!” he said:
Into the Valley of Death
Rode the six hundred.
 
‘Forward the Light Brigade!’
Was there a man dismayed?
Not though the soldier knew
Some one had blundered:
Their’s not to make reply,
Their’s not to reason why,
Their’s but to do and die:
Into the Valley of Death
Rode the six hundred.
 
Cannon to right of them,
Cannon to left of them,
Cannon in front of them
Volleyed and thundered.
Stormed at with shot and shell,
Boldly they rode and well,
Into the jaws of Death,
Into the mouth of Hell,
Rode the six hundred.
 
When can their glory fade?
O the wild charge they made!
All the world wondered.
Honour the charge they made!
Honour the Light Brigade,
Noble six hundred.
 
Alfred Lord Tennyson
 
The Charge of the Light Brigade occurred during the Crimean war in 1854. The brigade consisted of 673 officers and men at the start of the charge. 247 men and 497 horses were lost without achieving anything. But it was glorious while it lasted, and the survivors were decorated and promoted.

 

 

Sam And The Gradunzel-Eating Monster; It’s (hopefully) a fairy tale.

Long, long ago in an industry far, far away (cue the heroic music), the sale of moss-covered, three-handled family gradunzels* had taken off. Now, gradunzels had been around for a long time, and they were manufactured by a dedicated group of companies, the founders and owners of which had been among the earliest users of gradunzels. They were still the product’s strongest supporters and were respected and trusted by the people who bought the product.

            These companies had worked hard to make the best-performing gradunzels they could make. They had all worked so hard, in fact, that all their gradunzels performed well, and it was not always easy to distinguish one from another—as far as how they worked. They had all been so successful in making good products that, at the end of the day, the customer selected his gradunzel based largely on loyalty to the company and people he knew who used the product. Even the prices were more or less the same.
            Oh, sometimes the colors of the three handles were changed, or a different variety of moss was allowed to grow on the gradunzel, but it still worked basically the same as all the others. Once somebody, who was not part of the group that had made gradunzels forever and ever, actually made a gradunzel with four handles. Some said it did a better job at whatever it was gradunzels did. Some said not. In any event, it didn’t look like all the other gradunzels, and soon it was gone and forgotten.
            For a long while, gradunzel users were a pretty small group, at best ignored, at worst scorned, by the rest of the people. But they didn’t care. They just went about making the best use of gradunzels they could. And if they were, from time to time, disappointed that everybody didn’t like gradunzels, they were also pleased to be part of this special and distinctive group
.
            And then a funny thing happened. One day—nobody knows exactly why—everybody wanted to buy a gradunzel. New gradunzel factories and brands sprung up all over the place. These came and went. Some succeeded, some didn’t.
            The small group of old-line gradunzel makers was overwhelmed and didn’t quite know what to think. It was true, of course, that they were selling all the gradunzels they could make and making more money than they had ever imagined. They were producing all kinds of new gradunzels in different sizes and colors and with different names, although of course they were all still just gradunzels. That was a good thing, and they were proud that after all their years in the wilderness so many other people had recognized what a wonderful invention gradunzels were. But they were also just the smallest bit concerned.
            Gradunzels had become so popular that even people who didn’t use them wanted to share in their popularity and be part of the excitement. There were all kinds of new gradunzel products: toy gradunzels, gradunzel cleaners, tools for fixing gradunzels, and clothes and shoes to wear when you were using your gradunzel, or even when you weren’t. The original gradunzel makers didn’t manufacture most of these products, but they represented a big part of the industry’s total sales. The old-line producers felt they were losing a little control of what they had created and supported, and they wondered if, in the midst of all the growth and prosperity, things would ever be the way they had been before. And sometimes they even wondered if they really, really wanted them to be.
            Undoubtedly, all this noise, growth, and excitement was what ultimately attracted the  gradunzel-eating  monster. The monster had an enormous appetite that was never really satisfied. But he had to eat so much that he couldn’t waste his time on mere appetizers. Suddenly, the gradunzel business looked like a tasty, full-course, gourmet meal. And it was making so much noise that he couldn’t help but notice.
            The monster didn’t really care what a gradunzel was or how you used it. He just needed to keep his stomach full. His stomach, it turns out, was full of production equipment, and he already had everything (well, almost everything) he needed to make gradunzels.  He wasn’t a bad monster really. He didn’t want to hurt anybody, though he knew that what he was planning might make things difficult, or at least different, for some of the smaller monsters in the food chain. Still, he hoped that the people who bought and used gradunzels might get better ones for less money and he thought that was a good thing.
            Now, because he was a very old monster and had grown big and wise over many years of gobbling things down, he had the resources to carefully study gradunzel making. So that’s what he did. He discovered he could make gradunzels as well as anybody else’s for quite a bit less money, if only because he already had almost everything else he needed. He even had a few ideas for making them better and wasn’t reluctant to try them. He had to buy a few machines and reorganize some space, but the building, the people, the computer system, and everything else he needed was already there. There was just one problem: To whom was he going to sell gradunzels?
            The monster disguised himself (not very well, actually, in a button-down and khakis, although he did manage to ditch the tie) and went out into the world of gradunzel makers and users. He didn’t understand everything he saw, but he knew he wasn’t “cool,” and somehow that mattered.
            He wondered what he could do. Then he became aware of how many brands of gradunzels there were. He knew, because he was an old and wise monster, that many of those brands—through no fault of their own—probably wouldn’t survive, or at least wouldn’t succeed at the level they hoped for. There were just too many brands and not enough competitive advantages to be had. He wondered if he could find one of those brands to work with. Then maybe he could be a little cool, or at least make gradunzels for somebody who was.
            Still, the monster wasn’t completely happy. He wanted to make a lot of gradunzels, and no brand that was going to work with him would need very many. So he called his friend Sam. Sam owned almost 3,000 stores and had bought a lot of stuff the monster had made over the years. He already sold gradunzels, but they weren’t very good, and they certainly weren’t cool—whatever that meant.
            Sam had tried to buy gradunzels from the old-line manufacturers, but they wouldn’t sell to him for three reasons. First, if they sold to him, they wouldn’t be cool anymore. Second, they couldn’t make enough gradunzels for him and still meet demand from their other customers. Third, Sam never paid anybody until the following season, and the old-line companies couldn’t afford that.
            The monster didn’t care about the first and could handle the second and third. So he said to Sam, “If I could sell you a better product for a lower price, produce as many as you need, wait to get paid, make it cool, and advertise and promote it, how many would you buy?”
            They haggled over the specifics a little. Sam looked thoughtful, then said, “Well, not too many. But if you can do all that, maybe we could handle three-quarters of a million gradunzels in the first year. We’re already selling almost that many, and we know it’s a lousy product. Would that be enough?”
            The monster smiled.
            When the monster went to talk to some of the second-tier gradunzel makers, the first thing they all told him was that everything was great. After he got to know them a little better, often over a couple pints of grog, he found that some of them were running just to stay in place, having a hard time cash-flowing their business, and needed to get a lot bigger quickly to have a financial model that really worked. But they were cool.
            Usually when he got around to asking them about selling to Sam, they’d get up to leave. But when he quickly asked them if they’d like to sell more gradunzels in two years than they could reasonably expect to sell in twenty, they sat back down again. It turns out that making money is cool, too.
            The gradunzel-eating monster returned to his lair to  plan. He didn’t know if what he was thinking would work, or if serious gradunzel users would buy from Sam. But if he could get this meal cooked, it would be big and tasty, and the ingredients wouldn’t cost much. What did he have to lose by trying?

 

 

Snowboarding the Internet; Taking the Tour at 26.4

Slow connections suck. So while we wait for my 56k modem to connect at 26.4 kbs, consider this.

All the dotcoms with money (typically from an egregiously successful public offering) are advertising like mad. On TV, on the sides of buses, everywhere.
 
Why?
 
Because there’s not much difference between Barnes&Noble.com and Amazon.com if you want to buy a book. There’s no price difference, at least on the books I bought last week.
 
So entry barriers in this business are low, especially if you’re already doing fulfillment. Admittedly, the cost of maintaining a quality site is often underestimated. Price comparisons are easy to do. Similar sites are selling products that are often absolutely identical.
 
Under these conditions, prices should tend to move down, and consumers are more likely to view the product as a commodity. Spending increasing advertising and promotional dollars is critical to building brand awareness and keeping market share. Homegrocer.com will deliver an order free if it’s seventy-five dollars. New entrant Albertson’s.com will deliver for free if the order is sixty dollars. And so it goes.
 
Lower gross margins, too many competitors, high advertising and promotion costs, competition based too much on price. Hmmmm…….
 
He had to think for a minute. Hadn’t he seen this happen in another industry? Which one could it have been? How did it all shake out (so to speak)? Perhaps he’ll remember later.
 
Meanwhile, the computer has finally connected. Let’s go hunting for snowboards on the internet.
 
Brands on Line
 
I checked out the web sites of most of the significant brands. Some were good and some bad. Some fast, some slow. Several under construction. None were selling product. All referred you to dealers. Hardly a surprise. Brands have worked hard to build relationships with dealers. I can’t imagine anything that would make a retailer scurry to a competitor quicker than a supplier competing directly with it.
 
So brands aren’t selling boards directly on the web, through their own web sites- yet. And that’s where clarity on the issue ends.
 
I used a couple of search engines and searched under different brand names, and under snowboard or snowboarding. I went directly to some retail sites. Certain ones were sports specific. Others weren’t. The by no means complete and certainly not scientifically selected list included Performance Snowboarding, Fusion, Costco, OnSale, REI, FogDog, Gear, WorldwideSports, and OutletZoo.
 
They all had some snowboards. OutletZoo had a couple of Kemper 2000 Strike 151’s with bindings for $199. Costco was offering K2 Electras and Futuras for $359.99 (plus $18.57 shipping). FogDog had boards from Palmer, Salomon, Libtech, Option, Ride, World, Rossi, Santa Cruz and Hyperlite. I don’t know if they were all at manufacturers’ suggested list prices, but these were not heavily discounted boards. Sometimes there was just one model, sometimes damn near a whole line. Gear had what looked like nearly full lines of Arbor and Option, again at full or nearly full price.
 
I don’t suggest that my search was either indicative or all-inclusive, but the only major brands I couldn’t find at least some of were Sims and Burton. It’s interesting to note that if you do a search under either Sims or Burton, you find lots of references to places selling those brands, but the only ones who actually seem to have them are retailers.   If I were trying to attract snowboarders to my site, I’d certainly include “Burton” as a key word whether I had any product or not.
 
It’s the wild, wild west out there. You never know what brand, what model year, what quantity and what prices you’re going to find. Right now, it looks like most of the major brands selling on the web are doing a pretty good job keeping the prices at or near to what they would sell for in a quality retailer. 
 
What isn’t clear, of course, is how these boards are getting to these sites. Some brands I assume are legitimately placing product with sites under agreements to maintain pricing. Product may also be finding its way to sites through traditional, if I can call them that, gray market channels. I’m also wondering what will have happened to prices on the internet by the time you read this, well after Christmas.
 
The Internet Financial Model
 
Early financial discussions about the internet model postulated a cost structure that would allow internet merchants to make an attractive margin, but still give the consumer a better deal than he could get through conventional retail channels. The thinking was that total costs would decline dramatically with the elimination of “brick and mortar” and the associated expenses.
 
Certainly some costs are eliminated. But my sense is that they are basically replaced by others. Fulfillment (getting the product to the consumer, handling returns, warehousing, packing) is the same whether you are a traditional mail order retailer relying on a catalogue, or an internet merchant. It’s interesting to note that some internet merchants also offer a catalog- either through the mail or downloaded. That’s what Performance Snowboarding does. It’s also true that creating and maintaining a really good web site, and having adequate telephone customer service, costs a lot of money.
 
Irrespective of what costs are added or eliminated by selling over the internet, internet retailers are going to be competing against each other as much as against traditional retailers. That competition is going to result in the same business cycle for internet retailers as we saw with snowboard companies. A lot are going to disappear. A few larger, well-capitalized ones will have the bulk of the market.
 
A True Retail Story
 
The other day, I wandered into the Garts in Bellevue, Washington. For some reason, I gravitated to the snowboard section. It was a foreboding sight. The overall impression was like a snowboard junkyard. Boots of various brands were stacked in their boxes up to my eyes, with no apparent concern for brand or size. The stacks were leaning over, the boxes on the bottom being crushed by the weight of the ones on top. Boards of all brands were leaning against the wall many deep. Burton was mixed with Vision. Parts from Morrow Exchange step-in bindings spilled out of their boxes.  The clear message was that Garts didn’t care. It was all the same to them. If you wanted to buy some snowboard stuff, great. If not, they’d mark it down or sell it again next year. Whatever. There was clearly no concern for the product and no pride in being a dealer.
 
I’m not critical of Gart’s for taking that approach to snowboarding. If that’s the retail model that works for them, fine.
 
If, however, your question is what is the future of snowboard product sales on the internet, then we have to be concerned with the Garts model, because product that is treated that way is a candidate for internet sales. If it’s just another thing you buy, if no assurance comes from buying a specific brand, if the purchase process isn’t worth spending any time on because the stuff’s all the same and you don’t need the advice of a knowledgeable retailer, then buy it on the internet to spend the least possible time and use a bot to find the best price.
 
A Glimpse of a Possible Future
 
Get on the internet. Go to www.eshop.msn.com. In the little box in the upper left hand corner, type in “snowboards” and hit go. On the next page that comes up, under “matching categories,” click on “Snowboards.” On the next page, in the left hand column under “Related Links” click “Search for snowboards.”
 
Okay, now we’re to the part where it gets a little scary. You can, if you choose, specify one of something like 110 brands. Some of them aren’t even in business any more as far as I know. Maybe they’ve got closeout inventory out there. If you don’t choose a price range, model year, length, waist width, sidecut radius, or board style, you’ll have 3,758 boards to choose from, the page tells us. But you can select by any of those features, and I may have left a couple out.
 
Let’s pick a board in the $350 to $400 price range from the current model year. I want a freeride board that’s from 161 to 164 cm with a waist width of more than 25 cm (big feet). There are 42 boards available that meet those specifications. Let’s sort them by price (cheapest first of course) and list the models for sale on the internet ahead of others. I’ve selected all brands.
 
Okay, there’s the Lamar Hetzel Lite Freeride at 163 cm. Obviously, that’s a core brand. Clicking on that board, I get a list of its stats. I’ll add it to my wish list. When I do that, I get another screen, with a picture of the board and one of my choices under “Online Store” is to click on “Where to Buy.”
 
When I click there, the screen comes up blank. The product is not available online anywhere this site is aware of. It offers to help me find a retail store where I can buy. It comes up with a list of local sporting goods stores, but doesn’t tell me which carry the product I’m looking for.
 
The Microsoft site has been launched within the last month or so. Its format seems excellent even if the product availability isn’t too great yet. It’s going to be scary when it can really match buyers with the product they want to buy.
 
I recently bought a graphic card for my kid’s computer. I went to cnet.com. I clicked on sound and graphic cards. I clicked on graphic cards. It gave me a list with reviews and specifications. I picked one. It gave me a list of places I could buy it sorted by price. I went to the place where it was cheapest and bought it. It showed up in two days. I didn’t pay any sales tax. I was happy.
 
Is that the future of snowboard equipment on the internet? To some extent, that’s up to us. If we nurture our brands and control distribution, maybe giving up some immediate sales for longer term success, it doesn’t have to be.
 
But you know what? That would be good advice even if there was no internet. 

 

 

Competitive Challenges; Four Things You’ve Got to Do Better

In the August 1999 issue of SKATE Biz (Volume 11 Number 1), I wrote about two hypothetical skateboard factory owners, Dr. Jekyll and Mr. Hyde. Dr. Jekyll’s production was strictly OEM. Mr. Hyde had a successful brand and built his product at his own factory. They both made a bunch of perfectly logical and rational business decisions, but things kept getting worse financially. I suggested that their business models just didn’t work under emerging competitive conditions, then ended the article with the promise to suggest some fixes next issue.

            It didn’t happen “next issue,” but better late than never.
            The skateboard industry (including apparel and shoes) is highly competitive, with many competitors and little meaningful product differentiation. In this kind of environment, margins tend to drop while advertising and promotional costs stay high or increase. It can be hard times for many participants, even as the industry grows
.
            Well, you didn’t need me to tell you that, so I’ll get on with it. Sorry, I can be a little pedantic at times.
            You’re stuck with the business model. No individual company can influence significantly how the industry evolves because there is no dominant company. What can you do to succeed given the model? I want to suggest four things.
1. Growth Management
            The set of skills required to run a company with revenue of two-million dollars is completely different from what’s required to run a twenty-million-dollar company. When the company is smaller, you do everything. As it gets larger, you set the direction and supervise people who are doing everything. Those are two completely different skill sets. The faster the growth occurs, the harder it is to make the successful transition. Even if you do make it, there won’t be enough hours in the day to get it all done. You may be the best person at your company to do everything, but there isn’t time.
            You can become a huge bottleneck in the way the business operates. Everybody will be waiting for you to make decisions. I’ve seen it happen too many times.
            Some of the most successful entrepreneurs  hire their own bosses—if their egos will allow them to, that is. Usually, they aren’t willing to take that step until things are tough, and at that point, it’s hard to find people willing to step in.
            The person running a successful skate-industry company with over twenty-million dollars in revenue should ideally have fifteen-plus years’ experience in brand management and marketing (not just advertising and promotion). He or she should have managed growth and run a company larger than your company. It would be nice of they can read a balance sheet.
            There’s no reason management structure has to reflect ownership. If you’re an entrepreneur who has started and built your business, and you’ve made the transition to management, congratulations. If you’re not there yet, remember that a higher net worth and a business card that says “Founder” or “Creative Genius” seems preferable to a lower net worth and a business card that says “President.”
2. Systems
            Computer-system upgrades are a hassle, but do it now. Build it for what you want the company to become, not for what it is now. Get the latest (but not the bleeding edge) technology. Staff the function properly. Plan, plan, plan. Spend, spend, spend.
            What, all this for an accounting system? No. To control inventory. To put the right stuff in shipments. To manage cash efficiently. To make life easier for your customers. To make good advertising and promotion decisions. To gather critical marketing information.
            To spend money efficiently.
            Oh, and I guess you will end up with timely, accurate, detailed financial statements as a result.
            Recently, I got a close look at one skate-shoe company’s computer system. They’ve spent two years installing it—so far. The upgrades, customizations, and improvements never really end. It cost six figures already, and it’s still growing. Hardware is upgraded regularly. They’ve got around 10,000 SKUs (stocking units) available and are actively utilizing around half of that. If the size of the company doubled tomorrow, the system wouldn’t even be stressed.
            They didn’t need to spend all that, at least not right now. What a waste of money!?
            Not hardly. It’s almost physically impossible for them to ship the wrong stuff to a customer. They know immediately what sizes and styles are selling or not selling. Management can get almost any permutation of any report they need almost as soon as they ask for it. The reps know exactly what’s available to sell. Backorders are handled seamlessly as are calculation of discounts. Retailers get a packing list that tells them what’s in each box. The system is almost never down.
            What are the hard costs, not to mention the costs of customer and employee aggravation, of dealing with one pair of shoes shipped in the wrong size or color?
            How valuable is making it painless for your customer to buy from you and receive the inventory when every month the real differences between your product and that of your competitor are declining?
            The hard costs of buying and implementing a computer system show up as an expense on the income statement; the soft benefits of problems avoided and customers made happy don’t, but I’ll bet you they are more than the costs.

3. Brand And Distribution Management

            If there are competitors out there with a product that’s comparable to your product in quality and price, or is perceived to be comparable, then your success is ultimately going to depend on where you sell your product and how you protect and promote your brand name. Growth tops out if your only customers are ’core skate shops. But the market legitimacy of your brand goes to hell if it shows up at Costco, and ’core retailers will desert you.
            Between obvious ’core shops and Costco are all the shades of gray that make deciding whom to sell to such a critical management and marketing challenge. The challenge is made tougher by the fact that the industry financial model (more on that later) requires at least enough growth to get you to critical mass.
            How do you determine what are and are not appropriate product and distribution channel extensions?
            You’ll know them when you see them. I know that sounds like B.S., but it’s that simple and that complicated. It comes from good marketing, which I remind you not to confuse with advertising and promotion.
            Who are your customers and why do they buy your products? In a branded consumer-products business, the president and all the senior executives should be striving to improve their answers to those two questions all the time. Then it’s clear, as a result of your hard work and focus on the issue, that it may be okay, for example, to sell to Pacific Sunwear, but it’s not necessarily time for Garts. If you’ve done your marketing, you will literally know your customers when you see them.
            A good example of a product and brand extension in the skate-shoe business is DC’s all-terrain shoes. I have no idea how they came up with it, but it just makes sense. It has the following characteristics, which you might want to keep in mind when managing your own brand:
          · It capitalizes on the brand name.
          · It doesn’t require a change in distribution channels, but it may position them for some expansion in the future.
          · It puts them in a new category, but it shouldn’t cause any confusion among existing customers.
4. Managing Financial Reality
            As industries mature, larger companies tend to be the more successful ones. Why? If gross margins fall, but you have to spend the same or more dollars on advertising and promotion, you have to be larger. Otherwise, there just won’t be enough gross margin dollars around to adequately support the brand.
            I don’t look at that as my opinion. I don’t see it as a subject for discussion. It just is. How do you mold your company to conform to this fundamental financial law?
            At the risk of repeating myself, you make sure you have management personnel who know consumer-product brand management, have been through growth, and understand marketing. It costs money to do it wrong, and it could threaten the company’s survival.
            Utilize good marketing because it helps you spend your advertising and promotional dollars more efficiently and gives you a factual basis with which to make distribution and brand-extension decisions.
            You have the best systems you can get, and you lavish resources on them. They will give you some of the critical marketing data you need, and they will save you money because they will make your customers dependent on your systems and provide a point of differentiation when products aren’t all that different.
            Dr. Jekyll and Mr. Hyde can both be successful. They just have to change the basis on which they compete to conform to existing market conditions and financial laws.

 

 

Numbers, Numbers Everywhere And Who Knows What They Mean

I do confess it. I was trained as a finance guy. I have an MBA, started out in international banking (Ask me about Carnival in Brazil sometime!), and did some corporate treasury and investment banking kind of work. Given the way things have changed, I decided it was okay to come out of the closet. Please don’t throw me out of the industry.

Using this experience to get a handle on the snowboard industry isn’t an easy thing to do. With the acquisition of Ride and Morrow by K2, there is no snowboard only company left that provides public financial information. What is available is not all prepared in the same way. Canadian accounting standards are different from French accounting standards, are different from United States accounting standards are different from German accounting standards. Details on the snowboarding parts of business are typically unavailable.
Nevertheless, phone calls, internet searches, and rummaging through some file folders produced public information on K2, Far West, Adidas (Salomon), Quicksilver, Vans, and Rossignol. What trends, or confirmation of trends are visible from reviewing this data? How much small print can I read before going crazy or blind?
As required, I’ve converted numbers to U. S. dollars based on exchange rates on November 3, 1999.
Size Matters
The first thing to note is that, with the exception of Far West, the owner of Concept Outerwear (revenues of $7.4 million in 1998), there are no small companies in this group. Vans, at $205 million in its last full year, is next in size. Quik and Rossi were $316 and $338 million respectively. K2 comes in at $575 million and Adidas wins the heavyweight division at $5.3 billion.
It’s easier to compete in a highly seasonal, very competitive market where margins aren’t that great and products are, for the most part, only differentiable by marketing if you’re big enough to spread your overhead and have year around cash flow. Even Far West, by orders of magnitude the smallest company in this group has some of those things going for it. Without diversification, having a viable financial model in the snowboard business is a struggle unless you’ve got Burton’s market share.
These numbers represent each company’s total revenues. The snowboard portion is much smaller.
In some ways, then, it’s good to be big if you’re going to be in the snowboard business. It can also be seen as bad, if you believe that the sport derived its energy and success from the commitment of people who were 100% focused on snowboarding, risking everything they had, and were as much concerned with snowboarding as with the business of snowboarding. If snowboarding is just one of your lines of business, and sometimes a small one at that, it may not always have your full attention.
How Big Is It?
The people at Rossi were great. They sent the English language version of their annual report Fed Ex. It tells us that 8.4% of their revenue, or $28.4 million is from snowboarding.  Their snowboard business grew by 13 percent over the prior year. They sold 143,000 boards.
They also estimated worldwide board sales at 1.45 million units in 1998/99. They thought it had grown 5% over the prior year.
I don’t know if that estimate is at the wholesale or retail level. It really doesn’t matter. What’s interesting to note, based on my own estimates of board sales four or five years ago, is that the rate of growth in board sales hasn’t exactly been spectacular. Probably not much more than the five percent Rossi estimated over last year. Makes you wonder about some of the estimates of growth in the number of snowboarders we see. Could be that a lot more people are renting. It could also mean that a lot of people try it and get counted as “snowboarders” but don’t go very often if at all.
For all I know, the culture has been so furiously marketed and the style so widely accepted that people who have never snowboarded consider themselves snowboarder and get reported as such in the surveys.
Just kidding, I hope.
Boards, boots, bindings and accessories made up $10.7 million of Quiksilver’s sales in 1998- approximately 3.4% of total sales.   That includes Mervin and the late, lamented Arcane step-in binding system. Quik also sells some snowboard apparel, but the amount isn’t identified separately.
Vans snowboard sales come from a number of sources. They sell the Switch binding and boots that work with it. They also sell traditional strap bindings. Vans has a line of snowboard apparel. They also earn some amount of revenue from licensing Switch technology to other brands, including Nike, North Wave, and Heelside. Finally, the company now owns the High Cascade Snowboard Camp. There’s not a number anywhere that indicates how many dollars this all comes to,
K2 is no help either. All their annual report says is that the “Sporting Goods” segment of their business had sales of $405 million in 1998. That includes inline skates, skis, bikes and fishing tackle, not to mention snowboards.
Well, it’s time for some creative estimating. Somewhere around here, I’ve got some carefully prepared, hand scrawled estimates of relative market shares for snowboard brands.   Go with me on this, and we’ll assume that those estimates are valid worldwide and not just in the US. I know what Mervin’s and Rossignol sales were. If these market share percentages are at all reasonable, a seat-of-the-pants guesstimate for K2 snowboard hardgoods sales would be (drum roll please) $65 million, or eleven percent of their total sales. That’s before the acquisition of Morrow and Ride, of course. Those two deals should more or less double K2’s snowboard hard goods sales.
Adidas reports that Salomon doubled its snowboard sales to $42 million. It doesn’t indicate if that number includes Bonfire. $42 million is about three-quarters of one percent of Adidas’ total sales for the year.
It just doesn’t look like anybody is going to live or die by snowboard related sales, though with the addition of Morrow and Ride, K2 is going to have an even greater focus on it. It’s more like companies are having a hard time figuring out how to grow and be profitable in sporting goods, and winter sports especially, and think snowboarding can help them figure it out, beyond what it contributes to sales.
The Bottom Line
Soft goods are good. Hard goods are bad. Winter sports are tough. Summer activities bring diversification and hope. And there you have it.
Quiksilver and Vans are both growing and making money. They have limited exposure to snowboard/ski hard goods and sell product all year around. Other soft goods players we haven’t talked about are doing well too.   They are riding the demographic crest and the culture snowboarding and other so-called extreme sports have created.
Rossignol has seen its sales shrink over the last two years. It’s also lost money in the last two years. 72.5% of its sales came from ski related hardgoods (skis, boots, bindings, poles, cross country skis) and 85.8% came from winter sports. They hope to double their snowboard revenue over the next three years.
Adidas lost a little money in 1998, the first year in which Salomon was consolidated into their financial statements. They had earned a profit in each of the previous four years. Salomon’s overall winter sports business grew only one percent. Eighty percent ($364 million) of Salomon’s total sales were from winter sports. The Adidas annual report described Salomon’s overall financial performance this way: “The operating result improved due to a number of measures to enhance earnings and almost reached break even.” YeeHah!!
The good news was that twenty percent of Salomon’s business was summer related, up from eleven percent the previous year.
K2’s sales have grown in each of the last four years. They have been profitable in each of the last five. But in 1998, their net income fell to $4.8 million from $21.9 million the previous year. This was largely due to increases in their product costs and selling expense out of line with the sales increase.
K2 divides its business into three segments; sporting goods, other recreational and industrial. Sporting goods include snowboard hard goods, as well as skis, bikes, fishing tackle, and some other stuff. Sporting goods did $405 million in sales, down from $411 million the previous year. This represents 70% of the company’s total revenue. It earned an operating profit of $5.3 million and, after a reasonable allocation of interest expense and corporate overhead, probably lost a little money.
Mountain bike and ski sales fell. K2 snowboard product sales increased, though we don’t know by how much. They do say the following:
“Although also feeling the effects of poor weather conditions in late 1998, snowboard products benefited from strong demand for its Clicker step-in binding, related boots and snowboards.”
Other recreational includes apparel, skateboards and shoes. Industrial is mostly monofilament line. It earned them $18.4 million in operating profit on sales of $125 million. There’s a lesson there somewhere. Screw snowboarding. Sell line for weed trimmers.
The Bottom, Bottom Line
The hard good guys slug it out with each other to get a bigger share of slower growing markets with lower margins and high marketing expense- an impossible financial model. Mean while the shoe and apparel guys, who can appeal to a broader demographic because they aren’t tied to a particular sport, clean up.
It’s not a pretty picture, there’s not a happy ending, but that’s what the numbers show.

 

 

Changes in Market Focus; The New Snowboarding Reality

Most of us are in a different business than we were a few years ago. Retailer, brand, manufacturer, or even consultant, our customers have changed. There are only a handful of companies out there that can say they are snowboard companies. Others have adjusted their strategies, or aren’t around anymore.

 Remember the “C” word? Consolidation wasn’t just about a bunch of brands going away. It was about companies pausing, taking a deep breath, and recognizing that the opportunity represented by snowboarding went beyond selling boards, boots and bindings.
 
What is the snowboard market now? Who’s succeeding in it and why?
 
It’s the Culture, Dude
 
We’ve been over this before, so let’s keep it short. Hard goods have tended to become a commodity with lower margins. This has been especially true with boards but increasingly applies to boots and bindings as well. The days of rapid advances in quality and technology are nearly over.   
 
Young people represent a big demographic bulge everybody wants/needs a piece of. The lifestyle is what a lot of people are into whether they participate in the sport or not. There are more similarities than differences among the snow/surf/skate/BMX cultures. That’s hardly a surprise given the number of people who participate in more than one.
 
The term “participant” has to be viewed differently by hard and soft goods companies. Somebody who snowboards three days a year is a participant just like somebody who snowboards a hundred days a year. The hundred dayer probably spends more on equipment than the three dayer, but both need shoes and clothing for all one hundred days and probably want to look good wearing them.
 
Someone who perceives himself as a member of the culture is always a candidate to buy soft goods. But they may not buy any hard goods.
 
The sports have become the foundation of the lifestyle market. Nautica, ESPN, Mountain Dew and Tommy Hilfiger can make their money and grow their businesses as long as snowboarding ET. Al. is cool. Growth in the sport of snowboarding would be nice for them, but cool is more important than big.
 
It would actually be to their detriment if they were thought of as snowboard companies.   They wouldn’t be able to go after the broader market. Their potential wouldn’t be nearly what it is if they had a sport, rather than a lifestyle, focus.
 
Limits on Growth
 
Existing snowboard brands pretty much have their market niches. Those who are still standing and have been around a while are probably secure in those niches, but have a hard time figuring out what to do next. Let’s take Burton as an example just because they are far and away the most successful snowboard company.
 
Burton’s sitting there with, say, forty percent of the market. No doubt they’d like to grow. Their percentage share of the market is unlikely to grow much. They will get their share of general snowboard market growth, but that’s not what it use to be.
 
Real growth, if it’s going to happen, has to come from some new directions.    Skateboarding? Surf? Bikes? Bet they’ve looked at every action sport category there is to look at. But they haven’t done much.   Why?
 
Because of the danger of diffusing the strength of the brand and confusing people about what Burton stands for.
 
Think of a skateboard with the Burton name on it. “Why are they doing that?” you would wonder. It’s confusing and somehow disturbing. It’s a gratuitous new product with no meaning.
 
Apparel is different from hard goods. Burton has announced an initiative in brown shoes. They already sell a lot of apparel. We aren’t offended or confused if somebody who doesn’t snowboard wears some Burton clothing, but has chosen it because it’s stylish and functional.
 
But a Burton skateboard might get some strange looks from other skaters and, more importantly, from snowboarders.
 
Apparel, then, opens up a bigger market, and can be managed so as not to damage a brand’s credibility.
 
Moment of Clarity
 
It’s not a new thought that differentiation among hard goods is tough to achieve, and that margins are better in soft goods. But it was last March, from my perspective, that the market officially changed and the link between hard and soft goods largely severed.
 
It was the day Nike announced that they would not introduce a snowboard line. Their thinking, I imagine, had three basic components.
 
First, that they couldn’t introduce a snowboard that was any better than what everybody else was already making. Second, given that fact, selling snowboards wouldn’t help them sell soft goods. Indeed, if the board was received with a yawn or worse, it might even damage soft goods sales.
 
Finally, like all the other big players, Nike wants to capture some of the energy and legitimacy of the action sports culture, but they don’t want to be too closely associated with any one sport, less it restrict their broader sales prospects.
 
I didn’t think of it this way at the time, but that was the day the new market officially arrived in snowboarding.
 
And the Winner Is……
 
There isn’t one winner. But there does appear to be a single characteristic of companies likely to succeed in the lifestyle/action sports/youth culture market. Come with me now while we visit the Securities and Exchange Commission’s Edgar web site to see if we can distinguish that characteristic of success.
 
Listen to how Vans, Pacific Sunwear, and Quiksilver talk about their customers in the first paragraph or two of their most recent 10Ks (annual reports). By most measures, these are three successful companies. PacSun is a retailer that doesn’t sell any hard goods, possibly excluding some accessories. Van owns Switch and Quiksilver owns Mervyn, but neither Switch nor Mervyn contributes dollar sales, which, as a percentage of total revenue, are critical to their respective companies.
 
Vans characterizes itself as
 
….a leading lifestyle, retail and entertainment-based company which targets 10-24 year-old consumers through the sponsorship of Core Sports,(TM) which consist of alternative and enthusiast sports such as skateboarding, snowboarding, surfing and wakeboarding, and through major entertainment events and venues….
 
The retailer Pacific Sunwear says it is
 
selling everyday casual apparel, accessories and footwear designed to meet the lifestyle needs of active teens and young adults. The Company’s customers are primarily young men aged 12 to 24, as well as young women of the same age, who generally prefer a casual look.
 
Quiksilver
….designs, arranges for the manufacture of, and distributes casual
sportswear, swimwear, activewear, snowboardwear and related accessories
primarily for young men, boys, young women and girls….
 
 
All three are focused on the lifestyle market. All three are focused on the same age groups. None is associated with only one sport. All, if you read further in their annual reports, are concerned with staying close to trends and their markets.
 
They all start out by telling us not who they are as companies, but who they think their customers are.
 
There is, then, a new model for companies that want to grow quickly in the youth lifestyle market, as opposed to the snowboard market. Be compulsive about staying close to trends and be prepared to turn on a dime. Don’t be too closely associated with only one segment of the market. Focus on products that permit you to make a margin that’s high enough to fund the required advertising and promotional expenses. And finally, be big.
 
What To Do
 
If you’re a snowboard retailer……wait a minute. I guess what I’m suggesting is that there aren’t many snowboard retailers in the sense there use to be. There are retailers who sell snowboards. A growing percentage of their sales profit are coming from soft goods, and they probably sell skateboards, or wakeboards, or surf boards in addition to snowboards. Are you limiting your growth by focusing too much on only the snowboard market? Maybe you are, and maybe it’s what you should be doing. But please make sure it’s a conscious decision.
 
Choose the brands you carry with an eye towards the company’s ability to stay on top of the trends. Welcome customers who aren’t necessarily snowboarders. Maybe you can convince them to try the sport.
 
With the consolidation largely completed, growth for most brands is more or less limited to the market’s rate of growth. Unless you have a lot of capital to work with, and even if you do, you try and change your existing market position at your peril.
 
K2’s recent acquisition of Morrow and Ride seems to suggest they believe, given the prices they paid, that they can get a better return on investment through new brands than by investing similar resources in further building the K2 snowboard franchise. I think they are probably right.
 
If fast growth is no longer an option, and you not longer have sky rocketing capital requirements it imposes, then maybe it’s time to settle down and just run the business. Make incremental improvements in how you operate that improve you return on investment.
 
Control your distribution to encourage sell through. If you do that, you have the opportunity to raise prices a little and reduce end of the season discounts. Resist at all costs the urge to accept the 3,000-board order from Bulgaria. You know they will show up in either Japan or the U.S.
 
Negotiate with your supplier for better prices. With continued excess production capacity that should be possible.
 
Take a hard look at who your customers are. Do all your advertising and promotional activities really reach them? Can you cut back or redirect any of those expenses?
 
The pace of market change has been phenomenal. Not long ago, it seemed that demographic changes and endless snowboarding growth made the sky the limit. Now retailers have to be cautious about being too closely associated with one sport, and brands need to operate efficiently rather than prepare for fast growth. Large soft goods brands not closely associated with one sport seem to be the beneficiaries of our hard work.
 
Looks like resistance was somewhat futile, and we’ve been partly assimilated, maybe changing the assimilators in the process. Oh, the hell with it. I hope it snows soon.