Quiksilver’s Decision to License Children’s Apparel

On November 26, when Quik announced that LF USA  (a subsidiary of Hong Kong headquartered Li & Fung, a multinational consumer goods sourcing, logistics and distribution group) would “…design, manufacture and market children’s apparel bearing the Quiksilver and DC brand trademarks in the Americas…” I tried to ignore it. It was a short press release and, on the surface, consistent with Quik’s announced strategy of focusing “…our energies and resources on our core apparel business and significantly reduce product styles and SKUs in our supply chain,” as CEO Andy Mooney put it in the press release

Then one of my readers inconveniently messed with my comfortable mind set and asked, more or less, “Hey Jeff, if kids aren’t part of Quik’s core business, what is?” I thought that was a good enough question to require some discussion.
 
I’ve talked before about brands aging out. That is, the customers who grew up with them (and with whom the brand grew up) get older and decidedly less cool. The brand may retain those customers. They may even sell them new products.
 
I’d like to pause for a moment and tell you just how hard it is to move on here without stopping to have some fun imagining what those products might be. Send me your ideas. I’ll put them on my web site (anonymously of course).
 
But the future of a business can’t be only with those existing customers because they are going to start buying less and eventually buy nothing at all. New demographic groups have to discover the brand as they grow up and, with luck, make it their own.
 
Quik’s management team knows that kids matter. My reader is implying that Quik is somehow making a mistake by licensing the kid products because of its critical importance to the company’s future. Maybe, but maybe not.
 
Let’s recall that Quiksilver has been losing money. They’re working hard to turn that around by reducing expenses, improving operational efficiency, and focusing their limited resources where they think they can get the most bang for the buck. Remember in recent years they’ve tried selling bathing suits in vending machines at resorts, board shorts with NFL logos, etc. I sense perhaps they’ve learned a lesson.
 
A royalty revenue stream, no operating expenses and, as CEO Mooney points out, fewer SKUs, may be the right way to go operationally and financially given their resource constraints. I’m guessing this is as much a financial as a marketing decision.
 
More important is what’s in the license agreement and how LF USA will handle this. We know nothing about that. What products, exactly, will they sell? Through what distribution in what quantities? At what prices? How will product quality be? Does Quik have any input into design or any of these other issues?
 
The devil is always in the details in any licensing agreement I’ve seen. Obviously, poorly made products only tangentially related to Quiksilver’s market showing up in schlocky distribution would bad no matter how much royalty income it generated. Quik knows this and I am sure it’s managed in the agreement.
 
Do I wish Quik was doing and completely controlling its own kid’s products? Sure. They probably wish that too. Do they recognize the importance of the kid’s market to their future? Of course. Is it a mistake to license the product? Not if they know they need to be in the kid’s market and don’t’ have the resources to do it the right way themselves.
 
The product will hit retail in 2014, and I guess we’ll start to find out then what kind of deal they made with LF USA.

 

 

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33 Responses to “Quiksilver’s Decision to License Children’s Apparel”

  1. Santi says:

    How about two different distribution channels, two marketing campaign, two pricing structure, two product feel (color ways, styling, etc). Both in the same marketplace, one for kids, one for the rest….? Humm……
    Good for a few seasons, then…..Imagine two Jeff Harbaughs in the same town. Eventually all girls will have contacts with both, one has the chinese moral, the other one is you….Many girls will slap you in the middle of a bar… and you are not going to know why. Same name and similar look, same pain for both. Just some thoughts. Santi

    • jeff says:

      Hi Santi,
      I agree it’s a potential mess. That’s why I said it all depends on the details of the licensing agreement and how the two companies work together. And if I were going to be slapped, yeah, I’d like to know why.

      Thanks for the comment,
      J.

  2. RB says:

    Of course kids apparel is part of both Quik & DC core strategies, however if you look a little deeper you’ll find that L&F purchased Kids HQ a leader in mid tier kids apparel, and the the “Kids business” and I mean where the $$ are happen at Mid Tier, not at specialty. As a side note Kids HQ/L&F recently lost the Hurley kids license and Quik/DC were solid replacements. The real “kids” business is very price sensitive and L&F have a far greater ability to make product and meet price points that will work in the real kids market. This leads me to believe that Quik will follow DC into Mid Tier and do some business, L&F probably paid Quik a nice upfront fee, Quik divested itself of staff, overhead and sku’s. All in all a good move by Quik to help right the ship.

    My big question is: With sales declining in a consolidating market, how much headway is Quik making against its debt? ($800 million?) whats the plan to pay it down and get solvent, considering growth is not happening?

    • jeff says:

      Hi RB,
      Thanks for all the additional excellent information.

      With regards to the debt, it’s stopped falling. I don’t think they’ve enuciated a plan to pay it down, except that they are cutting expenses and selling assets and using at least some of that money to reduce it. I think you may be surprised at how much additional cash flow they can generate once they’ve simplified their business and cut their SKUs in half or something like that. And a lot of that is pretty low hanging fruit. Same is true of Billabong, by the way.

      As you know, I agree with you that incremental sales, in general, are going to be harder to come by than they used to be.

      Thanks for the comment.

      J.

  3. Joe Burlo says:

    Jeff, the more I think about it the more I suspect that Andy Mooney is possibly looking at his retirement bonus and applying a quick fix to generate a revenue based bonus after which he will quit and leave the job of re-inventing the brand to someone else – that is, of course if there still is a brand to leave.

    I do agree with you that you have to catch them young and keep them for life and that a brand has to have a single story not two separate ones. It’s not rocket science – build a brand, nurture brand loyalty at a young age, keep them for like and keep introducing new blood…. self perpetuating. How come no one at Quik has questioned this?

    On the other hand, investors demand an ever increasing return which puts CEOs under tremendous pressure to perform today without thinking of the long term consequences.
    Joe

    • jeff says:

      Hi Joe,
      When you become the new CEO at a company that’s losing money, needs to strengthen its balance sheet, and is public you don’t always have the luxury of time to be patient in shaping the brand just the way you’d like to. I can’t speak to Andy’s motivation (though I assume he likes money as much as the next guy) but his actions may be motivated by the circumstances Quik finds itself in. Like you say, being public creates pressure for performance regardless of the long term impact.

      Thanks for the comment.

      J.

  4. GB says:

    Santi touches but doesn’t really delve into what I believe is the wisdom behind the decision.
    While Quik, and the rest of us, want to capture the hearts and minds of kids at a young age, it is an entirely different market.
    Designing kids product is entirely different, you have to market to parents (and not be sexist but mothers in particular) and the distribution channels, while overlapping a little, are different.
    Having a little inside knowledge on licensing and Quiks experiences in China, I’m sure the Quik/LF agreement keeps the last word in design and marketing with Quik.
    This is probably a smart move on their part.
    Glenn

    • jeff says:

      Hi Glenn,
      I’m learning a bit about the kid’s market as a result of this post, and that’s good. Like you, I assume the license agreement leaves Quik with the control they need to keep the product from hurting the brand. I hope.

      Thanks for the comment,
      J.

  5. jb says:

    Just the first step in licensing the entire brand. Many prior
    Examples

    • jeff says:

      Hi John,
      While I guess I can imagine it ending up that way, I don’t believe it’s the intention. I am aware, however, that history is somewhat on your side.

      J.

  6. GB says:

    Jeff, I think Joe’s being a little unfair to Mooney. I seriously doubt he’s there to milk a big retirement package and bail. I don’t really “know” him but I do know Bob and I’m sure that they are trying hard to put the brand and the company back on track. Is Mooney the guy? Time will tell.

    Heard an interesting interview with Michael Dell this morning. He put it very succinctly. Paraphrased, Public companies answer to the short term thinking of Wall Street. It hobbles the company from implementing long term strategy.
    In my opinion, McKnight needs to take Quik private.

    In the words of Dennis Miller “thats just my opinion, I could be wrong”
    Glenn

    • jeff says:

      GB,
      I don’t know what Andy Mooney’s motives are, and I’m not quite sure we should be speculating on them here. Frankly, I like what he’s done so far and that’s good enough for me. Well, I don’t like it all, but I’m afraid it was necessary. I completely agree, and have written, that there’s a conflict between the demands of Wall Street and being successful and profitable in our industry. Private would be good, but I don’t expect it.

  7. You Know Who says:

    Maybe we can cut to the chase here. Kids is a totally different animal than adults. It, as mentioned above is very retail price sensitive and very hard to make what we in the action sports business take as a good margin. It has become a very specialized business at the factory level where the best factories have figured out where to get the lowest prices on everything so that they can be price competitive. Unlike what we normally do in the surf industry which is to make knock downs of our adult styles which end up with a first cost almost the same as the adults. That’s a fail. So i get why they did this. What I don’t get is why they didn’t package Hawk with Quik Kids and Hang Ten and sell them as a package to LF. My other strong feeling is that Quik is slowly becoming the next Op. I would not be a bit surprised if in 5 years the entire company is a Licensing model. Andy has a deep understanding of this business model and I am sure is very comfortable working with-in it. With virtually all the “old guard” now shown the door (with Bob really being the only one left) I see no real barrier left that might stop them from moving in this direction. History has shown though that once this happens the brand dies and become simply a label and loses almost all of it’s former brand equity. I guess only time will tell.

    • jeff says:

      Greetings YKW,
      Boy, are you gloomy to listen to. You sound like somebody else I know. Oh, wait, that’s me.

      I think we’ve got to see how Andy Mooney does with triage over the next six months or so. He’s still clearing the decks, cutting expenses, reducing SKUs and focusing on what they see as core brands. It may be as simple as either they go private, or they go to a licensing model.

      Thanks for the comment,
      J.

      • You Know Who says:

        Like Brumage mentioned. Michael Dell was on one of the Early Shows this morning talking about how much better it was going to be for them now that they are privet. This is a computer guy saying this. What does that say about our little industry? Are we kidding ourselves? Let’s also lay down some facts. At best 10% of Quik’s business has traditionally been in what we would refer to as kids, so in the big scheme of things this is not a huge part of their business model. The Tommy Bahama analogy from Chuck just might be a lot closer to reality than we think. As sales of Quik continue to slide at the specialty retail level, the option for them is to open more of their own stores. One of my best friends is the President of Tommy and trust me, it’s worked out just fine for them (Lamps anyone?). But they were always more department store focused than specialty so the transition for them was I think easier. They could as RB suggested segment the line as that has worked very well (for some unknown reason) for VANS. Oh, don’t worry Mr. Retailer, that’s just our Costco collection, they can’t get what you have. Oh really? They have the brand don’t they? Isn’t that what I have? Anyway, that’s an whole other debate. I’m just still not convinced that what we are all actually talking about is a train wreck happening in slow motion in front of all of us. I’m sticking to my Op analogy.

        • jeff says:

          YKW,

          What I’m starting to get interested in as I read these comments is how where a brand has its roots impacts where and how it can grow. If you’re hard goods, it feels like you’ve got nowhere to go and can just hope to be successful in your niche. If you’re roots are in one sport, maybe you can do a bit better, but growth will still be limited. What happens if you’re kind of a cool, multi sport soft lines brand? Volcom maybe? More growth opportunity but still a problem as you move further from your core market? How did Tommy Bahama get started exactly and where did they come from? Maybe I’m way over thinking this. I suppose every brand in every market and industry eventually runs into issues of distribution and growth if they don’t have an advantage based on actual product differences and improved functionality.

          Thanks for making me think. That’s why I love this.

          J.

          • You Know Who says:

            Tommy Bahama started when the founder of a collections line called Genera (remember that one) was in the Bahamas and went into the restaurant called Tommy Bahama. He got involved with the restaurant and over time it dawned on him, hey, this name has legs way beyond just a place to eat. So with his department store connections, his money and knowledge of the clothing industry they (meaning all the former Genera management guys) launched their first men’s line. The rest as they say is history. Today they do most of their sales through their own stores (although they still have a very respectable department store and specialty shop business) in which about half have restaurants attached. They sold the company about 5 years ago to a large publicly held clothing conglomerate whose name escapes me and most of the guys left with mountains of money. To this day they have a huge following. I was with my friend last New Years eve at their store in Palm Dessert and you could hardly get into the store. It has a restaurant up above the retail store and both where packed. They create such a encompassing theme it’s hard not to want to buy something when you are there. Like Disneyland for old guys.

          • jeff says:

            YKN,
            So what I conjecture is that Tommy Bahama’s success may have something to do with the fact that they didn’t start out identified with a specific sport or activity. Their potential market started out much larger than any action sports based brand can imagine, and they never had the problem of having to move away from their base to find new customers.

            Thanks for the history lesson.

            J.

          • GB says:

            Jeff, y’up, you boiled it down pretty well. A zebra can’t change it’s stripes so if you’re into hard goods, you have to live within your strict catagory. A little broader as you become less specialized but still limited.
            Why is that a problem though? Common sense says, Live within your means and enjoy the fact you aren’t wearing a suit to work. It’s really more about your motivation.
            Tommy B has a huge market because their lifestyle is “old men vacationing”. A huge and growing market as we are all living longer.
            YKW may be right, slomo train wreck.

  8. Chuck says:

    Tommy Bahama here we come. I see table lamps in Quik’s future. Seriously, I am more and more of the opinion Andy is a parachute out guy.

    If not for Dane, I do not think anyone under 30, or even under 40 would ever consider buying a Quiksilver branded product. Kids is cut-throat and very price sensitive and L&F never does anything in a small way. With a ton of 5 year old’s running around wearing the brand do you think a 14 year old would ever touch it? They know that, which is why they had Hawk. How can you do this and say you have not given up on the Quik brand?

    • RB says:

      If I were Mooney, my answer would be segmentation: There are 300 million people (potential consumers) in america and I would venture to say that through Quik’s current distribution they are not touching most of the potential consumers, by offering product through thousands more retail outlets like Penny & Kohls at price points that their consumers can afford, Quik expands its consumer base & brand presence and engages with millions of new consumers, if they do their job right and market properly they can maintain and grow with those retailers and consumers they have a chance to build a healthy business. Neither Nike or Levi would be defined as a core company, however they are both healthy and successful. As a public company Mooney has to get Quik healthy and successful, they will market to the core and sponsor surfers, but in the end they need to impress wall street and the investment community with performance on a quarterly basis. I’m not a Quik fan, and I’m not sure what Mooney is doing has time to work, but I do believe he is making sound business decisions while at the helm.

    • jeff says:

      RB,
      I’d say Nike and Levi are successful in broader distribution precisely because they aren’t defined as core brands. I’ve argued that as soon as “core” companies step outside their niche, they find themselves competing in the fashion business against way bigger companies that know fashion much better than they do for customers who may have heard the core brand’s name, but don’t necessarily identify with its story. That’s why being public is so hard for companies with their roots in action sports. As you say, there’s pressure to grow, but that growth may not be in the brand’s longer term interest.

      Thanks for the comment,

      J.

    • jeff says:

      Hi Chuck,
      Well, maybe because you’re managing with limited resources, a balance sheet that’s none too good, and have to make some choices based on where you can earn your best ROI. It sounds, from what everybody is saying, that kids isn’t that place. We’ll know next year if your point of view about how L & F works is what they do with Quik kids. If so, I’ll tend to come around to your point of view.

      The Tommy Bahama thing is intriguing. Where can I get one of those lamps?

      Thanks,
      J.

  9. Joe Burlo says:

    Everyone agrees that the kids market can make or break a brand. Most also agree that pricing is key with kids. Quik has been around long enough to be able to seek out the best and better priced kids factories or use agents. They would then keep control of their brand and story and look for specialised distribution channels to sell the kids into the mass market. Quik was, and might still be, the second largest employer in Huntington Beach so they do have the resources to do this.
    Joe

    • jeff says:

      Hi Joe,
      Well, I can’t speak for the rest of you, but I’m learning quite a bit about the kids market from all these excellent posts. I don’t think the kids market can make or break a brand in the short term, but as I said in the original post, it’s certainly critical to Quik if the brand wants to have staying power. We’ve learned (or at least I’ve learned from these posts) that this is a very competitive business without great margins. So I guess we can say that Quik has the resources to do this if they want, but I suspect Andy Mooney is looking at where he can get the best ROI, and it sounds like kids clothing would not be the place.

      Thanks,
      J.

      • RB says:

        I’ll address a few things in this post:

        1. Quik does not have the resources i.e. factories and personal to play in the kids apparel world remotely at the level of L&F That is why brands license to companies like L&F/Kids HQ and Haddad industries. They are far better at everything to do with Kids.

        2. I’d argue that Quik is no longer core company, and started heeding that direction when they pioneered the department store business, started selling to costco to make quarters, and lost their cool youth customer to Volcom in the early 1990′s. Moony is going to act like he’s the CEO of a public apparel company, which he is, the athletes they support and their heritage are nothing more that marketing on wall street.

        3. Tommy Bahama (like Genera was) is a great apparel company, they sell direct to consumer through their own stores, sell at premium price point at Nordstrom, market and sell to a huge demographic group that wants the premium “island feel”. If Quik could find a way to become remotely as successful they should do whatever it takes to make it happen!

        4. I know there are lots of fans or “core shops” and “core brands” on here, but when running a company and trying to grow the core often presents problems. Core retailers often don’t pay their bills, Core retailers after don’t provide a company with the brand experience necessary to represent the brand like the company wants/or needs to be represented to achieve growth goals. i.e. core retailers although necessary for companies like quik are often risky especially when the company is public. Quik is not a core company…

        • jeff says:

          Hi RB,
          Thanks for the additions. I agree with you on number one. That’s basically what they’ve said, though not in so many words. Number 2- yup. Kind of standard market evolution stuff. Number 3- Quik would have a hard time doing what Tommy Bahama does because Tommy started with it’s market position in mind. Quik started with another one and making the transition would be tough. But never say never! Number- As important as I think core shops still are for the credibility of brands, they just don’t offer enough growth opportunity and companies, for that reason always move past them as they grow. The financial equation to do that is very compelling if you want to grow.

          J.

  10. Beau says:

    Jeff,
    Well this posting has led to quite a bit of traffic! And I can see the very astute ponderings of my friends here. So astute that there is really not much I could add!

    Really all I can offer is:
    Quik has lots of experience with licensing throughout the years and has learned a lot along the way
    L&F is a very well known (some MIGHT say respected) licensee with experience in our industry and the connections in mid-mass tiers (read: “they know how to sell our lifestyle to their customers and make a profit”)
    Mooney and Quik’s legal team seem to have the experience to put a deal like this together

    I don’t think Mooney is looking to go for the big cash out, I’m sure he could have found more favorable climes for that. But I don’t think that we’ should expect him to be around too long should another more interesting challenge come along. Maybe not “Mr. Right”, definitely “Mr. Right Now”

    While it sucks for the many people that will lose their livelihood over this, I see why they would do it and I think it will be a fiscally savvy move in the long term.

    • jeff says:

      Hi Beau,
      Yeah I wasn’t expecting this when I wrong the short article. I suspect it’s something that they needed to do now given their circumstances and opportunities, but I don’t think it’s what they’d want to do.

      Thanks for the comment,
      J.

  11. jurgen schulz says:

    Jeff,

    Great comments from some very savvy people!
    I agree that quiksilver has to go mid tier and has to license their product to play the value game.
    Why? When kids don’t demand it, it becomes all about price.
    As a ex-retailer, the kids (boys) business, was very strong for us over the years. Often up to 20% of total sales. As the distribution channels opened up, those sales got weaker and finally non-existent unless it was on “sale”. For a “core” retailer the kids business was this simple. If kids demand it and if it’s hard to find, parents will buy it at full msrp. Simple supply and demand. The last example of this for me was Krew jeans.
    When I speak with other retailers about the state of their business, one of the things I ask them, is how their kid’s department is trending. If it’s been down, then it might be a good indicator that things are going to get interesting.
    Perhaps social media will replace the boys department as a means of developing future customers for the core shops.

    Have a great holiday!

    Js

    • jeff says:

      Hi Jurgen,

      Your comment on social media replacing the kids department is a really interesting one! So to grow, you have to open up distribution. But as you do that, it becomes more and more about price. Oh lord, is it really that simple? And that’s disturbing. Still, if accurate, it sure simplifies business planning. And continues to make being public suck.

      Great comment.

      J.

  12. GES says:

    The inside word is Mooney and whats left of senior mgmt magic price is $12, Mcknight has been relegated to a front row seat and a healthy pay day to follow the script. Licensing boys (a small part of the business for QS) is all part of the strategy to get there as quickly as possible. Look to see them expand their outlet strategy, bigger stores, narrower product assortment and a handful of high performing company owned larger full price stores…

    • jeff says:

      Hi GES,

      I’d be stunned if there wasn’t a target stock price. Expanding outlets and narrowing the product assortment I understand. Care to say more about the bigger store concept?

      Thanks for the comment.

      J.