Stuck In A Rut; Another Recession Article

Look, I’m sorry about this. I’d really rather write about upbeat, happy stuff. It’s not my fault we’re in a recession, or are going to be in one, or whatever. I’m not making up these lousy economic statistics we’re seeing, you now. I don’t just sit here and pull them out of my ass, damn it. Sure, sure, everybody just goes, “Why should we read this crap when he’s never got anything good to say!?” and then I’ll probably be out of an assignment. Vuckovich will throw me out on the street, my wife will leave me when we can’t pay the mortgage, but what the hell, she’ll probably get the house anyway, the dog will piss on my leg and all because of a couple of lousy quarters of negative economic growth. I mean, so what, it’s just that Hey!! Leave me alone. Give me that back. Yeah, same to you……

Editors Note: The Editors of TransWorld Skateboarding wish to apologize for Mr. Harbaugh’s egregious behavior. He’s been restrained, and locked in a small room with case of beer. He should be himself presently.
 
Though it won’t be official until another quarter of negative economic growth is announced, it is generally conceded that we are in a recession. We would have had one even without the events of September 11th, though it seems likely that either the depth or the duration, or both, will be longer as a result of those events.
 
The genesis of this recession, in my judgment, is in the decade of growth and prosperity we have experienced since the 1990-01 economic downturn and a financial markets decline (driven largely by the bursting of the technology bubble) that is unprecedented since the Depression.
 
The 1990-91 recession lasted eight months. It was relatively short at least partly because while the United States experienced economic weakness, other parts of the world economy were stronger. In 2001, Japan is entering its fourth recession in a decade and the major countries in Europe are weak as well. It was during the 1973-75 recession that the world last experienced such a confluence of negative economic forces. That recession lasted sixteen months. Its proximate cause was the oil crisis. No similar crisis is imminent at this time.
 
Questions
 
If you’re running a business in skateboarding, you have the following issues to consider:
 
1)            Will favorable demographics and industry momentum shelter skateboarding from a general economic downturn?
2)            If there is an impact, will it be different for hard goods than for soft goods?
3)            How will brands and retailers be affected differently?
4)            Are there any opportunities here and how can you take advantage of them?
 
Below, each of these questions is considered in turn. Neither I nor anybody else “knows” the answer to any of them. Your goal is simply to consider the issues as they may impact your business and draw your own conclusions. The only way you can be “wrong” is to not consider the issues.
 
Demographics and Momentum
 
My sense is that we can make short work of this one. Not only is the primary demographic for skateboarding growing, but it’s extending itself, as both younger and older participants take up skateboarding. That the sport has gone mainstream, or legit, or whatever adjective you want to use is undeniable. That doesn’t make the industry immune to recessionary pressures, but maybe it means that the impact is in a lower growth rate, instead of a decline.
 
Hard goods Versus Soft goods
 
If you want to skateboard, you got to have a skateboard. There’s just no way around it. On the other hand, you probably don’t need another pair of skate shoes in your closet. The old pair will last another month anyway, and if you don’t have the latest style of pants, you’ll get by. Or at least your parents think you can get by. But it’s tough to ollie off a board with a paper-thin tip.
 
In the economy in general, most public companies that sell casual clothing to our demographic have warned that they may not make their projected numbers in at least the fourth quarter. Granted, skateboarding is just a small part of that much broader market. Still, everything I’ve read, and everything I learned at ASR in September, tells me that soft goods sales are going to be down in at least the near future. I don’t expect skateboarding to completely avoid that trend.
 
It’s interesting how the worm has turned. The hard goods companies use to complain about the injustice of it all. Through their teams and promotional campaigns, they created and maintained the vibe which propelled the market. But it was the apparel and shoe companies, based on their size and growth rates that benefited the most from the activities of the hard goods companies. Everybody needed shoes and clothes. Not everybody needed a skateboard.
 
Now it seems like the soft goods companies are most likely to be hurt by recession. Hard goods companies, with their solid market niches, may look on any slowdown in growth as their first opportunity in a while to take care of some neglected pieces of their business. That’s how Paul Schmidt, at PS Stix, sees it.
 
“I’m only running five 24 hour days a week now,’ he says. “We’re finally able to reorganize our production line and install some new equipment that will make us more efficient.”
 
With confidence that their higher levels of production are here to stay, it’s likely that other hard goods brands will also be willing to invest in upgrading their production facilities.
 
Then there are skate shoes. It seems like we’ve had about seventy brands of shoes for a couple of years. Every six months, at ASR, ten of them have gone away, and there are ten new ones. I suspect there will be fewer brands by the end of this recession. It’s already pretty typical to go into one of the mall “skate” shops and see a pile of skate shoes on sale. The piles I’ve seen are typically so big that they have to sit near the front door, a barrier to the customer getting to the full price merchandise.
 
I’ve never understood the financial model of the newer skate shoe brands. They have to spend a passel of marketing dollars just to have a hope of making a dent. But their lower volumes means that they aren’t typically getting pricing, terms, or attention from the factory that’s as attractive as what the larger, established brands get. Look for the total number of independent skate shoe brands to decline consistent with a recession-impacted fall off in soft goods sales.
 
Retailers and Suppliers
 
The first thing we have to recognize, especially with retailers, is that there are damn few pure skate retailers. There are lots of retailers who sell skateboard products and lots of retailers who are primarily skateboarding oriented. But for the most part, they also sell surf, or snow, or BMX, or rock climbing, or roller blading or some or all of those. So things can be great in skate, but if they are off thirty percent in the spring because of a decline in surf apparel sales, they could have a problem.
 
Retail sales increased at an average annual rate of 6.55% from 1994 through 2000. Now they’re not. The whole United States, in general, is over retailed. Though demographics may to some extent shelter action sports retailers from a general decline in retail sales, it won’t protect them completely.
 
It’s also generally acknowledged that retailers earn most of their money from apparels, shoes, and accessories. Skate hard goods are simply not high margin products. A decline in soft good sales will have a disproportional impact on gross margin dollars earned at retail and on the bottom line.
 
Suppliers, as we’ve already indicated, are likely to do fine if they are hard goods companies, and see some declines if they sell soft goods or shoes. For both retailers and suppliers, the ones with the established competitive positions and strong balance sheets will come through this in the best condition.
 
Suppliers should be paying more attention to how and to whom they extend credit. Retailers, on the other hand, can expect suppliers to encourage them to buy from them and to cut some other supplier’s order, if any cutting is being done. This may translate into opportunities for some better prices and terms for retailers.
 
Opportunities
 
I can put this real succinctly. In hard times, the strongest competitors, with the best balance sheets tend to gain share and grow stronger. It’s not that they aren’t impacted by hard times, but they have the financial ability and customer loyalty to not only get through them, but to take advantage of them. 
 
They can afford to offer better terms and prices if necessary. They don’t have to cut their advertising and promotional expenditures as much and when they do cut, it doesn’t hurt their recognition with their customers as much as it hurts a less established business.
 
A little decline in volume doesn’t put them below breakeven. They have enough leverage to be able to get their factories to share the pain. Customers are more likely to cut purchases of marginal brands. They have the financial ability to buy some of their competitors when they get into trouble.
 
If you’re not a leader in your market as either a retailer or a brand, you’d better gird up your loins. Take steps to strengthen your balance sheet by cutting expenses where possible. Do it now, not later because expense reductions are cumulative over time. Dump that old inventory and stop kidding yourself about how much it’s really worth. Be cautious in extending credit and ruthless in collecting from those who owe you.
 
Take a hard look at your advertising and promotion commitments. Don’t fall into the old action sport trap of spending marketing money because you have to build your brand’s recognition no matter what. I can pretty much guarantee that your expensively bought market position won’t be worth squat if you can’t make payroll and pay your suppliers. 
 
By the time of the 1990-91 recession, skateboarding was well into a period of decline. Largely, people say, because the demographic trends of that time had run their course; not so much because there was a recession. But out of those hard times came new brands and companies that are among the leaders in skateboarding today. Those weren’t easy times. Some companies made it and some didn’t. But looking back ten years it’s pretty clear they created some opportunities by breaking down some barriers.
 
Get out your sledgehammer, but try not to hit yourself.