The Surf Industry and Bob McKnight’s Conference Speech: Points of Contact

Most of you are probably aware that the Surf Industry Summit took place in Cabo starting about 10 days ago. The keynote speaker on the first night was Quiksilver founder and Chairman Bob McKnight. His speech was somewhat controversial. The text is available on Shop Eat, Surf, but only if you’re an Executive Member. I’m not, but some people sent me a PDF. I’ve read it a few times and listened it to, but was not at the conference. You should find a way to get yourselves a copy.

My goal is for this to be useful and professional. That doesn’t mean I won’t disagree with Bob on some points. I do and I will. But as always, my goal is a discussion that makes us think differently, and do better business. A quality disagreement is the best way to learn new things.

I’m going to use Bob as a bit of a stalking horse, responding to some of the issues he raises but doesn’t fully address if only because of the limited time available. But these, I think, are precisely the issues that future conferences should focus on. When it does, I might start coming to the conference again.

If they’ll have me.

Bob started out saying he hadn’t wanted to make the speech, but the board of SIMA wouldn’t take no for an answer. I believe him. As the Chairman of a public company in a difficult financial situation, he is constrained in what he can say or wants to say. I would love to hear the speech Bob would have made if he had absolutely, positively known that none of the wall street crowd would see it. I hope it would have been different.

After a bit of history and some reminiscing, he talked about the good, the bad, and the ugly in the surf industry. Let’s take a look at each in turn.

The Good

He talks about how big the market has gotten since he made his conference speech 10 years ago on “Growing the Pond.” He notes that “…everybody loves the beach,” and describes what he saw at Surf Expo.

“…what I was amazed most by is what I call Water World – it’s getting huge. This is wakeboarding, waterskiing, surfing behind the boat, SUP, all the oceans and rivers of America. Kite surfing, windsurfing, all these things – it’s amazing. So, we have that definitely on the good list.”

“Also, all things surfing, and all the variations. There’s obviously free surfing, contest surfing, there’s hippie, feral, adventure travel surfing. All the boards – long board, short board, weirdo boards, boogie boards, body surfing – I mean, even diving, fishing, boating is all part of our deal, now. And we have fitness training, even MMA. And there’s some new wholesale opportunities.”

Same thing I saw. But it made me ask, “What market are we in?” rather than say “See how big our market is.” Maybe we’re in the “Things you do in water using a board” market. And that’s okay, but each company has to make a decision about that. “We” aren’t in any market. Each company has a market position that probably overlaps to a greater or lesser extent with other companies and different activities. That’s not a new idea.

The actual surf market, as we’ve traditionally thought about surf, is a pretty small market. The same is true for what we call the action sports market. It’s made up of the people who actually participate and the first line of people who don’t but who maybe watch contests and are firmly into the lifestyle.

Most of the product most surf companies sell isn’t sold to surfers. That’s not news. And the further you get from selling to people who surf if you’re a company with its roots in surf, the harder it is to differentiate yourself. As I’ve said before, they may know your brand, but not your story.

So I agree with Bob that the pond has grown. But I don’t think that because your roots are in surfing you should or can be in all those markets, and Bob doesn’t say you should be. As some brands have found out, that can be a dangerous way to think. Growing the pond has the downside of attracting tough, or at least persistent, competitors as Bob notes in the next section of his speech. Bob talks about what’s good for the industry. You have to think about what’s good for your company. Never assume they are necessarily the same.

Bob notes later that figuring out your marketing segmentation is important. He’s right. Who can be at the next conference explaining to industry companies how they figure out which parts of this admittedly bigger market a company belongs in?

The Bad

Here’s what Bob says about what he characterizes as the surf market, “Everybody’s in on it. All levels of distribution, with or without a legitimate brand, all levels of price, ecommerce – and not only do we have us in the room who do legit stuff, but we have Hollister, Gap, Old Navy, Tommy Hilfiger, PacSun private label, Target, Under Armour, Abercrombie– I mean, it just goes on and on and on.  And the women’s side – Forever 21, Lululemon, Zara, H&M.”

He points to the continuing global recession and to pricing pressures coming from Amazon, Costco, Sam’s, and kids spending their money on electronics and entertainment rather than shorts, t-shirts and sandals.

The pond’s grown, and that’s good. But everybody’s in on it, and that’s bad. We’d all prefer that it had grown without attracting other competitors, but that was never likely.   Ask the snowboard and skateboard guys. Seems to me there’s been a pretty standard business cycle here made worse by a tough economy. “The Industry” can’t “fix” this. Each company can determine which of these companies are in fact their competitors and act accordingly.

He notes that “…we’ve had about a 30 percent reduction in hardcore accounts because their rents were raised, they went out of business, hurricanes, you name it.”

That’s not an adequate description of why so many specialty retailers went belly up. There’s the “no longer the best economy we could ever have hoped to live through” issue, and that this country is way over retailed. And there’s the fact that some of those retailers weren’t good business people, but cash flow in the go-go years covered that up.

Retailers have become brands and brands have become retailers. On the internet and in their own stores, brands (not just Quiksilver) started competing directly with retailers. They also impacted retailers in how and where they distributed product.

Specialty retailers can’t compete by carrying brands that are distributed indiscriminately and priced below what core account needs to make a survivable margin. The best specialty retailers make the brands they carry special- not the other way around. But there’s limit to that. I’ve been encouraging specialty retailers to take risks on new brands with more limited distribution because, bluntly, I thought it was their best chance to succeed.

I’m not here to say the decisions made by brands and retailers were “good” or “bad” decisions. Each does what it perceives to be in its own best interest- not the industry’s. That’s what they should have done. Would a little longer term perspective have benefited them and the industry? I think so. But it can be hard to think that way when you have to run a business every day.

For the next conference, let’s get the ubiquitous retail panel, but have it consist of core retailers who went out of business, or who almost did and saved themselves. What happened? What would they have done differently? How could the brands have helped? Yes, it might be uncomfortable and I don’t know if we could find retailers prepared to describe the mistakes they made. But the discussion could take us outside our comfort zone. That would be valuable.

My brother in law once commented, “Wherever you go, there you’ll be.” It didn’t seem quite so insightful at the time, and there may have been a cocktail involved. But here we are. Bob’s litany of who’s involved in the industry (depending what we mean by that term) is accurate. It’s where our journey has taken us. Here we are. Now what?

The Ugly

“The ugly is really that we’ve lost our specialness and specialty retail – except for core accounts. But I think that we were once known to be really special, and people had to go to the beach, had to go to the cathedral accounts and buy something because it was one of our brands, and it was really special. And now, everybody’s in. So, there’s just too much stuff. Race to the bottom for price. We grew the pond, and now it’s time to really protect the perimeter.”

“I think we all just need to change. I think we need to do better and better product. I think we need to have less SKUs, more curated products where everything has a story, it’s special. I think we need to, as best we can, start raising prices, guys, because otherwise, the race to the bottom – we will not win that battle. “

The race Bob is describing is over at various levels. The consumer has won. We’ve got customers with perfect information, lower disposable income, a disinclination to be brand loyal, and that are influenced more by what their peers say than what we tell them and that want the new thing when they want it and how they want it. I don’t mean for that to sound quite so black and white. There are shades of grey for every retailer and brand. What do those fundamental and evolving changes mean for how we do business?

Better products, fewer SKUs, curated products, higher prices and better story telling are all things I’m for, though a discussion of the details would be in order. What, for example, do these way less compliant customers of ours think makes a product “better?” Damned if I know.

If we really want to dig into that, SIMA might consider inviting Neil Howe, the co-author of The Fourth Turning and a number of books on millennials to speak at next year’s conference.

As far as protecting the perimeter goes, I think the industry can do that. But it’s the perimeter of the smaller surf market as I describe it- not the much larger market Bob describes. “What do we mean by ‘the market’?” is worthy of a debate.

I also think Bob is onto something when he says, “I just almost feel like we need to be more like luxury brands as best we can. Not the high price, but just the way that their attitude is. Less is more, every product is important, has a story, higher price, hard to get, and more exclusive.”

I’ve been making the argument for years now that brands need to be focused on improving gross margin and controlling operating expenses to improve the bottom line rather than relying on big sales increases. But I think of luxury brands as having high prices almost by definition and I certainly believe they have limited distribution and a more targeted market. The distribution issue is particularly significant where there is no other fundamental difference between two brand’s products.

I’ve also been saying- regular readers know it’s been coming- wait for it- that there’s a conflict between the revenue growth a public company needs and making a brand special along the lines Bob describes. I think brands can and should take Bob’s advice in this area, but I’m unclear if it’s viable for public companies after they get to a certain size.

The rest of Bob’s speech I’d characterize as rallying the troops. He criticized the email Bob Hurley sent to the conference right before the his speech, tried to use “Je Suis Charlie” as a rallying cry for the surf industry, called for supporting core retailers, positive media coverage, and suggested some new directions for SIMA. I got comments.

First, 12 people were murdered in January, 2015 for standing up for what they believed in, and “Je Suis Charlie” emerged as a symbol of support and outrage. Nothing going on in the surf industry rises to that level of significance and I’m pretty sure there are no lives in danger from bad distribution.

Bob Hurley’s email ended up sounding like a commercial for the Hurley brand, and I have no idea why. The point is he didn’t come and I’m guessing he didn’t see the business value in showing up- or he would have been there.

I’m about 25 years into going to industry conferences and trade shows. There has been a remarkable sameness to them over the years. We spend way too much time talking to each other and validating each other’s preconceptions. Confirmation bias (look it up) reigns supreme at these functions. It was ten years ago at the conference when Bob made his first speech that I stood up during a retail panel and asked, “What happens when the brands have 5,000 retail stores?” One retailer responded, “We can compete against anybody!” They took the microphone from me and moved on to a less uncomfortable issue.

Bob’s right that we need positive publicity and to tell good stories. That’s among the jobs of good trade associations. I’ve occasionally run afoul of trade associations because I don’t always toe that line. Maybe I’m doing it again right now. I was almost disappointed not to be on Bob’s list of people who don’t always “…write good stuff.”

So I was surprised when Bob went after Tiffany Montgomery of Shop, Eat, Surf during his speech for publishing former Quik CEO Andy Mooney’s severance arrangements. I was surprised first because Shop, Eat, Surf has been overwhelmingly positive in its reporting. Perhaps Bob was caught a bit off guard when suddenly she wrote something that wasn’t.

More importantly, what Tiffany wrote about was public information available in an SEC filing. When you go public, you give up a certain expectation of privacy. A better way to put that is that you have an obligation to disclose.

What is the role of “core” accounts? We all (including me) take almost as an article of faith that they are important. Hell, I love going into a good core retailer and seeing what they are doing. But what does being “important” mean exactly? And to what market? Isn’t there a place for a serious and detailed conversation around that issue? Bob calls on SIMA to do some quality research and this is certainly a place they might start.

Time after time, I’ve seen companies exhibiting a behavior I characterize as denial and perseverance during a period of change. The result is an attempt to fix the problem by doing “more of the same.” It rarely works.

Bob highlights most of the issues the industry faces. In broad brush, I found myself agreeing with the business issues he identified, though not with his interpretation. To be fair, he didn’t have much time, was speaking as the Chairmanof a public company, and doesn’t necessarily want to highlight for his competitors any creative, original thinking on specific issues that he thinks might give Quiksilver an edge. Maybe surf companies are friendly competitors but as Bob points out, they are competitors.

The insidious problem is that we may have the same questions around pricing, product, and distribution but the environment in which we have to address them is completely different from anything we’ve ever operated in before and changing fast.

Let’s not start by identifying, for example, “We need higher prices” as the problem. Let’s ask, rather, what kinds of product commands higher products and why (Bob focused on luxury goods). Don’t start with the platitude “Core shops are important.” Ask how their role has changed.

We might be surprised at just how creative we can be.

17 replies
  1. Jeff_Fan
    Jeff_Fan says:

    Off to lunch, will read this during, but I had to make a comment about that speech….now, I am not in the Surf biz, I am in the bicycle biz, but man does it sound like an elitist cliquey club to be in, a lot of “us vs them” speak.

    • jeff
      jeff says:

      Hi Fan,
      It kind of is. That’s both a strength and a weakness. I think of the bike industry as much more accepting and less judgmental.

      Thanks for the comment.

      J.

  2. Jim P
    Jim P says:

    “I just almost feel like we need to be more like luxury brands as best we can. Not the high price, but just the way that their attitude is. Less is more, every product is important, has a story, higher price, hard to get, and more exclusive.”

    Apparel can certainly be commoditized, particularly when you ‘race to the bottom on pricing’. IMO, what Bob said (and must say as a public firm’s CEO) and you concurred is that a brand’s value is only the real/perceived/obtained amount above commodity status. Brand differentiation, other than price, is a must to survive & prosper.

    No plug intended, but Roark Revival seems to be an example of a relatively new woven, board shorts & head wear brand on a solid trajectory and firing on all media channels.

    • jeff
      jeff says:

      Hi Jim,
      Plugs are fine. I like Roark Revival too. But remember there are always new brands appearing. Some of them succeed. If they succeed too much, they run into the same issues of distribution that brands that came before them and got large will have. Roark has the advantage of having based its story on more than surfing. It appeals to a broader market. But how broad? Not Costco certainly, but I see they have some tees on Zumiez’s web site. If I ran Roark, I’d be looking to put it in boutique kinds of stores with high prices. Maybe that’s what they are doing. I’d sacrifice some sales and growth for coolness, limited distribution and higher margin.

      Thanks for the comment,

      J.

      s

  3. Kel
    Kel says:

    It is interesting that all the cool smaller brands look for the Core shops support and at the same time are stinging to get into the bigger retailers. It’s like the Piped Piper is calling them to go down the same road. Clothing brands are leveraging their marketing of the surf lifestyle. No more hard core than any other clothing label. It’s just a marketing exercise that I think most consumers can see through pretty easily. Fashion comes and goes but real surfing participation will stay forever.

    • jeff
      jeff says:

      Hi Kel,

      I agree the process of using the core shops as a springboard has gone on forever and will continue to go on. But even the smaller brands need to be cautious about where and how they get their growth. They will lose what made them exciting and different. As I keep saying, be thoughtful about each distribution decision and give up some growth to maintain the brand and focus on growing margin and controlling operating expenses.

      Thanks,
      J.

  4. Croc Dundee
    Croc Dundee says:

    “…and doesn’t necessarily want to highlight for his competitors any creative, original thinking on specific issues that he thinks might give Quiksilver an edge.”

    Hi Jeff,
    I think you are being overly kind with the above comment. Personally I think Bob’s original thinking ran out years ago.

    The world has changed, to have only cottoned onto that fact “two weeks ago” when his kids were sitting round watching tv and shopping online is case in point. “and I went, “Holy shit.” I mean, these kids used to love to go to the mall, and shop around, hang out. So, buying habits are really changing. We got to be aware of that.” – No shit.

    If he’d figured it out earlier perhaps Quik would have would have had a different strategy, both physical and online, instead of having to apologize for stuffing up all the time.

    I agree with Bob that we need better products and better stories. However I disagree with his comment that we all, retailers and brands, need topline sales growth. Chasing growth is a big part of the mess Quiksilver and the industry are in, look at DC. What we need is better quality products, which are more desirable to our customer because they are the best product for the purpose they are available in the right stores and channels and they aren’t oversupplied, resulting in better sell through and better finishing margin giving us more gross margin dollars. The days of growth growth growth are over.

    …and to single Tiffany Montgomery out like that is a disgrace. To make her stand up in front of everyone is borderline bullying, I wonder if he’d do it to a man?.

    On a different yet kinda related point have you seen this? Its an interesting read;
    https://medium.com/@ignacio.chavarria/can-anyone-save-the-surf-industry-64e63d3ece3f

    Thanks

    Croc

    • jeff
      jeff says:

      Hi Croc,
      To start from the bottom of your comment, no I haven’t seen it and will read it. Thanks. As I said in the article, I agree with you on what he did with Tiffany.

      You know how I feel about chasing growth- it has to be done carefully but I don’t know what you do as a public company who has to have it. I wasn’t trying to be overly or underly kind. I was just trying to present some issues and be pretty dispassionate about it in the hope it would be a good business discussion. I have to admit to you that I was also surprised at Bob’s comment about his kids. It bothers me because it make him sound not in touch with reality.

      Thanks,

      J.

  5. Mark
    Mark says:

    Awesome summary. I can’t tell you how much I appreciate your perspective on things. Really helps me crystallize my own thoughts on this stuff. Keep up the great work.

  6. Abercrombe Ian Fitch
    Abercrombe Ian Fitch says:

    JH: Great piece, as always.

    No one talks about the one factor I believe exists at the core of all of the tales of woe in the action sports business. People get close, diagnosing executive “hubris” (buying Rossignol, rolling out 500 retail stores, sponsoring an MMA fighter, launching an entertainment or travel division, etc. – all in the vein of “we are so freaking awesome there is nothing we can’t do successfully) but what is the root cause of even that level of arrogance… – GREED. Each brand has a “scale” of loyalists and fans who will buy their goods whenever and wherever they are, and depending on price point and initial reach, that scale is probably in the $5-30M range. A brand doing $30M largely on inprintibles can net the owner[s] a couple of million dollars in their pockets each year. For a bunch of local non-MBA guys who may be only high school educated or are former pro surfers or skaters just looking for a gig to avoid a real job (that includes the marketing & team guys, sales reps, etc.), that’s a perfect SoCal story, and what gets lost is that it’s precisely the DNA that makes that brand cool and aspirational to the initial consumer. Why that brand decides it needs to go public, to sell to a strategic, to bring in PE money – all so that the owner can put $35M in his pocket at once chasing billionaire status, is beyond me. Tell me a story where that cool brand, birthed and nurtured by being different, unique and small, is able to keep the dream alive (Vans may be the only one, despite its rocky lineage – and kudos to them and VF). It all goes back to this. Once the owner lives on the sand in Corona del Mar in a $7M house, still surfs every day, has his kids set for private school, and is still the boss, why is that not enough??? Ask the owner how happy he is post-closing, when he’s doing financial reporting all day, earnings calls, HR reviews, etc. Aeschylus, Sophocles and Euripides, eat your hearts out. Tragedy is not unique to Greece, it exists in Costa Mesa too, and that play keeps getting re-written.

    • jeff
      jeff says:

      Howdy AIF,
      Your logic is impeccable, and pretty much the same as mine. In spite of that, what I’ve always seen is that the pressures for growth ALWAYS ratchets up. I imagine you may have seen that too. Certainly it has something to do with greed and arrogance. I won’t fault anybody for a little greed and, for better or worse, some arrogance is probably what it takes to create and build a successful company. What I’ve experienced in the active outdoor industry (I think I’m over the “action sports” moniker) is that expectations from consumers, customers, employees and other stakeholders take not growing off the table as an option. You are relentlessly pulled into growing. Sometimes, at least with private companies, it might be possible to at least constrain the pace, and I’ve been arguing for that for a while now. I’ve finally decided that a company can only prosper by doing some combination of new things on an ongoing basis. Growth always seems to be a part of the recipe.

      Thanks for the comment,

      J.

  7. Nate
    Nate says:

    Jeff,
    This post was by far was my favorite of yours yet. You brought up points that many within the industry are either blind too or unwilling to address because of ego’s or ignorance. The retail landscape is changing and many are still stuck in the 1990’s.

    When you look at four of the world’s most recognized companies – Amazon, Uber, Apple, and Google, who is the most successful? The answer is simple, Apple. Why? Because Apple figured out what most companies within the action sports industry have forgotten – create a high quality product that people need, turned that need into a want by marketing it to the people who need that product, and lastly create demand by controlling supply.

    If you look back at every Apple iphone ever released, what has happened? Sell throughs every single time. Why? Because Apple purposely delayed shipments of iphones to help boost consumer demand and it has worked EVERY TIME! Record sales, sell throughs, and increased consumer demand EVERY SINGLE TIME! Have you ever seen a action sports brand do that? No, and I wish they would.

    The last point I want to make refers to the huge increase in cell phone cost. Before the Iphone, people typically would sign two year contracts with service providers in order to buy an iphone for the standard $199-299. These days when you go to purchase a new iphone how much does it cost? Roughly $649-$749 or $21-24 per month. When is the last time here in the U.S. you paid $700 for a cell phone? What happened here? Apple has overnight managed to turn a once “common good” into what I would consider a “luxury good” and because of it demand keeps growing and so do sales. However, they have even taken it a step further by selling iwatches which retail for over $10k! Thats more than a Rolex! How much has the price of boardshorts gone up? What about surfboards (shapers seriously need to look at Japan)? What about wetsuits (again look at Japan’s quality/prices)? Next to nothing when you compare it to other industries.

    As you mentioned earlier Jeff, we need to stop focusing on the bottom and instead focus on the top just like Apple has done. We are specialty industry and our products are unique. Price points and quality should reflect that.

    As always Jeff, thanks for being one of the few to call it how it is. Keep the commentary coming.

    Cheers

    • jeff
      jeff says:

      Hi Nate,
      I disagree with you about some of the points you make about Apple, but not your general concept. To make your product special and in demand, you either make it hard to find, or you give it features nobody else has. Apple did both, though we’ll see if they can keep it up. It will require that they keep coming up with products that people want. I think the jury is out on the watch, and certainly Android has taken a chunk of market from the iPhone. I am not quite certain that the surf industry has the ability to produce products that are as distinctive as the iPhone, so they are stuck with thoughtful distribution as the way to make a product “special.” But a desire/need for growth has typically gotten in the way of doing that. In 2008, when the Great Recession hit and everybody got scared, snow brands and retailers cut back on product. The result, when the next season started, was a shortage of product and a willingness of consumers to pay higher prices because they felt if they didn’t get it now, they wouldn’t get it. That of course didn’t last.

      Thanks for the comment.

      J.

  8. Big Guy
    Big Guy says:

    Jeff and readers,
    Great commentary as always. It is entertaining to sit back and watch all this, especially as one who was purged from the Quiksilver machine en route to their “comeback.” I’m betting they never saw their stock hit $1.18 again in their grand vision for the company. I agree with some of the comments about greed and/or the lack thereof, and have a case in point here. Stussy. Think about it. A sleeper company, privately held, very managed distribution, a cool, small crew of people running an amazing show without fanfare, making good margin and continuing to sell every year in such a cool way that even Zumiez still gives them a showing of product. If ever there was a brand to represent the best in staying cool, not being greedy, just enjoying the lifestyle while still making a good living, I’m putting Stussy forth here as the poster child. If I could create a company today, Stussy would be my template and owners manual. Just follow their pattern, and “shhhh! don’t tell anybody!”

    • jeff
      jeff says:

      Hi Big Guy,
      Yeah, as somebody who’s interested by organizational evolution Quik is kind of intriguing, but I hate that it’s happening. Denial and perseverance in a period of change. There room for private companies to be like Stussy. But no room for public companies to be successful at what Stussy does.

      Thanks for the comment,

      J.

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