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.