Changes in the Skateboard Competitive Environment. Time to Run Your Business Differently?

It’s interesting how a handful of events and business trends seem to be converging in skateboarding at this time. They have, I think, the potential to change the industry and how it does business. The consumers, as always, will get what they want. For some companies- usually those willing to take a risk and do something a little different- this will represent an opportunity. For others, it won’t.

Let’s look at these trends and speculate a little on how companies might be impacted and how they might take advantage of them.
The Trends
I don’t claim to know which of these is or will be most important so don’t conclude anything from the order in which I list them. More interesting than individual trends may be the way they interact. One plus one plus one plus one plus one may be more than five. It may also be three Or at least result in some surprises.
First is Chinese (or where ever is cheap) production. I wrote a whole article on that last issue, so ‘nuff said.
Second is the apparent slowing in the rate of growth of skateboarding. Look, some slowing was inevitable. If skateboarding kept growing at recent rates, soon everybody person on the planet would be on a skateboard and we’d be trying to sell to people (or whatever) on the third planet in the system of the star at the end of Orion’s Belt. Imagine a vert contest on a low gravity planet. “Dude, I’m going to go have lunch while we wait for him to come down.” Kind of boring.
Anyway, the third trend is the increasing willingness of kids to buy blanks and shop decks to save money. No surprise there. It’s not like that’s new. I don’t see it slowing down.
Number four on the hit parade is the decision on the part of certain brands to include new materials in their decks. It’s been tried before and hasn’t really taken hold. But what if it does?
Finally, like really baggy jeans and baseless snowboard bindings, the habit of changing shapes on skateboards every twenty minutes has run its course, at least for now.
A Lesson From Snowboarding
Seems like every four article or so, there’s a section with this title. Before snowboarding became run by a bunch of ski companies, back when it was as hot as skateboarding is now, I always looked forward to going to the SIA trade show in Vegas and seeing the latest “new” snowboard. One year it was the articulating snowboard. The next I was the dual camber snowboard. One especially memorable year it was the honeycomb snowboard. That’s my all time favorite because somebody flexed it and it broke in half. A gut splitter for me- not so funny to the guy trying to sell them.
Anyway, did any of these technologies actually work? Who the hell knows? It didn’t matter because they were never adopted by any of the leading snowboard brands. So they weren’t legitimized in the minds of snowboarders. So they died. Snowboarders knew what a snowboard was and these things weren’t it no matter how good they might or might not have been.
Skateboarders have always known that a skateboard is made of Canadian maple and glue. Now Tum Yeto, Santa Cruz and Mervin Manufacturing all have skateboards with new materials in them. They claim they work better and/or last longer. Great. But now skaters are being asked to accept that a skateboard isn’t just Canadian maple and glue. It can be something else as well, and this something else can result in a better skating experience.
What else can it be? What other materials might be included? How about a complete composite deck if (when?) somebody figures out how to do that? Might different woods be okay with Kevlar or fiberglass reinforcing the deck? Like Chinese maple maybe.
Plots Within Plots Within Plots
Now things get strategically interesting and we can look at some of the other trends we identified earlier. Let’s say growth slows enough to leave us with some excess manufacturing capacity. The usual result, if you’re making a product that isn’t really different from what everybody else makes, is price competition. So maybe brands without factories start shopping for manufacturers who can offer a little better price, or terms, or something. The factories with brands go, “Oh shit.” They want to keep their factory working, so maybe they try new materials in certain of their decks. The skaters like it. The decks do, in fact, last longer. But of course any factory can eventually learn to make a deck with these materials. As skaters, being bombarded with pictures of their favorite team riders on these decks, accept them as legitimate skateboards, more are produced. But they last longer, so total deck sales decline. And competition keeps margins from moving up. So unless skateboarding continues to grow quickly, total gross margin dollars available to the industry decline.
Maybe the good news is that the factories with brands are smart enough not to make blanks and shop decks. And early on, the new material decks might even sell for a premium. Blank sales decline as longer lasting decks with Kevlar or fiberglass take hold.
But advertising is lauding the functionality of new materials. Intentionally or not, part of the message is “the wood isn’t as important as it use to be.” Some factory without brands, or some smart person, sees an opportunity. Soon blanks and shop decks with new materials are pouring out of their factory. Or they went over to China and, with wood not quite as important it was, are bringing in Chinese maple decks with Kevlar or fiberglass or whatever. The price is low- like half the price- and they now have a way to deflect the wood argument.
Back when everybody was experimenting with new skateboard shapes every month, bringing decks in from China was even tougher. With that phase apparently over, another barrier to entry has fallen.
At the end of the day, when there is little real product differentiation, product changes are fairly easy to copy, and there are no effective barriers to entry, the consumer tends to get a better product at a lower price.
Good for the consumer. Not so good for the industry. I don’t expect skateboarding to be threatened with the kind of near total collapses in interest it has experienced in the past. I won’t say never, but not in the foreseeable future. It’s just become too accepted and too much a part of the mainstream for too many kids.
Still, in the scenario I paint above you can see the pressure on the industry that could be created. Some of that pressure is inevitable and already starting. I don’t claim to know which pressures will be greatest and how they will interact with each other. I, or you for that matter, could probably imagine half a dozen other ways things could get tougher for the industry than they are now.
On the other hand, we could also imagine ways things could get better. Maybe skateboarding can continue to grow. Demographics are still favorable. Maybe most kids won’t want to pay more for a deck even if it lasts longer. I have no idea how a twelve-year-old skateboarder thinks. Speaking from the perspective of having a thirteen-year-old boy, it isn’t even clear that they do think regularly and clearly. He, of course, feels the same way about me I suspect.
What To Do
If skateboarding continues to grow, and kids want wood decks with pictures of their favorite riders, enjoy the ride. It’s not that you shouldn’t try and run your business better, but cash flow covers up a variety of shortcomings.
If, on the other hand, you think, as I do, that some of these trends, individually or as a group, will make the skateboarding industry tougher than it is right now what should you do?
First, when you hear people talking about what “the industry” should do, smile politely and nod your head. Then remember that every single company out there will do what it perceives to be in its own best interest. You’re going to scurry back to your company and do that I bet. It’s this dynamic that always leads to somebody trying to do some of the things I outline above.
At the recent surf industry conference at Cabo San Lucas, the surf companies were worrying about skateboarding and the new chain of Hollister surf stores. At the National Ski Areas Association convention in New Orleans (tough spring I’ve had) they were worried about retention of new snow sliders. I remember when snowboarding was worried about the buy/sell cycle. In each case, the industry seemed to hope that the industry, or their association would collectively fix the problem for them.
In all three of those circumstances, and in skateboarding’s current circumstances, the message is the same. Business is a risk. It is a risk whether you sit on your butt and do nothing or try some innovative approaches to a changing competitive environment. If you do nothing, competitors may walk right over you. Or maybe not. If you try some innovative, new things some of them will probably fail and some will probably work. But at least you will be leading the way and making people react to you. It’s a risk either way, but my experience is that the companies with the mindset to take some risks are usually the winners when competitive circumstances change quickly.
Create your plan and execute it. Focus on what you can do right, not the stuff that can go wrong that you can’t control anyway.
Don’t worry, be happy. After all, you could in an industry that’s a whole lot less fun than this one.



What To Do in a Recession? Hint: “Nothing” is the Wrong Answer

I’m sure that everybody who was in the snowboard business during the 1990-91 recession liked that one better than we’re going to like this one. Assuming, of course, that you even noticed the one in 1990-91. Ah, those were the good old days- when suppliers and retailers could sell whatever decks they could manage to get their hands on at high prices and good margins and consumers were so grateful to get anything at all that they’d cheerfully pay what look today like impossible prices and barely complain if it fell apart after the second run.

Okay, perhaps I’m romanticizing it just a bit.
So let’s get back down to earth and take a look at this recession. I’m writing this at the end of October. It’s not officially a recession until we’ve had two quarters of negative gross domestic product growth, but I’m pretty certain we’re going to get there. This recession also has the potential to be a longer and deeper than the 1990-91 one. It looks like we may have the U. S., Japan and Europe in a recession at the same time. The last time that happened was in 973-75. That recession lasted sixteen months.
The good news, if you want to call it that, is that suppliers and retailers with solid competitive positions and strong balance sheets will be in a position to gain business. The bad news is that they are likely to gain it on the back of weaker companies that may not be around when the recession ends.
Snowboard suppliers have largely been through most of their consolidation and, as you probably recall, it wasn’t pretty. Retailers, on the other hand, have enjoyed high levels of retail sales growth, averaging 6.55% annually between 1994 and 2000 for the U. S. economy as a whole. But as every retailer who has ever complained when a supplier opened his competitor right down the street knows, there are a lot of retailers. My concern is that a decline in the growth of retail sales, or even falling sales, will be something weaker retailers may have difficulty surviving.
What are people doing about it? Are they concerned about the potential impact of an economic downturn on their businesses? I’ve talked to snowboard retailers and suppliers to see how they are working to cope with recessionary pressures.
A Little Perspective
This is the snowboard business (Don’t say you never learned anything from me). Suppliers ordered or started to make product last winter. Much of it (hopefully) had been shipped and received by retailers long before you read this, though of course there have been the usual delays and screwups on some product by most companies.
That’s practically a part of the industry’s tradition. If suppliers weren’t late on something and didn’t handle it badly with at least some of their retailers, often because they have to allocate scarce product, then those retailers wouldn’t get a chance to grind the suppliers for a bigger discount, better terms, or some free product and what would we do all in September and October?
Gregg Keeling, National Sales Manager for Salomon hard goods, says his product was eighty-five percent shipped by mid September. Dave Schmidt, Director of Sales and Vice President of Burton, says his number was 75% by the end of September.
The irresistible momentum of the industry business cycle means that a lot of business at the supplier level was already done before September 11th and before a recession looked certain. Well, there’s the minor matter of collecting the money, but let’s ignore that for the moment.
For retailers, the jury is obviously still out, though early signs look promising. A generally good snow season last year (unless you have the misfortune to live in the Northwest that is), coupled with growth in snowboarding and hard learned inventory control means that retailers seem generally optimistic, though praying for snow as usual.
If this was just the apparel business, or the surf business, or we had a major trade show now, there’d be a lot more public industry knowledge about general business conditions. In the apparel business, and to a lesser extent in the surf business, there are public companies. When public companies notice that their business has hit a rough spot, they have to put out a press release that says, in affect, “We’re screwed! This is why.”
There are few public companies in snowboarding, and those that are public don’t make most of their revenue from snowboarding. September’s ASR show, coming a week before the attack, gave the surf and skate industries a real chance to take their own pulse, and the word was that spring orders for soft goods especially were down substantially. This was consistent with what the public companies announced.
We’ll get a chance to take our pulse at the end of January in Vegas and in the selling season that follows. It’s then that we’ll really know what impact the recession may have on snowboarding.
In the Trenches
Jeff France, at Board of Missoula in Montana, says he saw the economic slowdown coming late last year. His part of the world suffered from a drought last year, with a result that he was left “a little heavy” on inventory when the season ended. That, and concern about the economy, led him to cut his preseason orders by twenty five percent for this season. His suppliers were “not real happy,” but understood the impact of drought. The larger suppliers, he said were content as long as they saw that their relative market share had stayed the same.
There are no resorts in his territory, which he characterized as a bit insulated from the national economy and “always in a recession” anyway. When he ordered, he was a little more price sensitive about really high-end board, but didn’t change his overall mix. He hasn’t had any calls from brands trying to get bigger orders, but he did get a little the other day from one snowboard company offering a five percent discount for early payment.
Maybe the consolidation isn’t over.
Jeff usually spends one percent of snowboard revenue on advertising during the season. He’s eliminated that completely. He’s comfortable doing that because of his shop’s market position. He says that, especially if they know anything about snowboarding, he’s really the only choice for his customers.
He’s got a defined market niche and has taken steps to safeguard and strengthen his balance sheet.
Adam Valedaserra is the snowboard buyer for Ski Market in the Boston area. They currently have twenty-five stores with a separate Underground snowboard department in most of them. They’ve been around a long while.
Business is good for Adam- up slightly from last year.
Overall, and not just in snowboarding, action sports seems stronger in the East and then in the West, which has caught some people by surprise. In snowboarding, the speculation is that people are still going to make it to the mountain, but they aren’t going to be as likely to get on a plane and come out West to do it.
Adam has kept his budgets a lot tighter. He’s not jumping so quickly into new opportunities. He’s watching his inventory a lot closer, and has made some alterations in his deliveries, delaying some and reducing the size of others just a bit. He’s seen some improvement in terms and discounts from suppliers.
Business is up, budgets and inventory are under control, and he’s getting some better deals. “All things considered, I’m pretty content,” he says. I guess so.
He’s got a defined market niche and has taken steps to safeguard and strengthen his balance sheet.
Dave Pascoe is the Manager of Boarderline in Bellevue, Washington. The store has been around for twenty-five years. He’s cancelled some late order, which he might have cancelled regardless of September 11th and general economic conditions. He’s also reordered some product. He characterizes deliveries as “pretty good” and has already reordered some product. His sales at the local consumer show were up twenty percent this year.
He got lots of good deal from various companies for the product he sold at that show. “I think this year is going to be good for that [good deals] too. If I can exercise some cancellation clauses, maybe I’ll just take half now and a month from now I can call up and it’s on sale at thirty off.”
His staffing promotional budgets remain the same.
He’s got a defined market niche and has taken steps to safeguard and strengthen his balance sheet.
The Supplier Side of the Story
GenX Sports sells a lot of snowboard product, know the distribution better than anybody, and have helped an awful lot of companies out of inventory quandaries, if I may put it tactfully.  You don’t much like them? Too bad. They have a big impact on the industry, help give the consumer what they want, and are going to be around.
Mark Brazier is the VP and Director of the Snowboard and Action Sports Divisions.   Their preseason orders were up slightly. After September 11th, they saw some initial calls to modify orders, but there were hardly any cancellations. They’ve already had some reorders. They haven’t changed their promotional and advertising budget in response to economic concerns.
However, they are not being as aggressive as they have been in the past about placing product in the market place. This goes to the heart of their relationship with their retail customers and how they compete. Mark estimates that they get eighty percent of their snowboard sales from thirty snowboard buyers. Those buyers, with whom they are in touch daily, generally see snowboard product as just another thing to sell “It’s SKUs to them,” says Mark.
GenX’s job is to know the snowboard market intimately and, to the extent possible, to make sure their customers have the right product at the right time. As things change over the season, it’s their job to make sure the retailer has the right product mix, in the right amounts, at the right prices. It’s a hell of a way to tie the customer to you as long as you don’t abuse the dependence. That’s where not being too aggressive in placing product comes in this year for GenX.
On the other side of the snowboard world, at Burton, Dave Schmidt says there’s an “Air of caution over our forecasting going into next season.” They saw a “blip” of cancellations following September 11th, but retailer confidence seems strong.
Burton has accelerated shipments to some big players so that Burton’s product would be on the floor. There have been no changes in their advertising and promotional budgets, and they haven’t modified their credit process as of this date. He reiterated their caution going into next year’s budget process.
Salomon’s Greg Keeling, just back from a tour of seventy-five shops, reports that sales on the East Coast are great, California is hurting, and Colorado is killing it because of the lift ticket price wars (Thanks resorts! Sure hope you don’t put yourselves out of business). That’s pretty consistent with what I heard from various other sources.
He saw the same sort of cancellation blip that Dave Schmidt at Burton saw after September 11th. Greg thinks people are going to reorder, and he’s helping them out with some incentives. There’s ten percent off standard wholesale (not on top of existing discounts), free freight, and payment on the reorders won’t be due until March 15.
Well, I guess by the time you read this it will be too late to cancel your orders and them make them reorders latter.
Salomon has reforecast down a bit for next year, but still have pretty aggressive growth plans. They have tightened their belt on credit, and didn’t ship some accounts. Greg says Salomon has a reputation of being the last to be paid, so he sees that as a positive thing.
It will be interesting to see how they reconcile their tighter credit policy with their aggressive growth plans.
So What?
Pay attention to your market niche and balance sheet. Expect soft goods to be hit harder than harder goods by an economic slowdown. Look for weak retailers and suppliers to disappear. Hope for a short recession, but plan for a longer one. You might want to check out the paper I wrote for SIA to see why I think that. Use Vegas and the weeks right after it to get a firm fix on the 2002-2003 season.
If you’re a supplier, watch your credit and collections closely. If you’re a retailer, work your suppliers for better terms and discounts.
Some things never change. Pray for snow and the continued growth of snowboarding- our best antidote for economic hard times.



“Hey! How Come You’re Still Around?” Conversations With Survivors

It’s old news, of course, that we’ve gotten to the point in this industry where probably north of eighty-five percent of the snowboards sold come from a handful of brands, mostly made by ski companies with the usual exception. And if that concentration is not how we’d like it to be, it’s how it almost always is. Don’t worry; I’m not going to give you the lecture on consolidation again- it’s too late to help anyway.

 But there are a number of small brands still out there when hundreds of others aren’t. How have they done it? Have they found the proverbial “defendable market niche?” Or did they just luck out and find an investor with too much money and not enough common sense? Or maybe, at different times, both.
So I’m going to call some of them up and ask something tactful like, “How come you’re still in business?” If they don’t hang up on me, maybe we’ll all learn something.
My Guess?
Okay, not completely a guess, as I’ve talked to most of these people before over the years and have watched them build their brands and companies. We’re going to find a high level of continuity in management, and a lot of support from shareholders. These are brands that have been around a while.
None of them ever thought they were going to be “the next Burton.” They were balance sheet aware, and never tried to grow faster than their financing allowed. They’ve generally figured out how to make money, and are bemused and perplexed when they hear about brands doing 30,000 snowboards and losing money. Advertising, promotion and team riders? It’s a good thing- as long as you can actually afford it. Having happy retailers who sell through at full margin, call for more product, and then can’t get it seems to be their approach to marketing. Oh, and, for some reason, they seem to only want to sell to people who can pay them on time.
They have generally discovered a market niche, and it’s typically high end. In one case, they’ve discovered that they aren’t only a snowboard company. Here they are in alphabetical order.
“We’ve been making snowboards for seventeen years,” says Glissade founder and president Greg Pronko. “I think we might be the sixth oldest snowboard brand in the world.”
But Glissade no longer sees itself as strictly a snowboard brand competing only against other snowboard brands. They produce a relatively small volume of a few thousand very high-end boards, and don’t want too much volume. What they’ve learned to love is working with materials and figuring out how to use new ones. They have evolved to the point where they earn revenues from materials research and development, and rapid prototyping for other companies in snowboarding and other industries.
In spite of these other activities, the Glissade brand is the founder’s true love. But the love that goes into these custom, low-volume boards has a price. One of their decks will set you back a bit north of $500 at select retailers. For a little more, they’ll be happy to make you a custom board. Or you might call them and see if you can get on the list to get one of only twenty-five 195s they make each year.
So what have we got? Year around cash flow, a redefinition of their market niche that allows them to compete, no warranty problems, and a product that doesn’t require a big advertising and marketing campaign to check at retail. Oh- and good margins for Glissade and the retailer. 
Heelside started as a boot company before expanding into bindings and, more recently, boards. They are heading into their seventh season. President Jim Ferguson emphasizes the continuity in investors and employees they’ve enjoyed since the company was founded. “Consistency of ownership and management has been key for us,” he says.
They have also enjoyed a few other advantages. Jim’s background in making boots went a long way towards getting Heelside started without some of the startup and growing pains that other companies have typically experienced. When they did decide to make boards (interestingly enough, at just about the peak of the consolidation), they purchased high quality equipment for not much money from a factory going out of business and hired the manufacturing team to make Heelside’s boards. Good for cash flow, and good for avoiding mistakes in learning the manufacturing process.
Growth is a good thing, but “The numbers have to make sense,” says Jim. “We’ve always lived within our means,” he emphasizes. “We do as much marketing as we can, but keep a close eye on the bottom line.”
Evidently Heelside isn’t sure how much being cool will help if you can’t pay your bills.
Of the up to 15,000 boards they expect to sell this year (depending on the snow) most will be sold in North America. One thing Heelside has in common with many of the other brands being discussed here is no dependence on the Japanese market for financing. I’m sure we all remember when Japanese prepayment for boards dried up, and one hundred plus brands vanished in short order.
Never Summer
They were profitable when they were only making 7,000 boards. That was the plan. Now, they’re making more, but maybe not as many as you might expect from a brand that’s been consistently pursuing its plan for ten years. They’re still making money. “Clean distribution, limited supply, unmatched customer service and exclusive territories for retailers,” is the foundation of their market position, explains co-founder Tracey Canaday.
The average wholesale price is higher than most brands, but Never Summer uses a layered, precured, pretensioned fiberglass that, according to Tracey, costs about three times as much as the glass in a traditionally made board. They also make their sidewalls out of sintered ptex. The result, according to Tracey, is a construction that makes the board more durable and responsive and gives the retailer something to sell.
Never Summer, located in Colorado, doesn’t sell a single snowboard in Japan. Zero, zip, nada, the big goose egg. So clearly when the Japanese market crashed, it didn’t hurt them much. Might even have helped their competitive position. Would they sell some boards there? Sure, but they haven’t been approached by the right potential partner and don’t want to be distracted from their retailer focus.
There’s little discounting at retail, and typically few Never Summers left over at the end of the year. Scarcity does much of the marketing for them. Want to buy a Never Summer? Better go find one now (October 3) and expect to pay full retail.
There are only four or five managers at the company, and two of them are owners. They are careful where they spend their dollars. For example, all new accounts are COD, no matter who they are. “This is our retirement,” says Tracey.
I’d be careful too.
“We’re modest in our goals and live within our means,” says Option President Geoff Power. “We have really good people who don’t have stars in their eyes.”
Option was started in August of 1992. Geoff gives a lot of credit to the company’s investors, who have always taken the long term view, don’t need a return to live on, and have been willing to help the company over some rough spots or to take advantage of opportunities. One of those opportunities was the acquisition of the snowboard apparel company NFA at a time when lots of apparel companies were available for purchase. NFA has been able to grow and transition nicely in the direction of the street ware/lifestyle market. 
There was never a big dependence on Japan, so when that market cratered, it didn’t have as much impact on Option as on its competitors.
Option has done many of the same things as the other smaller, successful, brands mentioned in this article. They are careful with distribution. Their product cost is above the average but also, according to Option, better made. Customer service is critical. They like to be paid by the people they sell to, and control their marketing expenses consistent with their overall financial plan and capabilities.
It seems to be working.
One of these days, I have to remember to ask BK Norman, the lead dog at Silence, what BK stands for. Silence is nine years old. Their story is a bit different from the other brands mentioned above, but BK has been there for the whole ride. Continuity seems to be important.
When Silence was started, it had the good fortune to be owned by a guy who, in terms of his understanding of the snowboard business, had more money than sense. He had a whole lot of money. Like a real lot. He spent it on Silence. After all, snowboarding was hot. So they could build up the brand in a few years, go public and all retire rich. Seems like I’ve heard that story somewhere else before.
Never mind. Anyway, BK kept going “Uhhhhh, I’m not quite sure we can sell as many boards as you want,” but who was he to turn down all this marketing money? It’s just too much to ask a snowboard guy to do. The marketing money got spent. As BK had foretold, not as many boards as the inflated corporate plan required were sold. It was a financial mess, but the literally millions of dollars spent on advertising and promotion created brand awareness.
Silence has changed hands twice. The first time, it was sold to A Sports which also bought Avalanche. Now, a new investment group has picked up both Silence and Avalanche, and is working closely with BK, Dale Rehberg and Maureen ter Horst to run the brands the right way. “I always managed to find a new investor before things really cratered,” was the way BK put it. “A lot of money was wasted on huge corporate business plans that never came true. Now, we are concentrating on building our business on a grass roots level working closely with our retailers all over the world.
So now, well financed and with a realistic business plan, BK uses the brand awareness created in Silence’s early “drunken sailor” spending period to make some money.
The Japanese distribution has been kept intact over nine years. The distributor didn’t go bankrupt and the market was never over supplied. BK has stayed focused on building and selling snowboards. Most of the business is to specialty shops, but that is changing gradually. Because of the wider awareness the brand has and the presence of Avalanche, he can expand his distribution a bit more than some other smaller brands without damage. “We’ll keep Silence true to its history as a specialty shop brand and expand the distribution for Avalanche,” he says.
I Think I See a Pattern
These brands have quite a bit in common. Continuity in management would seem to be high on the list. Financial acumen with a balance sheet focus is up there too. Growth was kept consistent with their financial capabilities, and an awareness of whom their customers were. They focused on the bottom line, not the top. They tend to have their own factories. They spend a lot of time thinking about their distribution.
Anything there that should surprise us? Nah. Any small company that successfully competes against much larger brands has to have an answer to all those issues.



A Good Snow Year Does Not Make Us Heroes of Management; A Minor Reality Check

1980- Michael Porter, the Harvard strategy Guru published Competitive Strategy.   In it, he discusses how industries change, and how companies have to change, as they transition from growth to maturity.

 I want to look briefly at what Porter says stereotypically happens during this transition and see how it applies to the winter resort business. Like all industries, this one has become insular- we talk to each other too much. Yet basically, we are experiencing the same trends that every other maturing industry faces. Maybe if we realize we aren’t different or immune, it will make it easier to respond to these inevitable and ongoing changes. Twenty years working with companies in transition has convinced me that the sooner you respond, the easier and more successful your transition will be. There must be something to what Porter writes, because I’ve found him relevant to every industry I’ve worked with.
He recognizes, of course, that maturity doesn’t happen at a fixed point in an industry’s development, and that it can be delayed. He also notes that rapid growth can return due to strategic breakthroughs, and that mature industries can therefore go through more than one transition to maturity.
Here are eight things he says happen during this transition.
  1. Slowing growth means more competition for market share.
  2. Firms in the industry increasingly are selling to experienced repeat buyers.
  3. Competition often shifts toward greater emphasis on cost and service.
  4. There is a topping-out problem in adding industry capacity and personnel. Thus companies’ orientations toward adding capacity and personnel must fundamentally shift and be disassociated from the euphoria of the past.
  5. Manufacturing, marketing, distribution, selling, and research methods are often undergoing change. The firm is faced with the need for either a fundamental reorientation of its functional policies or some strategic action that will make reorientation unnecessary.
  6. New products and applications are harder to come by.
  7. International competition increases.
  8. Industry profits often fall during the transition period, sometimes temporarily and sometimes permanently.
Does any of this look familiar? Can we just for a moment see through the industry’s historical momentum and inbred myopia to recognize that this is us? I lived through it in the snowboard industry. I’ve watched it in computers, automobiles, and funeral homes. It’s happening right now in retail, telecommunications and, by the way, winter resorts.
The winter resort business is no different from any other industry in how it responds to maturity and consolidation. One good snow winter doesn’t change that.
At best, we’re growing slowly. Maybe demographics will change that. We’re sure as hell selling to more repeat buyers, and they mostly want to get more and spend less.
Cheap season passes are competition based on price no matter how you rationalize it. That’s not to say there aren’t valid business and competitive reasons for some resorts to utilize them. But hopefully, those reasons are consistent with a carefully thought out business plan- not just a response to needing to improve cash flow.
If you’re adding capacity and personnel and our industry growth rate doesn’t pickup, then the only way you succeed is by taking market share from other players. I’d say we’ve turned the corner as far as euphorically adding capacity and personnel goes. But competitive conditions, in the overall leisure as well as in the winter sports market, seems to require resorts to invest in new facilities and capabilities just to stay even with other resorts.
If you’re big enough and well enough capitalized to diversify into real estate, golf courses, conference centers, retail, theme parks or whatever then perhaps at some level it can be business as usual for you. If you’re strictly a winter resort and you make most of your money from lift tickets, then you are going to have to do business better than you’ve done it before. Tubing, snow skates, snow bikes and mini skis can all add some incremental revenue. But there’s not another snowboarding on the horizon. Like the man said, new products and applications are harder to come by unless you can change what you are.
What can you say about profitability when the before tax profit was only eight tenths of one percent (0.8%) in the 1999-00 season? That’s down from 5.8% the previous season (that season was six days longer). Leading short term government bond mutual funds have one year returns of eight to twelve percent with just a bit less risk.
If margins are lousy and competition extreme, it’s hard to justify investing in the winter sports business because of its seasonality and the financial implications of that.  On the one hand, you’d really like to operate the business with somebody else’s money, because you don’t want to tie up all year equity you really only need in the business for four or five months. On the other hand, lacking a good balance sheet and reserves for bad snow years, which I expect we all agree will continue to happen, nobody will lend you the money you need to get through the season, because they see it as an equity risk. And if they do lend it to you, and your margins and/or total revenue are too low, the interest expense will kill you.
You know from the number of resorts that have reported financial problems that this is a very real problem. On the other hand, there are a significant number of resorts that make money year after year. They are big and they are small and they are all over the continent. They are mostly privately held so you don’t hear much about them. Besides, a financial and management crisis is much more interesting than a low key, boring, resort that just goes along knowing who their customers are and meeting their needs in consistent and predictable, but changing, ways.
How do they do it?
In any industry I’ve ever seen, there are always a few who are in the right place at the right time. I’ve got nothing against luck, but it usually doesn’t last. What I expect you’ll find if you talk to the people running these resorts (or any manager of a company succeeding in a maturing industry) is that they mostly never heard of Michael Porter. They do know who their customers are and why they come to their resort. They know whom they compete against. They have good management information systems, and their finger is on the pulse of their cash flow. They have had to deal with most of the issues listed above, and continue to deal with them.
But not in a crisis mode. Not with the bank threatening to pull the line of credit and uncertainty about how they will make payroll next week. They were more or less open-minded and aware of the changes that were happening. They have responded, and continue to respond, over a period of years with changes in how they do business. For the most part, no single change represented, by itself, a life or death issue. But the cumulative impact was dramatic.
Paraphrasing Les Otten, “They didn’t have a problem- they had an opportunity.” It was an opportunity because they saw the need for change and dealt with it before it was paralyzingly threatening. They never had to step outside their box. They just extended it a little at a time.
Don’t feel comfortable because it snowed.



Questions That Retailers Should Always Have Answers To

When I start writing these articles, I always have to remind myself who the audience is. The Skateboard Industry, of course and, based on the circulation of Skate Biz, skateboard retailers especially.

That’s where things get a little tougher, because what I know is that skateboard retailers don’t just sell skateboards and they don’t just sell to core skateboarders. With the mainstreaming of skateboarding, they are selling to the lifestyle crowd and making their money on the higher margins of shoes, soft goods and accessories. And they aren’t just selling skate hard and soft goods. Surf, or snow, or something else is probably part of the mix as well. So, what kind of retailer are they? What kind of retailer are you?
Hell, I don’t know. That use to be a lot simpler to answer back in the good old days when there were many fewer product choices and you were basically selling equipment to participants- a much more clearly defined customer group.
I know we’ve got skateboarding euphoria right now, but retailing is a tough business, the country is over retailed by most measures, and differentiating one store from another is hard. If I were a skate retailer, there are a handful of questions I’d be continuously asking myself to figure out what kind of retailer I was. Some of them you should always know the answer to. For others, it’s the continuing quest for the answer that’s the important thing.
How Do I Make Money?
The stock answer seems to be some variation on “Hard good margins suck and I make money on shoes, soft goods, and accessories.”
That’s probably correct, but not adequate. You have to calculate monthly which brands and product categories are generating how much of your sales and at what gross margin. If you’ve got a point of purchase system and a decent accounting package, you can probably calculate it every day, though I imagine you have better things to do.
In a past issue of Skate Biz, I presented a form you can use to calculate this. As I’m sure you carefully preserve all issues of Skate Biz in pristine condition in gilded binders, you can look it up. If you’ve misplaced your binders, email me and I’ll send it to you.
What might you do with this information? Let me answer a question with a question. How can you possible decide how much of which brands to carry and which products to emphasize in merchandising without it?
You also need a cash flow and regular financial statements (income statement and balance sheet- no less frequently than quarterly), but to me the revenue and gross profit analysis is the critical and irreplaceable document you require.
Who Are My Customers?
This is one of those questions you never really finish answering. And you can slice and dice your customer base a thousand different ways. I guess the first thing I’d want to know is how many of them are actually serious skaters. Second, I’d ask them their zip codes to find out where they come from. That has huge implications for your marketing efforts. 
Don’t assume that what you think you know about your customers is accurate, especially if you believe it hasn’t changed over time. The value of this data is not just in what you learn about your customers at a point in time, but in seeing how it changes over time, assuming you collect it consistently.
Granted, collecting this is a pain in the ass. What good might it specifically do you? Just for fun let’s show that the zip code data shows you are getting customers predominantly from a couple of high income neighborhoods, and that people are coming a long way to get to your store. My God, it’s the retailer’s wet dream. People with more money than they know what to do with going out of their way to visit your store. Maybe you could help them dispose of some of that pesky extra money by raising your prices a few points.
That’s an extreme example, and it’s unlikely the data will be so clear-cut. But the insights you can get will make a difference in the success of your shop.
Who’s the Competition?
Ask your customers. The beauty is that you don’t have to do this systematically. If you only remember to do it with every third customer or so, fine. “Where else do you buy shoes/decks/t-shirts/wheels?” It’s not so hard to ask. The hard part is remembering to write down and organize the responses. If you do that, you’ll probably end up with a fairly short list of often-mentioned stores where you have to go occasionally to check on their selection and pricing. Hopefully, you’re doing that anyway, and it would be great if you knew you were visiting the most important competitors. Of course, your most successful competitors are where you’d like to find new employees.
Compare your prices to your competitors. If you’re cheaper, do you need to be? If you are more expensive, why are you able to get away with it? Because you’re more convenient? Have a better image? Offer better service? Analyzing circumstances where you can hold a higher price will tell you a lot about your competitive position.
What Products and Brands Should I Carry?
Well, you can’t carry them all, and if you try to carry too many, you end up not doing justice to any of them. Picking products and brands to carry has to be just about the toughest and most critical thing a retailer has to do. Inevitably, it involves a compromise on a number of levels. Financially, there’s a decision between products that generate volume and those that generate margin. No doubt every retailer would like carrying only products that carry margins of 65 percent and higher. But volume would decline rather substantially, and covering overhead expense would be impossible.
There are also market driven product decisions. In the skateboard retail business, the predominant example has to be skateboard decks. Most retailers seem to have a wall of decks they display even while acknowledging that the product’s margin is lousy. I’m sure they’d love to be able to rip those decks down and put up a wall full of shoes, watches, and pants that offer higher margins, more margin dollars, or both. But you can’t be a skateboard shop without skateboards, so in this case marketing and image wins out, as it should, over strict financial considerations. After all, we’re serving and supporting a market- not just raking in the cash.
That doesn’t mean you’re helpless. If you’ve got answers to the questions posed above, you know where you make your money, and something about who your customers are, and who you’re competing against. That’s powerful information.  How can you use it?
Start by looking long and hard at products with low margin and volume. If you don’t have such things, great. If you do carry them, is there really a customer service or image reason to be doing that? Identify them and make a decision.
If you had more room, how would you use it? Which new brands would you bring in? Which brands you already carry would you allocate more space to? Your new knowledge of your margins, customers and competitors may allow you to bring in some of those products by making you comfortable with eliminating some others.
There will never be a time when you won’t have customers coming and asking for a product you don’t carry. Inevitably, you’ll wonder if you should have it. Armed with good data, maybe it won’t be such a hard question to answer.
Do twenty percent of the deck brands you carry account for eighty percent of your deck sales? The wall space those other decks take up could be used to show a lot of higher margin shoes or accessories. Your concern with such an action may be that your shop’s image as a skate shop will be tarnished if you don’t carry these brands, even if they aren’t fast movers and don’t provide attractive margins. But if you know where you make your money, what percentage of your customers are skaters and why they come into your shop, you have the ability to make a rational decision.
To a greater or lesser extent, every skateboard retailer goes through the kind of analysis I’ve described. Frequently, it’s informal, incomplete, irregular and based on gut instinct and experience instead of facts and a thorough analysis. It’s difficult to implement and institutionalize this kind of process. Once it’s part of the normal routine, however, it’s not much trouble. My experience is that the improvement in your decision-making process (and profitability) will more than make up for the inconvenience of having to learn to do some things differently.



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.
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.
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.
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
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.



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.



Life in the Real World; Hoisted by My Own Petard

I’ve had the luxury, over the last couple of years, to be able to dispense advice and commentary from the relative safety of an observer’s perch. Suddenly and, amazingly, of my own choosing, I’ve given up a perfectly comfortable life style to reenter the snowboard management fray. I must be out of my mind.

I’ve done this at a time when the snowboard industry consolidation, if measured by the number of companies, is probably entering its final year. But we’ve become part of the winter sports industry. That industry is going through some hard times, and the continued scurry to embrace snowboarding as its savior is perpetuating some tough and irrational competitive conditions that aren’t going away quickly.
When I last sat in the management chair, in the early 90s, industry conditions were, well, just a bit different. Remember when we could sell everything we could get made, there weren’t enough factories to go around, and raising prices ten percent each season was a no brainer? Ah, those were the days.
Since that move from management to consulting, I’ve dispensed a bunch of advice in this space. I trust it was at least worth what you paid for it. Four ideas have stuck with me.
·       Protect Your Brand Name
·       Know Your Numbers
·       Find a Niche
·       Don’t Kid Yourself
How has the relevance of these ideas changed as the industry has involved? Maybe more interestingly, am I taking my own advice? Let’s see.
Protect Your Brand Name; It’s All You’ve Got
I’m there. I get an “A.” Maximizing sales isn’t the goal. Increasing sales at a respectable rate, selling out every year and earning a profit is. Growing too quickly can mean lower margins and higher short term working capital requirements. Who needs that? The best advertising and promotion that can be done is the kind where the retailers says, “Say, I sold it all at full margin, and when I called to order more, they were all out!” Next ordering season the poor sales rep, with any luck at all, will find himself faced with having to control the increases requested by the shops to make sure they sell out again. And you didn’t spend a single marketing dollar to get that.
Then there’s the issue of gray market sales. Avoid them, I’ve said. It’s not that simple. Your distribution can get better year by year, but it will never be pristine. The impact on sales if you arbitrarily cut off all the sales that might be gray market could be too severe. Every snowboard brand has some gray market sales. Everybody. And I think most of us know where they are. When the boards are going to somewhere Hitler and Stalin fought a tank battle, it’s pretty clear they aren’t staying there.
Four or five years ago, brand name hardly seemed to be an issue. If it was a snowboard, it sold. With hindsight, it looks obvious that those who succeeded managed to grow while controlling their distribution and bringing some brand equity to their name. It was a fine line to walk. One the one hand, you had to get out of the awkward “tweens,” that level of sales between, say, five and fifteen million dollars where you needed to act like a larger company, but couldn’t afford to. On the other hand, if you tried to push sales too hard, your credibility as a brand suffered. To put it succinctly, you had to perform and grow according to the market’s expectations, but no faster. Too slow or too fast and you were toast.
So building your brand was just as important, and difficult, as it is now. It just didn’t seem quite so urgent.   
Know Your Numbers; Cash Flow is Everything
Opps- so far, I’m only a Cplus to B minus on this one. I’ve got the numbers thanks to some good systems and people. In fact, even as I write this they’re sitting on the desk next to me waiting to be studied, analyzed and dissected (“Crunch me, crunch me!” I hear them whispering). But I’m finding that management issues during the first month or so have left me with precious little time to spend the consecutive hours required to really get into them. I can wing it pretty well because I already know the financial model of a snowboard company, but that’s no excuse.
They are also not “my” numbers yet. They’re somebody else’s. Cash flow, I’ve said, is a living, breathing thing. By creating your own model, working with it and thereby internalizing it, you develop certain instincts for how the money moves through a business. In a highly seasonal business like snowboarding, there’s probably nothing more important than the dance of the cash flow. I’m prepared to give myself something of a break on this issue, because I haven’t really been at it long enough to have the necessary gut instinct for this particular company’s cash flow.
At a time when everybody is struggling to make a profit, and so few are succeeding, knowing and managing by your numbers should be at the top of everybody’s management priorities. It always should have been there. Five years ago, however, flush with high margins, soaring sales, Japanese prepayments and COD terms to retailers, knowing and working with your numbers didn’t seem quite so compelling. In truth, it wasn’t. You didn’t have to invest as much money, and you got it back sooner. Boy I miss the good old days, where various management miscues could be hidden behind ravenous product demand.
 Find a Niche; Know Your Customers and How You Compete
I can console myself on this one by remembering that when I gave the advice, I acknowledged that it was not a trivial thing to do. In fact, I said it was time consuming, detail oriented, hard work to really figure out who your customer is. I know the market niche and the basis of the company’s competitive advantage. But as far as what kind of consumers are actually buying the stuff, I haven’t even gotten around to asking the question. Let’s give me an incomplete.
And let’s acknowledge that it will always be an incomplete. The process will always be never ending, unless the market stops changing.
A niche, it turns out, is a necessary survival mechanism. The hundreds of companies who didn’t have one, or the basis for creating it, aren’t with us any more. Creating a niche is a long term process, and it was five or more years ago, when it didn’t seem to matter, that you had to have begun the process if you wanted a niche you could defend in current business conditions. Some companies found theirs, then lost it in the struggle between growth and credibility I described above. Some stumbled on it, and kept it in spite of themselves.
Don’t Kid Yourself; Make the Hard Decisions
The rumors are always worse than the truth. Ignoring it won’t make it go away. Change is easier when you make it before you have no choice. Bullshit is inevitably dysfunctional to an organization. Etcetera.
We kidded ourselves as an industry for a long time. Sure there was going to be a consolidation, but it would be somebody else who would be the consolidatee. We were brainwashed by the wonder years. No hard decisions required. We couldn’t bring ourselves to believe that snowboarding was just another industry, as susceptible to competitive trends as any other.
Guilty. Along with most of you. In my first snowboard management incarnation I was a believer. Even though I knew better from my experience in other industries. The excitement was contagious, the opportunity apparently endless. The bullshit smelled great.
Never again. I’ll have fun, but I won’t lose my perspective and objectivity. May I suggest that you shouldn’t either?
Well, I guess these four ideas have held up pretty well. They weren’t any more or less valid five or seven years ago then they are now. The irony is that in the past they were easier to ignore, but paying attention to them then might have made consolidation a little more manageable for some companies. Like compounding interest, little changes can have a big impact given the advantage of time.



Building a Business; Issues for Would be Skate Entrepreneurs

When a market gets hot, people start companies.   Where the capital costs and entry barriers are low, they start more rather than less. When there’s enthusiasm for the industry and the lifestyle, they often start them for all the wrong reasons, and without adequate or any business planning. It looks like easy money, but it usually isn’t. 

Well, God bless naïve, enthusiastic entrepreneurs because if everybody understood the risks and stresses of starting new businesses, none would ever be started. I don’t want to discourage anybody from starting their business, but I’d like them to know what they are getting into, what’s going to happen if they have some early success, and why it’s too late to begin when the market is already hot. The genius of the entrepreneur is in starting his or her business before everybody else sees the opportunity.
Just for fun, let’s say you want to start an independent street shoe company. Now? Today? Okay, okay, stop laughing. Pretend it’s two years ago.
In the Beginning
You’re a sponsored skater with a good reputation, and a following among local retailers. You don’t like the shoes available to you. Conversations with retailers you know make it “obvious” they’d be receptive to some new colors and designs. Response to your color sketches and description is positive. “Cool! We’ll buy them for sure,” they say almost without exception.
“Kaching!!!” you think. Easy money, here I come. Not that anybody gets into the business for the money of course…….
Let’s make this simple. Magically, you’re through the product development cycle and are ready for production. You did all the work yourself.   A friend introduces you to a manufacturer who loves you and your shoes so much he agrees to produce a thousand pairs with no up front money and to give you 60 days after delivery to pay. Orders from some retailers materialize, though not from everybody who said they would buy and not always as large as you’d like. You successfully grovel, taking the “I’m just a poor skate entrepreneur” approach to your new customers, and they reluctantly agree to pay you cash on delivery.
Your shoes arrive on time (right). All the people who said they’d buy your shoes buy them (sure they do). They all pay you cash as promised (uh-huh). You put the money in the bank and earn interest until you have to pay the factory that made the shoes for you. The shoes all sell through great (of course). Reorders flow in like water over Niagara Falls during the rainy season. What a terrific business this is. Here’s what your income statement for this little business looks like after the first 1,000 pair.
Net Sales                                                          $25,000            
Cost of Goods                                                  $15,000
Gross Profit                                                      $10,000 (40 percent)
Operating Expenses                                          $2.000
Pretax Income                                                   $8,000
Remember that everything went perfectly. Also, you worked for yourself for free and did everything yourself. Your operating expense was almost all for travel and communications. At the end of the day, you’ve got yourself a nice little 32 percent profit margin. Isn’t that wonderful!
Having run a distributor that was selling imported product, I am here to tell you that everything working right is a full-on, drug induced, hit your head while skating without a helmet, hallucination.
But it’s a great hallucination to have, so let’s assume it continues except for a couple of little things. You’re so hot that your next order is for 10,000 pairs.
The Next Step Up
Your supplier still likes you but, hey, this is business. With an order that size, he wants a letter of credit or a deposit up front, and you’ll have to pay him the balance when he ships the shoes. Remember, though, that this is a hallucination, so he gives you a break and says you just need to pay him when the shoes ship.
Your retailers still like you but, hey, this is business (you’re starting to hear that a lot as your company grows). They want 45 -day terms just like they say they get from the other companies. The 10,000 pair cost you $150,000 including freight and duty.  Your supplier says, “I’m ready to ship, send the money.”
Details like this can really put a damper on perfectly good hallucination. The bank won’t lend you any money, your credit card limit isn’t quite that big and none of those lottery tickets you’ve bought have been winners. You need $150,000 or you’re out of business. Let’s assume somebody comes along and lends you the money for only an exorbitant interest rate and doesn’t want 50% of the equity in your company to do it. Remember, this is a pleasant hallucination.
The shoes are delivered to you and, in turn, to your customers. You’ve sold the shoes, you’ve got the same 40 percent gross profit that you had when you sold 1,000 pair, but this time it’s 40 percent of $250,000 or $100,000.
Inconvenient Realities
The expense side looks a little different though. You had to get some help warehousing and delivering the product. Retailers want some service so you need some phone lines and somebody to answer them. Some promotional product has to go out the door for free. The guy you borrowed the $150,000 from wants interest. You’re still making money at the bottom line, but that 32 pretax margin has evaporated. Maybe if you’re lucky it’s still as high as 15 percent but heading south fast as you become an established company.
Oh, and by the way, you’ve got no cash. You retailers aren’t paying you for 45 days and, strangely enough, not all the cash shows up exactly on the 45th day. But the people you’re hiring to man the phones and deliver the product don’t seem to want to wait 45 days to get paid. It’s the lament of the entrepreneur to their accountant- if I’m making so much money, how come I can’t pay my bills!?!?!?!
Now, awaking from our dreamlike state, we find that the supplier wants a letter of credit before he’ll produce any more, and the order isn’t really big enough to get his attention anyway. Retailers are asking about your team and your promotion budget. Some shoes sell and some don’t. Certain retailers you really want to be in want a credit for the ones that haven’t moved. There’s so much to do that you need to hire more people to help you. The government wants you to fill out a bunch of paperwork, and they want their piece too. You’ve got every cent you can find invested in the business and it’s barely enough-for the moment.
Congratulations- you’re no longer an entrepreneur, you’ve a manager. Overall, your income has increased. But your net margin on each pair of shoes sold has declined as the cost of running the business gets bigger.
You didn’t do anything wrong. This is all normal stuff. Every time volume increases and margins decline, more working capital has to be invested in the business. Working capital is nothing but the money you have to spend to pay bills, get product made and market your brand while you wait for retailers to pay you. Almost every successful, growing business I’ve ever seen has working capital crunches as a normal part of growth.
Managing by the Numbers
What can you do to avoid this financial hang grenade?   Nothing. It comes with being in business. But you can try and minimize its impact by a little planning. Do it on a computer or with a piece of paper. Here’s a format I’ve used with some success in a variety of businesses. Don’t get fixated by the categories I’ve used. Change them to work for your business.
                                                            Jan.      Feb.     March. Etc.
Beginning Cash Balance
Sources of Cash
            Cash Sales
            Collection of Receivables
Total Sources of Cash
Total Cash Available
Uses of Cash
            Product Purchases
Total Uses of Cash
Ending Cash Balance
The beginning cash balance is probably whatever is in your checking account. The ending cash balance each month becomes the beginning cash balance for the next period. Depending on how quickly your situation is changing, your estimate of expenses can usually be based on your historical experience. But remember that just because you get your phone bill in July doesn’t mean you pay it that month. Typical many of your operating expenses will be paid in the month following receipts, and your cash flow has to take this into account.
Don’t get too caught up in the process of creating a perfect model. Get it done and work with it. Modify it as you learn more. Look at your projections versus what actually happens. Creating the model isn’t really where you get the benefit. Using it and watching the variables change with each other is.  It’s a lot like learning a language. You only get better with practice and as soon as you stop speaking it, you start to lose it.
Rules to Live by
Rule one, then, is don’t try to grow your business faster than you can finance it.
Rule two for the budding skate entrepreneur is to know the difference between starting a company and running one. Get the help you need.
Rule three is that it’s easy to sell when you’re new and small, and harder as you grow. Know how you’re going to compete.
Follow these three rules and maybe the glamour of having your own company won’t wear off so quickly.