Focus on Expense Control; A New Business Model for Skateboarding

Well, maybe not a new business model. Expense control is always important. But somehow, in every industry I’ve ever seen, it’s always assigned a lower priority when you’re selling everything you can make. Cash flow makes it easier to not worry so much about how you’re spending your money.

 You’ve no doubt noticed that skateboarding (especially in hard goods) is going through a bit of retrenchment. Sales are down from last year. Lest this get too gloomy, remember that, as an industry, we’ve had substantial growth for a number of years and skateboarding is larger than ever. No serious business person thought that phenomenal growth rate would continue indefinitely. We may have hoped it would, and we certainly hoped when it stopped it would hurt somebody else’s company, but we knew it would end.
So now it’s ended? No. Our five year growth rate is still amazing even given the current decline. Being down over last year may suck, but it doesn’t make it the end of the world.
I should probably clarify that. Changing business conditions usually mean it will be the end of the world for some companies without the balance sheet and market position to weather the storm or recognize the changing business conditions. And there’s always the chance that kids will decide skateboarding ain’t cool any more. If that should happen, and it’s happened before, all bets are off, but that’s hardly a new consideration for the industry.
Old News
Whenever an industry goes through a period of consolidation, a number of things tend to happen to one extent or another. As I’ve written about them before in nauseating detail, I’ll just describe them briefly and move on to dealing with the new circumstances they represent. Remember these trends aren’t unique to skateboarding or action sports. They have been just as prevalent in the automobile, computer, funeral home, and waste disposal industries as they consolidated. There’s nothing surprising or unique in this list.
·                 Growth slows (Duh!). There’s more competition for market share.
·                 Margins decline at the retail level.
·                 Retailers have more power.
·                 Cost management and customer service become more important in competing
·                 Size matters. You either have to be big or own a very clear market position. Companies in the middle get lost.
·                 Consumers get smarter- marketing loses some of its effectiveness.
·                 International competition increases.
·                 Industry profits fall. This may be temporary. Or it may not be.
·                 Over capacity can become an issue.
That’s an ugly list, but you can see its relevance to the skateboard industry at this point in time. Of course, it’s not necessarily so ugly for the skateboarder, who tends to get a better product at a lower price.
What’s To Be Done?
Every company is of course different, but from the 10,000 foot level, the general strategic issue is clear, and more or less the same for everybody. If sales are down, and the product appears to be more of a commodity, then marketing is even more important is differentiating the product. In skateboarding, of course differentiation has come almost completely through marketing.
But as the consumer has gotten smarter, marketing has maybe lost some of its effectiveness. So you have to what? Spend more on marketing? But your sales and maybe your margins are down. But unless you were large and very profitable, that can be impossible to do without spending yourself into oblivion.
The interesting thing is that this is where strategy and operations come together. By that I mean an important part of a company’s strategies at this point is expense control. Unless and until margins improve, or sales start growing again, there isn’t much of a choice. You can either reduce expense or earn less, or no, money.
The sad part is that this fundamental change in the business model means that some companies have a hard time making it. They had the illusion of prosperity because growing cash flow allowed them to keep paying their bills. As long as the money comes in just a little faster than it has to go out, it doesn’t matter if your balance sheet- the measure of your financial viability as a company- is a disaster.
Now it does matter, because unless you are a very unusual business person, you didn’t foresee the change in the business climate far enougn in advance to adjust your business model. Your competitors weren’t doing it, and you sure weren’t going to cut your marketing and other expenses unless they were. So now, as you scurry to adjust spending to reflect revenue and margin levels, it’s your strong balance sheet that allows you to stay in business as you make those adjustments.
When I ran action sports companies that had to deal with a tougher market, here’s some of the things I did and that you should consider too.
·                 Reduce the trade show presence and the number of people from the company who attended. The booth was refurbished- not built new. People didn’t get to go as a reward, but because they needed to be there.
·                 Let go of people who weren’t doing an outstanding job or who weren’t needed given the lower sales level.
·                 Stop selling to people who aren’t paying. There’s no cash flow in a sale- only in collecting the cash.
·                 Get rid of old inventory for whatever it brings. Old inventory is never worth more later.
·                 Order or produce only what is pretty certain to sell. Minimize your inventory risk. Lower volume on higher margin can be better, for both cash flow and for the brand, than higher volume on lower margin.
·                 Review the team roster. Top riders are probably worth what you’re paying them. The ams and others getting maybe just product and photo incentives are keepers. It’s the mid range riders I’ve always looked most carefully at. As hard as it may be, there’s usually some money to be saved there.
·                 I cut the advertising and promotional expenses that I’d sort of done because I could when times were better, and it was easier to just pay the money than throw the rabid marketing manager out of my office for the 12th time on the same issue.
·                 Ask your suppliers for better terms. They’re probably struggling to keep customers too.
·                 Have good financial information.
Your goal is not just to cut expenses. It’s to have a budget that makes sense given a realistic expectations of sales and margins. Look, I understand the pressure to run the two page, four color spreads because marketing is the basis of your competitive positioning and that’s what the other companies are doing.
But the best advertising campaign in the world won’t save your bacon if you can’t pay your bills.
Hard vs. Soft Goods
Interestingly enough, I’m hearing that the shoe and apparel companies are holding up noticeably better than the hard goods guys. That surprised me at first, but I’ve formed an opinion as to why that might be and as long as you’ve read this far, you might as well finish the article and see if you agree with me.
Hard goods companies only sell to people who actually skate. Soft goods and apparel companies sell a lot of product to people who don’t skate. They are increasingly lifestyle companies even with their roots in skate. If skating is somehow not as popular, or at least growing more slowly, it’s the skaters who decide that and lead the trend; they skate less and therefore buy less product.
But out in the world of non skaters who buy skate influenced shoes and apparel are a whole lot of people who were late coming to the skate party and, in the same way, are later in realizing that the party is maybe not quite exciting as it use to be. Besides, they still need shoes and clothing even though they never needed skateboards.
So they keep buying, though maybe influenced by soft economic conditions, until their perception of skating and its “coolness quotient,” for lack of a better term, changes. When that happens, the shoe and apparel companies that have made the jump to lifestyle brand and are less connected to skate than when they started, can succeed anyway. Those too closely tied to skating may find themselves, though with the impact delayed, in the same boat as hard goods companies.
It will be interesting to watch. In the meantime, your job, as an owner or manager of a skateboard industry company, is to restructure and manage your business so that it operates under a viable financial model in this business reality for however long it lasts. Part of that will involve a new focus on expense control.