Another ASR. Anything to Learn

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Lousy time for a deadline. What am I going to say about ASR that seems relevant when what’s left of the World Trade Center towers is still burning? The most talked about issue at ASR seemed to be conjecture about what was holding up the girls’ low riser pants, and it suddenly doesn’t seem so compelling.

 
I love this business, and am grateful to be in it because it’s fun and I like the people involved in it. But at the end of the day, we’re about marketing and brand building. We succeed if we create demand for and perceived differences among products that aren’t very different from each. It all sounds pretty trivial after the descriptions of people jumping out of the World Trade Center.
 
Sorry if I’m feeling a little morose today. I imagine some of you might be feeling the same. I’m going to go hug my wife and kids, then its time to focus on some business stuff.
 
Advertising Trends
 
Speaking of marketing and brand building, it’s getting kind of hard to spot an ad that focuses on product features. They all show teams and tricks. Sometimes, it takes a second to figure out which company the ad is for. One hard goods company told me they could double their sales if they could get a couple of more leading team riders.
 
Talk about shooting ourselves in the foot. We’re working as hard as we can to demonstrate to our customers that most of our products are functionally the same. We call it differentiating ourselves from our competitors. How do you do that on a brand versus brand basis? By spending more on team, advertising and promotion. When can you afford to do that? Only if your volume and/or your prices go up. Who wins this game? Companies who are either larger, have strong balance sheets, or both. How many can win? Don’t know. But I know it’s more if the market is growing, and fewer if it’s not.
 
Maybe this accounts for the feeling I got that there was a lot of energy at ASR, but it was at a pretty even level through the skate portion. Exciting, but the same everywhere. I don’t like sameness. It’s not a good foundation on which to keep growing an industry.
 
It Is the Economy
 
Quiksilver isn’t a skate company, though I suspect a lot of people who skate buy some of their stuff from time to time. Thursday, the first day of the show, they guided earnings expectations for their fourth quarter down for two reasons. First, they said that their domestic men’s inventories are much too high and will have to be closed out at distressed prices. Second, they said reorders are coming in more slowly than plan and are being negotiated at lower prices.
 
Part of me feels like I should be able to just stop this section right now and move on, but allow me to belabor the point. In my conversations with people at the show, I frequently heard about softness at retail. This generally focused on soft goods. Hard goods seem to be holding up so far, as did skate shoes, at least for the credible skate brands.
 
My interpretation? If you’re a skater, and you want to keep skateboarding, when the tip of your board has worn down to the point where it’s paper thin, you finally have to get a new board. No choice. If the bearings fall out, you have to replace them. No choice.
 
Do you need a new pair of pants or shirt to keep skating? Nope. You’ve got a choice.
 
With shoes, my hypothesis is that the skate shoe brands with the most credibility with skaters are taking business from all the wannabee brands. So it may be that shoe sales can soften without the major brands really noticing. If they will be cautious about raising prices, this can be a hell of an opportunity for those major skate shoe brands.
 
The ASR show guide has seventy companies listed under footwear. That number is, as I recall, the same or a little higher than the previous show. Not all of those offer skate shoes, of course. But if I’m right about the more credible skate brands taking share from the others, and the economy is soft, then you might expect to see the beginnings of a consolidation in skate shoes we’ve all been expecting. Why might it not happen? Because some of the brands that are in the skate shoe business, but not as credible as the leading brands, have lots of money and big balance sheets. They could make a “strategic” decision to stay in the business and lose money for a while. It happens. Then the number of brands doesn’t decline so dramatically, but everybody’s profitability can be hit because price becomes more of a competitive factor and more has to be spent on marketing.
 
The successful, branded skateboard companies have watched the shoe and soft goods’ companies grow like mad at least partly on the backs of the hard goods brands’ support of skateboarding. Sometimes it looks like the hard goods brands have missed out. I bet they’ve all wondered from time to time if they should be making shoes and soft goods. If the economy turns, they will look prescient, because their market position, focused on the core of people who really skate, is likely to hold up better than the much broader market the soft goods aim at.    
 
Check out again the section above on Advertising Trends and what happens when the basis of competition is advertising, team, and promotion. If you’re a retailer, you might go back a couple of issues and read what I suggested you do if we are, in fact, heading into a recession. Maybe our favorable demographics insulate us from economic cycles? Or may the force be with us. Whatever works.
 
Chinese Skateboards
 
The Chinese make lots of stuff that was once made here, and they can make a skateboard. They are making them now.
 
To pick some rough numbers, let’s say there’s maybe $4.00 of wood and $1.00 of glue in a deck. There’s also labor, freight in, waste, the cost of operating a factory, administrative overhead, maybe royalties to team members. Eight dollars? Ten dollars in total? A little more? That’s before graphics and any dying of plies before you make the deck. Total cost depends on your overhead, your cost accounting, and your volume.
 
I hold in my hand an actually quote from a Chinese factory to supply seven ply Canadian maple blank decks at a little under $8.00 depending on dimensions. That’s before shipping and before the four percent duty U. S. Customs tells me would apply. It’s also for a natural colored board. This communication names a couple of brands that are making them there now. 
 
So you can buy decks from China, and probably land them for less than you can make them here. It seems to work for Variflex, who buys god knows how many completes from China and sells them in various discount chain sporting goods stores. 
 
But Variflex isn’t concerned with pro models, doesn’t have to change their graphics as often, and doesn’t, I suspect, handles quite the numbers of brands and models. Make them cheap, make a lot, and ship them out.
 
However, if you were convinced the quality was what you required, and I see no reason why it can’t be, what’s to stop a brand from bringing in blanks and screening them as and when required? You can maintain your flexibility and get a price that is lower. How much would depend on the specifics of your operation.     
 
New Products?
 
Not too much, as usual. I saw a couple of variations of the long boards with single center wheels on the front and rear that are suppose to emulate surfing or snowboarding I guess. Looks like it might be fun.
 
I heard about something coming out called Sticky. Apparently there are magnets in the shoes and metal plates on the deck so the deck doesn’t always have to be gripped during tricks. It’s not just an idea. It’s been extensively tested and, I’m told, been given thumbs up by skaters who have tried it. Guess it could open up some new possibilities. Wonder what the added weight is?
 
There use to always be “new” snowboards at the snowboard show. Trouble was, the snowboard had already been invented and none of these “new” things, good ideas or not, could ever break through what the established concept of a snowboard was. All these guys might have the same problem. You can have a great technology, but it comes down to marketing. If the riders don’t accept, it’s a bad idea.
 
Dark Horse showed me the rocket bolts and V-Beam axle, which seemed to make sense. But how do you sell technology in a market driven by team and promotion?
 
I’m sure there was some other stuff I missed. Wish I could have gotten into all the booths to see it.
 
Are we headed for economic hard times? If we are, the next ASR could be a bit different. It couldn’t hurt for you to think about what you’d do if we were before we get there. If they happen, they will be hardest on those who haven’t prepared in advance. 

 

 

Cash Flow Revisited; Why Hardly Any Successful Business is Just Snowboarding Anymore

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I know it’s because of crossover, and the mainstreaming of action sports, and because we’re selling to parents as much as to kids. I know all that. Largely, I believe it. I just did my occasional and not nearly frequent enough sojourn into a bunch of local snowboard retail stores, big and small, and looked at what they’re selling. Snowboards and snowboarding equipment, apparel and accessories- sure. But they are also selling skateboarding, surfing, skiing, wakeboarding, bikes, roller blades, tennis and/or some others depending on the time of year.

 
Have they become as diversified as they are because of “the market?” Yes, “the market” demands it. But lurking in the lichens is the financial requirement of businesses that are highly competitive and selling products that are awfully similar to each other in a given product category, differentiated largely by the brand marketing strategy. Bottom line is that the less seasonal your business is, the more money you can expect to make.
 
Let’s take a journey into fantasy land and take a look at a couple of hypothetical business that are in snowboarding (retailers or manufacturers- makes no difference) and see how their financial equations differ with the seasonality of their sales. I know you already know that it’s bad to be seasonal, and good to sell all year around. But the extent of the difference on the two company’s financial results-especially the return on investment- may surprise you.
 
Meet the Contestants
 
Seasonal Enterprises (SE) and Year Around Ventures (YAV) both sell snowboard hard and soft goods. But while SE sells almost exclusively snowboarding and snowboard related products, YAV has diversified into other action sports.
 
Both SE and YAV sell $12 million a year. SE does all its business in five months. YAV boringly sells $2 million a month, month in and month out. 
 
At the end of the year their income statements, down to the Income before Interest and Taxes Line, look identical.
 
Net Sales                                                                   $12,000,000
Cost of Goods Sold                                                 $ 7,800,000
Gross Profit                                                               $ 4,200,000 
 
Operating Expenses                                               $ 3,600,000
 
Income Before Interest and Taxes                        $     600,000 
 
Now, $12 million is kind of an awkward revenue number. It’s much more than your typical specialty shop sells, and it’s probably less than a snowboarding brand needs to do in revenue to break even (I think that number is maybe a little north of $20 million unless you have a very well established brand and market niche).
 
Just for your information, in their most recent complete years, Vans, K2, and Pacific Sunwear had gross profit margins of, respectively, 43.5%, 31.1%, and 33.5% of sales. Operating expenses, respectively, were 35.7%, 25.3%, and 22.7%. Unfortunately, no specialty shops publish their financial results.
 
This hypothetical income statement is kind of a cross between a retailer and a brand. The goal, however, is to make a point so allow me a little creative license as I set the stage to make it.
 
Balance Sheets and Working Capital
 
Working capital is the money you have invested in a business so that it can operate.   Rent, salaries, product costs all of which are incurred before you sell anything represent working capital invested in the business. To the extent that you can get terms from the supplier of the product or service you are using, your working capital requirements can be reduced.
 
The balance sheet shows, as a point in time, the financial viability of a company and its ability to finance itself. Let’s compare the working capital and balance sheet situation of SE and YAV.
 
Seasonal Enterprises
 
SE, you will recall, does all its business in five months. But it has to operate for twelve months, and buy the product it sells in a way that it has product to ship during its selling window. Assume its total expenses of $3.6 million are spent evenly over the year- $300,000 a month. In practice, selling and marketing expenses would be weighted towards its selling season.
 
It’s got to buy its product for a total of $7.8 million. Remember SE is getting some terms from its suppliers, but it may also be giving some terms to its customers. Where does that all net out in the real world?    Obviously it’s different depending on whether you’re a retailer or a manufacturer.
 
SE’s going to spend $300,000 a month for seven months before it sells a thing. It will probably collect some money from the previous season during this period, but it will also have some expenses that go out during its selling season before much comes in the door. If, then, it has to borrow $300,000 a month for seven months it will have $2.1 million in loans just for operating expenses by the time it starts selling. And of course you won’t pay it all off the day you start selling.
 
Then there’s the $7.8 million in cost of goods sold SE has had to finance. For how long? Shall we say four months?
 
The last prime lending rate cut was to 6.5 percent on August 22nd. Just to make my calculations easier, let’s say you are borrowing at 10 per cent. I know that may be high for some borrowers, but if we think about credit card fees (which I consider basically financing costs) letter of credit fees, commitment fees, etc. maybe it’s not too far off when you look at your real cost of borrowed capital- especially for smaller businesses.
 
If you assume you pay off the loan for operating costs completely literally the day you start selling, your interest charge would be $70,000. It’s more realistic to say you pay it off over a couple of months at best, so let’s say it’s really $90,000.
 
At 10% for four months, financing the cost of goods sold comes to $240,000. Total interest expense, then, is $350,000.
 
After interest, pretax income is $250,000. Assuming a 30% tax rate, the business earned $175,000 for the year, or 1.46 percent of sales.
 
Year Around Ventures
 
This is a little easier to explain. They just do $2 million in business each month. No big inventory buildup. No operating expenses to finance without any income.  They get some terms from their suppliers, and, with luck and depending on the type of business it is, may even collect before they have to pay. They don’t need millions of dollars in temporary working capital just to get through the business cycle. All they have to finance, more or less, is a month’s worth of expenses or maybe a little more. Their interest expense? Hardly anything. Maybe if they’ve got any sort of balance sheet at all, nothing. If that’s the case, and with the same 30 percent tax rate their net income for the year is $420,000, or 3.5% of sales.
 
Balance Sheets and Rates of Return
 
Income statements don’t happen in isolation from balance sheets. On your balance sheet, you (hopefully) show some equity- the total of the investment in the business plus the profit you’ve made, less any losses you’ve incurred, and less any dividends you’ve paid out. The larger the number is, the stronger the business is, and the less money you should have to borrow. So, you can truthfully exclaim, “If I’ve got a whole bunch of equity in my business I don’t have to borrow squat and I’ll have no interest expense! My return on sales will be the same whether I’m SE or YAV.”
 
True, but that’s a misleading and incomplete analysis. The financial issue is always what are you earning on the money you have invested (the equity in the company, more or less) and how much risk are you taking? Most simply stated, return on investment is net income divided by total equity. YAV, due to its year around sales, doesn’t need much equity to have basically no interest expense. It’s probably got a great return on equity, and because of the diversification that allows it to sell the same amount each month, it’s risk is lower.
 
SE, on the other hand, has to have a pile of equity if it’s going to eliminate its need to borrow money. If it does that, it will have the same net income at YAV, but it’s return on equity will be much, much lower. And its seasonality makes its risk higher.
 
As you consider your return on equity, be aware that if you’d invested your equity in an intermediate term bond fund for five years, you would have earned around eight percent a year before taxes. Over the last twelve months, with the Fed cutting rates, you would have earned something like thirteen percent. We can probably agree that the risk in an intermediate term bond fund is less than the risk of an action sports business.
 
In the market we’re in right now, is there any competitive advantage to being a “snowboarding only” business? I can think of a couple of possible exceptions but generally, I’d say probably not. If there was, it would be financially rewarding from a return on investment point of view. Isn’t it interesting how the industry’s requirements for success from a marketing and a financial perspective have come together?

 

 

Product Selection and Merchandising: The Blackjack Analogy

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I guess this is a little incestuous, but the idea for this column came from reading Sharon Harrison’s “Ten Shops, One Question” in the June issue of this prestigious rag. The question was “What type of bearings are skaters in your shop buying?”

 
What struck me was how each retailer had similar, but different answers. It made me think about how they selected and presented skate products in their shops. If you read between the lines of that article, there were, I thought, some lessons and ideas that could be generalized for decks, shoes, wheels, trucks and clothing as well as bearings.
 
What They Said
 
“It’s the brand.” It’s the price” (low or high). “It’s the packaging.” “It’s the ABEC rating.” “It’s our service and reputation.”
 
Obviously, there are some customers who want the lowest price. Period. Some just want the cool package. For quite a few, it’s the brand that dominates the purchase decision. 
 
But there’s a lot of ambiguity, and purchasers often fall within those extremes. They’d like a certain brand, as long as it’s not too expensive. They want to keep the package, so they’ll pay a bit more. They got to have what their friends’ have- unless you’re out of that in which case you can probably transition them to another product.
 
About a hundred years ago, in the first marketing book I ever read, a guy named Kotler introduced me to the concept of the four Ps in marketing; product, price, place, promotion. In traditional marketing at least, they are the cornerstone of how you sell any product. And you’ll notice they correspond pretty well to what retailers said motivates buyers of skateboard bearings.
 
I never miss an opportunity to remind us all, including me, that we may all love skateboarding, but from a business perspective it’s, well, just business. At its core, the process of choosing, pricing, merchandising and selling the product is the same as in every other business. Enthusiasm and commitment is part of business success, but so is realism and objectivity. We can’t just believe what we would like to be true.
 
But I digress. I know (hope?) there was a point I was trying to make. Maybe if I keep writing it will come back to me.
 
Ambiguity- How To Utilize and Minimize It
 
There’s good news and there’s bad news. There always is. On the one hand, you know your customers’ basic motivations. You understand in a general sense why they buy what they buy. On the other hand, for the individual customer, those motivations are often pliable depending on the choices presented to them at a given moment. If you understand your customer you can help them make good choices. I almost used the word “manipulate,” but that has a nasty connotation to it. I’m suggesting you can support the customer in making decisions that are good for him and for you. That’s not a bad definition of successful retailing.
 
Casinos love people who play blackjack but know nothing about the odds. They make a whole lot of money from that kind of person. That’s why they give you free drinks. They also like, though not as well, the person who is sophisticated enough to more or less play the so-called “neutral strategy.” The casino will consistently win around one and a half percent from that person.
 
They hate the card counter. She will minimize her risk and make big bets at the right time and, over the long run, take money from the casino. She won’t win all the time. She may not even win half of the time. But when she does win, it will tend to be big, and that can make up for a lot of small losses. She doesn’t have perfect information. But she has the best information she can get and uses it to control how she plays. That’s not a bad strategy in the stock market either.
 
I want to suggest you can use a similar strategy in skate retailing.
 
The ambiguity of customer motivations isn’t a hell of a lot different from the ambiguity of how the cards will come out in blackjack- even when you’re counting. A single blackjack hand is a statistical, probabilistic result. A single customer’s decision is not. But a lot of customer decisions, taken as a group, are.
 
Goals
 
What’s the goal of blackjack? Easy- to make money. Right? I can’t argue with that, but I’d point out that setting a goal of making money doesn’t tell you what to do or how to go about it. If you set a goal of making your bets according to the count of the cards, you will make money in blackjack.
 
In retailing, the goal of making money suffers from the same shortcoming- it doesn’t tell you what to do. Every time I look at a retail situation, I end up suggesting a focus on the same two goals:
 
1.    Get the customer to come back.
 
2.    Maximize your gross profit dollars.
 
By doing these two things, you maximize your chance of making money.   
 
Gross Profit Dollars
 
Where do your earn the most gross profit dollars by percentage and total dollars by product category and by brand? Do you communicate that to everybody who works in your shop? Do you make your purchasing decisions with that information in your hand?
 
Yeah, yeah, I know- “Well, we make most of our money on shoes and clothing.” That is not an acceptable answer. Neither is:
 
  • “Hey, I’ve been in this business a long time and have a good gut for it.”
  • “We just buy what the customer wants.”
  • “We don’t have the system to track that.”
  • Etc., etc., etc.
 
That’s all a bunch of fatuous blather and if you’re taking anything other than a quantitatively rigorous approach to figuring out where you make your gross margin dollars, you’re no different from the guy who sits down at the blackjack table in Vegas with no knowledge of the odds, has five drinks and bets in the dark. You may have fun, but it’s not likely to last for long.
 
Getting Customers Back
 
I don’t get into enough shops, but I have never gone into one and gotten a good answer to, “What factors are most important to your customers in making their buying decisions?” Everybody names all the same factors, but nobody can rank or quantify them in a valid way. What I’m always hoping for is “Well, we don’t talk to every customer, of course, but the data base of responses we’ve kept tells us that 32% come in here because they know us and we’re conveniently located. 27% know us as a shop that has the brands they want and the rest are guys trying to pick up the cute girl we’ve got on the floor.”
 
Why haven’t I ever gotten an answer like that? Because nobody asks their customers in a systematic way and tracks the answers. The more customers you ask the more valid the responses become. To go back to the blackjack analogy one more time, it’s a lot like a card counter that doesn’t keep track of how many ten value cards are left in the deck. He has no idea how big a bet to place or when to place it.
 
Now we’re getting somewhere. It’s always nice when I’m writing one of these and that finally starts to happen. There you are sitting with concise information about where you get your gross margin dollars, and some solid insights into your customer’s motivations. What might you do with that information?
 
First, recognize that there’s some inevitable conflict between giving your customers what they want and maximizing your gross profit dollars, especially where there’s a lot of price sensitivity. Welcome to specialty retail, where your success as a shop will depend on your ability to position yourself and the brands you carry so that customers don’t just focus on price. 
 
Perhaps you’ll move some product around to highlight high margin, fast moving products. Are there brands being asked for you aren’t carrying? When you’ve been out of, say, a specific deck, has the customer bought something another one and does that tell you anything about how many brands you really need to carry? If you do a lose some sales because you don’t carry as many brands, but sell some higher margin stuff instead, are you better or worse off? Maybe you should forget all this and just hire more cute sales girls.
 
Let me share a little secret with you. What I’ve been trying to do with recent article is to help shop owners prepare themselves for a recession if it happens. Last issue, I think, I suggested a few steps you might take to prepare yourself for a slowdown that made good business sense even if one doesn’t happen. This article has a couple of more. As I write this, the Federal Reserve has come out with its “beige book-“ a regional anecdotal survey of economic conditions. Manufacturing is still suffering, but the gloom is spreading to other sectors. Consumer spending is looking like it might falter and the stock market shows no signs of reviving.
 
Nothing I’m suggesting is a bad idea even if skateboarding continues to boom. Try it- you’ll like it.

 

 

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

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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

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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.

 

 

Can’t Live With Them, Can’t Live Without Them; Trade Shows, That Is

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It feels to me like more trade shows are being better produced at exactly the time when we don’t need them in quite the same way we use to. Or maybe there’s the same number of trade shows, but we don’t feel the need to go to as many. Or maybe retailers, who don’t make their living on only snowboarding, could justify going to so many shows that they can’t afford to go to that they just throw up their hands. Or maybe snowboard retailers already know which brands most of their open to buy is going to be committed to. Or maybe they know there’s not as much new stuff to see as there was in the past.

Or maybe all of these.
 
Still, wouldn’t it be great if there were just one giant trade show a year for action sports? You’d go for a few more days and order all the snow, skate surf, accessories and apparel you needed for the whole year and arrange for it to be delivered when you needed it. And all the suppliers would make sure it all came on time and complete. And all the retailers would get their orders in on time and pay their bills on time.
 
But since I have a vivid imagination and it’s not going to happen quite as I describe it, let’s look instead at the current trade show environment and how retailers might react to it.
 
The Trade Show Industry 
 
It’s a business. Let’s start from there. The people who bring us Vegas, Outdoor Retailer, Action Sports Retailer, ISPO, Supershow, the regional shows and the consumer shows want to make a buck. With the exception of SIA, they are for profit organizations. SIA wants to make a buck too, but they use the money they earn to support snow sports industry consumer marketing and that’s a good thing. Still, they all, including SIA, are to some extent competing with other trade shows and they all want to prosper.
 
When the number of snowboard companies exploded, SIA boomed. ASR lost exhibitors who decided they didn’t need (couldn’t afford?) both it and Vegas. ASR took off again when skateboarding went crazy, and SIA shrank as the winter sports business consolidated. Outdoor Retailer drew some snowboard business as the action sports business homogenized a bit and brands wondered how to reach a wider market.
 
SIA moves the Vegas dates to January 29th through February 2nd to make it a kickoff show. Suppliers wonder how to do Vegas, ISPO (February 2nd to 5th), and NSIA (February 10th to 13th). I heard a rumor that cloning of sales managers is under active discussion. When’s the main Japanese show anyway?
 
The SIA move, of course, changes the dynamic for the increasingly successful regional shows if they are no longer the first place a lot of retailers see new product. But of course SIA isn’t the first place where major retailers are likely to see product. Suppliers will arrange private showings for selected customers even earlier. Meanwhile, too many retailers aren’t making enough money and there’s a recession brewing (maybe) with its potential impact on consumer spending.
 
To top it all off, Surf Expo, known for its East Coast shows, is planning a new surf apparel show for Anaheim, California in March 2002 and ASR, apparently in response, announced it is planning a new show as well for the same time. What a coincidence. Both would be focused on retailers writing back to school orders. Magic, of course, has been trying to add a board sports section to its show.
 
But wait! As I write this, a press release from SIA dated May 23rd has announced that SIA Board Chairman Hugh Harley and the SIA staff has held a meeting with the five professional sales rep associations “…to review the revised show schedule for 2002 and to work through various issues regarding the new buy/sell cycle.”
 
SIA President David Ingemie says the meeting focused on how a beginning of the season trade show is different from one at the end of the year. “It was nuts and bolts oriented,” Ingemie said. Teams of suppliers, retailers, and reps focused on ways to make the show better for everybody. Since there’s general agreement Vegas won’t be a writing show, they discussed things like digital workbooks that retailers could take with them to use in reviewing and managing product line information prior to ordering. They worked on getting food delivered to booths if desired (Say, if we could just get cots and portapotties in there, nobody would ever have to leave the booth, and think of the money you’d save on hotels).  
 
Trade show organizers have two sets of customers. The exhibitors, who pay the bills, and the retailers, who the organizers have to have show up if they want the bill paying exhibitors back. But the interests of those two customer groups aren’t necessarily the same.
 
So- more tradeshows, more complex customer groups based on broader lifestyle considerations and not just a sport, a possible recession, and retailers interested in cutting the cost of trade shows- not increasing it.
 
Doesn’t more tradeshows for the same products if the number of retailers isn’t growing and business is very competitive translate, on average, to fewer retailer days at each show?
 
In the mid 90s, snowboard companies sprouted like mushrooms on damp, warm, spring days (you should see my lawn). Each knew there wasn’t enough room for everybody, but assumed it would be the other guy who would take it in the shorts. People rush in when there’s perceived money to be made- in snowboarding or in trade shows.  
 
I’ve talked before in Market Watch about competitive dynamics, and the possible dangers of competitors reacting too much to the action of other companies instead of focusing on what their end customers want. A new show gets announced. Some suppliers commit to going. Other suppliers worry that people will talk if they aren’t there, so they decide to talk. Retailers start to wonder if they will miss seeing new styles and products they should have. Pretty soon we’re all off to a new show.
 
What is the cost of a new show to suppliers? Travel and lodging, the booth, rep time and expense, the development of a new product line and samples for the show, loss of time. That’s a lot of money. If you’re going to, defacto, create a new product cycle and introduction you better feel strongly that it will increase sales.
 
And there’s the rub of course. It may not increase industry sales, but it may increase your competitor’s sales if they attend and cost you sales if you don’t. What’s a retailer to do?          
 
What Is a Retailer To Do?
 
Retailers, of course, aren’t just snowboard retailers. They are selling skate as well. Or surf. Or camping. Or rock climbing. Or skiing. Which means they have more than just winter shows to go to, and that complicates the picture. Still, there are some things they are all doing, or ought to be doing, to make management of their trade show schedule and open to buy a little easier, and maybe less financially painful.
 
That process begins with the recognition that things aren’t changing in snowboarding as quickly as they use to. You don’t have to go to Vegas to figure out which of the 150 new brands you are going to carry. In fact, you probably know right now (it’s May 2001) most of the brands you will be carrying in the 2002-2003 season.
 
John Coffaney, the Vice President of Merchandising for Any Mountain, a ten shop retailer in central California, agrees that the process of selecting among brands is a lot easier than it use to be. “Twenty percent of the brands we carry get eighty percent of our open to buy, and we know who they are well before the shows.”
 
So you start out knowing most of the brands you are going to buy and having a pretty good idea how many dollars you are going to commit to each. When you go to Vegas in January, what’s your job? Not to place orders, according to Coffaney. For Any Mountain, it will be strictly a looking show. If he buys anything, he expects it to be current year merchandise he’ll use to finish out the season. He’ll meet with supplier executives to discuss marketing issues like coop advertising.
 
The big suppliers he’ll see again at regional shows or at their showrooms, so he’ll spend his time in Vegas checking out other than the usual suspects.
 
Retailers in Any Mountain’s situation should focus in Vegas on the small brands they won’t typically see anywhere else and expect to accomplish two things. First, they can figure out how to use that twenty percent or so (it may actually be a lot less) of open to buy that isn’t already committed. Second, they can troll the backwaters of the show to find the small and/or new companies that offer new products or styles that will help differentiate the store and keep it on the leading edge.
 
SIA President Ingemie points out that seeing new products and brands early in the season, rather than in March, gives you the information you need to accurately do your product planning.
 
Derek Miller, the owner of Bad Boyz Toyz with four shops in the Chicago area, says that’s how he came to order Capita. It was the only place he could have seen it. Besides seeing new brands, what does he get out of Vegas?
 
“Long nights and no sleep,” is his first response. Obviously, I have no idea what he’s talking about. “We look to Vegas to see what’s going on. We’ll write some large lines there, but we’ll lean on the regional shows even harder.”
 
The good news for snowboard retailers may be that if choosing lines has gotten simpler (because there are fewer choices), and this is a preview show where not as many decisions have to be made and orders written, then maybe it gets cheaper for retailers to go there. You don’t need as many people and they don’t have to stay as long.
 
By anybody’s measure, for supplier or retailer, trade shows are expensive. Retailers are looking to reduce that expense. Bad Boyz’s Miller claims he doesn’t know how much it costs to go to trade shows each year. “I’m afraid to add it up,” he says.
 
Any Mountain’s Coffaney has cut trade show expenses using in store presentations and similar mechanisms. He says that as a result, some of his soft goods buyers have not had to attend Outdoor Retailer.
 
He also points to a longer selling season that is emerging for Any Mountain. “February,” he says, “is becoming as big as December. Our open to buy goes up tremendously after President’s Day weekend.”
 
Retailers, of course, don’t want their key people at trade shows during the midst of the selling season. They think they should sell what they’ve already bought before committing to buying more.
 
Originally, I thought the new Vegas dates would be most beneficial to SIA because it made the show a kickoff show and the foundation of the buy/sell cycle. It made the show more relevant again. The exhibitors, I thought, would ultimately benefit from having to get their product acts together sooner and perhaps from some earlier orders from retailers. Retailers would be inconvenienced.
 
But if the retailer’s buying process has changed as I’ve suggested, the regional shows are continuing to improve, and the large suppliers are finding more ways to make it convenient for retailers to see and order product, then maybe we have a win for everybody. Retailers can spend less time and money and do just as good a job ordering. But as you strive to control trade show expenses, make sure you do go to Vegas. If you are a snowboard retailer, this is your show, you need it, and the competitive chaos in the trade show business doesn’t change that.
 
Oh, but then there’s the poor sales managers, who have to figure out how to be in at least two places at once. Maybe for the next Market Watch I’ll check out all those rumors of clones.
 
Jeff Harbaugh has spent 20 years finding solutions for companies managing transitions, the last 10 in action sports. Reach him at (206) 232-3138 or at jharbaugh@email.msn.com.
 
 
SIDEBAR
 
Then there’s the Nixon model of trade show management- don’t exhibit at trade shows.   Since people have no expectation of their exhibiting, not exhibiting doesn’t cause various negative rumors. Of course, they are always there and the product (watches) lends itself to being shown while walking the floor. And even though they don’t have a booth, they have a major presence by being associated with the most important piece of paper at the show- the party schedule.

 

 

Swell Raises $2 Million

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Almost as soon as my article on surf industry internet models was finished, Swell shut down its Crossrocket site and then, on May 3rd, announced it had raised $2 million in bridge financing. I hate it when that happens.

Rather than just throw up a press release that created more questions than it answered (see it below) Surf Biz asked me to track down new Swell Chairman and CEO Bob Allison and ask him what was up. It required a fairly impressive game of phone tag, but we manage to connect. Hopefully you’ll agree that the additional information was worth the wait.
 
The headline on the press release was about a $2 million bridge, so the first question was “Bridge to what?”
 
The $2 million is a loan convertible to equity. Mr. Allison confirmed that Swell had burned through most of the capital it had raised (most recently, $8 million raised last October). The $2 million “gives the investors time to evaluate how to move forward with the appropriate plan,” said Mr. Allison. He indicated that investors had committed to invest an additional $5 million in Swell consistent with the company demonstrating to them a viable business plan and revenue model.
 
So the additional $5 million is “committed” but not in the bank. It’s hardly surprising to learn that investors won’t throw money at a company until they understand the business model. 
 
The money raised towards the end of last October lasted six months or a little longer. That’s a burn rate of something like $1.3 million per month. Obviously, Swell has moved to reduce that. Part of that is the moving of the Swell media business to Huntington Beach, which Mr. Allison confirmed.
 
Swell’s actions in containing costs are consistent with what other surviving dot coms have had to do and, in any event, just make good business sense. But of course, no matter how much you reduce costs, you also have to grow revenue to demonstrate a viable business.
 
That business, according to Mr. Allison, will focus around the catalogue and ecommerce business. Brick and mortar may still be in the picture, but only in the longer term. Since launch, Swell had generated more than $1.5 million in revenue in spite of having essentially missed the Christmas season. $400,000 of that was in the last month, so it appears that revenue growth is accelerating. Their four catalogues have had a combined circulation of 1.6 million, and Swell has shipped more than 25,000 orders.
 
Still, they clearly have to grow revenue, reduce expenses and raise more money for the business model to succeed. The alternative is to make a deal.
 
Like with Surfing, for example.
 
Mr. Allison pointed out that Primedia, the owner of Surfing, had been an investor in Swell since its inception. He said that the two companies see significant potential synergies between what Swell is doing on line and what Surfing is doing off line. He acknowledged that there were discussions ongoing, but that no deal had been reached as of this time (May 11th). He expects a conclusion to those discussions in the next couple of weeks.

 

 

Recession? You’re Kidding- Right? Please?

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The NASDAQ stock market rocketed towards heaven for several years. Its decline has been equally spectacular. Four trillion dollars of value have been wiped out in a year. It’s matched its worst fall ever in percentage terms, but it’s done it in half the time. Should we be surprised? No. The statistical concept of “regression to the mean” is working like it always works. Things do tend to even out. What goes up must come down. If it sounds too good to be true, it usually is.

 
You get the idea. 
 
Now, after an unprecedented economic expansion, we’re facing, or we’re already in, a recession. Pundits are hoping for a soft landing. I’m hoping for one.
 
The skateboard market has taken off like the stock market or the economy of the 90s. Someday it will soften. A little? Or will we be facing regression to the mean? If (maybe when?) we are, what should skate retailers be doing?
 
The Word at the Retailer
 
The first thing I did was to call at random half a dozen skate shops in various parts of the country. I’d introduce myself and get the shop manager or owner on the phone. When I ask if the economic slowdown was having any impact on skateboarding sales, the responses ranged from a long pause to hysterical laughter in the background. I think I was lucky they didn’t want to offend anybody from Transworld.
 
Without exception, the response was some variation on, “What recession? You’re kidding, right?” One San Diego shop talked about sales being the same. Everybody else talked about them being up.
 
Carolyn Zuzworsky, the owner of CD Skate shop in New York, said it was “so crazy we’ve had to hire extra people.” NC Skate in North Carolina has been open three years. Manager Trey Womble indicates sales had grown every month. With a skate park opening two blocks away, he anticipates that will continue.
 
Tim and Stephanie Pogue, at Faction in Seattle, see nothing but strength in the skateboard market.
 
Reggae Destin at Push Skateboarding and Culture in Illinois told me there was a “surge of new little kids coming out of nowhere.” His only problem is the lousy Chicago weather. That would be a problem for me too.
 
Lots of happy, happy, joy, joy going around. Margins on decks are still lousy, but expensive shoes are flying out the door and a lot of kids somehow have money (nobody knows exactly where they get it) for new decks as often as every couple of weeks.
 
See paragraph one under “If it sounds too good to be true….” I am reminded that it was March of 2000 when a major brokerage house finally recommended internet stocks they had heretofore pronounced as too expensive. That was the top. Sort of like going to the last ASR show and seeing the Savier shoe brand.   
 
Still, things are great in the skateboard market at retail, and there are no clouds on the horizon. Everybody is making lots of money.
 
So stop reading. Obviously, there’s nothing to worry about. But if you don’t mind, I’m going to finish this article anyway. What I want to suggest is that there are some things you can do that are not only good for your business now, but will serve you well if someday, impossible as it seems now, things aren’t quite so good.
 
Don’t Kid Yourself
 
Everybody looks like a hero when cash flow is good. Customers are coming in without much marketing expense. Inventory is flying off the shelf. There’s less price sensitivity. Skate parks are popping up like mushrooms.
 
Made a couple of bad inventory choices lately? Got one more kid working on the floor than you probably really need? Haven’t bothered to update your web site regularly- or don’t have one? Haven’t bought new racks to replace those old beat up ones? What the hell- the lighting in the store is so bad nobody can see the racks anyway.
 
But it really doesn’t seem to matter. You’re a hero of retailing because the kids, with their parent’s money clutched firmly in their fists, keep coming in. Cash flow makes a few things you could be doing better seem unimportant. It covers up deficiencies.
 
But this is precisely the time when you should attack these issues – for three reasons.
 
First, right now you can afford to. There’s a little extra money in the till. Second, profitability will improve right now if you manage expenses like you would if times weren’t so good and good merchandising can increase your sales even further. Finally, and most importantly, you’ll be positioning yourself for when times aren’t so good. Let me explain.
 
Someday, (Next month? Next year? Next decade?) because skateboarding won’t be so hot, or because there will be less money floating around, or just because there are too many places to buy skateboards, customers will be harder to come by. They’ll still come of course, but not as often and they won’t spend as much. Why will they come to your store?
 
Maybe it will because you put in those new racks and improved the lighting. Or because you send them occasional emails on what’s new in the store. Perhaps you’re a habit for them- your shop has consistently offered them the merchandise they want and expect to see. You’re part of their lifestyle. Maybe they’ve got a personal relationship with you, or with one of the sales people (assuming you keep sales people long enough for a relationship to form).
 
However you did it, you’ve created an image of your shop in your core customer’s mind. There’s a more durable relationship there, and that relationship can survive when times aren’t so good. Your customer knows what you stand for and why they shop there. Make sure you’re building that relationship now.
 
 
Don’t Just Sell
 
Brands often get screwed up because they expand their distribution too far, too fast. Shops can get screwed up if they become willing to sell anything to anybody.
 
In both cases, the customer gets confused. He loses his motivation to buy that brand or go to that shop. Right now, you don’t even notice the impact. You’ve got a skateboarding feeding frenzy.
 
I’m not suggesting you shouldn’t be responsive to what the customer is asking for. I’m not saying its bad to grow sales. But growth of sales alone shouldn’t be your exclusive focus and only measure of success- because right now anybody can grow skateboarding sales.
 
Focus also on gross margin and select products and brands at least partly on the margin you can earn. Control expenses. Paying attention to just those two things will serve you well now and if the day comes when sales aren’t so easy to come by. 
 
Never lose sight of who your customers are and why they buy from you. Try writing that down and hanging it over your desk. Look at it every day. Make your purchasing decisions through that filter.   
 
If you find you can’t easily write that down, or if when you have written it you know in your heart of hearts it’s bullshit, or it’s three pages long, you have a problem.   
 
This will especially be an issue with new shops who have only known the good times and have never had to figure this out. If your shop has been in business more than a couple of years, you may have had the good fortune to have to succeed when skateboarding wasn’t going off. If so, this little exercise I’ve suggested shouldn’t be a big deal to you.
 
If anybody wants to email me their statements of whom their customers are and why they buy from you, I’d be glad to comment on them. If I get a bunch of them it might be the basis of an article for SkateBiz, though of course I wouldn’t identify the shops.
 
Good Business
 
The challenge, then, is to make hay while the sun shines (whatever that means exactly) but to do it in such a way that you’re ready for a cloudy day. It’s a bit of a balancing act. To some extent it goes against human nature because I’m suggesting that selling everything you can isn’t necessarily the right thing to do if you take the slightly longer view. Nor is it the only thing to focus on. I’m also asking you to recognize and react to your opportunities to do things better when there’s no pressure to do so. That’s the easiest time to do it. But I’ve learned that it’s also the time when any of us are least likely to do it. I never worry about marketing my consulting business when I’m busy with lots of consulting.
 
I think we’re about to enter a bit of an economic downturn. I don’t know how severe it will be, or how much skateboarding will be affected. The good news is that the things I’m suggesting you do to position yourself for it are good business in any economic environment.
 
What would your business look like if sales were down five to twenty percent, and margins were two percentage points lower? How would you react? What can you do to make sure it’s somebody else’s sales and margins that fall? Think about it now. Run your shop well now.

 

 

After the Gold Rush; The Internet’s Role in the Surf Industry, One Year Later

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Just about a year ago, I asked here in Surf Biz what it took to make money on the internet in the surf business. I said that if you were exclusively an etailer, and had to be both a merchant and journalist, it cost a lot of money just to operate, and you had the added expense of building a brand. I saw no financial advantage, and perhaps a disadvantage. Existing brands and retailers already had existing infrastructure and/or brand recognition. They would figure out how to use the internet to their advantage and it would become just another distribution channel, to be used or not depending on their strategy. Ultimately, they would realize that they were in control.

 
Internet e-commerce stocks were in the tank when I wrote that first article last May and things have been basically downhill since then. The Nasdaq has experienced a percentage decline that’s as bad as its worst decline ever, but it’s done it in half the time. There must be a bottom here somewhere.
 
Still moving forward with internet strategies in the surf industry are Becker, Swell, and Hub360. Becker, the four (about to be five) store Southern California surf retailer, is building its internet business based on a strong brand name and existing retail business. The retail business came first.
 
Swell is the leading (maybe the last?) combination etailer and content provider in the surf industry. It also owns and runs the Monster Skate and Cross Rocket web sites. It’s highly successful Surf Line, established in 1985 and purchased by Swell, is the genesis of the business.
 
Hub360, which has yet to launch its site, is positioning itself as a service provider to suppliers and retailers- a place where retailers and suppliers can place orders, check status, and see what’s in inventory.   Essentially, it sees itself as being able to make it easier and cheaper for suppliers to accomplish certain logistical activities and administrative activities that are important to do right, but don’t necessarily represent critical competences.
 
Three different business models. Three different ways to use the internet to build a successful company. Let’s look at each and see what we can learn, how the models might relate, and what the potential opportunities and sticky points are.
 
Becker
 
This is kind of the easiest one to talk about, because they aren’t an internet business, though they do business on the internet. They are a 20 year old, successful, core surf retailer with four (going on five) shops in Southern California.
 
And that brings us quickly to the first generalization we can make about successful internet businesses- in surf or anywhere else. There’s no such thing as a successful internet business- there are just successful businesses that can competitively provide a product or service to a defined customer base that happen to use the internet. The internet is not the source of their competitive advantage and is not their key differentiator, though it facilitates (or maybe makes possible) the delivery of their product or service.
 
Becker’s competitive advantage, according to CEO Dave Hollander, comes from the fact that they are a family of people and employees that sells the cool California culture without bastardizing it. To maintain what he sees as this key competitive advantage, they have intentionally limited their growth to preserve the company’s culture and market position.
 
Their internet site (www.beckersurf.com) first went up three and a half years ago. That’s practically back in the late Bronze Age in internet years. The brand was already credible when the internet presence was established. They didn’t have to begin with no brand recognition and spend lots and lots of time and money creating it. They didn’t have to work very hard to convince brands to allow their product on Becker’s web site due to the trust that long relationship brings. There are no discounted prices on the internet and never anything for sale, Hollander says. Some items end up selling for more than they sell for at a store.
 
They already own the inventory, and buy no inventory for the internet that they wouldn’t be buying for the stores anyway. “Well, no kidding,” I said the first time Dave told me that. But as we talked a little more, the significance hit me.
 
Dave (and, I imagine, any surf retailer who’s been in business twenty years) knows what will sell in his stores and what will not. That’s what he orders. On the internet, it’s a different story. He never knows what’s going to sell well, and where he’ll be shipping it. “The challenge of inventory management if you don’t have retail stores is overwhelming on the net,” states Hollander.
 
If you’re an internet only retailer, how do you choose and manage your inventory? If you never know who your customer is going to be or where they live, how do you order for them? If inventory selection is a crapshoot, what margin can you really expect to earn after discounting the stuff that doesn’t move? How will that discounting affect the perception of your site and brand?
 
A brick and mortar store gets its customers locally, and can learn about purchase patterns. The only thing Dave knows for sure about his internet purchasing patterns is that those U.S. accounts that are shipping to Indonesia always represent credit card fraud, and he won’t ship to them. Becker’s biggest internet problem is, in fact, credit card fraud, estimated to be ten to fifteen percent of orders received though, happily, not of orders shipped.
 
So here’s internet model number one- as an extension of an existing retail brand. With existing brand recognition and the infrastructure and inventory already in place, it’s an efficient, lower risk and cost strategy.
 
In most industries, we’re seeing existing brick and mortar retailers figure the internet out, using the same advantages Becker is using to make it work for them as an extension of their already successful brands.
 
Swell
 
Rumors about Swell being bought, running out of money, or going out of business are as common as fleas on a stray dog. Passing those rumors around seems like an industry obsession. But Swell is still here when most other internet companies aren’t and certainly at least some of the rumors are the result of the overall abysmal performance of the internet sector.
 
In response to all the rumors, Swell CEO Doug Palladini puts it this way: “Swell is not in imminent danger of running out of money. Funding was obtained consistent with a financial model showing profitability by the end of 2001
He didn’t seem inclined to answer questions like, “How much money do you have in the bank?” and “How much are you spending each month?” Well, I tried.
 
Enough of the fun stuff. Let’s get on to the business model.
 
The Swell internet site launched last October. According to Palladini, the business model, since its earliest presentation, wasn’t just about etailing- it always included the concept of brick and mortar retail. He isn’t prepared to be specific about how that will be accomplished or what the timing might be. Other revenue sources include advertising, catalogue sales (the second issue is out), and content syndication.
 
Although this is about surf, it’s a bit hard to talk about the Swell model without reminding everybody that the company includes the Monsterskate and Crossrocket sites for skate and snow boarding respectively. According to the Corporate Overview on the Swell website (www.swell.com), “Swell, Crossrocket and Monsterskate will be the definitive sources, regardless of medium, in the sports and cultures of surfing, snowboarding and skateboarding. Delivering rich content – news, information and entertainment – with extensive community applications and a robust etailing enterprises, Swell, Crossrocket and Monsterskate bring together action sports’ premier editorial talent to produce content of unparalleled quality and depth aimed at the core of each market, yet will appeal to the broader lifestyle audience as well.”
 
That’s a lofty goal. And expensive to achieve. Given the expense, how do you make money at it? Check out below the matrix of Swell’s existing or planned business opportunities.
 
Revenue
Source
                        Market>                                  Surf                Skate             Snow
                                                            Core/Lifestyle   Core/Lifestyle   Core/Lifestyle   
Etailing
Catalog
Retail Stores
Content Syndication
Surf Line
Advertising
 
Surf line only applies to surf obviously. The other revenue sources are potentially valid across the three markets. And they want to address both the core and the lifestyle markets as well. Five revenue sources times three markets is fifteen. Add Surf Line in the surf market. That’s sixteen. If you choose to look at core and lifestyle as related but distinct markets, that’s thirty-two possible market segments.
 
Not all these segments are really distinctive of course. There’s significant crossover and, Swell hopes, (oh god, here comes that word) synergies.
 
Here we are, I think, at internet business generalization number two. Few if any companies selling only to consumers will make it strictly by etailing. The internet is a tool- not a competitive advantage. Existing brick and mortar retailers have it all over etailers, especially if you’re selling fashion, and the brands control product supply.
 
Swell’s first challenge it to build its brand name. Or maybe three brand names, since they seem intent on doing the same with their skate and snow sites.
 
Its next challenge is to get customers. They are going to have to take them from somebody else, unless they believe that what they are doing creates new customers.
 
Time for internet business generalization number three. The internet does not create new customers. Okay, I know there was some kid in Northfield, Minnesota who stumbled on an etailer when he was checking out porn sites and bought something, but that doesn’t amount to a hill of beans, and I believe he probably would have bought it anyway at a traditional retailer.
 
Getting customers requires that Swell do etail as well or better than other etailers. I think they are doing surf content better than anybody, so I guess they might have a leg up there if you believe that people who come to look at content turn into etail customers. They have to do brick and mortar retail at least as well as existing retailers. They have to do catalog at least as well as existing cataloguers.
 
The third challenge is to get all this done. Somebody who’s in a position to know told me that opening a new surf shop requires between $180,000 and $225,000 in inventory plus $100,000 to $250,000 in up front expense. Just to pick the number in the middle, let’s say a total of $375,000 per store. They will have the same brick and mortar retail expense structure as any other brick and mortar retailer. They will have the same catalogue expense structure as any other catalogue retailer. They will have the same etail expense structure as any other etailer. And producing the killer content they have, which I agree is critical to their strategy, ain’t cheap.
 
To quote what I said a year ago, “Chaching! Chaching! Chachaching!”
 
Their final challenge is to make one and one equal three, or at least more than two. They are creating a brand and all these retail channels for the consumer (the same consumer everybody else has/wants) to choose from. Swell has to represent such a ubiquitous buying opportunity that the consumer who normally buys one hundred dollars of stuff buys more than that one hundred dollars. How much more? Don’t know. If that doesn’t happen, they are creating convenience for the consumer for sure but they’ve got a bigger expense structure that has to survive off the same dollar in sales.
 
But fundamentally, I like their “brand centric” concept. So do a number of important surf industry brands including Reef, Quiksilver, Billabong, Oakley and OP who have year long, not inexpensive, commitments to Swell. If they can get big enough fast enough, and create enough brand legitimacy, their different business pieces and revenue sources can feed off each other more than justifying the expense structure.
 
The idea is almost “Amazonian” in conception and I hope the market is large enough to support it. I wish Swell was doing this two years ago, when a recession didn’t seem imminent and money was easier to come by.
 
Hub360
 
When Hub’s business becomes active in the second quarter of the year Hub, as a business to business site, will allow retailers to browse catalogues on line, check inventory, place and track orders, access order history, and use online forecasting tools. Suppliers will be able to track retailer status. Hub President Dan McInerny describes it as a B2B marketplace for the action sports industry.
 
“It will bring together manufacturers, retailers, sales agents and industry organizations into one standard platform that allows them to better communicate, collaborate and conduct business,” he says.
 
Hubs customers will be the suppliers. There will be no charge for retailers to access the various supplier spaces once approved by the supplier. Hub will make its money the same way as somebody who runs a trade show. A company can have as big a presence on the web site as they want, and they will be charged accordingly.
 
Dan stresses that this is a service business that happens to do business on the internet. He’s helping suppliers by outsourcing certain tasks they have to perform, but that don’t represent critical competences to them. He believes Hub can do them better and cheaper.
 
Some suppliers seem to agree. Dan says he has letters of intent from over a dozen of the biggest companies in the industry representing apparel, footwear, optics, wetsuits and accessories. Their focus will be on surf and skate, because that’s the industry they know.   He hopes that once the concept has proven itself, they can license the idea and their proprietary software for use in other industries by people who know those industries.
 
Obviously, the suppliers won’t care if the retailers don’t come. Hub has signed letters from fifty top retailers saying they will use the site, giving the suppliers some assurance that the cash they pay Hub won’t be wasted. Dan indicated that Hub360 expects to be profitable in its first year if nothing happens except that the twelve suppliers sign on the dotted line.
 
Most suppliers may not have the time, energy, focus and/or money to develop their own site that can do everything the Hub site will do. The benefit to the retailer is that they won’t have to learn a different system and functionality for each supplier.
 
Of course, all the suppliers are already doing (well or not so well) what Hub will do for them. For better or worse, they have the systems and resources in place. Resistance to change can be a powerful force, and I’ll be interested to watch how retailers and suppliers adopt Hub’s system. Because the suppliers will still have to physically handle the product (that’s where much of the cost lies in the activities Hub will facilitate) I can imagine that the benefit from working with Hub will be from providing better customer service and having more accurate, timely information, rather than from overall cost reductions achieved.
 
At the end of the day will it work? The concept seems to make sense, but it’s a hell of a lot easier to evaluate an operating business model than it is a concept that has yet to see the light of day.
 
What’s New?
 
Well, I note that the internet stocks have gotten worse since I started writing this and several more companies have gone out of business. I guess I’m not inclined to change any of the conclusions I reached a year ago. Neither Becker, Swell, nor Hub360 are internet companies- they are just companies who use the internet. Their success depends, has always depended, and will continue to depend, on their ability to give their customers what they want- not on the internet.

 

 

Sell!? Maybe It’s Time to Think About It

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Here we all are, back from ASR and boy are we excited. More brands, more excitement, hype, orders, deals, three page ads in Skate Biz. People can’t get enough of skateboarding There’s nowhere for business to go but up, and it’s got to be even better next year.

 
Unless, of course, it’s not.
 
As a business owner, you have (or you ought to have) some goals that go beyond running your business every day. They may include spending more time with your family, buying an island in the Caribbean, working less hours, diversifying your financial position, or just getting off the damn personal guarantee for the bank loan. Clearly, these aren’t all financial goals, but they have a big financial component to them. Someday, it’s going to be time to sell your business, though it may not be now. If you were to decide that this was the time, when, why and how do you do it?
 
It was August 1996 when I wrote a column for Snowboarding Business on selling your company. Given how long it takes to sell a company, and the timing of the snowboard industry consolidation, I was probably about a year late writing it. As I write this article, I have a high level of confidence that nobody (but me) has an issue of SnowBiz from August 1996 lying around, so I figure I can plagiarize the hell out of that article.
 
A Cautionary Tale of Success
 
Doug Griffith left K2 in the early 90s to start American Snowboard Manufacturing (ASC). Len Hall joined him a little later. ASC grew and prospered. Scott came and offered to buy the company. For a bunch of money. They were going to make snowboards and be cool and would need their own factory.
 
But Doug and Len hesitated. “If it’s worth this much money now,” they thought, “How much more will it be worth after another year of growth?”
 
Doug and Len had been around a while and knew something about business cycles. They knew enough to realize that their crystal ball was just the slightest bit cloudy. One of them, and I don’t know which one, had the acumen and perspective to step away from the euphoria of running a profitable, exciting, fast growing business and say, “Well, the truth is I’m not exactly certain how long this ride is going to last.”
 
They sold.   They took the money and ran. Skedaddled. Laughed all the way to the bank. Now, I’m sure they had a little seller’s remorse initially as they worried about how much money they might have left on the negotiating table. But their remorse no doubt went away as the snowboard industry went into the depths of consolidation hell. Scott stopped producing boards for the US. They sold the factory to A Sport. I have no idea if it’s still operating.
 
Their timing of the sale was prescient. If they could buy and sell stocks like that, they’d own the world. If they hadn’t sold when they did, they would probably have had some hard times before they sold the place for not much, or just had to close it down. There are a lot of people who are (or were) in the snowboard business who weren’t as insightful/lucky as Doug and Len. They either got a lot less money (or just got debt assumed) or they went out of business with nothing to show for a lot of hard work, except maybe some creditors chasing them around.
 
I’m not claiming that skateboarding is like snowboarding and is going to go through the same cycle. Nor am I saying that everybody who owns a skateboard, or skateboard related business, should try and sell now. What am I saying?
 
  • Business cycles happen.   Someday, skateboarding won’t be as hot as it is now and your company, even if it’s exactly the same, will be harder to sell and worth less.
  • Getting a business ready to sell, and selling it, takes time. Want to have a deal done in a year and get the best deal you can? Start now. Anybody can sell a good company fast if they are willing to sell it cheap.
  • Figure out what you want to do and what you are trying to accomplish. Then decide if and when you should explore selling. It’s true that you can just wait for a buyer to show up. But you won’t be in control of the process and probably won’t get the best deal.
  • Business is a risk. Money in your pocket today is worth more than money in your pocket tomorrow. That’s why we have interest rates, a measure of time and risk. Given that time and risk, and the difference between what you can sell for today compared to tomorrow, it might not make sense to wait. Especially if you expect valuations to decline. That is, a company might be worth more today than tomorrow even if tomorrow’s company was bigger and more profitable.
  • Supply and demand matters. If times should get hard, there will be lots of sellers and fewer buyers. If you sell, you want to do it when you’re the only one for sale.
 
If you’re going to sell your business, let’s make sure you do it right and for the right reasons. You can maximize your chances of success, and minimize wasted time, by focusing on what I call the five “Gets.” Get real, get a goal, get ready, get agreement, get help. 
 
Get Real
 
It’s as predictable as the sun coming up in the morning. The owner believes in his business so much that his perception of what it is worth to a buyer is, in my experience, almost always out of line. A sophisticated buyer won’t ignore your projections, but he will discount them. He will recognize the growth potential of your business, but balance that with a realistic assessment of the competition. He will want to know very specifically why you have been or will be successful. He will base his offer to you on the potential return he objectively thinks he can earn compared with other investment opportunities he has. He will value your business in ways that are standard for valuing companies in this or similar industries.
 
He will recognize that your growth depends on increasing working capital investment in the business and that he, not you, is the one who is going to have to take that risk. He will admit that there are some synergies in combining the two companies, but will believe (probably correctly) that his organization will be more responsible for achieving them than yours. Accordingly, he will be reluctant to pay you for them. He will understand that the business is dependent on you and perhaps a few key managers, and will be concerned with your motivation once the deal is closed. So if you expect to receive the value you perceive in your business you should expect to do it in an earn out.
 
He will look closely at your historical financial statements. They will frequently be the single most important (though not the only) factor in determining the price he is willing to offer and no amount of explaining, rationalizing, projecting or shucking and jiving will change that.
 
So, to begin, make a realistic estimate of the value of your company. There are many ways to value a company. None of them give a right or wrong answer. But when you are done you will have a reasonable range of value for your company. You may also want to value it under different scenarios. For example, your company may be worth more as part of a larger organization because your sales will no longer have to support, on a stand-alone basis, all the overhead expense you currently have.   Value it, in other words, as the potential buyer would to get insight into his thought process.
 
This knowledge is a powerful negotiating tool. Make sure you have it.
 
Get A Goal
 
What do you want to accomplish by selling (besides get money)? What do you want to sell; assets or equity? How do you want to get paid? Will you take stock? Cash at closing only? Is an earn out acceptable? What will be your role be in the business after the deal closes? For how long? How hard do you want to work following the sale? What is the minimum price you will accept? 
 
There is no way to know if an offer is a good one or a bad one unless you know what you are trying to accomplish by selling the business. You always want the other side to put the first offer on the table, but you never want them to be able to control the negotiating process because you haven’t thought long and hard about what a good offer looks like.
 
The converse is that you must also know when to walk away. If you are desperate for a deal, you’ll get a bad one.
 
Get Ready
 
From the time the first contact with a serious purchaser begin, it you can generally expect it to take six months or longer to close a deal. But preparations may begin literally years earlier, when the owner concludes that her best long-term strategy is a sale of the business.
 
Try and increase awareness of your company among potential buyers. You can do this, for example, by being active in the appropriate professional associations. Get articles about your company published in trade journals.
 
Have systems that prepare consistent, accurate financial statements and information that can be easily verified or audited. It’s a critical element in determining a purchase price and an important indication that you are a competent business person the buyer can rely on to operate the acquired business.
 
Clean up your balance sheet. Get rid of old inventory and write off uncollectable receivables. It’s never a good idea to fool yourself about the value of assets, and you won’t fool a potential buyer. But by not making these adjustments you may find your own competence and credibility questioned during the acquisition process. “What other surprises are hidden here?” wonders the potential buyer.
 
Have a current business plan that validates your strategy. Make sure the warehouse is brightly lit and painted. If there’s any tax issues, litigation or disputes with employees out there, settle them.
 
You can’t put your best foot forward if it’s stuck in the mud.
 
Get Agreement
 
This may seem a little obvious, but it’s a good idea if all the shareholders agree with the decision to sell the business and have a common understanding of what constitutes an acceptable deal. Legally, it’s possible to sell a business with the approval of less than 100% of the ownership. But in a private company, with only a few shareholders, it can be difficult. A buyer may be concerned about litigation by a minority shareholder. If a dissenting shareholder is expected to continue to work for the acquired company, an uncomfortable operating situation can result.
 
While you can’t please all of the people all of the time, it’s usually a good idea to try and get acceptance (enthusiasm would be nice) from other key stakeholders. These may include customers, suppliers and key employees. They will all be asking “How is this going to affect my relationship with this company?” and you need to have an honest and accurate answer.
 
Get Help
 
Sale of a company demands an accelerating time commitment from the owner. My experience is that as the deal gains momentum, you can either manage your business or work on the deal. There’s often not enough hours in the day to do both well.
 
Let’s look at a typical scenario. You’re selling the business you built. It’s your baby. You’re proud of it, and are far from objective. To make it more interesting, you’re entering into a process with which you have little or no experience. And this deal is potentially the most important and lucrative transaction you have ever entered into.
 
Let’s say that on the other side of the table is the representative of a larger company. He’s been through this before and knows what to expect. At the end of the day, whether or not there’s a deal, he gets paid the same and goes on to work on the next deal. He’s completely dispassionate and may not have any stake in the outcome.
 
Somewhere in the course of the negotiations he looks at you and says, “I assume you’re willing to warrant that there are no outstanding disputes with any federal, state or local tax authorities except as disclosed in appendix A of the agreement?”
 
Now, a good response, assuming it’s true, is something like “I’m willing to warrant it to the best of my knowledge,” but if you’ve never done this before, you might not know that. Happily, you’ve got an attorney sitting by your side to handle those kinds of issues.
 
But if he’s the attorney who drafted your will, helps you collect from delinquent creditors, or kept you out of jail after the IRS audit, he may be waiting for you to speak up. Your attorney must be experienced in representing sellers of business.
 
Right now, there are some skateboard industry companies that are a lot more valuable today than they will be in a year or two. I don’t know who they are, or whether their decline in value will be due to industry changes, competitive pressures, or operational mistakes. But right now, I’m not aware of a single successful skateboard, or skateboard related, company that is for sale. One that was might command a lot of attention and an attractive price. I’m not saying, “sell” but I do suggest you think about it. If you decide this is the right time, make sure you do it right. You may only get one chance.