Everybody Needs a Balance Sheet; Notes from the Conference Retailer Panel

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It’s not that this group of retailers, speaking at the Transworld Industry Conference in Banff, was wrong in the comments they made about how suppliers work with them. God knows I wouldn’t want to be a snowboard retailer and, in the words of one participant, it may indeed be a good year if you manage to pay your bills and spend 100 days on the hill.

 Among the things retailers said they needed were better margins, more thoughtful distribution from suppliers, support for stores that hold prices longer, discretion in managing warranties, better communications, and complete orders shipped on time. Judging from the comments after the session ended, had it been a supplier panel, the suppliers would have spent the whole session complaining about not getting paid on time.
 
“Nobody’s right, when everybody’s wrong,” somebody sang a long time ago. In this case, everybody’s right, but it doesn’t seem to matter. I asked the first question when the session ended: “Is there anything the suppliers are doing right?” I didn’t get any specific, positive answers.
 
Why can’t we all just get along? Suppliers should get paid on time, and retailers should get complete orders on the dates requested. It would be good for everybody and for the industry. It would even be good for the consumer. Here’s why I think it’s so hard to make it happen and a few things you might be able to do to improve the situation.
 
It’s the Balance Sheet
 
It isn’t any secret that this hasn’t been an easy industry to make money in whether you’re a manufacturer, brand, or retailer. The result is a lot of weak balance sheets. Without getting into the gory details, that makes it hard to cash flow your way through a season. From the manufacturer, to the brand, to the retailer, almost everybody needs somebody to finance them. And the cheapest source of working capital is almost always your supplier, no matter where you are on the food chain.
 
If your balance sheet is weak, finding that financing can be tough, or at least expensive. Often, it’s both. I have one client who, because of his weak balance sheet, had financing costs that were nearly ten percent of sales. That’s a huge number in most businesses. It’s especially big when margins aren’t that good to start with, all your business has to be done in four months, and marketing costs are high. The way you finance your business can and does make the difference between a profit and a loss. No wonder everybody tries to get the other guy to pay for it.
 
The bad news is that it’s sort of a zero sum game- what one side gets, the other side loses. No wonder the retailer panel had an “us against them” feel to it and was so focused on complaints by both retailers and, after the presentations, suppliers.
 
What can we do? I’ve got no magic wand for weak balance sheets or seasonality. But I do think there are a few things we might do to at least improve understanding between suppliers and retailers and maybe make things work a little smoother.
 
Warranties
 
Are a pain in the ass for everybody, but I doubt they are going to go away. We tend to spend a lot of time negotiating what is and what is not a warranty, and how it should be managed. Retailers want total discretion, authority, and support from the supplier in managing them. Suppliers aren’t quite sure they can trust the retailers to deny an unjustifiable claim from a good customer if they know the supplier will back them up and replace the product.
 
How about if suppliers and retailers negotiate a warranty allowance equal to some small percentage of sales? It’s the retailer’s to use as they see fit, with the caveat that they have to return the warrantied product, or maybe just review it with the rep in the store, so the supplier can see it’s being put to good use. The bad news is that it would be a direct cost known at the beginning of the season. The good news is that if it worked right the warranty process would be reduced to an accounting entry, hopefully eliminating a good part of the hassle that goes with handling warranties. That may not be direct, visible cost like a warranty credit, but it shows up in employee time, phone calls and inventory management.
 
What percentage should it be? What if you, as a supplier, proposed just a bit less than what you already know it costs you to handle warranties every year anyway? Try it with just a few key accounts to start with.
 
Invoice Due Dates
 
Everybody wants to be paid early and to pay late. Me too. I have no suggestions for changing human nature, but I do think there’s a need for clarification. When I sat in the supplier’s chair, I always thought (hoped?) that if an invoice was “due” for payment January 15th, that was when I should have the money. Silly me. I have the feeling many retailers act as though that’s the date when they need to begin to consider paying the invoice.
 
What if you offered accounts an extra one percent discount the following season if all their payments were received by the due date? What if, with your largest accounts at least, you actually discussed what the “due date” meant and agreed on the day you’d have the money, not arbitrarily setting the due date as 120 days from invoice date, but on a date, perhaps a bit more or less than 120 days, when payment seemed to be possible and make sense.
 
Okay, okay, I know no agreement means anything if the retailer doesn’t have the money to pay and the supplier can’t afford another one percent discount. It’s that balance sheet thing again. Still, it couldn’t hurt to have similar expectations as to what a due date is.
 
Communications
 
With email and the internet, there’s probably no excuse for retailers and suppliers not to know what the other knows about inventory availability, shipping, and order status. Even if the message is, “We don’t know,” which is the case more often than you would think. With as much high quality, similar product as is out there, communication should be a source of competitive advantage for companies who do it well.
 
Retailers and suppliers can improve communication by walking a mile in each other’s shoes. A retailer might invite managers from key suppliers for a discussion about managing open to buy. Lay out a scenario where shipments come in incomplete and either later or early than what was specified. How would they merchandise with an incomplete shipment? When would they cancel and order another brand, if it’s available? What do you do when the supplier can’t tell you when it will be there?
 
Suppliers might request retailer’s insight into working with factories. Want the best prices? Let’s reduce the breadth of product lines and let the factory make the longest possible production runs. Oh, but you also want complete mixes in four different shipments in lots of new colors? Well, then the factory has to stop and start production so that we have some of all sizes and shapes of boots, boards, bindings, or outerwear to send you. There go the lower prices from efficient production. Unless we have them make it all really early and ship it to us. But there’s that balance sheet thing again. Who’s going to finance that inventory while it’s sitting around?
 
Our bank only loans us forty percent of the value of inventory, but they’ll finance seventy-five percent of current receivables, so we’d really like to ship it all to you retailers right now.
 
Distribution
 
The retailer, of course, wants an exclusive territory extending 300 miles in all directions and doesn’t want anybody who discounts before Easter opened. The supplier wants to open everybody his major competitors are in and see his existing dealers increase their orders significantly every year. Retailers looking for any kind of geographic exclusivity probably need to work with smaller brands. Option, for example, has built dealer relationships that involve a certain level of exclusivity. They have decided that full price sell through and higher margins for themselves and their dealers is more important than the highest possible growth rate. At the other extreme, Burton has the market position, and advertising and promotion programs to be aggressive with distribution.
 
There will always be a distribution conflict between suppliers and retailers. My suggestion is that both focus not just on sales, but on gross margin dollars earned, as a way of measuring the success of their relationship with the other.
 
I hope that at the retailer panel at next year’s Industry Conference, the discussion can focus on what we can do better to work together, not just on what’s wrong. I also hope there’s some good snow.

 

 

I Think I See a Plan. News From the Ski Industry Summit

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Okay, what was I doing at the Ski Industry Summit (formerly known as Ski Week) and why am I writing about it for Snow Biz?

Anybody got a problem with some early season turns in Vail when there’s hardly anybody here? Didn’t think so. Also, there was an open bar each night.
 
But aside from the obvious hedonistic reasons to show, the winter resort business has to do some things differently. Baby boomers are showing up less as they get older, and kids and younger people, overall, are either doing something besides coming to winter resorts or trying it, not liking it, and not coming back. The retention rates for beginners basically suck. If as an industry (and I mean the winter sports industry, not just the winter resort industry) nothing happens and demographic trends and retention/conversion rates continue on their present source, the National Ski Areas Association (NSAA) projects that total visits to resorts will drop 27.2% from 52.2 million to 38 million in 15 years. 
 
Forget the ski versus snowboarding, them versus us, “they don’t get it” stuff. If present trends continue, there will be fewer resorts around, less money to spend on half pipes, terrain parks, new lifts, and developing new runs. Snowboard hard goods and apparel sales will drop. So it’s not just their problem. We are part of the winter sports business and snowboarding’s success is related to the resorts’ success. As far as I know, nobody has figured out a way to snowboard without a mountain.
 
The Ski Industry Summit got three hundred people together to talk about this issue from December 3rd through 6th. This is hardly a new issue, but there was a sense of urgency and an attempt to focus on specifics that was positive, refreshing and to some extent overdue. People were interested in specifics.
 
In the same study that suggested what might happen if we do nothing, NSAA showed that if the industry can increase the number of beginners by 6% each year (subject to some statistical limits that keep growth rates from getting ridiculous) and boost the conversion rate of those beginners by 1% a year, we can have 69 million visitor days annually by 2015.
 
There was general agreement on the need for action, at least among the attendees. Obviously, this kind of conference is self-selecting for people who already recognize that need. And there also seemed to be a consensus that concentrating on getting more people on the slopes and working to make them stay was an appropriate focus.
 
Formally and informally, people had different ideas about exactly what should be done by whom and what the opportunities and obstacles to success might be. There wasn’t an overall program presented. Still, from the studies I’ve seen from SIA and NSAA, the comments made at the conference, and my own experience working with companies that had to change, there was an implicit program that came out of the discussion. Recognizing that I don’t know much about running a mountain resort, here’s what I think I heard the elements of such a program might be.
 
Every Mountain is Different
 
There are 300 or so people out there who use to own snowboard brands who would have killed for the competitive differences that exist among winter resorts. Each is unique, and can utilize its uniqueness in attracting and retaining customers. But how is it unique? Step one is to find out. I don’t mean from anecdotal evidence, informal surveys, or perceptions from 15 years ago. An ongoing program of carefully structured, unbiased, thoughtful market research is required.   I know it costs money, is a pain in the ass, and leaves you with more questions than you had when you started. But you still have to have that the information.
 
Marketing Schizophrenia
 
Male or female? Skier or snowboarder or neither? Day tripper or destination visitor? Young or older? Rich, or not so rich? Real estate buyer? As an industry, it seems hard for the resorts to know where to focus its marketing efforts, although, of course, individual resorts may and often do have a clearer focus. But it’s never as easy in the skateboard business, where north of 90% of the customers are male and between the ages of eight and seventeen. What can resorts do to get that kind of focus?
 
Teaching and Retention: The Customer Experience
 
My perception, reinforced at the summit, is that the winter resort industry generally agrees that the battle has to be won by getting beginners to the slopes and motivating them to come back and by attracting back lapsed participants. There’s no need to market to core participants. They show up no matter what.   What has to happen so that the others show up?
 
They have to have a good experience. Short lines. Rental boots that fit. No confusion about where to go. Warm and dry. Access to bathrooms. Minimal caught edges during lessons. There are, no doubt, 100 others I haven’t mentioned or don’t know about. What’s the magic of this? Rich or not so rich, male or female, skier or snowboarder, young or old, the visitor to a winter resort wants this kind of good experience. They want to have fun. There shouldn’t be a penalty that can border on a fraternity hazing to become or remain a snow slider.
 
Magically, this is a big step in managing the winter resort’s Marketing Schizophrenia. The confusion caused by the apparently irresolvable market segmentation problems and the conflicting demands of each segment is suddenly dramatically diminished. It may not be as conceptually simple as being in the skateboard business, but suddenly a resort can say, “All our customers want this!”
 
Ultimately, customers always get what they want- from somebody. How shall we give it to them?
 
Management Commitment
 
It starts at the top, and there’s never been a truer cliché. Well, maybe one. I’ll get to it in a minute. If you run or own a winter resort (or any other business for that matter) and you think that your future success, and maybe your survival, depends on doing some things differently, you better be leading the charge. If you don’t- if you aren’t involved and seen to be committed every day- the organization won’t change. The customers will get what they want somewhere else.
 
Andy Clurman, President of The Skiing Company, suggested that each resort should appoint a Director of Learning and Retention, or some such title. Great idea. I’d add that the new Director should report directly to the General Manager or President of the resort and have instant access to them.
 
Nuts and Bolts
 
ASC reported at the Summit that the conversion rate for beginners who participated in their new Learn To Ski program was 30%. That program emerged from a complete reevaluation and restructuring of every detail of their teaching program and from measuring the results. It had nothing to do with running ads or showing people jumping off cliffs or selling the latest and coolest technology. It required changing the compensation structure. It meant a two-day seminar where instructors were turned, initially kicking and screaming it sounds like, into sales people. It meant new facilities and processes. No detail of the teaching and conversion process was left unexamined.
 
Opportunities- Not Problems
 
ASC Chairman Les Otten, addressing the Summit, said, “We don’t have a problem- we have an opportunity.” That’s the even truer cliché I mentioned earlier.
 
I think perhaps part of the audience did take it as a bit of a cliché. I didn’t get a chance to ask Mr. Otten, but here’s what I think he meant.
 
When a company needs to change, it resists. Of all the company’s I’ve worked with, I can’t think of one where that wasn’t the case. Inevitably, in addressing the issue, they try to do what’s worked in the past to fix the problem. “More of the same,” no matter how rigorously applied, doesn’t usually work. It also grinds you down. Pretty soon, if all you do is deal with problems you can’t solve, life sucks. It’s depressing, demoralizing, and no fun. There’s no way to succeed. And the worse it gets, the harder it gets to change. You trap yourself in an endless downward spiral.
 
Unless you’ve got an opportunity. In which case, you can create a positive environment, move forward, have fun, give credit, do good things and celebrate a little bit. And by the way you may have accidentally taken a step towards solving that problem that just wouldn’t go away. Pretty soon, you don’t have to “step outside of your box” to use another cliché. You’ve created a new, bigger and more comfortable box to be in.
 
Mr. Otten and the ASC management team saw an opportunity. It just so happens that it helps solve a problem.
 
Finance and Factories
 
General Motors hates it when the production line slows down or stops. They don’t want to repaint fenders. They can’t stand sending back parts. It drives them nuts when a poorly trained employee connects a wire wrong. They moan with every warranty claim.
 
Because every one of these things costs them money.
 
People aren’t cars. Still, the process by which a resort moves a beginner, or any customer for that matter, through the process of getting to the resort, getting equipment, learning, getting on the hill, and committing to come back is a bit of a production line. And people yell louder then cars on an assembly line when you connect their wires wrong. Every customer who’s boots don’t fit, who can’t find where the lesson starts on time, who gets wet and cold in the middle of the lesson, costs you money due to the disruption of the process. Not to mention potentially a future customer.
 
I love it when the marketing and the financial strategy seem to dovetail. I’ve discovered that usually an indication that a strategy makes sense. The operationally oriented approach that the Summit suggested is required to attract and retain snow sliders seems to make financial sense. Not only because of the medium and longer-term impact on visitor days, but because it requires an efficient (i.e., customer friendly) operation that saves you money right now. I also wonder how it might impact your spending on advertising and promotion over the longer run. I note from SIA data that 87% of visitors to winter resorts have internet access. If you’ve better identified your customer, have made it easier for them to come and have fun and have their email address, perhaps some of your other marketing expenses can be reassessed.
 
I don’t want to underestimate the financial implications of some of the ideas presented at the Summit. It costs money to undertake some of these initiatives and cash flow is a hard thing in all parts of the winter sports industry. Still, I can probably guarantee that resorts that don’t start now will have a harder time starting later.
 
What can retailers and suppliers do? You share some responsibility for making sure people know how much fun we have on the mountain. If you can equip them right, and the resorts can make sure they have a positive experience, maybe we will be looking at 69 million visitors in 15 years.

 

 

Benefiting from Recent Industry Initiatives; It’s Up to Each of You

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By now, you should all have seen SIA’s study “Growing the Snow Sports Industry” and NSAA’s growth model for the resort business. They don’t claim that any industry initiative by a trade association is the salvation of the winter sports industry’s issues of participation and profitability. They say, if not exactly this way, “It’s up to each of you.”

From the 20,000 foot level, where the oxygen is thin, here’s what they said, how you can use their work, (whether you’re a brand, a retailer, or a resort) and why it’s such a hard thing to do well.
Industry Initiatives
SIA commissioned Growing the Snow Sports Industry: Marketing Analysis and Strategy for Breaking Down the Barriers. NSAA created a growth model for the snow resort industry based at least in part the conclusions of the SIA study, which you should also make sure you see.
SIA and NSAA did not position their studies as “industry initiatives.” They didn’t make any claims that their programs offered industry wide solutions. They acknowledged that previous industry initiatives hadn’t worked, or hadn’t had the funding and support to be implemented consistently over a long enough time frame.
They said, and this is the most important thing they said, here are some facts and ideas-It’s all up to you. We can’t fix the industry’s problems, but we hope we can give you some guidance and support as you do it.   They are exactly right.
I think that industry initiatives only work, or appear to work, when you don’t need them. When there is lots of growth, lots of money and less competitive pressure, everything seems to be working. In fact what’s going on is that consumer demand and cash flow can cover up a lot of shortcomings in a company’s strategic position.    When that changes, focus often becomes internal and understandably a bit more selfish. Support for industry initiatives, both in terms of time and money, is harder to come by.
In any event, in a consolidating or mature industry there is no rising tide to lift all boats. It’s up to each company to find their market position and respond to the particular needs of their carefully identified customers. The individual companies in addressing their particular circumstances can almost certainly put the resources that might be committed to an industry initiative to better use. That’s just business- in any industry.
What They Said
NSAA proposed focusing on two things; getting a 6% annual increase in beginners and increasing the conversion rate of beginners from 15 to 25 percent with the goal of increasing skier [their word] visits from 52 million to 67.2 million by in 2015. In their words, “The success of this formula for growth…lies not in any national campaign, but rather in the dedicated efforts of individual area operators consistently implementing achievable trial and conversion goals that make sense for their resorts.”
They go on to say that, “…this was developed with input parameters that reflect the national environment. At the regional level and at the level of the individual resort, the underlying dynamics of the Model change and, therefore, the specific goals also change…The great strength of NSAA’s approach toward growing the industry over the next 15 years is that it encourages individual self-gain and entrepreneurial spirit to achieve collective benefits” (Quoted from the September 2000 issue of SAM magazine, page 10. NSAA’s Model for Growth: What It Is, and What It Is Not. By Nolan Rosall, RRC Associates and Michael Berry, President, National Ski Areas Association).
Good strategy is the process of defining where you are, envisioning where you want to be and when, and filling in the time in between with appropriate tactics.   That’s what NSAA is suggesting to each of its individual members.
The SIA study recommends that each member company take steps appropriate to its specific circumstances and opportunities. Like NSAA, the SIA study is meant to support its members, not kick off any national campaign.
It starts by stating that “We must:”
  • Develop a unified understanding of the marketing problems and opportunities
  • Identify the market segments that hold the greatest “acceleration potential”
  • Focus our marketing resources on those productive audience segments
  • Apply those resources in an integrated, efficient manner
All true. For any business in any industry any time and I wouldn’t expect anybody to be even slightly surprised by that. The devil, as usual, is in the details.
They went on to “explode the industry myths that bind us to the obsolete remedies of the past.” Simplified, the five myths are:
  • That participants aspire to be “extreme.” They don’t. They are in it for the wholesome, lifestyle activities.
  • That the dominant barrier to increased participation is increased cost. It’s more complex than that and involves time, quality of experience and proficiency.
  • That we have a big opportunity with underserved populations who have never been on the hill. Maybe not. They have to be lured to the slopes, sold on winter vacations and cold weather activities, and convinced to adopt an activity their peers don’t participate in.
  • There’s a single advertising message that will work for the whole industry. There isn’t. The consumer base is too diverse.
  • That awareness of various “make it easier” technologies like shaped skis and of the technology’s benefits are high. Nope. Most are unaware of its existence or benefits.
After that we’ve got six key findings.
  • There is a strong relationship between proficiency, enthusiasm, participation and sales.
  • The industry is bleeding new triers and participants of low proficiency.
  • The biggest opportunity is in reactivating lapsed participants and upgrading light and moderate users.
  • New technology can produce marketing leverage.
  • Children can be a barrier or a motivator to increased participation.
  • Introducing consumers to skiing/boarding young and keeping their loyalty can have an exponential impact on revenue.
Based on this, they suggested a “new” approach to the market that included:
·         Looking at snow market as the sum of many segments- not as a mass market.
·         Communicating the brand snow sports in terms relevant to each of these customer segments.
·         Allocating marketing resources based on the potential value of each segment.
They go on to suggest more specific strategies and tactics for retailers, suppliers and resorts.
I’m sure most of us recognize that this “new” approach is old. It represents a pretty traditional market strategy that is new to winter sports only because it was, historically, unnecessary for success or, more recently, resisted. Why is that?
Déjà vu All Over Again
It doesn’t matter what industry we talk about. In periods of difficult transitions, all companies tend to react the same way. Specifically,
·         They do what they perceive to be in their own (short term?) best interest. They don’t ask, “How can we help the industry?” when they are dealing with gut renching issues of change and survival.
·         They resist change and tend to do “more of the same.” Change is uncomfortable and most of us dislike stepping out of our comfort zones.
·         They have a hard time just recognizing the new environment they are operating in and frequently don’t until they are slapped upside the head.
·         They focus on tactics that are responsive to short term pressures rather than identifying and reacting to critical strategic issues.
·         Typically, an outside change agent (the bank, big customers, a consultant or new CEO) is required to motivate the change process.
Before I’d ever heard of a snowboard, I’d worked with companies in banking, pharmaceuticals, light manufacturing and retail where this was the case. I can assure you it’s true in snowboarding and in all of winter sports as well.
Many of the people making skis and running resorts have been doing what they do for a long time. There’s a tremendous amount of inertia and continuity in the industry. With such long histories, established relationships, and common perceptions firmly entrenched in a comfort zone, it can be difficult to make the kinds of changes the industry required.
Those of us who got into action sports through snowboarding have the same issues, though perhaps not to such an extreme if only because we haven’t been involved as long. Like skiing in another era, snowboarding could rely in its early years on the enthusiasm of its youthful participants to overcome issues of expense, poor facilities, lousy equipment and inconvenience. If, as an industry, we didn’t handle our consolidation as well as we might have, we can plead that it happened too quickly to react to, and we’d be partly right.
Now, we’re getting older (which is fine given the alternative). Larger corporations, most of who are also in the ski business, dominate snowboarding. The snowboard, ski and resort industries increasingly have common issues, interests, and relationships.
What You Can Do
One of those common interests is making money, which has been a hard thing to do for a lot of organizations. I know we’re also interested in the lifestyle, and the product, and the experience, and supporting the sport, but if there isn’t enough money made, we won’t be here to do that. Everybody reading this knows somebody who’s committed to snowboarding, use to be in the business, and isn’t anymore as a result of financial issues.
SIA and NSAA have now provided their members with a justification and a framework, rigorously validated through actual data, for changing the way they do business in response to new competitive conditions. But they can’t (and have learned they can only get in trouble if they try to) do it for you.
That’s all they can do. A basic blue print is in your hands.   Adapt it for your organization and go and do it. You can’t “fix” the industry anymore than SIA and NSAA can. But you can sure take a shot at fixing your piece of it. Bottom line? Marketing, and customer identification and segmentation, not discounted season passes, longer terms for retailers, and discounting at retail that starts in November are the answer if we have the patience and longer-term perspective to do it consistently. Step out of your comfort zone.

 

 

Tulips

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I walked out of ASR feeling positive about skateboarding and its market and will discuss why below. Still, when things look too good to be true, it’s been my experience that they usually are and I’m as susceptible to the hype as the next person. Let’s start, then, with this cautionary tale from Edward Chancellor book “Devil Take the Hindmost- A History of Financial Speculation.” 

 
Tulip Mania
 
“Conditions in the Dutch Republic in the 1630s were propitious for an outburst of speculative euphoria. It was a period of rising commercial optimism, owing partly to the final extinction of the Spanish military threat and partly to the booming Dutch textile trade, which profited from the turmoil in Central Europe at the beginning of the Thirty Years’ War. The Amsterdam bourse [stock market] had moved into a new building in 1631. The East India Company was profitably developing its settlement in Batavia and its shares rose faster than at any time during the century. House prices were also climbing sharply, producing a boom in the construction of suburban mansions. The Dutch Republic lost some of its Calvinist austerity as its people, who enjoyed the highest incomes in Europe, became a nation of consumers. In the tulip, they found an object which enabled them to mix their love of display with the avid pursuit of wealth.”
 
Tulip bulbs were classified according to the flower colors. They were given military titles that reflected their position in the bulb hierarchy. Unknown at the time, tulip colors and patterns are affected by a virus that attacks the bulb. You never knew what pattern or colors might result. This led itself to a speculation that was essentially gambling. 
 
In late 1636 and early 1637, at the height of the market, no actual deliveries of tulip bulbs took place. A tulip futures market known at the windhandel (the wind trade- say no more) appeared. At the peak, the combination of the windhandel and paper credit “created a perfect symmetry of insubstantiality: Most transactions were for tulip bulbs that could never be delivered because they didn’t exist and were paid for with credit notes that could never be honored because the money wasn’t there.”
 
Average annual wages in Holland were from 200 to 400 guilders. A small town house cost 300 guilders. Bulbs at the top of the tulip hierarchy sold for thousands of guilders. There were examples of prices for a pound of bulbs going from the equivalent of one month’s pay to five year’s in a week.
 
On February 3, 1637, the market crashed. There were no more buyers, and existing contracts were rejected. Perhaps it had something to do with the fact that spring was coming, and most of the bulbs promised for delivery didn’t exist. The litigation dragged on until the following year, when it was decreed by the government that contracts could be settled for 3.5% of their value.
 
We Are Not in the Tulip Business- Not Exactly
 
I’m not claiming that tulips are like skateboards and skate shoes. People are delivering real products in return for real money. Obviously, there are more differences among skate decks and shoes than just color, though I can’t think of many right off the top of my head. Oh yeah- who the team riders are. See, there’s a difference.
 
Nobody will ever pay a year’s wages for a pair of skate shoes, though it seemed like some prices were tending to go up at the show in spite of the fact that sixty companies were offering footwear (not all skate shoes) up from forty-two at the last show. Eighty-two companies were selling what was classified as “Skateboard Hard goods.”
 
And nobody is going to sell to somebody for future delivery that they think can’t pay, though the use of terms to retailers appears to be growing.
 
This seemed like the busiest ASR I’ve been to in years, and the most business like. Lots of order writing going on. People with things to do- not just hanging around. It was, in a word, purposeful.
 
That’s one of the things that makes me optimistic. I remember the 1995-96 Snow Industries America Trade shows in Las Vegas, where snowboarding ruled and would never die. But that show had the feeling of people energized by hope and expecting to find the deal that would save them. Snowboarding’s imminent consolidation was a big shared secret, and nobody wanted to tell Emperor Snowboard to go and get some clothes on.
 
This ASR was about doing business, not looking for a deal to save your butt. Most of the time when the people in booths told me the show was going great, I believed them. This was a show where just moving through the aisles was a challenge if you were in a hurry.
 
Where at the last ASR, all the shoe brand offerings looked the same, this time I saw some visual differences among brands that offered the possibility of their establishing distinct personalities- call it different signature looks. Easy to copy, of course.
 
This isn’t to say that there isn’t going to be a period of consolidation in the skateboard industry at some point in time. There are too many companies selling trying to sell “me too” products. If you don’t have an established brand name or a product that can be seriously differentiated, this is the wrong time to offer a new brand in the skateboard industry.
 
But here we are with a seriously strong economy, very favorable demographics, woodshops unable to meet demand, skate parks popping up like mushrooms, skate styles influencing shoes and clothing in a way that has expanded the market to a whole lot of non skating people, and skateboarding being exposed to and accepted by a much larger group of people than ever before. What can go wrong?
 
Sector Rotation
 
In the stock market, they call it sector rotation. The industry groups that lead the market change. Not too long ago, it was the internet stocks.   A year or so ago, the health maintenance organization stocks were dead last. Now they are among the leading sectors. The issue is never if a sector is going to crash, or leap to the top. It’s when- and how long it stays down- or up.
 
Action sports is powerful right now for a variety of reasons we all know. It’s a strong market and seems likely to stay that way. But what sectors will lead it?
 
Inline skates had their day. So did snowboarding. So did surf. So did ski. Now it’s skate. For how long? Normally, I’d say until all the companies are making quality, nearly identical products and the basis of competition has been reduced to price and marketing, the consumer figures that out and the hype gets massive. But we’re already there. And it’s possible that by next ASR I’ll be hoping nobody remembers that I wrote an article suggesting that skateboarding might have some legs.
 
Skateboarding has broken out. It’s becoming legitimate without losing too much of its edge. Compared to most other sports (with apologies to those who object to that word) it’s cheap and convenient to participate in. The related shoes and clothing can be and are worn by nonparticipants unlike, for example, snowboard boots. The hard goods companies continue to support, promote, and maintain the core of skateboarding even though this may prevent them from participating in the growth of the larger market.
 
Somehow, skateboarding has made a meta-change. It has repositioned itself and become legitimate to a much larger market without letting itself be changed too much. I wish we could claim it had been an active act on the part of the industry; a strategy we chose to implement.
 
But it wasn’t. We were lucky, or maybe deserving after a long period in the wilderness. If any single event was indicative of this change (I hesitate to say responsible for, though I’m tempted) it was the changing of the liability laws that unleashed the skateboard park building boom. So if you aren’t a member of IASC, join now if only to say thanks to Jim.
 
Strategies
 
Retailers have already figured it out. Their hearts may be in skate, but when it’s some other action sport the customer is asking for, they will be offering the goods related to that sport. Much of their sales are higher margin shoes and apparel to non-participants. The clothing manufacturers, by and large, aren’t tied to a single activity/sport. Their customers are the action sports crowd- participants or not- who are tied into the lifestyle, music and attitude. The shoe brands are actively expanding their product lines to include footwear in addition to core skate shoes.
 
The skate hard goods brands have a tougher road to follow. Their focus is on the core of skateboarding, and that focus has a lot of responsibility for skateboarding’s continued strength. Yet even in this record year, I suspect (can’t prove it) that a large hard goods manufacturer is doing, say, $25 million in sales. Compare that to the sales and growth of clothing companies. Even the leading skate shoe companies are several times that size.
 
To really take advantage of market conditions, skate hard goods brands need to figure out how to move beyond their traditional market. But it may be that their movement beyond the core hard goods market if it occurs, will signal a market top in skateboarding. That’s a bit of a conundrum.
 
Schizophrenia
 
Is skateboarding going to crash or continue? Obviously, I feel strongly both ways. I think we’ve got a bit of a run ahead of us, but being bigger and having an established brand is going to be critical for success. Right now, fast growth and cash flow can paper over a whole host of competitive shortcomings. And no industry is immune from business cycles.

 

 

“I Don’t Think We’re In Kansas Anymore, Dorothy.” Skate Retailers in the Lifestyle Market

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Let me start by telling you, in no particular order, some things you already know.

 
1)            Margins on hard goods suck, but carrying them draws customers in and legitimizes you as a skate retailer.
2)            Truth be known, hard goods from different brands are pretty much the same. You may have some brand loyalties, but you’ll buy what your customers wants. 
3)            You make most of your money in higher margin footwear, apparel and accessories.
4)            You’re a “lifestyle” business. Most of you don’t sell just to skaters, but to people who want to be part of the culture.
5)            Your hard goods go beyond skate. Maybe you also sell snowboards, maybe some other stuff.
6)            A lot of your soft goods aren’t skate specific. They come from brands that are focused on the actions sports lifestyle- not just on skateboarding.
7)            With so many brands (hard and soft goods) and so little real product differentiation, price, terms, service and support from the brand plays a larger role in your product selection.
 
First, the usual caveat. Not all of the items on the list apply equally to all shops and obviously where they do apply, they apply to different degrees.
 
Look at each item on the list again and think about how each was different a few years ago. How has your customer base changed? Margins? What was the importance of footwear compared to now?
 
They say a frog will jump out of a pot of boiling water, but will boil to death if you put him in cool water and raise the temperature gradually.   All these changes have happened gradually. Sitting here, writing this, I’m struck with just how dramatic the changes are for retailers. Looks like I’ve got something good to write about this month after all. What a relief! I was kind of worried when I started this.
 
As we’re all smarter than the average frog, we should have noticed the changing temperature and clambered out of the pot before the water temperature climbed past that of a comfortable hot tub. Still, it’s been my experience that when you’ve got a business to run, the seemingly easiest thing to do is see if you can stand a couple of more degrees.
 
Let’s look at the implications of these “things we all know” and see how running a shop may have changed as a result.
 
Margins and Profitability
 
My educated guess is that soft goods and apparel account for north of 60% of sales in many shops, and a lot more of the total gross profit. You cannot succeed financially if you try and rely on hard goods sales for your turnover. It’s not possible to sell enough to have adequate gross margin dollars to pay the bills.  
 
Points one and three from the list suggest some obvious changes that have largely already occurred in response to the financial facts of life. Carry the hard goods you have to carry, but leave the most space, and the best space, you can for the higher margin footwear and apparel. Maybe it makes sense to use hard goods in displays to establish the credibility of the store. What I’ve seen happen is that thoughtful stores tend to put the decks and other hard goods towards the back of the store, making customers move through the apparel and footwear on their way to them. I don’t know this statistically, but my expectation is that skate decks are a planned, purposeful purchase. Soft good purchases can be more spontaneous. If that’s the case, then the location of hard goods isn’t a consideration in people getting to them and buying them. Might as well use that location to encourage other purchases.
 
Customer Base
 
The message from points four and six is that your customer base is probably larger and broader, and you can appeal to a much bigger group of people. I am not suggesting you can be all things to all people. You still have to know who your customer is and is not. But the days when all your customers are core skaters are gone for many shops. And if you do it right, having new customers won’t alienate the old ones.
 
In some ways, of course, life was easier when the definition of the customer of a skate shop was most likely to be somebody who skated. Appealing to a broader customer group while maintaining the edginess and legitimacy that made you successful in the first place isn’t an easy thing to do. I’ve got two suggestions.
 
First, if there’s one piece of market research you should be doing, it’s to ask each customer (when it isn’t obvious one way or another) if they skate. If you were willing to go one step further, you could mark your copy of their receipt (when they purchase something) with the answer to the question. Based on a few simple calculations involving adding up sales and calculating gross margins, you could make a good start on learning where you’re earning your money, and how your customer base has or is changing.
 
Second, in your product selection and merchandising, move towards the mainstream cautiously. But move. That’s where skating is going and seems likely to keep going. Whether we like it or not.
 
Well, it’s always great to sit here and be able to spew forth some fatuous blather like “move towards the mainstream cautiously,” sound like I know what I’m talking about and then move on. Let me try and say a few useful things on just what that means.
 
It means that the process of selecting the brands you carry, and how deep you go with each, is more complicated. You aren’t going to carry all the shoe, apparel, deck, truck and wheel brands there are. Nobody has a store that big.   It’s complicated because there are more to choose from and you have to select brands that appeal to a broader customer base, but maintain your credentials as a skate shop.
 
It means, if you want to take advantage of the broader market, that you may need more square feet, or at least creative ways to display more product.
 
It means changing your product planning and purchasing habits. Decks, trucks, and wheels can typically be gotten pretty quickly. Skate shoes and apparel have an order/production/delivery cycle that’s a lot longer. You either have to take an inventory risk, or accept the chance that you may run out, not be able to get more, and lose sales.
 
It means recognizing, like it says in point two in the list, that there are few meaningful differences among products of equal quality- either soft or hard goods- and that the differences are mostly created by advertising and promotion (teams are just one method of promotion). This has tremendous implications for how you select and work with brands.
 
Brand Selection
 
These days, most brands produce quality products. The differences the consumer perceives are largely marketing driven. If, as I’ve suggested, your customers are more mainstream and more diverse, your product offering has to be too. But you are limited in the number of brands you can carry in each product line and in the number of sizes and styles you can carry of each brand. At the end of the day, like buying stocks in the stock market, you’re going to have made some good choices and some bad ones.
 
To carry the stock market analogy one step further, there’s really no effective way for you to evaluate all possible brand purchases and combinations of purchases for your store and to select “the best.” While you can, by careful study and based on past history, make selections that are more likely to be successful, there are no guarantees. As in the stock market, you want to purchase quality brands for your shop at good prices. Most of your portfolio, as a stock market investor or a buyer in a skate shop, should be in known, quality companies.
 
New brands, like the stocks of Internet companies, aren’t likely to make you rich any longer. You are better off with a portfolio of consistent, if not spectacular winners which, if they won’t make you rich overnight, won’t leave you in debtor’s prison either.
 
These are the brands your more mainstream customers are going to want anyway. They are the ones who can afford the ongoing advertising and promotion to differentiate themselves. As a group, they are the brands the customers usually ask for and, with a few obvious exceptions, if you didn’t or couldn’t carry one of them your shop could probably get by with another.
 
The result, as it says in the list, is that pricing, terms and service move up the list in importance as you consider which brands to carry.   
 
Next Step
 
By necessity, I’ve had to discuss these issues in general terms. To bring the discussion around to your specific situation, begin with the seven items listed at the beginning of the article. Maybe add one you think I’ve missed and throw one out if you don’t think it applies to you.
 
Next to each point, write down the situation as it existed with regards to that particular issue, say, three years ago in your shop. Where have the biggest changes happened for you? How, specifically, have you modified the way you do business in response? Where is it obvious you need to change and haven’t?
 
We all know how much retailing has changed. Take a little time and evaluate how you’ve responded to those changes.

 

 

The Dot Com Equation; What Does it Take to Make Money?

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In internet years, it seems like ancient history. But it really wasn’t long ago when it was taken for granted that on line retailing represented a new paradigm in selling to consumers. Maybe it still does- or will. But so far, making money as an online only retailer has proven illusive. How come? How many pairs of surf trunks do you have to move at a “normal” margin before you show a profit?

“It doesn’t matter!” One surf retailing dot com executive was heard to say. “These companies aren’t valued that way.” Of, course that was some weeks ago, and the world has changed. As of May 12th, internet e-commerce stocks, as a group, were rated 197 out of 197 industry groups followed for stock market performance by Investors Business Daily over six months. It wasn’t many months ago that they were among the leaders.   As a group, their stock prices have declined by 48% since January 1st.
 
Mr. Dot Com surf retailing executive, they’re valued that way now.
 
What have people figured out that’s made this happen?
 
Costs
 
It costs a lot of money to develop and maintain a quality web site. Instead of hiring $8.00 an hour sales people, you need $80,000 a year programmers and have a hard time finding them. Caching! You still have to carry inventory and take the associated inventory risk. Caching! You still have to get the product to the customer, and you can’t do that over the internet. Caching! You still have to provide customer service, including handling returns, and sometimes that means actually talking to the customer on the phone. It seems to be necessary, according to the conventional wisdom, to have not only product, but content. In other words, you’re not only an etailer, but also an ejournalist, and that adds some costs as well. Caching!! Caching!! Caching!! Oh, and of course you need to spend some money on marketing to establish your brand. CA-CA-CA-CHING!!
 
Lands End, the mainstream catalogue retailer with a great web site and killer customer service, earned $48 million on sales of $1.319 billion for the year ended January 28, 2000. Of course, they spent $190 million on producing, printing and mailing catalogues. But except for that expense, how is a dot.com retailer’s cost structure different from Land’s End? It isn’t.
 
Lands End internet based revenue totaled $138 million during the year, or 10.5% of total revenue. To put it bluntly, if they didn’t mail those catalogues, they wouldn’t have a viable business. Of course, Lands End isn’t exactly known as being cool, cutting edge, and appealing to the younger generation. Still, they’d have to do an awful lot of internet business before they could stop mailing those catalogues.
 
How much? Well, I guess more than $1.639 billion. That’s how much Amazon sold in the year ended December 31, 1999 and they lost $720 million for the year. It’s interesting to note that Amazon’s gross profit margin was only 18%. Lands End, cool or not, had a gross profit margin of 45%. That’s pretty cool to me. If Amazon had Lands End’s gross profit margin, they would still have lost a couple of hundred million, however.
 
Part of the difference in gross margins comes from the fact that Lands End is just better and more experienced in fulfillment and customer service than Amazon. But the biggest difference is that Lands End is selling product it makes itself with its own brand name on it. Amazon is selling stuff it buys from other brands. Lands End has cut out the middleman. Amazon is the middleman.
 
It looks like there’s more to making money in e-commerce than a cool website and building a community. The devil, as they say, (and the expense) is in the details. 
 
Competition
 
Quiksilver had $444 million in revenue for the fiscal year ended October 31, 1999. If, just to pick a number, Quik has 25% of the surf soft goods market, then we’re looking at an industry, at wholesale, that’s something less than $2 billion, though growing. If you’re a dot com in the surf industry, with the expense structure described above, how much business do you have to do before you can turn a profit? Where are the customers going to come from?
 
It doesn’t seem to me that the etailer is creating any new customers just by being an etailer. He’s fighting over existing customers, in an over retailed environment where he can only succeed largely by taking customers from competitors, of which there are a whole lot. And he’s trying to do it selling products that are probably differentiated from his competitors largely by marketing using a brand name that isn’t as well known.
 
Before the days of the internet, what percentage of total soft goods sales did catalogue companies do? If dot coms get that percentage of the surf industry soft goods market, can they make money? Are there any specific advantages conferred by the internet that will increase that percentage? I don’t know the answers to these questions, but that’s what I’d be asking if I was considering an investment in a dot com.
 
One statistic I saw a few years ago, which may or may not be relevant, was that catalogue and telephone sales of skis had never exceeded 5% of total sales in a given year.   Just for fun, let’s hypothesize that because of the cool factor, or their content, or technology, surf etailers can optimistically get twenty percent of total sales, or something less than $400 million. How many companies can that support? Given the implied size of those companies and their growth prospects, can they expect to attract adequate capital? PacSun and Quiksilver have both experienced some softness in their stock prices due to concerns about their ability to continue to grow quickly. They are both established companies that make money.
 
My personal opinion is that etailers of surf soft goods won’t even approach 20% of the total market. They may not get over five. But even if they can get to 20%, how does the financial model make sense to investors looking for fast growth, big returns, and a public offering?
 
Another competitive issue for dot coms is that established brands will ultimately figure out how to reconcile selling their product on line with supporting their brick and mortar retailers. Dot coms competing with retailers who already know how to handle customer service and fulfillment, have their infrastructure in place, and aren’t all that far behind in web development. Once the internet frenzy wears off, as it seems to be doing, I expect brands to recognize that it’s their product, they are in control and an etailer is just another retailer they may choose to sell too. Or not.
 
Community
 
The etailers’ answer, I expect, would resolve around “community.”   It has become the rallying cry for internet retailers who see creating a community as the focal point of their strategy for getting eyeballs and, hopefully, customers. It’s a good strategy. In all non-internet businesses, it’s called marketing- the process of identifying your customers and building a relationship with them.
 
On the internet, the concept of community implies it’s not adequate to look at the dot com’s revenue model just from the point of view of product sales. There are opportunities to generate revenue through advertisement, sale of content and information, and strategic alliances. How do you create these other sources of revenue? How much revenue can they generate? I don’t know. Neither does anybody else, though there are lots of theories.
 
Some of those theories will prove to be the correct ones, and those etailers may prosper. 
 
And So…….
 
At the end of the day, I wonder if the whole retail world, in the surf industry and in most other industries, won’t just be a fluid amalgamation of brick and mortar and on line. Whatever the successful model is, it’s going to change dramatically as broadband finds its way into more homes.
 
My bottom line on surf industry dot coms is that unless a lot of revenue comes from sources other than product sales, it’s hard to see a viable financial model. I suspect the inevitable result is that the need for sales volume will drive most of them to compete in the broader action sports market along the lines of Earthsports.com or FogDog.com. 

 

 

The Retailer’s Dilemma; Are There Any Snowboard Shops Left?

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Use to be that I’d scurry home from Vegas in March with my extra backpack full of snowboard dealer packages and, like a kid at Christmas, throw myself into them to see what was new. It still takes an extra backpack (though a smaller one- fewer brands but a lot more pages per brand). This year, though, there didn’t seem to be any urgency to reviewing them. Not having to make buying decisions, in fact, I didn’t get around to really reading them in detail until, well, actually, it was late June.

I’ve also been thinking lately about what “the snowboard industry” is now and how things have changed for retailers. That thought process, and the realization that it hadn’t mattered that I waited to June to read the new product packages, led me to think about retailer strategies and buying decisions. Retailers, I think, have to make buying decisions differently. And they look at snowboarding as just one piece of their selling strategy. Here’s why.
 
The Snowboard Industry- What Is It?
 
Five or seven years ago, snowboarding lead the way, representing an emerging demographic of young people interested in individual sports. Posers were disdained. If you didn’t snowboard, you shouldn’t have been wearing snowboard clothing. Margins on hard goods were a lot higher, and retailers could build credibility around snowboarding.
 
Today, thank God for posers.   They buy a lot of high margin soft goods, shoes and accessory items. They aren’t even posers anymore. They are just people who want to wear stylish, functional soft goods. We all got to wear something, after all. Retailers carry hard goods because they legitimize them as an action sports lifestyle store. But they’d much rather sell shirts, jackets or jeans that earn them a fifty percent plus margin than a snowboard that earns them a thirty-five.
 
I’m not suggesting that retailers don’t care about hard goods, or that selling them doesn’t make a contribution to a store’s overall success. But retailing is a very tough business, and my hat’s off to those who succeed at it. Selling higher margin items to a bigger potential customer group is a significant chunk of the success equation.
 
And it’s not just true in snowboarding. There’s not a lot of margin in skateboards, wakeboards, or surf boards (or skis or roller blades) either. In all these sports, the brands produce the hard goods and support the teams, advertising, and promotion to legitimize the sport and, maybe more importantly, the lifestyle image with the target audience. But it’s the soft goods players who grow like mad and make a lot of the money because they can sell to a bigger group of consumers.
 
Retailers who are still in business figured out a long time ago that they can’t just sell snowboard product. They’ve got to have cash flow year around because their overhead goes on all year, and they generally don’t have the balance sheets to support a long period of low sales. As larger corporations and the media have grabbed hold of action sports and demographic it represents, the lifestyle has come to be, for better or worse, more of a focus than the sport in the larger population.
 
Surfers skate, skaters snowboard, snowboarders surf. A skate shoe company I know does snow influenced clothing. The commonality isn’t the equipment- it’s the attitude, music, clothing, lifestyle. The equipment is just a tool. It use to be more of a statement. The equipment makers have contributed to this by making lots of quality equipment that’s often hard to tell apart and then endlessly trying to distinguish it by claiming various technical innovations that most of the time aren’t significant. If they are significant, they are drowned out by the promotional noise.
 
If you want to know what’s happened to the snowboard retailers who’ve fought this trend, check out your local court’s bankruptcy filings. But why should they fight it? A shop may have its roots in snowboarding, but here’s its chance to sell higher margin product to a larger customer base year around in more than one sport without the former danger of being seen as “selling out.”
 
Retailers can’t set the general trends- they can only recognize and take advantage of them. Since they are operating in an environment where there are, frankly, more of them than the market can reasonably support, recognizing and taking advantage of trends is a critical thing to do.
 
I hate this, but snowboarding has become a cog in the great corporate, action sports, youth demographic, marketing machine with the result that snowboard retailers have to approach the sport differently. The sport is still distinctive, but what it represents isn’t.
 
Retailer Challenges
 
With this background, I’ll try and put myself in a snowboard retailer’s shoes for a minute. I have the privilege of ordering in March or April something I won’t receive or start selling until late summer or fall, and have only three or so months to sell at full margin. If it doesn’t snow, I could be screwed, but that’s life. The hard goods margins aren’t that great, and I’ve got to work the system for all the discounts, free POPs, and show bonuses I can get. I know all my choices aren’t going to be right, and the probability is very high that after Christmas, or even before, I’ll have to offer some discounts. I feel better than I did a few years ago that the stuff will show up more or less when I want it, but I know there will be some delivery glitches.
 
Where I am right on the product I choose, I may not be able to get any more of the hot selling stuff when I run out in early December. My flexibility in ordering is constrained, to some extent, by brand requirements that I take product in certain proportion, by minimum order requirements, or by the space I have in my store. My ability to grow my order may be reduced by the brand imposed credit limit.
 
Boy, life was almost better when you couldn’t get enough product, it was always late, and the quality was suspect. At least you could count on selling it all at a good margin.
 
Back to the Brochures
 
There you sit, having gone (or not gone) to more trade shows at the worst time of the year than you could possibly have a use for. Before you is a pile of paper two feet high with catalogues, price sheets, credit applications, terms and conditions and order forms. These are just the official snowboard brands. Now what?
 
My recommendation is to always begin with the Mervin catalog. At least you their narrative will keep you grinning as you review their product line. And it might ward off the depression you feel when you see some brands have the ski and snowboard prices in the same place. But shortly reality and inertia set in. Reality is:
 
·         You’ve got to carry the right hard goods mix, but really want to leave as much room as you can for the higher margin soft goods.
·         Your customers are probably a more diverse group, and you may not live and die by snowboarding like you use to.
·         All the major brands offer monster products lines that start, after a few hours of study, to look a little too much like the others. They all cover all the price points, have comparable terms and purchasing programs, and similar advertising and promotional programs.
 
Inertia comes from the fact that you’re already carrying – what? Burton, one or two other major brands, maybe one of the few surviving niche brand where you don’t have too much local competition, and one of the former high flyers that tanked and has been sold to somebody who’s trying to capitalize on any left over brand equity as your el cheapo model? Five brands is about the max I’d say. Merchandising them all well is going to be an effort. Three brands would be better.
 
What’s going to make you change brands? The rep from a brand you don’t carry has pictures of you at that Vegas party you don’t want to see the light of day? Okay, that might do it. A major customer service or delivery snafu? Maybe. Prices and terms are pretty comparable. A lot of kids asking for a brand you don’t carry? Yup, that would do it. Major technological differences among product? In your dreams.
 
The bottom line is that with five or even three brands, you’ve got all your bases covered. If I were a retailer, I’d try to pick brands that helped me sell soft goods, though I admit to not knowing exactly how to do that.
 
Hard goods have become props to support the apparel and shoe sales that I suspect provide more than half the revenue and gross margin a typical store earns. It doesn’t seem to me like successful retailers are in the snowboard business anymore. They’re in the lifestyle, action sports, soft goods business.     

 

 

Quality Financial Planning for Every Action Sports Retailer; No Accounting Degree Required

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Rarely, but once in a while, I come across something I want to plug. Not too long ago, it was the new Board Retailers’ Association (

www.boardretailers.com

. If you haven’t joined yet, get moving.  Opps, there I go plugging them again.).

 
This time, it’s some inexpensive, easy to use, financial planning software that the Retail Owners’ Institute has developed. So today, instead of ranting and raving about some possible industry trend, or saying something depressing about how the skate industry might be evolving, I thought I’d say glowing things about this software in the hope that some of you might check it out.  
 
I doubt there’s an action sport retailer (or at least not a successful one) who hasn’t figured out that some form of good financial planning is a requirement for success. I’ve written from time to time about cash flow, budgeting, margin analysis, and financial statements. I’ve tried to present some simple ways to approach those issues, but at the end of the day the need to create and manage separate templates for all the planning tools, or trying to integrate them, can be a bit of a daunting task. This software solves that.
 
I became aware of the software, called Strata-G Financial Planner, when I went to a seminar on retailer financial planning at the Snow Industry Conference in early April. Yeah, I know it was the Snow Industry Conference, but let’s get real- most core retailers are not just skate, or snow, or surf and, fundamentally, they have a lot of the same business issues. So I decided to write this for Skate Biz because that was my next deadline and no other pressing topic was popping into my head. What? TransWorld has reorganized again? Only one biz mag now? Never mind.
 
Retailer Owners’ Institute Co-Founders Richard Outcalt and Patricia Johnson started going through their presentation on financial statements and how the balance sheet related to the income statement and stuff like that. This was not exactly the dynamic and inspiring part of the presentation, especially for a finance trained guy like me who, for better or worse, has had the accounting classes they were trying (with some success) to compress into 20 minutes instead of two years.
 
So my eyes glazed over a little. But when they got to the part of the presentation that focused on the financial planning software, I perked right up.
 
It Can’t Be This Easy
 
That has my immediate and overwhelming thought. Three lousy input screens covering historical data and some rough plan numbers for the next year that you can modify with a click of a button is all that’s required?   Then it spits out projected income statement, cash flow, and balance sheet by month with ratios included? And you can add the departments you could possibly want and it gives you open to buy for each one? 
 
Where the hell was this thing when I needed it? Every financial model I ever built took at best days to create, and there was always some fudge factor to get the balance sheet to balance. Uhh, actually, you see, it’s not that I really  fudged my balance sheets. I mean, it’s not like it really mattered. Give me a break- it was only a little, tiny, teeny weenie fudge. And I was the only one who would ever find it anyway- I made sure all my models were complicated enough to guarantee that.
 
Anyway, how ‘bout this Strata- G Financial Planner Software? Ain’t it great! Go to http://www.retailowner.com/ and check it out. You can even download a fully operational copy for evaluation purposes that works for five days, which means I have three days to finish this article.
 
There are a couple of reasons why the software is so easy to use. First, the structure of the financial statements is such that it really only works for retailers and, from my point of view, it’s particularly well suited to smaller retailers. What that means is there isn’t a bunch of extra stuff that adds complexity in the name of giving the software “flexibility,” which I have found is often a code word for making software too complicated to use.
 
Second, it’s financial planning, not accounting software. That means there aren’t endless line items for you to complete. It’s concerned with showing trends, not detailed nuts and bolts. Operating expenses, for example, are entered in only five line items; payroll, selling, occupancy, administrative, and depreciation expense. Want more detail? Want a different line item for each size of post it note you buy? Great! There are lots of people who will charge you a fortune to create that model. I personally will charge you as much as you want to pay, so call me.
 
In the end, when you have that gloriously complex model, you won’t be able to see the forest for the trees, which kind of prevents you from achieving the whole goal of financial planning. And, by the way, it will also leave you right down in the mud with me, fudging your balance sheet to get it to balance for no good reason other than that you love to screw with Excel.      
 
What could keep this software from working for you? To get the most use out of it the fastest, you need good historical numbers to enter as a starting point. I have to believe that most successful skate retailers (or snow or surf or candle retailers, for that matter) already know that and have those numbers. If you’re one of the shrinking number of retailers sitting there thinking either 1) “I’ve got those all in my head,” or 2) “My accountant gives me that stuff two months after the end of my fiscal year,” or the dreaded and ultimately fatal 3) ”I don’t need that- I run this business on my gut,” do not visit the Retailer Owners Institute’s web site and do not download this software and do not waste even the ridiculously cheap $139.00 this software costs, because you’ve got bigger problems to solve first.
 
Did I say $139.00? My mistake. At this presentation, I was sitting next to Board Retailer Association founder Roy Turner. His eyes lit up at approximately the same time as mine and, being as impressed as I was with the software, he’s made a deal with the Retail Owners Institute. Members of the Board Retailer’s Association can now purchase the software for $100.00.  For those hundred bucks, you not only get the planning software, but training software that teaches you all about open to buy and financial planning. It usually sells by itself for $119.00
 
Using the Financial Planning Software
 
If I were a retailer, there are two things I would use this software for. As a management tool, I’d use it probably weekly to make sure my plan reflected any real or projected changes in business conditions and to make sure I had a plan that made me a profit for the year. Margins looking better (or worse) than originally projected? Take thirty seconds to change it in the impacted department and see what the change for the year looks like. Higher or lower inventory levels looking likely? Put in the new inventory numbers and see how your open to buy changes.
 
The magic here (assuming you have those historical numbers) is that Strata-G takes almost no time to use and will get more and more valuable as you use it. Even entering the initial data will take very little time, though of course you can spend as much time as you like envisioning the future.
 
When you think that the future you’ve envisioned might change, you can project how those changes will impact your business and decide whether and how to react sooner rather than later. Changes made sooner rather than later have more of an impact over the year and are usually less painful to make in the first place.
 
The second thing I’d use Strata-G for is to make my banker, or other financing source, happy. Bankers are not interested in taking risks. They are not impressed by three inch thick financial plans because extracting the essential facts from them is time consuming. They have to present and defend their loan to you to others in the bank and the easier you make that, the more they like you. I make those observations as a former banker.
 
This software allows you to give your banker the information they need to understand your plan and financing requirements in a simple but complete format. You can do some simple “what-if-ing” with your banker so you are both on the same page in terms of possible risks. The only thing I might add to the information you can print out is a list of assumptions. It’s always nice to explain why you did things the way you did them. It gives bankers a warm feeling to know that you’ve considered the possible impact of things that could go wrong.
 
Go take a look at this software. It will save you time and help you make better business decisions faster.

 

 

Public Wisdom, Maybe; Comparing the 1999 and 2000 Buyers Guides

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I hold in my hand the Transworld Skateboard Buyers Guides from 1999 and 2000. Everything you could possibly want to know about decks, trucks, wheels, and bearings are in these guides.

 Well, okay, Transworld exercises some discretion in which brands make it into the guide and which don’t.   All the product from each brand isn’t necessarily included. Not everybody has actual suggested list prices so the ones included may be a little suspect. Certainly, the prices don’t bear much relationship to what things really retail for, do they?
 
Still, there are a lot of data points, and when you’ve got a lot of data points something statisticians call “regression to the mean” takes over and you find that you may be able to glean some relavent information in spite of all the inaccuracies.
 
I’ve spent a lot of time figuring out average prices and price trends and comparing them from one year to the next and listing and counting brands to see who’s there and how it’s changed from one year to the next. My fingertip is raw from punching the calculator button, and I’ve damn near gone blind staring at the guides (nobody warned me you could blind from reading skateboard buyers guides). So caveats aside, what can we learn from the two Guides about how the industry is evolving?
 
After we’ve looked at the Guide data, we’ll travel to a major skateboard internet site and see how the data checks with retail reality.
 
Decks
 
The 1999 Guide featured 411 decks from 49 brands. The 2000 edition had 402 decks from 60 brands. The increase in the number of brands has more to do with who Transworld put in the guide than with the number of brands there really are. The numbers exclude longboards.
 
The average suggested retail price for a deck declined from $54.79 to $53.35, or about 2.6%. The overall range of prices also moved down. In 1999, decks were priced from $39.95 to $76.95. In 2000, it was from $33 to $67. In 2000, everybody pretty much dropped the cents from their prices, rounding them to the nearest dollar and, incidentally, making my calculations a lot easier. Keep in mind that blanks aren’t included here.
 
MIK-
 
Here’s the distribution of decks by price for 1999 and 2000. I suggest you do a chart that shows the number of decks at each price point for each year.   You kind of need to do it, because I’m going to refer to it.
 
1999
 
Price               Number of Decks
 
34              3         
40              20
45                  20
46              90
47              14
48                  11
49                  22
50                  106
51                  4
52                  2
53                  5
54                  1
55                  35
58                  8
60              11
70              137
77                  1
 
2000
 
Price   Number of Decks
 
33          1
35              1
37                  2
40                  2
45                  7
48                  7
49                  2
50                  115
51                  3
52                  33
53                  99
54                  2
55                  38
56                  4
59                  10
60                  63
65                  3
66                  7
 
The two charts show the distribution of decks by price for the two years. Check out how the distribution has tightened up. There are fewer decks at either the lower or the higher price points. In 1999, there were 180 decks priced under $50. In 2000, the number is 22. Similarly, 1999 included 137 decks at $69.95 (I call them $70 on the chart). There aren’t any in 2000.
 
The distribution of prices has gotten a lot tighter, and the average suggested retail price moved up because of the huge decline in the number of lower priced decks. Basically, what you’re seeing is that consumers can’t afford to pay $70 for a deck (or can’t be convinced that it’s any better than a $50 deck), and nobody can make money on full graphic, branded decks that retail for under $40.
 
This tightening of the price distribution is absolutely consistent with a market where there are few real differences among products. The consumer is price resistant, and the brands all find themselves on the same cost curve. That is, it costs them all more or less the same for a deck. It’s inevitable that prices move closer to each other.
 
Wheels, Trucks and Bearings
 
There were 208 wheels in the 1999 guide from 48 brands with an average cost of $31.25 per set. The 2000 guide featured 224 wheels from 58 brands with an average cost of $30.58, down two percent. Again, be cautious in concluding anything from the number of brands.
 
Sets of wheels were priced from $24 to $43.95 in 1999 and from $20 to $40 in 2000. Prices moved down about four bucks per set, but the spread between the lowest and highest remained the same.
 
Now if I was really diligent (read that obsessive/compulsive) and had nothing else to do with my life, and loved the feeling of calculator buttons moving under my fingers, I’d go back and create the same kind of chart for wheels I did for decks. My guess is you’d see the same trend towards a tighter distribution of prices, and for the same reasons.
 
28 trucks were available from 19 brands in the 1999 guide. The average price, excluding the product for $100 a set, was $38.50 per set. They ranged from $19.60 to $100 per set, but if you take out that $100 set, the top price was $55.50 for a set. 
 
In 2000, 21 brands offered 43 trucks. The average price was $40.56, up 5.3%, excluding the $100 product. Prices ranged from $22 to $52.
 
Happily, there are fewer bearings to count and calculate. In 1999, sixteen brands offered 26 bearings. The average price was $20.79 a set and they ranged from $9.60 a set to $36.50 a set.
 
The 2000 guide featured 22 bearings from 15 brands at an average price of $19.73 (five percent lower than the previous year) excluding the $120 ceramics. Prices ranged from $10 to $37- basically the same as 1999.
 
Trends Across Products
 
The number of brands was up in all product categories except bearings, where it dropped by one. The number of product offerings was up everywhere except in decks, where it declined by two percent. Prices fell except in trucks.
 
It’s hard to interpret the increase in the number of brands. I want to emphasize again that it is probably more how Transworld put the Guides together than how the actual number of brands changed. I guess there are some new companies, and new brands also represent new offerings from existing companies trying to find a marketing advantage. It’s troubling for the industry as a whole that such a maneuver is part of the basis of competition. It just confirms the similarity of product from brand to brand.
 
Prices are tending down, at least slightly, even in what I believe is the hottest market that’s ever existed in skateboarding. In snowboarding’s go-go years, you could raise prices each year. The implications for what the market and industry may be like when (not if) growth slows aren’t very encouraging. Right now, if I were a brand that was having trouble meeting demand I wouldn’t try to meet quite all of it.
 
Yup, you heard me right. When business isn’t so good, the companies that will get through it successfully will be the ones who have nurtured their brand’s market position, built their balance sheet, and controlled expenses. The skateboard industry’s consumers tend to lose interest in any product that everybody has. What better way to support your brand then to make it just the slightest bit harder to find? I think it may be better marketing than some of the things you spend advertising and promotional dollars on.
 
Another trend, obscured by the coming and going of brands in the industry, is the dominance of perhaps the five or seven largest players.  As I watch deck prices move towards each other, with every player on basically the same cost curve, I’m certain, for better or worse, that these companies will end up with the lion’s share of the market. I’m not saying there isn’t some room for smaller players, but every industry has this trend towards consolidation.
 
Back in the Real World
 
Because of my healthy skepticism about the picture painted by the Guides, my nimble fingers have taken me to a major internet retailer of skate products. I didn’t check out every brand in every category, but I looked at a lot. Decks, including grip tape were either $44.99 or $49.99. Add some shipping costs, but may be subtract sales tax depending on where you are ordering from, and the price isn’t too far from the average price of $53.35 in the 2000 guide. Then, of course, there are the store brand decks for $29.99.
 
Almost all the trucks were either $33.98 a set for plain metal, or $37.98 for painted. The average price in the 2000 guide was $40.56. That number included both painted and plane metal trucks. Again, not so far off from this site’s prices if you take account of shipping costs.
 
Wheels were $23.96 a set “unless otherwise noted.” I saw some at $31.96 a set and there were the store brand wheels for $15.96 a set. That’s quite a different from our 2000 guide average price of $30.58.
 
To nobody’s surprise, the Guide’s suggested retail prices are higher than street prices when compared to one very comprehensive web retailer. We also confirm the tendency to move towards a simpler pricing structure, recognizing the lack of real product differentiation.   But except for wheels these retail prices are not that much higher then the Guide average prices. 
 
It looks like, at the end of the day, the lack of product differentiation is pushing product prices lower, but high demand is controlling, though not eliminating, that trend. At least for the time being.

 

 

Snowboards from Afar; The Potential Impact on Retailers

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In the early 90’s, when snowboards started pouring into the U.S. from the Austrian ski factories, there were claims that consumers wouldn’t accept boards labeled “Made in Austria.” Mostly, those claims were made by U.S. factories threatened by foreign production. If there was a marketing advantage to a board “made in the USA,” it didn’t last long, and smaller inefficient U.S. producers went out of business.

In our consolidated, mature industry, brands are taking the next and inevitable step of looking for ways to cut production costs while maintaining or even improving quality. Boards have and are coming in from China, Tunisia, and Spain, and we can reasonable expect to see numbers from lower cost countries grow.
 
In seeking lower cost product, what are the issues the brands have had to consider? What’s in it for the retailer?
 
The Cost Equation
 
There are four basic components to the cost of a snowboard- materials, direct labor, factory overhead and allocated overhead.
 
No matter where you build it, Tunisia, China or Tierra del Fuego (uhhh, there are no factories in Tierra del Fuego as far as I know) the materials that go into the board are the same. You have the same choices of where to buy them. If everybody buys their materials from the same suppliers, the material cost of making a snowboard will be more or less the same for everybody. Would it make sense to start your own factory to make, for example, cores in a low labor cost country? Maybe. If you have enough volume. If you can get the right wood. If you could actually make them for less than it would cost to buy them from an efficient, established source.  
 
Direct labor is often the major advertised justification for making a snowboard outside of Europe or the U.S. Let’s say that you’re paying somebody $13 an hour, including taxes and benefits in the U.S. to make snowboards. If they work, for example, eight hours a day, 25 days a month, labor cost is $2,600 a month.
 
For sure direct labor is cheaper in China. Jim Ferguson, the President of Heelside doesn’t make boards there, but he’s a thirteen-year veteran of China, lived there, and has a boot factory there. “You don’t pay an hourly wage in China,” he said. “You pay monthly and the cost includes room and board.” He estimates his average cost is $150 per worker per month, and indicates that he’s more generous than many employers. But from his point of view, he more than gets it back in continuity and loyalty.
 
 Well, even without a calculator, I can tell that $2,600 a month is more than $150 a month. A lot more. So clearly if you compare the cost of a worker in a less developed country with the cost of one in the developed world, you’ve got a savings that’s somewhere between significant and huge.
 
Hold on. It’s not quite that simple. There are two related issues. Training and productivity.
 
If it took 11.33 (2,600 divided by 150) workers in China to make the same number of boards that one worker in the U.S. could make in a month, then there would be no direct labor cost advantage to making boards in China.   Both factories would spend the same amount of direct labor money to make a given number of boards. And maybe, when you first open the doors in China, that’s the case. Don’t underestimate the labor training costs in a new manufacturing operation. It’s easy to find people to make skate shoes in Korea. They’ve been making shoes there a long time. Out in the fabled Isles of Langerham, though, they’ve never heard of snowboarding.
 
Let’s also dispose right now of a common delusion about labor. Just because it’s cheap doesn’t usually mean that if one worker isn’t doing the job you can throw ten more at it and fix the problem. It may be true in ditch digging, but not in snowboard manufacturing. Only one person can work a snowboard press at a time, and ten untrained people can’t resolve the problems caused by one who doesn’t know what he’s doing. 
 
Having said that, it’s important to recognize that a lot of complicated products are produced perfectly well in so called third world countries and making a snowboard ain’t rocket science.
 
Things start to get really interesting when you look at overhead. Here in the States, if we want to start a factory, we see either a contractor or a commercial real estate agent, tell them what we want, and they either build it or find it. Maybe we’ve got to make changes or improvements in a rented facility, but we can generally assume that the place will have a level floor that isn’t dirt, and that water and power is easily accessible. We probably count on a road. 
 
All the money you have to spend to get the place the way you want it is called leasehold improvements. It gets amortized over time on the income statement. It can be a huge number in a low labor cost country.   
 
What does it cost a brand to have managers live in third world country? Maybe it’s only temporary until things are up and running smoothly- like a year or two. Who will perform maintenance and repairs on complex machines? How long does it take to get parts? In the States, you get them by FedEx the next day. In a low cost labor haven, you may have the expense of keeping a big inventory to keep things going.
 
But then, there are those costs for workers again, so it doesn’t cost much to keep the place clean. Or maybe you don’t have too. No Environmental Protection Agency after all.
 
Putting It All Together
 
Obviously, there are cost savings in making many products in low labor cost environments. Everybody’s doing it. In making the decision to go for it, the brands are asking the following questions:
 
·         Is the product already being made in the country I want to produce in? If so there’s probably already some experience there, and it’s easier to get going.
·         Can I just buy from an established producer, perhaps helping them improve their technology and processes, rather than starting my own factory?
·         Am I in this for the long run, and can I build enough volume? There will likely be some surprises and additional costs, both ongoing and of the one time startup nature.
·         Are those seductive, loudly trumpeted, low worker costs enough to make up for the additional expenses and surprises? As much as anything, that comes back to the issue of volume. There has to be enough volume so that the direct labor savings per piece are greater than the additional overhead costs.
 
The Retailer Perspective
 
Assuming that, in fact, it turns out to be cheaper to produce a board (or other product) of the same quality in these new locations, what benefits can the retailer expect?
 
For a start, it should be clear from the above discussion that production in low labor cost countries is not the magic potion of higher margins. Obviously, the benefits are expected to be there. But one manufacturer I spoke with described the years it took to get it right.
 
Also, remember that the brands aren’t necessarily rolling in dough. It’s not easy to make a buck in the snowboard hard goods business right now whether you’re a retailer or a brand.
 
So what retailers shouldn’t expect is to see sudden, big price reductions on wholesale product prices.
This is especially true because not all of anybody’s boards are likely to be made in lower cost countries. Marketing and research and development considerations suggest that production at traditional sources will continue. I’m sure we can all hear it now. “Well, yes, we’re making a few boards in Nepal, but our high end stuff still comes from our hi tech factory in the states and all our R & D is done there.”
 
But retailers may benefit in other ways. If there is, indeed, more margin for brands, you could see some of that show up as better customer service and expanded advertising and promotion by the brand. Part of the extra income may just stay on their balance sheet as additional profit, making it easier for them to make and sell the retailer boards they often don’t get paid for until six or more months from manufacture.
 
Often, the relationship between the brand and the retailer, at least in terms of product wholesale pricing, seems like a zero sum game. One wins, one loses. In this case I don’t think that’s true.
 
Assuming that the brands did pass through all of their supposed cost savings realized from moving production to low labor cost environments, retailers would inevitably, in the normal course of competing with each other, begin to lower prices. Each would know they didn’t really want to do it, but would feel the competitive situation required it.
 
Do you think that such cost reductions would make your sales volume go way up if your competitors had reduced prices in the same way? My guess is no.
 
Would you rather earn your usual margin on a $400.00 board, for example, or a $300.00 board?
 
If you sell the same number of $300 boards as you were selling of $400 boards, your total margin dollars decline. That’s a bad thing.
 
Cost reductions from new production locations won’t happen overnight. When (if?) they do happen, I’d select certain select, gradual price reductions to be passed on to retailers because the brands compete with each other in the same way that the retailers do. Overall, my hope is incremental profit for the brands goes into supporting the sport and the retailers. Maintaining brand image is key to everybody making a few bucks.
 
 
Check out the table below, taken from U.S. government data, showing snowboard imports from selected countries in 1999.
 
Country                      Units                           Value                         Cost Per Unit
 
Austria                       198,535                      $14,587,818              $ 73.48
Spain                          39,679                      $   3,771,523             $ 95.05
China                          67,765                      $   3,379,457             $ 49.87
Taiwan                        39,676                      $      623,477             $ 15.71
Tunisia                           4,600                      $      581,826             $126.48
Canada                      230,326                      $12,033,129              $   52.24
 
Some caveats and warnings about these numbers. Call me naïve, but I just have a hunch that all those boards coming in from Canada aren’t made there. I also suspect, especially in the case of the product coming from Taiwan, that the goods aren’t all what we’d call snowboards. Just materials for a real board cost several times the unit cost of $15.71.
 
As a retailer, you should keep in mind that these prices include second qualities, closeouts, kids stuff, and snowboard like products you wouldn’t be caught dead with in your store. So don’t look at any of these unit costs as necessarily indicative of what you’re favorite brand is getting the new season’s first quality boards for.