Future History; What’s the Price of Success

/0 Comments/in , , , /by

Originally, it was enthusiast driven. People started companies because it was an important part of their lives and they wanted to be part of what was happening. It wasn’t just about a sport- it was an attitude and a lifestyle.

At first bigger companies in related sports weren’t interested because the market wasn’t large enough. When they got interested, they couldn’t figure it out because they just weren’t close enough to it. When the entrepreneurs who created the industry woke up in the morning and looked in the mirror, they saw their customer. No market studies, no focus groups, no statistical analysis. Clearly, obviously and directly they were their customer. If they liked it, the market liked it. They could smirk at the corporate giants in suits trying to figure out what to do, because they knew the giant just didn’t get it.
 
More and more small companies got started. The industry and the participants grew. Hype overtook reality. Product quality improved to the point where there wasn’t much difference among brands, and the consumer started to figure that out. Margins dropped even as companies spent more and more money trying to differentiate a product that wasn’t any different. Making a profit got harder.
 
With growth and acceptance, the sport became more legitimate and more accepted. Big companies decided they had to have a piece of it. Not just because of the sport, but because they wanted access to the customer group it represented and to coop the lifestyle to use in selling other products. They still didn’t really get it, but by buying a couple of successful companies, and throwing a bunch of money around, they changed the market at the same time they legitimized it. The small companies who had created the sport were outraged by what was happening to “their” sport, but outrage didn’t change any basic business principals and pretty soon most of them were out of business.
 
The sport was bigger, and here to stay at a new level. But it had paid a price.
 
I was thinking about snowboarding, not skateboarding. But the industry evolution I described could have been referring to personal computers. Or flush toilets (invented by Thomas J. Crapper- how’s that for your own piece of immortality?). Or automobiles, if we went back to the early decades of the century.   
 
In the past, an explosion of skateboarding popularity has been the prelude to a big decline. Why might that not be the case this time? What, if anything, is unusual about skateboarding that might check the kind of industry evolution I’ve described? What’s the owner of a small skate company to do?
 
What Goes Up……..Could Stay There
 
The thing I really like about the skateboarding business is that you know exactly who your customers are; males age 13-17. Who can blame them for giving up skateboarding for girls and cars when they get a little older? I seem to recall being willing to give up almost anything (my money and self respect for sure) for girls at that age.
 
That age group, according to the census data, is and will be the fastest growing group for the next several years. Check out the information in the chart. It may be that, with the target customer so clearly defined, those numbers are a great predictor of where the skateboarding market is going.
 
With K2 having purchased Planet Earth and other mainstream companies increasingly interested in the sport, it’s clear that Corporate America, for better or worse, has decided skateboarding is worth its attention. They may not understand the sport and its culture; they may not even succeed in becoming part of it. But as they stumble around and throw money at it, they’ll change it as the ski companies have changed snowboarding.  
 
The good news is you may get respect for skaters and acceptance of the sport by a more mainstream group. Hell, you may even be as lucky as snowboarders and get your very own Muppet as a mascot.
 
What’s to Stop It?
 
Typically, a period of rapid growth in an industry is followed by a period of consolidation where the number of companies declines dramatically and the growth rate falls. There’s one reason to hope that the industry might escape that pattern and a couple why, if it doesn’t escape, it might be manageable.
 
The reason you might escape it (though I doubt it) is because the industry is too small to become really interesting to big companies. If they don’t find growth opportunities, they’ll milk the culture and lifestyle in hopes of benefiting their image and other product areas, and then move on. Note that the larger companies becoming interested in skate aren’t like the ski companies; they don’t need skateboarding to survive like ski manufacturers and the resorts need snowboarding.
 
More companies (though not most by a long shot) may hope to survive a consolidation than in snowboarding. This is because of the relatively year around basis of the business, the shorter product cycles, what seem to be selling terms that favor the companies, and the speed with which what’s in and what’s out changes. In short, you don’t have to lose money six to eight months of the year and by being nimble you can compete against bigger companies.
 
But inevitably, the skate industry is already making it harder on itself as companies jockey for position in a growing industry. The proliferation of companies, the declining credibility of the pro model, and blank boards are starting to turn skateboards and their components into a commodity. Which means lower prices and margins. Which means higher breakeven points. Which mean more working capital investments.
 
All of which is fine with any corporate companies looking to stake a claim to the skate market. Because market changes that are financially devastating to a small company are pocket change to them.
 
What’s An Owner to Do?
 
All the outrage over the changes in the industry, the “prostitution” of pro models, the “selling out” that blanks are suppose to represent, the threat of Nike the industry should “stand against” all sounds ominously and sadly familiar. No matter what it does, the skate industry is not going to repeal the laws of economics and human nature. The snowboarding industry shot itself in the foot because each company pursued what it perceived to be in its own best interest. Betcha the skateboard companies do the same thing. Not because it’s good or bad. Just because they will compete to find their most viable position in a changing market.
 
While Powell has come in for some criticism because of its commitment to blanks and mini logos, I applaud their business acumen. By recognizing an emerging industry trend, and by further recognizing that it wasn’t going to go away, Powell prepared itself to benefit from it. Because they were first to move aggressively into the product category, they have positioned themselves between the blanks and the traditional full graphic boards. If they do it right, they may not have to share that niche with anybody else. I haven’t talked to anybody at Powell, and I obviously haven’t seen their financial statements. But I imagine that the cost, volume and margin numbers are pretty compelling.
 
It’s not that Powell doesn’t want to “support the industry.”   But since blanks aren’t going to go away, Powell figures they can support the industry better if they take advantage of the opportunity the evolving market presents. They sure as hell won’t support the industry if they are financially flat on their back because they stood on principal and ignored industry change. If Powell hadn’t done it, somebody else would have. 
 
Don’t forget your principals. By all means support the industry (you might start by joining IASC if you haven’t). But don’t let emotional resistance to change you don’t like prevent you from making good business decisions. In working with companies in financial distress over a period of 10 plus years, I found that they all (not some, not most- all) got into trouble because of denial and perseverance during a period of change. Skateboarding is going through some changes. You change with it.

 

 

Specialty Snowboard Shops and the Industry Consolidation; Who Are They and What’s Happening to Them?

/0 Comments/in , , , /by

Over the last month, I’ve stopped by eight or ten snowboard retailers in the Northwest. I talked to the owner, manager, or whoever was around and not too busy to talk with me. The number of stores I went in probably isn’t large enough to be statistically significant, the stores were picked based on my personal biases, and I didn’t ask the same questions every where. I told them I wrote for Transworld Biz, so they probably thought they had to humor me rather than throwing me out when they found out I wanted to waste their time and not buy anything.

I had three goals:
 
·         To try and reach a definition of a specialty snowboard shop.
 
·         To find out what the snowboard business has been like for retailers so far this season (I’m writing this in early December).
 
·         To hear from retailers how the industry consolidation was affecting them.
 
Here’s what I think I learned and some conjecture on what it means for the industry.
 
An Attempted Definition
 
We all know one when we see it, but defining the specialty snowboard shop isn’t easy. The word “shop” is important. REI is a specialty store, but it’s not a shop. The consumer also looks at a retailer differently than we who are in the business do. Zumiez’s may look like a specialty shop to some consumers, but with 143 stores, it’s business issues and competitive strategies are a lot different from the sole proprietor with one storefront.
 
Okay, now we’re getting somewhere. A specialty snowboard shop typically has one location, though I guess it could still qualify with a couple. I’d say it occupies something like 2, 000 square feet, though there’s a wide variation in that number. Fifty to seventy five percent of its total annual sales are snowboard related. It usually also sells skate boards and related products. Shoes and surf products are other common lines that are used to round out its offerings and improve summer cash flow.
 
SIDEBAR
 
Street Shoes
 
Everybody is carrying them and everybody is making them. New brands seem to pop up all the time. Distribution is starting to get screwed up and discounts are becoming more and more prevalent. There are no barriers to entry, and no fundamental differences among many shoes except for cosmetics. Differentiating a brand is getting harder. Does this sound familiar to anybody besides me? 
 
END OF SIDEBAR 
 
It’s highly seasonal (I bet you’re all stunned to learn that) and there’s a greater or lesser dependence on supplier financing to manage inventory and seasonality. It’s not located in high rent retail space at the mall. It depends on customer service and a carefully calculated reputation among its clientele to make it a shop people trust and are willing to go out of their way to get to.
 
The owner is running the place or, at the very least, is around an awful lot. Snowboarding is important to their life style. Their customer base, and what they have to do to succeed, is changing as snowboarding gets mainstreamed. If you’re a traditional “core” shop, you may be missing out on growth opportunities that result from the homogenization of the market, because a declining percentage of the total market is the traditional core.
 
So Far This Season
 
At least one thing hasn’t changed in this business- product still arrives late. Nobody told me about boards being late (maybe nobody cares?) but I heard stories about boots, bindings and outerwear. But there’s a difference from previous years. It use to be that if it came in, the specialty shops got it first. I’m getting the impression that the specialty chains with their large orders and resulting leverage with the suppliers are being given some priority. This is another confirmation of how the market is changing.
 
When asked what boards were selling, Burton was named everywhere it was carried and nobody else got consistent mention. The racks were stocked with the usual brands. Literally nowhere, except occasionally on the closeout racks, did I see any boards from any really small brands. At least in the Northwest, literally none (zero, zip, nada) of the small brands that appeared in the feeding frenzy seem to have survived. 
 
The closeout racks weren’t as stocked as I had expected. The smallest number of closeout boards I saw was six. I’d estimate the largest was around thirty. I didn’t get to peek in the back rooms, but it seems like old product (not just boards) was more or less under control in the shops I visited.
 
Boots and bindings are selling well, and clothing seems to be doing better than anything else is. Retailer enthusiasm is directly proportional to gross profit margins. With boards it’s, well, lousy coming in at around thirty to thirty five percent. Boots and bindings are better, and outerwear is king both in terms of sales and margins. The demise of certain clothing companies coupled with selected late delivery by others seems to have balanced supply and demand pretty well, and clothing is moving at keystone.
 
 Retailers are getting fewer calls than they were at this time last year offering them this year’s product at closeout. I heard a number of comments about certain brands already being sold out of product, especially the high-end stuff.
 
More than ever, the shops have to be inviting to boarders’ parents, and prepared to deal with ignorance of the sport and the whole culture. One owner had to stop talking with me to help somebody’s mother pick out a beanie. She wanted to know if it was a snowboarding or skateboarding beanie. He explained it could be used for either, sold it to her with a smile, and continued our conversation.  
 
SIDEBAR
 
Calculating Gross Margin
 
Let’s say you bought a board for $225 and sold it for $346. You’ve earned a thirty five percent margin. Not great but what do you expect for a board? You’re happier if you remembered to take into account your discount and terms when figuring your per item profitability. Reduce your item cost by your volume discount. That’s easy. Now figure out how much money your supplier is lending you at zero interest and what your bank would charge you if you had to borrow that money. This isn’t strictly part of your margin calculation, but it’s an “avoided cost” you should calculate and consider in figuring out what an acceptable margin is.
 
END OF SIDEBAR
 
Impact of Consolidation
 
There are no surprises here. Retailer leverage with suppliers has grown as witnessed by increased terms, better discounts and lower prices. However, as noted above some of that leverage has migrated from the specialty shops to the specialty retail chains because of the sheer size of their orders.
 
Many fewer brands are being carried. There are fewer to carry, and a retailer doesn’t have to be patient with any brand that doesn’t offer product, prices and programs that he doesn’t like. One retailer told me about dropping a brand because they didn’t feel like they saw the rep often enough. 
 
Especially in boards, margins are tougher to hold. This is the result of over supply, and a more sophisticated consumer who has a lot more information and choices and, because she has been overwhelmed by brand claims and counter claims, is less likely to be swayed by advertising.
 
One retailer who also sells skis and other sporting goods equipment but has a separate snowboard shop also pointed out how the relatively small size of the snowboard industry impacts his margins. “Look,” he said, I sell 700 pair of Rossignol skis a year. I sell 400 snowboards total from five brands. Which supplier do you think gives me the best prices and where do you think I earn the higher margin?”
 
A specialty snowboard retailer, then, if they are facing declining margins, has to sell more product and invest more working capital in the business to make the same profit. The implication is that maybe they need to expand their customer base.
 
Which they can probably do. My perception is that the mainstreaming of the snowboard business also means the mainstreaming of the snowboard specialty store. The hard core part of the market is declining as a percent of total business and the retailer can’t ignore that. The fact is that a grungy store with lousy customer service and stuff lying around isn’t going to appeal to what will be, if it isn’t already, the largest part of the market.
 
Successful snowboard specialty shops seem to be entering the mainstream right along with the rest of the industry. No surprise- they’re going where the customers are. If they’ve lost some margin to a more discriminating, less excitable consumer, they’ve gained terms, service, and predictability from a stabilizing, though far from stable, supplier base. Now if only they could have an accurate weather forecast.

 

 

Snowboard Industry Evolution; Is It the Survival of the Fattest?

/0 Comments/in , , /by

The snowboard industry is changing so quickly that I find myself looking back at articles that haven’t been published yet and wondering if I’ll agree with what I wrote by the time it’s in print. When Adidas buys Salomon, Quicksilver buys Mervin, Elan talks about putting its own name on a board, and Nike makes a deal for hard goods with DNR, last month’s immortal truth can become this month’s fatuous blather faster than you can say “Isn’t Animal cute!”

Valid business principals don’t change. But the arena in which you have to apply those principals is changing rapidly with growth, new players, and the challenges of consolidation. In a strategic sense, what are these changes, why are they happening and what are your choices in dealing with them?
The first time Elan, to pick a convenient example, put their name on a snowboard and it didn’t sell well we all smiled and said, “They don’t get it.”   And they didn’t. It wasn’t just about sliding down the mountain, but about lifestyle and attitude as well. You could make a good product but if you weren’t connected to the culture it wasn’t going to sell.
That at least hasn’t changed. It’s still about lifestyle marketing and we can hang our hats on it. But as the sport has grown and its energy become diffused, the lifestyle it represents is being interpreted and caricatured into a mass-market phenomenon. Witness Fila’s two page outerwear ad in the November, 1997 issue of Freeze with the punch line “BE CORE in two inch letters.
Nike, Solomon, Fila, etc. are going to show us what lifestyle marketing is all about by going after and attempting to tie together the pieces of that market in a way few companies in the snowboard industry can match. The ski business has finally remembered its roots, and is trying to regain some its previous energy and focus by reintroducing the youth market to skiing, recreating their own core market.
The big players aren’t going to dominate the core snowboard market (The core market consists of enthusiasts for whom participation in the activity of snowboarding is an integral and validating part of their lifestyle and self image.). But it won’t matter. They will try, and to some extent succeed in redefining and expanding “core.” Fila wants you to believe that if you “Buy Fila Skiwear” you’ll “BE CORE.”
 Nike’s sales alone, remember, are something more than 10 times those of the entire snowboard industry at wholesale. The traditional industry’s combined marketing and promotional budget could probably be doubled if we just had the cash from the experiments and false starts Nike probably made and is making in figuring out what to do with, to, and about snowboarding.
The second strategic change, then, is that we’ve got the attention of the big boys. The “they don’t get it” barrier to entry is diminishing because the market has gotten so much bigger. It’s now on the radar screen and worth a few missteps to decipher. And if they can’t decipher it, no problem; they’ll change it.
The third strategic change is that the borders of what is the snowboard business and what is not are getting less distinctive. As ski companies start marketing to the youth market, big companies try to grab a piece of and redefine the snowboarding vibe, and resorts have accepted (become dependent on?) snowboarding, the business we’re in and the customer we’re after is less clear than it use to be. Whether that’s good or bad depends on what you do with it.
Get yourself a little perspective. The March-April 1997 issue of The Harvard Business Review has an article by George S. Day called “Strategies for Surviving a Shakeout.”   I spoke with Professor Day, who has basically never heard of snowboarding. But if you changed a few words, his article could be about our industry cycle (damn-why didn’t I think of that sooner). I described our industry’s circumstances and the only thing that surprised him was the speed with which the consolidation was occurring. Somehow it wasn’t very comforting to learn that we were exceptional only in that way.
The good news is that though the sport will inevitably get homogenized, it will also grow and be legitimized to a whole new group of participants. The uncertainty is in how existing companies will participate in that growth. The newcomers to snowboarding won’t be completely successful in the traditional core market. Nobody can please all of the people all of the time, and it is exactly these inevitable inefficiencies in larger companies that result in the market niches where smaller players can thrive.
As the large players change the market, who are the new snowboarders going to be? To what extent will they care about the values of the core market? Can the core market grow and still be a core market? If it doesn’t grow, what are the growth prospects for existing companies who have positioned their brands to appeal to that market?
Traditional business strategy suggests that snowboard companies have two choices. They either can get big, or they can attempt to dominate a niche. Dominating a niche implies reduced growth prospects. Getting big in the snowboard industry, where big implies an ability to compete with the very large players, is probably unrealistic for many snowboard companies. The solution, if you’re unwilling to accept a niche position, even a profitable one, is growing in product areas related to snowboarding. I am anticipating, as a result, that snowboard companies will focus on making acquisitions in related action sports industries or will end up as subsidiaries or divisions of larger companies. There will, of course, be the exceptions that are satisfied with and can defend a profitable niche.
But how many niches are there? The one everybody has seemed to focus on are “high end boards to specialty shops.”   Others may be in leading edge technology and in image (Mervin?).
Don’t despair; there’s room for more than one company in a niche. But there’s not room for 300 and that’s one fundamental reason so many companies have fallen by the wayside. The competition to claim a piece of the most obvious and attractive market niches has been, and continues to be, intense.
I’m afraid that snowboarding is a bit of a flea on an elephant. The elephant is going to go where it wants and the flea can only ride along, get a tasty meal, and try not to be in the wrong place when the elephant roles in the dust. But fleas always get enough to eat, breed like crazy, are notoriously tough to kill, and can be really annoying to their host. In fact, the reason the elephant roles in the dust is to try and get rid of them.
But he never does.

 

 

The Financial Impact of Consolidation; Why Is It So Hard on Smaller Companies?

/0 Comments/in , , /by

It’s conventional wisdom that smaller companies are having an especially tough time meeting their financial needs, or even surviving, in the snowboard industry shakeout. It’s so conventional it’s taken for granted; even chanted like a mantra at times.

And it’s true. But why exactly? What are the specific changes in the financial operating environment of smaller companies that’s made life so difficult for them?
 
It’s 1993. The glory days when a snowboard company could sell all the decks it could get at full price if they could only find a competent manufacturer who would deliver on time (well, at least not too late) a quality (okay, reasonably decent) product. The mythical Burp Snowboard Company is on a role. The company did US$4 million in sales this year and its income statement looks like this for the 12 months ending 31 December 1993:
 
Net Sales                                  $4,000,000
Cost of Goods Sold                  $2,400,000
Gross Profit                              $1,600,000
 
Expenses:
Sales and Marketing                  $    400,000
Commissions                            $    280,000
General and Administrative        $    500,000
Interest and Miscellaneous         $    100,000
Total Expenses:                                    $ 1,280,000
 
Pretax Profit                             $    320,000
 
In 1993, snowboarding is a nice clean business. The balance sheet at the same date is a thing of beauty. There’s cash in the bank. Receivables are pretty low because a big chunk of sales were COD and terms, when offered, didn’t extend past 60 days. Product is flying off the retailers’ shelves, so retailers have paid you as agreed and bad debts are minimal.
 
Inventory? Not much more than what you think you need for warranty and some stickers and T-shirts. If you’re lucky, some samples for next season have already arrived.
 
Cash flow wasn’t great at the beginning of the season. But half of sales are to Japan and they paid for at least half their $1,200,000 order in advance. The rest showed up in the company’s bank account a few days after shipment. Your creditors (excluding some of your suppliers) are giving you terms of 30 to 60 days and retailers are paying you before you have to pay them. Snowboarding is so hot that raising a little money from some wealthy friends of friends was pretty easy. That and the money from Japan allowed you fund your operating expenses from January through July and to make required supplier payments.
 
Burp’s employees and you, the owner, are all thrilled to be in the snowboard business and are working your asses off for not too much money. Customer service, sales management and warranty are all pretty minimal expenses. Retailers and customers are just happy to get product and aren’t demanding much in return. You increased your prices 10% over last year and nobody so much as raised an eyebrow.
 
Ain’t life grand?
 
Fast forward to 31 December 1996.   Who knows what happened to Burp, but the New Guy snowboard company has also done US$4 million in the calendar year that has just ended. Their income statement looks like this:
 
Net Sales                                  $4,000,000
Cost of Goods Sold                  $2,720,000
Gross Profit                              $1,280,000
 
Expenses:
Sales and Marketing                  $    400,000
Commissions                            $    280,000
General and Administrative        $    500,000
Interest and Miscellaneous         $    100,000
Total Expenses:                                    $ 1,280,000
 
Pretax Profit                             $               0
 
The only change shown above is that the gross profit margin has been reduced by 8 percent from 40 to 32, reflecting competitive pressures and the resulting product pricing. In fact, as discussed below, you can also expect some increases in operating expenses.
 
Your balance sheet has changed from a thing of beauty to a nightmare. Cash is kind of scarce. Inventory isn’t. You’ve got a bunch of it left and it’s worth less by the day. If you sell it at all, you’ll be lucky to get your cost out of it. This is the result of order cancellations and over supply that has allowed retailers to buy product in season at great discounts (great for them anyway).
 
Your receivables look about as good as your inventory. Retailers have demanded terms with the result that, as of 31 December, a bunch of your receivables aren’t even due yet. Those that are due aren’t exactly coming in right on time, and some significant bad debt seems inevitable. Unless you’ve built up a hell of a bad debt reserve over the last couple of years, your pretax profit of $0.00 is going to be a loss if only because of collection problems.
 
Japanese orders were only a quarter of your total sales this year. The market there, and in the rest of the world, is moving towards more recognized and reliable brands from larger companies. There was no cash up front from the Japanese distributor and you felt fortunate to receive a letter of credit that got you paid within a week or two of shipment.
 
You had to sell more product units to achieve the same net sales due to price competition and as a result had to finance an additional $320,000 in cost of goods sold. Because of collection problems, you have to finance it for longer. Your suppliers, feeling some of the same competitive pressures you are feeling, helped out some by offering some better terms, but the net result of higher cost of goods sold and slower collections is more interest expense.
 
Administrative and selling costs have increased as retailers have demanded better warranty and customer service and reliable, timely delivery. You had to add a customer service person, offer point of purchase displays, and upgrade your computer hardware and software. You had to front your reps some more money so they could be every where they needed to be and look good being there. Shipping expenses increased as you worked hard to make sure everything got to the retailers on time.
 
You can’t just be an order taker anymore. Sales have to be earned and that means time and expense.
 
All these changes didn’t catch you completely by surprise. In order to adjust to them, you actually reduced your sales and marketing expenses by 25% during the season. Unfortunately, you did it at exactly the time you needed to spend more to establish your brand name. Your move made good tactical, short-term sense, but was a strategic error that will only make things more difficult in the future.
 
The net affect of all these changes, then, leaves you with an income statement for 1996 that probably looks something like what’s shown below.
 
Net Sales                                  $3,850,000
Cost of Goods Sold                  $2,720,000
Gross Profit                              $1,130,000
 
Expenses:
Sales and Marketing                  $    300,000
Commissions                            $    269,500
General and Administrative        $    600,000
Interest and Miscellaneous         $    150,000
Total Expenses:                                    $ 1,319,000
 
Pretax Profit (Loss)                   $(   189,000)
 
Not a pretty picture. I’ve assumed a five percent bad debt on the non-Japanese part of sales. Your cost of goods doesn’t decline because you don’t typically get that product back. Sales and marketing expenses are reduced by $100,000 though you really ought to be increasing them. Commissions are down a little to the extent net sales have declined. General and administrative expenses are up $100,000 to reflect the increased costs of doing business and an extra $50,000 in interest expense has been added.
 
A company similar to one that made $320,000 in 1993 has lost $189,000 in 1996. That’s a decline of 159 percent. Cash flow is critical as well and investors who were so accommodating in 1993 are reluctant to provide any additional financing in 1997 because they can’t see that the risk they would be taking is justified by the potential return. Prospects for orders for the 1997-98 season look bleak because retailers are turning to larger, more established suppliers.
 
What did the management of New Guy do wrong? Operationally, nothing. This is the result they would have achieved, and the position they would be in, if they did literally everything right. Their problem is that they didn’t have a well functioning crystal ball. They didn’t look into the future and see that industry maturity was inevitable and would require either that their company achieve critical mass before the consolidation began or have a distinctive competitive advantage.
 
It’s hard to be too tough on them for that, since most of our crystal balls don’t work to perfection either.
 
The industry shakeout isn’t going to reward only operating well. Of course you have to do that, but success under the new market conditions will ultimately depend on the strength of your balance sheet and having a clear competitive advantage and market position.

 

 

Market Niches; Gimme One! Now! But How?

/0 Comments/in , , /by

Last issue I took most of this space to discuss some tactical measures businesses could take to respond to the extremely difficult competitive conditions in the snowboard industry. I went on to say in what may have seemed like an after thought that none of those measures mattered if you didn’t have a way to compete. That is, a market niche you can succeed  in.

Then I ran out of space.
 
So it’s a month later and time to talk about market niches as part of your business’  strategy.
 
What’s a Niche?
 
Well, for one thing, it’s a term that’s thrown around a lot without much specificity. A market niche exists when you can offer features and benefits in your product or service that appeal to a specific customer group. These features and benefits have to be ones that your competitors are unable or unwilling to offer. Put another way, it’s  a portion of the market where growth prospects are acceptable and competitive pressures are manageable.
 
Niches can also be very difficult to identify, and your success in identifying them will ultimately determine your company’s success.   Is snowboard boots a market niche? How about women’s’ boots? Maybe women’s’ step-in boots? Perhaps women’s step-in boots with heel/toe lockdown. Let’s go one more step further and say that they can only be made of leather.
 
I suppose those are all niches,  but all or none of them may be a niche in which a successful business can be built. That depends not only on identifying the product characteristics and customer base, but the specific resources and capabilities of the company trying to succeed in the niche. And that, I suppose is why defining market niches is so difficult. They don’t actually exist until somebody has succeeded in creating or exploiting them.
 
Market niches are very dynamic. They change in response to economic conditions and the actions of all the players in the industry. What was the most popular highback binding three years ago would be tough to sell today.
 
Even the strongest niche doesn’t necessarily last forever.    When was the last time you sent a Western Union telegram? Okay, how many of you have even heard of a telegram? Visi Calc was the first computer spreadsheet program and was an incredible advance. But Lotus ate it for lunch and, in its turn Lotus, is being munched on by Excel. 
 
To companies that aren’t already industry leaders in snowboarding, a niche strategy means reduced expectations and cutting back operations. This is consistent with the general concept of market niches representing a small part of a market.   But that’s not always the case. The best market niches in the world are those in which the product is identified with the product category; Coke in colas, Kleenex in tissues. Maybe Burton in snowboards?
 
Burton’s market image is based on brand recognition built up over a period of years. They spent a lot of money on dealer brochures, riders, ads, and promotions when most other players didn’t have the resources to match them. Switch and K2 are trying to establish the technical standard for the step in binding as a market niche. Mervin Manufacturing’s market niche is based on their consistent appeal to a clearly defined group of young consumers. Sims seems to be focusing on being pure to the roots of snowboarding as a way to distinguish their products.
 
A market niche isn’t enough to insure a successful company. Beta was a better technical format for videotapes than VHS, but guess which one we all rent? Switch and K2 know that being first into the market and having the best technology (if they do) by itself does  not guarantee  their products will be adopted as industry standards. They are both involved in licensing programs to expand their market penetration.
 
Why Do Niches Exist?
 
A niche strategy is viable because smaller companies can take advantage of the compromises that larger players have to make as they expand their reach. As they expand their reach into more and more segments, over performance for some customers and under performance for others is inevitable.
 
In the snowboard business, we’ve seen some industry leaders increase minimum orders and impose other terms and conditions that all retailers can’t meet. Those leaders have found that it doesn’t pay to do business with an account if it can’t do a minimum amount of business with them. This perfectly rational business decision may create a niche opportunity for other players.
 
Community banks have survived the ongoing consolidation in banking (or have positioned themselves to be bought out at high multiples) by offering better service and being part of their community.
 
Continued growth means an inevitable reliance on larger accounts. Look at the numbers. Let’s say you are a five million-dollar company looking to grow ten percent. That means you have to sell another five hundred thousand dollars in merchandise. If you were to accomplish it all in new accounts, that would mean fifty accounts each buying ten thousand dollars of merchandise- not easy, but theoretically possible.
 
Now let’s say you’re doing twenty five million in business and want to grow ten percent, or two and a half million dollars. Finding two hundred and fifty new shops to buy ten thousand dollars each is probably not in the cards- especially in an environment where most of the possible customers are already carrying your product or your competitor’s. Larger dollar sales increases usually have to come from bigger customers.
 
Can You Create Your Own Niche?
 
Four things seem clear from the discussion above. First, even the most powerful niches don’t guarantee a company’s financial success. You have to do all the other things well, if not quite as well as your competitors.
 
Let’s say your new snowboard jacket hits the season’s colors and style dead on.  It’s got the latest fabric and the technical features everybody is lusting for. Maybe you can price it a little higher than the competition; but not double. You can be a week or two late delivering; but not a month or two. You’ll still have to finance your production. 
 
Second, market niches don’t spring forth fully articulated in a blaze of customer acclaim. Fred Smith, the founder of Federal Express, identified a powerful, distinct market niche but it still took time, work, money, faith and some good timing to make his idea into an industry leading company.
 
“The concept is interesting and well-formed, but in order to earn better than a ‘C,’ the idea must be feasible,” said a Yale University management professor in response to Mr. Smith’s paper proposing reliable overnight delivery service.
 
Burton didn’t exactly spring to the top of the pack over night either. I recall the story about Jake being unwilling to leave his trade show booth for a bathroom break because he was the only one in the booth and was afraid he’d miss a sale. It would be going too far to say that having a stronger bladder than your competition represents a market niche, but it’s indicative of how tough it can be to define one.
 
Third, the customer must perceive and accept the qualities of the product or company that you are offering, or there is no niche. If 300,000 1996-97 snowboards from Japan of almost any brand you can imagine show up in various chain stores this summer/fall for prices not too far over $100 (“Attention shoppers, we have a K-Mart Blue Light Special today on snowboards…….”) you are going to need a hell of a niche to sell many for north of 300 dollars. I have, by the way, no information that is going to happen, but I am concerned.
 
Finally, if too many companies pursue the same market niche, it’s no market niche at all. There’s no room in the snowboard market for another brand that wants to be “the high end board sold to core shops.”
 
Now What?
 
If you don’t have a market niche now, it’s probably too late to create one in the snowboard business. That’s not to say that somebody won’t succeed in doing it, but because of where we are in the business cycle, the odds against you are long indeed.
 
Just because you’re already in business doesn’t mean you have a market niche; just a customer base. Whether that base is sufficient to make you successful in creating a niche in a maturing market is another question. Make a start on figuring that out by asking: Who are my customers? Why do they buy my products?
 
Hunches don’t count. The usual glib and imprecise answers that seemed adequate when you could sell all the product you could get won’t be any help. Answering these questions is hard work. It takes time, planning and effort. The answer may never be “right” but it can keep getting better.
 
With that information in hand, stand in front of a full-length mirror. With the most serious demeanor you can muster (difficult, granted when you’re talking to yourself in a mirror) repeat the following, one at a time, with firm conviction
 
·         I can compete based on price.
·         I can compete based on image.
·         I can provide better customer service.
·         My technology differentiates me.
·         I’m king in one geographic area.
·         My graphics are better than anybody else’s.
·         We’re closer to the market than the competition.
 
The list above is by no means complete, and you should modify it to fit your situation. The ones that don’t leave you feeling ridiculous or laughing hysterically are probably worth exploring if you really understand your customers.
 
The above exercise may appear goofy, but the business of determining your market niche and basis of competition is deadly serious whether you’re a materials supplier, brand, or retailer. If you can’t annunciate it clearly and quantitatively in no more than a paragraph, you’ve got work to do. Don’t put it off any longer.
 

 

 

Winter Resorts and Snowboarding; Why Does It Seem Like an Arranged Marriage?

/0 Comments/in , , /by

The Medici family of Italy rose to commercial prominence during the renaissance at least partly because of their ability to make or receive payments in widely dispersed geographic locations. Lacking a wire transfer system, they arranged marriages between family members and other prominent merchants in commercial centers that gave them the ability to move money or goods through somebody they could trust. There was no love lost, but the commercial opportunities were too good to pass up.

 Sound a little like winter resorts and snowboarding?   The antagonism of past years has largely evaporated. We don’t have complete enthusiasm, but it seems like we’ve at least worked our way past grudging acceptance. We’re certainly a long way from understanding. If we weren’t, we wouldn’t have had Animal foisted on us as a mascot.
 
At the National Ski Areas Association (NSAA) last May, the moderator asked the panel of four CEOs of major resorts, “What about snowboarding?” There was a pause before Adam Aron, CEO of Vail and, interestingly enough, a newcomer to the winter sports business said something like, “It’s here, it’s not going away, that’s it.”   There was another pause before the conversations moved on, with what I thought was palpable relief, to another subject. 
 
Is this any way to treat the sport that represents 17% of lift tickets, is growing rapidly, and, frankly, has saved your posterior quarter while skiing has stagnated?
 
Maybe. There’s a couple of things that may explain this can’t live with us, can’t live without us attitude and behavior.
 
Legitimate Lifestyle Differences
 
The NSAA meeting was my first exposure to a ski industry gathering. Those of you in snowboarding who have never been to one should try it. It really brings home the differences between the two sports. It was more subdued than a snowboard gathering, dress was more conservative (tuckers in button down shirts) and the average age, higher. The number of relationships that went back thirty plus years seemed astounding. The meeting was about business and, for better or worse, the passion and concern for the sport that has been so common in snowboarding was less obvious. A number of ski industry veterans commented on that fact with concern.
 
I had a good time and don’t make the above comments as a criticism, but as a statement of obvious differences. Skiing use to be a lifestyle but now it’s a sport. Snowboarding is still closely associated with participant lifestyle choices in music, clothing, culture, and other sports.  Skiing and snowboarding are of different generations, with different participant concerns and focuses at their different stages of life. It’s not good or bad. It just is.
 
These generational differences go a long way towards explaining why the resorts want the snowboarders’ money, but would just as soon we all took up skiing. We share sliding down a hill, and not much else. Really catering to snowboarding requires that the skiing establishment develop a commitment to lifestyle activities they aren’t attracted to and don’t understand.
 
Remember, this isn’t about finger pointing or right/wrong. We’ve just got groups of people with different life experiences who are at different stages of their life.
 
Financial Realities
 
If you take the time to read through the stock offering prospectuses of Vail Resorts and Intrawest Corporation from earlier this year, you’ll quickly realize that there’s a lot more to their business visions than selling lift tickets. It’s not enough, and it’s not accurate, to say simply that they are in the skiing business, or even the resort management business. It’s closer to the mark to say they are in the business of maximizing asset utilization, but I think a better way to put it is that they are in the theme park business.
 
Yup- just like Disneyland.
 
Walt Disney and successors have spent and are spending hundreds of millions of dollars on castles, monorails, fancy roller coasters, hotels and retail space. Their ongoing maintenance and operating expenses are big numbers. Even if they shut the parks down, interest expense and depreciation by itself would be a huge financial burden.
 
Disney’s revenue in the year ended September 30, 1996 was 18.7 billion dollars. Depreciation expense by itself was 3.94 billion. They had long term debt of over $12 billion on which they have to pay interest. Not all of that is associated with the theme parks, but you get the picture.
 
So how are they going to cover all those expenses and make a buck? By keeping those assets busy. They don’t want you to come for a day and go on a few rides. They want you to come for a least a week, stay in their hotels, eat their food, shop in their stores, play a round on their golf course and ride all the park attractions. And it would be nice if you got there via an airline they have a deal with. Keep those assets busy and hear the cash register go ca-ching!
 
Now, check out this nice juicy quote from Vail’s prospectus.
 
While lift ticket sales….have grown each year over the past ten years, revenues from other sources have grown at a much faster rate and, as a result, have increased as a percentage of Resort Revenue from 36% in fiscal 1985 to 51% in fiscal 1996.
 
The Company’s focus on developing a comprehensive destination resort experience has also allowed it to attract a diverse quest population with an attractive demographic and economic profile, including a significant number of affluent and family-oriented destination guests, who tend to generate higher and more diversified revenues per guest than day skiers from local population centers. While the Company’s Resort Revenue per skier day is currently among the highest in the industry, management believes that the Company currently captures less than 20% of the total vacation expenditures of an average destination guest at its resorts. Vail Resorts’ business strategy is not only to increase skier days and guest visits but also to increase Resort Revenue per skier day by capturing a higher percentage of the total spending by its year round destination and day guests, by continuing to expand the range and enhance the quality of activities and services offered by the Company.
 
Intrawest says much the same thing.
 
Intrawest’s operating strategy is to link the staged modernization and expansion of mountain facilities at its resorts with the controlled development of four-season resort villages focused on high occupancy accommodations.
 
I think it’s a hell of a good strategy, and if I were CEO of a large mountain (not winter!) resort, I’d do the same thing.
 
I wouldn’t do it because I didn’t like snowboarders. I wouldn’t do it because I didn’t want them on my mountain. I wouldn’t do it because I didn’t like/understand/participate in their activities and life style. I’d do it because it made business sense and my first responsibility was to my shareholders or myself as the owner. I’d believe that right now I can attract more destination guests and make more money on a golf course than a skate board park, because the people who golf have more money than the people who skate. That’s just the way it is.
 
But it won’t always be. And so the mountain resort community has to deal with a bit of a conundrum that I think explains their sometimes schizophrenic approach to snowboarding. The larger resort’s strategies seem to require them to focus on the current generation of skiers. Given that this group is constant to shrinking in numbers, skier days can only be increased by taking market share from other mountains. This explains some of the consolidation pressure in winter resorts, but it also represents a marketing opportunity for some smaller mountains (Hey-I think I feel another article coming on!).
 
But those skiers are going to get old and, someday, stop skiing. So are current snowboarders, but not so soon. How do resorts that have to rely on the current skiing generation to achieve their strategic and financial goals keep a growing and important minority of their customers happy?
 
Do they need to do very much at all? Will snowboarders turn into their parents, have similar disposable incomes, and want the same facilities and amenities their parents wanted by the time they are the destination decision makers? Don’t laugh; it’s been known to happen. I wonder if Nike will come out with an adult diaper someday (Just do it?).
 
Maybe snowboarding and snowsboarders need to take the time to understand the ski industry that we wish they would take to understand us. Betcha there’s some business opportunities there somewhere.

 

 

Now What Do We Do? Living With the Industry’s Success

/0 Comments/in , , , /by

I guess you can start by congratulating yourself. Though the snowboarding industry is still relatively small ($800 million at wholesale?) it’s continuing to grow at a rate most industries can only dream of and is clearly here to stay. You’ve been a part of that.

 
But now, you are face to face with the results of your own success. The consolidation we knew would eventually come is here. Three years ago, it was an intellectual concern for the future. Last year we could see it happening, but were hopeful it would be gradual and, therefore, manageable. This year, in the wake of the trade show season, it’s a lot like a cow pie dropping on an ant hill; sudden, stinky and overwhelming.
 
I couldn’t back this up statistically, but my travels and conversations tell me that a lot of companies lost money last year and are poorly positioned to carry themselves through another season. I’d guesstimate that retailers typically committed no more than half of their open to buy for the season and are expecting to rely on closeout product available during the season. Brands, including a couple of the larger ones, have been disappointed by their preseason orders. I view being positioned to do as much business in units as you did last year as a big success.   I suspect that quite a few smaller brands (hard and soft goods) are past disappointed and approaching scared.
 
There are a lot of deals being discussed among companies. Buyers want to give themselves the critical mass and product mix they think they need to be a successful industry player. They also see it as a time to pick up good brands cheap. Most sellers are making deals out of necessity. Ride has never made a secret of the fact that selected strategic acquisitions were part of its plan. The Silence board brand was acquired by Straight Line Manufacturing. I think you can count on some more announcements over the next couple of months. 
 
Everybody that’s having a tough time isn’t going out of business. But some are. I’ve talked to too many companies who’s strategy for surviving the consolidation is to “hunker down until it’s over.” The problem with that particular strategy is that they’ll have to hunker down a hell of a long time; by definition a consolidation isn’t over until smaller players without clearly defined market niches are gone.
 
It’s also not appropriate to assume that “getting through” one more year will be enough. Over capacity, which I see as the primary cause of the consolidation, isn’t going to go away that quickly. As soon as I get my crystal ball working again, I’ll let you know exactly how long it will take.
 
Well, I hope you enjoyed that little dose of doom and despair. Now let’s talk about what you can do about it.
 
The funny thing is that when times get hard and things get chaotic, there are always opportunities if you can just raise yourself out of the paralysis and myopia that is always the result of short term pressures. I’ve seen it time after time with companies in difficult transitions and been the victim of it myself. The effort, time and focus that it takes just to manage from day to day when money is tight takes most of your energy. You are so busy hiking through the forest that you never find the perspective to climb one of the trees and see if you’re going the right way, or are even in the right forest.
 
The good news is that the tougher things get, the less you have to lose my trying. You’re probably better off dying in a fall from the top of a tree than starving to death hiking through the wrong forest.
 
We all come to business with a clear sense of what “makes sense.” Forget it. Pull out all the apparently crazy ideas you’ve rejected out of hand and look them over. Put a sock in the mouth of the little voice in your head that says “We can’t do that.”
 
It’s time for absolute openness and absolute honesty with the people you work with. Listen, have respect for everybody’s crazy ideas and don’t reject anything out of hand. Stop worrying about people finding out things ain’t great right now. They already know it. Chances are they will respect you for your honesty and for dealing with it. Get the all the big uglies on the table so you can deal with them. The companies I have least confidence in are the ones who tell me everything is going great (“Oh yeah, we’re booking lots of orders!”) when I know they aren’t.
 
·         Cut that expense you didn’t think you could do without. What have you got to lose?
 
·         Ask that supplier for better terms and lower prices. All they can say is no.
 
·         Get rid of that old inventory at whatever price. Take the income statement hit and generate some cash. It’s not going to be worth more later.
 
·         Renegotiate your lease. Tell your landlord you need the rent to come down by 15% if he wants to have a viable tenant. Get him to give half of your security deposit back. 
 
·         Let people go if you have to, even if they are relatives and friends of long standing. How else are you going to preserve the company and jobs of the remaining employees (including yours).
 
·         Cut everybody’s salary 10%. And never pay payroll if you can’t pay the associated payroll taxes. Those taxes are a personal obligation.
 
·         Tell your creditors you can’t pay them now. Explain what happened and what steps you are taking to change things. Be honest with them. Keep them informed. Ask them for a discount and make a deal.
 
·         Get rid of the 800 number. Call the phone company and tell them you want a better rate per minute. You’ll probably get one. I did.
 
·         Stop making nice to people who owe you money and haven’t paid.
 
·         Raise your prices. Now. If you can’t survive with in your current financial circumstances anyway, what do you have to lose?
 
If you’re shocked by that last one, good. I want you to be. Maybe it’s not the right step for you. But there are a dozen other equally crazy sounding ones that are. All you have to do is think of them.
 
All these tactical steps will help as long as they are part of a feasible, overall plan. Don’t tell me it’s impossible. I’ve implemented all the steps above at one company or another. Remember that the power of enhancing revenue or reducing costs is in how quickly you do it. $2,000 a month becomes $24,000 over the period of a year.
 
So much for tactics. Unless you’ve got a workable strategy none of the above matters. Fundamentally, there has to be a reason why you are going to be able to successfully compete. If you can’t specifically define who your customers are and why they will buy your product instead of a competitor’s, you don’t pass go and you don’t collect $200 dollars. If you can’t differentiate your product and your company, you have a limited chance of being a survivor.
 
Ask 200 customers why they bought your product or why they came into your store. Listen to them carefully. Tabulate the responses and looks for trends and consistencies. Visit 20 other stores who are your customers or competitors. Have a check list of things you want to ask or note. What are they doing better or worse than you? How are they displaying your product?
 
Developing an effective strategy doesn’t result from taking everybody to a nice hotel for three days of meetings. It comes from a tedious process of collecting and studying meaningful information. Strategic planning is the process of looking at the same information your competitor can get from a different perspective and making better decisions as a result.
 
So you think you have identified a competitive advantage and have a strategy to carry out. Is it worth the effort?
 
Envision your store or company as you want it to be three years from now. What will it’s sales be? What will its customers think about it? How hard will you be working and what you will be earning? How much risk will you be taking? Ask the questions that are relevant to your circumstances.
 
Now look where you are right now. What resources will you need to get where you want to be? What are the risks? This is part of a much more detailed process but, in general, does it look like what you have to go through to get where you want to be is worth the time, risk and effort? Can you get the resources you need? If not, why are you considering doing it?
 
Nimble, aggressive companies that can identify opportunities, have a competitive advantage they understand, and have made an explicit decision about what they want to achieve and how they are going to get there will be the survivors. Don’t starve marching around the wrong forest. Climb the tallest tree and see which way to go even if you risk being killed in a fall.

 

 

Orders; I Got to Get Some Orders! The View From Las Vegas

/0 Comments/in , , , /by

Many snowboard companies came to Las Vegas this year knowing in their heads it could be tough to get orders, but hoping in their hearts that oversupply in all product areas wouldn’t stifle retailers’ demand for new, branded product. There are prominent exceptions, but a month after the show, it looks like some heads were right and some hearts broken. Companies at all levels of the sport have experienced disappointing preseason orders and face the hard decision of whether to order on faith or reduce their projections for the year.

Anybody who had hoped that the worst of the consolidation was behind the industry unfortunately knows better now. Even as retail sales climb and snowboarding becomes more mainstream and better established, some industry participants seem to be facing hard times.
 
The Numbers
 
SIA’s numbers on the show for 1997 and the three preceding years appear to validate industry conditions and suggest why some companies have been disappointed by their preseason order numbers. The total number of show exhibitors grew from 705 in 1994 to 897 in 1996. In 1997, the number declined a little more than eight percent to 823.
 
Total show square footage grew almost twenty-one percent from 427,000 in 1994 to 515,960 in 1996. In 1997, total square feet fell to a little over 504,000. That decline was reflected by the fact that no companies were exhibiting in the upstairs meeting rooms like they had the previous year.
 
The total number of buyers attending the show and shops represented also dropped. After growing thirty-one percent between 1994 and 1996, from 2,854 to 3,738, the number of shops attending dropped by over seventeen percent to 3,101. The number of buyers grew twenty percent during the same three year period from 7,761 to 9,333. It fell five percent in 1997 to 8,867.
 
My conjecture is that the decline in the number of shops and buyers attending the show is to some extent a function of an increase in orders being written at regional shows. As a result, I don’t see it as being a significant negative for the industry.
 
The Feeling
 
Comparing the mood at Vegas this year to last year was initially difficult. In past years, the peaks of excitement in the snowboard area were balanced by the valleys of the ski side. This year, with both major ski and snowboard players in the main hall, the energy level seemed more even, the peaks and valleys having leveled off somewhat.
 
Perhaps this was the result of the show reorganization. More likely, it followed from the larger booth and more business-like atmosphere, a continuation of trends from last year. The product, not the booth, was definitely the focal point. Ride and Sims must have been thrilled by that, since it appeared that the same designer using the same materials had created both their booths.
 
There were more people with ties than purple hair. Nobody was thrown out for having drugs in their booth and I heard fewer stories (only one) of product theft. There didn’t seem to be a keg in a booth anywhere. It’s possible I just wasn’t in the right place at the right time, but I’m usually pretty good at sniffing them out.   
 
My other observation about booths is that many companies were using the same booth materials they used the previous year, though the materials were assembled in a different way. I took that as one confirmation that maturing industry conditions are leading companies to be a little more careful how they spend money.
 
The booths of the leading snowboard companies seemed busy most of the time. Salomon and Bonfire shared a booth, with the boards along the back and the clothing on both sides. To keep things from getting too businesslike, Mervyn Manufacturing featured big white boards on which they listed and ranked the leading marketing gimmicks as reported by people walking the show. These included three dimensional top sheets and a bunch of others I can’t remember. Mervyn also had some women (I think they were women) walking around dressed as nuns.
 
It occurred to me that the best marketing gimmick at the show was Mervyn making fun of everybody else’s marketing gimmicks as a way of attracting attention to their booth. Thank God we’ve got Mervyn to keep us from taking ourselves too seriously.
 
The Other Hall
 
Back across the lobby, in what use to be the snowboard ghetto, it was, well, kind of a ghetto. Though traffic picked up as the week progressed, there were few larger companies to serve as a draw for the smaller players there. West Beach was the largest snowboard related company in that hall, and they seemed to be having a good show. The moral of the story may be that if you have good product, programs, financing, management, industry history and your reps do their jobs, show location may not be as big an issue for you.
 
In the corner of the hall, as far from the main entrance as you can get, was the Reef Brazil booth. I have absolutely no recollection what the booth looked like. I don’t even remember what products they were selling. But(t) till the day I die I will carry with me the memory of the Reef Brazil models standing there and signing posters. My own theory is that SIA intentionally put the Reef booth in that location to draw traffic into and through that hall in response to some of the complaints from companies who didn’t get into the other hall. I think it worked and I hope Reef took the same approach at ISPO.
 
New Brands and Manufacturers
 
I swear I didn’t expect to have to write this section. I thought the recent performance of snowboard company stocks, the publicity about over supply, and the declining prices for hard goods would cause people to be cautious about entering the industry now. Compared to previous years I suppose they were cautious. But there were fifteen or so new brands I hadn’t seen before. Even more interesting was the amount of additional manufacturing capacity associated with these brands.
 
Wolverine Snowboards is apparently owned by a Michigan auto parts manufacturer and expects to do OEM business. I don’t know for whom. Kuusport Mfg. Ltd. has a great looking accessory line but has decided to start making snowboards. They took out a full page color ad in Transworld Snowboard Business advertising what appeared to be good quality boards for between $105 and, I think, $130 dollars. Good luck to them.
 
After a few days of going from booth to booth to booth and being told by everybody that business was great and they were writing lots of orders, I had begun to feel like Diogenese searching for an honest man. At one of the new brands, I finally found one.
 
This booth was manned by an industry veteran who was old enough to have had his rose colored glasses shattered. After a few minutes of conversation, I cautiously approached the subject of his ability to compete and ask him, in the nicest possible way, why his current employer had leaped into snowboarding now and how they expected to succeed. He looked me right in the eye and, with hardly a moment’s hesitation said, “We can afford to lose a lot of money.”
 
It was one of those moments of clarity that happens all too infrequently in business. I don’t know where this guy is now. I have no reason to think he’ll see this article. But if he should, I want him to know that if I was starting a new snowboard company, I’d hire him in a minute.
 
Trends
 
Boards really do seem lighter this year. Significantly; not just by an ounce or two. It’s been suggested to me that this trend will finally run its course when durability declines and there isn’t enough weight to provide adequate dampening. Like pants can get too baggy, boards can get too light.
 
Quicksilver introduced its step in, joining the apparent rush towards that technology. But the waters were muddied a bit by improvements to traditional soft bindings that improved their ease of use and, in some cases, claimed to make them nearly as convenient as a true step in. All I really care about is that somebody makes a step in boot bigger than a (US size) 13 so I can actually try one of them.
 
Maybe a dozen companies showed some form of a three dimensional top sheet. Some claimed various performance benefits, but I see it mostly as a decorative way to reduce weight. Morrow first used this technology in a limited way maybe three years ago. It’s not new, but it’s sure gotten more popular.
 
This year’s Vegas show and the period immediately following it basically validated the changes many of us have seen coming in the industry. I won’t characterize them as good or bad, but as inevitable. Hype and image aren’t enough anymore.   

 

 

How a Brand Makes Money In the Snowboard Business

/0 Comments/in , , , /by

Don’t get too comfortable. This is a short article that won’t take long to read. It’s a direct result of that moment in Vegas when I finally decided I wasn’t dreaming and that there actually were a bunch of new snowboard brands and new factory capacity. What makes it even worse is that some of these companies appear to be backed by financially solid parent companies, and can afford to lose money for a really, really long time.

I had thought maybe we were making some progress in getting through the consolidation, but now it looks like we’ve got some new fodder for the irresistible business cycle and we can all be miserable a little longer.
 
To make money, do these things:
 
·         Realize that all you have is your brand name and do everything you can to build and protect it. If you don’t have a recognized one, you probably can’t expect to make any sort of reasonable return by starting to build it now.
 
·         Base your product orders on your preseason.  Don’t kid yourself about reorders. Business people I respect are ordering no more than 10% above their preseason bookings, and some are 5% below. If you have to count on reorders to break even, you might want to ask yourself if your company has a future in snowboarding.
 
·         Be clean at the end of the year. You’re better off agonizing over sales you lost than inventory you have left. Leave your retailers sold through at full margins and anxious to increase their orders next year. You aren’t giving up sales; you are just delaying them a year.
 
·         Don’t chase market share right now. I’m beginning to think market share is a code word for losing money.
 
·         Respect the fact that closed out, brand name product may be among your toughest competitors this year.
 
·         Sharpen your pencil when formulating your advertising and promotional budgets. If you’re ordering product based only on what’s already booked and you aren’t fighting for an increase in market share, aren’t there some things you can do without?
 
That’s it.
 

 

 

Hard Learned Lessons; You Can Do Everything Right and Still Get Screwed

/0 Comments/in , /by

This is the industry. Snowboarding. Some are in it to make a buck, some because they love the sport and just want to make a living doing what they love. Occasionally, the two collide and the golden rule prevails; the one with the gold makes the rules. When there’s a business lesson to be learned that might help some others, I get involved. My name’s Harbaugh. I carry a pen (well, actually a key board).

 I was working the day watch out of the precinct office when the phone rang. The boss’ name is Stouffer. My partner is O’Brien.
 
The story you are about to hear is true. The names, places and other details have been changed to protect the innocent.
 
Dum, Da Dum Dum……..Dum!
 
“The fact is I thought I had everything covered. I thought I was on the money with that letter of credit. I thought there was no way I’d get screwed with that letter of credit.”
 
Ralph thought he finally had it made. All he really loved to do was build stuff and when he learned to love to snowboard and found that he could make money building boards, it seemed like it was all coming together.
 
Not that it was easy. There were the usual startup/entrepreneur/cash flow challenges. It was 1994 when he took a salary for the first time; $25,000. The company did 4,000 boards that year with fifteen employees, one press and a simple production line. They produced for half a year. 1,500 were their own brand (let’s call the brand and the company “Burp”), and the remainder for other brands.
 
A 1995 order for $1.3 million and 8,000 OEM boards convinced him he was over the hump.
 
“I was completely ready for it. I had the process down and I knew where I wanted to go. All I needed was the volume to get up so I had enough machines. So I had a constant flow through the shop and I figured hey, get it to that point, get it running smoothly and then I can concentrate on Burp.”
 
The first 5,000 of the 8,000 board order were manufactured, shipped and paid for. The buyer called back with a problem with the inserts, which was fixed at Burp’s expense. Before making the rest of the boards, they created four samples with the insert problem corrected and sent them to the buyer for approval. They were approved, in writing, and Burp geared up to produce the boards to that newly agreed upon standard.
 
That’s when the buyer tried to cancel the remainder of the contract. But with the materials bought, that wasn’t really an option for Burp. It took the buyer around a month, until October, to determine that the boards would be produced under another label, and the order was upped to 4,000 from 3,000. A shipping schedule was agreed to and Burp began to produce.
 
The first 400 boards are shipped and paid for with no problem. The second 500 are ready to ship on time and on schedule and the buyer says “Hold it, we don’t have an address for you to ship them to.” A week later, Burp finally gets permission to ship them; to the buyer’s warehouse.
 
Ralph is starting to get nervous. He’s been shipping these boards, and getting paid, under a letter of credit. The buyer’s delays have meant that there are only fifteen or so days to ship the remainder of the product and present the documents before the letter of credit expires. It could only be extended with the cooperation of the buyer, and Ralph isn’t feeling too confident that they will be willing to do that.
 
Another thousand boards go out the door and at this point, the nameless buyer owes Burp $350,000. Another week goes by and another 500 boards are ready to go. His bank tells him he hasn’t been paid for an earlier shipment, and the buyer’s bank pleasantly informs him that their are discrepancies in the letter of credit.
 
A letter of credit is an agreement whereby a bank agrees to pay the beneficiary (in this case, Burp) a certain amount of money based on the presentation of very specifically prepared documents usually indicating the shipment by the specified means of certain goods. If any detail is incorrect, the account party (the entity that had the bank issue the letter of credit; in this case the buyer) can refuse to honor the letter of credit. Incorrect details are called discrepancies.
 
I can’t recall ever seeing a letter of credit without a discrepancy. Ralph was new to the letter of credit game and didn’t know about discrepancies.
 
“I called them (the buyer) up and asked what’s up. They drug it out for three or four days. I stopped manufacturing at this point because I didn’t have any money to pay my guys for two weeks and this is like three weeks before Christmas. Bad scene. ******* is the heroin user capital of the world. I’ve got some burley ass dudes working for me, 38 of them. And when you come to them and tell them they can’t get their pay check…..three days before Christmas, your talking about some pretty pissed off guys.”
 
The buyer claimed there were only two and a half instead of the industry standard three turns on the inserts. Ralph didn’t know what the hell the industry standard was, but he knew he was producing the boards to the standards they had all agreed to in writing. He put the extra half turn on the boards in the warehouse at Burp’s expense.
 
For the next few weeks, Ralph is the beneficiary of an education that’s not in the curriculum at any business schools. For reasons Ralph has a hard time figuring out, the CEO of the buyer gets involved. He pressures Ralph to ship the remainder of the product, but won’t pay what is already owed. He tells Ralph he’s going to take his house through some mysterious legal mechanism that was never made clear. Endless conversations, attempted negotiations, and confrontations go nowhere. People show up from the buyer with a truck on three separate occasions to pick up the product, but they have no authority to pay for it.
 
When December 31 comes around, the CEO suddenly disappears from the picture. There’s no resolution, and no decision maker for Ralph to talk to. He’s $550,000 in the whole, his business is on the verge of collapsing, and he’s got nowhere to go.
 
“These guys lied to me, straight up lied to me. This guy told me that a company check could not be revoked, a wire transfer could not be revoked, every time he’s telling me this I’d call my bank and say, listen, if a wire transfer comes from *************** how long does it take? They said it takes about four days. Okay, can it be revoked? Sure.”
 
Having run out of options, and with his company and personal assets on the line, Ralph filed a lawsuit against the buyer for $4.8 million. His attorney told him he’d win, but it would take something like three and a half years. Both he and his company would be in bankruptcy almost immediately.
 
His attorney went back to the buyer and made a deal. The buyer got the product, Ralph got some money, they signed mutual releases and walked away from each other. But the money wasn’t enough to cover all the debt.
 
Ralph’s only solution was to sell the company. There was plenty of interest, but when the smoke has cleared, there was only one buyer for the company remaining. Let’s call it the ABC company. ABC was willing to buy the assets and pay the creditors $0.45 for each dollar they were owed over three years. Ralph’s job was to convince them to take that. Overall, the deal was worth something like $400,000.
 
Ralph spent six months trying to bring the only three creditors who didn’t quickly agree to the deal into line. He couldn’t do it. Ultimately, it got too late in the year to make the season and ABC pulled out. At this point the major secured creditor, the bank, finally said they’d do it, but it was too late.
 
Ralph went back to ABC. The bank foreclosed on the assets, and ABC bought the assets, including the Burp name, from the bank for $85,000. The unsecured creditors got nothing and the bank got less than it could have gotten had it agreed to ABC’s original deal earlier.
 
Ralph works for ABC now. He’s running their factory, doing what he likes to do, and the business is well capitalized.
 
“At the end of the day, if everything had worked out, and I had made the product and shipped it and they (the buyer) accepted it, I would have been in the plus; not substantially, not like I thought I would be, but I would be in the plus. I would have paid back all my trade debt no problem and I would have been half way strong going into next year. Instead I was sitting there with $350,000 worth of debt.”
 
SIDEBAR:
 
Hard Lessons Worth Remembering:
 
1)    Letters of credit are gnarly documents
2)    Agreements are only as reliable as the people you make them with.
3)    Nothing ever works out quite the way you expect it.
4)    There isn’t always time to learn; know what you don’t know.
5)    A bank’s decision making process can be hard to figure out.
6)    When all is said and done, all you’ve got is your integrity, your ethics, and the relationships you build with people.