One Possible Future; An Industry Model for Skateboarding

Last month, I wrote about surviving a downturn, suggesting that this wasn’t just a downturn but a fundamental change in industry structure, requiring a change in the way successful companies competed. This month, I’d like to be more specific about how I see the industry evolving.

It’s perhaps a bit pompous to do this, because my crystal ball is no better than yours. But my recent study of China’s fixed exchange rate and the September 21 cover of the New York Times Magazine made me decide to give it a shot.
Perhaps that needs some explaining.
Chinese Exchange Rates
I took a whole column in SnowBiz to write what I’m summarizing here. It should be out by the time you see this, so for more detail refer there. Basically, China keeps its exchange rate fixed at 8.3 Yuan to the US dollar. Most currencies are managed from time to time and to some extent, but the major ones change against each other daily based on interest rates, trade, general economic conditions and other factors. The Chinese government makes sure its exchange rate doesn’t change.
The result is that the Yuan is between 10 and 40 percent undervalued against the dollar. That is, stuff we buy from China is between 10 and 40 percent cheaper than it should be. Great for consumers and companies that import from China. Not so good for U.S. manufacturers and people who want to sell to China.
And there’s not much you, as a US manufacturer can do, given the artificial undervaluation of the currency. It may be, as some have claimed, that you can beat low labor costs with technology. But add the artificial exchange rate advantage and you’re screwed.
It’s unlikely that the undervaluation of the Chinese currency will go away in the short term. Among other reasons, we need them to invest a chunk of their trade surplus with us in U. S. Treasury securities so we can finance our budget deficit.
We all know that more and more skate hard goods (not to mention soft goods) are being made in China. Lacking some kind of meaningful technological change in skateboards, expect that to continue and grow. If the quality of Chinese made skate hard goods is still an issue, and I’m not sure it is, it won’t be for long.
So the stuff gets made a lot cheaper, and the quality is fine. Lacking product differentiation, those lower prices eventually, through normal competitive dynamics, get passed along to consumers. Good for the consumers, and perhaps for the general growth of skate. Bad for manufacturers and retailers.
Because even if sales of hard goods grow (unless they grow an awful lot) and even if percentage margins remain the same, the total number of margin dollars realized from hard goods sales declines.
Margins dollars are the dollars available to pay for team, marketing, rent and telephone, salaries and bunches of other stuff excluding product. Whatever left is profit, more or less.
I am not suggesting that there will be no skaters left willing to pay higher prices for branded decks, but I expect the number of such skaters to decline as percentage of the total. And, at the end of the day, there’s no reason higher end branded decks can’t and won’t succumb to the same competitive pressures as any other deck.
So if you’re a seller of skate hard goods, manufacturer or retailer, your financial model may change. In hard goods, you’ll have to sell more to make the same money.
Boy, I’m just full of good news today, aren’t I?
The Kid on the Cover
I think he was four. He was a skateboarder and he was on the cover of last Sunday’s New York Times Magazine. The story was about how really young kids are becoming sponsored and managed.
Seeing him there didn’t tell us anything we didn’t already know about the mainstreaming of skateboarding, but it sort of galvanized me into saying the following:
The skate market will increasingly be driven by the apparel (including footwear) brands. They can sell product to anybody who thinks that skateboarding is cool. Hard goods brands can only sell to people who skate. The apparel market, which I suppose includes everybody who needs shirts, pants, and shoes and is over four and under 50, is simply a couple of orders of magnitude bigger than the hard goods market. And, for successful companies, margins are and will be better in apparel than in hard goods.
They will influence skateboarding, to put it bluntly, because they will be bigger and have a lot more money than most hard goods companies. Hard goods skate companies already know everything I’ve said here. They have the following choices:
1)            They can try and use the strength and remaining cash flow of their established brands to transition into soft goods and, ultimately, make those soft goods the bigger part of their business. You saw that process already going on with some brands at ASR. Soft goods are tougher to do well than hard goods, and skate brands that take this approach will (for the most part) be competing with companies that are larger and better financed than they are. They will also have to decide whom they are trying to sell to- the core skaters who buy their branded product, or the larger mainstream market. Obviously, it starts with the core and has the possibility of being extended from there. The art is in figuring out how to expand distribution without damaging the brand’s credibility.
2)            They can sell their companies. But if they wanted to do that, they should have done it two years ago at the peak of the frenzy. Element is the only brand I recall that really did that. Companies selling now won’t get near the prices they would have gotten. Still, it may turn out to be the only financial choice for some and certain brands may have more value as part of a larger organization than as stand alone companies.
3)            They can remain as independent “core” skate companies. Whether there is a financial model that can support that strategy is unclear to me.
If you want some confirmation that this kind of industry evolution is a reasonable possibility, look no further than the surf industry. It’s dominated by a handful of soft goods companies. Mainstream sales, for both brands and retailers, are where the sales volume and profit is. Many to most industry customers don’t surf. Hard goods are having problems with cheap product from China, and nobody seems to make any money on them. Hard goods have hardly been discussed at the last two surf industry conferences.
Under the scenario I’ve suggested here what, exactly, is skateboarding? Fairly clearly, it’s not the kind of urban, underground, at the fringe activity it use to be. Time was when it was in the interest of the major hard goods brands to position it like that and hell, that’s how it was anyway. But if the picture of industry evolution I’ve painted here is valid, that no longer makes sense at least in terms of the business strategy. Because, as I’ve tried to explain above, the sales, growth and margins are in the other, much, much larger part of the market- the mainstream, if you will.
You can be a successful, profitable $20 million company with a significant marketing and advertising program if your margins are 45%. If those margins fall to 25%, I’m not so sure that works. Okay, I’m pretty sure it doesn’t actually.
More and more of my articles could be written for any of Skate, Snow or Surf Biz. There’s a lesson there somewhere about how the industry is evolving. In line with that, I want to suggest that skate retailers who haven’t seen it get hold of the September 2003 issue of TransWorld Surf Business and read the “When It’s Time to Change” article on the cover. It’s an interview with K-Five Boarding House owner Jurgen Schultz. He’s much smarter than I am because he started reacting, as a retailer, to the changes I’ve described here a couple of years ago. He took some risks to do it, but he saw doing nothing as a worse risk.
That’s a good way to think in this market.