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

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

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

 

 

Swell Raises $2 Million

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

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

 

 

Recession? You’re Kidding- Right? Please?

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

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

 

 

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

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

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

 

 

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

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

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

 

 

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.