Consolidation, War, and a Lousy Economy;Skateboarding Will Be Fine, Thank You Very Much

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It doesn’t seem fair. Okay, after the 90s, some economic slow down was inevitable and most industries are having to deal with it. Skateboarding, after a few years of simply spectacular growth was due for a consolidation, and we’re getting it in spades. War, of course, isn’t good for already soft consumer spending- too many people staying home to watch the war on TV. And just to make things perfect, the weather hasn’t exactly cooperated. The East Coast has had its first real winter in a few years.

 
Any one of the four would have been a pain in the ass for business. All four simultaneously is downright inconvenient. Let’s put this in a little perspective and try and separate the good from the bad and the ugly, to coin a phrase.
 
Current Circumstances
 
Everything I’ve read, and everybody I’ve talked to who remembers it, tells me that skateboarding declined by something like 90% in and around 1990. It declined dramatically- some have said nearly vanished- and I guess at its nadir, only like one skate park was operating in the country.
 
That scenario will never be completely out of the thoughts of people who experienced it, but it’s unlikely that it will be repeated. There are too many skaters, too many skate parks, too much exposure, and too much involvement and dependence on the part of too many organizations for that to happen again.
 
My guesstimate, based on being in a few stores and talking to some people, is that hard goods sales are down north of 30% compared to a year ago. They may not be through dropping yet. I don’t know if traffic is down, but parents, I suspect, are less likely to fork over the dough their little munchkins, who don’t have their own money, need to buy a new deck.
 
I haven’t been able to get a solid fix on whether shoe sales are soft or not. I wouldn’t be surprised if market softness in shoes manifested itself as lower price points rather than the big volume decline that seems apparent in hard goods. You need shoes no matter what, and shoe margins are better than deck margins to start out with.
 
With those general comments as background, let’s talk about three specific issues that may give us some incite into where skateboarding is going; the number of brands, the role of distribution, China and how skate compares to other action sports. I guess that’s four. Oh well.
 
Brands
 
One thing about this market that’s neither good, bad nor ugly but just downright strange is that I haven’t seen brands going out of business. Typically, when times get tough, especially in an industry that’s grown quickly, some brands just don’t make it. I’ve heard of a couple of companies that are for sale, and I know of a brand or two that’s having a hard time, but they gone away. I wasn’t expecting mass extinction, but I thought we’d see some serious consolidation by now. 
 
I feel strongly both ways about this. On the one hand, companies that manage to hang on for a while by the skin of their teeth when they have no viable way to compete make it harder for stronger companies to prosper (though retailers may get some really good deals!). On the other hand, small companies, scrapping to build a market position and less conservative than their larger, more stable brethren can be a fountain of new ideas. That’s always a good thing.
 
Why haven’t we seen more consolidation? I have the following speculations. First, I’ve been surprised by just how well most companies have reacted to a slowdown in business. I perceive a faster than normal movement towards control of expenses and inventories.    That can prolong survival, though it doesn’t solve the basic problem of brands that don’t have a defendable market position. Second, a number of brands/companies that have appeared in recent years are backed by companies that can afford to lose a whole lot of money for so called “strategic” or “positioning” reasons. This seems particularly true in shoes and apparel. In hard goods, I don’t think we have as many small companies as we use to have. Some consolidation has already happened there.
 
I do ultimately expect to see fewer brands, especially in shoes and hard goods. How that shakes out will depend in no small way on distribution, so let’s move onto that.
 
Distribution
 
The major hard goods brands are dependent on the specialty shops and distributors for much of their sales. Specialty shops are hit by both economic softness and the decline in skateboarding sales. The successful footwear and apparel companies have diversified and expanded their distribution. The hard goods brands have generally been unable to do that. People need shoes and clothes all the time, though they may require that the stuff cost less. People don’t necessarily need a skateboard.  If they do, it’s as likely as not to be a blank or a shop deck. 
 
The hard goods industry is reaping what it has sown, by selling basically the same products for years with all the differentiation being based on marketing. Inevitably consumers got smarter and price got to matter. When skating isn’t quite as cool at it was and the economy sucks, price matters a lot. Not that I wouldn’t have done the same thing if I’d been running a skate hard goods company, but the result was predictable, and I think I’ve discussed it in this column before.
 
Meanwhile, the shoe and apparel companies, operating in a much larger market, get larger. Their sales are less dependent on the popularity of skate, or at least they are all trying to make them less dependent. When the downturn comes, they are selling products everybody needs, they are not just selling to the skate market, there’s less seasonality, and their size gives them some financial flexibility smaller companies don’t have. What I mean is that even if they should earn less money because their gross margins fall, they still earn enough gross margin dollars so that they don’t have to gut their marketing and product development efforts. Smaller companies may not have that option.
 
So distribution matters in who prospers or even survives in a consolidation. Having a bigger potential customer base and more possible outlets for your products helps. More on this when the section on other action sports below.
 
China
 
This, strangely enough, comes under the heading of “good.” In the past I’ve said that cheap Chinese decks could take over the skateboard market like in so many other wood products, if the market was big enough to make it worth while. Now it appears, until the market recovers and growth resumes, that it won’t be worth while. The Chinese can continue to have the cheap complete market in the chains as they always have, but I’m no longer as concerned that they will get a significant position in the higher end branded market.
 
I know the apparent price difference has made it compelling to try and get decks from China. But nobody had suggested to me with any conviction (except the Chinese) that the quality problem is resolved. I also believe, and have argued in this space before, that the apparent gross margin improvement is an illusion for the industry as a whole over the medium to long term. If the quality problem was resolved, and one brand started bringing in Chinese decks, other brands would tend to do the same. Natural competitive pressures would inevitably lead to somebody discounting to retailers, who would inevitably figure out what was going on and would demand some of that margin for themselves. At the end of the day, unless a whole lot more decks were sold, the overall industry might find itself with fewer total margin dollars to play with. Of course, the consumer would be happy.
 
But why bother even discussing this. If the quality’s no good you’ll kill your brand with serious skaters and if it is, you’ll just end up in the same boat as all the other brands again, though some with their own manufacturing plants might be hurting. So why bother. I mean nobody could really think this would work in the core market, could they?
 
Synthesis
 
In surfing, the subject of the actual surf boards didn’t even come up at last year’s surf industry conference. Sales in surf equal soft goods. I’m told that making money with surf boards is damn difficult due to competitive pressures, lack of product differentiation, and low volume. The soft goods brands in surf are selling their life style across a wide and widening variety of retail distribution. There aren’t and will never be as many surfers as there are people who like the idea of surfing and the surf style. That’s where the money is.  
 
In snowboarding, decks are very competitive for the same reasons. In binding, and even more in boots, there’s been continuing, meaningful, product improvement that which has at least created a basis for competition that’s other than just price and marketing. But generally product in all hard goods categories is damn good. It’s durable, functional and isn’t replaced as often as it used to be. As in surfing, soft goods and the expansion of brands into the lifestyle market are seen as an important source of profit and growth. Not perhaps as much as in surfing because a significant percentage of snowboarding soft goods are basically for snowboarding in the same way that a wet suit is only functional when you’re actually surfing.
 
In surfing, the soft goods brands dominate the market. In snow, the leading hard goods companies also have significant apparel lines that are both for snowboarding and have lifestyle components.
 
In skate, the important hard goods companies are much smaller than the leading companies in either surf or snow. They don’t have the same possibilities of expanding their distribution and, mostly, they aren’t doing a lot of soft goods business. You shouldn’t hold your breath waiting to see one of the leading hard goods companies grow to $300 million in revenue.
 
Yet these are the companies and brands that set the tone for skateboarding, because that is what they are about and focused on. In the past, when skateboarding was much smaller and not nearly as mainstream, companies and brands just vanished in a down market and mostly nobody noticed. What’s different this time is that these brands have value and are on more people’s radar screen.
 
But that doesn’t change the financial equation- at some point a decline in sales, inability to expand distribution, and a need to maintain expensive marketing/team programs with inadequate gross margins means a company is losing money.
 
So skateboarding will be fine, but I expect to see some companies acquired. As divisions of larger organizations with certain shared functions, these companies make financial sense. On a stand alone basis, some of them may not if current circumstances last very long. Let’s hope any acquirers treat what they buy with respect- if they don’t, I’ll be a lot less sanguine about the prospects for skateboarding.

 

 

Hey! Look at All the Retailers! Good News From Vegas

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Flying in from ASR in Long Beach, where the consensus was that the number of retailers was down significantly, it was a relief to get to the SIA show in Vegas and see the place jumping. It was simply the best show since some time in the mid 90s. Not just by energy level but, in my perception, business being done.

 How come? What happened? When there are still too many trade shows back to back to back, and the economy is soft, how did SIA and the snow sports industry manage to pull this off?
 
Uhhhh, well, actually, I don’t know for sure and I don’t think anybody else does either, but let’s explore some of the factors that may have made the difference and see what they might mean for snowboarding.
 
New, New, New
 
I guess we start with the new location. The food was better, the accommodations more convenient, the walking easier, the ride from the airport shorter, and the smaller footprint helped keep it exciting. Like in your high school physics class, when you compress molecules into a smaller space, they move faster.
 
It even kept it exciting, more or less, all over the show. Use to be that all the energy was in the snowboard section and up in the ski part of the show, nothing would be going on. But this show, for the first time ever in my memory, there was even some buzz, and apparently some retailers, in the nonsnow board part of the show. This extended beyond the couple of ski booths, like Line, that had a distinctly snowboard feel to them.
 
Product was new too. Oh, not so much new technically, but because of the earlier show date, most people, especially from the non chain retailers, are seeing product for the first time. That can generate some excitement.
 
There were perhaps a half dozen new, or recently arrived, small snowboard companies. There’s been lots of talk (some in this column) about the opportunity that smaller brands may have. Their arrival suggests a level of optimism and enthusiasm for the snowboarding business that may be stronger than it has been over the least couple of years. I don’t want to underestimate the business challenges they face, but I sure want to see them succeed. One of the reasons they may is that they seem more business focused than most of the many new brands that popped up eight to ten years ago.
 
One of the things that caught my eye was the quality of the decks’ fit and finish. Graphics, in a word, were generally spectacular. We went through a period of year where graphics seemed kind of taken for granted. Now, with functionality being so good for all brands, graphics may emerge again as a basis for product differentiation.
 
Nitro had a level of detail in its graphics that required a close look and careful study if you didn’t want to miss any of the points of interest and, in some cases, sheer fun that long time Nitro designer Mike Dawson had included. Arbor combined their traditional wood with eye catching screened graphics on certain models in a way that I thought gave their original look a run for its money. Volkl had a finish with two textures that made you stop and figure out what you were touching as you ran your hand over the board.
 
New exhibitors like Volcom added their unusual presentation and irreverence to the mix. I’m glad I didn’t have to clean up all those tortillas.
 
Also new was a four day show, after five days in recent years. Obviously, if you squeeze the same number of retailers and business meetings into four days instead of five, things will look busier even if the same amount of work gets done. I’m okay with efficiency- how about three days next year SIA? How long did retailers really stay at the show?
 
Trade Show Politics
 
The retailers (and the brands for that matter), have more trade shows than they want or can possibly attend. Organizations being the way they are, the companies that put on trade shows are going to keep putting on their shows and hope the other guy goes away. From what I’ve seen and heard at other trade shows this trade show season, SIA seems to be the one that gets to hang out and say “Our show rocks! And yours doesn’t.” That means, I guess, that any talk about snowboard companies exhibiting at ASR instead of Vegas won’t be more than talk. It probably never would have been anyway. Even if the snowboard companies are soul mates to the skate and surf companies exhibiting at ASR, they have to do business with the many ski shops that come to Vegas but not to ASR.
 
SIA’s successful show might also put them in a better arrangement to negotiate a merger with Outdoor Retailer, with whom I hear they overlap a day next year. A number of people I talked to about trade shows in general suggested that would be the best thing to do. But there’s still the same problem that existed last year when the two organizations talked about some kind of merger. OR is for profit and SIA isn’t. How you negotiate starting from those two completely different perspectives continues to be beyond me.
 
Business Trends
 
The earlier show dates are consistent with the strategy I see snow retailers pursuing in their purchasing. Either because they are smarter, the economy is soft, boarders aren’t buying new stuff as often, or because the brands will tend to let them get away with it, snowboard retailers are going to be continuously cautious in their ordering. I expect to see preseason orders for basically what they think they can sell through Christmas and maybe a little beyond. Then they can come to Vegas and get any end of season products they need at better prices.
 
Some brands have said they will only produce to preseason orders, with the usual increment for team, warranty, demos, etc. So some retailers may find they can’t fill in after the holidays with the product they want.
 
I don’t see selling product at large discounts after January 1 as a big money maker for anybody- especially for brands who paid preseason order prices for product. Maybe the best thing that could happen to the industry is if there was just a bit of product scarcity from time to time. So I hope the retailers are cautious in their ordering and the brands are cautious in their production. That would be the best for the snowboard industry overall.
 
In another outburst of raging optimism, I’m hopeful that the quality of the show is at least partly the result of all the time, effort and money that the whole winter sports industry, especially the resorts, has spent on programs to improve facilities, the learning experience, and the overall customer experience in the last five to eight years. That has got to be having a positive impact, and maybe we’ve seen it at the show for the first time.
 
One other thing I’d like about the early show as a brand, or at least as the finance guy for a brand, is the ability to deal with retailers who haven’t paid me in January instead of March. In January, you can have the, “Well, we’d like to take your order and give you the show and preseason discounts, but we need to clean up this old receivable first” conversation with a higher probability of success than in March. Receivables that are open in March and April tend, in my experience, to be receivables you don’t collect until it’s time to ship next summer/fall if then.
 
Finally, this was a busy, upbeat, exciting show. But it wasn’t that way, like in some previous Vegas shows, because of people who snuck in for the vibe or companies thrown out for various amusing behaviors. It was like that because the snowboard business community was excited to be there, to see new products, and to do business. That’s good to see.
 
My Quandary
 
Well this is kind of a problem. I’ve gone and written an unabashedly upbeat, glowing and positive article about the show and the prospects for the industry it seems to represent. This is going to ruin my reputation. I’ve got to complain about something.
 
Ah! The signage sucked. You couldn’t find your way around. I spend the whole time looking at the damn map and even that didn’t help. I’m going to call SIA President David Ingemie and asked him how come that was so screwed up.
 
Oh dear. Turns out they did it on purpose. David points out that the aisles and signage in a department store are laid out to “encourage” you to see more product in more locations, and they did the same thing at the show. He did agree that the restroom signs needed to be a little easier to see. I imagine I’m not the only one who noticed that problem.
 
Okay, I guess I might as well drink the Kool Aid here. I shouldn’t be this easily seduced by one good show, but I have some hope that a confluence of events in retailers, resorts, and brands may mark a turning point for snowboarding and the winter sports business in general. Perhaps business cycles are longer than we think. We didn’t just need to consolidate, but to get over and come out of it. Ski and snowboard had to, in some sense, come together. The large brands had to solidify their market positions to make room for smaller ones to emerge again. Retailers had to start and do better business and those that didn’t had to go away. Resorts had to give their customers a better experience.
 
The retail numbers don’t necessarily support this kind of perspective- at least not yet- but in a soft economy, I’m willing to see the glass half full instead of half empty.

 

 

Focus on Expense Control; A New Business Model for Skateboarding

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Well, maybe not a new business model. Expense control is always important. But somehow, in every industry I’ve ever seen, it’s always assigned a lower priority when you’re selling everything you can make. Cash flow makes it easier to not worry so much about how you’re spending your money.

 You’ve no doubt noticed that skateboarding (especially in hard goods) is going through a bit of retrenchment. Sales are down from last year. Lest this get too gloomy, remember that, as an industry, we’ve had substantial growth for a number of years and skateboarding is larger than ever. No serious business person thought that phenomenal growth rate would continue indefinitely. We may have hoped it would, and we certainly hoped when it stopped it would hurt somebody else’s company, but we knew it would end.
 
So now it’s ended? No. Our five year growth rate is still amazing even given the current decline. Being down over last year may suck, but it doesn’t make it the end of the world.
 
I should probably clarify that. Changing business conditions usually mean it will be the end of the world for some companies without the balance sheet and market position to weather the storm or recognize the changing business conditions. And there’s always the chance that kids will decide skateboarding ain’t cool any more. If that should happen, and it’s happened before, all bets are off, but that’s hardly a new consideration for the industry.
 
Old News
 
Whenever an industry goes through a period of consolidation, a number of things tend to happen to one extent or another. As I’ve written about them before in nauseating detail, I’ll just describe them briefly and move on to dealing with the new circumstances they represent. Remember these trends aren’t unique to skateboarding or action sports. They have been just as prevalent in the automobile, computer, funeral home, and waste disposal industries as they consolidated. There’s nothing surprising or unique in this list.
 
·                 Growth slows (Duh!). There’s more competition for market share.
·                 Margins decline at the retail level.
·                 Retailers have more power.
·                 Cost management and customer service become more important in competing
·                 Size matters. You either have to be big or own a very clear market position. Companies in the middle get lost.
·                 Consumers get smarter- marketing loses some of its effectiveness.
·                 International competition increases.
·                 Industry profits fall. This may be temporary. Or it may not be.
·                 Over capacity can become an issue.
 
That’s an ugly list, but you can see its relevance to the skateboard industry at this point in time. Of course, it’s not necessarily so ugly for the skateboarder, who tends to get a better product at a lower price.
 
What’s To Be Done?
 
Every company is of course different, but from the 10,000 foot level, the general strategic issue is clear, and more or less the same for everybody. If sales are down, and the product appears to be more of a commodity, then marketing is even more important is differentiating the product. In skateboarding, of course differentiation has come almost completely through marketing.
 
But as the consumer has gotten smarter, marketing has maybe lost some of its effectiveness. So you have to what? Spend more on marketing? But your sales and maybe your margins are down. But unless you were large and very profitable, that can be impossible to do without spending yourself into oblivion.
 
The interesting thing is that this is where strategy and operations come together. By that I mean an important part of a company’s strategies at this point is expense control. Unless and until margins improve, or sales start growing again, there isn’t much of a choice. You can either reduce expense or earn less, or no, money.
 
The sad part is that this fundamental change in the business model means that some companies have a hard time making it. They had the illusion of prosperity because growing cash flow allowed them to keep paying their bills. As long as the money comes in just a little faster than it has to go out, it doesn’t matter if your balance sheet- the measure of your financial viability as a company- is a disaster.
 
Now it does matter, because unless you are a very unusual business person, you didn’t foresee the change in the business climate far enougn in advance to adjust your business model. Your competitors weren’t doing it, and you sure weren’t going to cut your marketing and other expenses unless they were. So now, as you scurry to adjust spending to reflect revenue and margin levels, it’s your strong balance sheet that allows you to stay in business as you make those adjustments.
 
When I ran action sports companies that had to deal with a tougher market, here’s some of the things I did and that you should consider too.
 
·                 Reduce the trade show presence and the number of people from the company who attended. The booth was refurbished- not built new. People didn’t get to go as a reward, but because they needed to be there.
·                 Let go of people who weren’t doing an outstanding job or who weren’t needed given the lower sales level.
·                 Stop selling to people who aren’t paying. There’s no cash flow in a sale- only in collecting the cash.
·                 Get rid of old inventory for whatever it brings. Old inventory is never worth more later.
·                 Order or produce only what is pretty certain to sell. Minimize your inventory risk. Lower volume on higher margin can be better, for both cash flow and for the brand, than higher volume on lower margin.
·                 Review the team roster. Top riders are probably worth what you’re paying them. The ams and others getting maybe just product and photo incentives are keepers. It’s the mid range riders I’ve always looked most carefully at. As hard as it may be, there’s usually some money to be saved there.
·                 I cut the advertising and promotional expenses that I’d sort of done because I could when times were better, and it was easier to just pay the money than throw the rabid marketing manager out of my office for the 12th time on the same issue.
·                 Ask your suppliers for better terms. They’re probably struggling to keep customers too.
·                 Have good financial information.
 
Your goal is not just to cut expenses. It’s to have a budget that makes sense given a realistic expectations of sales and margins. Look, I understand the pressure to run the two page, four color spreads because marketing is the basis of your competitive positioning and that’s what the other companies are doing.
 
But the best advertising campaign in the world won’t save your bacon if you can’t pay your bills.
 
Hard vs. Soft Goods
 
Interestingly enough, I’m hearing that the shoe and apparel companies are holding up noticeably better than the hard goods guys. That surprised me at first, but I’ve formed an opinion as to why that might be and as long as you’ve read this far, you might as well finish the article and see if you agree with me.
 
Hard goods companies only sell to people who actually skate. Soft goods and apparel companies sell a lot of product to people who don’t skate. They are increasingly lifestyle companies even with their roots in skate. If skating is somehow not as popular, or at least growing more slowly, it’s the skaters who decide that and lead the trend; they skate less and therefore buy less product.
 
But out in the world of non skaters who buy skate influenced shoes and apparel are a whole lot of people who were late coming to the skate party and, in the same way, are later in realizing that the party is maybe not quite exciting as it use to be. Besides, they still need shoes and clothing even though they never needed skateboards.
 
So they keep buying, though maybe influenced by soft economic conditions, until their perception of skating and its “coolness quotient,” for lack of a better term, changes. When that happens, the shoe and apparel companies that have made the jump to lifestyle brand and are less connected to skate than when they started, can succeed anyway. Those too closely tied to skating may find themselves, though with the impact delayed, in the same boat as hard goods companies.
 
It will be interesting to watch. In the meantime, your job, as an owner or manager of a skateboard industry company, is to restructure and manage your business so that it operates under a viable financial model in this business reality for however long it lasts. Part of that will involve a new focus on expense control.