Billabong Purchase of West 49 and Implications for the Industry- Questions, Questions, Questions
Billabong’s acquisition of West 49 was the biggest retail expansion by a brand so far. We’ll see more brands buying more retailers and opening more stores. This article is about why. What are the motivations and the industry impacts? And what are some of the conflicts and contradictions companies will face as they pursue this strategy? Some of this is a bit repetitive of stuff I’ve written before, but we’re really talking strategy and industry evolution at the highest level. I want to tie it all together.
A Little History
Years ago we all knew, and I and lots of others wrote, that we didn’t need any more retailers (not just in action sports). Especially as the internet came into its own, consumers had more choices of product and place to buy than could possibly be useful. That didn’t mean a new store by brand x couldn’t succeed- we were all giddy with rising income and asset values after all- but if it wasn’t opened, no consumer was likely to care.
Then came the recession. If things are improving, we’re hardly out of the woods yet. U.S. Unemployment is 9.6% (a lot higher if you count people who have given up looking). The creation of 150,000 jobs in October was hailed as a big success, but that’s not much more than the number we need to keep up with population growth. Foreclosures and housing prices are still a major burden. Banks are cautious about their lending (we want them to be, I think- isn’t not being cautious part of what got us into this mess in the first place?), and consumers are still paying down debt and saving (again, hard to say that’s a bad thing).
Wish we were doing as well in the U.S. as in Canada. Well, this is for a Canadian publication after all and there’s nothing like a little ass kissing directed at the editor to minimize requests for rewrites.
Anyway, retailers across the whole economy closed when the recession hit, and the process is still continuing. We are all intimately familiar with the impact on action sports core stores. I’m sure everybody reading this knows a favorite store that’s gone away or is struggling. West 49’s public financials made it very clear it had some issues before it was acquired, and I expect its problems were part of the motivation for the deal.
Point one, then, is that if the economy is improving, we’re still struggling, at least south of the border.
Point two is that the role and numbers of “core” retailers is changing. Use to be that we thought anybody who was an independent retailer and carried hard goods was a “core” shop. Turns out we were wrong. A real core shop caters to participants and serious lifestylers who are not so price sensitive, carries the newest and best product, and is owned and staffed by people who are part of the culture and are participants themselves.
What does a core shop have to do to be successful? My list is below.
Attributes of a Successful Core Retailer
By the way, I first created this list (slightly modified here) so long ago that I can’t even find it on my web site.
· Good management accounting systems that they actually maintain and use
· A quality internet presence
· Active participant in its community
· Sales volume high enough to make their shop financially viable (duh!)
· A career path that helps them keep good employees for at least a while
· Willingness to carry and promote new brands
· They excel at selling and servicing hard goods.
The Rationale for More Stores
Things are better in Canada, so maybe it’s easier to justify new retailers there than in the U.S. Still, looking at the overall economic picture, and what I’d characterize as the apparent lack of consistent, real, growth in skate/snow/surf participation, one has to wonder why more stores make sense.
Answer? They probably don’t overall. But of course each company does what it perceives to be in its own best interest at the time. Especially as a public company, you’ve got to find ways to grow and become more profitable. Your choices of how you might grow haven’t changed in a long, long time.
You can sell more to existing independent retailers. Well, the action sports market doesn’t quite offer the organic growth potential it used to. There are fewer of those retailers, and the growth you can expect from them becomes less and less significant as a company gets bigger and bigger.
You can expand your distribution. I think at this point we all understand that there are limits to that unless you’re fundamentally changing your brand’s positioning- not an easy thing to do.
You can make acquisitions, and we’ve seen a lot of that from Billabong and others. I expect we’ll see more.
You can try and expand your brand franchise into other product areas. Quiksilver’s women’s brand comes to mind. You can add product under an existing brand like Electric (owned by Volcom) is doing with apparel. You can start a new brand. All of these have costs and risks as well as potential that aren’t the subject of this article.
You can run your business better, trying to improve your inventory management and controlling expenses in hopes of improving the bottom line even with limited sales increases. Pretty much everybody who’s made it through the recession has done and is doing this.
And finally, you can go vertical and, as part of that, open or acquire retail stores. Why does that appear to be so attractive right now? That question brings us to the list below. The points on the list are not of my creation. They are taken from conference calls, publications, and conversations.
Why Retail Locations?
· Capture the middleman’s margin dollars.
· Better control of our brand and image. Improving the consumer experience with the brand.
· As a response to fast fashion; we can get new product into retail faster and we don’t have to convince some buyer to order it.
· Collection issues and uncertainty as to the future of small, independent retailers.
· We don’t see better growth opportunities (okay, nobody exactly said it quite that directly).
· Ability to merchandise their offerings better across the complete product line.
· Leverage with landlords, infrastructure and vendors.
· As a competitive response.
I am not saying these points are all valid for any brand that opens retail stores- only that they have the potential to be. Or that brands going into retail believe they are. One of the things I wrote when the Billabong/West 49 deal was announced was that I thought Billabong might find integrating a 130 or so chain with some apparent financial difficulties more challenging than integrating a brand (like their previous acquisitions) that was growing, profitable, and well managed. As far as I can tell, Billabong really has left their acquired brands more or less alone. I wonder if they can do that with West 49.
The Strategic Conundrum
I’ll get to the tactical issues for brands building its retail base below. Right now, I want to take a few paragraphs to talk about how this retail focus might fit into the industry’s general evolution. It’s possible I’ve got more questions than answers, but it’s clearly something anybody running a brand or a retailer needs to be thinking about.
And maybe the distinction between brand and retailer is a good place to start. Action sports began as brands selling to core retailers. Those sales expanded into broader distribution. Now brands are also selling their own (and other) brands direct to consumer through both the internet and their own stores. I expect this to continue to grow. Brands becoming retailers, retailers becoming brands. The impact?
If you’re a small independent retailer, go back and read the box with attributes of a successful core retailer. If you read between the lines, you have figured out that you have to be a brand too- but a local brand in your community, not a national one.
But maybe I’ve spoken too quickly. There’s the internet after all. Think of a shop like Evo in Seattle. It’s got a successful retail store, but just one. Where it seems to be growing is with its internet presence. And it’s not the only one. As a brick and mortar retailer, it’s a local brand. With its internet sales exceeding its store sales is it a national brand? Can it be? Will it start selling Evo branded product to other retailers?
Next, it seems clear that the brand retail explosion is pretty much ending any stigma there was to being in a mall. This is working particularly well for Zumiez which, with its hard goods and action sports lifestyle committed employees, looks and tries to act an awful lot like a core shop. It’s almost like brands open retail locations in malls are validating Zumiez’s business model, but can’t match Zumiez’s history and focus. Maybe Billabong thinks West 49 can have a similar positioning and advantages in Canada. It will be interesting to watch Zumiez does in Canada now that West 49 is part of Billabong.
Now, let’s talk about the action sports business. What is that exactly? For one thing, it’s a term that’s been thrown around out of habit even as the industry has evolved almost beyond recognition. Try this: The action sports industry is that group of brands and retailers who develop and sell product to participants in the sports of snowboarding, skateboarding, surfing, and wakeboarding, (arguments can be made to add others) and to a close circle of non-participants actively involved in the sports and lifestyles.
If you accept my definition, it becomes pretty clear that retail building brands aren’t just after the action sports market. It’s just not a big enough market given their existing size and objectives. I came up with the “lifestyle sports fashion business,” as a description of the market they are focused on growing in, but I’m not sure that captures it either. Maybe that’s why we keep using terms like “action sports” and “core.” We have no idea what to replace them with. Maybe youth culture is the correct term.
It’s no secret that this growth and industry evolution means we’re more fashion and non-participant oriented in our sales. I don’t say that critically- it’s kind of inevitable. The retail blossoming we’re experiencing puts companies like Billabong into a whole new market. I’ll say it again- it’s where they have to go to grow, and they face a whole new set of competitors as they go there.
What Will Billabong Do?
There are a number of issues Billabong will have to address as they integrate West 49. But I hasten to mention that any company with multiple brands and a retail presence will face similar issues.
How much of their owned brands will they sell in West 49 stores? Billabong’s Paul Naude suggested it might get up to 60% eventually. West 49, of course, was already a customer of Billabong’s. But given the higher margins and the leverage they get, Billabong would like to increase it. Go back and review my “Why Retail Locations” list. In a perfect world, where it wouldn’t cost them any sales, they’d probably love to make West 49 stores all Billabong and its owned brands. With brands including Nixon, Element, Sector 9, Dakine, Von Zipper. Xcel and others, they certainly have the product to increase the proportion sold in West 49.
Assuming for a minute that Billabong wants to keep essentially the same levels of total inventory in West 49 stores (subject to any changes in sales levels), do they bring in more Dakine backpacks and reduce or eliminate Hurley, just to pick a brand? There are also Element backpacks. And Billabong backpacks. And Vans. Etc.
Billabong’s strict financial and operational bias will be to replace Vans, Hurley and other backpacks with its own brands. They can’t, however, make that decision without reference to West 49s customers and its market position. Do customers come in asking for Hurley backpacks and will they care if they end up with an Element one instead?
Would Billabong be okay with selling a bit less at West 49 stores if they got higher margins because of their owner brands?
If Billabong sells more of its owned brands in these stores, it will have to carry and sell less of somebody’s brand. Who’s? How much less? Will the customers care?
Billabong believes it can better merchandise it product and position its brands through its own retail because it can present the whole line the way it wants. Doesn’t Hurley, to continue with the same example, feel the same way?
When Billabong, or another brand, begins to control how much of which product is carried in a retail store, what happens to the manager/owner’s ability to change product/brands in response to changing local conditions?
So, if you’re Hurley and Billabong is cutting back its purchases of backpacks for the West 49 stores, how far do they have to cut it back before you begin to feel like your product is an afterthought and that there’s not enough product and selection of product to represent the brand well?
Might not Hurley (owned by Nike) take a look at the situation not just in terms of backpacks, but strategically in terms of the overall impact of brand owned retailers on its brand? One conclusion they could reach is that the distinction between brands and retail is disappearing and that competitive conditions require them to control more of their own retail. Go look at the list of reasons a brand might want to be in retail again. Given the advantages listed there, how can a big brand not do some of its own retail?
How about the implications for retail chains? If you’re going to have to compete with vertical brands with the advantages I’ve outlined. You’d better have a hell of a market position. I wouldn’t be surprised to see some more chains up for sale as this all evolves. And I wouldn’t be surprised to see some competition for buying them. The economics are very compelling. They might be equally compelling when it comes to buying a brand that would fit into your retail.
What would I do if I were Billabong? I’ve be crunching my numbers, looking at margins and sell through for various brands in West 49. I’d be talking about Billabong owned brands and what are possible substitutes for other brands. I think I’d probably conclude that I don’t want to carry brands that I can’t merchandise correctly. My bias would be to eliminate some brands rather than to inefficiently cut back on a lot of them.
Conclusion
Billabong’s purchase of West 49 feels like it might be the formal announcement of a new industry consolidation based on vertical integration. The competitive dynamics associated with this out in the larger world of sports fashion lifestyle product are driving it. As I said, I don’t like that term. But I don’t have a better one and I have to draw a distinction between the action sports market as I defined it above and this much, much larger market that the big, public, multi-brand companies are focused on.
The break between the two seems so fundamental that I can almost see a big gap between them. Maybe that’s where the “youth culture market” fits in. If you are in what I’ve defined as the action sports market, forget about what vertical brands are doing. If you are one of those vertical brands, you aren’t going to ignore the “core” market, but you are going to get a declining piece of your revenue and profitability from it and you will focus accordingly.
Hi Jeff,
Great article. Global Surf Industries pretty much only sells surfboards. We sell them in 57 countries now. We are seeing and feeling the impact of big brands opening or buying stores around the world. The participants are finding it hard to buy boards from retail as Billabong and the put Hardgoods in the too hard basket.
I think your list needs to slightly revised, maybe to – be a passion participant more than just an active one. Being passionate helps drive the business. Customers come for quality advice as they know they will get it and their experience will be a better one, this equals more enjoyment for them. This then equals more business for the rest of the surf industry. Participants drive the industry over the long term. Fashion will come and go, but participation rules.
The surfboard market is a little more fragmented at retail due to the shaper direct sales but if the retail industry doesn’t foster the core segment of participants with products on every level then I believe we will or are already see a general slowing for the whole industry. GSI is doing all that we can to cater to people’s needs; through upgrades to our website, Live Chat sessions, Demo days, Free shipping to help people get into product. I believe that the majority of hardgoods sales will always be sold by touch. Pick it up, fall in love with it. Buy it use it.
OK time for the morning surf.
Cheers,
Mark Kelly
President
Global Surf Industries
Mark,
I think you’re right- passionate is the kind of retailer to be. If you weren’t passionate, you wouldn’t be a core retailer in this industry. I also agree with you that participants drive the industry “over the long term.” But I also think that long term business cycles can be measured in as much as decades. Right now, I’m afraid the long term trend is towards bigger companies selling surf, or action sports in general (whatever that means now, which is part of the problem) to as broad an audience as they can find through a vertical model. The core will always exist, but this industry iteration may not leave as much room for it as we’d like. It’s not that they don’t support surfing; they do. But the danger is that their expansion can be dilutive of its energy. Well, that’s what managers in this industry struggle with every day. How do you expand beyond the core (which you have to do at some point to grow) but remain connected to it, and have it still be important to you.
Thanks for the comment.
J.
Hi Jeff,
From my travels and I have visited over 300 of our accounts in the US. The lack of passion is another real issue on the core side of things. What I see is that the owners of the core stores are ageing. In many cases their 401k plan isn’t the long term vision to sell their business as a going profitable concern, it is to sell the real estate their current business sits on.
Staying passionate over a number of decades is hard I guess, getting great Managers in and keeping them around is hard as well when the stores don’t make huge profits.
That said there are some wonderful young guys coming in and making a difference. The next decade will see huge changes on this front as many of the ageing retailers will be pushing past retirement age.
The non core is larger than the core by a factor of near infinity right now. Hollister has 4,425,986 Facebook fans, Billabong has 1,018,290, Quik has 1,043,379. What’s real? Who cares? I do I guess.
Cheers,
Kel
Kel,
Selling a retail store for much more than the fixture and inventory value can be hard. So much of the store’s success depends on that aging owner who’s been around forever. I wrote about this a while ago. Years and years that is. My hope for the young guys is that they are also good business people. They have to be.
J.