The Evolution Of Marketing & The Future Retail Model

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Recently, some companies have said some intriguing things about the omnichannel and the relationship between brick and mortar and online (for the record, when I say “online” I’m including mobile devices). I’ve also read some interesting things about generational behavior that made me think about the future of brands and retail structure.

It’s no surprise that buying patterns are different for the millennials (born 1982-2000) than they are for the baby boomer (born 1946-1964). Millennials have faced (and will continue to face) different and more difficult economic circumstances than boomers. And of course, they take technology for granted. They shop differently, have different priorities, and are less likely to be brand loyal.

I’ve written about brands that were originally focused on the boomers aging out, and the complexity around maintaining the loyalty of your original customer base while trying to appeal to younger customers. The first thing to note is that right now, boomers spend way more than the millennials. But, for obvious reasons, that’s going to change. If you’re a company that likes customers with money to spend, it’s hard, right now, to ignore the boomers.

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Speaking of Brand Retail Strategies…..

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Shortly after I posted my article on Quiksilver’s annual results, a reader of mine sent me this brief article (thanks YKW!). Here’s another article on the same subject with a little more information (don’t be confused because it has the same picture). Basically, what they say is that “Nike and Adidas recently dealt an additional blow to small-scale commerce by severing ties with those accounts unable to sell £25,000 GBP (approximately $41,000 USD) worth of sportswear in a 12-month time frame.”

Apparently the decision, at present, is just for shops in the London area and impacts about 50 retailers. But if Nike and Adidas think it good business strategy for shops in the London area, I’m hard pressed to think of a reason why they won’t come to the same conclusion for other shops in other locations, though perhaps with a different minimum sales number.
On the one hand, I suppose we shouldn’t be all that surprised by this development. We’ve had various brands bemoan the decline of the small shops and the difficulty of working with some of them. It was years ago I pointed out what we all already knew; that as a brand got bigger the financial contribution of small shops to a brand’s success became less significant to the point of being unimportant. And I’ll tell you from personal experience that if you’ve got a shop that orders small and then can’t pay, you don’t make any money from that shop- no matter how cool the shop is and how much you want to work with it.
It’s not like a minimum order is a new development in the industry. They’ve been used in combination with discount structures and order breadth to encourage/require not just larger orders, but a better representation of the brand. The question is whether a $41,000 order is of a size that makes it impossible for a shop to carry a brand. That is, is it Nike’s or Adidas’ intention to flat out exit these smaller shops or is it just that they don’t want to do business with accounts they can’t make money with.
Whatever the financial motivation, more interesting is the market implication. Talking about the United States, I once wrote that there might be 50 “core” shops (and maybe and number is smaller or larger) that every brand needs to be in to be credible with the core market where a brand’s legitimacy comes from. At some level, Nike and Adidas are making a statement that what used to be considered a marketing imperative just isn’t as important any more. For neither brand were the number of dollars (or pounds) they received from the affected shops ever very important, but now the financial considerations, minimal though they may be, seem to trump the market ones.
It’s also true that larger brands now have their own retail outlets and very specifically rely on those stores to present the brand image. This makes the smaller, independent retailer seem less important to those larger brands.
Neither Nike nor Adidas are action sport based companies, so I suppose they can more easily make this decision than some other brands. Nike’s credibility with its larger target market is just fine and Adidas, from my perspective, has never really penetrated the core market anyway.  I always had to smile when I walked past a booth labeled “Adidas Skateboarding” at a trade show. I’ll be sure to get by the Adidas booth at the shows and somebody can tell me why I’m wrong. Actually, I’m going to ask.
I won’t bore you by re-re-re-repeating my thesis that the real action sports market is and always has been pretty small. The internet, lack of product differentiation and a lousy economy are pushing the youth culture market into larger companies, chain retailers, and broader distribution. This announcement is just one small occurrence in an ongoing process. Pay attention independent specialty retailers.

 

Quiksilver’s Decision to License Children’s Apparel

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On November 26, when Quik announced that LF USA  (a subsidiary of Hong Kong headquartered Li & Fung, a multinational consumer goods sourcing, logistics and distribution group) would “…design, manufacture and market children’s apparel bearing the Quiksilver and DC brand trademarks in the Americas…” I tried to ignore it. It was a short press release and, on the surface, consistent with Quik’s announced strategy of focusing “…our energies and resources on our core apparel business and significantly reduce product styles and SKUs in our supply chain,” as CEO Andy Mooney put it in the press release. 

Then one of my readers inconveniently messed with my comfortable mind set and asked, more or less, “Hey Jeff, if kids aren’t part of Quik’s core business, what is?” I thought that was a good enough question to require some discussion.
 
I’ve talked before about brands aging out. That is, the customers who grew up with them (and with whom the brand grew up) get older and decidedly less cool. The brand may retain those customers. They may even sell them new products.
 
I’d like to pause for a moment and tell you just how hard it is to move on here without stopping to have some fun imagining what those products might be. Send me your ideas. I’ll put them on my web site (anonymously of course).
 
But the future of a business can’t be only with those existing customers because they are going to start buying less and eventually buy nothing at all. New demographic groups have to discover the brand as they grow up and, with luck, make it their own.
 
Quik’s management team knows that kids matter. My reader is implying that Quik is somehow making a mistake by licensing the kid products because of its critical importance to the company’s future. Maybe, but maybe not.
 
Let’s recall that Quiksilver has been losing money. They’re working hard to turn that around by reducing expenses, improving operational efficiency, and focusing their limited resources where they think they can get the most bang for the buck. Remember in recent years they’ve tried selling bathing suits in vending machines at resorts, board shorts with NFL logos, etc. I sense perhaps they’ve learned a lesson.
 
A royalty revenue stream, no operating expenses and, as CEO Mooney points out, fewer SKUs, may be the right way to go operationally and financially given their resource constraints. I’m guessing this is as much a financial as a marketing decision.
 
More important is what’s in the license agreement and how LF USA will handle this. We know nothing about that. What products, exactly, will they sell? Through what distribution in what quantities? At what prices? How will product quality be? Does Quik have any input into design or any of these other issues?
 
The devil is always in the details in any licensing agreement I’ve seen. Obviously, poorly made products only tangentially related to Quiksilver’s market showing up in schlocky distribution would bad no matter how much royalty income it generated. Quik knows this and I am sure it’s managed in the agreement.
 
Do I wish Quik was doing and completely controlling its own kid’s products? Sure. They probably wish that too. Do they recognize the importance of the kid’s market to their future? Of course. Is it a mistake to license the product? Not if they know they need to be in the kid’s market and don’t’ have the resources to do it the right way themselves.
 
The product will hit retail in 2014, and I guess we’ll start to find out then what kind of deal they made with LF USA.

 

 

Some Interesting Numbers

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I was lucky enough last week to be at IASC’s Skateboard Industry Conference. I was sorry to have to leave early, but among the things I enjoyed doing while there was making a presentation. As part of that presentation I showed some numbers provided by Snowsports Industries of America and I wanted to share them with you. Here they are for five complete snow seasons.

2007/2008
2008/2009
2009/2010
2010/2011
2011/1012
Units Sold
31,370,674
26,960,496
26,633,131
28,157,156
23,900,283
Dollars Sold
$1,980,551,677
$1,730,590,053
$1,798,552,214
$2,001,686,760
$1,854,581,370
Inventory Dollars
$487,541,750
$505,431,179
$441,593,937
$450,570,953
$571,271,999
Gross Margin
44.40%
42.30%
43.80%
46.50%
44.70%
GM Dollars Earned
$879,364,945
$732,039,592
$787,765,870
$930,784,343
$828,997,872
Remember when the economy went off the cliff in 2008 and the snow was none too good? Look what happened between the 2007/2008 and 2008/2009 seasons. Pretty much everything went south, except unsold inventory which went north. Not a pretty picture.
Then, in a completely expected and quite reasonable fear induced panic, the entire industry got rid of all that inventory. And to say they were cautious in ordering for next season is a bit of an understatement.
A funny thing happened. In the fall of 2009, when snow sliders walked into their favorite retailer to take advantage of the anticipated fall sales they found, well, nothing. It became very apparent that if they wanted the product, they needed to buy it now at full price. And that’s what they did.
Look at the numbers in the 2009/2010 column. Unit sales were down, but dollars sold, gross margin, and gross margin dollars earned all rose. That happened while year-end inventory fell 13%.
With product not quite so widely distributed and in short supply, and with limited left over product from the previous season, customers were willing to pay more and buy sooner.
Let me just say it once more. More gross margins dollars were earned on lower unit sales. With any luck at all, customers learned not to expect discounts all the time, to value the brand a bit more, and that they couldn’t wait until the last minute and expect to get what they wanted.
What I conclude from these kinds of numbers, and what I said at the conference, was that as long as the economy was weak and sales increases harder to come by, maybe you could strengthen your brand and bottom line by taking a different approach than you had in the past.
I’m all for sales increases, but don’t focus on getting them exclusively. Looks carefully at your distribution and who you are selling too. Distribution is no longer “core” or “not core.” Each new account needs to be reviewed separately for its fit with your customer base and brand positioning. You want to avoid the broad fashion industry, where you’re a small fish in a huge pond and where the customers, even if they know your brand, won’t know your story and what makes you legitimate. They may not even care.
Change your thinking a bit so you feel it’s okay for a retailer to sell out of your product and you have to tell him there’s no more right now. There’s nothing a retailer wants more than a product that sold well at full margin that he can’t get any more of. Let the consumers discover that your product is kind of exclusive and communicate that at the speed of light to their friends. Bet you won’t have to spend quite so much on advertising and promotion, your brand will be stronger, your gross margin higher, and disputes between brand and retailer fewer. There are other benefits as well.
This isn’t as easy as I make it sound in a couple of paragraphs, but I’m pretty certain it’s worth your consideration in a week economy and highly competitive market where most of your competitive advantage comes from a brand story and positioning rather than product differentiation.
I’m suggesting you could make more money with less risk. That has to be at least worth thinking about.
If you want a copy of the power point I presented at the IASC conference, let me know.

 

 

The 2010 SIMA Retail Distribution Study

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The first thing to say is thanks to SIMA for making this study happen and to Leisure Trends Group for doing the research. We don’t get access to near enough industry and market data.

As I’m not a member of SIMA, I don’t have access to the complete study. I’m working with the “Media Highlights” package that came out after the press release on the study.     

Two years ago, when the previous study came out, I did the same kind of analysis I’m going to do now. You can see that analysis here.
 
As usual, I’m doing this to try and identify trends and information that will help you run your business better and make you think about important issues. But the Media Highlights weren’t constructed with my needs in mind. SIMA’s goal in producing the highlights is to promote the industry to the broader market and to make it look good. I do not, by the way, fault them for a moment for doing that. It’s part of their job.
 
Anyway, keep that in mind here as we proceed.
 
The Headline Numbers
 
I’m sure most of you all saw these numbers in the press release. The “core channel” sales at retail (all these numbers are at retail) fell 13.5% between 2008 and 2010 from $5.32 billion to $4.6 billion. Sales at skate focused stores were down 11.6% from $2.85 billion to $2.52 billion. At surf focused stores, they fell 15.8% from $2.47 billion to $2.08 billion.
 
Footwear in core channels rose 8.2% to $1.5 billion and represents one third of total sales. Hard goods sales over two years were up 35.3% to $1.46 billion and represent another third. Well, if footwear and hard goods were up, but total core sales fell 13.5%, then apparel must be, well, not specifically too good. Down 41.1% actually to $1.0 billion. Interestingly, men’s/boy’s apparel accounted for 57% of overall apparel sales. Even with the weakness in juniors, that surprised me.
 
So if you’re like me you looked at these numbers and went, “Huh?!” On the face of it the hard goods increase and apparel decline seem just impossible even though it’s over two years. Then there’s the “other” category of sales which fell from $498.8 million to $18.4 million in two years. I hypothesize that there are some changes in classification and what’s included or not included going on here.
 
Core stores do not include military exchanges, company stores, and national department stores. I know what a military exchange and a national department store are. But when it excludes company stores does that mean, for example, that the Billabong store in my local mall is excluded?
 
That’s just what it means and, having discussed it with SIMA, I can see their point of view. If you called a company owned store, SIMA said, and asked them what their best-selling board short was, what might you guess the answer would be? The weighting towards company owned brands in company owned stores, SIMA argues, would skew the data.
 
You can see the difficulty SIMA and Leisure Trends have in decided who to survey or not to survey. The other side of the argument, of course, is that those board shorts sold in a company owned stores are real board shorts sold to real customers. Surveying them might skew the results, but all the brands who have company owned stores are working every day just as hard as they can to do just that.
 
Then there’s the issue of company owned stores that carry brands in addition to those brands owned by the company. What would SIMA do with Billabong owned West 49 and its 125 or so stores if it was a U.S., rather than Canadian, retailer? On the one hand, it carries other brands. On the other hand, Billabong is working to increase the owned brands component of those stores to as high as 60%. Would that skew the sample in such a way that West 49 stores shouldn’t be included in the survey?
 
I don’t know.  I’ve got an opinion, but I don’t know in a definitive way. You don’t know either. Neither do SIMA or Leisure Trends. They make the best decisions they can make given the information they have.
 
Internet and catalog sales contributed 16% of the total, compared to 14% in 2004. 55% of retailers are now selling on the internet. That’s double the 2008 percentage of 24%. I’m surprised it’s only 55%.
 
SIMA also estimates that surf and skate sales in all channels (including company stores, military exchanges and national department stores) fell 13.6% from $7.22 billion to $6.24 billion.
 
There’s a chart on page 5 called “Putting Things into Perspective-Retail Size of Other Sports/Recreational Industries that I didn’t agree with.” It lists that all channel estimate for surf/skate and shows 2010 retail sales for Outdoor (core), including paddle sales at $5.70 billion. Bicycle comes in at $3.2 billion, snow sports at $2.92 billion, scuba at $658 million, snowboard at $481 million and paddle by itself at $360 million. Next to the chart it says the following:
 
“Based on other work completed by Leisure Trends Group, surf/skate is impressively positioned among other retail industries.”
I don’t know what “impressively positioned” means. And I would dispute the idea that an industry’s size is determinate of its competitive positioning against other industries. I wish that could have been stated a little differently.
 
Definitions and Methodology
 
Just what is “core,” we’ve all wondered. In doing the research for this study SIMA says, “The CORE channel includes retail operations that classify themselves as specialty, lifestyle or sporting goods stores. Core stores do not include military exchanges, company stores, and national department stores.”
 
I asked SIMA if surveyed stores really did classify themselves and if that meant that Sports Authority could be “core.” They clarified that sporting goods stores are, in fact, included in the core numbers but couldn’t tell me about specific retailers because of confidentiality reasons. I can understand that. You aren’t likely to get much cooperation if the retailers submitting data don’t think it will be confidential.
During January and February of 2011, Leisure Trends did 446 telephone interviews with surf and skate retailers in the U.S. This sample was taken from a list of retailers reviewed and provided to Leisure Trends by SIMA. “The list of core shops that are surveyed is a list that has been compiled by brands’ accounts.” The brands provided the list.
 
“By being on the list, and qualifying for the study by having at least 10% or higher of their operation’s overall sales coming from surf and/or skate products they are considered within the Core Surf/Skate Channel,” SIMA told me.
 
That 10% bar seems kind of low for me. Especially as that’s for surf and skate combined. I wonder to what extent setting the bar that low expands the size of the total market?
 
I also wonder how they measure which retailer makes it to the 10% bar and what products are included in the calculation. It sounds like the retailers decide if they are 10% skate/surf. If a sporting goods store thinks they sell 10% skate/surf by including boogie boards, beach umbrellas, various brands of apparel, cheap complete skate decks, every swimsuit in the place and sun tan lotion, can they end up classified as being in what SIMA calls the core channel? Okay, kind of an extreme example but you can see my point.
 
SIMA clarified for me that they weren’t trying to define what a “core shop” means by the study and use the word only to define the shops that were surveyed. They suggested that something like “surveyed stores” might be a better term. I think it might be and hope they consider using it in two years.
 
Just to say it again, every study like this one has methodological and statistical challenges to deal with. There are tradeoffs and choices you make as you do your best to collect good data. But my readers know I think the core market is a lot smaller than this study suggests and I suspect many of you agree with me. If so, do me a favor and put a comment to that effect on my web site please.
 
Some Interesting Trends
 
The most interesting thing I found was that chain stores represented 35% of the total list of stores compared to only 9% in 2008.  The report notes that “Independent stores closed many doors in the past two years. Most of these were replaced by specialty chain stores causing a less than expected drop (-1.7%) in total surf and skate doors to 4,826 in 2010.”  That speaks more eloquently than I can to the way the industry is changing; or maybe it’s better to say the way larger brands are evolving out of the core action sports space.
Consistent with this, 81% of all surveyed retailers use a point of sale system, up from 60% in 2008. I conjecture that’s because a lot of the smaller, unsophisticated stores are gone, replaced by chains with good systems. SIMA points to two other trends that are probably driven by the growth of chain stores in their sample.
 
The first is the increase in the average number of store employees from 6.5 to 7.7. I’m guessing this could also reflect some recovery from the depth of the recession.
 
They also note more stores carrying snowboarding, wakeboarding, motocross, BMX and other sporting goods and suggest this is because more chains are in the sample. Probably true.
 
I’ve spent more timing writing and rewriting this than you would believe. It’s kind of old news, I’m working with incomplete data, and while SIMA was as cooperative as they could be, there was just some data they aren’t allowed to give me and questions confidentiality prevented them from answering. Why am I doing it?
 
As usual, because I think there’s a business lesson to learn. You just can’t look at the headline numbers and say, “Oh, this represents how the industry has changed.” 
 
The dramatic changes in certain categories (hard goods up so much, apparel down so much, the “other” category) gives me pause. They are indicative of huge changes in our competitive environment. They reflect vertical integration, the rise of chains, specialty shops going out of business, a broader definition of what our industry is, the use of systems by the survivors (and probably some different classification of product as a result), a lousy economy, and some others as well.   
 
You shouldn’t be depressed because the industry is smaller than it was two years ago. There’s good news for some segments, and for some companies, in there.    At the same time, you shouldn’t be giddy with joy as a hard goods company just because hard goods were reported to be up 35%.
 
What we can learn, as a reader of the press release and even the media highlights or the whole study if you have it available to you, is that you have to be cautious in drawing conclusions from summary data lacking a thorough understanding of how the study (or any study for that matter) was conducted. 

 

 

The Skateboard Distribution Model- It Never Was Broken

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I just found out I’d volunteered to facilitate the panel on distribution at next week’s IASC and BRA sponsored Skateboard Industry Summit. I had to spend some time getting my thoughts about distribution in order, and I know of no better way than to write them down.

Distribution has always been a bit of a contentious issue in the skateboard industry. I’d regularly go to the IASC sponsored breakfasts at ASR and listen to the participants agree that the industry should “do something” about distribution. Then came the implied blame and pointing of fingers as the brands, retailers and distributors all looked at each other. Needless to say, nothing much was accomplished.

“The industry,” of course, is never going to “fix” distribution. Every company, if I can recite for the umpteenth time what seems to be becoming my mantra, is going to do what it perceives to be in its own best interest- as it should.  And, by the way, distribution isn’t and was never “broken” and doesn’t need fixing. As it does in every industry, it just evolved based on consumer requirements and competitive actions by companies. Distribution may be inconvenient and not the way we’d like it to be, but it’s not broken.
 
When concern about distribution is expressed, I usually translate it into “Where and how the other guy is selling his product is pushing my gross margins down and I need higher gross margins so they should change what they’re doing.” Another translation might be, “I need to run my business a little differently in the existing competitive environment, but I’d rather not.”
 
But of course eventually you will or you won’t be here. Let’s take a short look at how distribution evolved and what the drivers have been and are.
 
A Little History
 
Maybe ten years ago, skate hard goods distribution was pretty closely controlled. When it was still a smaller, underground activity the smaller number of skaters were content, or committed enough, to pay a high price for branded decks. Also, they had few options.  This gave the companies enough margin dollars to support their team and marketing programs.
 
Then a handful of things happened. The Chinese learned to make quality decks. The internet market place blossomed. Skateboarding went mainstream. The industry was slow to innovate. Big companies with way, way more money than a skate company could even imagine got interested in skating. Skaters figured out that what the skate companies had been telling them for years was true- a skate board was seven or eight plies of laminated Canadian maple and anything not made like that wasn’t a skateboard. But they took it a step further then we in the industry might have wanted them to. Many of them decided that since all the decks were the same (as they perceived it), it would be nice to have an extra $25 in their pocket for a product that was going to wear out anyway.
 
My belief is that the number of skaters grew dramatically for a while. But of course somebody who identifies themself as a skater isn’t necessarily skating every day, or even every week in our new broader market, so how much product they buy is unclear. As with any activity, you can identify closely with it, but not do it regularly yourself. Maybe you buy shoes and clothes instead of hard goods.
 
 In spite of the increase in the number of skaters, the market for branded, full price decks fell. There will always be a market for branded decks, but the overall number of skaters that feel it’s necessary to pay that price has fallen even as the number of skaters has increased. Please remember here I’m talking about the industry here- not specific brands.
 
We can’t talk about distribution without mentioning blanks and shop decks. Blanks are still out there, and those who want them can get them. But the shops, correctly I think, have decided that carrying blanks isn’t in their interest, and they’ve turned to shop decks. The margins are good, and those shop branded decks go a long way towards helping them connect with their customers and build the local skate community. And quite a few skaters, I gather, like belonging to the more tangible community revolving around their local shop than to the one represented by a pro skater they’ve only seen in videos. 
 
Cary Allington at Action Watch reports that in 2010 “shop deck” was the leading brand at the stores in his panel, accounting for something like 25% of short deck revenues. The second brand was about 6%. He further reports that the average price paid for a branded short deck (under 34 inches) was $47.34 in 2007 and $47.31 in 2010- essentially unchanged. Wonder what the cost of a deck did over that period. The average gross margin over the same period rose from 34.1% to 36. 2%.
 
The Distributors
 
Brands have two choices. They can sell in smaller quantities directly to retailers. They have to carry and manage the inventory to cover those orders, cover the associated overhead and, to the extent they extend terms, collect from the retailers. This ties up working capital. Or they can sell in larger quantities to distributors. If they take that approach they don’t have to collect, they get paid quickly, they don’t have to stock as much inventory and they save some operating expenses. It is, to put it succinctly, less balance sheet intensive.
 
In practice brands do both, selling to distributors and directly to retailers as well. I guess it’s pretty much up to the retailer to decide who they buy from. We could have a long and interesting conversation about the role of distributors in marketing brands. But let’s keep to the numbers part of things right now.
 
Distributors require discounts off the brand’s usual wholesale price- typically around 25% I’m told. At a time when margins for brands are already squeezed one wonders why brands haven’t stopped selling to distributors and gone direct. Nobody has shared their rationale for continuing to use distributors with me, but I suspect it’s at least partly a cash flow issue. Here’s why.
 
Let’s say a brand pulls out of a distributor. Immediately, the brand’s sales will fall to the extent of its sales to the distributor and assuming that all the distributor’s customers for that brand don’t turn right away to that brand to buy their product direct. And the distributor would continue to sell its existing stock of the brand’s product unless, maybe, the brand bought that stock back.
 
Over some amount of time, depending on the brands market strength, some of those sales would migrate from the distributor back to the brand giving the brand a higher overall margin. The question is how much and how fast? Once again, it depends on the brand. Would retailers that had been buying from a distributor just shrug their shoulders and say, “Oh well, I’ll buy a different brand” or would they say, “We’ve got to have that brand in our store.”
 
There would, then, be some initial decline in cash flow (hopefully temporary) and some permanent increase in expenses as a brand made the transition from the distributor to selling direct. My hypothesis is that business conditions have evolved for some brands to the point where they just don’t have the balance sheet to consider making that kind of change even if their analysis shows it would make business sense.
   
A Different Point of View
 
Snowsports Industries of America recently reported that February industry sales were down 1.5% for the month compared to the previous year. A bad thing? Nope, a great thing because gross margins had risen 8%. I wrote about it on my web site and basically said, “You made more money by selling less.” Now, a great snow year didn’t hurt, but basically most of the snow brands were scared shitless by the recession into ordering and producing less product and the consumer, finding shortages, was willing to pay more and valued the brands more. And if the snow guys are lucky and not too many brands and retailers get too greedy, and if it snows some, the industry can expect customers who won’t have any closeouts available to them this fall and who will be anxious to buy at full margin to get what they want.
 
I also wrote recently about Orange 21’s (Spy Optic) financial results for the year and recent management changes. I looked at their strategies, market position and competitive environment and suggested that maybe a $34 million company just didn’t have the resources to do all the things it needed to do to compete successfully in the sunglass and goggle market given the competitors and their resources.
 
I think both these ideas are worthy of consideration by the skate industry. Selling more doesn’t necessarily make you more money if everybody else is trying to do the same thing. And, like Orange 21, some of the industry companies may simply not have the resources to effectively pursue the skate team pro rider strategy that’s been the anointed foundation of this industry forever.
 
That’s not to say that isn’t a great strategy for certain brands, but I suspect that with the growth of skateboarding it’s become less important to more skaters. And that’s before we even talk about long boarding.
 
Shops are becoming brands. Quality decks are available from a variety of sources and can be found in a broader retail environment. Price matters more than it used to. Some brands have become dependent, to a greater or lesser extent, on distributors who could easily become their competitors if they choose to. Large companies with massive resources want a piece of the pie.
 
As much as we might want to, we’re not going back to the skate brand and retailer friendly distribution and pricing scenario of some years ago. Let’s stop talking about “fixing” distribution and focus on competing in the environment we’ve been handed.
 
I’m hoping, by the way, that some of what I’ve written is just the slightest bit controversial and that some of you will take the opportunity at the conference next week to explain to me how it is that my head found its way into such a warm, dark place. The goal isn’t to be right or wrong but to exchange information and maybe get a new perspective that will help us run our businesses better and build the industry. I always learn a lot when people tell me why I’m wrong.   

 

 

Can We All Please Just Calm Down? A Business Perspective on Blanks

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I can’t believe I’m doing this. Oh lord, how many people am I going to piss off this time? I mean, I could just lay low and let the slings and arrows fly back and forth but no, I just don’t have the intestinal fortitude to keep my mouth shut. Instead, there’s this almost pathological need to try and reduce a highly controversial and frankly emotional issue to a series of business bullet points. I guess I’ll console myself by remembering that I’m not going to say anything here I didn’t say some years ago in Market Watch.

I might as well get it over with. Maybe it will help me sleep at night.
For those of you who live at the United States Air Force weather station three miles from the South Pole (and don’t have an internet connection), IASC and the leading skate hard goods companies created and wrote the 32 page insert called “Under Fire” that you all received in the recent issue of Transworld Business.
My hats off to them for achieving a level of efficiency and cooperation that, honestly, I wasn’t sure they could pull off. And they succeeded in highlighting what I think most of us would agree are the major issues confronting the skateboard hard goods industry today and identifying some action items. What I’m going to do is review those issues and then go a little deeper into the business implications of what they are saying and advocating.
Remember that “Under Fire” is a consensus document. That is, not everybody who was represented in it would agree with everything everybody else said. Still, I thought there was remarkable consistency across a number of key points.
And the Key Points Are……
The bedrock of the whole argument is that pros are the foundation on which skateboarding is built and that their influence is key to getting kids excited about and continually committed to skating. Okay, I agree that pros have big influence on the core of skating. How much? As much as they use to? Don’t know.
The next point is that the brands’ marketing activities, including their support of pros, is critical to the health of skateboarding. If skaters are buying blanks and shop decks (I consider those separate categories, and will discuss why later) rather than the more expensive branded decks, the brands can’t afford the same marketing programs. That’s simply a financial equation. Can’t argue with it.
And, the argument continues, if professional skateboarding and the associated promotional activities aren’t strong and can’t be continued at the same level skating, as an activity, a lifestyle, an attitude, and as a business is fated to decline.
Well that would suck if it actually happened. What do the brands want to do about it?
First, they acknowledge that it’s time to introduce some technology and innovation into skate hard goods to give skaters a reason to buy the more expensive branded decks. We’re already seeing some of that start to happen and you’ll see more. But of course it’s not an instant solution. The industry has spent a lot of time, effort and marketing dollars to convince skaters that a skateboard is a seven to nine ply laminated product made of hard rock Canadian maple. Skaters seem to believe it. Getting some of them to pay more for something that ain’t quite that, even when the benefits seem obvious, will take some persuasion and some time.
I guess where we’d like to be in where, for example, golf is. You know- they come out with “new and improved” models every year and people buy them even though there’s nothing wrong with their old stuff and the new stuff is expensive and doesn’t necessarily make a difference in their game. Or like in automobiles- where the newest technology appears in the top of the line product and works its way down year by year.
This will require, however, that the pros be in lock step with their sponsors.
Second, they recognize the shop’s need for a better margin on branded hard goods. What are they going to do about it? Somewhere between lots and nothing. There are brands already offering better margins and some that just don’t want to compete at the lower price point. There is, by the way, nothing wrong with a business decision to not offer a less expensive product if that’s what your market position and targeted customers require.
“Under Fire” is only “the first step in IASC’s plan to continue educating and informing the industry about this issue.” There will be additional steps in the program. The supplement ends with a call to action suggesting some tactics that all the industry’s stakeholders should consider.
So, Where Are We Exactly?
You remember all this from a few years ago. Skating takes off, skate parks start to sprout like mushrooms, brands can’t keep up with demand. Everybody’s happy. Then the market gets big enough for the foreign, low cost manufacturers to notice it. “Hey, we can make this cheap,” they say. They’re right. The usual startup problems. Problems resolved. Eight bucks landed cost for a blank skateboard if you’re buying in quantity. Maybe less. Consumers get the idea that the quality of blanks and shop decks are the same as the branded deck. Big price difference. Product wears out. No fundamental change in the product in 20 years or so. Percentage margins decline. Worse, total margin dollars earned on a deck decline. Fifty to seventy percent of deck sales world wide (you pick the number you believe) are blanks and shop decks.
So after a period of rapid growth, the industry matured a bit and started to consolidate. Product becomes a bit of a commodity, price and margin pressures, volume matters, etc. Look, I’m not going to go through this for the 14th time. All the usual things happen that happen to any industry in its life cycle. Big surprise. It’s so predictable it’s boring.
Anyway, wherever you go, there you’ll be. And here we are. There are some business issues implicit in Under Fire that it didn’t specifically discuss. Well, you can’t blame them- if they had, you’d be confusing this thing with the telephone book. But me, I always wanted to write a phone book.
Why People Buy
As far as I know, there are three things that motivate people to purchase a product. They are advertising and promotion, product features, and price. It appears, right at the moment, that advertising and promotion isn’t working too well for branded skate decks. If it was, there would be no Under Fire and I wouldn’t be writing this. Which, frankly, would be fine with me. There must be a better use for a Saturday morning. I mean, I could be doing yard work. Never mind. I’ll write and send the two teenagers out. Same to you kids. No, you can’t play with the chain saw.
New product features? Well, uhh, there really haven’t been any that have caught on, though hopefully that’s starting to change.
That, I am afraid, leaves us where we really, really didn’t want to be. At price. Let us then discuss the elasticity of demand with regards to price. If the blank/shop deck is, say $20.00 and the branded deck is $50.00 and you’re a fourteen year old without a lot of money or the a parent of a fourteen year old who knows you’re going to be back in this shop in a month, that’s a big difference. Apparently, too big a difference for a lot of people.
How big a difference wouldn’t be too much? Judging from the discussion of the demand for the $35 branded deck in the sacred supplement, the retailers seem to think that’s a price point at which they can sell branded product. But would $40 also work? Or does it need to be $30? What kind of and how much advertising and promotion and product innovation can change that?
We don’t really know. Or at least I don’t know. Actually, I guess I do know the answer. The answer is, “It depends.” Isn’t that helpful? It depends on the brand. It depends on the shop. It depends on buyer motivation. Has anybody out there rigorously asked 500 skaters, or even 100, why they bought the skate board they bought?
Right at the moment, if we asked a bunch of skaters, we know quite a few of them (fifty to seventy percent I suppose) would say that price was a big factor, as is their belief in a lack of meaningful product differentiation. More troubling, I suspect that if we asked our questions just right, we’d find that many are indeed influenced by the pros- but that doesn’t translate into buying a branded deck.  Finally I’d expect to hear, “I support my local skate scene.” And that brings us to our next topic.
Blanks and Shop Decks
Let’s define a blank as a skate board either with no graphics at all or with graphics with absolutely no legitimate connection to skateboarding. There will always be a market for both. Some percentage of the market, especially lacking any real or perceived product differentiation, will always want to buy the cheapest thing they can. It’s true in any market. And somebody will always supply it.
I’d like to say that again- If the customer wants it, somebody will always supply it. Lacking a change in skater perception and motivation, every store and shop that stops selling blanks creates an opportunity for somebody who does sell them.
The non branded board with graphics has been the province of the larger chains and sporting goods stores, often as completes. There’s no possible reason for a “real” skate retailer to carry them, if only because they’d make more money on their shop decks as well as promoting their shop. They are going to be around, and I imagine the quality has improved.
Shop decks, though, are a different story. What I hear, and what I suspect is often true, is that a shop deck, in a good shop’s neighborhood, is essentially a lower priced substitute for the traditional branded product. It offers a certain customer the same sense of legitimacy, belonging, and connection to skating and the skate culture that they use to get from the branded pro deck. And it’s cheaper. And shops make good money on them. I wonder how many shops put out their own pro models. Shop decks are not going to disappear. In fact, they may get stronger. And as I said, I don’t think the success of shop decks is just a price issue.
Maybe, with the right technology and promotion by the brands, shop decks can become the entry level boards.
It would be interesting to collect some good information on sales of shop versus blank decks as I’ve defined them. They really are separate categories, but they’ve been lumped together.
The Role of the Pro
I suspect there are some people who feel no need to collect any data on buyer motivation. They believe they already know the answer they’ll get back. In Under Fire, most of the brands say their companies are rider driven, or words to that affect. Always have been, always will be. That’s a valid statement of principal, but it may not be an adequate basis for a business, judging from the decline in the sale of full price branded decks.
I would not try to push a comparison between snowboarding and skateboarding too far. But I will point out that snowboarding use to have a pile of pros and sell lots of pro decks. Once the industry matured, that started to decline until today, the number of pro snowboards sold is vanishingly small.
That doesn’t mean that the pros don’t still influence snowboarders. But what the snow board brands finally figured out was that the best pros were worth whatever you had to pay them. The ones that you just flowed product to and maybe offered contest and photo incentives were influential at their local scene. All the riders in the middle? Not worth what they cost was the decision, and they are gone.
By the way, my definition of the best pro is not just the one who’s the best skater. It’s also the one who’s personable, responsible, professional, and shows up on time.
The other things that happened, in surf especially, is that the apparel and footwear companies picked up most of the team/pro sponsorship and other marketing expenses.
Is this how skateboarding will evolve? I don’t know. Skate hard goods companies have historically been the bedrock of skate boarding.   Certainly shoe and apparel companies are spending plenty of money supporting skateboarding.
So here’s the marketing matrix. Some skaters are influenced by the pros and buy pro decks. Some are influenced and buy the pro’s brand. Some are influenced, but still buy what’s cheap, maybe spending their money on shoes and clothing again. Some are influenced and would like to buy the pro deck but can’t afford it. Some don’t give a shit and buy whatever is cheapest as long as they perceive the quality is equivalent.
Well, we’re back to buyer motivation. Let’s talk to those few hundred skaters and figure out just where the industry (and individual companies) should be spending its advertising and promotional dollars.
Distribution
Everybody gets together to discuss distribution, tries to blame the other guy for the so called mess, and nothing changes. I’ve seen it too often, and I’m not talking just about skateboarding. Anybody who runs a company in the action sports business sits at their desk and ponders distribution every day. They know who they can absolutely sell to. They know who they should definitely not sell to right now. They try and figure out when and what and how much they can sell to all the accounts that don’t fit neatly in the “sell” or “don’t sell” categories. They ask themselves, “What will other accounts think? How will it impact the brand? How much money can I make? What’s the potential for growth? Is it consistent with my brand’s market position and brand strategy?”
So distribution evolves as companies grow and brands change. It just does. There is no mess. There’s just normal industry/brand/retailer evolution. Do what’s right for your business given this inevitable fact. Don’t look for somebody to blame, and don’t wait for it to be fixed.
Industry Evolution
Industries change. They just do. Companies adapt or die.  The customer always gets what they want. You can influence them, but not always as much as you’d like. An industry succeeds when the companies that make it up compete. Part of that competition is always innovation. Some do well, some don’t. But the industry itself progresses; sometimes kicking and screaming, but it progresses. I guarantee that every company will do what it perceives to be in its own best interest.
I went to the Park and Recreation Convention here in Seattle last October. Basically this is the convention of people who sell stuff to playgrounds, and I can only say that I wish I was a kid again. Lots of cool stuff that’s beyond what I could have imagined when I was of an age to use it.
I saw Per Welinder from Blitz there, manning the IASC booth and promoting skate parks. I walked around a corner and came face to face with Beau Brown, formerly of Sole Tech and now COO of Radius 8, a seller of portable skate ramps. His face was all aglow from the huge number of business opportunities he thought he had at the show. As we talked, a guy from some municipality came up and, apparently amazed to learn that portable ramps existed, asked how quickly he could get some. He guessed at the price, kind of suggesting that one might cost $3,000 as I recall. Beau, who seems to have a nasty ethical streak he needs to get over, told him that no, the one he was looking at was only $300. The guy scurried away to get his boss.