The Future of Malls and Impact on Industry Retailers

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I have in front of me the pleasant task of reviewing the quarterly fillings of a bunch of our favorite retailers. But before I get to that, I thought I might point you at this article that talks about the future of malls in the U.S. It may have something to do with the evolution of retail.

Like me, you know that we’ve got way too much retail space in this country across all industries. But when the article tells us we’ve got 50 square feet for every man, woman, and child and Great Britain (which may be less great by the time you see this depending on the Scot’s independence vote) comes in second with 10 square feet, you began to get a sense of just how big the problem is.

The article (go read it) talks about anticipated mall closings, how no new malls have been opened since 2006, and that’s it’s only the high end malls that can expect to prosper. He also makes the rather obvious point that online is cannibalizing, brick and mortar sales.

Most of the retailers I follow, of course, are opening new stores. Those new stores are a critical part of their long term growth strategy. As they open these stores, they chant, “Omnichannel! Omnichannel!” like it’s a protective talisman with mystical powers.

For some I guess it will be. They will the ones who figure out how to integrate brick and mortar with mobile and online to generate enough incremental operating income to pay for all the costs they incur in the process. I’ve pointed that out before.

But that additional operating income won’t all come from more revenues. It will come from smaller stores, configured and merchandised differently. It will come from lower inventory levels as more sophisticated systems and increasing comfort with getting it next day or the day after means customers can be satisfied without having every piece in all sizes and colors in each store. I also think it’s going to come from increased U.S. manufacturing, resulting in shorter lead times.

Finally, and most importantly, it’s going to come from an increasing understanding of how mobile and online relates to brick and mortar.  That is, the decision as to where and what kind of store to open will be influenced by the online/mobile activities and demands of customers in the area, or potential area, of the store.

And, by the way, I’m not quite sure I know what “store” is going to mean in the future. Larger or smaller? Permanent or temporary? What will location criteria be? How will they be fixture and inventoried? Will they sell the actual product or maybe just let the customer see the product then download the specs to be used at home on their 3D printer? You might want to listen to this Ted Talk on the subject. Consider the implications for manufacturing and supply channels.

Remember this is all going to be happening while brands stop telling customers what they should buy and have to ask customers what they want to buy and give it to them- quickly. I don’t know how this is all going to work out, but it should be fascinating. And it’s not all going to happen in malls.

Thoughts on the Omnichannel; Decker’s June 30 Results and Sanuk’s Impact

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Deckers is mostly of interest to us because of their ownership of Sanuk. We’ll talk about how Sanuk is doing. But Deckers management say some interesting, perhaps even insightful, things about online business and the omnichannel and I want to focus on those as well. Let’s start by getting some of the numbers out of the way. 

In a quarter that Deckers management describes as being historically their weakest, the company had a sales gain of 24.1%, with sales rising to $211 million from $170 million in the same quarter last year. “The increase in overall net sales was primarily due to an increase in our UGG brand sales through our wholesale channel and retail stores as well as an increase in our Teva brand wholesale sales,” says the 10Q.
 
But Tom George, the CFO, tells us in the conference call, that “Nearly half the upside revenue was attributed to the timing of wholesale and distributor sales and the other half with some higher than expected sales. The higher than expected sales contributed approximately $0.05 to the EPS while the other $0.21 was due to the timing of sales and operating expenses.”
 
So half of the revenue increase was just timing differences that don’t change their estimate of total revenue for the year. That is, the revenue was booked in the June 30 quarter instead of the September 30 quarter. But the other half of the revenue increase is from higher than expected sales.
 
In spite of that sales gain, the net loss rose from $29.3 to $37 million. How’d that happen?
 
There was a very minor decline in the gross margin from 41.1% to 41.0%. Gross profit basically rose with sales from $69.8 to $86.8 million. I guess that’s not it.
 
Ah, here we go. Selling, general and administrative expenses were up 21.9% from $112.6 to $137.3 million. That increase included $11 million for opening 37 new stores (they’ve got 126 stores worldwide), $4 million for marketing and promotions related to the UGG and Hoka brands, $3 million for “information technology costs,” and $3 million for ecommerce. As a percentage of sales, it fell from 66.2% to 64.9%.
 
Sanuk’s wholesale revenues were $32.3 million, up 16.4% from $27.8 million in last year’s quarter. That represented 21% of Decker’s total whole sale business of $154 million in the quarter. UGG was $74 million and Teva, $35.6 million at wholesale. Deckers tells us that “Wholesale net sales of our Sanuk brand increased primarily due to an increase in the volume of pairs sold, partially offset by a decrease in the weighted-average wholesale selling price per pair. The decrease in average selling price was primarily due to a shift in product mix.” They gained $7 million in revenue in higher volume but lost $2 million due to lower selling prices.
 
Sanuk’s total sales for the quarter were $36 million, up 19.6% from $30.1 million a year ago. That includes ecommerce sales of $2.71 million up from $2.09 million in last year’s quarter and sales in Decker’s retail stores of $243,000, up from $22,000.  We’re told in the conference call by President and CEO Angel Martinez that, “Sanuk had a strong quarter due in large part to the continued success of women’s sandals, most notably the Yoga Sling Series.” The brand is also being expanded into “…the broader selection of casual shoes and boots that can be comfortably worn during colder weather.”
 
He talks further about this in response to an analyst’s question. “…when we acquired that brand, the brand really was 70% men’s, 30% women’s. It was primarily distributed in surf shops and actions sports distribution. And we knew that the gender profile of the brand would need to alter significantly, if we would to have any hope of selling product in department stores for examples. So one of the things we are seeing with Sanuk is a major transition to a much more compelling women’s product offering.”
 
Even though its revenues are the smallest of Decker’s three biggest brands, Sanuk’s operating income, at $6.9 million, was larger than that of either UGG or Teva which, respectively, had operating income of $2.7 million and $4.8 million. That’s an operating profit margin of 21.4% for Sanuk compared to 13.4% for Teva and 3.6% for UGG.
 
In what can only be acknowledged to be a blinding glimpse of the obvious, I’d say Deckers needs to get that operating margin for UGG up. I suppose they are as the UGG brand had an operating loss of $510,000 in last year’s quarter. Decker’s marketing spend has increased from 5% to 6% of sales, with the majority “…being directed towards the UGG brand with the incremental dollars going towards the combination of digital programs and tactics aimed at broadening brand awareness and driving traffic to our direct-to-consumer channel.”
 
We’re also told that, “The increase in income from operations of Sanuk brand wholesale was primarily the result of the increase in net sales offset by a 5.1 percentage point decrease in gross margin as well as increased operating expenses of approximately $500. The decrease in gross margin was primarily due to a shift in sales mix as well as an increased impact from closeout sales.”
 
As you recall, when Deckers acquired Sanuk In July of 2011, there were some big contingent payments required. The last year of the earn out is calendar year 2015 and that earn out will be 40% of Sanuk’s gross profit. Deckers has a long term contingent liability of $28 million booked for that. There was an earn out due and paid in 2013 (I think it was less than 40%- maybe 35%), but there is none due in 2013. 
 
Meanwhile, Deckers ecommerce revenue rose from $10.7 million to $15.4 million. But operating income for that segment fell from $1.7 million to $809,000. Retail store revenues rose 29.4% from $32.5 to $42.0 million but the operating loss on those retail operations climbed from $9.8 million in last year’s quarter to $15.9 million.
 
The balance sheet remains in pretty good shape, though current ratio has declined just slightly and total liabilities to equity is up a bit compared to year ago. I’d note that they managed to reduce their inventory very slightly even as sales rose even while bringing some $17 million in product in early due to concern about a West Coast port strike.   Cash is up a bunch from $49.1 to $158 million.
 
Given the increase in cash, I find it interesting that after the June 30 balance sheet date, they took a mortgage on their corporate headquarters for $33.9 million. They expect to use those proceeds “…for working capital and other general corporate purposes.” I’m not clear why they did that.
 
Okay, on to interesting omnichannel stuff. 
 
Dave Powers, Decker’s President, Omni-Channel, tells us that total direct to consumer (DTC) was up 33% in the quarter compared to the same quarter last year.   But that includes 37 new retail stores and, as we’ve already noted, the loss from their retail stores was larger than in last year’s quarter.
 
Comparable DTC sales were up 10%, but that included a 39% increase in e-commerce sales and a “…low single-digit comparable store sales decline.”
 
As I’ve discussed a few times before, the holy grail of e-commerce is when the brick and mortar and online activities support each other. The sum has to be bigger than the parts or the rather significant investment in omnichannel activities just doesn’t make sense. Right now, we see Decker’s brick and mortar comparable store sales down, while e-commerce is up. How do you know when your e-commerce isn’t cannibalizing your brick and mortar?
 
Deckers knows this is important. Dave Powers says, “We now know that brick-and-mortar locations fuel e-ecommerce and vice versa. And we believe that a portion of our e-commerce growth is fueled by our increasing store base. We see the internet UGG program and similar omni-channel initiatives providing increased contribution to overall DTC comps going forward as we further tie our stores and website.”
 
He goes on, “The key next step of our omni-channel evolution will be the opening of a smaller concept omni-channel store in Tysons Galleria this fall. That will feature new in-store web technology such as interactive displays and the ability to reserve online and pickup in-store.”
President and CEO Angel Martinez notes that their average cost to build out stores is down 30%. He doesn’t attribute that all to smaller stores and omni-channel related stuff, but I imagine it’s had some impact. In another comment, he notes that stores may no longer need the back room. Obviously, that’s omnichannel related and has implications for further reducing real estate costs.
 
The devil, as always, is in the details, and here are a few of those. They are rolling out something they call Infinite UGG which “…gives us the ability to offer our retail customers every skew available from the UGG brand to our in-store POS system…Our UGG by You customization program will include additional files and design details for the consumers to choose from such as the popular daily bow and daily button…we’re also extending retail inventory online or RIO, a new tool launched this past spring in select stores in North America and EMEA advance of the fall and holiday selling season. RIO provides customers with visibility into store inventory, helping them to efficiently locate the product they want prior to visiting the store.”
From what I know, this isn’t unique to Deckers, but it certainly feels to me that they are doing the right things. CEO Martinez talks about this from a more strategic perspective.
 
“…just a few short years ago we were a wholesale vendor that delivered product twice a year and our success was largely driven by how well buyers, wholesale buyers responded to our collections at industry tradeshows. The consumer had very little influence in shaping our future direction. This dynamic has been turned completely upside down. The consumer is now the gatekeeper and we’ve transformed our business model to not only adapt to the new retail paradigm but also to thrive and to grow.”
 
“We now drop product more than 10 times a year and communicate with consumers on a much more frequent and personal basis. This constant flow of information is reshaping our growth strategies including our product development and store expansion plans, as we now have much better insight into pinpointing demand and directing capital towards what we believe will be high return, high productivity locations.”
 
Dave Powers adds to this when responding to an analyst’s question:
 
“So we’re starting to think about the stores as not just the store in a four-wall P&L but a store that impacts the overall macro environment of our brand in that metro area. The inverse of that is that we have the ability now through analytics and increasingly CRM and loyalty programs through e-commerce to better target customers in those metro areas we know where they are. And we can send them through merchandising and marketing initiatives digitally back to the store.”
Sorry for the long quotes, but I couldn’t say this important thing any better.   And I could go on with more quotes, but I think you get the picture. Deckers is making a big bet on the omnichannel. Well, who isn’t? But their conception seems particularly well thought out.
 
When Deckers first bought Sanuk, I suggested that they didn’t quite know what they’d bought and what to do with it. Given the price they paid, I have to believe they are not completely happy with the results to date. To justify the purchase price, they have to be able to take it from a quirky surf, beach, action sport brand to one that will sell well in broader distribution. But of course they have to do that without losing the quirkiness. 
 
Quite a challenge and the 5% decline in Sanuk’s gross margin during the quarter gives me pause.   So here we are again. Can a brand owned by a public company grow fast enough to satisfy Wall Street without damaging the brand? I hope the crew at Sanuk is following what Skullcandy is trying to do.

 

 

Another Tactic in Integrating Online and Brick and Mortar

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A reader pointed out to me that Zumiez has started (don’t know exactly when) a program they call “Order Online Pay in Store.” You order it online, selecting “pay in store” when you check out, go to the store within 48 hours and pay for the item, and it’s shipped to either your home or the store. Per normal procedure, there’s no shipping charge if you pick it up at the store. If the item should be available at the store, you just come home with it.

Why might Zumiez do this? Will it generate any incremental sales?
With a weak economy, high teen unemployment, and the credit card companies no longer making “having a pulse” the criteria for getting a card, there are probably a bunch of Zumiez customers and potential customers that don’t have a credit card or don’t want to use it because they’ve figured out that if you can’t afford to pay off your credit in full at the end of each month, you can’t afford to use it. This gives them a way to shop on line but, and Zumiez has to love this, still gets them into the store.

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The Confluence of Internet with Brick and Mortar, and Notes from Nike’s 10Q

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Nike filed its 10Q for the quarter ended February 28th on April 4th. You can see it here. An actual analysis of their financial statements seems like a waste of time. I’ll mention a few comments I pulled out, but then I want to get on to what they are saying about e-commerce as it seems to be consistent with what other companies are saying. 

The first thing about Nike’s 10Q and conference call is what’s conspicuous by its absence. I can’t claim to have read every word, but nowhere did I see “skate,” “skateboard,” or “skate shoe.” I assume those sales are just part of footwear. Hardly a surprise. As I’ve discussed, skate shoe sales were never going to move Nike’s earnings per share. Their goal was to become credible with a piece of the market that didn’t see Nike as quite legitimate. Mission accomplished I’d say. And it doesn’t hurt Nike that the skate shoe market has evolved towards casual footwear, because they are pretty good at that.
 
Next, here’s the little bit we find out about Hurley. Nike’s “other businesses” are Converse, Hurley and Nike golf. Revenues for the quarter of those businesses totaled $615 million, around 10% of total quarterly revenues of $6.187 billion.
 
“Excluding the impact of currency changes, total revenues for these businesses increased by 9% and 8% in the third quarter and year to date periods, respectively, reflecting growth in Converse and NIKE Golf.”
 
I read that to say little if any revenue growth in Hurley.
 
“On a reported basis, EBIT for our Other Businesses increased 23% for the third quarter and 18% year to date, driven by improved profits at Converse and Hurley.”
 
So even if Hurley’s revenues didn’t increase, it’s being managed a little more rigorously to improve operating profitability. You know I like that approach.
 
Meanwhile, here’s what President and CEO Mike Parker says about their online business:
 
“In Q3 our online business grew 33% – outpacing the growth in our total DTC business and for total NIKE, Inc. We’ve delivered strong double-digit results in our e-commerce business every quarter for the last 5 years.”
 
He continues:
 
“That said, I’m not satisfied. Right now e-commerce is a relatively small portion of our total revenue. There’s a pretty big gap between where ecommerce is today and where we can take it. So we’re driving more innovation into the shopping experience, elevating the level of service and expanding customization online. At the same time we’re simplifying the user experience making it easier to find and buy our products. I can assure you given the size of the opportunity; everyone on the leadership team shares my sense of urgency around e-commerce.”
 
We’ve all watched a lot of companies get big percentage increases from their e-commerce business though sometimes those big increases were coming from small bases. We’ve wondered (or at least I’ve wondered) just what the mix of online and brick and mortar was going to be and how the two would influence each other. I think I’m getting an inkling.
 
The two channels are supporting mutual growth, but I suspect that online is going to mean fewer brick and mortar stores. That doesn’t mean there won’t be total brick and mortar revenue growth, but the number and purpose of actual stores will change. 
 
Zumiez alluded to this in their last conference call where they talked about the need for new metrics to measure comparable store sales and discussed how growth in the number of stores no longer translates in the same way into revenue.
 
It’s not that stores still won’t be opened (and closed). But the decisions may be more strategic. That is, there will be more to that decision than what sales that store can generate. The question is becoming, “How can opening a store here contribute to our reaching our customers through all available channels?
 
I don’t know how to measure that, but lots of companies are no doubt working on it. As they figure it out, I expect it to have implications for store size, location and inventory. There isn’t any doubt that e-commerce sales cannibalize brick and mortar sales to some extent, but that doesn’t mean there can’t be growth in the combined channels as well as some potential cost savings in the brick and mortar channel. I assume everybody who’s doing both (which is basically everybody) believes that.
 
We’ve also noted that brands are becoming retailers and retailers are becoming brands. We noted it, however, without really explaining why. Now we’ve got a clue. The internet and the need to be at all consumer touch points (Omni channel to use Zumiez’s phrase) requires it.
 
Uh, am I saying here that branding is becoming more important at a time when product is everywhere, it’s hard to create meaningful differences among a lot of products in a category, and the consumer knows everything and is picky? That implies high marketing costs but not always great margins and would seem to favor larger players.
 
Yeah, I guess I am saying that. I’ll be back to you after I’ve thought about it some more.

 

 

Trying to Think About the Junction of Retail, Brands and the Internet.

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The more I think about it, the less I feel I know for sure. I know the internet and brick and mortar are changing each other, that brands are becoming retailers and retailers brands, that easy information and product availability is making most products commodities at some level, that brands are really pushing product extensions, and that consumers are making long term changes in their purchasing behavior. But stirring this soup of change just makes it cloudy. 

Yet we all have to be thinking about it, and I’ve had a few experiences in recent months that are at least helping with the thinking and, to my surprise, are turning out to be related. Why don’t I tell you about them and we’ll see if they turn out to be related for you too.
 
At the Mall
 
Bellevue Square is a large regional mall here in the Northwest. It’s anchored by a Nordstrom, Penney, and Macy.   I’m in it occasionally and usually take the time to walk through some of the retailers firmly in our industry to see if I can learn anything. For some reason, at my last visit I determined to make a list of those retailers and see just how long it was. Here’s the list I came up with:
 
7 For All Mankind
Abercrombie & Fitch
Aeropostale
American Eagle
Billabong
Buckle
Element
Forever 21
Helly Hansen
Hollister
Lidz
Lucky Brand
Lululemon
Oakley
PacSun
The North Face
True Religion
Vans
Zumiez
 
I didn’t include Nordstrom or Sketchers. Maybe I shouldn’t include Lululemon. There are a few other fashion retailers I might have added. I know the list is shorter if I include only committed action sports brands. Yet I think that would be deluding ourselves. Every store on this list tries to get at least some of the dollars from customers of the core action sports/youth culture market. And I’m sure they all sell on line.
 
That’s a lot of stores for one mall. Bluntly, I’m not sure there are enough market niches to go around especially given that there’s nobody on this list whose niche isn’t determined largely by advertising and promotion.
 
Buckle
 
Buckle, headquartered in Kearney, Nebraska (don’t ask me), has about 430 stores in 43 states and had revenue of $949 million in the fiscal year ended January 29, 2011. The first time I walked into a Buckle store, it had the action sports/youth culture vibe I was familiar with from various other industry stores. But there was something different, and I literally walked around for a minute or two trying to figure out what it was.
 
You know how most action sports retailers have fixtures, posters, and other promotional aids representing the brands they carry? Buckle, I realized, didn’t have as much of that as most retailers. If you look at the list of brands they carry at their web site, you’ll recognize many of the brands, but those brands don’t overwhelm the merchandising of the store. They kind of get equal billing with Buckle’s owned brands, which are not named Buckle.
 
PacSun carried and promoted the brands we’re all familiar with. Then they added their store brands as a way to generate some more margin dollars and to offer more price conscious customers a choice. The way they handled their private label felt tactical and financial- almost like an afterthought- rather than being part of a strategy. I think that choice, along with over expansion, poor merchandising, and a weak economy, was what got PacSun in trouble.
 
Now, PacSun is being more thoughtful in how they handle their mix of brands.  We learn in their recent filings that their mix is about 50/50 between private label and brands owned by others.
 
Buckle, on the other hand, has what I take to be a deliberate strategy of building its image based on all its brands combined- owned and bought from other brands. In their merchandising, there almost isn’t a distinction made between the two. Buckle is a retailer making itself into a brand (or maybe creating brands?) through this approach.
 
I have often thought of store label brands in terms of what percentage of revenues they could safely represent. Perhaps that was short sighted. Buckle’s premise seems to be that it’s the mix and merchandising of the brands that matters given the target customer; there’s no percentage that’s “too much” or “too little.”
 
I wonder if the day will ever come when we see a retailer that has created brands get enough traction with those owned brands to sell them to other retailers. Maybe internationally.
 
Kohl’s
 
I’d characterize Kohl’s as a discount department store with quite a broad array of merchandise (Here’s a link to their investor relations site, which is full of all kinds of good information). Among the brands they carry are Vans, Hawk, and Zoo York. I was struck by the good selection and attractive pricing. Interestingly, they’ve moved from 75% national brands and 25% “private and exclusive brands” in 2004 to 52% national brands and 48% “private and exclusive brands in 2010.” I guess Buckle isn’t the only store that has the idea of melding owned with national brands.
 
“Private” and “exclusive” brands are not the same thing, and it’s important to understand the difference. A private brand is just what you expect; created, owned and controlled by Kohl’s. An exclusive brand is not owned by Kohl’s, but is available exclusively in Kohl’s stores. The Hawk brand is such a brand for Kohl’s.
 
I noticed a poster in the store advertising the Hawk brand, but featuring a skater who was not Tony Hawk. Makes sense to me. That’s what you do when you’re trying to give a brand credibility and longevity beyond an individual.
 
Target has the same kind of deal with Shaun White. Say, I’m going to have to rush right out a nd get me some of those Shaun White window curtains at Target. There are 237 Shaun White items on Target’s web site. Well, good for him. I would have made the same deal even though at some level I hated to see it happen. But I wouldn’t have minded if they’d not done the curtains.
 
Kohl’s has revenues of almost $19 billion generated from over 1,100 stores plus their web site.
 
Reaching Everybody, Everywhere, All the Time with Everything
 
I noted after SIA that everybody who was selling hard goods was making apparel, and apparel makers were making hard goods. I recently commented on Quiksilver’s foray into board shorts for NBA teams and suggested that just because a market extension was possible didn’t mean it was a good idea. Referring to the trends in online shopping, I’ve suggested that consumers no longer feel compelled to have a product they want the same day, so one perceived barrier to internet shopping is falling. About 2008 I started to point out that it was going to be tough to get sales increases, and it was years before that I suggested that perhaps a focus on gross margin dollars was appropriate since that was what you paid your bills with. Even earlier than that, I noted that where to sell or not sell your product was something brand managers focused on every day.
 
It’s just interesting how all this is coming together, at least in my mind. In a weak (though slowly improving) economy with cautious consumers and an environment most companies describe as “highly promotional,” many companies are trying to reach new consumers through product extensions that may or may not widen distribution. And it’s funny, because I see this as the hardest kind of economy to do that in. Almost by definition, you’re moving into a space where other brands are stronger than you are.
 
This trend is driven partly by a need to find sales growth somewhere, especially for public companies. It’s facilitated by technology and the internet, improved logistics and information systems, and a sense, I think, that the distribution cat is already out of the bag so what the hell.
 
Just to be clear, product extensions and distribution expansion aren’t by definition bad. Nike can sell some product at Costco without crippling their brand. Think about what Sanuk did. I expect to see Nixon do some interesting stuff once Billabong’s deal to sell half of Nixon closes and I think they will succeed because of how Nixon is already positioned with their customers.
 
These Days, What is “Positioning?”
 
If you ask me what “we” should do about this, I’d say, “nothing.” It is, as usual, up to individual companies and brands. The first question in the everybody, everything, everywhere all the time chaos is, “Has positioning changed and is it still meaningful.”
 
I’ve thought about that a bunch, which is why this article was actually started before Christmas but is just being finished. I hope it’s being finished. I’ll know in a couple of paragraphs.
 
The tools you use to build your market position have changed in ways we all know. But the concept is still valid and maybe more valid than ever. You build and defend your market position by doing what you do well and communicating that to your customers.
 
When I wrote about companies in snowboarding pushing into apparel from hard goods and hard goods from apparel, I suggested that companies that didn’t do that might find themselves with an advantage. I want to expand on that a little.
 
Maybe effective market positioning is now at least partly a matter of doing less. That is, let other companies pursue dubious product extensions. To exaggerate a bit to make the point, let them try to sell everything to everybody everywhere all the time. I wasn’t even born the first time somebody said, “If you think everybody is your customer, nobody is your customer.”
 
That doesn’t mean never do a product extension. But, more than ever, come at it from a solid foundation of knowing who your customer is and why they buy from you. Never go after a new market because, “We need more sales!” And don’t over simplify the analysis by going, “Well, we’re in business X, and all our competitors in business X make product Y, so we should make product Y too.” That ain’t analysis.
 
If you take the time to really understand how customers perceive you and why they buy your products, you won’t ever be tempted by the wrong growth opportunity, and you’ll immediately recognize the good ones when they come along.
 
I guess that at the junction of retail, brands, and the internet what we find is a slightly different way to think about old, still valid concepts.

 

 

Cyberboutiques. I Don’t Know if this is a Great Idea or a Waste of Bandwidth.

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My wife sent me this article from the New York Time’s Fashion and Style section. For some reason, I don’t read that section regularly. Not enough graphs, charts, and numbers to get me excited I guess.

I played around a bit with the application at the web site. It was a bit jerky and slow, but I could certainly see the potential. Either that or I couldn’t, and I guess that conundrum is what’s leading me to write this.

On the one hand, maybe this is the next step in integrating online with brick and mortar retail. What might happen if each store in a chain had its own virtual store with avatars of the actual sales people who worked in the store? What is the customer could chat with the actual people in the store through their mobile device and the inventory online reflected the inventory in the store? Or you could click on an icon to talk with the actual sales person on a web cam.
 
Or maybe I’m over thinking this and nobody would care. Just because you can do something doesn’t always mean it’s a good idea. Like all of you, I learned that when I was very young.
 
I can imagine some kind of temporary marketing advantage here due to the immediate “that’s cool” factor. But I also felt like it had the potential to slow down my shopping. I don’t necessarily want to wander around a web site the way I wander around a store. And there seemed to be some glitches in the navigation. Make sure you go up the stairs (though it isn’t clear that you can at first and I sort of stumbled on it). 
 
Of course, I’m looking at version 1.0 so we need to consider the general concept and not be too critical of the specifics. You know the software will improve if the concept is well received.   But what’s the purpose? I’m not sure it adds to the shopping experience and nobody expects a web site to be the same as a brick and mortar store. Do they?
 
I guess I think that if it doesn’t improve web site navigation, make shopping more efficient, or give me some new information I want then I don’t care. No doubt there are people working right now to make those very things happen. It will be interesting to see what they come up with.      

 

 

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

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

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

 

 

The Dot Com Equation; What Does it Take to Make Money?

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In internet years, it seems like ancient history. But it really wasn’t long ago when it was taken for granted that on line retailing represented a new paradigm in selling to consumers. Maybe it still does- or will. But so far, making money as an online only retailer has proven illusive. How come? How many pairs of surf trunks do you have to move at a “normal” margin before you show a profit?

“It doesn’t matter!” One surf retailing dot com executive was heard to say. “These companies aren’t valued that way.” Of, course that was some weeks ago, and the world has changed. As of May 12th, internet e-commerce stocks, as a group, were rated 197 out of 197 industry groups followed for stock market performance by Investors Business Daily over six months. It wasn’t many months ago that they were among the leaders.   As a group, their stock prices have declined by 48% since January 1st.
 
Mr. Dot Com surf retailing executive, they’re valued that way now.
 
What have people figured out that’s made this happen?
 
Costs
 
It costs a lot of money to develop and maintain a quality web site. Instead of hiring $8.00 an hour sales people, you need $80,000 a year programmers and have a hard time finding them. Caching! You still have to carry inventory and take the associated inventory risk. Caching! You still have to get the product to the customer, and you can’t do that over the internet. Caching! You still have to provide customer service, including handling returns, and sometimes that means actually talking to the customer on the phone. It seems to be necessary, according to the conventional wisdom, to have not only product, but content. In other words, you’re not only an etailer, but also an ejournalist, and that adds some costs as well. Caching!! Caching!! Caching!! Oh, and of course you need to spend some money on marketing to establish your brand. CA-CA-CA-CHING!!
 
Lands End, the mainstream catalogue retailer with a great web site and killer customer service, earned $48 million on sales of $1.319 billion for the year ended January 28, 2000. Of course, they spent $190 million on producing, printing and mailing catalogues. But except for that expense, how is a dot.com retailer’s cost structure different from Land’s End? It isn’t.
 
Lands End internet based revenue totaled $138 million during the year, or 10.5% of total revenue. To put it bluntly, if they didn’t mail those catalogues, they wouldn’t have a viable business. Of course, Lands End isn’t exactly known as being cool, cutting edge, and appealing to the younger generation. Still, they’d have to do an awful lot of internet business before they could stop mailing those catalogues.
 
How much? Well, I guess more than $1.639 billion. That’s how much Amazon sold in the year ended December 31, 1999 and they lost $720 million for the year. It’s interesting to note that Amazon’s gross profit margin was only 18%. Lands End, cool or not, had a gross profit margin of 45%. That’s pretty cool to me. If Amazon had Lands End’s gross profit margin, they would still have lost a couple of hundred million, however.
 
Part of the difference in gross margins comes from the fact that Lands End is just better and more experienced in fulfillment and customer service than Amazon. But the biggest difference is that Lands End is selling product it makes itself with its own brand name on it. Amazon is selling stuff it buys from other brands. Lands End has cut out the middleman. Amazon is the middleman.
 
It looks like there’s more to making money in e-commerce than a cool website and building a community. The devil, as they say, (and the expense) is in the details. 
 
Competition
 
Quiksilver had $444 million in revenue for the fiscal year ended October 31, 1999. If, just to pick a number, Quik has 25% of the surf soft goods market, then we’re looking at an industry, at wholesale, that’s something less than $2 billion, though growing. If you’re a dot com in the surf industry, with the expense structure described above, how much business do you have to do before you can turn a profit? Where are the customers going to come from?
 
It doesn’t seem to me that the etailer is creating any new customers just by being an etailer. He’s fighting over existing customers, in an over retailed environment where he can only succeed largely by taking customers from competitors, of which there are a whole lot. And he’s trying to do it selling products that are probably differentiated from his competitors largely by marketing using a brand name that isn’t as well known.
 
Before the days of the internet, what percentage of total soft goods sales did catalogue companies do? If dot coms get that percentage of the surf industry soft goods market, can they make money? Are there any specific advantages conferred by the internet that will increase that percentage? I don’t know the answers to these questions, but that’s what I’d be asking if I was considering an investment in a dot com.
 
One statistic I saw a few years ago, which may or may not be relevant, was that catalogue and telephone sales of skis had never exceeded 5% of total sales in a given year.   Just for fun, let’s hypothesize that because of the cool factor, or their content, or technology, surf etailers can optimistically get twenty percent of total sales, or something less than $400 million. How many companies can that support? Given the implied size of those companies and their growth prospects, can they expect to attract adequate capital? PacSun and Quiksilver have both experienced some softness in their stock prices due to concerns about their ability to continue to grow quickly. They are both established companies that make money.
 
My personal opinion is that etailers of surf soft goods won’t even approach 20% of the total market. They may not get over five. But even if they can get to 20%, how does the financial model make sense to investors looking for fast growth, big returns, and a public offering?
 
Another competitive issue for dot coms is that established brands will ultimately figure out how to reconcile selling their product on line with supporting their brick and mortar retailers. Dot coms competing with retailers who already know how to handle customer service and fulfillment, have their infrastructure in place, and aren’t all that far behind in web development. Once the internet frenzy wears off, as it seems to be doing, I expect brands to recognize that it’s their product, they are in control and an etailer is just another retailer they may choose to sell too. Or not.
 
Community
 
The etailers’ answer, I expect, would resolve around “community.”   It has become the rallying cry for internet retailers who see creating a community as the focal point of their strategy for getting eyeballs and, hopefully, customers. It’s a good strategy. In all non-internet businesses, it’s called marketing- the process of identifying your customers and building a relationship with them.
 
On the internet, the concept of community implies it’s not adequate to look at the dot com’s revenue model just from the point of view of product sales. There are opportunities to generate revenue through advertisement, sale of content and information, and strategic alliances. How do you create these other sources of revenue? How much revenue can they generate? I don’t know. Neither does anybody else, though there are lots of theories.
 
Some of those theories will prove to be the correct ones, and those etailers may prosper. 
 
And So…….
 
At the end of the day, I wonder if the whole retail world, in the surf industry and in most other industries, won’t just be a fluid amalgamation of brick and mortar and on line. Whatever the successful model is, it’s going to change dramatically as broadband finds its way into more homes.
 
My bottom line on surf industry dot coms is that unless a lot of revenue comes from sources other than product sales, it’s hard to see a viable financial model. I suspect the inevitable result is that the need for sales volume will drive most of them to compete in the broader action sports market along the lines of Earthsports.com or FogDog.com. 

 

 

Skateboards on the Internet; “You Can Get Anything You Want…….”

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I girded up my loins (you’d think doing that would hurt) and sat down to research this story, fully expecting to have to visit dozens of web sites and to check each of them out utilizing my infuriatingly slow web connection.

My web connection is, indeed, infuriatingly slow, but it looks like there may be less research than anticipated. You can pretty much find any deck, truck or wheel you want at prices competitive to shops. Let me give you one example- the first site I visited.
 
The Ask Jeeves search engine sent me to MySimon’s skateboard buying page when I asked where I could compare product prices. There were 38 board brands listed and north of 300 decks available on line mostly through FogDog and N.A.G. Skate House. A couple could be bought from Sports Authority. Almost all the decks were priced at $49.95.
 
There were 150 trucks from 17 different brands available at 12 different on line sellers. The overwhelmingly common prices were from $14 to $19 (per piece). A mere 410 wheels from over 30 brands could be purchased from 12 retailers. Sets of four wheels were priced typically from $25 to $29. Note the same product was sometimes available from more than one on-line retailer so 300 decks, for example, isn’t necessarily 300 different decks.
 
I checked out Fusion, Earthsports and CCS to name just a few. I looked at some shop sites, and some brand sites. For the most part, the brand sites aren’t selling directly, but my initial conclusion stood up. You can, indeed, get anything you want. Not everything every place all the time. But pretty much everything someplace most of the time.
 
What are the implications for the industry?
 
Entropy and Palm Pilots
 
The idea of entropy as used in the second law of thermodynamics says, to use an example, that if you drop a hot rock in a bucket of cool water, the temperature of the rock will drop, and that of the water will rise, until they are equal.
 
When I bought my Palm V, I went to CNet.com. It showed me the list of 20 or more places where I could buy the product. I sorted the list by price, and bought from the cheapest place (after taking shipping costs and sales tax into account).
 
All the water molecules in the bucket, being identical to each other, become the same temperature. All other things being equal, Palm Vs should all be priced the same. Modern economic theory sort of mimics the second law of thermodynamics; prices will fall until marginal revenue equals marginal cost the textbooks say.
 
Of course in business, all things are never equal for either Palm Pilots or skateboards. Even where the products are effectively identical, various market “frictions” such as distribution, production efficiencies, advertising and consumer perception create points of differentiation that can justify some price differences among essentially identical products. Happily, skateboards aren’t water molecules.
 
On the other hand, they aren’t as distinctive as Palm Pilots.
 
The temperature of the rock and water in the bucket only fall and rise to a certain point on the assumption that the heat can’t get out of the bucket. That is, it’s a closed system. That’s not true with the skateboard industry. It’s an open system where companies and product come and go. If heat can go through the side of the bucket, then the temperature can drop further. In business, the comparable result might be irrational competition, where marginal revenue is pushed below marginal cost on the assumption that the other guy will fold first.
 
Happily for skateboarding, favorable demographics and the resulting market growth seem to be putting more hot rocks in the bucket and at least keeping the temperature from falling. Business seems good right now.
 
Elvis Has Left the Building
 
Where other industries are agonizing over how their products should be distributed on the internet, skateboarding has made its decision. I can’t say that every deck, truck, wheel and bearing of every brand is available on the net, but an awful lot are. My gut is that most are. Enough so that, as an industry, we are suggesting to the consumer, at least from a distribution point of view, that there’s nothing distinctive or special about the product.
 
“Here’s a bunch of decks-they’re kind of all the same,” we proclaim by our actions. Web sites show them all in rows like soldiers standing at attention with the prices the same or close to each other. Perhaps it doesn’t matter, and this is just an extension of a skate shop with decks lining the walls. It’s also the result of a distribution system where brands not only sell direct to retailers but to middle men who distribute the product further. For better or worse, distribution is simply not controlled as well in skateboarding as in some other industries.
 
Maybe Elvis left the building long before the internet became an issue. Skate hard goods have been awfully similar for a long time in features, pricing, functionality, and durability. Many of the online sites where you can buy boards are also brick and mortar retailers.
 
And there’s some good news. In spite of broad distribution online, product isn’t finding it’s way to the big discounters. There was no significant branded product, and mostly no skateboard product at all, on internet sites for Costco, Garts, Sports Chalet, GI Joes, Sports Authority and some others I now can’t remember.
 
Issues
 
Someday, if it’s not already out there, some web search bot is going to be able to find a particular brand and model at the lowest price like I did with my Palm Pilot. As that happens, skateboards (or any other product) become even more like the water molecules in the bucket and price becomes a bigger consideration- especially since we’re presenting the product on the web as all kind of the same anyway.
 
The tool we’re left with to buck that trend is the old, reliable advertising, promotion and team budget. Old and reliable, but damned expensive. If margins drop because of over supply and the product being hard to differentiate, and what differentiation we can do requires a big marketing budget, then this becomes an industry where only bigger players survive.
 
For retailers, the question is simple- at least simple to ask. If prices are more or less equal, can a web site create a “community” on line that will motivate somebody to buy on line rather than visit a shop? A good shop is a community too. More than any web site I hope and expect. Seems like a good shop with a good web site has a lot going for it. The question, simply put, is whether a customer would rather have the instant gratification of getting the product right away as opposed to the convenience of ordering on line but waiting a few days for it to arrive. An awful lot depends on the experience the customer can expect to have at the shop. But we already knew that, whether the competition is another store or a web site. 
 
It’s hard to see any problems on the horizon when the economy and industry is booming and factories can’t make enough decks. But we’ve got an inverted interest rate curve (short term rates higher than long term rates), and four interest rate increases with more expected. Historically three increases have often preceded a stock market correction and a recession. I’m not prepared to declare that the “new economy” has relegated traditional economic relationships to the dust bin of history. Some of you “elders” who actually remember what a recession in skateboarding and in the economy in general is like might share the experience with your younger colleagues.
 
Meanwhile, Back On the Internet
 
I started out pessimistic about how the skateboard industry was utilizing the internet, but given our target customers and the fact that products were already tough to differentiate from each other, I’ve decided we’re doing a pretty good job.
 
First, leading brands are being kept out of discount chains- both on the internet and in brick and mortar. That is a huge victory. It’s probably the single biggest reason why there’s any margin left in hard goods at all and why teams and other forms of promotion work as well as they do.
 
Second, lots of shops have embraced online sales as an extension of their existing business, rather than seeing it as competition. Used correctly, it’s a way to move close out product without damaging your shop’s image, collect customer information, expand sales, build your image and maybe reach customers. My parents were the TV generation. I’m from the PC generation. Skateboarders are generally from the online generation. Embracing reality rather than fighting it usually makes a whole lot of sense.
 
Finally, brands are using their internet to support their products and the sport but not to compete with other retailers. The future there has to be online ordering and accounting and seamless information exchange with your customers. Eastern Skateboard Supply is one example of a company already doing that.
 
Skateboarding’s customer demographics diffuses some of the issues usually associated with internet sales. We’re not trying to pull our customers on line- we’re following them.

 

 

Snowboarding the Internet; Taking the Tour at 26.4

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Slow connections suck. So while we wait for my 56k modem to connect at 26.4 kbs, consider this.

All the dotcoms with money (typically from an egregiously successful public offering) are advertising like mad. On TV, on the sides of buses, everywhere.
 
Why?
 
Because there’s not much difference between Barnes&Noble.com and Amazon.com if you want to buy a book. There’s no price difference, at least on the books I bought last week.
 
So entry barriers in this business are low, especially if you’re already doing fulfillment. Admittedly, the cost of maintaining a quality site is often underestimated. Price comparisons are easy to do. Similar sites are selling products that are often absolutely identical.
 
Under these conditions, prices should tend to move down, and consumers are more likely to view the product as a commodity. Spending increasing advertising and promotional dollars is critical to building brand awareness and keeping market share. Homegrocer.com will deliver an order free if it’s seventy-five dollars. New entrant Albertson’s.com will deliver for free if the order is sixty dollars. And so it goes.
 
Lower gross margins, too many competitors, high advertising and promotion costs, competition based too much on price. Hmmmm…….
 
He had to think for a minute. Hadn’t he seen this happen in another industry? Which one could it have been? How did it all shake out (so to speak)? Perhaps he’ll remember later.
 
Meanwhile, the computer has finally connected. Let’s go hunting for snowboards on the internet.
 
Brands on Line
 
I checked out the web sites of most of the significant brands. Some were good and some bad. Some fast, some slow. Several under construction. None were selling product. All referred you to dealers. Hardly a surprise. Brands have worked hard to build relationships with dealers. I can’t imagine anything that would make a retailer scurry to a competitor quicker than a supplier competing directly with it.
 
So brands aren’t selling boards directly on the web, through their own web sites- yet. And that’s where clarity on the issue ends.
 
I used a couple of search engines and searched under different brand names, and under snowboard or snowboarding. I went directly to some retail sites. Certain ones were sports specific. Others weren’t. The by no means complete and certainly not scientifically selected list included Performance Snowboarding, Fusion, Costco, OnSale, REI, FogDog, Gear, WorldwideSports, and OutletZoo.
 
They all had some snowboards. OutletZoo had a couple of Kemper 2000 Strike 151’s with bindings for $199. Costco was offering K2 Electras and Futuras for $359.99 (plus $18.57 shipping). FogDog had boards from Palmer, Salomon, Libtech, Option, Ride, World, Rossi, Santa Cruz and Hyperlite. I don’t know if they were all at manufacturers’ suggested list prices, but these were not heavily discounted boards. Sometimes there was just one model, sometimes damn near a whole line. Gear had what looked like nearly full lines of Arbor and Option, again at full or nearly full price.
 
I don’t suggest that my search was either indicative or all-inclusive, but the only major brands I couldn’t find at least some of were Sims and Burton. It’s interesting to note that if you do a search under either Sims or Burton, you find lots of references to places selling those brands, but the only ones who actually seem to have them are retailers.   If I were trying to attract snowboarders to my site, I’d certainly include “Burton” as a key word whether I had any product or not.
 
It’s the wild, wild west out there. You never know what brand, what model year, what quantity and what prices you’re going to find. Right now, it looks like most of the major brands selling on the web are doing a pretty good job keeping the prices at or near to what they would sell for in a quality retailer. 
 
What isn’t clear, of course, is how these boards are getting to these sites. Some brands I assume are legitimately placing product with sites under agreements to maintain pricing. Product may also be finding its way to sites through traditional, if I can call them that, gray market channels. I’m also wondering what will have happened to prices on the internet by the time you read this, well after Christmas.
 
The Internet Financial Model
 
Early financial discussions about the internet model postulated a cost structure that would allow internet merchants to make an attractive margin, but still give the consumer a better deal than he could get through conventional retail channels. The thinking was that total costs would decline dramatically with the elimination of “brick and mortar” and the associated expenses.
 
Certainly some costs are eliminated. But my sense is that they are basically replaced by others. Fulfillment (getting the product to the consumer, handling returns, warehousing, packing) is the same whether you are a traditional mail order retailer relying on a catalogue, or an internet merchant. It’s interesting to note that some internet merchants also offer a catalog- either through the mail or downloaded. That’s what Performance Snowboarding does. It’s also true that creating and maintaining a really good web site, and having adequate telephone customer service, costs a lot of money.
 
Irrespective of what costs are added or eliminated by selling over the internet, internet retailers are going to be competing against each other as much as against traditional retailers. That competition is going to result in the same business cycle for internet retailers as we saw with snowboard companies. A lot are going to disappear. A few larger, well-capitalized ones will have the bulk of the market.
 
A True Retail Story
 
The other day, I wandered into the Garts in Bellevue, Washington. For some reason, I gravitated to the snowboard section. It was a foreboding sight. The overall impression was like a snowboard junkyard. Boots of various brands were stacked in their boxes up to my eyes, with no apparent concern for brand or size. The stacks were leaning over, the boxes on the bottom being crushed by the weight of the ones on top. Boards of all brands were leaning against the wall many deep. Burton was mixed with Vision. Parts from Morrow Exchange step-in bindings spilled out of their boxes.  The clear message was that Garts didn’t care. It was all the same to them. If you wanted to buy some snowboard stuff, great. If not, they’d mark it down or sell it again next year. Whatever. There was clearly no concern for the product and no pride in being a dealer.
 
I’m not critical of Gart’s for taking that approach to snowboarding. If that’s the retail model that works for them, fine.
 
If, however, your question is what is the future of snowboard product sales on the internet, then we have to be concerned with the Garts model, because product that is treated that way is a candidate for internet sales. If it’s just another thing you buy, if no assurance comes from buying a specific brand, if the purchase process isn’t worth spending any time on because the stuff’s all the same and you don’t need the advice of a knowledgeable retailer, then buy it on the internet to spend the least possible time and use a bot to find the best price.
 
A Glimpse of a Possible Future
 
Get on the internet. Go to www.eshop.msn.com. In the little box in the upper left hand corner, type in “snowboards” and hit go. On the next page that comes up, under “matching categories,” click on “Snowboards.” On the next page, in the left hand column under “Related Links” click “Search for snowboards.”
 
Okay, now we’re to the part where it gets a little scary. You can, if you choose, specify one of something like 110 brands. Some of them aren’t even in business any more as far as I know. Maybe they’ve got closeout inventory out there. If you don’t choose a price range, model year, length, waist width, sidecut radius, or board style, you’ll have 3,758 boards to choose from, the page tells us. But you can select by any of those features, and I may have left a couple out.
 
Let’s pick a board in the $350 to $400 price range from the current model year. I want a freeride board that’s from 161 to 164 cm with a waist width of more than 25 cm (big feet). There are 42 boards available that meet those specifications. Let’s sort them by price (cheapest first of course) and list the models for sale on the internet ahead of others. I’ve selected all brands.
 
Okay, there’s the Lamar Hetzel Lite Freeride at 163 cm. Obviously, that’s a core brand. Clicking on that board, I get a list of its stats. I’ll add it to my wish list. When I do that, I get another screen, with a picture of the board and one of my choices under “Online Store” is to click on “Where to Buy.”
 
When I click there, the screen comes up blank. The product is not available online anywhere this site is aware of. It offers to help me find a retail store where I can buy. It comes up with a list of local sporting goods stores, but doesn’t tell me which carry the product I’m looking for.
 
The Microsoft site has been launched within the last month or so. Its format seems excellent even if the product availability isn’t too great yet. It’s going to be scary when it can really match buyers with the product they want to buy.
 
I recently bought a graphic card for my kid’s computer. I went to cnet.com. I clicked on sound and graphic cards. I clicked on graphic cards. It gave me a list with reviews and specifications. I picked one. It gave me a list of places I could buy it sorted by price. I went to the place where it was cheapest and bought it. It showed up in two days. I didn’t pay any sales tax. I was happy.
 
Is that the future of snowboard equipment on the internet? To some extent, that’s up to us. If we nurture our brands and control distribution, maybe giving up some immediate sales for longer term success, it doesn’t have to be.
 
But you know what? That would be good advice even if there was no internet.