Well, I Guess It’s a Recession; Perspective on an Economic Downturn.

/0 Comments/in , , /by

It has been a while—ten years actually—since we endured the lastr ecession back in ’90/91. But business cycles are pretty much immutable. 

What goes up must come down. “Regression to the mean” they call it in statistics.
 
Two things have me especially concerned about our current situation.  First, the economic rubber band is stretched tight after ten years of prosperity and growth. Second, this might be the first global recession since the early 70s.
 
Maybe our customers have enough net worth that there won’t be much impact on their spending. Maybe a kid’s ability to nag his parents into shelling out bucks for new shorts is more powerful than any concern over the family cash flow. Maybe people find money for things that are fun when everything looks bad. Maybe, but maybe not.
 
September 11th has had an unknown impact on consumer confidence andour nation’s psyche. It’s accelerated the decline of an already shaky economy. Any doubt about whether we were headed toward recession ended that awful day. The question is: how deep and how long will it be?
 
Obviously, I don’t know the answer to that. But since the surf industry is based on products that aren’t necessities (although we try to make the consumer feel they are), retailers and suppliers should be examining their business models and making adjustments now to deal with the impact of an economic downturn.
 
Maybe a short history lesson, a look at some current economic statistics, and a few conversations with people in the trenches will
give us all some insight on what we can expect in the months to come.
 
A History Lesson
 
In 1990, the economy started off pretty well. Gross Domestic Product (GDP) grew at a 5.1-percent rate during the first quarter. That declined to 0.9 percent in the second quarter and fell further to a negative 0.7 percent in the third. Fourth quarter GDP fell at a 3.2-percent rate.
 
For the year, we ended up with a real GDP growth rate of 1.2 percent. In 1991, it was a negative 0.6 percent. Officially, the 1990 recession started in July 1990 and ended in March, 1991—eight months later. A recession, by the way, is technically defined as a decline in GDP for two consecutive quarters, so they can’t get much shorter than that one was.
 
Iraq invaded Kuwait on August 2, 1990. The air war began January 17, 1991. The ground war followed on February 23 and lasted four days before President Bush declared a cease-fire. The first U.S. troops began to leave on March 8. We declared victory and went home.
 
Our current conflict began September 11. I’m sure none of us knows how long it will last or what exactly success will look like, but it’s not going to be as definitive as the Gulf War.
 
I’m told that the ’90/91 recession and the year or two that followed it was a tough time for the surf industry. Surfing was in the pits, and we had to reinvent ourselves. Of course, not all of the surf industry’s malaise back then was related to the economy. But the fact that a major change in fashion trends coincided with a recession meant the surf industry was hit hard.
 
Yet that was a relatively mild recession, because there was economic strength in much of the rest of the world. The last time Europe, Asia, and the U.S. all experienced economic weakness at the same time was during the 1973 to 1975 recession. It lasted sixteen months. Once again, I’m not certain of anything, but it’s possible that we may be facing that kind of global recession this time around.
 
The Current Situation
 
Parts of Asia haven’t gotten over the 1997 currency crisis, and Japan seems poised for its fourth recession in ten years. Germany and Britain, along with other parts of Europe, teeter on the edge of recession as well.
 
From a healthy 5.6-percent rate of growth in 2000’s second quarter, GDP in the U.S. has fallen each quarter. It ended the second quarter of this year with 0.2 percent growth. My guess is that the number we get at the end of October for the third quarter will be negative.
 
September retail sales were reported October 12. They showed a drop of 2.4 percent—the biggest in nine years. Economists had expected a drop of 0.7 percent. The September employment report showed the country lost 199,000 jobs during the month. That’s the largest decline in ten years.  Most of the fallout from the attack isn’t reflected yet. September was the twelfth month of declining industrial production. That ties a record that goes back to right after World War II.
 
But there’s also a bit of good economic news. Consumer spending had been holding up fairly well, though it had finally weakened a bit even before September 11. Housing has also held up well—probably due to declining interest rates.
 
The Federal Reserve has cut the discount rate from six to two percent this year. It was last that low in 1958. Typically, it takes six to nine
months for the benefit of rate cuts to work its way through the economy. The first rate cut was in January and the most recent October, so clearly we haven’t seen most of that impact yet.
 
Finally, the stock market looks like it may have put in a bottom after the worse bear market since the depression, and the market always turns around before the economy.
 
Among the public companies in the surf market, it was Quiksilver that made me first say to myself, “Okay, we’re having a recession.” That was back on September 6, the first day of the Action Sports Retailer show in San Diego. Quiksilver held an analyst’s conference call to announce that third quarter earnings were in line with expectations, but that fourth quarter earnings would be lower than projected. This was due to weaker than expected retail orders and too much inventory that would have to be closed out at reduced prices.
 
Quiksilver said that diluted earnings per share for fiscal year 2002 would be in the range of $1.50 to $1.55. The consensus analysts’
forecast had been for $1.85 per share.
 
Of course, Quik’s situation was hardly unique among surf-related manufacturers—they were just first to announce. On September 25, Vans beat analysts estimates for its first quarter ended September 1, but expected its second quarter to be flat or down five percent due to the impact of September 11. For fiscal 2002, Vans said its earnings per share would be near the level of a year ago on a forecast revenue increase of roughly ten percent.
 
Pacific Sunwear, on October 11, warned that its third and fourth quarter earnings would miss analysts’ consensus estimates, citing lower consumer confidence and spending. It now sees third quarter earnings of 25 to 27 cents per share, compared with a mean analysts estimate of 33 cents. It sees fourth-quarter earnings as being between 33 and 37 cents, compared with the previous mean analysts’ expectation of 41 cents.
 
But let’s not look at Quik, Vans, and PacSun as though they were unusual or had done something wrong. Tommy Hilfiger, Nautica, Kenneth Cole, Jones Apparel, VF Corp, Coach, Polo Ralph Lauren, Liz Claiborne, and Columbia have all either cut their earnings estimates or had them cut by the analysts—or both. Recession and terrorism are hitting pretty much everybody who sells apparel.
 
What Are They Doing About It?
 
Steve Price at Killer Dana has been reacting to the possibility of a recession for months now. By August, he’d already backed off on some of his projections and orders. He’s booking less going into spring, and scheduling it for delivery a little further out. He’s forecasting November and December sales will be off eight to ten percent from last year (which he described as being an incredible year), and is planning to be off ten percent through spring.
 
There were a few slow days after September 11, but overall September and October sales are up twenty-five percent for Price. Customers, he says, “Aren’t afraid to spend, but are paying more attention to what they get for their money.” He’s stocked up on a lot of rubber this fall, and it seems to be paying off for him. The best-selling wetsuit has been those around the relatively low 150-dollar pricepoint. Price says this is due to both consumer caution about spending, but also the good quality of even lower pricepoint wetsuits.
 
Killer Dana, it seems to me, has done two things that will get it through hard times. First, it started planning when the storm clouds
were first on the horizon—not when the floods came. Second, it has brand recognition and a market position that should keep it a shopping choice for its committed customers.
 
Jay Wilson, vice president of marketing at Vans, reports that the brand’s high-end and signature products are still experiencing good sell through and demand. West Coast sales, he says, have been harder hit than East Coast sales since September 11. Vans’ core customers are doing fine. “It’s the mainstream retailers who are affecting our business,” he reports. They’ve had some order cancellations and some shipping postponements.
 
In response, “Vans has reallocated dollars from branding to the store level,” says Wilson. The company is doing more demos at skate parks.  It’s revved up the rep force to spend more time with the customers and it’s making more shop calls to find out how they’re doing and to help fill in product. “We’ve got ten people calling shops one to two hours a day,” he says.
 
Vans has put a hold on new advertising or promotional commitments, and expects to maintain that through the middle or end of November. 
 
Dave Juan, one of the owners of Unsound Surf on Long Island, New York must be one of the guys Vans is calling more regularly. He’s now cut his orders for spring by 30 percent—though he wasn’t worried about a recession until September 11. “Sales were impacted, but are recovering,” he says.
 
He’s getting lots of calls from reps trying to get him to change his mind. Product is coming early and orders are complete—rather than a bit at a time as has been the case in the past. His interpretation is that brands don’t want to give him the chance to change his mind, and want to get their stuff into his store before the competition. He’s seen some loosening of credit terms and additional discounting. He’s ordered some extra Ocean Minded sandals, citing that brand’s commitment to donate part of its sales to the Red Cross relief effort.
 
Pat Fraley, president of Counter Culture, says sales aren’t going down, but buyers are more cautious. Some spring orders have been delayed, but he doesn’t see ship dates slipping yet. His perception is that companies with broader distribution are feeling it more than specialty shops. “It seems like most of our retailers are doing the right things,” he says.  “They have the right attitude.”
 
To help those retailers, Counter Culture has changed its pricing structure. “We’re shifting our entire [wholesale] price structure and
price points down two or three dollars,” says Fraley.
 
Fabrice Le Det, Asia and European sales manager for Reef, says he has some distributors who are very reluctant to travel, but that his
international prebooks for spring are still strong and fall product seems to be moving. “The big test,” he says, “will be once the spring
line hits the stores beginning in March and we see how the consumer behaves.”
 
He hasn’t seen many cancellations, though there have been some minor decreases in orders or delivery dates pushed out. Overall, sales are up from last year. He blames any minor softness in international sales on weak economic conditions and competition at the low end, rather than the events of September 11.
 
Mark Price, who’s handling international distribution for Tavarua apparel, says he’s not sure how much of the domestic retailing slowdown is due to the September 11 attacks, and how much is the result of recession. “The holiday season,” he says, “will be the acid test. It will create opportunities for those left standing.” Strong brands, he thinks, will be stronger next year.
 
“But what happens,” Price wonders, “when eighty percent of the floor space in specialty shops is taken up by brands that are also distributed nationally in larger stores?”
 
Hell of a good question. If the trend Price points to, accentuated by competition and economic conditions push margins down, but your onlypoint of differentiation comes from your expensive marketing program, how the hell are you going to make a buck? Lower margins and higher costs are not typically a recipe for financial success—especially if you are a small guy. Look what happened to the snowboard industry even without a recession. When brands are ubiquitous, how do we keep them exciting and special? A recession has the potential to accelerate the same trend in the surf industry.
 
Do Something!
 
My wife and I had dinner in an established Seattle restaurant about a week after the attack on the World Trade Center. Business was off about 30 percent, according to our waiter, who predicted: “There’s going to be a bunch of restaurants in Seattle closing down.”
 
He should be in a position to know. Which ones would close? The ones with either a poor balance sheet or no established clientele—or both. It’s the same situation for businesses around he country—including surf shops.
 
During a lot of the 90s, low interest rates, high personal expenditures, low inflation and unemployment, and big jumps in net worth meant a high growth rate for retail sales (averaging 6.55 percent annually between 1994 and 2000). That kind of growth and cash flow can cover up a lot of miscues and lack of a competitive advantage.
 
At the same time, retail competition is tough, to put it mildly. There have been a lot of store closings, but the United States is still over
retailed. All of you surf retailers who have ever had cause to complain about a brand opening your competitor in the next block understand this at a fundamental level. I’m still getting pretty regular e-mails from people who want to open shops and are looking for information.
 
Just like in the restaurant business, brands and retailers lacking a solid balance sheet and a viable market position are going to be
vulnerable in a recession.
 
You can either sit there and hope, or you can minimize your chances of being a casualty by taking action now. Examine your cash flow now. See what a ten-percent decline in revenues would do to your business and adjust your business model right now. I’ve gone out of my way to sound a little economically pessimistic. Hopefully I’m wrong—but plan as though I might be right.

 

 

What To Do in a Recession? Hint: “Nothing” is the Wrong Answer

/0 Comments/in , , /by

I’m sure that everybody who was in the snowboard business during the 1990-91 recession liked that one better than we’re going to like this one. Assuming, of course, that you even noticed the one in 1990-91. Ah, those were the good old days- when suppliers and retailers could sell whatever decks they could manage to get their hands on at high prices and good margins and consumers were so grateful to get anything at all that they’d cheerfully pay what look today like impossible prices and barely complain if it fell apart after the second run.

Okay, perhaps I’m romanticizing it just a bit.
 
So let’s get back down to earth and take a look at this recession. I’m writing this at the end of October. It’s not officially a recession until we’ve had two quarters of negative gross domestic product growth, but I’m pretty certain we’re going to get there. This recession also has the potential to be a longer and deeper than the 1990-91 one. It looks like we may have the U. S., Japan and Europe in a recession at the same time. The last time that happened was in 973-75. That recession lasted sixteen months.
 
The good news, if you want to call it that, is that suppliers and retailers with solid competitive positions and strong balance sheets will be in a position to gain business. The bad news is that they are likely to gain it on the back of weaker companies that may not be around when the recession ends.
 
Snowboard suppliers have largely been through most of their consolidation and, as you probably recall, it wasn’t pretty. Retailers, on the other hand, have enjoyed high levels of retail sales growth, averaging 6.55% annually between 1994 and 2000 for the U. S. economy as a whole. But as every retailer who has ever complained when a supplier opened his competitor right down the street knows, there are a lot of retailers. My concern is that a decline in the growth of retail sales, or even falling sales, will be something weaker retailers may have difficulty surviving.
 
What are people doing about it? Are they concerned about the potential impact of an economic downturn on their businesses? I’ve talked to snowboard retailers and suppliers to see how they are working to cope with recessionary pressures.
 
A Little Perspective
 
This is the snowboard business (Don’t say you never learned anything from me). Suppliers ordered or started to make product last winter. Much of it (hopefully) had been shipped and received by retailers long before you read this, though of course there have been the usual delays and screwups on some product by most companies.
 
That’s practically a part of the industry’s tradition. If suppliers weren’t late on something and didn’t handle it badly with at least some of their retailers, often because they have to allocate scarce product, then those retailers wouldn’t get a chance to grind the suppliers for a bigger discount, better terms, or some free product and what would we do all in September and October?
 
Gregg Keeling, National Sales Manager for Salomon hard goods, says his product was eighty-five percent shipped by mid September. Dave Schmidt, Director of Sales and Vice President of Burton, says his number was 75% by the end of September.
 
The irresistible momentum of the industry business cycle means that a lot of business at the supplier level was already done before September 11th and before a recession looked certain. Well, there’s the minor matter of collecting the money, but let’s ignore that for the moment.
 
For retailers, the jury is obviously still out, though early signs look promising. A generally good snow season last year (unless you have the misfortune to live in the Northwest that is), coupled with growth in snowboarding and hard learned inventory control means that retailers seem generally optimistic, though praying for snow as usual.
 
If this was just the apparel business, or the surf business, or we had a major trade show now, there’d be a lot more public industry knowledge about general business conditions. In the apparel business, and to a lesser extent in the surf business, there are public companies. When public companies notice that their business has hit a rough spot, they have to put out a press release that says, in affect, “We’re screwed! This is why.”
 
There are few public companies in snowboarding, and those that are public don’t make most of their revenue from snowboarding. September’s ASR show, coming a week before the attack, gave the surf and skate industries a real chance to take their own pulse, and the word was that spring orders for soft goods especially were down substantially. This was consistent with what the public companies announced.
 
We’ll get a chance to take our pulse at the end of January in Vegas and in the selling season that follows. It’s then that we’ll really know what impact the recession may have on snowboarding.
 
In the Trenches
 
Jeff France, at Board of Missoula in Montana, says he saw the economic slowdown coming late last year. His part of the world suffered from a drought last year, with a result that he was left “a little heavy” on inventory when the season ended. That, and concern about the economy, led him to cut his preseason orders by twenty five percent for this season. His suppliers were “not real happy,” but understood the impact of drought. The larger suppliers, he said were content as long as they saw that their relative market share had stayed the same.
 
There are no resorts in his territory, which he characterized as a bit insulated from the national economy and “always in a recession” anyway. When he ordered, he was a little more price sensitive about really high-end board, but didn’t change his overall mix. He hasn’t had any calls from brands trying to get bigger orders, but he did get a little the other day from one snowboard company offering a five percent discount for early payment.
 
Maybe the consolidation isn’t over.
 
Jeff usually spends one percent of snowboard revenue on advertising during the season. He’s eliminated that completely. He’s comfortable doing that because of his shop’s market position. He says that, especially if they know anything about snowboarding, he’s really the only choice for his customers.
 
He’s got a defined market niche and has taken steps to safeguard and strengthen his balance sheet.
 
Adam Valedaserra is the snowboard buyer for Ski Market in the Boston area. They currently have twenty-five stores with a separate Underground snowboard department in most of them. They’ve been around a long while.
 
Business is good for Adam- up slightly from last year.
 
Overall, and not just in snowboarding, action sports seems stronger in the East and then in the West, which has caught some people by surprise. In snowboarding, the speculation is that people are still going to make it to the mountain, but they aren’t going to be as likely to get on a plane and come out West to do it.
 
Adam has kept his budgets a lot tighter. He’s not jumping so quickly into new opportunities. He’s watching his inventory a lot closer, and has made some alterations in his deliveries, delaying some and reducing the size of others just a bit. He’s seen some improvement in terms and discounts from suppliers.
 
Business is up, budgets and inventory are under control, and he’s getting some better deals. “All things considered, I’m pretty content,” he says. I guess so.
 
He’s got a defined market niche and has taken steps to safeguard and strengthen his balance sheet.
 
Dave Pascoe is the Manager of Boarderline in Bellevue, Washington. The store has been around for twenty-five years. He’s cancelled some late order, which he might have cancelled regardless of September 11th and general economic conditions. He’s also reordered some product. He characterizes deliveries as “pretty good” and has already reordered some product. His sales at the local consumer show were up twenty percent this year.
 
He got lots of good deal from various companies for the product he sold at that show. “I think this year is going to be good for that [good deals] too. If I can exercise some cancellation clauses, maybe I’ll just take half now and a month from now I can call up and it’s on sale at thirty off.”
 
His staffing promotional budgets remain the same.
 
He’s got a defined market niche and has taken steps to safeguard and strengthen his balance sheet.
 
The Supplier Side of the Story
 
GenX Sports sells a lot of snowboard product, know the distribution better than anybody, and have helped an awful lot of companies out of inventory quandaries, if I may put it tactfully.  You don’t much like them? Too bad. They have a big impact on the industry, help give the consumer what they want, and are going to be around.
 
Mark Brazier is the VP and Director of the Snowboard and Action Sports Divisions.   Their preseason orders were up slightly. After September 11th, they saw some initial calls to modify orders, but there were hardly any cancellations. They’ve already had some reorders. They haven’t changed their promotional and advertising budget in response to economic concerns.
 
However, they are not being as aggressive as they have been in the past about placing product in the market place. This goes to the heart of their relationship with their retail customers and how they compete. Mark estimates that they get eighty percent of their snowboard sales from thirty snowboard buyers. Those buyers, with whom they are in touch daily, generally see snowboard product as just another thing to sell “It’s SKUs to them,” says Mark.
 
GenX’s job is to know the snowboard market intimately and, to the extent possible, to make sure their customers have the right product at the right time. As things change over the season, it’s their job to make sure the retailer has the right product mix, in the right amounts, at the right prices. It’s a hell of a way to tie the customer to you as long as you don’t abuse the dependence. That’s where not being too aggressive in placing product comes in this year for GenX.
 
On the other side of the snowboard world, at Burton, Dave Schmidt says there’s an “Air of caution over our forecasting going into next season.” They saw a “blip” of cancellations following September 11th, but retailer confidence seems strong.
 
Burton has accelerated shipments to some big players so that Burton’s product would be on the floor. There have been no changes in their advertising and promotional budgets, and they haven’t modified their credit process as of this date. He reiterated their caution going into next year’s budget process.
 
Salomon’s Greg Keeling, just back from a tour of seventy-five shops, reports that sales on the East Coast are great, California is hurting, and Colorado is killing it because of the lift ticket price wars (Thanks resorts! Sure hope you don’t put yourselves out of business). That’s pretty consistent with what I heard from various other sources.
 
He saw the same sort of cancellation blip that Dave Schmidt at Burton saw after September 11th. Greg thinks people are going to reorder, and he’s helping them out with some incentives. There’s ten percent off standard wholesale (not on top of existing discounts), free freight, and payment on the reorders won’t be due until March 15.
 
Well, I guess by the time you read this it will be too late to cancel your orders and them make them reorders latter.
 
Salomon has reforecast down a bit for next year, but still have pretty aggressive growth plans. They have tightened their belt on credit, and didn’t ship some accounts. Greg says Salomon has a reputation of being the last to be paid, so he sees that as a positive thing.
 
It will be interesting to see how they reconcile their tighter credit policy with their aggressive growth plans.
 
So What?
 
Pay attention to your market niche and balance sheet. Expect soft goods to be hit harder than harder goods by an economic slowdown. Look for weak retailers and suppliers to disappear. Hope for a short recession, but plan for a longer one. You might want to check out the paper I wrote for SIA to see why I think that. Use Vegas and the weeks right after it to get a firm fix on the 2002-2003 season.
 
If you’re a supplier, watch your credit and collections closely. If you’re a retailer, work your suppliers for better terms and discounts.
 
Some things never change. Pray for snow and the continued growth of snowboarding- our best antidote for economic hard times.

 

 

Potential Impact of War and Recession on the Snow Sports Industry; Relevant Statistics and Possible Strategies

/0 Comments/in , , , /by

We were looking at a recession before the September 11 attacks on the World Trade Center and the Pentagon and the tragedy raised the possibility (certainty in the minds of many) that the recession would be longer, deeper or both then it would otherwise have been. Economic activity has already rebounded since its nadir in the days following the WTC. But what’s a “normal” recovery from such an event? Who knows.

The snow sports industry may be as impacted by a recession as other sectors of the economy. As we represent discretionary spending, we have the potential to be impacted more. Add to that the “fear of flying” hangover and we can’t help but be nervous about the coming season, especially with the possibility of further terrorist attacks. Air passenger volume was down 50% for a couple of days after flying resumed and, as of October 4th, was still off 29%, according to the International Air Travel Association (IATA).
 
On the other hand, as you’ll see below, the last recession, with its very low resort visitor days, corresponded to the worst snow year in a long time, so it’s hard to lay that awful year only at the feet of the war and recession of that time.
 
Still, my feeling is that this recession, and the caution in traveling and vacationing precipitated by September 11 and subsequent events, will be worse than in 1990-91.   Rather than just be nervous and pray for good snow we should probably “do” something. What?
 
Where Are We?
 
Before I yield to the inevitable and start quoting economic statistics, I want to introduce you to the statistical concept of regression to the mean. Discovered in 1875 by the amateur mathematician Francis Galton, it’s the single biggest reason one might be cautious about predicting a short, shallow recession.
 
To dramatically oversimplify and avoid a really boring discussion of statistics, it says, “What goes up must come down.” And the further up it goes, or the further down it goes, the more likely and the faster, it is to go the other way. We haven’t had a recession since 1990-91, and it was mild.
 
Of course a statistical mean can move, and some of these trends can be over very long periods. Still, the economic rubber band looks stretched awfully tight, and a snap back is inevitable.
 
This is supported by the fact that Japan is going into its fourth recession in a decade. Parts of Asia haven’t gotten over the impact of the currency crisis that started in 1997. Other Asian countries depend on exports to the U. S. to support their economies, and those exports are likely to decline. Much of Europe seems on the brink of recession as well.
 
During recent U. S. recessions, some other part of the world was strong and could pick up some slack. This time, the rest of the world was counting on a U.S. that is weak itself. The last time Europe, Asia and the U. S. all experienced economic weakness at the same time was during the 1973-75 recession. It lasted sixteen months.
 
Consumer spending had started to weaken before September 11. September will be the 12th month of declining industrial production. That ties a record that goes back to just after World War II. The September employment report showed a decline of 199,000 jobs during the month, the largest decline in over a decade. Very little of that reflects layoffs that occurred after the attack.
 
September retail sales, reported October 12th, showed a decline of 2.4%, the biggest drop in nine years. Economists had expected a 0.7% drop. At the same time, consumer sentiment rose to 83.4% in October from 81.8% in September, compared to expectations of a 76.0% reading in the measure of consumer confidence.     
 
The consensus is that the fourth quarter statistics will confirm that we are in a recession if the September retail sales numbers haven’t done it already.
 
Regression to the mean, indeed. Any good news?
 
Some. Housing starts haven’t plummeted and, up to now, consumer spending has held up fairly well. The Federal Reserve has cut the discount rate from six percent at the beginning of the year to two percent now. The last time it was that low was 1958. There’s some concern that the impact of interest rate cuts may not be as powerful as it once was due to the globalization of the financial markets. However, conventional wisdom is that it takes six to nine months for the impact of interest rate cuts to be felt. The first interest rate cut happened January 3rd, nine months ago. The last was October 2nd. Obviously, we haven’t felt the full impact of all the cuts yet.
 
Another thing that tends to lead an economic recovery is the stock market. We’ve all had the pleasure of experiencing the worst bear market since the depression. The week when the market opened after the WTC looked like the capitulation week that’s normally required to find a bottom. There was high point loss on big volume. The put/call ratio reached a level not seen since 1985. The number of investment advisors bearish was higher than the number bullish (they are almost always wrong at extremes). The market broke out on October 24th, and followed through on the 28th. The follow through doesn’t guarantee a rally, but one has never started without it. Since then, the market has acted the way you want it to act, shrugging off bad news, going up on higher volume and declining on lower volume. Hope I don’t sound like an idiot by the time this is published.
 
That analysis and two bucks will get you coffee at Starbuck’s (a small one). But as I sit here writing this, I’ve put my money where my mouth is.
 
SIA’s Retail Audit, conducted by Leisure Trends Group, reported early in the week of October 8th that a sample of 277 storefronts showed September ski and snowboard sales up 19%. By the end of the week, when the sample size had increased to 376, the increase was at 6.1%. That’s still a lot better than the overall national retail numbers reported for September (see above) but I guess we better not breathe a sign of relief until we see results for the full 900 store fronts survey (due in early December).   
 
Finally, increased government spending in the wake of September 11th should make the recession shorter than it would otherwise have been.
 
We’re looking at a recession. Though there are some mitigating factors, there are reasonable arguments that it may not be as mild or short as recent (if ten years ago is recent) ones have been.
 
Right today, the winter sports industry doesn’t have to worry about its length so much as it’s impact on the season that’s starting right now. What does history tell us we can expect?
 
“It’s Déjà vu All Over Again”
 
A recession, a war, and a President Bush in the White House. The parallels are almost eerie.
 
Iraq invaded Kuwait on August 2, 1990. The air war began January 17, 1991. The ground war followed on February 23rd and lasted four days until President Bush declared a cease-fire on the 27th. The first U. S. troops began to leave on March 8th. We declared victory and went home.
 
Our current conflict began September 11. I’m sure none of us knows how long it will last or what exactly success will look like, but it’s not going to be as definitive as the Gulf War. 
 
In 1990, the economy started off pretty well. Gross Domestic Product (GDP) grew at a 5.1% rate during the first quarter. That declined to 0.9% in the second quarter and fell further to a negative 0.7% in the third. Fourth quarter GDP fell at 3.2% rate.
 
For the year, we ended up with a real GDP growth rate of 1.2%. In 1991, it was a negative 0.6%. Officially, the 1990 recession started in July 1990 and ended in March, 1991- eight months later. A recession, by the way, is technically defined as a decline in GDP for two consecutive quarters.
 
From a healthy 5.6% rate of growth in 2000’s second quarter, GDP has fallen each quarter. It ended the second quarter of this year with 0.2% growth. My guess is that the number we get at the end of October for the third quarter will be negative.
 
According to the IATA, airline traffic has fallen each month this year since February compared to the same month in the previous year. When was the last time airline traffic declined? It was during the 1990-91 recession.
 
1991 is the only year from 1983 through 2000 when world airline passenger growth was negative (by 5%). Obviously, it corresponded with the recession, but it also corresponded with the Gulf War. Revenue passenger kilometers (RPKs- the total number of kilometers paying passengers paid) fell 25% during the first month of the war. They were below 1990 levels from January through September of 1991. It took a year for traffic to recover to prewar levels.
 
As we all know, the 2000-01 season was a generally good snow year, and generated 57.3 million resort visits, the highest ever. The 1990-91 season saw only 46.7 million visits, the lowest of any season since 1978-79 except for the 39.7 million in 1980-81. Visits in 1989-90 were 50.0 and in 1991-92, they were 50.8 million.
 
The USIA End of Season National Business Survey for 1990-1991 reported that the average inches of snowfall per area, based on 173 reporting resorts, was 130 inches. RRC Associates in Boulder reports that for the 2000/01 season, with 187 resorts reporting, the average number of inches per resort was 185.34 inches.
 
Over the last eight seasons, according to RRC, the average number of inches per resort was 177.6. 1990-91 was by far the worst snow year for which I have data. Which is good news, because if the snow had been great in a year when visits were 46.7 million, we would have had to lay the bad year completely at the door of war and recession. So maybe we’ll find, with good snow, that people want to go do something fun with their families and forget about war and recession.
 
We are, as usual, left praying for good snow. Even with good snow, I expect to see a negative impact from war and recession. The similarity to 1990-91 is too great to ignore. It’s my judgment that the recession will probably be steeper than that of ten years ago. In addition, the war against terrorism won’t have the clear and glorious ending the Gulf War had. It started in this country with an act that has left a long-term scar on our collective psyche and potentially on our willingness to fly and take vacations. Any further acts of terrorism will only make it worse. 
 
Do It Now Rather Than Later
 
In twenty years of working with companies in transition, the last ten in action sports, I’ve worked with quite a number of financially distressed businesses. It’s a lot of fun for me when I walk in the door and am met with, “We can’t make payroll next Tuesday. What should we do?” because when you’ve got nothing to lose, you can try or suggest anything to anybody. Still, I wouldn’t wish that set of circumstances on anybody. By the time you get to that point it’s frequently too late to solve the problem except at a tremendous personal and financial cost. 
 
Without exception, and regardless of industry, companies who are so financially distressed that their survival is uncertain got there for the same reason; denial and perseverance during a period of change.
 
Universally, the owners/managers recognized the issues before they had become issues of survival. Universally, they resisted doing anything different in response to the new circumstances. Universally, they believed that doing “more of the same,” but doing it better and harder would be an adequate response to a changing business environment. For a while, this may have worked. Typically, it at least bought them some time.
 
But the business continued to decline because they simply weren’t addressing the new business conditions. As things worsened, their options, or at least their perceived options, declined. Soon, managing cash flow was taking up all of their time. They had to do it, but it still didn’t address the basic business issues. Finally, it’s typically an outside stakeholder- the bank, a supplier, a shareholder- who forces them to deal with reality. Hopefully, it’s not too late.
 
My crystal ball is no better than yours. I don’t know what this season is going to bring.    But whether you’re a resort, a supplier or a retailer, the winter sports business isn’t an easy one if only due to seasonality. Most of you, I’m sure, have already asked the question, “What if my business is off 10%? 20%? For those of you who haven’t started that process, here, in general, is how I might go about it.
 
If you were around in 1990-91, how did you fare? If you weren’t, talk to others in similar businesses and find out how they fared. What actions did they take and when?
 
Now pull out your cash flow. Cut revenues by 10%, or by whatever number you think more relevant or likely. What happens? Is your bank line still adequate? Can you pay your suppliers on time? Can you afford any capital expenditures you had planned? Does the cash in your cash flow, flow?
 
Obviously, this is also a balance sheet issue. Even when cash flow from operations turns a little negative, some companies have the financial resources, as reflected by their balance sheet, to support spending at current levels.
 
Whatever your cash flow projections show, now is the time to take any action you decide to take. Here’s why. If, for example, you need to reduce expenditures by $36,000 over six months, just to pick a number, that’s either $6,000 a month or $36,000 in the last month. $6,000 a month may be manageable through judicious expense control. $36,000 in that final month probably (typically, I’d say) damages the operational continuity of the company.
 
So whatever actions you think you need to take, if any, to cut expenses, improve efficiency, reduce inventory, or bolster sales, start doing it now. Early action is always the key to weathering hard times if they come.
 
As a retailer, you don’t just sell winter sports products- even in winter. The highest dependence on winter sports sales comes, I think, from retailers closely associated with resorts. From that point of view, I guess you’re better equipped to weather a slow season than many suppliers and resorts who make most of their money in only one season. But retailers have some problems that suppliers and resorts, which have already undergone some consolidation, don’t have. To put it succinctly, there are too many of you. I don’t think that will be a shock to most retailers. They deal with it all the time as suppliers open up competitors just down the street.
 
For most of the 90s, high personal expenditures, low interest rates, very low inflation, huge gains in net worth and low unemployment yielded high levels of growth in retail sales, averaging 6.55% annually between 1994 and 2000. Since sometime in 2000, weakening consumer confidence, slowly increasing unemployment, declining household wealth, and high consumer debt levels have begun to take their toll.
 
In the meantime, retail competition has never been tougher. There have been growing numbers of store closing. Various kinds of direct sellers are taking more business from traditional retailers.
 
As a winter sports retailer what should you be doing? Largely, what you’re already doing as far as I can tell. Watch your inventory and expense levels carefully. Focus on knowing whom your core customer is and on attracting and keeping them. Order to maximize your discounts. Have the kind of product customers are likely to want in harder times.
 
Resorts who sold lots of cheap season passes may look like geniuses if traffic does drop significantly, though I guess maybe the people who have already made the investment will be the ones who show up anyway. The issue at many resorts, in the event of a slow winter season, is financial leverage. This is an industry where extreme seasonality requires the use of borrowed money to get through the off season- often a lot of borrowed money. You have to be able to borrow enough and, inconveniently, you have to be able to pay it back and then borrow it again for the following season. Managing that debt is already the single biggest challenge some resorts have. If revenues decline significantly, it will become an even bigger challenge.
 
Suppliers have largely already ordered and/or produced for the season. They are in the middle of shipping to retailers. Some products coming into the country have been delayed by understandably more rigorous checks by U. S. Customs. Anecdotal evidence is of some cancellations from retailers, but they don’t seem very high. If I was a supplier, I wouldn’t be counting on a lot of reorders, and I’d be damn cautious about credit this year. I’d also plan my selling efforts on the assumptions that discounts will start early if retail traffic is slow.
 
Economically, the whole country has had a bunch of good years. Now, we may be in for one that’s not so good. In good times, cash flow and growth can cover up a lot of mistakes and competitive weaknesses. In bad times, the market takes no prisoners. Whether you are a supplier, a retailer, or a resort the quality of your competition position and the strength of your balance sheet are the two things (besides snow) that will determine how you do this year.
 
That’s true in any year of course, but in a recession year, you may not get another chance. My best guess right now is that this is not going to be an easy season even with good snow. Make it as good as it can be for you by starting to deal with it right now.
 
 SIDEBAR:
 
As an industry, especially on the resort side, there’s a consensus of the need to revitalize growth by attracting young enthusiasts to the slopes and keeping them coming back. Retailers, and obviously the suppliers on the snowboard side, are already on that program or, bluntly, they wouldn’t be around. Resorts recognize the same necessity, but have the understandable need to focus on the traditional customers who are older, but have lots of disposable income and provide much of a typical resort’s cash flow. In a recession, it will be interesting to watch who shows up. Will it be the young enthusiasts, who figure out a way to find money for a list ticket and some new equipment, or the older customer, who has a high enough disposable income and net worth that a little thing like a recession doesn’t change her spending habits?
 
Speaking of the kids, the most exciting new thing in snow sliding this year may be the snowskate. It has its genesis in skateboarding, which has to be as hot right now as any action sport has ever been. Skateboarding, of course, has entered the mainstream, with skate parks popping up all over the place and being funded by local recreation departments. Now, I’m hearing the first rumblings about snow parks for use, I guess, with either snowboards or snowskates being built at places other than resorts. Especially for snowskates, you don’t need that much room, and you don’t need much vertical. Gives the resorts something to think about. What if the kids don’t have to come to participate?

 

 

Recession? You’re Kidding- Right? Please?

/0 Comments/in , , /by

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

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