Inventory Management and Customer Conversion/Retention in the Snow Sliding Business

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SIA was kind enough to feed me a nice breakfast this (Friday) morning before the show opened. While I ate and drank coffee, people from the various industry organizations that are and have been involved in the industry’s programs to convert first time snow sliders talked to us about what they’ve accomplished and what more needs to happen.

I guess the headline number was that conversion of first timers has increased 2% over ten years to 18%. There was a sense of “that’s not so good and we can do better” in how it was presented. I am sure we can do better, but I’m not quite sure that’s such a bad result. When you talk about trying to change people’s fundamental behavior, ten years isn’t very long and I’m not quite sure that 2% is so bad. We’ve learned a lot over the last ten years (both about what to do and what not to do) and I expect more progress over the next ten.

One thing that didn’t come up was how our inventory management can contribute to conversion. One of the stories in the Snow Show Daily for Friday is called Sold Out and Stoked. It’s about how hard goods inventories have reached equilibrium.
 
If there’s one thing every retailer, resort, and brand has learned over the last couple of years it’s that having leftover snowsliding inventory at the end of the season sucks. When you’ve got to carry over or close out a bunch of inventory, it can easily mean you make no money on your snow business for the year. Not to mention the impact on your cash flow and balance sheet.
 
I’ve been arguing for years that you might be better off focusing on your inventory management and gross margin dollar generation than on getting every last sale you could. Now, in the midst of our little ongoing economic inconvenience, I feel even more strongly about that and I want to discuss how it ties into the conversion issue.
 
Every brand I talked to yesterday told me they were managing their inventories tightly and had next to nothing left. I’ve heard a couple of stories about retailers exchanging product with each other to meet customer requests because they couldn’t get any product from suppliers. This morning at breakfast one long time industry participant I chatted with bemoaned not being able to get a pair of boots he needed for himself.
 
I’m in favor of tight inventory management, but I sure hope it doesn’t come to us all having to pay retail for product.
 
So what does this have to do with conversion and retention? Suddenly, the harder to find product looks special to the consumer and finding whatever they need at a discount isn’t something they can take for granted. Under conditions of uncertain supply, price can’t always be the driving factor in a purchase. Retailers are making a good margin, which means they are better positioned to service their customers. Price increases are more likely to stick. The money the retailer would like to have to pay his suppliers isn’t tied up in inventory. There won’t be excess inventory that will keep him from ordering for next season and he won’t go out of business.
 
Brands will have happy, solvent retailers. I’d even suggest they might be in a position to spend a bit less on advertising and promotion because there’s no better marketing than customers and retailers who want more of a product and can’t always get it.
 
Want more people to go snowsliding? Or to do almost anything for that matter? Make the product just a bit hard to find and require that the consumer make a conscious, active decision to seek it out because if they don’t, it won’t be there. I think that’s an important step in creating commitment.
 
And now what’s happened? We go and have all this great snow (unless you’re from the Northwest like me where we have floods instead of powder) and I know that somewhere out there some management team at some brand is planning for next year. And they’re going, “Wow! We had a great year! We’re great managers [We always are when it snows]. We could have sold more if we’d had it!”
 
And some retailer is thinking, “Damn! I have got to make sure I don’t run out of product next year! I’m boosting the hell out of my preseason orders.”
 
Well, you can see where this is going. Not for a minute am I suggesting that “the industry” should control inventory levels. It won’t happen and isn’t legal. Every business will and should do what they perceive to be in their own best interest.
 
I know.   If you’re a retailer that it just felt awful when you didn’t have the product your customer wanted, though hopefully you sold them something else. But forget that bad feeling. Think of the good feeling when you had great margins and less discounting and closing out to manage. And look at your bottom line and balance sheet. What I’m suggesting is that it’s not in your best interest to boost those orders too much. Clean inventory and high margins may well give you a better bottom line result than a boost in sales. I talked about that a while ago in an article you can see here.
 
As a brand, when that wild eyed retailer comes to you with a greedy look in their eye and wants to books their order for next season 58%, try and calm them down. And you calm down too. Talk about how much it sucked when they couldn’t pay their bill, and you had to either take product back or they had to sell it for cost or through some ugly distribution channels you’d rather have stayed away from.
 
Both of you try to remember how nice it feels when inventory is clean, margins are high, and customers are clamoring for product they see as special. You just don’t want to return to the days of overbuilding and overstocking for hoped for incremental sales.
 
 If we can maintain the mentality that has led to just a bit of product scarcity we just might contribute to getting more people snowsliding. And we could make some more money besides.

 

 

Inventory Risk and Inventory Management; Our Own Version of Musical Chairs?

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Janet Freeman, owner of the small but well established women’s snowboard apparel brand Betty Rides, has a problem. On October 17th, she told me, “It’s weird but Betty Rides has ALREADY been getting lots of re-orders for snowboard jackets and pants. We cut to order, and are sold out on most things.”

Naturally, I was sympathetic to her terrible problem and said, “Which means that you are holding margins, selling through at good margins at retail, creating demand without running a big promotional campaign, being important to your retailers, and minimizing your (and the retailer’s) inventory risk?  I predicted some products shortages a while ago and I think, for the industry overall, it’s a great thing.  I think you are also seeing that small retailers are dependent more than ever on small brands that have not blown up their distribution and on which they can make good money.”

Better ringing your hands over sales you missed then inventory you can’t sell. Of course, I recommended this strategy for smaller brands especially years ago but, for some reason, it’s suddenly gotten popular. You can track the article down on my web site if you want.
 
What’s Inventory Risk?
I imagine most of you don’t need that question answered, but there are a few points I want to make and that seems like as good a subheading as any. Mathematically, I suppose your total inventory risk is the cost of everything you purchase or make for resale. If you want to eliminate that risk, you don’t make or buy anything. But that seems a little extreme. Instead, let’s define inventory risk as the potential decline in the value of your inventory from what you expect it to be; from the anticipated selling price, that is. Once you sell it, it’s no longer inventory risk. It’s credit risk if you weren’t paid before you ship it. Retailers, of course, are typically paid before “shipping.”
 
Inventory risk gets managed in two ways.  First, by buying well. Hopefully, that helps you with the second part of inventory risk management- selling well. My last article for Canadian Snowboard Business actually talked about that. Maybe they’ve put it up on their web site and could put the link HERE?  I’ve also written about using a concept called Gross Margin Return on Inventory Investment (GMROII) as a tool to increase your gross profit dollars and, incidentally, reduce your inventory risk and you can see that on my web site here. 
 
You can never get rid of inventory risk, but if you’re buying well and using GMROII, you’ve probably done everything you can reasonably do to minimize it.
 
Who’s Inventory Risk?
It’s impossible to completely eliminate inventory risk and be in business. In a perfect world, a retailer would love it if the brand could give them only the stock they need to merchandise their store and then have replenishments show up over night. Oh- and they’d prefer it if everything they got was on consignment. The brand, sitting on the other side of the equation, wants the store to buy everything all at once and pay cash in advance. Obviously neither is going to get their way.
 
The original premise behind this article was that inventory risk was a zero sum game. That is, it existed and somebody- the retailer, the brand, or the manufacturer- had to shoulder it. Zero sum means that you can pass it around, but not reduce or eliminate it. The only question is who takes the risk.
 
I’m not so sure that’s completely true. After some thought, and some conversations with some smart people, I’m beginning to look at inventory risk as an indivisible part of systemic business risk. You can manage it, but it’s just not independent of overall business conditions and your relationship with your customer or buyer. It’s not zero sum because you can work together to reduce it.
 
Some Real Life Examples
 
“One you find the demand line and are honest about it, and start producing under it, you really start building your brand,” Jeff says.
And of course both the retailer and the brand reduce their inventory risk because they aren’t kidding themselves about demand. You can see where I’m going with this. Good demand planning at all levels of the supply chain can reduce the inventory risk for everybody- not just transfer it from one player to the other.
 
Sanction is a snowboard and skate retailer with shops in North Toronto and the Kitchener/Waterloo area. Co-owner Charles Javier says he dropped a lot of the larger snow related brands or lowered the quantity he bought this year. He’s been bringing in smaller brands, and does better with them than with some of the larger ones. In fact, they upped their total buy this year. “How we manage inventory risk isn’t about how we put risk off on the brand, but about how we buy,” he told me.
 
And he’s not particularly concerned that his smaller preseason orders with some brands will keep him from having enough product later in the season. “There’s always going to be inventory available,” he said.
 
A consistent theme in my conversations has been brands warning that they aren’t making product much beyond orders, and that retailers who want it better have gotten their orders in, and retailers not quite believing them, or not quite caring, or thinking they could substitute another brand. I guess by the time you read this, we’ll know how it worked out. I hope to hell there are some product shortages that make some of this stuff a bit scarce and special again.
 
Darren Hawrish is the president and owner of No Limits Distribution. Located in Vancouver, it handles Sessions, Reef, Osiris, Capita, Union and other brands in Canada. He and Charles at Sanction would probably get along just fine, as Darren, like Charles think you manage your inventory risk by how you buy. He’s been more diligent on inventory this year, looking at it weekly instead of monthly.
“Inventory is the make or break part of your business,” he told me. “You can’t increase sales [which they expect to do, though not as much as in previous years] without it.” But posted on their walls is a sign that says, “Inventory Is Death” so it seems they have a healthy balance in how they handle it. “The discount doesn’t matter if you can’t sell it,” he reminded me.
 
He’s seeing tightness all along the supply chain. He thinks it’s a lot tougher to make in season buys than it was 18 months ago or so. His goal is to sell what he gets in. On the face of it, that sounds kind of obvious. But in his mind inventory and buying are closely tied to having clearly defined growth and margin goals, so there is a strategic component to inventory that a lot of people may not be thinking about. And that is another way that Darren works to reduce inventory risk.
 
I’m not quite sure the musical chairs analogy I used in the title holds up. Inventory risk can’t be isolated from general business risk, and it’s not a known quantity that just gets passed around. A brand that sells its product and gets paid for it still hasn’t eliminated its inventory risk. What happens when all that inventory doesn’t sell and the retailer has to dump it? What’s the impact if they go out of business and aren’t around to buy anything next year? What if the value of the retailer’s inventory goes to hell because of the distribution actions of the brand? What’s the brand suppose to do when a retailer grey markets stuff outside of normal distribution channels?     Seems to me that inventory risk exists all across the supply channel and we’re all in it together.
 
It gets minimized when the sales plan is realistic and consistent with the brand or retailer’s market position and strategic goals. Not to mention market conditions. It is further minimized when you buy based on your best estimate of demand regardless of terms, discounts and or other incentives.
 
Current economic conditions are requiring us to reduce our inventory risk and to pay closer attention to all the management accounting and operations management things that, frankly, aren’t much fun. But we’ll be a much better run industry as a result and might even bring back to at least some of our product the sense of exclusivity it has lost over time.

 

 

The New Management Environment- A Few Ideas

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In 1995 I wrote a Market Watch column called “Getting in Deep Trouble.”   For those of you who might have accidentally misplaced your copies it talked, as the snowboard industry was starting its (first) consolidation, about what led companies to face survival issues and how they could save themselves. I started with the following:

“All businesses in trouble share two characteristics: denial and perseverance in the face of inescapable change. It’s easy to believe in what worked in the past, and hard to step outside our comfort zone and do things differently.”
It does look as though we have some inescapable change going on. And as difficult as that change is and will continue to be, I’d point out that issues of distribution, hard goods margins, lack of product differentiation and others existed long before the economy went south. Growing sales and free spending consumers made it easier to manage (or maybe ignore) them, but they were there.
Last year, and especially in the fourth quarter, we reacted by cutting orders, reducing expenses, and controlling inventories. That’s what you do when customer demand declines. I guess. Maybe I mean that’s the first thing you do. Some of that attention to detail would have been, and is, appropriate to all business conditions. Perhaps some businesses wouldn’t be having such a hard time if they’d been focusing on those management nuts and bolts all along. And maybe they would have had the balance sheet to take advantage of the opportunities the existing conditions present.
Now, we’re all waiting for the recession to end. And it will end, though I probably think that’s going to take a little longer to happen than some of you do. The concern I have, speaking of denial and perseverance, is that there are still some people with unrealistic expectations as to what a recovery will mean.
So I’m going to give you my perception of what the recovery may look like, what appropriate management behaviors could be if I’m right, and tie it to some interesting emails I’ve received and conversations I’ve had.
The New Normal (and Other Overused Clichés)
I’ve written some of this before, so I’ll be brief. But I’d like us all to be on the same page as far as the expected environment goes.
Growth, when it comes, will be a lot slower than we’re use to. Overall sales increases may be harder to come by, but there will be some fewer retailers and maybe fewer brands to share them. I expect consumers to continue to save. The time it will take to complete the ongoing deleveraging will be measured in years, not months. The Federal Reserve has cut interest rates as low as is possible and done everything they can to expand the money supply. Their goal is to get banks lending and people borrowing. Trouble is, banks are busy rebuilding their capital base, and consumers, having turned cautious, aren’t in a rush to borrow any more money. They’ve got to deal with the mortgages, credit card balances, and car payments they already have.
I think it gives you some good perspective to realize that what got us into trouble in the first place (excessive consumption and debt) is what some authorities seem to be hoping will get us out of trouble. I don’t think that’s going to happen. The Bush tax cuts expire in 2010 and I don’t expect them to be renewed. That’s going to take a lot of purchasing power out of the economy at just the wrong time.
Unemployment, always a lagging indicator (and worse than the number looks when you add the number of part time employed people who can’t find full time work), may be slow to decline. I’m concerned this recovery isn’t going to produce a lot of good jobs.
Well, that was cheery. Sorry. Feel free to send me lots of emails telling him I’m too negative. Hope you’re right. If you do email me out of annoyance, please tell me why you disagree with my analysis- not just that I shouldn’t write stuff like that. Hey- we’re trying to run businesses. We need the best information we can get- good or bad.
Some Things You Can Do
I wrote with enthusiasm last month about Gross Margin Return on Inventory Investment (GMROII) as a tool to help you increase those gross margin dollars and choose your inventory more carefully. I noted in that article that taking the best advantage of it required that you had and maintained quality management information systems. Last week, I asked a pretty senior manager of a major brand if they knew about GMROII. “Sure!” they said, “But our systems are so bad we can’t pull out the information we need to really take advantage of it.” That was disappointing.
Especially in a slower sales growth environment, whether you’re a retailer or a brand, there’s a lot of money on the table if you can manage your inventory and improve your inventory turns. There is some expense involved in buying the software and hardware you need to establish or upgrade your systems. But the real costs come in converting the data, training, and making maintenance of the system and its data a priority. I can’t say this strongly enough. You’ve got to have and use good systems. Please make the investment.
My online article on SIMA’s retail study and core snowboard retailers lead to an interesting exchange from a retailer whose sales were down 20% but whose profits were actually up due to better management including ruthless expense and inventory control. Not up a lot, they hastened to point out, but up nevertheless. I believe that kind of result is possible with good management practices for both retailers and brands. However, this retailer pointed out that at least part of their success was due to a level of cooperation and enthusiasm from the staff in controlling expenses that just couldn’t be sustained over the long term.
You know what else you can do? You can remember that nobody who’s a manager in this industry (or, for that matter, in any other industry) has ever managed under these conditions. In a lot of ways, we literally don’t know what to do. You know what the good news is? There are no rules. If change in the business environment is dramatic and long lasting, as I think this is, then you’ve got to blow up your preconceptions, be willing to take new approaches, and bring your entire team along with you.
There’s a limit to analysis. When I did turnarounds, we’d refer to “just working the deal.” We weren’t quite sure what the right thing to do was, or what exactly was going to happen when we took an action, but we knew that not trying some stuff and going along the way we had been was fatal. So what did we have to lose? Question your preconceptions. When Target is hiring team riders, they may need a close look.
One of the best ways I know to do that is to go talk to people you haven’t known for 20 years and who aren’t in this industry. Tell them about your problems, issues, and opportunities and see how they react. We spent way too much time talking to each other. I think that tends to reinforce our preconceptions.
Ed Seymour, the Director of Global Sales for Westbeach, emailed me about an interesting approach they are taking with some of their core retailers. As he describes it, under their Affiliate program, they don’t sell any product to certain key retailers, but end up making more money. I suppose that require some explanation.
They work with each store they have this relationship with and agree on a display and a location in the store. They train a key staff member as their brand champion and share the margin with the store after the product is sold. The store never owns the product. He didn’t tell me exactly how they split the margin.
After closeouts and the end of the season, Westbeach takes back the unsold merchandise and puts new stuff in. Stores with their own web sites can banner link to the Westbeach site. They track sales and share the margin with the store the same as if the customer had made the purchase in the store. They also give the retailer 12% of any product sold to somebody in their area directly through Westbeach’s web site.
Ed says Westbeach gets paid faster, the store is more willing to take risks with merchandise, and Westbeach knows right away when a shop starts to get in trouble.
Consignment, of course, isn’t a new idea. But it sounds like the structure Westbeach has built around it is making it more effective.
If you are uneasy from my description of the emerging economy, maybe my description of what others are doing, and what you can do, will help lift you up. You’ve got to get out of the denial and perseverance way of thinking and find the opportunities that are always out there when things change. Get out there and try some new stuff.

Gross Margin Return on Inventory Investment A Tool for Our Times

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Since last fall, as our new economic reality has evolved, I’ve had a few things to say about what to do. They’ve included building your balance sheet, controlling your inventory and other expenses, focusing on the gross profit line, looking at gross margin dollars as well as percentages, and making good use of your management accounting system, which I consider a strategic tool in this environment.

All very sage and business like stuff I’m sure you’ll agree. Trouble is, I didn’t really have a method to help you do it all. Problem solved.
Serendipitously, Cary Allington, President of ActionWatch, the collector and supplier of sophisticated, detailed retail information on what’s selling at what prices and margins in our industry sent me an article on the Gross Margin Return on Inventory Investment concept (GMROII). He was pretty excited. So was I after I’d read it.
 
The concept isn’t new. It’s valid for brands and retailers. It comes as close as I could hope to drawing together most of the ideas I’ve been talking about lately. Hopefully, you’ll read this and say, “Oh hell, I already know and do all that.” But I don’t think so. Neither does Cary, who spends a lot of time talking with retailers and brands about the data they have or want and its quality.
 
What Is It?
GMROII is a conceptually simple method for measuring which inventory items (or categories, or brands) give you your best return on your investment in that inventory. It combines gross profit with inventory turns in a way that allows you to compare the profitability of snowboards (or a particular snowboard) with, say, surf wax at the gross profit level. It’s not perfect, and we’ll discuss the caveats below, but it looks like it can be very useful.
 
Just as a refresher, inventory turn refers to how many times you have to replenish your inventory for a given level of sales over the year. It’s important because the more turns you have, the less inventory you can carry for a given level of sales. And the less chance your inventory will have to be marked down. Carrying extra inventory costs you money in lots of ways including cost of capital, overhead, and opportunity cost when you have money tied up in something that takes a long time to sell and has to be discounted instead of in fast moving, full margin inventory. 
 
The GMROII calculation itself is simple. It’s just the number of gross margin dollars you make selling a product (or category or brand) over whatever period of time you choose to measure it divided by the average inventory at cost over the same period. Typically, it’s done over a year. The result is a number (in dollars- not a percentage) that tells you how many gross margin dollars you earned for each dollar invested in inventory over the period.
 
Having calculated these numbers, what might you do with them? For the first time, you’ll be able to compare what I’ll call the inventory financial efficiency (I just made that up! Kind of like it) of any item you sell with any other item. You can also do it for a brand or a category. You can actually say, based on the example above, I’d rather sell the same amount of Item A than Item B even though one sells for $600 and the other sells for $12.00 and they are in completely unrelated categories. You can see which ones you’re wasting your time selling (or at least recognize that there’s no financial reason to be selling them). You can eliminate too much emphasis on gross profit margin, which I think you can see in the table below can be misleading. You may significantly reduce your inventory investment.
 
Below is a table supplied by ActionWatch that calculates the GMROII for a number of categories using data they collected from their panel of retail shops.

 

 

The GMROII is the number of gross margin dollars generated for each dollar of inventory you had in that category over the period of a year. If you could plan your whole business around GMROII, obviously you’d get rid of everything but long completes and just sell them. But your customers probably wouldn’t go along with that.

That shoes are at the bottom of the list isn’t a surprise, at least to me. Given all the color, sizes, and styles you have to carry the inventory investment is pretty significant. The opportunity is to calculate the GMROII for each SKU and figure out how you can change your mix to drive that shoe GMROII up.
 
I was kind of surprised to see the GMROII for accessories as far down on the list as it was. We’re all favorably disposed to accessories and think of them as a high margin, profitable product. This particular analysis suggests they aren’t quite as spiffy as we thought.
That skate hard goods all had GMROIIs higher than soft goods was kind of a surprise. I’d especially note the high values for short decks. We bitch and moan that the gross margins need to be higher, but because of the speed at which short deck inventory turns, they look pretty good in a GMROII analysis. This analysis doesn’t break out branded from shop decks. That would be interesting to see.
Notice how increasing the annual inventory turns boosts the GMROII even when the gross margin percentages are lower. You’d rather have an extra half turn on that inventory than a couple of gross margin points any day. But how many of you calculate the inventory you buy based on the dollars you have to spend and the percentage gross margin you expect to make? You can’t ignore those factors, but pretty clearly turn needs to be part of the analysis. 
 
The basic calculation for GMROII is conceptually simple as you can see. But I’m afraid it requires some work. What an inconvenience.
 
The System Thing
You won’t be doing a lot with GMROII unless you have a quality management information system. For the calculations to be meaningful, your sales history and inventory tracking have to be solid. If you want to track it by category or brand, your chart of accounts has to have been set up to aggregate the numbers. And of course this isn’t a onetime activity. You need to keep it current as product comes and goes, as credits are processed, as write downs occur. You get the picture.
 
I’ve talked about the need for good systems before. I’ve gone so far as to say you can’t get by without one- especially now. Some systems do the GMROII calculations for you. I’ve been told that these include Cam Commerce, which offers it in their Retail STAR and Retail ICE applications. Win Retail also offers it. I’m not sure which systems for brands might offer it.
 
Other Considerations
You can’t just keep the products with the highest GMROII. Total dollars generated matter and there are other reasons besides financial to stock a product. You can have products with huge GMROII that wouldn’t generate enough gross margin dollars to cover expenses (and some bottom line profit besides would be nice).
 
You have to already have been carrying a product for a period of time before you can do the calculation. If you want to conduct a GMROII analysis at the item level, it works best for items that you replenish rather than replace. If you’re out of inventory for a period of time, that will impact the value of the calculation.   In general, the longer you’ve carried the product, the better the calculation will be because the average inventory number will be more accurate. 
 
Come to think of it, for those of you who are statistically inclined, I recommend calculating the mean inventory and the standard deviation (dispersion around the mean) rather than just average inventory. That would give you a good sense of whether or not you can calculate GMROII for shorter time periods. Though I suppose you’d need to calculate it for the same period for all products to get comparable results.
 
If only because it gives a result in dollars, GMROII is not a traditional return on investment calculation and should not be confused with one. It’s a way to manage your inventory- not your whole business. But inventory is often the biggest number on your balance sheet, so managing it well pays big dividends. How might you start?
 
To take the greatest advantage of the concept, you really do need the good system and data I describe above. Just to work up some enthusiasm, assuming your system isn’t quite set up to make the calculations, get a pencil, calculator, paper and inventory and sales records going back a year. Pick, oh, I don’t know, sunglasses. Choose a brand. Or a style or color. Whatever it’s easy to get the data for.
Figure out the total gross margin dollars (after all allowances and markdowns) you earned on that product or product group over the year. Now add up the inventory at cost of the product or product group at the end of each month over the last year and divide by 12. Divide the gross margin dollars by that average inventory number and you’ve got your GMROII.
 
Next, depending on what you decided to do the first calculation on, do it again for another brand, color, or style. Now you’ve got the GMROII for two groups of products. Is the result similar? If not, why not? Was a style you ordered the most of just a dog? One brand just cooler than the other? Did the order get screwed up?
 
What adjustments should you make in your purchasing so you’re selling more of the higher GMROII stuff?
 
Now, for even more fun, do the same calculation for surf wax. Or whatever. Which should you want to be selling more of; the sunglasses or the surf wax? Bet you didn’t have a way to figure that out before.
 
It won’t be as simple or clear cut as I’m making it sound here. It will never be exactly accurate, but the more you use it, the more useful it will become. It’s clearly harder to do with seasonal merchandise and changing styles, but I think it’s worth the extra work, though the quality of your information won’t be as good.
 
Cary has put a link to the article I referred to on the ActionWatch web site. You can access it in the section called “POS Tips Links” at www.ActionWatchReports.com.   The GMROII concept is worth some of your time. There’s a bunch of money on the table.

 

 

Hard Truths about the Action Sports Business; Use Them to Make Lemonade from Lemons

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As I said in the last issue of Boardsport Source, the way companies choose to compete in the action sports industry and, I suppose, in most industries, is largely responsible for the maturing and consolidation of fast growth industries. Ask the skate and snow people. People way smarter than I have acknowledged that surf’s time will come.

It wouldn’t hurt to read that last article before this one.  So if you’re one of the few people who doesn’t seal their copy of this mag in an air tight case of bullet proof glass filled with argon gas to prevent the paper from deteriorating, let me know and I’ll email it to you.
 
I have the privilege of looking at things at my leisure from the 10,000 foot level without the distraction of having to make a budget, ship a product, or figure out which brands to go how deep on. I guess what I want to tell you is just how much this industry has changed. Perhaps that seems obvious, though if we take it as a given it’s amazing how little we seem to try to manage our businesses differently to compensate. What can we do, anyway? Let’s think about some old habits we should consider breaking.
 
Hardgoods
 
Congratulations. Surfboards, skateboards, and snowboards are all well made, quality products that the consumer can rely on.   The brands have done an outstanding job of designing, sourcing, and manufacturing. So much so that the prices keep going down. In the industry’s incestuous world, we bemoan this, point fingers in various directions (usually not in the mirror, which is where we ought to be pointing at least some of the time), and discuss endlessly what we can do to increase margins to what we “need.”
 
Maybe, instead of wringing our hands over lower prices and margins, we should all be congratulating ourselves for making it easier and cheaper for the consumer to skateboard, snowboard, or surf. I’m not suggesting that cost is the only, or even the most important, determinant of participation. But as long as we, as an industry, seem determined to drive down costs and prices, don’t you think we should celebrate that service we’ve performed for our customers and figure out how to turn it into a good thing rather than complaining endlessly about something that doesn’t seem like it’s going to change?
 
Why haven’t I heard of a surf retailer giving a free surfboard ($95 ex-factory out of China) to a customer who buys a wet suit, baggies, wax, sun glasses and a surf trip from the retailer? “But we’re not a travel agent!” bemoans the retailer. Well, maybe you better consider becoming one. That’s how scuba diving retailers, in the US at least, make a lot of their money. Is there any reason a snow retailer couldn’t do more or less the same thing? Maybe skate retailers should be selling a deck at cost to a kid who buys wheels, trucks, grip tape and a pair of shoes at regular prices.
 
Brands, resorts (or skatepark owners) and retailers should be sitting and talking about how you can help the consumer rather than about who’s fault it is that it’s harder to make money. Ignoring the Japanese snowboard phenomenon of the early to mid 90s, consumers don’t want a surfboard, skateboard, or snowboard for its intrinsic value or artistic design- they want to skate, snow, or surf.
 
Rather than bitching about what’s happened in hard goods, why don’t you embrace it (since you’re stuck with it!) and do something positive with it? Don’t sell skateboards, surfboards, and snowboards. Sell skateboarding, surfing, and snowboarding. That’s what your consumer is interested in. 
 
And those margins you “need?” Zumiez, the very successful US action sports retailer with around 130 stores just launched its stock in an initial public offering and so far, the stock has performed pretty well. Zumiez gross margin in its last complete year was 31%. I guess that’s all they “need.” I know- they’ve got all those stores, and they’re a mall shop, and they get better prices from suppliers, and we’re way cooler than they are, and, and, and, and….. Guess what? It appears that quite a few of the industry’s consumers don’t care about that. They think Zumiez does a great job. So do I. If you’re interested, here’s a link to their public offering prospectus. http://www.sec.gov/Archives/edgar/data/1318008/000104746905013143/a2153924zs-1a.htm
 
Distribution
 
I don’t have the words to describe how tired I am of hearing people argue over whose “fault” our distribution problems are. Whenever you get a group of brands and retailers together, the issue is bound to come up. But no new information is ever exchanged, and nobody has any useful suggestions. Why don’t we just get over it?  Whether you’re a retailer or a brand, assume that most product, hard good or soft good, is going to be available all over the place. It mostly already is. Am I overstating that maybe a little? Maybe. But we can all agree that every brand of any size is available in many different size and quality retailers in many locations.
 
Retailers have three choices. First, if your margins are going to drop, then you have to sell more to make the same level of gross profit. Maybe you’re a brilliant retailer and can do it by increasing sales per square meter in your existing space. More likely, you’ll have to increase your floor space or open new locations or add products. Or all of those. That, of course, requires you to increase the working capital investment in the business.
 
Choice two is to carry more new, lesser known brands. Risky? Yes, but no more risky than doing nothing as your margin drops and your operating expenses stay the same or rise. Besides it fits right in with choice three, which is to do what smaller retailers are suppose to do to compete- differentiate themselves by brands carried, customer service, and expertise. At the end of the day, the best specialty retailers can sell whatever quality brands they choose to carry, because the credibility of the retailers is so high that it rubs off on whatever brands the shop has. The ability to give credibility to any brand it carries may be the best definition of the specialty retailer I’ve ever heard.
 
Actually, I suppose these three things aren’t really choices, but tactics that should be pursued simultaneously.
 
If I were a brand, I think I’d sharpen by pencil and ask what would happen to my gross margin, marketing expenses, and bottom line if I were to get a bit more cautious on my distribution and was satisfied with lower top line growth. The UK brand Animal is taking something like this approach. By being cautious about their distribution, they keep retailers happy by promoting sell through at higher margins. That exclusivity increases demand and next year’s preseason orders. It also means they can be more judicious in their marketing expenses because limited availability drives demand better than a whole bunch of paid ads. The bottom line is, well, a bigger bottom line than if they focused exclusively on driving sales.
 
Marketing
 
I keep turning back to the two page Globe ad in this mag’s spring issue. It’s an artistic rendition of a single wave breaking in a big ocean. There’s nothing else in the picture. Not a product or a team rider in sight. Nobody doing a trick that 99% of the people looking at the ad can’t do. It reminded me of what I really value about surfing- the peace of just being out there even if the surf sucked. Anyway, there was always the hope that the occasional, elusive good wave that comes through even when the surf was bad would be the next one.
 
Was it a good ad or a bad ad? I loved it, but that’s up to you to decide. At least it was different and I noticed it. And of course this was a trade, rather than a consumer, publication. Obviously if you can make your ads different so that they get noticed in a positive way that’s good. If in fact more of the consumers who buy your product are non participants interested in the lifestyle rather than the technical specifics of the newest trick maybe more of these ads are particularly appropriate.
 
The caveat is it depends where you are advertising. In core consumer publications, read mostly by core participants, (I think- that’s an interesting question! Who does read them?) I suppose tricks and pros will also be the staple of advertising, though it tends to leave everybody’s ads looking the same. But if you’re reaching to the mainstream and becoming more and more part of the fashion industry, your advertising placement may change, or at least expand, and a different kind of ad become appropriate.
 
Don’t find yourself directing too much of your advertising to the industry. Deliver an image and a message that your consumers- not your retailers or your competitors- think is cool.
 
In this article, I’m asking you to do three things. First, focus like a laser on your consumer and what they want. Don’t confuse your team riders, the industry, or the retailers for the people who buy your stuff. They overlap for sure, but they are increasingly not the same for most companies. I can guarantee you that the companies that do that will be the most successful.
 
Second, rather than bemoaning the trends in hardgoods and distribution laid out above, recognize that they are normal industry evolution stuff and figure out how to operate your business given that they are here to stay.
 
Third, do some things differently keeping the focus on the consumer in mind. Yes, they feel risky but I hope I’ve made it clear that not trying some new business approaches is even riskier. If you agree that the industry has changed, how can you possibly make the argument that you should be using the same old tactics to build your business?

 

 

Living in the Past- Or Not; The New Old Skateboarding

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I can’t be the only one it’s occurred to that skateboarding seems to have dodged its historical cycle of disappearing and being reborn every ten years. I think that’s a good thing, though shrinking to nothing and more or less starting over had the advantage of letting everything be fresh and rediscovered.

True, sales fell from their peak by maybe a third. But a third is better than nine tenths. And sales are growing again though inevitably not at the rate of three or four years ago. And I suspect, though I can’t quite prove it, that they’d be growing even if it wasn’t for the BAM phenomena.
Somehow, skateboarding has broken through and is established and accepted in a way it never has been before. At the same time, at least for the moment, it’s still got a bit of an underground, urban edge to it.
Strangely enough, the fact that skate didn’t follow its pattern of completely cratering is both a good and, in some ways, a bad thing.  This article will expand on that (guess I better since it sounds a bit crazy to suggest that there are benefits to crashing) and look at some ways that maybe our business model has to change given that we didn’t crash. No doubt I will have thought of some before I get much further along here.
In The Beginning
The cosmologist, mathematicians and particle physicists tell us that the universe began in a “Big Bang.” Whatever that is. It started as a point particle of infinite density and temperature. Whatever that means.   It’s been expanding in all directions since then and if the string theorists can get their nine dimensional act together they may be able to unite electromagnetism and the weak and strong nuclear forces with gravity and tell us if there’s enough dark matter to ever stop the expansion and I’m sure you all understand that as well as I do.
Yikes, that sounded like something Jim Fitzpatrick would have written. I miss reading his stuff.
So anyway, in a few billion years we could have a real problem (I mean aside from the sun dying) but my point is that when you start from nothing, like skateboarding kind of has done in the past, you can create whatever you want and a lot of people won’t understand it. Or care. Or even know it’s there.
You can see why that might be kind of a good thing for a small industry. The people and companies who are the bedrock of the industry are in control.   The 800 pound gorillas don’t even know you exist or, if they do, they don’t care. Customers, retailers, and brands share certain common interests and perception. As competition emphasizes marketing, prices and margins tend to remain high.
Clubby little deal isn’t it? And it works great until people start to discover you, or somebody wants to grow.
Our Universe Expands
Skateboarding has had its Big Bang and there’s no going back. Skate parks, cheaper, quality hard goods, fashion focus, national media attention, maybe the Olympics, blah, blah, blah. You know it all. Good or bad? I don’t know, but apparently it’s irresistible. But, to continue the cosmological analogy, when Copernicus announced that apparently the earth went around the sun and wasn’t the center of everything, some people weren’t anxious to accept the new reality and the same may be true in skate,
To be honest, I’m not all that anxious to accept it either. I liked the business model where skaters controlled skating for skaters and, in the process, could make a few bucks themselves. I thought it kept the industry about the act of skating, rather than blowing it up into the echo of a fashion trend I’m afraid it might become. I don’t want skating to be just a sport.
On the other hand, I tend to be a bit of a green eye shaded kind of business guy and I’ve learned that sometimes when industries change you either have to go with the flow or go away. What does that mean?
Remember Snowboarding?
  • After a phenomenal period of growth, snowboarding consolidated down to the point where five or so large, multibrand companies sell most of the hard goods.
  • Hard good prices have fallen and continue to fall. Everybody makes good product differentiable only by marketing and most of them make some of in China, or somewhere like China, as a competitive necessity.
  • Sales of pro rider snowboards now account, I’m told, for only around five percent of total deck sales.   It use to be more.
  • Soft goods and accessories are an important- maybe the most important- source of income and potential growth for snowboard companies. Seeking opportunities for growth that hard goods won’t provide, some snowboard companies interested in moving into the much larger and more profitable fashion business. That means they are running into some heavy duty competitors with more resources and fashion industry knowledge.
  • Distribution was allowed to expand dramatically. Looking for growth, or with the rationale of building market share, brands became available at more and more locations, causing some decline in the perceived value of the snowboard product in spite of the brands’ marketing campaigns.
  • Snowboarding started as an outlaw sport, with some resort’s first action with regards to snowboarding being to ban it. In short order they embraced it and started building terrain parks all over the place.
  • Snowboard shops became multiactivity action sports shops. Hard goods were no longer as profitable as soft goods but were critical to the shops market position. Sales of apparel, shoes, and accessories to non participants interested in the lifestyle, or just in the trendy clothing, because critical to shop success.
I didn’t think I’d get seven items when I started the list. But the comparisons are compelling.   I don’t claim snow and skate are “the same.” Snowboarding is a highly seasonal, destination sport with generally older participants requiring a big cash outlay. Still the comparisons are obviously valid to some extent and we’ve been seeing those trends in skate to a greater or lesser extent.
So What?
Shit, I’m out of clever cosmological analogies. Oh well.
Most of this you already knew this stuff and probably didn’t really enjoy being reminded of it. Don’t blame you. But besides sit, suffer, and bemoan industry evolution, there are some things I think we should try and do.
Let’s agree that any brand, distributor, or retailer that starts arguing with another about how the other guy has screwed up distribution or pricing has to immediately donate $1,000 to IASC.   Elvis has left the building on this one. Cheap decks are going to keep coming in from China and retailers are going to carry blanks and shop decks if their customers want them. Every shop and brand is going to do what they perceive to be in their own best interest.
Cherish, identify and follow those customers who still buy branded decks at full (whatever that means) retail. Give them a discount they didn’t ask for because they come in so often. Be nice to their friends. Give them first shot at new products. The companies and maybe their pros should be contacting them and thanking them. Imagine the loyalty a single email might build. These kids are worth a fortune not just in what they spend but because they are the bedrock of what keeps skateboarding cool.
Go and look at your marketing budget from three years ago. How much have you cut it back and where? Were there some things you should have cut and didn’t, and some things you did cut, maybe because they were easy to cut, and wish you hadn’t? Which ones are working and how do you really know? Tough to figure out, but worth the effort. If you can’t do as much, at least make sure you’re doing the right things.
Where a brand is part of a larger company, try and insulate the brand from the larger corporate circumstances while stealing all the marketing resources and other forms of financial support you possible can. We aren’t starting from nothing anymore and inevitably the “larger corporate structure” is going to cramp your style a bit.
But what I know is that a hand full of relatively small companies have had an amazingly high level of influence and control over skateboarding. Because the people who ran those companies were skateboarders, they did good things for the industry and for their companies. As we grow, and get diluted by the 800 pound gorillas, that influence and control will be reduced to some extent.
On the one hand, no matter how much it’s fought, the cool/urban/underground factor in skate gets diluted by over exposure and mainstreaming. On the other hand, with growth and general awareness of skate, the industry acquires some strength and survivability it didn’t have before. What’s the net? I don’t know. But there’s some business opportunities in there if we don’t automatically stick to what worked before.

 

 

Buying Smart; Selecting Among Snowboard Brands

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Ain’t business grand? You’ve got a choice of something over 100 snowboard brands to sell in your shop. ‘Course, 20 of them will be gone by the time the snow melts and next year there’ll be 35 new ones. Delivery, not to mention service, is uncertain.  Some of those new companies will be only as real as the ad they managed to scrap up enough cash to run in Transworld.

But hey, if the graphics are cool, the product is new and there aren’t many of that brand around you can probably sell some as long as the construction is solid, they are delivered on time and there’s a semblance of a marketing program.
 
Let’s assume that, like most shops, you’re going to carry some old brands and some new ones. I’ll leave it to you to figure out if the graphics and shapes are right. If I could do that with any certainty, I probably would have been in a position to buy Transworld myself instead of letting Times Mirror do it. 
 
So into your store walks the sales rep, or into the booth you walk at the trade show. What factual information can you have that would allow you to compare brands from a business perspective and keep from being completely carried away by the enthusiasm of the moment? A checklist with the following information would be useful.
 
1)            Where are the boards made?
 
Al Russell, the president of Grindrite, says there are eighty (!) factories in the U. S. alone. That includes everybody from Burton to the garage that will turn out 200 hand made boards in a season. If it’s a larger factory (Morrow, Pale, Elan, Taylor-Dykema, etc.), ask who else has their boards made there. Don’t take “I don’t know” for an answer. Somebody in the company knows. If it’s convenient, call the factory and ask for a tour. The company you’re buying from can help you get in the door. You’ll learn a lot about how snowboards are made and, at a minimum, that knowledge and the fact that you’ve been to the factory will make you a more effective sales person.
 
If it’s not convenient, go anyway. Go visit a factory in Europe, spend some days “product testing” on new terrain, and deduct the cost of the trip. I like to think this industry is getting to the point where tax deductions are becoming important. Means somebody is making some money.
 
If it’s a new brand and/or a small factory you’ve got a whole new set of issues. Can they deliver in a timely manner, will they be there for service and what will product quality be like? Lacking a track record, there’s no way to tell, so be wary. Check out the people involved. Do they actually know anything about making boards? Get a couple of samples to ride. As discussed below, make sure they have enough financial strength and savvy to be around when you need them. Consider insisting on personal guarantees from the principals.
 
2)            What’s the construction like?
 
In past issues, this scholarly and erudite publication has told you all about the various constructions and the materials used. There aren’t many basic constructions and the materials are more or less the same from board to board and factory to factory.
 
Once you’ve got all this good information from questions one and two, what are you suppose to do with it?
 
You now know brands A and B are made at the same factory (or different comparable factories) with the same materials and very similar (if not identical) construction techniques. After examining the boards, it’s clear that the visible differences are only in graphics.
 
Oh yeah- and maybe in prices. If the wholesale price sheets show major differences in what you know are boards that are basically identical except for graphics, why should you be willing to pay it?
 
Maybe the graphics are so hot that a price differential is justified. Perhaps the brand’s reputation, marketing program, quality of service, warranty policy, payment terms or some combination of these justify the higher price. If it isn’t clear that’s the case, your decision just got a whole lot easier. Alternatively, your negotiating position with the more expensive brand just got stronger. “Hey, how come I’m paying you $25 more a board when the only difference is the graphics?”
 
Could lead to some interesting conversations. Even if you’ve decided that the more expensive board really is the one you want, use your knowledge to negotiate a little better deal.
 
Consider carrying the information gathering process one step further and starting a little sooner. Meet with or call a half dozen or more other retailers. Have each retailer rate each brand they carried on a scale from one to five for timely delivery, warranty claim handling, service and other factors you consider important. Share that information among yourselves and get together to discuss it. Now the questions becomes, “Hey Joe, how come I’m paying you $25 more a board for your product when the only difference is the graphics, you were late delivering and it took two months to get warranty replacements?”
 
Alternatively, you might find out exactly why you want to pay that extra $25.
 
3)            How is the company financed? Can they provide a bank reference? What does the company sell during the off season?
 
The simple fact is that financing a fast growing, highly seasonal business is tough. It takes a lot of capital for a short period of time and coming up with it can be hard, especially if you’re a new business without a history of profitability. I’m here to tell you that just because a snowboard company has an outstanding sales organization, great graphics, a strong marketing program and a good reputation doesn’t mean it’s well financed. Size and apparent prosperity is not a guarantee of financial strength. Ask the people in Orange County, California.
 
It would be nice if your supplier would give you a financial statement, but that’s probably not going to happen (except for Ride of course). Ask for a bank reference. The banker will always be cautious about what they say but in general, the less they have to say, the more reason there may be for concern. Ask your banker to get a Dun and Bradstreet report on the supplier. Ask them for a list of credit references and check them. See if they have any cash flow during the summer, or if they just lose money for six or seven months of the year. Having some summer cash flow simplifies the problem of working capital financing significantly by reducing the peak amount required and providing some collateral for bank borrowings. I imagine that has something to do with why there are so few snowboard only shops around.
 
They say that when you go to the supermarket, it’s best to go with a list to avoid impulse purchases. I have to think that’s true in Las Vegas too. To a large extent, snowboarding is the fashion business. Hype, controversy and the other intangibles are always going to sell product. You can’t be completely rational about brand selection; your gut feel and experience does count for something. But there is some hard information out there for those of you who are willing to take the time and make the effort to collect it. It isn’t too much time or too much effort, and you can significantly improve your decision making process. Not only will it show up in your bottom line, but you can expect fewer surprises and headaches once you get into the season by finding out a little more about your suppliers now.

 

 

How to Survive a Downturn And Take Advantage of the Opportunity It Represents

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In previous articles, going back to when skating was growing like the proverbial weed, I’ve talked about issues related to a downturn. Things like expense control, if you should sell your business, characteristics of a maturing market, cash flow management, the impact of a recession, and the potential impact of foreign competition. Given the continuing, current conditions in the skateboarding industry, it’s kind of time, and probably well past time, to bring it all together.

 
This isn’t necessarily a completely cheery subject-companies do go out of business in downturns- and I’ve learned over the years that the practice of shooting the messenger is alive and well. Still, I know from my consulting practice that denial and perseverance in a period of change is what gets good companies in trouble in the first place. Getting them to recognize that continuing to do what they’ve always done successfully when the business climate changes is more of a risk than doing new and apparently risky things is hard.
 
This is important, so I guess I can deal with a little hate email.
 
The Good News
 
Let’s recognize that downturns are opportunities for companies with sound competitive market positions and strong balance sheets. As weaker competitors go into crisis mode and spend all their time managing cash, cutting back on commitments, not delivering well and scurrying around looking for money, solid player can, and will, and do, move in.
 
That’s not to suggest that the soft market isn’t impacting even solid brands. But at the least they can continue their ad campaigns, deliver product when promised, pay their team on time and service customers better than their weak competitors. If others can’t, that puts you ahead of the game even in a soft market.
 
Now consider taking the next step. If you have confidence in your market position and branding, this might be the time- when your weaker competitors can’t respond effectively- to take that next step. Come out with that new product. Introduce new POPs. Go aggressively after those retailers who’ve been carrying other brands instead of yours.
 
Established skate retailers have for sure taken a sales hit- especially in hard goods. But some established stores have watched competing newcomer retailers disappear, and they’ve found some better deals available from brands.
 
Do I know that from careful market research and talking to dozens of retailer? Nah. I’ve talked to a few, and what I’ve heard has been pretty consistent. But this is what happens in every industry after a big growth spurt. As the industry matures, margins decline (temporarily or permanently), retailers have more power, consumers get smarter (so marketing may not work as well), product differentiation gets harder to come by, overcapacity can be a problem, competition shifts to a greater emphasis on cost and service, and international competition increases.
 
Aside from that, nothing changes.
 
These structural changes are different from industry to industry, but they are always present. Think of how each can be applied to skateboarding and I think you’ll see my point.
 
Retailers, even if they are skate focused, are usually not just skate retailers. They also sell surf, snow, bike and/or others in some combination. Surf, of course, is hot right now and taking up some of the slack of a soft skate market for retailers.
 
The decline in skate hard goods sales isn’t as traumatic for retailers as it would be if those were high gross margin items. Obviously, any sale with any positive margin contributes to overhead. But if you could pick where sales were going to suffer, you’d pick the lower margin items. In skate, that’s typically hard goods. Besides being diversified across sports, retailers have the added advantage of selling shoes and clothing to people who don’t participate in the sport but still needs soft goods.
 
Bad News
 
Companies are almost organic is their single-minded focus on survival. Even when any objective analysis of risk versus potential return suggests they should go quietly away, they don’t. Well, people who are pessimists don’t start businesses or rise to lead them so maybe that’s inevitable.
 
If you’ve got a few spare minutes, go to the Harvard Business Review web site (www.hbr.com) and buy a copy of an article in the July 2003 issue called “Delusions of Success; How Optimism Undermines Executives’ Decisions.” What the authors say is that “In planning major initiatives, executives routinely exaggerate the benefits and discount the costs, setting themselves up for failure.” That consistent with what I’ve seen in my practice.
 
During the kind of fast growth and seemingly endless product demand that skateboarding recently experienced, managers could do no wrong. The truth is that growth and cash flow cover up a weak balance sheet and lack of a sustainable competitive advantage admirably. When the cash flow and fast growth goes away, so does the illusion that everything is working fine.
 
I can’t think of a single company owner who, recognizing that the ride was over said, “Say that was fun. Let’s pick up our chips and get the hell out of Dodge.”
 
They believe that what they were doing before can still work, so they try harder. But more of the same is rarely the answer. Some succeed. But many, and perhaps most, just prolong their agony. In the process, and this is why it’s bad news, the market actions they take hurt other companies better positioned to succeed. They discount product. They extend terms. They sell into discount channels. They don’t pay suppliers. They flood the market with product that devalues all brands’ products. In their attempt to return to the glory days they take action which encourage the industry structural changes I allude to above that make their survival unlikely. The HBR article referenced above specifically mentions competitors’ response as one of the things executive tend to underestimate the impact of.
 
What’s a “Downturn?”
 
The implication of “downturn” is that there will be an “upturn.” Fair enough. I guess there will be. Soon would be good. But lurking in that thought process is the suggestion (or the hope) that the upturn will take us back to skateboarding growth rates of a year and a half ago. I don’t expect that to happen, though I would be thrilled to be wrong.    .
 
I don’t expect it to happen because of the structural changes in the industry I refer to above. They don’t have to be permanent- but they often are. What is going to change about skateboarding that’s going to take us back to the days when it was a small, underground, sport? Is there some technology out there that won’t just make skateboarding easier or better, but will fundamentally change it? It has to be something like what the invention of the microprocessor did for the computer.
 
If you are concerned that we aren’t going back to the “good old days” then your job isn’t to survive the downturn, but to succeed in the new skateboard business environment. What does that mean?
 
I guess it depends what you think the skateboard business environment is and is going to be. There’s no reason to believe I can see the future any better than you can, but if you feel that a return to fast industry growth is unlikely, even when the economy improves, then you might consider the following in creating a viable business model.
 
Control your expenses better. Duh. As far as I can tell, most skate industry brands and, to a lesser extent retailers, are already doing a pretty good job at it.
 
Understand clearly and specifically why your customers are buying your product. Adjust your spending to conform to that understanding. For example, if price should turn out to be critical, maybe you should look hard at your marketing budget since you might end up with a better bottom line by reducing some of those expenses and cutting price a bit more.
 
Or maybe it’s your team, and you should be promoting the hell out of them and raising prices. But when you do that, of course, you’re making a decision to limit yourself to that segment of the market that’s highly team influenced. How big is that market?
 
Build a financial model that tells you what volume you need at what gross profit to succeed. No denial and perseverance please. Look at it hard and without the rose colored glasses. When you project growth, have really good reasons for expecting it. May I suggest again the Harvard Business Review article mentioned above?
 
Look for brand extensions that won’t damage the quality of your brand. In this business, that brand is all you’ve got.
 
Retailers, don’t stop taking chances on carrying some new product. But at the end of the day if it doesn’t check and it doesn’t have a good margin be ruthless in your pruning. And make sure you have the systems to give you the information. Skate retailers no longer have the ability to screw up their buying and survive.
 
Consider the possibility that you may need more volume, as a retailer or a brand, to succeed. With a lot of product, hard and soft goods, that’s all high quality and pretty much all the same, and smarter consumers who are no longer quite as likely to be swayed by marketing, you may not have a choice.
 
This new skate industry structure may be temporary- or not- and it may suck. But if you manage your business starting right now for the new conditions, you can succeed and even prosper. Get to it. Your job isn’t to wait out a downturn but to succeed in it.

 

 

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

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

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

 

 

Wherever You Go, There You’ll Be. I Can’t Think of a Subtitle

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It’s 2002 and I think the five biggest snowboard companies, in alphabetical order, are Burton, Gen X, K2, Rossignol, and Salomon.

Gen X is owned by Huffy and Salomon is part of Adidas, so maybe I should change the alphabetical listing. But the point, and I hope this helps me think of a subtitle, is that through normal industry evolution we’ve arrived at a place where the companies that have the biggest impact on snowboarding aren’t just about snowboarding anymore. Increasingly, they have other products and product lines to consider as they build business plans and allocate resources.
Let’s look at just how wide spread this is, and then think about who it might be good and bad for in the continuing saga of snowboarding.
Who Does What?
Continuing with the alphabetical order thing, Burton is and I expect will continue to be the closest thing to a snowboard company among the five contestants. But Gravis shoes, and the delayed but imminent launch of the Korda street wear line, means that even Burton isn’t only about snowboarding anymore. Assuming you’re concerned about return on investment, and margins and growth opportunities are perceived to be better in street wear than in snowboarding, where would you choose to invest?
I can imagine the conversation, because I’ve been in it in other companies. There’s the marketing guys going, “We’re about snowboarding. No need to discuss it further.” Then growth slows and some troublesome financial guy says, “Well, okay, but there’s not much room for us to grow in snowboarding, and the margins aren’t as good as they use to be, but over in this street wear/shoe part of the world they are and we could grow and, you know, we’ve got certain financial obligations and there’s a limit to just how far we can push snowboarding distribution and we could utilize our distribution strength and leverage our overhead….”
I’ve oversimplified, and I don’t know the specifics of the process by which Burton chose to expand, but you can see the inevitable dynamic.
Burton at least started out as only, and is still mainly, a snowboard company. They’re the only one who can say that. Gen X, we know from public information, has revenues of around $150 million. Huffy, its new owner, is around $500 million including Gen X. Gen X sells, in addition to snowboards, golf, hockey and ski equipment. Not to mention scooters and whatever other sporting goods equipment they can work the distribution channels for.
In addition to Gen X’s products, Huffy sells bikes, basketball equipment, and retailer services that include in-store and in-home product assembly and repair and merchandising services. My estimate is that snowboard equipment makes up only around 10% of Huffy’s total sales.
Do you think Gen X senior management treats snowboarding as anything besides another product line that has to meet its business goals?
K2’s product line is pretty broad as well. It’s sporting goods products, of which it sold $445 million in its last complete fiscal year, includes skis, snowboards and accessories, in-line skates, fishing rods, reels and kits, active water sport outdoor products, bikes and backpacks.
Sales of other recreational products of $39.8 million in 2001 included imprinted corporate casual clothing under the Hilton brand, skate and snowboard apparel under the Planet Earth name, and Adio and Hawk skateboard shoes.  Sales of industrial products were $110.5 million in 2001 and included monofilament line, light poles and radio antennas under the Shakespeare brand.
They don’t show dollar sales by product or brand, but do you think K2 senior management treats snowboarding as anything besides another product line that has to meet its business goals?
In the year ended May 14, 2002, Rossignol had consolidated sales of 473.1 million Euros. These days, a Euro is more or less one US dollar. Of that total 50.1 million was from snowboarding, down 11.3% from the previous year. Alpine skiing, at 288 million Euros is the dominant activity. They also did 94 million Euros in golf and 25 million in textiles. Golf revenues grew 17.7% during the year and textiles 29.6%. Assuming equivalent gross margins do you think Rossignol senior management would prefer to invest in a business that’s shrinking, or one that’s growing?
You can probably see where I’m going with this, but just to make it complete, let’s finish going through the list.
Adidas-Salomon did 6.1 billion Euros in sales during its last complete fiscal year. Of that total, 79% was represented by Adidas and 9% was Taylor Made. The remaining 12% was Salomon. Of that 12%, or 730 million Euros, 8% was from snowboarding. That’s about 58 million Euros, or 1% of Adidas-Taylor-Salomon consolidated revenues.
Alpine ski products represented about 49% of Salomon’s revenues. Outdoor footwear is 14%. Skating products are 9% and cycling, 8%- the same as snowboarding.
You probably know that I have the same question here I’ve had about the other companies. As snowboarding represents less of a percentage of total revenues, and if margins and growth opportunities are perceived to be less than in other product groups, especially where it’s a very small piece of the total, what’s the incentive to invest and support it if you can’t see the best return on investment? At least, that’s the financial argument.
And if I were running any of these large, multi-product companies, I imagine I’d be making that argument too even if I didn’t completely like it.
Ying and Yang
 
Good news or bad news, or both? Certainly, you’ve got to run a business like a business. If there’s no money made, you won’t be around to fight another day. On the other hand, it’s passion and commitment that got snowboarding going and if it isn’t quite as important in keeping it going, it’s certainly critical in keeping it growing. Hopefully, there’s room for some long term perspective even when you’re worried about quarterly performance.
The winners in this corporate dilution of the snowboarding ethos are, in the first place, snowboarders. Okay, maybe there’s not quite as much hype and excitement in the air, but they can sure get a better product for less money than they use to be able to. We owe that to some of these large “corporate” snowboard companies who, in the process of competing and trying to take over the market, had to figure out how to be efficient and make product that worked. God knows it’s easier and cheaper to become a snowboarder than it use to be. You don’t even have to sneak onto the mountain any more.
Second, as I discussed in my last Market Watch, the new and existing smaller companies are winners. Almost by definition, the larger corporations abandon a chunk of the market to them. As long as they don’t harbor illusions of becoming like the big guys, and there is a significant minority of committed snowboarders who still see snowboarding as something more than a sport, there’s a market for them that the big guys mostly can’t hope to capture. And in the process, these small players might be able to keep the vibe going, to use a phrase that passed out of popular usage some time ago.
The losers? If there is one, I guess it’s kind of the snowboard industry, or maybe I mean the snowboard culture. With the diffusion of snowboarding I’ve described above, we’ve lost “good” competitors (Eureka! That the subtitle. “Where are the Good Competitors?) “Good” isn’t a moral judgment. A good competitor is a company that challenges your company not to be satisfied with the status quo while, at the same time, you are able to operate in a stable and profitable equilibrium without mutually destructive warfare. When these circumstances exist, there’s enough success and cash flow to go around so that the industry can be supported and nurtured. Okay, maybe the consumer doesn’t get the cheapest deck that can possibly be made, but snowboarding is more likely to be something people want to be part of and don’t just see as another activity.
We lose a lot of that to the extent that snowboarding becomes “just another product line.”   To those of you who are fighting that trend, thanks.