The Enthusiast Cycle; Lessons From the Scuba Diving Industry

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Yes, the scuba diving industry. Maybe nine months ago Fran Richards, former VP at TransWorld and somebody whom I consider one of the best intuitive marketing guys in action sports, called me up and said, “Hey Jeff, I’ve given your name to the guys at the Dive Equipment Manufacturers Association!”

“Uhhhhh, thanks Fran, that’s great, I guess…..WHY?!”
 
Anyway, to make a long story short, some months later I found myself facilitating a conference for that industry. It seemed that the sport was perceived as too expensive, the instructors were not very sales oriented, the baby boomer customers were dropping out, the equipment was all good and not differentiable (and a lot made in China by one manufacturer who may enter the market with its own brand), nobody had the time to participate, it was becoming even more a destination sport, there were too many small retailers who had no idea what they were doing, the industry had no idea how to attract kids and as a result of all this, the market was shrinking or at best not growing.
 
Anybody who is or has been in the winter sports business, as a resort, retailer, or manufacturer probably feels for the dive guys by now. At one time or another we’ve had or have all those problems. Like the dive industry, we’re still working through some of them. The good news is that we’re further along the “figuring it out” curve than they are.
 
Anyway, having noted once again that industries tend to be more similar than different in spite of the protestations to the contrary by the participants in each industry, I found that working in a new industry gave me better perspective on this one (In some ways, diving ought to be an action sport, but it’s just too damn peaceful).
 
The Enthusiast Cycle
 
As I listened to the dive retailers and manufacturers talk, I found myself thinking about the ski resort business in the 60s and 70s. People came and skied in droves in spite of comparatively poor base facilities, equipment, lifts and various other inconveniences. I won’t say that none of that mattered, but it certainly didn’t keep people from showing up and participating.
 
The resorts got just the slightest bit complacent. When skier days started to decline, the resorts didn’t know what to do, but while they were thinking about it, the snowboarders appeared to the resort’s ever lasting relief.
 
And the snowboarders didn’t care about poor base facilities, equipment, lifts and various other inconveniences. Hell, they even found ways around the people trying to kick them off the mountain.
 
The skiers in the 60s and 70s and the snowboarders into the 90s weren’t just participating in a sport. Many of them defined themselves as snowboarders and skiers. It was their lifestyle.
 
As people trying to make a few bucks (or Euros- whatever. Look, I’m in the middle of moving to Dublin and have no idea what currency to think in. I suppose it doesn’t matter as long as I can buy beer with it) in the action sports business, that’s exactly where we want (need) people to be. We want them to feel that participating in the sport is validating their lifestyle and self image. Then, to put it a bit indelicately, they buy more and put up with more.
 
Why do they do that? I think it’s because they are young, something is new, and maybe perceived as a bit exclusive. But whatever it is, they don’t stay young, it doesn’t stay new and we bust our butts trying to make sure it doesn’t stay exclusive lest too many of us go out of business.
 
So somehow, at some point in the enthusiast cycle, it becomes just a sport to more people. You can participate in a whole lot of sports and activities. You can’t have a whole lot of lifestyles- maybe you can only have one. As you get older, your lifestyle can revolve a bit more around kids, career and mortgage payments and less around snowboarding, or skating, or surfing. Not for everybody, I know, but I’d say that’s true for most.
 
SIA’s web site shows this succinctly in a couple of graphs in one of their reports. They show snowboard and skier participation by age. Guess what it shows? Snowboarders are younger, skiers are older, skiing participation is going down, snowboard participation is going up. What a shock.
 
Skateboarding has been through this a couple of times and may just be starting to come out of its latest down cycle. At the recent Surf Summit, in May, Quiksilver CEO Bob McKnight warned that surf’s present good times wouldn’t last forever.
 
These cycles happen and will continue to happen. When surf/skate/snow/diving become “only” a sport they become vulnerable to new competitive pressures. It is no longer the same priority at the top of the participant’s list. Maybe we can influence these cycles (and I’m not sure of that) but we can’t change them. What should we do?
 
The Ski Resort Response
 
To their credit winter resorts started to figure it out and snowboarding bought them some time to do it.   They trained instructors in selling and conversion. They collaborated with manufacturers in making equipment that was easy to learn on. They put up signs so you could find the bathroom. They offered cheap lessons and incentives to come back. They tried to make sure that people didn’t show up for their first lesson in jeans and freeze to death. Some resorts have restructured their rental process from the ground up to make it more customer friendly. High speed lifts, better base facilities, the list is endless.
 
It cost a lot of money. My perception is that it’s working to some extent, though the jury is still out on whether it will work in a way that makes financial sense. But at the end of the day, what the U. S. resort industry says is:
 
“While these tangible issues are encouraging, conversion (“software issues”) has emerged as the predominant roadblock in the industry’s ultimate goal of growing the sport by 10 percent.”
 
The intangible “psychology of conversion” and the “golden hour” between trial and conversion must be more effectively addressed.”
 
In other words, all the tangible improvement and enhancements in processes and facilities are necessary but probably not enough. Somehow, they need people to “feel the love” and make snow- or skate, or surf, or diving- something that defines, to some extent who they are. They don’t need somebody who participates in snowboarding, though they’ll take them. They need people who think of themselves as snowboarders.
 
The Marketing Delusion
 
We all believe, or perhaps hope, that the rather significant sums we spend on advertising, teams, trade shows, promotional product, events- the list can seem endless- contribute to creating people who don’t just participate but associate themselves with the lifestyle images we try to create. We know to some extent it works and if I knew what “to some extent” meant exactly you’d all be paying me a fortune to tell you.
 
My belief is that it works better when the target audience is younger and the product is fresher. That’s why the skate companies, with an overwhelmingly adolescent male audience, have tended to introduce new brands on a regular basis.
 
I’m suggesting two things. First, and most importantly, we’re at the mercy of what I’ve described as the enthusiast cycle- not in control of it. We can’t stop people from getting older and, as a result, changing their priorities.
 
Second, and here’s a BGO (Blinding Glimpse of the Obvious) for you, we damn well better know as precisely as we can who our customers before we spend those buckets of money on marketing.
 
It’s not just about whether a customer is “young” or “old.” We should be concerned with their changing motivations as they age. Resorts have been trying to sell condos to baby boomers as they sell terrain parks to teenagers. Some have succeeded, but lord that’s a hell of a schizophrenic marketing message to manage.
 
Recognize that you can’t do anything about the enthusiast cycle. It’s as inevitable as death and taxes. Don’t believe that the same marketing will work as the customers’ priorities change and they age. Start by checking out the demographic statistics in your market. The U.S. Census bureau has great stuff on line that tells you how many people are what ages and where are they.
I don’t know if all the EU countries have the same thing. 
 
To oversimplify a bit, are you going to try and hold on to the same customers as they age, or are you prepared to drop them and go after the new crop? Or both?
I know it’s not that linear, but your answer will determine where, how, and how much you spend on marketing.
 
Don’t fool yourself into believing you can overcome the enthusiast cycle with marketing. Acknowledge it and build it into your business strategy. If you approach it that way it’s an opportunity, not a problem.

 

 

Chop Chop, Fizz Fizz, Oh What a Morass It Is!

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Apologies to the Alka Seltzer people for bastardizing one of their old advertising slogans. It just sort of sprang into my head the moment I saw Dwindle’s announcement on their Chop Chop Wood Shop. I assume it occurred to somebody that the name might be offensive to the Chinese, but this is probably just some form of obscure skateboard humor. Hope it turns out to be good business.

Last issue, I offered up my opinion on how the industry might evolve. That was written before Dwindle’s announcement. Dwindle may have validated the scenario I laid out, so you might want to go back and read it if you haven’t already.
Let’s not waste time being pissed at Dwindle, and let’s not be surprised by their actions either. It’s not like they are the only skate company making or planning to make product in China- they’re just the only one that’s made a big formal announcement. They should get credit for standing up and saying it. This is just kind of standard industry evolution stuff.
But that’s not to say it isn’t important. The announcement marks a symbolic divide between how the industry use to be and how it’s going to be. That sure sounds pompous, but I really, really, really, believe it.
If it’s that important, what are you going to do about it?
Break Out the Spreadsheets!
At the end of the day, how this affects your business is going to have a large financial component, whether you’re a retailer or a brand or a manufacturer. With your computer on and your budget (you do have one, right?) on the screen, decide the following things:
  • To what extent will it be possible for an established brand to maintain higher prices in the face of Dwindle’s price cuts without giving away much or most of their volume?
  • How much of these price cuts is going to filter down to the consumer? That is, do you think retailers will hold prices, or pass the lower prices on to the skater?
  • What will be the impact on sales and margin of hard goods prices besides decks?
  • What’s going to happen to the pricing and sales of blanks?
  • To the extent that retailers choose to pass on their savings to skaters, what will happen the number of decks sold? Will it go up enough to compensate for making fewer margin dollars on each deck?
  • Is there going to be any kind of backlash against decks made in China? If so, how long do you think it will last?
  • What’s going to happen to distributors? If price cuts get passed through to consumers, will there be enough margin dollars to go around?
  • What’s going to happen to brand value? That is, how will lower prices impact the consumers’ impression of a brand and its desirability to them?
Say, these are all cheery questions, aren’t they!
Make your best guess and plug the resulting numbers into your budget. What does your new financial model look like? Are you making money? If not, what are you going to start doing differently?
For Retailers
Interestingly enough, retailers may be less impacted than anybody. Most retailers have already gotten use to the idea that hard goods aren’t necessarily the biggest profit maker in the store. They have allocated more and more space to shoes, apparel and accessories because they know that’s where they make their money. Many to most are selling blanks and shop decks. Largely, they are not just skate shops either. Obviously, the more skate focused you are, the bigger the potential impact. Tactically, the most important thing retailers may have to worry about is how the profitability of their blanks and shop deck sales could be affected.
Strategically, it’s a different thing. A few years ago, Burton Snowboards expanded its distribution dramatically. Pretty soon Burton, like most of the other major brands, was available in most distribution channels from specialty shops to big chains like Garts. I thought the message this distribution by the major snowboard brands sent to the consumer was, “It’s just a snowboard. No reason not to buy it where it’s cheapest.” If Burton wasn’t special in snowboarding, then nothing was.
That was the moment when the “race to the bottom” began in snowboards in earnest, though price competition was already pronounced before then. I hope skate hard goods aren’t doing the same thing.
For the retailers, the future can probably be seen in a Zumiezs or BC store, both of which I’ve visited in the last few days. They carry skate and snow hard goods, but I wouldn’t call either one a skate or snow shop. They are either lifestyle or action sports stores, or some other name I haven’t thought of. The hard goods are there, but they are casually displayed and don’t take up all that much room. I’m sure it’s not that they don’t want to sell them, but hard goods do appear to be a badge of credibility among the racks, stacks, and piles of shoes and apparel.
They have a year around business model that doesn’t just cater to skaters and snowboarders, but to the much broader market interested in the fashions associated with the lifestyles. If, as I think, we’re sending the message that “It’s just a skateboard” like it’s been sent in snowboarding, this is where I expect skate retailing to head. I’d note that this has happened in snow in spite of big team programs, promotions, and advertising campaigns by the major snow brands.
For Brands
Tactically, of course, brands without their own factories now have some ability to get lower prices either by getting their own product from China or using the threat of doing it to get better prices from their domestic suppliers. They won’t get as good a deal locally as they can get from China no matter how well they negotiate.
The strategic financial question is the more interesting one.
When Chinese production (not just from Dwindle) works its way through the system, will a brand be selling more or less decks at higher or lower margin? I’m not concerned about the gross margin percentage as much as about the total number of gross margin dollars available. Given the total gross margin dollars the brand has available, will they be able to support their team and marketing programs (the only real source of brand differentiation) at the level they have supported it at in the past and still make money? If marketing programs suffer for financial reasons, it gets even harder to support the argument that there’s any reason to buy a skateboard based on anything but price.
For Manufacturers
In the late 80s and early 90s, there was no snowboard manufacturing capacity available. Factory after factory opened in the US. Then the big Austrian ski factories and, later, the Chinese, stepped in. Most of the US factories disappeared. Mervin Manufacturing, the producer of the Gnu and LibTech brands, survived the transition by being bought by Quiksilver. Now, even they are starting to make some low end product in China.
Due partly to a managed foreign exchange rate that keeps the Chinese currency ten to forty percent undervalued against the dollar, the Chinese have eaten the lunch of various wood products manufacturers in the United States. I hope it’s different with skateboard manufacturers.
If it is, it will probably have to involve consolidation and a highly efficient, large player. Maybe something along the Mervin model will happen, though it’s unclear to me why anybody would buy a skateboard manufacturing facility right now.
Speaking of the Mervin model of course, they also make their E-Maple skateboards with the plastihide tops that are suppose to last longer and offer more pop. Technology has been the traditional defense against low cost manufacturers. We could sure use some more right about now.
Don’t Panic, At Least Not Too Much
No doubt everybody, including me, would feel a whole lot better if I’d painted a rosier picture. Unfortunately, I have the really bad habit of saying what I actually think. Maybe I have exaggerated the potential changes just a little to encourage everybody to take a hard look at their business model and plan for how they are going to react as things unfold. Bottom line is that the Dwindle announcement and associated price cuts shouldn’t be that big a stunner because anybody who hasn’t been playing at being an ostrich knew this was coming from somewhere, though of course we hoped it wouldn’t happen. Industries change. You change with it.

 

 

One Possible Future; An Industry Model for Skateboarding

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Last month, I wrote about surviving a downturn, suggesting that this wasn’t just a downturn but a fundamental change in industry structure, requiring a change in the way successful companies competed. This month, I’d like to be more specific about how I see the industry evolving.

It’s perhaps a bit pompous to do this, because my crystal ball is no better than yours. But my recent study of China’s fixed exchange rate and the September 21 cover of the New York Times Magazine made me decide to give it a shot.
 
Perhaps that needs some explaining.
 
Chinese Exchange Rates
 
I took a whole column in SnowBiz to write what I’m summarizing here. It should be out by the time you see this, so for more detail refer there. Basically, China keeps its exchange rate fixed at 8.3 Yuan to the US dollar. Most currencies are managed from time to time and to some extent, but the major ones change against each other daily based on interest rates, trade, general economic conditions and other factors. The Chinese government makes sure its exchange rate doesn’t change.
 
The result is that the Yuan is between 10 and 40 percent undervalued against the dollar. That is, stuff we buy from China is between 10 and 40 percent cheaper than it should be. Great for consumers and companies that import from China. Not so good for U.S. manufacturers and people who want to sell to China.
 
And there’s not much you, as a US manufacturer can do, given the artificial undervaluation of the currency. It may be, as some have claimed, that you can beat low labor costs with technology. But add the artificial exchange rate advantage and you’re screwed.
 
It’s unlikely that the undervaluation of the Chinese currency will go away in the short term. Among other reasons, we need them to invest a chunk of their trade surplus with us in U. S. Treasury securities so we can finance our budget deficit.
 
We all know that more and more skate hard goods (not to mention soft goods) are being made in China. Lacking some kind of meaningful technological change in skateboards, expect that to continue and grow. If the quality of Chinese made skate hard goods is still an issue, and I’m not sure it is, it won’t be for long.
 
So the stuff gets made a lot cheaper, and the quality is fine. Lacking product differentiation, those lower prices eventually, through normal competitive dynamics, get passed along to consumers. Good for the consumers, and perhaps for the general growth of skate. Bad for manufacturers and retailers.
 
Because even if sales of hard goods grow (unless they grow an awful lot) and even if percentage margins remain the same, the total number of margin dollars realized from hard goods sales declines.
 
Margins dollars are the dollars available to pay for team, marketing, rent and telephone, salaries and bunches of other stuff excluding product. Whatever left is profit, more or less.
 
I am not suggesting that there will be no skaters left willing to pay higher prices for branded decks, but I expect the number of such skaters to decline as percentage of the total. And, at the end of the day, there’s no reason higher end branded decks can’t and won’t succumb to the same competitive pressures as any other deck.
 
So if you’re a seller of skate hard goods, manufacturer or retailer, your financial model may change. In hard goods, you’ll have to sell more to make the same money.
 
Boy, I’m just full of good news today, aren’t I?
 
The Kid on the Cover
 
I think he was four. He was a skateboarder and he was on the cover of last Sunday’s New York Times Magazine. The story was about how really young kids are becoming sponsored and managed.
 
Seeing him there didn’t tell us anything we didn’t already know about the mainstreaming of skateboarding, but it sort of galvanized me into saying the following:
 
The skate market will increasingly be driven by the apparel (including footwear) brands. They can sell product to anybody who thinks that skateboarding is cool. Hard goods brands can only sell to people who skate. The apparel market, which I suppose includes everybody who needs shirts, pants, and shoes and is over four and under 50, is simply a couple of orders of magnitude bigger than the hard goods market. And, for successful companies, margins are and will be better in apparel than in hard goods.
 
They will influence skateboarding, to put it bluntly, because they will be bigger and have a lot more money than most hard goods companies. Hard goods skate companies already know everything I’ve said here. They have the following choices:
 
1)            They can try and use the strength and remaining cash flow of their established brands to transition into soft goods and, ultimately, make those soft goods the bigger part of their business. You saw that process already going on with some brands at ASR. Soft goods are tougher to do well than hard goods, and skate brands that take this approach will (for the most part) be competing with companies that are larger and better financed than they are. They will also have to decide whom they are trying to sell to- the core skaters who buy their branded product, or the larger mainstream market. Obviously, it starts with the core and has the possibility of being extended from there. The art is in figuring out how to expand distribution without damaging the brand’s credibility.
 
2)            They can sell their companies. But if they wanted to do that, they should have done it two years ago at the peak of the frenzy. Element is the only brand I recall that really did that. Companies selling now won’t get near the prices they would have gotten. Still, it may turn out to be the only financial choice for some and certain brands may have more value as part of a larger organization than as stand alone companies.
 
3)            They can remain as independent “core” skate companies. Whether there is a financial model that can support that strategy is unclear to me.
 
If you want some confirmation that this kind of industry evolution is a reasonable possibility, look no further than the surf industry. It’s dominated by a handful of soft goods companies. Mainstream sales, for both brands and retailers, are where the sales volume and profit is. Many to most industry customers don’t surf. Hard goods are having problems with cheap product from China, and nobody seems to make any money on them. Hard goods have hardly been discussed at the last two surf industry conferences.
 
Under the scenario I’ve suggested here what, exactly, is skateboarding? Fairly clearly, it’s not the kind of urban, underground, at the fringe activity it use to be. Time was when it was in the interest of the major hard goods brands to position it like that and hell, that’s how it was anyway. But if the picture of industry evolution I’ve painted here is valid, that no longer makes sense at least in terms of the business strategy. Because, as I’ve tried to explain above, the sales, growth and margins are in the other, much, much larger part of the market- the mainstream, if you will.
 
You can be a successful, profitable $20 million company with a significant marketing and advertising program if your margins are 45%. If those margins fall to 25%, I’m not so sure that works. Okay, I’m pretty sure it doesn’t actually.
 
More and more of my articles could be written for any of Skate, Snow or Surf Biz. There’s a lesson there somewhere about how the industry is evolving. In line with that, I want to suggest that skate retailers who haven’t seen it get hold of the September 2003 issue of TransWorld Surf Business and read the “When It’s Time to Change” article on the cover. It’s an interview with K-Five Boarding House owner Jurgen Schultz. He’s much smarter than I am because he started reacting, as a retailer, to the changes I’ve described here a couple of years ago. He took some risks to do it, but he saw doing nothing as a worse risk.
 
That’s a good way to think in this market.

 

 

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.

 

 

Reality Check; Input From the Outside World

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Sometimes I get accused of being too much of a pessimist. Maybe sometimes I am. On the other hand, maybe the correct question is whether or not my occasionally pessimistic outlook is justified . I’d prefer to think I’m just taking a hard look at real business issues.

 
For a change, I’m going to let somebody else raise the tough issues and, incidentally, write half my column for me. Can’t beat that. I received this email unsolicited. It is published here complete and unedited. Go read it and then I’ll tell you what I suggested when I talked with the guy (It’s below). Hurry up please. I’m late getting this column done.
 
I had lots of no doubt accurate and valuable platitudes about business cycles I recited to Dale. None of them seemed to make him feel much better. I received this email over a month ago (more by the time you read this). Thinking about it since then, I’ve come up with a couple of ideas, or maybe just helpful perspectives.
 
First, let’s all decide to call the wood from China birch. That’s apparently what it is, and there’s no reason we should be helping to perpetuate the myth that it’s anything else.
 
Second, recognize that it’s been around a long time and is going to continue to be around. For cheap completes sold in big chains it probably makes sense and may even have the benefit of getting kids skating cheaper.
 
Third, it’s clear that Chinese birch skateboards don’t hold up when used by real skaters doing real skate tricks. So while some of the major brands may be tempted by cost to try and use it, enlightened self interest will make them back off. They can’t afford to have their decks collapse on a massive scale in the way Dale describes. The issue, then, becomes whether Chinese manufacturers can procure the harder Canadian maple and make and deliver decks that are as good as what’s made currently in the US. What I’ve said is that they can and will if the market makes it worthwhile in the same way they have with so many other products.
 
If the quality is there, and the price is lower, then they will become a standard and only new technology in skateboards will slow that process down. I suppose the other thing that could happen is that the major brands could decide as a group not to buy decks from China. Aside from the issue of legality, that’s a level of industry cooperation I rarely see. Even if it exists, it can break down if business pressures get too strong.
 
The other problem is that we already know that blanks take a big piece of the market. If Canadian maple Chinese decks of good quality become available, I suspect people who are willing to buy current blanks, and maybe some others, will be more than happy to buy an even cheaper, high quality product.
 
But where will the Chinese get their Canadian maple? It doesn’t appear that they will get it from LaGrand Lumber & Veneer. It sounds like Dale would have to price it in such a way that he’d lose money if he wants the business. Well, maybe if they get in early they can corner the market, but it doesn’t sound like Dale and the other members of management at LaGrand are the kind of people who believe that you can lose a little on each piece but make it up in volume. So unless LaGrand can dramatically change its business model, it doesn’t sound like losing money selling to the Chinese while helping knock its existing domestic customers out of business makes much sense.
 
Dale might do five things- the first one of which he is probably already doing. Talk to all the other domestic veneer suppliers and find out how they are reacting. Second, he might publicize the quality issue (I guess I’m starting that for him) with an ad or two in Skateboarding Business to begin to create some awareness- sort of like “Intel Inside.”
 
The third one is to meet with the companies he sells veneer to and talk about their plans and their reaction. Is there room for some form of cooperation on new skateboarding technology? Fourth, and he’s probably already doing this too, he has to look at the source of the existing decline in veneer sales. How much does he really believe is the result of Chinese decks coming into the country, and how much is the slowing of skateboard sales?
 
Finally, and depending on the answer to four, he should certainly be looking for new markets. That’s something any business should be doing all the time. It’s worth some attention even when part of your business isn’t threatened because it positions you much better when, inevitably it seems, some threat emerges.
 
The devil, of course, is in the details. I can’t offer specific advise to Dale or LaGrand without specific information about their business. I hope my general advice is useful, and I thank Dale for sharing this very real issue with us.
 
Jeff Harbaugh is President of Jeff Harbaugh & Associates, an action sports consulting firm that helps managers and owners improve profits by focusing on the few issues that are really important. Reach him at (206) 232-3138 or at jharbaugh@msn.com.
 
SIDEBAR   
 
Dear Mr. Harbaugh:
Thank you for your insights and ideas you submit in your columns in Transworld Skateboarding Business magazine. I always appreciate your hard line on doing what is best for the business in general.
I am the sales manager here at LaGrand Lumber & Veneer, Inc. and am very alarmed by the Asian influence on business here in the States in general and especially with the Skateboard Industry. We supply Hard Maple veneer from our three mills to skateboard deck manufacturing plants throughout the US, Canada and sometimes abroad. In an average year we sell nearly *** . 25%-30% is skateboard veneer which we have been supplying for nearly 25 yrs.
As you are probably aware, the furniture industry has taken huge hits from imported components shipped in from China. Over a dozen plants have been closed forever in North Carolina because those companies now order their components and completed goods from China, idling over ten thousand workers. I have clients in the component manufacturing business here in the States that have lost 50%+ of their business to Pacific Rim countries. This is trade they’ll never get back.
Mean while, when you and I go to buy a new piece of furniture for our home, none of the cost savings benefit reaped by the mfr is gained by us. That same $3,000.00 sofa made two years ago completely in the States still costs $3,000.00 even though it cost far less to produce overseas. The mfr and the Chinese govt. are the winners.
While furniture imported from China, made from Chinese raw material may be acceptable in appearance and performance, my experience with skateboards is totally different. As was indicated in the article, Skateboard Science (Skateboarding Business, April 2002) Chinese raw material (veneer) does not match Hard Maple which has been the standard forever. The veneer, touted as "China Maple" is in fact not Maple. It is a specie of Birch. Tests performed at the Forest Research Laboratory in Madison, WI prove that this specie has approximately the same physical characteristics as Soft Maple, a specie long ago abandoned by the skateboard industry.
I have two customers who bought China Maple veneer from a sales rep here thinking they were buying North American Hard Maple. That rep should be tarred and feathered (or worse), but that’s another topic. Anyway, they manufactured the decks and sent them out through their normal distribution channels. In short order, literally thousands of decks were returned in various states of ruin and decay. Decks were split, broken, and mushy. All due to the quality of veneer used to manufacture them. One customer nearly lost his largest account because of the poor quality. He was able to salvage the account when we provided him with the necessary veneer to quickly replace the order.
My fear is that as a raw material supplier I should have seen this coming long ago and it may be too late to react. I believe that if we don’t do something soon, cheap imported decks will become the standard. Once riders become accustomed to a lower standard they will no longer know the difference and imported decks will be acceptable. I know this may be insulting to the current rider who can tell the difference, but my concern is perpetuating the business and I’m afraid the young, new rider won’t know and won’t be told.
You should know that what really convinced me to write you is an experience I had yesterday with an export agent. He called requesting a quote on container loads of skate veneer going to China. Upon quoting him our standard prices, he laughed and told me that if I wanted to do business with China, I needed to learn how to lower my prices. We price veneer based on the cost to produce plus a reasonable profit margin. I asked him what benefit I would gain from hurting my loyal US customers by selling overseas for less and loosing my profit margin. He laughed and responded that I’d have my foot in the door when the Chinese totally take over US skateboard manufacturing.
There is no doubt that manufacturing is down due to the economy. However, there is also pressure coming from beyond the economy and if we don’t react now while we are slow and have the time to react, we will all be left in the dust when the next surge (and I’m confident there’ll be one) comes.
I am venting this on you because you are a connected person who people seem to listen to. We do as much as we can to promote the industry including attending shows and working on promos with our customers. Try as I may to get the message out that quality and integrity starts with the raw material, it seems to fall on deaf ears.
Is the skateboard manufacturing business preparing to roll over and allow imported decks become the standard? Should I start looking for new markets to replace our skateboard veneer sales? Should I "learn how to lower my prices to China"?
Please advise.

Best Regards,
Dale Rosema
Sales Mgr – LaGrand Lumber & Veneer, Inc.

 

The End of the Beginning; Observations from Glitter Gulch

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“Now, this is not the end. It is not even the beginning of the end. But it is, perhaps, the end of the beginning.”

Overall, Vegas showed signs of being the end of the beginning of the snowboard industry’s consolidation process. 
 
Which is convenient, since I’ve always wanted to use that quote. The first person who identifies the person being quoted by calling or e-mailing me, the approximate date of the quote, and the event being referred to will be acknowledged along with their business in the next Market Watch.
 
In Vegas, the industry shows some signs of stabilizing, but it has a long ways to go. There were few or no new exhibiting snowboard companies, but not less by my count. Prices were up, down or unchanged depending on who you talked with. But not too much either way. Careful cash management has become more important than taking market share. With a couple of exceptions, senior managers seemed to feel that they had or could get enough cash to do what they needed to do, but not what they would like to do. Significant product innovations were rare. I saw only one new step-in system. Making a profit is still tough. Retailers seemed more deliberate perhaps because there were fewer choices to consider.
 
The Good News
 
The good news starts with SIA’s retail audit, where a big increase in hard goods sales by units and dollars was reported through the end of December in both chain and specialty shops. Especially in boards, the dollar increases were generally more than the unit increases. This translates into an increase in the price per unit at retail. It’s about time. Over the same period, snowboard apparel sales plunged, but that’s more a reflection of last season’s unsustainable growth rate and poor weather than of a problem with apparel.
 
The chaotic over supply that resulted from companies producing with the goal of achieving hopelessly optimistic projections, to keep factories running, or to take market share from competitors is gone, bludgeoned by the sacred sledgehammer of financial reality. That’s not to say that over capacity isn’t still an issue (see “The Bad News” below), only that the conditions that lead to forty dollar wholesale board prices are pretty much gone. At least they are gone until confidence in Chinese production quality increases, but that’s a discussion for another time.
 
The next thing I noticed was that all the booths looked more or less the same as they each looked last year. Oh, they’d been renovated or dressed up and rearranged, but they were basically the same. Let me explain why this is really good news.
 
When an industry consolidates, managers have to start running their businesses differently if they are going to be counted among the survivors. The cornerstone of these changes in management perception and focus are financial. There’s a seminal moment when the realization hits home that all these cool marketing things would be great, but if we do them, we won’t be around to enjoy the benefits. At that moment, the competitive environment begins to get a little more rational and the tendency for new companies to enter starts to decline. We’re there.
 
I’ve always looked forward at Vegas to walking around to see who had thought up “the next snowboard.” Usually, it was some strange contraption that might have made technical sense but had no chance from a marketing perspective. It wasn’t there this year. But there was one new board with an unusual technical innovation- a double flex.
 
Nobody I talked to had ridden it, but the consensus was that it made conceptual sense and might work. It’s important that it wasn’t just a board being introduced by somebody who wanted to be involved in snowboarding. It appeared to be the result of cautious development and careful market analysis and timing. Based on the background of the owner, I expect there’s enough capital behind it and the risk has been carefully thought out. I’ll bet they wouldn’t have introduced it two years ago even if it was ready given the market conditions that existed then. In other words, it’s a rational product introduction based on a competitive advantage which the owner believe can be validated in the market. He doesn’t care if he’s cool. 
 
That’s another positive indication of a market that is starting to behave rationally.
 
I say this every year, but the show was more businesslike than the previous year. As long as there continues to be free beer in the booths after the show closes, I can stand it. I say that every year too.
 
At least partly due to SIA’s good work on the subject and its decision to cancel the Snow Show, the buy sell cycle is progressing more smoothly. There was plenty of business done in Vegas, but it wasn’t, and didn’t have to be, done in a frantic way. In the first place, it’s a lot easier to choose between fifty brands than three hundred. In addition, brands and retailers are doing more work before Vegas. More retailers, planning to carry most of the brands they carried last year, are coming to Vegas to confirm decisions they have largely made- not to begin and conclude the information gathering process in five frantic days like they use to.
 
The final piece of good news is that there are 60 million people in the United States between the ages of 5 and 20, over half of who have not yet moved into adolescence. There’s plenty of room for snowboarding to grow. We’ve also got the attention of every big company in the country with a brand name, because they know that if they can’t get the loyalty of some piece of this group, their future success is doubtful. I guess that’s good news…..maybe.
 
The Bad News
 
When a consolidation happens, profits drop. That drop can be temporary or permanent. I am not going to conclude that it’s permanent in the snowboarding industry- the demographics alone suggest there’s some money to be made- but the same handicap that has kept skiing among the financially disabled has the potential to do the same to snowboarding.
 
That handicap is too much production capacity. There are always more than enough soft goods factories. If every ski and snowboard factory in North America closed, there would still be enough manufacturing capability in Europe to supply all the skis and snowboards the world wants. Hell, there might be enough if all the plants outside of Austria closed. I don’t expect our excess capacity problem to go away.
 
The capacity problem is reflected in the actions of the (mostly) ski companies from Europe trying to establish their snowboard businesses in the United States. Unfortunately, I observed in Vegas some tendency on the part of European owners to interfere with the marketing direction the U.S. managers are trying to set, and I suspect that will be to the detriment of the brands’ success here.   Oh well, I’ve seen lots of U. S. companies have the same problems when they tried to move into Europe. People who live in glass houses….
 
The point, however, is that these companies, with tens of millions of dollars invested in snowboard and ski production equipment, really, really, really want to make product to keep those factories running. They look at the whole market from a production, rather than a market, perspective. I have some personal experience telling companies with factories that the market required less product. Their first priority is simply not brand positioning- it’s maintaining and increasing production.
 
Then there’s the fact that we’ve still got fifty plus brands competing in North America. It’s too many. I still believe snowboarding can support more brands than skiing, but not fifty. I expected to get to Vegas and see fewer.
 
The big brands, and the brands owned by big companies, making money or not, are likely to survive. They either have a balance sheet or an access to capital that insures it. The small brands that have pursued a consistent strategy and niche also have a reasonable chance to be successful. They all report anticipated sales increases consistent with their historical growth. It’s potentially a breakthrough year for them because if a retailer wants any product from a smaller brand, there aren’t many choices. Of course, sometimes the managers at these brands can be a little disingenuous when they talk to me, but I asked the same question in enough different ways that I think they mean it. I hope so.
 
As usual, being big or having a market niche seems to be the way to succeed. It’s tougher when you’re in the middle either by size or brand positioning.
 
In Las Vegas, I saw light at the end of the consolidation tunnel, but land mines on the cave floor. The demographics suggest a huge opportunity, but everybody wants a piece of it. Knowing who your customer is has gotten tougher as what use to be distinct specialty markets overlap and many new customers are as interested in fashion as they are in the sport. I am reminded of what happened to skateboarding the last time it got respectable. The kids dumped it because it wasn’t cool.

 

 

We Win. Now What? Ruminations on the Future of Skateboarding

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The “AHAA!” moment at the ASR show came early for me. I’d just flown in from the SIA winter sports show in Vegas and literally walked in the door at ASR when I heard that the ubiquitous ASR Board Trac seminar had already started. I was fifteen minutes late. When I walked in, they were questioning ten “typical” teenagers about their buying habits and perceptions. I think it was five surfers and five skateboarders. Three or four were team riders. It was clear that being team riders skewed their points of view a bit. Nothing like getting free stuff to change your buying habits.

 
I listened for maybe thirty minutes. Then I had to turn to TransWorld Surf Biz Managing Editor Sean O’Brien and whisper, “Hey Sean, is this suppose to be just about skateboarding?”
 
Congratulations to Us
 
Skate was clearly the driver of the discussion. Surfing seemed largely a sport. Skating was somehow more. Skateboarding has, I guess, become something of an arbiter of style and fashion for a lot of kids.
 
That sounds kind of high and mighty. I wrote it pretty much from the gut and now that I think about it, it bothers me that I even had the thought. The consensus is that we’ve dodged the recession bullet with no more than a minor flesh wound (Assuming you believe it is a recession without a significant drop in consumer spending and that we’re in recovery mode. Can consumers start to spend more when they didn’t spend much less?).
 
We are skateboarding and we are immortal. Unless they cut off our head maybe? Or close all the skateparks in California. Check out the box on this page and do something.
 
What an enviable market position. What did we do to deserve it and how do we keep it- at least for a while?
 
Skate is Not Snow or Surf
 
Okay, you knew that. Perhaps I should be more specific. In snow, the top five to seven companies control maybe 85% of hard goods sales. Maybe more. Burton is first, followed, not necessarily in order, by K2, GenX, Rossignol and Salomon. Yes, I’m pretty damn sure GenX is either number two or number three by number of snowboards sold.
 
None of these companies, including Burton with its Gravis shoe brand, is one hundred per cent dependent on snowboarding for its revenues. None of these companies is under $100 million, and Salomon-Adidas is over $5 billion. They sell a significant amount of product to people who don’t participate in snowboarding. They want to grow, and are widening their distribution to do it. You can generally find their snowboard products in some places where you would have been surprised to find them a few years ago.
 
You need a mountain to snowboard (or at least a big hill). Buying all the gear you need to participate is pretty expensive (less than is use to be) and the expensive stuff is mostly special purpose. You don’t wear your snowboard boots to walk around when you’re not at the mountain, that is. You can’t do it all year around (unless you have a really big travel budget) and you are weather dependent.
 
For surfing you need an ocean. Or maybe, someday, a wave machine that generates high quality waves in an indoor facility. Let’s hope Surf Parks LLC pulls it off. You’re weather restricted (weather makes waves as I understand it). Buying what you need new probably will set you back six to eight hundred for a board, wet suit and bathing suit plus some accessories. Except for the bathing suit, its pretty much special purpose stuff.
 
It seems to me that the biggest surf companies are largely soft goods makers. Quiksilver had revenues of $615 million over its last four quarters. Vans did $353 million (I don’t know if I call Vans a surf company or not. I wonder if that’s a problem or an opportunity for them?) Surf soft goods brands are interested in pushing their distribution as well. Look, if you’re going to grow, you have to do it be expanding distribution. Once you get to a certain size, you just can’t get meaningful increases through the specialty distribution channels.
 
Meanwhile, over in our part of the world, we’re got a handful of large, multibrand skateboard companies with a primary focus on hard goods and skateboarding in general They sell some soft goods, sometimes under other brands, but it’s not their focus. The majority of f their revenue comes from selling skateboard hard goods to skaters. They have not, for the most part, expanded their distribution outside of specialty shops and smaller chains. They believe, and I think they are right, that it would kill their credibility with their core customers.
 
They aren’t giant companies. I don’t have any numbers but I’d be stunned if any of them topped $100 million in skate and skate related sales. I’ll be surprised if they are over $50 million and $20 to $30 million might be more typical. 
 
Though you can be weather constrained, you can pretty much skateboard anywhere. And, though decks wear out pretty quickly if you skate hard with existing skateboard technology, it’s a lot cheaper to buy what you need to skate then to surf or snowboard.
 
Skate shoe and softwoods companies, of course, are pushing madly into the broader distribution channels. Skate shoes are a limited market no matter how big skateboarding gets compared to casual shoes. There were 100 footwear companies exhibiting at ASR compared to around 70 six months ago.
 
So here we sit in skateboarding with a handful of hard goods companies that have been in skateboarding forever are largely run by skaters or former skaters focused, in their own best interest, on hard goods, riders, skateboarding’s vibe, and helping skateboarding progress. They are still their customers in many ways. They are still proselytizing missionaries for skateboarding.
 
That is pretty much a distant memory in snowboarding. Surf has the same problem though, in my judgment, not to the same extent as snow.
 
Shoe and soft goods companies get to sell to the general action sports, lifestyle market. Skateboard hard goods companies have to sell to skateboarders. I suspect it’s with some interest, if not envy, that the hard goods suppliers watch the shoe and clothing companies grow and diversify while they stay focused on a market that is nearly all young males.
 
ASR
 
We better hope the hard goods companies keep doing what they are doing. It is, I think, skateboarding’s unique competitive advantage over activities. ASR wasn’t able to give me the final show numbers before my deadline. What I felt was that traffic was down, things were generally a little quieter and the show was smaller. Company managers were talking about tighter budgets and “meeting reduced expectations.”
 
Given a recession, September 11th, overlap with other shows and a Super Bowl weekend, maybe that was inevitable. What troubled me more than that was my perception that the horde of new, little companies that usually come and go at ASR like the tide, weren’t anywhere to be seen. Okay, it’s probably a lousy time to be starting a business. But the presence of those companies is, to me, a barometer of just how exciting things are in skateboarding. When I don’t see them I worry. 
 
I worry that the hard goods companies that are the foundation of the industry will succumb to go big into clothing or shoes, or expand their distribution too much. I’m not quite sure that’s possible, given the start and the resources and the market positions that the shoe and soft goods companies now have. But it must be tempting.
 
It’s nice to be a big company I suppose, but it’s maybe even nicer to have a rock solid market niche that consistently earns money, keeps you close to your customer, and is a likely survivor in the event of a downturn. I hope the skateboard companies look at it that way. It would be good for all of us.
 
 
SIDEBAR
 
The law that releases California skateparks from liability expires December 31, 2002. Word is that it will be left to each skatepark manager to decide what to do and without this liability protection, a bunch seem to be saying they will close their parks. That would be a bad thing.
 
So, if you don’t want to risk having skateparks in California closed, YOU have to give California State Senator Bill Morrow, who spearheaded the original legislation, the leverage he needs to get the new law, SB 994, passed. You should tell him you appreciate what AB 1296 (the expiring law) has done by providing safe skateboarding venues for young and beginning skateboarders, and that you support SB 994, the new law.
 
You can do this at the following web site: http://republican.sen.ca.gov/web/38/feed.asp
 
Or you can write Senator Morrow at any or all of the three following addresses. Send a copy of your letter to each address for maximum impact.
 
2755 Jefferson St., #10                   State Capital Room 4048  
Carlsbad, CA 92008                       Sacramento, CA 95814
 
27126 Avenue Paseo Espapa #1621
San Juan Capistrano, CA 92675
 
This is important. Do it. Even if you don’t live in California but especially if you do.

 

 

Tulips

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I walked out of ASR feeling positive about skateboarding and its market and will discuss why below. Still, when things look too good to be true, it’s been my experience that they usually are and I’m as susceptible to the hype as the next person. Let’s start, then, with this cautionary tale from Edward Chancellor book “Devil Take the Hindmost- A History of Financial Speculation.” 

 
Tulip Mania
 
“Conditions in the Dutch Republic in the 1630s were propitious for an outburst of speculative euphoria. It was a period of rising commercial optimism, owing partly to the final extinction of the Spanish military threat and partly to the booming Dutch textile trade, which profited from the turmoil in Central Europe at the beginning of the Thirty Years’ War. The Amsterdam bourse [stock market] had moved into a new building in 1631. The East India Company was profitably developing its settlement in Batavia and its shares rose faster than at any time during the century. House prices were also climbing sharply, producing a boom in the construction of suburban mansions. The Dutch Republic lost some of its Calvinist austerity as its people, who enjoyed the highest incomes in Europe, became a nation of consumers. In the tulip, they found an object which enabled them to mix their love of display with the avid pursuit of wealth.”
 
Tulip bulbs were classified according to the flower colors. They were given military titles that reflected their position in the bulb hierarchy. Unknown at the time, tulip colors and patterns are affected by a virus that attacks the bulb. You never knew what pattern or colors might result. This led itself to a speculation that was essentially gambling. 
 
In late 1636 and early 1637, at the height of the market, no actual deliveries of tulip bulbs took place. A tulip futures market known at the windhandel (the wind trade- say no more) appeared. At the peak, the combination of the windhandel and paper credit “created a perfect symmetry of insubstantiality: Most transactions were for tulip bulbs that could never be delivered because they didn’t exist and were paid for with credit notes that could never be honored because the money wasn’t there.”
 
Average annual wages in Holland were from 200 to 400 guilders. A small town house cost 300 guilders. Bulbs at the top of the tulip hierarchy sold for thousands of guilders. There were examples of prices for a pound of bulbs going from the equivalent of one month’s pay to five year’s in a week.
 
On February 3, 1637, the market crashed. There were no more buyers, and existing contracts were rejected. Perhaps it had something to do with the fact that spring was coming, and most of the bulbs promised for delivery didn’t exist. The litigation dragged on until the following year, when it was decreed by the government that contracts could be settled for 3.5% of their value.
 
We Are Not in the Tulip Business- Not Exactly
 
I’m not claiming that tulips are like skateboards and skate shoes. People are delivering real products in return for real money. Obviously, there are more differences among skate decks and shoes than just color, though I can’t think of many right off the top of my head. Oh yeah- who the team riders are. See, there’s a difference.
 
Nobody will ever pay a year’s wages for a pair of skate shoes, though it seemed like some prices were tending to go up at the show in spite of the fact that sixty companies were offering footwear (not all skate shoes) up from forty-two at the last show. Eighty-two companies were selling what was classified as “Skateboard Hard goods.”
 
And nobody is going to sell to somebody for future delivery that they think can’t pay, though the use of terms to retailers appears to be growing.
 
This seemed like the busiest ASR I’ve been to in years, and the most business like. Lots of order writing going on. People with things to do- not just hanging around. It was, in a word, purposeful.
 
That’s one of the things that makes me optimistic. I remember the 1995-96 Snow Industries America Trade shows in Las Vegas, where snowboarding ruled and would never die. But that show had the feeling of people energized by hope and expecting to find the deal that would save them. Snowboarding’s imminent consolidation was a big shared secret, and nobody wanted to tell Emperor Snowboard to go and get some clothes on.
 
This ASR was about doing business, not looking for a deal to save your butt. Most of the time when the people in booths told me the show was going great, I believed them. This was a show where just moving through the aisles was a challenge if you were in a hurry.
 
Where at the last ASR, all the shoe brand offerings looked the same, this time I saw some visual differences among brands that offered the possibility of their establishing distinct personalities- call it different signature looks. Easy to copy, of course.
 
This isn’t to say that there isn’t going to be a period of consolidation in the skateboard industry at some point in time. There are too many companies selling trying to sell “me too” products. If you don’t have an established brand name or a product that can be seriously differentiated, this is the wrong time to offer a new brand in the skateboard industry.
 
But here we are with a seriously strong economy, very favorable demographics, woodshops unable to meet demand, skate parks popping up like mushrooms, skate styles influencing shoes and clothing in a way that has expanded the market to a whole lot of non skating people, and skateboarding being exposed to and accepted by a much larger group of people than ever before. What can go wrong?
 
Sector Rotation
 
In the stock market, they call it sector rotation. The industry groups that lead the market change. Not too long ago, it was the internet stocks.   A year or so ago, the health maintenance organization stocks were dead last. Now they are among the leading sectors. The issue is never if a sector is going to crash, or leap to the top. It’s when- and how long it stays down- or up.
 
Action sports is powerful right now for a variety of reasons we all know. It’s a strong market and seems likely to stay that way. But what sectors will lead it?
 
Inline skates had their day. So did snowboarding. So did surf. So did ski. Now it’s skate. For how long? Normally, I’d say until all the companies are making quality, nearly identical products and the basis of competition has been reduced to price and marketing, the consumer figures that out and the hype gets massive. But we’re already there. And it’s possible that by next ASR I’ll be hoping nobody remembers that I wrote an article suggesting that skateboarding might have some legs.
 
Skateboarding has broken out. It’s becoming legitimate without losing too much of its edge. Compared to most other sports (with apologies to those who object to that word) it’s cheap and convenient to participate in. The related shoes and clothing can be and are worn by nonparticipants unlike, for example, snowboard boots. The hard goods companies continue to support, promote, and maintain the core of skateboarding even though this may prevent them from participating in the growth of the larger market.
 
Somehow, skateboarding has made a meta-change. It has repositioned itself and become legitimate to a much larger market without letting itself be changed too much. I wish we could claim it had been an active act on the part of the industry; a strategy we chose to implement.
 
But it wasn’t. We were lucky, or maybe deserving after a long period in the wilderness. If any single event was indicative of this change (I hesitate to say responsible for, though I’m tempted) it was the changing of the liability laws that unleashed the skateboard park building boom. So if you aren’t a member of IASC, join now if only to say thanks to Jim.
 
Strategies
 
Retailers have already figured it out. Their hearts may be in skate, but when it’s some other action sport the customer is asking for, they will be offering the goods related to that sport. Much of their sales are higher margin shoes and apparel to non-participants. The clothing manufacturers, by and large, aren’t tied to a single activity/sport. Their customers are the action sports crowd- participants or not- who are tied into the lifestyle, music and attitude. The shoe brands are actively expanding their product lines to include footwear in addition to core skate shoes.
 
The skate hard goods brands have a tougher road to follow. Their focus is on the core of skateboarding, and that focus has a lot of responsibility for skateboarding’s continued strength. Yet even in this record year, I suspect (can’t prove it) that a large hard goods manufacturer is doing, say, $25 million in sales. Compare that to the sales and growth of clothing companies. Even the leading skate shoe companies are several times that size.
 
To really take advantage of market conditions, skate hard goods brands need to figure out how to move beyond their traditional market. But it may be that their movement beyond the core hard goods market if it occurs, will signal a market top in skateboarding. That’s a bit of a conundrum.
 
Schizophrenia
 
Is skateboarding going to crash or continue? Obviously, I feel strongly both ways. I think we’ve got a bit of a run ahead of us, but being bigger and having an established brand is going to be critical for success. Right now, fast growth and cash flow can paper over a whole host of competitive shortcomings. And no industry is immune from business cycles.

 

 

The Retailer’s Dilemma; Are There Any Snowboard Shops Left?

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Use to be that I’d scurry home from Vegas in March with my extra backpack full of snowboard dealer packages and, like a kid at Christmas, throw myself into them to see what was new. It still takes an extra backpack (though a smaller one- fewer brands but a lot more pages per brand). This year, though, there didn’t seem to be any urgency to reviewing them. Not having to make buying decisions, in fact, I didn’t get around to really reading them in detail until, well, actually, it was late June.

I’ve also been thinking lately about what “the snowboard industry” is now and how things have changed for retailers. That thought process, and the realization that it hadn’t mattered that I waited to June to read the new product packages, led me to think about retailer strategies and buying decisions. Retailers, I think, have to make buying decisions differently. And they look at snowboarding as just one piece of their selling strategy. Here’s why.
 
The Snowboard Industry- What Is It?
 
Five or seven years ago, snowboarding lead the way, representing an emerging demographic of young people interested in individual sports. Posers were disdained. If you didn’t snowboard, you shouldn’t have been wearing snowboard clothing. Margins on hard goods were a lot higher, and retailers could build credibility around snowboarding.
 
Today, thank God for posers.   They buy a lot of high margin soft goods, shoes and accessory items. They aren’t even posers anymore. They are just people who want to wear stylish, functional soft goods. We all got to wear something, after all. Retailers carry hard goods because they legitimize them as an action sports lifestyle store. But they’d much rather sell shirts, jackets or jeans that earn them a fifty percent plus margin than a snowboard that earns them a thirty-five.
 
I’m not suggesting that retailers don’t care about hard goods, or that selling them doesn’t make a contribution to a store’s overall success. But retailing is a very tough business, and my hat’s off to those who succeed at it. Selling higher margin items to a bigger potential customer group is a significant chunk of the success equation.
 
And it’s not just true in snowboarding. There’s not a lot of margin in skateboards, wakeboards, or surf boards (or skis or roller blades) either. In all these sports, the brands produce the hard goods and support the teams, advertising, and promotion to legitimize the sport and, maybe more importantly, the lifestyle image with the target audience. But it’s the soft goods players who grow like mad and make a lot of the money because they can sell to a bigger group of consumers.
 
Retailers who are still in business figured out a long time ago that they can’t just sell snowboard product. They’ve got to have cash flow year around because their overhead goes on all year, and they generally don’t have the balance sheets to support a long period of low sales. As larger corporations and the media have grabbed hold of action sports and demographic it represents, the lifestyle has come to be, for better or worse, more of a focus than the sport in the larger population.
 
Surfers skate, skaters snowboard, snowboarders surf. A skate shoe company I know does snow influenced clothing. The commonality isn’t the equipment- it’s the attitude, music, clothing, lifestyle. The equipment is just a tool. It use to be more of a statement. The equipment makers have contributed to this by making lots of quality equipment that’s often hard to tell apart and then endlessly trying to distinguish it by claiming various technical innovations that most of the time aren’t significant. If they are significant, they are drowned out by the promotional noise.
 
If you want to know what’s happened to the snowboard retailers who’ve fought this trend, check out your local court’s bankruptcy filings. But why should they fight it? A shop may have its roots in snowboarding, but here’s its chance to sell higher margin product to a larger customer base year around in more than one sport without the former danger of being seen as “selling out.”
 
Retailers can’t set the general trends- they can only recognize and take advantage of them. Since they are operating in an environment where there are, frankly, more of them than the market can reasonably support, recognizing and taking advantage of trends is a critical thing to do.
 
I hate this, but snowboarding has become a cog in the great corporate, action sports, youth demographic, marketing machine with the result that snowboard retailers have to approach the sport differently. The sport is still distinctive, but what it represents isn’t.
 
Retailer Challenges
 
With this background, I’ll try and put myself in a snowboard retailer’s shoes for a minute. I have the privilege of ordering in March or April something I won’t receive or start selling until late summer or fall, and have only three or so months to sell at full margin. If it doesn’t snow, I could be screwed, but that’s life. The hard goods margins aren’t that great, and I’ve got to work the system for all the discounts, free POPs, and show bonuses I can get. I know all my choices aren’t going to be right, and the probability is very high that after Christmas, or even before, I’ll have to offer some discounts. I feel better than I did a few years ago that the stuff will show up more or less when I want it, but I know there will be some delivery glitches.
 
Where I am right on the product I choose, I may not be able to get any more of the hot selling stuff when I run out in early December. My flexibility in ordering is constrained, to some extent, by brand requirements that I take product in certain proportion, by minimum order requirements, or by the space I have in my store. My ability to grow my order may be reduced by the brand imposed credit limit.
 
Boy, life was almost better when you couldn’t get enough product, it was always late, and the quality was suspect. At least you could count on selling it all at a good margin.
 
Back to the Brochures
 
There you sit, having gone (or not gone) to more trade shows at the worst time of the year than you could possibly have a use for. Before you is a pile of paper two feet high with catalogues, price sheets, credit applications, terms and conditions and order forms. These are just the official snowboard brands. Now what?
 
My recommendation is to always begin with the Mervin catalog. At least you their narrative will keep you grinning as you review their product line. And it might ward off the depression you feel when you see some brands have the ski and snowboard prices in the same place. But shortly reality and inertia set in. Reality is:
 
·         You’ve got to carry the right hard goods mix, but really want to leave as much room as you can for the higher margin soft goods.
·         Your customers are probably a more diverse group, and you may not live and die by snowboarding like you use to.
·         All the major brands offer monster products lines that start, after a few hours of study, to look a little too much like the others. They all cover all the price points, have comparable terms and purchasing programs, and similar advertising and promotional programs.
 
Inertia comes from the fact that you’re already carrying – what? Burton, one or two other major brands, maybe one of the few surviving niche brand where you don’t have too much local competition, and one of the former high flyers that tanked and has been sold to somebody who’s trying to capitalize on any left over brand equity as your el cheapo model? Five brands is about the max I’d say. Merchandising them all well is going to be an effort. Three brands would be better.
 
What’s going to make you change brands? The rep from a brand you don’t carry has pictures of you at that Vegas party you don’t want to see the light of day? Okay, that might do it. A major customer service or delivery snafu? Maybe. Prices and terms are pretty comparable. A lot of kids asking for a brand you don’t carry? Yup, that would do it. Major technological differences among product? In your dreams.
 
The bottom line is that with five or even three brands, you’ve got all your bases covered. If I were a retailer, I’d try to pick brands that helped me sell soft goods, though I admit to not knowing exactly how to do that.
 
Hard goods have become props to support the apparel and shoe sales that I suspect provide more than half the revenue and gross margin a typical store earns. It doesn’t seem to me like successful retailers are in the snowboard business anymore. They’re in the lifestyle, action sports, soft goods business.     

 

 

Thoughts From the Action Shoe Retailer Show; Opps- Did I Get That Wrong?

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This article sort of took shape the Monday the show ended. In the first place, I was flying back to Seattle on an Alaska Airlines MD80, which didn’t exactly put me in a positive frame of mind. Second, thanks to the ticket to the Sunday evening Gallas party Jeff Cutler gave me, I was suffering from the residual affects of too much fun.

 
There were 42 companies listed as selling footwear. I trust they weren’t all skate shoes, but a lot of them were. Not only were there more companies with skate shoes- each company was showing more colors and styles.
 
I pulled out the article I did at the end of 1994 on the imminent consolidation of the snowboard industry. I actually toyed with the idea of taking that article, changing “snowboard” to “skate shoe” wherever it appeared in the article, and having Skate Biz run that article with the changes showing just to make a point.
 
But I changed my mind, deciding there were a couple of differences worth discussing, and I’ll get to them in a bit.
 
Shoes to the Right of Me, Shoes to the Left of Me
 
With one exception, every shoe company I talked with had increased the number of shoes they were offering. The walls were covered with skate shoes. Mostly high quality skate shoes. Even the price point shoes seemed well built. They didn’t have all the colors and different layered materials of the expensive models, but I was assured they were just as solid and functional.
 
Everybody’s shoes were solid and functional. Made largely from the same materials and with similar features. If there was a color that wasn’t used in somebody’s shoe, I don’t know what it was.
 
The increase in the number of shoes per company is a response to what each company’s competitors are doing. It is not meeting any need of the consumer, unless it’s a perceived need the industry hopes to create by marketing.   
 
Though I’m not a skater anymore, I enjoy wearing skate shoes. I find them comfortable, they give good support, and they look great. But I could be talking about any brand. Because the industry has done such a good job creating a quality product, the basis of competition is starting to inevitably evolve to price and marketing.
 
Charge for the Guns!
 
The price trend I heard about was down. My belief is that this decline in prices offered to retailers wasn’t accompanied by a similar decline in manufacturing costs. I recognize that not every style and color way exhibited at the show will be produced. But more styles and colors will be produced. Manufacturing efficiencies result not just from overall volume, but also from the volume by style and color. If you want to make 10,000 pairs of shoes, you’ll get your best price if they are all exactly the same. So increasing styles and colors has some negative affect on your cost per pair.
 
But the thing that really caught my attention was the first shoe company giving 90-day terms to some of its customers.
 
Let’s say that a skate shoe company starts offering its better customers 90-day terms. Just to pick a number, let’s say it’s a larger company, and they have $10 million in annual sales done with terms of 90 days, where before that whole amount was sold COD. If they’ve got a gross margin of fifty percent, just to pick a number, that means they’ve got an extra $5 million of working capital invested in the business for 90 days. What does it cost to borrow $5 million for 90 days? You do the math using your own cost of capital.
 
Of course, it’s even a little worse than that. In the first place, we’re making the assumption that the check for each sale with 90-day terms is deposited on the 90th day and you get immediate credit. Bet some take longer to pay. In addition, the thing about giving terms is that somebody ends up not paying at all.
 
Companies give retailers terms when they feel they have to in order to compete. The trouble, of course, is that like frequent flyer programs, once one company does it, most of the rest of the companies have to do the same.  If they can afford it. Instead of being a competitive advantage, it’s just a cost. But it’s a great thing for the retailers.
 
The retailers, of course, find it harder and harder to make a rational selection among the hundreds of colors and styles. How do they select? They pick the shoes that give them the best price and terms and check at retail. Best price and terms means lower margin and higher working capital requirements for the brands. Making a shoe check at retail when it’s more or less the same as everybody else’s shoes means big marketing programs. Talk about charging for the guns.
 
Boldly They Rode, and Well
 
Big booths. Two stories. Back rooms. At the end of the show, if you put some of those booths on a lot, added plumbing (they’ve already got enough electric) and put on a roof, you’d have a fair sized house.
 
We’ve got a market that’s growing quickly. All the competitors want their piece of it. This is the time to get it, and they are pulling out all the stops to do that. The typical argument is “Market share is more important than profitability while the market is growing this fast.”
 
Guess what? I agree with that. The time to establish your position in a market is when it is growing quickly. If you’ve started recently, you better either have a big balance sheet and lots of money to lose for a while, or a clear picture of your market niche and a way to compete against the big guys.
 
The Good News
 
Okay, I’ve had my fun. I think the cautionary analogy of the Charge of the Light Brigade is worth thinking about in the skate shoe business. Will you care how glorious your charge was if you die in the process, no matter how many flags you had waving? And the chance to see a classic poem written 150 years ago printed in Skate Biz is just too good to pass up.
 
The skate shoe business is evolving to the point where it isn’t really just the skate shoe business. It’s the lifestyle casual footwear business. That opens up a big market. A really big market. I won’t give the favorable demographics speech. I’m sure we’ve all heard it too damn many times. That’s why there were 42 footwear companies at the show. But the fact is that more and more young people are going to be looking for casual, comfortable, stylish casual shoes. Everybody needs shoes. And they need them all year around. The market should be growing for a while.
 
Piece of good news number one, then, is that the market is growing, and should continue to grow. Number two is that it’s a year around business, though it has some seasonality. Year around sales means year around cash flow. Which means it’s easier to finance growth. Not easy, but easier.   
 
The financial model I’ve described in this industry- declining gross margins and higher marketing expense due to normal competitive pressures when product differentiation is difficult- usually has only one solution. That solution is to be big, or for your skate shoe line to be only one product line in a company that sells other product as well. 
 
At some volume of sales, your general and administrative expenses, and your advertising and promotion expenses, can decline as a percentage of sales even as their absolute dollar amounts go up. Obviously, companies like Adidas and Converse can afford to invest in the skate shoe business.    But there are a number of “core” skate shoe companies who already have the sales volume and/or balance sheet to compete in the market as it’s going to be and make money. There greatest challenge will be to transition to broader distribution without losing their legitimacy.
 
That there are core companies solidly positioned is good news, because I want to see the companies who understand skating continue to support and influence it. To me, that lessons the chance of another skateboarding recession. 
 
Please remember the lessons of every other industry. Growth eventually slows, and the conditions of competition change. Retailers gain power, size becomes important, the financial model becomes tougher, and entrepreneurs have to become managers.
 
The charge of the heavy brigade under General Scarlett, which preceded that of the Light Brigade, succeeded in reaching its objective at very little cost. They were prepared for their battle.           
 
The Charge of the Light Brigade
 
Half a league, half a league,
Half a league onward,
All in the Valley of Death
Rode the six hundred.
‘Forward the Light Brigade!
Charge for the guns!” he said:
Into the Valley of Death
Rode the six hundred.
 
‘Forward the Light Brigade!’
Was there a man dismayed?
Not though the soldier knew
Some one had blundered:
Their’s not to make reply,
Their’s not to reason why,
Their’s but to do and die:
Into the Valley of Death
Rode the six hundred.
 
Cannon to right of them,
Cannon to left of them,
Cannon in front of them
Volleyed and thundered.
Stormed at with shot and shell,
Boldly they rode and well,
Into the jaws of Death,
Into the mouth of Hell,
Rode the six hundred.
 
When can their glory fade?
O the wild charge they made!
All the world wondered.
Honour the charge they made!
Honour the Light Brigade,
Noble six hundred.
 
Alfred Lord Tennyson
 
The Charge of the Light Brigade occurred during the Crimean war in 1854. The brigade consisted of 673 officers and men at the start of the charge. 247 men and 497 horses were lost without achieving anything. But it was glorious while it lasted, and the survivors were decorated and promoted.