Sam And The Gradunzel-Eating Monster; It’s (hopefully) a fairy tale.

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Long, long ago in an industry far, far away (cue the heroic music), the sale of moss-covered, three-handled family gradunzels* had taken off. Now, gradunzels had been around for a long time, and they were manufactured by a dedicated group of companies, the founders and owners of which had been among the earliest users of gradunzels. They were still the product’s strongest supporters and were respected and trusted by the people who bought the product.

            These companies had worked hard to make the best-performing gradunzels they could make. They had all worked so hard, in fact, that all their gradunzels performed well, and it was not always easy to distinguish one from another—as far as how they worked. They had all been so successful in making good products that, at the end of the day, the customer selected his gradunzel based largely on loyalty to the company and people he knew who used the product. Even the prices were more or less the same.
            Oh, sometimes the colors of the three handles were changed, or a different variety of moss was allowed to grow on the gradunzel, but it still worked basically the same as all the others. Once somebody, who was not part of the group that had made gradunzels forever and ever, actually made a gradunzel with four handles. Some said it did a better job at whatever it was gradunzels did. Some said not. In any event, it didn’t look like all the other gradunzels, and soon it was gone and forgotten.
            For a long while, gradunzel users were a pretty small group, at best ignored, at worst scorned, by the rest of the people. But they didn’t care. They just went about making the best use of gradunzels they could. And if they were, from time to time, disappointed that everybody didn’t like gradunzels, they were also pleased to be part of this special and distinctive group
.
            And then a funny thing happened. One day—nobody knows exactly why—everybody wanted to buy a gradunzel. New gradunzel factories and brands sprung up all over the place. These came and went. Some succeeded, some didn’t.
            The small group of old-line gradunzel makers was overwhelmed and didn’t quite know what to think. It was true, of course, that they were selling all the gradunzels they could make and making more money than they had ever imagined. They were producing all kinds of new gradunzels in different sizes and colors and with different names, although of course they were all still just gradunzels. That was a good thing, and they were proud that after all their years in the wilderness so many other people had recognized what a wonderful invention gradunzels were. But they were also just the smallest bit concerned.
            Gradunzels had become so popular that even people who didn’t use them wanted to share in their popularity and be part of the excitement. There were all kinds of new gradunzel products: toy gradunzels, gradunzel cleaners, tools for fixing gradunzels, and clothes and shoes to wear when you were using your gradunzel, or even when you weren’t. The original gradunzel makers didn’t manufacture most of these products, but they represented a big part of the industry’s total sales. The old-line producers felt they were losing a little control of what they had created and supported, and they wondered if, in the midst of all the growth and prosperity, things would ever be the way they had been before. And sometimes they even wondered if they really, really wanted them to be.
            Undoubtedly, all this noise, growth, and excitement was what ultimately attracted the  gradunzel-eating  monster. The monster had an enormous appetite that was never really satisfied. But he had to eat so much that he couldn’t waste his time on mere appetizers. Suddenly, the gradunzel business looked like a tasty, full-course, gourmet meal. And it was making so much noise that he couldn’t help but notice.
            The monster didn’t really care what a gradunzel was or how you used it. He just needed to keep his stomach full. His stomach, it turns out, was full of production equipment, and he already had everything (well, almost everything) he needed to make gradunzels.  He wasn’t a bad monster really. He didn’t want to hurt anybody, though he knew that what he was planning might make things difficult, or at least different, for some of the smaller monsters in the food chain. Still, he hoped that the people who bought and used gradunzels might get better ones for less money and he thought that was a good thing.
            Now, because he was a very old monster and had grown big and wise over many years of gobbling things down, he had the resources to carefully study gradunzel making. So that’s what he did. He discovered he could make gradunzels as well as anybody else’s for quite a bit less money, if only because he already had almost everything else he needed. He even had a few ideas for making them better and wasn’t reluctant to try them. He had to buy a few machines and reorganize some space, but the building, the people, the computer system, and everything else he needed was already there. There was just one problem: To whom was he going to sell gradunzels?
            The monster disguised himself (not very well, actually, in a button-down and khakis, although he did manage to ditch the tie) and went out into the world of gradunzel makers and users. He didn’t understand everything he saw, but he knew he wasn’t “cool,” and somehow that mattered.
            He wondered what he could do. Then he became aware of how many brands of gradunzels there were. He knew, because he was an old and wise monster, that many of those brands—through no fault of their own—probably wouldn’t survive, or at least wouldn’t succeed at the level they hoped for. There were just too many brands and not enough competitive advantages to be had. He wondered if he could find one of those brands to work with. Then maybe he could be a little cool, or at least make gradunzels for somebody who was.
            Still, the monster wasn’t completely happy. He wanted to make a lot of gradunzels, and no brand that was going to work with him would need very many. So he called his friend Sam. Sam owned almost 3,000 stores and had bought a lot of stuff the monster had made over the years. He already sold gradunzels, but they weren’t very good, and they certainly weren’t cool—whatever that meant.
            Sam had tried to buy gradunzels from the old-line manufacturers, but they wouldn’t sell to him for three reasons. First, if they sold to him, they wouldn’t be cool anymore. Second, they couldn’t make enough gradunzels for him and still meet demand from their other customers. Third, Sam never paid anybody until the following season, and the old-line companies couldn’t afford that.
            The monster didn’t care about the first and could handle the second and third. So he said to Sam, “If I could sell you a better product for a lower price, produce as many as you need, wait to get paid, make it cool, and advertise and promote it, how many would you buy?”
            They haggled over the specifics a little. Sam looked thoughtful, then said, “Well, not too many. But if you can do all that, maybe we could handle three-quarters of a million gradunzels in the first year. We’re already selling almost that many, and we know it’s a lousy product. Would that be enough?”
            The monster smiled.
            When the monster went to talk to some of the second-tier gradunzel makers, the first thing they all told him was that everything was great. After he got to know them a little better, often over a couple pints of grog, he found that some of them were running just to stay in place, having a hard time cash-flowing their business, and needed to get a lot bigger quickly to have a financial model that really worked. But they were cool.
            Usually when he got around to asking them about selling to Sam, they’d get up to leave. But when he quickly asked them if they’d like to sell more gradunzels in two years than they could reasonably expect to sell in twenty, they sat back down again. It turns out that making money is cool, too.
            The gradunzel-eating monster returned to his lair to  plan. He didn’t know if what he was thinking would work, or if serious gradunzel users would buy from Sam. But if he could get this meal cooked, it would be big and tasty, and the ingredients wouldn’t cost much. What did he have to lose by trying?

 

 

Numbers, Numbers Everywhere And Who Knows What They Mean

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I do confess it. I was trained as a finance guy. I have an MBA, started out in international banking (Ask me about Carnival in Brazil sometime!), and did some corporate treasury and investment banking kind of work. Given the way things have changed, I decided it was okay to come out of the closet. Please don’t throw me out of the industry.

Using this experience to get a handle on the snowboard industry isn’t an easy thing to do. With the acquisition of Ride and Morrow by K2, there is no snowboard only company left that provides public financial information. What is available is not all prepared in the same way. Canadian accounting standards are different from French accounting standards, are different from United States accounting standards are different from German accounting standards. Details on the snowboarding parts of business are typically unavailable.
Nevertheless, phone calls, internet searches, and rummaging through some file folders produced public information on K2, Far West, Adidas (Salomon), Quicksilver, Vans, and Rossignol. What trends, or confirmation of trends are visible from reviewing this data? How much small print can I read before going crazy or blind?
As required, I’ve converted numbers to U. S. dollars based on exchange rates on November 3, 1999.
Size Matters
The first thing to note is that, with the exception of Far West, the owner of Concept Outerwear (revenues of $7.4 million in 1998), there are no small companies in this group. Vans, at $205 million in its last full year, is next in size. Quik and Rossi were $316 and $338 million respectively. K2 comes in at $575 million and Adidas wins the heavyweight division at $5.3 billion.
It’s easier to compete in a highly seasonal, very competitive market where margins aren’t that great and products are, for the most part, only differentiable by marketing if you’re big enough to spread your overhead and have year around cash flow. Even Far West, by orders of magnitude the smallest company in this group has some of those things going for it. Without diversification, having a viable financial model in the snowboard business is a struggle unless you’ve got Burton’s market share.
These numbers represent each company’s total revenues. The snowboard portion is much smaller.
In some ways, then, it’s good to be big if you’re going to be in the snowboard business. It can also be seen as bad, if you believe that the sport derived its energy and success from the commitment of people who were 100% focused on snowboarding, risking everything they had, and were as much concerned with snowboarding as with the business of snowboarding. If snowboarding is just one of your lines of business, and sometimes a small one at that, it may not always have your full attention.
How Big Is It?
The people at Rossi were great. They sent the English language version of their annual report Fed Ex. It tells us that 8.4% of their revenue, or $28.4 million is from snowboarding.  Their snowboard business grew by 13 percent over the prior year. They sold 143,000 boards.
They also estimated worldwide board sales at 1.45 million units in 1998/99. They thought it had grown 5% over the prior year.
I don’t know if that estimate is at the wholesale or retail level. It really doesn’t matter. What’s interesting to note, based on my own estimates of board sales four or five years ago, is that the rate of growth in board sales hasn’t exactly been spectacular. Probably not much more than the five percent Rossi estimated over last year. Makes you wonder about some of the estimates of growth in the number of snowboarders we see. Could be that a lot more people are renting. It could also mean that a lot of people try it and get counted as “snowboarders” but don’t go very often if at all.
For all I know, the culture has been so furiously marketed and the style so widely accepted that people who have never snowboarded consider themselves snowboarder and get reported as such in the surveys.
Just kidding, I hope.
Boards, boots, bindings and accessories made up $10.7 million of Quiksilver’s sales in 1998- approximately 3.4% of total sales.   That includes Mervin and the late, lamented Arcane step-in binding system. Quik also sells some snowboard apparel, but the amount isn’t identified separately.
Vans snowboard sales come from a number of sources. They sell the Switch binding and boots that work with it. They also sell traditional strap bindings. Vans has a line of snowboard apparel. They also earn some amount of revenue from licensing Switch technology to other brands, including Nike, North Wave, and Heelside. Finally, the company now owns the High Cascade Snowboard Camp. There’s not a number anywhere that indicates how many dollars this all comes to,
K2 is no help either. All their annual report says is that the “Sporting Goods” segment of their business had sales of $405 million in 1998. That includes inline skates, skis, bikes and fishing tackle, not to mention snowboards.
Well, it’s time for some creative estimating. Somewhere around here, I’ve got some carefully prepared, hand scrawled estimates of relative market shares for snowboard brands.   Go with me on this, and we’ll assume that those estimates are valid worldwide and not just in the US. I know what Mervin’s and Rossignol sales were. If these market share percentages are at all reasonable, a seat-of-the-pants guesstimate for K2 snowboard hardgoods sales would be (drum roll please) $65 million, or eleven percent of their total sales. That’s before the acquisition of Morrow and Ride, of course. Those two deals should more or less double K2’s snowboard hard goods sales.
Adidas reports that Salomon doubled its snowboard sales to $42 million. It doesn’t indicate if that number includes Bonfire. $42 million is about three-quarters of one percent of Adidas’ total sales for the year.
It just doesn’t look like anybody is going to live or die by snowboard related sales, though with the addition of Morrow and Ride, K2 is going to have an even greater focus on it. It’s more like companies are having a hard time figuring out how to grow and be profitable in sporting goods, and winter sports especially, and think snowboarding can help them figure it out, beyond what it contributes to sales.
The Bottom Line
Soft goods are good. Hard goods are bad. Winter sports are tough. Summer activities bring diversification and hope. And there you have it.
Quiksilver and Vans are both growing and making money. They have limited exposure to snowboard/ski hard goods and sell product all year around. Other soft goods players we haven’t talked about are doing well too.   They are riding the demographic crest and the culture snowboarding and other so-called extreme sports have created.
Rossignol has seen its sales shrink over the last two years. It’s also lost money in the last two years. 72.5% of its sales came from ski related hardgoods (skis, boots, bindings, poles, cross country skis) and 85.8% came from winter sports. They hope to double their snowboard revenue over the next three years.
Adidas lost a little money in 1998, the first year in which Salomon was consolidated into their financial statements. They had earned a profit in each of the previous four years. Salomon’s overall winter sports business grew only one percent. Eighty percent ($364 million) of Salomon’s total sales were from winter sports. The Adidas annual report described Salomon’s overall financial performance this way: “The operating result improved due to a number of measures to enhance earnings and almost reached break even.” YeeHah!!
The good news was that twenty percent of Salomon’s business was summer related, up from eleven percent the previous year.
K2’s sales have grown in each of the last four years. They have been profitable in each of the last five. But in 1998, their net income fell to $4.8 million from $21.9 million the previous year. This was largely due to increases in their product costs and selling expense out of line with the sales increase.
K2 divides its business into three segments; sporting goods, other recreational and industrial. Sporting goods include snowboard hard goods, as well as skis, bikes, fishing tackle, and some other stuff. Sporting goods did $405 million in sales, down from $411 million the previous year. This represents 70% of the company’s total revenue. It earned an operating profit of $5.3 million and, after a reasonable allocation of interest expense and corporate overhead, probably lost a little money.
Mountain bike and ski sales fell. K2 snowboard product sales increased, though we don’t know by how much. They do say the following:
“Although also feeling the effects of poor weather conditions in late 1998, snowboard products benefited from strong demand for its Clicker step-in binding, related boots and snowboards.”
Other recreational includes apparel, skateboards and shoes. Industrial is mostly monofilament line. It earned them $18.4 million in operating profit on sales of $125 million. There’s a lesson there somewhere. Screw snowboarding. Sell line for weed trimmers.
The Bottom, Bottom Line
The hard good guys slug it out with each other to get a bigger share of slower growing markets with lower margins and high marketing expense- an impossible financial model. Mean while the shoe and apparel guys, who can appeal to a broader demographic because they aren’t tied to a particular sport, clean up.
It’s not a pretty picture, there’s not a happy ending, but that’s what the numbers show.

 

 

Changes in Market Focus; The New Snowboarding Reality

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Most of us are in a different business than we were a few years ago. Retailer, brand, manufacturer, or even consultant, our customers have changed. There are only a handful of companies out there that can say they are snowboard companies. Others have adjusted their strategies, or aren’t around anymore.

 Remember the “C” word? Consolidation wasn’t just about a bunch of brands going away. It was about companies pausing, taking a deep breath, and recognizing that the opportunity represented by snowboarding went beyond selling boards, boots and bindings.
 
What is the snowboard market now? Who’s succeeding in it and why?
 
It’s the Culture, Dude
 
We’ve been over this before, so let’s keep it short. Hard goods have tended to become a commodity with lower margins. This has been especially true with boards but increasingly applies to boots and bindings as well. The days of rapid advances in quality and technology are nearly over.   
 
Young people represent a big demographic bulge everybody wants/needs a piece of. The lifestyle is what a lot of people are into whether they participate in the sport or not. There are more similarities than differences among the snow/surf/skate/BMX cultures. That’s hardly a surprise given the number of people who participate in more than one.
 
The term “participant” has to be viewed differently by hard and soft goods companies. Somebody who snowboards three days a year is a participant just like somebody who snowboards a hundred days a year. The hundred dayer probably spends more on equipment than the three dayer, but both need shoes and clothing for all one hundred days and probably want to look good wearing them.
 
Someone who perceives himself as a member of the culture is always a candidate to buy soft goods. But they may not buy any hard goods.
 
The sports have become the foundation of the lifestyle market. Nautica, ESPN, Mountain Dew and Tommy Hilfiger can make their money and grow their businesses as long as snowboarding ET. Al. is cool. Growth in the sport of snowboarding would be nice for them, but cool is more important than big.
 
It would actually be to their detriment if they were thought of as snowboard companies.   They wouldn’t be able to go after the broader market. Their potential wouldn’t be nearly what it is if they had a sport, rather than a lifestyle, focus.
 
Limits on Growth
 
Existing snowboard brands pretty much have their market niches. Those who are still standing and have been around a while are probably secure in those niches, but have a hard time figuring out what to do next. Let’s take Burton as an example just because they are far and away the most successful snowboard company.
 
Burton’s sitting there with, say, forty percent of the market. No doubt they’d like to grow. Their percentage share of the market is unlikely to grow much. They will get their share of general snowboard market growth, but that’s not what it use to be.
 
Real growth, if it’s going to happen, has to come from some new directions.    Skateboarding? Surf? Bikes? Bet they’ve looked at every action sport category there is to look at. But they haven’t done much.   Why?
 
Because of the danger of diffusing the strength of the brand and confusing people about what Burton stands for.
 
Think of a skateboard with the Burton name on it. “Why are they doing that?” you would wonder. It’s confusing and somehow disturbing. It’s a gratuitous new product with no meaning.
 
Apparel is different from hard goods. Burton has announced an initiative in brown shoes. They already sell a lot of apparel. We aren’t offended or confused if somebody who doesn’t snowboard wears some Burton clothing, but has chosen it because it’s stylish and functional.
 
But a Burton skateboard might get some strange looks from other skaters and, more importantly, from snowboarders.
 
Apparel, then, opens up a bigger market, and can be managed so as not to damage a brand’s credibility.
 
Moment of Clarity
 
It’s not a new thought that differentiation among hard goods is tough to achieve, and that margins are better in soft goods. But it was last March, from my perspective, that the market officially changed and the link between hard and soft goods largely severed.
 
It was the day Nike announced that they would not introduce a snowboard line. Their thinking, I imagine, had three basic components.
 
First, that they couldn’t introduce a snowboard that was any better than what everybody else was already making. Second, given that fact, selling snowboards wouldn’t help them sell soft goods. Indeed, if the board was received with a yawn or worse, it might even damage soft goods sales.
 
Finally, like all the other big players, Nike wants to capture some of the energy and legitimacy of the action sports culture, but they don’t want to be too closely associated with any one sport, less it restrict their broader sales prospects.
 
I didn’t think of it this way at the time, but that was the day the new market officially arrived in snowboarding.
 
And the Winner Is……
 
There isn’t one winner. But there does appear to be a single characteristic of companies likely to succeed in the lifestyle/action sports/youth culture market. Come with me now while we visit the Securities and Exchange Commission’s Edgar web site to see if we can distinguish that characteristic of success.
 
Listen to how Vans, Pacific Sunwear, and Quiksilver talk about their customers in the first paragraph or two of their most recent 10Ks (annual reports). By most measures, these are three successful companies. PacSun is a retailer that doesn’t sell any hard goods, possibly excluding some accessories. Van owns Switch and Quiksilver owns Mervyn, but neither Switch nor Mervyn contributes dollar sales, which, as a percentage of total revenue, are critical to their respective companies.
 
Vans characterizes itself as
 
….a leading lifestyle, retail and entertainment-based company which targets 10-24 year-old consumers through the sponsorship of Core Sports,(TM) which consist of alternative and enthusiast sports such as skateboarding, snowboarding, surfing and wakeboarding, and through major entertainment events and venues….
 
The retailer Pacific Sunwear says it is
 
selling everyday casual apparel, accessories and footwear designed to meet the lifestyle needs of active teens and young adults. The Company’s customers are primarily young men aged 12 to 24, as well as young women of the same age, who generally prefer a casual look.
 
Quiksilver
….designs, arranges for the manufacture of, and distributes casual
sportswear, swimwear, activewear, snowboardwear and related accessories
primarily for young men, boys, young women and girls….
 
 
All three are focused on the lifestyle market. All three are focused on the same age groups. None is associated with only one sport. All, if you read further in their annual reports, are concerned with staying close to trends and their markets.
 
They all start out by telling us not who they are as companies, but who they think their customers are.
 
There is, then, a new model for companies that want to grow quickly in the youth lifestyle market, as opposed to the snowboard market. Be compulsive about staying close to trends and be prepared to turn on a dime. Don’t be too closely associated with only one segment of the market. Focus on products that permit you to make a margin that’s high enough to fund the required advertising and promotional expenses. And finally, be big.
 
What To Do
 
If you’re a snowboard retailer……wait a minute. I guess what I’m suggesting is that there aren’t many snowboard retailers in the sense there use to be. There are retailers who sell snowboards. A growing percentage of their sales profit are coming from soft goods, and they probably sell skateboards, or wakeboards, or surf boards in addition to snowboards. Are you limiting your growth by focusing too much on only the snowboard market? Maybe you are, and maybe it’s what you should be doing. But please make sure it’s a conscious decision.
 
Choose the brands you carry with an eye towards the company’s ability to stay on top of the trends. Welcome customers who aren’t necessarily snowboarders. Maybe you can convince them to try the sport.
 
With the consolidation largely completed, growth for most brands is more or less limited to the market’s rate of growth. Unless you have a lot of capital to work with, and even if you do, you try and change your existing market position at your peril.
 
K2’s recent acquisition of Morrow and Ride seems to suggest they believe, given the prices they paid, that they can get a better return on investment through new brands than by investing similar resources in further building the K2 snowboard franchise. I think they are probably right.
 
If fast growth is no longer an option, and you not longer have sky rocketing capital requirements it imposes, then maybe it’s time to settle down and just run the business. Make incremental improvements in how you operate that improve you return on investment.
 
Control your distribution to encourage sell through. If you do that, you have the opportunity to raise prices a little and reduce end of the season discounts. Resist at all costs the urge to accept the 3,000-board order from Bulgaria. You know they will show up in either Japan or the U.S.
 
Negotiate with your supplier for better prices. With continued excess production capacity that should be possible.
 
Take a hard look at who your customers are. Do all your advertising and promotional activities really reach them? Can you cut back or redirect any of those expenses?
 
The pace of market change has been phenomenal. Not long ago, it seemed that demographic changes and endless snowboarding growth made the sky the limit. Now retailers have to be cautious about being too closely associated with one sport, and brands need to operate efficiently rather than prepare for fast growth. Large soft goods brands not closely associated with one sport seem to be the beneficiaries of our hard work.
 
Looks like resistance was somewhat futile, and we’ve been partly assimilated, maybe changing the assimilators in the process. Oh, the hell with it. I hope it snows soon.

 

 

I Feel a Whole Lot More Like I Do Now Than I Did a Little While Ago; My Take on ASR

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I’m not entirely sure what the title of this article means, but I’m pretty certain it applies to the skateboard industry. Conditioned as I am by the snowboard industry consolidation, I went to ASR expecting to observe a similar process. Subjectively, it seemed like the show wasn’t quite so crowded, and things were more business like, but there weren’t dozens of companies missing and multiple unused booths. And there were some small companies saying and doing the kind of things that made me think they might be around a while.

 
Don’t get too excited. Not for a moment am I going to suggest that skateboarding is in any way immune to typical business cycles. But there may be some forces at work that will allow the process of industry maturation be a little less painful, or at least draw out the agony over a longer period of time. I’m not sure if that’s good or bad.
 
So here’s the plan. Let’s decide what we mean by “the skateboarding industry,” review how consolidating industries change, look at a couple of industry trends that may make it easier to deal with, and then, to conclude with a happy feeling, look at some of the positive things I think I spotted at ASR.
 
Who Are We?
 
This use to be easy to answer. A company in the skateboard industry was any brand or retailer that sold skateboards and/or any other hard goods. Probably they also sold some soft goods but, at least in the case of the brands, those tended to be promotional and if they happened to make money on them, great. Now you’ve got skate shoe companies and skate clothing companies and shoes and clothing are an important component of any retailer’s sales. Are they still skate companies?
 
When you sold a skateboard, you could reliably assume it was to somebody who was going to actually go skateboarding. That’s not so clear when you sell a pair of skate shoes or some skate clothing. I’m going to guess that an increasing percentage of non-hard goods sales are going to people who don’t skateboard. Are companies who don’t sell hard goods and who sell a bunch of product to non-skaters industry companies?
 
Have a great time arguing over that. Since I seem to have a 5,000-word story I have to write in 1,500 words, I’d better move on. The point I’d like to make is that the industry has evolved so that, for better or worse, it’s no longer just defined by people skate, but by people interested in the image, attitude and lifestyle of skating. And by companies with a lot of money who are having a hard time understanding the sport. I’ll get back to this when I talk about industry trends.
 
Trends in Consolidating Industries
 
I’ve said this all before. Just check out the sidebar to refresh your memories, think about it for a minute or two, and we can move on.
 
SIDEBAR
 
Changes in Consolidating Industries
 
·         More competition for market share. Competitors become more aggressive because they realize their survival is at stake.
·         New products and applications become harder to develop.
·         Dealer margins fall, but dealer power increases.
·         Industry profits fall during the transition period. Cash flow declines when it is needed most. Raising capital becomes very difficult.
·         There is the danger of over capacity and turning the product into a commodity (Repeat after me- “Blanks are sure swell!”).
·         A new basis of competition is required for successful companies, but past industry euphoria makes changing difficult.
·         There’s a bunch of irrational competitive behavior. “It won’t happen to me” is an idea frequently expressed by companies waiting for their competitors to falter.
 
Industry Trends and Circumstances
 
Not all the changes in consolidating industries happen at the same time to all companies. Nor do they all occur with equal strength. In skateboarding, there are a number of reasons consolidation doesn’t seem to be occurring in a textbook way.
 
The industry is not extremely seasonal.   Retailers aren’t being offered 120-day terms by manufacturers. There are no long lead times on making and delivering product.   Inventory turns, let’s say, four to six times a year (my guess). Manufacturing technology is simple enough, or well enough established at least, that no huge investments are required and yield is high.
 
All those things mean that the working capital investment required in skateboarding is comparatively easier to manage than in some other industries. So the financial pressures on marginal players is less. It also means that it’s easier to get in, and to get out, of this industry. Due to extreme seasonality and the timing of the product cycle, there was never a good time for a company to exit snowboarding.
 
I’m not suggesting that things are easy financially. Low hard goods margins, blank decks, and difficulty differentiating one company’s product from another’s means you have to spend more on advertising ad promotion exactly when margins are declining. That creates a bias in favor of larger companies that move more volume because it gives them more gross margin dollars to work with.
 
But maybe financial pressures will be increasing. I talked to one large company that sells skate shoes (among other things) at the show that mentioned how they were starting to offer 60 day terms to select retail accounts. And so it begins.
 
There is no leading, clearly dominant company in the industry. My guess is that the single largest hard goods company sells no more than $15 million annually in decks, wheels, and trucks. In snowboarding, Burton, with a market share in excess of 50% a few years ago, had the market leverage to set the bar for successful competitors. An awful lot couldn’t get over it. Nobody can set that bar in skateboarding at this time. It’s interesting to note that some of the larger shoe and soft goods companies appear to be at least double the size of the hard goods leaders based on revenue.
 
Skateboarding is operating in a roaring economy, with income and spending growing, interest rates low, lots of wealth created in the stock market and jobs for anybody who wants one. Now add to that 60 million young people between five and twenty born between 1979 and 1994. Levi’s, Converse and Nike aren’t cool any more. But their long-term success requires that they make an impression on this group, whose spending habits aren’t formed yet and the largest chunk of who are still ten years or so away from adolescence. So they are interested in skateboarding and other activities that are part of this group’s culture. Not because they want t sell skateboards- they could take the whole skateboard hard goods business and it wouldn’t have a material impact on their bottom lines- but because they want their involvement with the sport/lifestyle/attitude to give them credibility with this group.
 
The (Probably) Good News
 
So we’ve got a strong economy, favorable demographics for the next ten years or so, and big money interested in the sport.   For the reasons I mentioned above, the financial environment could be a lot more difficult than it is right now. That’s especially true if you define the skateboarding industry to include clothing and shoes- which, to answer the question I raised earlier, I think you have to do.
 
Some smaller companies seem to be making some good decisions. At ASR I heard people talk about cutting teams to get costs in line with measurable financial benefits. There were comments like, “I’m not going to run an advertising campaign that drives me into the hole financially.” People were acknowledging the similarity of products from company to company and being thoughtful about how to differentiate themselves from their competitors.
 
I suppose you’re only surprised by such common sense ideas and comments if you were around at the peak of the snowboard feeding frenzy, when it was grow at any cost, take market share, find money for just one more ad. The perception was that if you didn’t “establish your position” you were dead meat. That was true. But the cost of establishing your position was as likely to kill you as not establishing it. Turned out it didn’t matter how you died- only that you were dead.
 
Pay attention to the trends in consolidating industries, but recognize that the rapid growth, maturity, and consolidation cycle is more typical of emerging industries. Skateboarding has been around a while. Hard goods, clothing and shoes are all part of skateboarding, but each seems to be at a different point in the cycle. I’d look at them separately. The lack of a dominant company in the industry and the fact that the business isn’t extremely seasonal suggests that more players can survive.
 
In the past, the attention of large companies caused a severe decline in skateboarding. Given the demographics we’ve got, and assuming that skateboarding doesn’t become “uncool” who’s to say that the industry can’t continue to grow at a rate that lets it at least keep its existing percentage share of adolescent males? That doesn’t mean a hundred new hard goods companies. That could only happen if some product innovation lifted margins on hard goods to the point where new, smaller players could compete. I don’t see that happening and expect the lion’s share of any growth in skateboarding to accrue, at least in hard goods, to the existing, larger, companies.
 
Interesting stuff. Let’s talk about it at the Industry Conference in April.

 

 

Hung Over, Jet Lagged, and Sleep Deprived; A View of the Industry from 37,000 Feet

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The specialty shop in Vienna was all snowboards and snowboard products. It was mostly last year’s stuff and was all on sale. Word was that financial problems were preventing them from getting new stuff.

Over at a big Intersport store, there was just as much space devoted to snowboard products and the deals were just as good. I’d estimate that roughly the same amount of space was devoted to snowboarding. Thought under construction for the upcoming season, it appeared well laid out, and the people I spoke with seemed knowledgeable.  New product was arriving, and it seemed that only Burton had any hope of holding high price points. New product board pricing for many brands was either at the high or the low end. Last year’s product is apparently taking over as the mid-price product, and there were a couple of boards of almost any brand you could imagine (Heavy Tools lives!)
 
I’m crammed in this tourist class sardine can with circulation to my butt cut off, and for reasons explained by the article title, only half my neurons are firing, but I don’t think the retail situation in the US is much different from what I observed in Vienna. And it’s consistent with what the textbooks and my own experience tell me happens in a maturing industry. Brands either become specialty players with clear market niches or they are larger volume, lower cost producers. If you get stuck in the middle, you’re, well, last year’s board in perpetuity.
 
The Good, the Bad, and the Ugly
 
Apologies to Clint Eastwood, but sometimes when an analogy fits, you just have to steal it. In no particular order we’ve got four classes of snowboard companies right now. Morrow, Ride and Sims are one class- the three companies that are arguably large enough and have enough brand recognition to survive all as specialty brands.  Burton is a class by itself. Third are the brands owned by large companies; K2, Salomon, Rossignol, Nitro and Mervin. Apologies to anybody I missed. Finally, there are the smaller brands that I won’t list. In my judgment, most of them are looking at the same fate at Lamar or Silence. They have enough brand equity to be milked, but the time when they could hope to grow and prosper independently is past. A couple have always focused on being small niche brands, and may be succeeding at that.
 
Morrow, Ride and Sims (place politically correctly in alphabetical order) have all had well publicized financial, management and brand positioning issues. During the feeding frenzy of a few years ago, they all sought to increase their market shares by rapid expansion of distribution. In the process, either by use of multiple brand names or sales through the wrong channels, they got some volume but reduced their brand strength. The impact on their brand’s market positions didn’t become apparent until growth slowed and the torture of consolidation set in. They tried to get big and they tried to be specialty brands. It turned out to be hard to do both.
 
Burton is both large enough and well enough established as a brand that it’s fairly secure as the industry leader. The word “fairly” is thrown in there in recognition of that the fact that although Burton is by far the biggest snowboard brand with the most brand equity, it’s still tiny compared to some other companies involved, or trying to be involved, in snowboarding.
 
Burton did a lot of things right, but two things stand out. First, they were well capitalized when most of their competitors were struggling to find enough dollars to print a decent catalog. Second, the expanded their franchise quickly into soft goods and are shielded, as a result, from some of the hard goods pressures even they aren’t immune to.
 
The smaller brands I didn’t list fit into one of two groups. The ones with a problem are those who use to be more visible in the market, but tried to grow and compete- to be a Morrow-Ride-Sims you could say. Now, they don’t have the money to market their brands and grow. It may be too late to succeed at that strategy anyway. At the same time, price pressures have pushed down their margins, and they have to increase volume to be profitable. They are caught between the proverbial rock and hard place.
 
A couple of smaller brands, like maybe Never Summer and Glissade, have always been focused on being smaller niche players. With a connection to a particular kind of rider or a geographic area, they never tried to be big and so don’t have to be. Consistency in your approach to the market continues to be critical for success.
  
Being a snowboard brand owned by a larger company offers both some opportunities and some challenges. On the one hand, you have the “security” of being part of a larger organization. You share overhead. You don’t need your own warehouse and computer system. You can earn lower margins and still be successful. You have access to some distribution channels that may help make it a little easier to increase sales.
 
On the other hand, you are not one hundred percent a snowboard company and are, to a greater or lesser extent, subject to the ebbs and flows of the overall company’s fortunes. Snowboard brands owned by ski companies have been directly impacted financially by the declining fortunes of the ski business. At least they are still here as snowboard brands. But they aren’t snowboard companies, and it’s likely that there will continue to be some “creative tension” between the snowboard and ski sides of the business. Skiing and snowboarding still seem to be separate changes that don’t entirely understand each other. Some things never change.
 
Which gets us, happily, to the point of the article. As an aside, I’d just like to say that it’s always gratifying to get towards the end and find myself somehow wandering towards the point I started out to make.
 
Snowboard industry evolution is not going to go the way of the ski industry. That is, I don’t expect the industry to work its way down to only half a dozen brands. Snowboarding may have become part of the winter sports business, but it still has some uniqueness to it. Unlike skiing, it’s still driven by lifestyle issues. Music, clothing, attitude are all part of snowboarding. Companies that have ignored that have gotten their asses in a sling. Witness the rise of Forum. Theoretically, it shouldn’t have been able to get started against all the large players in the industry. It is apparently adequately capitalized, is growing at a manageable rate that insures some artificial scarcity, and has a focused market strategy. Confusion, chaos and mistakes by other companies created a market niche for Ride when that brand was created a few years ago. Trying to grow too fast, in my judgment to meet the demands of wall street, cost it momentum and legitimacy in the market it had originally succeeded in.
 
Now other company’s mistakes have created an opportunity for Forum. It will be fun to watch and see if they have learned anything from history- like not to get too greedy. Brand success in snowboarding seems to require meeting the market’s expectations, but not exceeding them. You have to leave the customer just a little hungry.
 
The other reason there is room for more than a handful of companies is demographics. In spite of crossover, in spite of the increasing age of the average snowboarder, this is still a youth driven business, and the demographics suggest it will stay that way for at least the next five to seven years.
 
Retailers probably have to not get too comfortable with the brands they are carrying. What’s hot and what’s not will keep changing. Brands have to keep focused on snowboarding no matter who owns them. People who write columns for trade magazines will have lots to write about.
 
Over the last couple of years, the term “core” is perceived to have lost some of the passion, importance and legitimacy that was once associated with it. But the sport still has its roots there. And it looks like it will for the foreseeable future. Successful companies will have to sell beyond that core, but always have a focus there. That’s our biggest challenge and the reason snowboarding won’t become the ski business.

 

 

News from the North; Lessons for the Snowboard Industry from Canadian Resorts

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Last April, I headed to Tremblant for the Canadian Ski Council’s annual symposium on the state of the Canadian resort industry. Naturally, my naïve anticipation of great snowboarding had nothing to do with my decision to go.

Groomed hardpack with mud and rocks sticking through on narrow runs wasn’t what I’d expected. Thanks El Nino. At least it motivated me to go to most of the seminars and presentations. Nor did I miss a single dinner or cocktail party. I’ll be there again next year even if the snow conditions are lousy.
 
One of the presentations I attended was by a gentleman named Richard Basford of Integrated Marketing Strategies. He’d conducted for the Canadian Ski Council their annual Skier/Snowboarder survey and was presenting the preliminary results. Here’s some selected survey results that really jumped out at me.
 
First, Richard said that about 20 percent of the Canadian resorts’ winter visitors were snowboarders. No big surprise there. Then he announced that out of 4,293 responses, only 7 percent considered themselves beginners as skiers (three times skiing or less) and 9 percent considered themselves novices. That’s a total of 16% of the survey that’s just starting to ski. 
 
Now, the numbers for snowboarding were, respectively, 36 percent and 17 percent, for a total of 53 percent who are starting to snowboard.
 
Only fifteen percent of skiers have been skiing for two years or less. The number is 69 percent for snowboarders!
 
Go back and read that again, please. It’s okay- I can wait.
 
By the way, I’m pretty certain that a similar situation exists in the United States. Jim Springs of Leisure Trends presented some numbers at the SIA show in Las Vegas this year that supports that conclusion.
 
I looked around the room at the group of Canadian resort managers and owners who were attending the presentation. They were all sitting there calmly. Nobody asked a question, fainted, said “Oh dear!” or anything. I wondered if they were all hopelessly hung over from the previous evening’s business meetings. Some of them were definitely moving, so they weren’t all dead.
 
If you put a frog in cold water and raise the temperature slowly they say he’ll boil calmly to death rather than jump out. That same type of behavior-denial and perseverance during a period of change- seems to be going on in the winter sports industry right now.
 
For me, that stark, black and white survey was kind of an epiphany.
 
If the number of people starting to ski is relatively low, the drop out rate among beginners is high,and the number of existing skiers is declining due to aging, how many skiers will there be in ten years? In twenty? On the other hand, the percentage of snowboarders new to the sport is high. I’ll bet that the drop out rate is lower than skiing. I’m confident we aren’t starting to retire from snowboarding because of age. Snowboarding is growing, though not as fast as it use to.
 
But snowboarding is only twenty percent of the total. For every twenty snowboarders, there are still eighty skiers. It’s not clear to me that the industry can rely on the growth of snowboarding to make up for the decline in skiing, assuming current trends continue.
 
Somewhere in the bowels of some ski manufacturer or resort group the trends I’ve alluded to have been more thoroughly quantified and analyzed. In a more formal and systematic way, they have reached the same conclusions I’ve reached. That’s why there’s a proposal for the resorts and manufacturers to fund a three-year, $57 million promotional campaign. That’s why summer activities, tubing and mini skis are being embraced and promoted. That’s why individual resorts are upgrading facilities and creating more terrain even as, overall, their financial condition is not improving.
 
What are the implications for the snowboard industry? Two main ones, I think.
 
First, while much of the expected consolidation, measured by number of brands, may be behind us, competitive conditions are still very difficult. The brands may be gone, but most of the production capacity, with its need to keep producing something, still exists. If ski companies can’t make money selling skis (one projection is for pre season ski orders for 1998-99 to be down ten percent or more) they are going to continue to flock to the growing sport of snowboarding.
 
The evolution of the snowboard industry from its entrepreneurial roots as a distinct sport and market to a part of the winter sports industry is already being confirmed by the market segmentation that is occurring. There’s no longer a bias against snowboards made by ski companies and, with the exception of Burton, the success of every independent snow board company seems to be an uphill battle. More and more boards are sold by large companies to which snowboarding is just one of a number of product lines.
 
This industry evolution is consistent with most business theories that suggest you must either compete on price, as a volume producer, or by defining a market niche that will allow you to sustain your competitive position even though you’re more expensive. But the explosion of quality product at lower and lower prices has made it tough to be a traditional niche player. If everybody’s product quality and pricing is basically pretty comparable, that leaves marketing as the primary way to differentiate your brand. 
 
The second implication for the snowboard industry is that what the resorts are doing matters. We’re past the point where just the fact that they let us on the lift is enough.
 
Resort shops are charging manufacturers for space and displays like grocery stores charging for shelf space. Exclusive deals are being made to supply rental fleets- witness Rossignol and Intrawest. Joint promotional efforts are becoming more frequent. It seems like “resort marketing” should start to be a standard category in every snowboard company budget.
 
The Canadian Ski Council survey provided some additional statistics. They may be important as snowboard brands consider their marketing position given the increasing importance of resorts in building a brand. Sixty percent of resort visitors won’t be staying over night. Half expect to board/ski for only one day on a given trip. Seventy six percent live two or less hours from the mountains they visited.
 
Perhaps this says something about the location of the shops snowboard companies should focus on. Maybe there are products that can be developed just for the day boarder. Maybe we should be providing benches and lockers, or at least having banners, in the day lodges.
 
I’m beginning to believe that snowboard brands should be interested in building relationships with some local resorts and sharing information with them for the benefit both of the company and the resort. I’d try and use the resort’s perspective, and information they would hopefully share on the composition of their visitors, to help me differentiate my brand.
 
We’ve all talked about our period of consolidation ending. If that is measured by stabilization in the number of snowboard brands, we can expect to be there in less than a year. But the end of the brand consolidation should not be assumed to imply a return to a more rational competitive environment.
 
The snowboard industry is not the distinct industry it use to be. It’s part of the winter sports industry and subject more than ever to the trials and tribulations of the ski companies and resorts.
 

We can learn a lot by looking at who’s visiting resorts and what they are doing while they are there. Maybe we can even help the resorts deal with some of their own competitive issues

 

Just Who Are We Anyway? Perceptions of Market and Industry Evolution

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One day, a few years ago, we looked up and had become “the snowboard industry.” Growth, friends, good margins, optimism, an endearing naivete about the future and a quotient of bullshit was all part of what made it fun. The boundaries were clear. We were on the right side of that boundary and knew what was up. If you were on the other side, you didn’t. It was simple. We sold snowboards to snowboarders.

But fast growth and high margins can create an illusionary sense of control and invincibility. When these went away, the boundaries collapsed along with an awful lot of brands. Now it seems like the snowboard industry, for practical purposes, has become a piece of the winter sports industry. The retailers, the resorts, the ski companies, and everybody who is interested in hitching their star to the alternative sports market all have or want a piece of snowboarding- or at least of what snowboarding represents. Take Mountain Dew as an example. It doesn’t want to sell snowboard products, but it wants to be legitimized in the eyes of the consumer the snowboard market represents.
The reason that’s so important to Mountain Dew and others is because the Echo Boom Generation- loosely defined as the thirteen to twenty-five year olds- is projected to grow at a compound rate approaching fifteen percent between 1995 and 2005. There are a lot of them, and they have money to spend.
It’s no longer simple, and it’s not just about selling snowboards to snowboarders. At its 1998 annual shareholders’ meeting,  Ride Sports (note the previously announced new company name) CEO Bob Hall talked about the company’s mission as “creatively marketing high quality, technologically innovative contemporary sports products and extending those brands into apparel.”   Burton has started a shoe business. Morrow owned West Beach has a summer clothing line.
These companies are not just selling a product. They’re building brand equity with the goal of servicing the broader needs and interests of their target market. If the brand is legitimate in the eyes of that target market, they can sell an awful lot besides snowboards. And they can sell it at good margins.
In the past, I’ve called this market evolution “homogenization.”   That continues to be a good term. But it might be construed as implying a high level of “sameness” to a much larger action-sports market. In fact, what you’ve got is an increasing overlap among what use to be smaller, distinct segments: snowboarding, skateboarding, wakeboarding, etc. The boundaries have gotten fuzzy, as lifestyle and attitude become more important to a larger market.
What does this means for companies, resorts and retailers? They share some of the same strategic business issues, and are increasingly dependent on each other. Maybe they were always dependent, but they are recognizing the dependence and, in fact, seeing it as an opportunity.
Companies
Transworld Snowboarding Buyers’ Guide includes around seventy-five board brands.  I counted only around fifty exhibiting at Vegas. Once there were over 300.  The number will decline further. Most of the “How are you guys doing” calls I make seem to end up discussing layoffs and budget cuts. Orders are up for the coming season, but up twenty percent when you were down fifty percent the year before doesn’t cut it. Breakeven points are up. Everybody seems to be talking to everybody else about merging or being acquired. Making it as a snowboard-product-only company is tough.
Ski companies, in a declining market, aren’t making money on skis. Rossignol effectively recognized that when it tripled the company’s snowboard marketing budget last season. Salomon makes most of its money on golf.
Successful business strategies for these companies probably involve a year round business and less seasonality, multiple product lines, higher volume, better expense control and the creation of brand equity.
Resorts and Ski Areas
During the ‘85/86 season, there were 52 million visits to U.S. ski areas. In ‘96-97, the number was 52.5 million. If essentially none of those ‘85-86 visits were by snowboarders, and eighteen percent were by snowboarders in ‘96-97, then the number of skiers has declined by eighteen percent. Over that same period the number of North America ski areas has declined by 22 percent.
The 1996-97 Economic Analysis of United States Ski Areas, prepared by the National Ski Areas Association, noted the following trends during that season:
·         Increases in capacity and infrastructure improvement.
·         No change in total revenue per skier/boarder visit.
·         Declines in the net working capital and current ratio measures.
·         A 2.3 percent decline in operating profits and a 9.8 percent decline in pretax income.
Obviously, some of these numbers are open to interpretation, and results vary by region and resort size. But if participation is even (and may decline when snowboarding growth slows), balance sheets are in some sense weaker and profitability is declining, what is the justification for capacity and infrastructure improvements?
Sounds a little like the frantic competition for market share in the snowboard industry that led to product oversupply and a decline in the number of brands from over 300 to 50 and still falling. What’s a ski area to do?
Successful business strategies for resorts and ski areas probably involve a year round business and less seasonality, multiple product lines (golfing, real estate, tubing, etc), higher volume, better expense control and the creation of brand equity.
In fact, that’s what’s happening. Vail, American Ski Company, Intrawest and Booth Creek are purchasing other resorts. They are trying to remake resorts as year round destinations, create purchasing synergies, sell real estate, reduce seasonality and create brand equity they can cross market among their resort locations. Together, these four companies probably account for 35 percent of North American skier/boarder days.
Retailers
The National Sporting Goods Association recently released its Cost of Doing Business Survey for Retail Sporting Goods Stores. The survey is done every other year. It reported the following changes in financial results for full-line and specialty sport shops between 1995 and 1997.
                                                                        Full-Line Stores             Specialty Sport Shops
                                                                        1997     1995                 1997     1995
Return on Total Assets                                      9.4%     8.6%                 5.3%     9.8%
Return on Net Worth                                          23.3%   15.6%               16.6%   23.9%
Net Operating Profit                                          4.8%     5.0%                 4.1%     4.5%
Gross Margin on Merchandise Sales                  35.9%   34.7%               36.4%   36.5%
The full-line stores’ financial performance seems to have improved, even though their net operating profit declined by four percent. Specialty sports shops saw their performance decline, with operating profit down almost 9 percent.
The United States simply has more retail space than it needs in almost every product category. This is reflected in sporting goods stores in the low net operating profit percentages shown above. Remember that operating profit is before interest expense and taxes, so bottom line returns are even worse. When there is too much of something, the laws of supply and demand kick in and it gets hard to make money. It’s true in snowboard brands and ski resorts as well as sporting goods stores.
My belief is that specialty sport shops are also experiencing the market changes described earlier in this article. They can’t, for example, just sell snowboards to snowboarders any more. They have to cross-market different products to the alternative sports lifestyle market.
Successful business strategies for specialty sport shops probably involve a year round business and less seasonality, multiple product lines, higher volume, better expense control and the creation of brand equity.
A Community of Interest
I’ve used that last sentence three times now to describe what I see as the business imperatives of the ski and snowboard companies, resorts and ski areas and winter sports retailers. They are all operating in oversupplied markets and trying to focus on the same basic consumer group. I expect this emerging common focus to cause them to increasingly coordinate their efforts and evolve new relationships.
For example, we’re already seeing buying groups have more leverage with brands. The large resort groups are beginning to own their own retail space. The resorts are also working directly with the brands to supply their own product needs. Witness Intrawest putting its rental equipment needs out to bid and going with Rossignol. Brands are working with resorts to promote not only their products, but the sports themselves. Salomon made a major effort to work with resorts in promoting mini skis this past season.
What we’ve got going on is a huge change in the market, how it is perceived, and how it’s sold to. Put a dozen small circles of different sizes on a piece of paper, with none of them touching the others. Put one big circle around all of those smaller ones signifying the relative isolation of those related, but distinct markets. Those were the markets we focused on a couple of years ago. Now take those same circles, grow them, and have them intersect with each other in various ways. They don’t all touch each other, but are all connected if only through a common connection with another. And the connections change spontaneously. Finally, make the boundary of the big circle into a dotted line, signifying that it has become porous.
This is our new market. It’s bigger, but tougher to target. There’s greater interdependence. It’s not just composed of enthusiasts. Competitive pressures don’t come only from companies who make the same product you do. Single product/market companies are becoming increasingly rare.
Where do you fit in the new market?

 

 

Future History; What’s the Price of Success

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Originally, it was enthusiast driven. People started companies because it was an important part of their lives and they wanted to be part of what was happening. It wasn’t just about a sport- it was an attitude and a lifestyle.

At first bigger companies in related sports weren’t interested because the market wasn’t large enough. When they got interested, they couldn’t figure it out because they just weren’t close enough to it. When the entrepreneurs who created the industry woke up in the morning and looked in the mirror, they saw their customer. No market studies, no focus groups, no statistical analysis. Clearly, obviously and directly they were their customer. If they liked it, the market liked it. They could smirk at the corporate giants in suits trying to figure out what to do, because they knew the giant just didn’t get it.
 
More and more small companies got started. The industry and the participants grew. Hype overtook reality. Product quality improved to the point where there wasn’t much difference among brands, and the consumer started to figure that out. Margins dropped even as companies spent more and more money trying to differentiate a product that wasn’t any different. Making a profit got harder.
 
With growth and acceptance, the sport became more legitimate and more accepted. Big companies decided they had to have a piece of it. Not just because of the sport, but because they wanted access to the customer group it represented and to coop the lifestyle to use in selling other products. They still didn’t really get it, but by buying a couple of successful companies, and throwing a bunch of money around, they changed the market at the same time they legitimized it. The small companies who had created the sport were outraged by what was happening to “their” sport, but outrage didn’t change any basic business principals and pretty soon most of them were out of business.
 
The sport was bigger, and here to stay at a new level. But it had paid a price.
 
I was thinking about snowboarding, not skateboarding. But the industry evolution I described could have been referring to personal computers. Or flush toilets (invented by Thomas J. Crapper- how’s that for your own piece of immortality?). Or automobiles, if we went back to the early decades of the century.   
 
In the past, an explosion of skateboarding popularity has been the prelude to a big decline. Why might that not be the case this time? What, if anything, is unusual about skateboarding that might check the kind of industry evolution I’ve described? What’s the owner of a small skate company to do?
 
What Goes Up……..Could Stay There
 
The thing I really like about the skateboarding business is that you know exactly who your customers are; males age 13-17. Who can blame them for giving up skateboarding for girls and cars when they get a little older? I seem to recall being willing to give up almost anything (my money and self respect for sure) for girls at that age.
 
That age group, according to the census data, is and will be the fastest growing group for the next several years. Check out the information in the chart. It may be that, with the target customer so clearly defined, those numbers are a great predictor of where the skateboarding market is going.
 
With K2 having purchased Planet Earth and other mainstream companies increasingly interested in the sport, it’s clear that Corporate America, for better or worse, has decided skateboarding is worth its attention. They may not understand the sport and its culture; they may not even succeed in becoming part of it. But as they stumble around and throw money at it, they’ll change it as the ski companies have changed snowboarding.  
 
The good news is you may get respect for skaters and acceptance of the sport by a more mainstream group. Hell, you may even be as lucky as snowboarders and get your very own Muppet as a mascot.
 
What’s to Stop It?
 
Typically, a period of rapid growth in an industry is followed by a period of consolidation where the number of companies declines dramatically and the growth rate falls. There’s one reason to hope that the industry might escape that pattern and a couple why, if it doesn’t escape, it might be manageable.
 
The reason you might escape it (though I doubt it) is because the industry is too small to become really interesting to big companies. If they don’t find growth opportunities, they’ll milk the culture and lifestyle in hopes of benefiting their image and other product areas, and then move on. Note that the larger companies becoming interested in skate aren’t like the ski companies; they don’t need skateboarding to survive like ski manufacturers and the resorts need snowboarding.
 
More companies (though not most by a long shot) may hope to survive a consolidation than in snowboarding. This is because of the relatively year around basis of the business, the shorter product cycles, what seem to be selling terms that favor the companies, and the speed with which what’s in and what’s out changes. In short, you don’t have to lose money six to eight months of the year and by being nimble you can compete against bigger companies.
 
But inevitably, the skate industry is already making it harder on itself as companies jockey for position in a growing industry. The proliferation of companies, the declining credibility of the pro model, and blank boards are starting to turn skateboards and their components into a commodity. Which means lower prices and margins. Which means higher breakeven points. Which mean more working capital investments.
 
All of which is fine with any corporate companies looking to stake a claim to the skate market. Because market changes that are financially devastating to a small company are pocket change to them.
 
What’s An Owner to Do?
 
All the outrage over the changes in the industry, the “prostitution” of pro models, the “selling out” that blanks are suppose to represent, the threat of Nike the industry should “stand against” all sounds ominously and sadly familiar. No matter what it does, the skate industry is not going to repeal the laws of economics and human nature. The snowboarding industry shot itself in the foot because each company pursued what it perceived to be in its own best interest. Betcha the skateboard companies do the same thing. Not because it’s good or bad. Just because they will compete to find their most viable position in a changing market.
 
While Powell has come in for some criticism because of its commitment to blanks and mini logos, I applaud their business acumen. By recognizing an emerging industry trend, and by further recognizing that it wasn’t going to go away, Powell prepared itself to benefit from it. Because they were first to move aggressively into the product category, they have positioned themselves between the blanks and the traditional full graphic boards. If they do it right, they may not have to share that niche with anybody else. I haven’t talked to anybody at Powell, and I obviously haven’t seen their financial statements. But I imagine that the cost, volume and margin numbers are pretty compelling.
 
It’s not that Powell doesn’t want to “support the industry.”   But since blanks aren’t going to go away, Powell figures they can support the industry better if they take advantage of the opportunity the evolving market presents. They sure as hell won’t support the industry if they are financially flat on their back because they stood on principal and ignored industry change. If Powell hadn’t done it, somebody else would have. 
 
Don’t forget your principals. By all means support the industry (you might start by joining IASC if you haven’t). But don’t let emotional resistance to change you don’t like prevent you from making good business decisions. In working with companies in financial distress over a period of 10 plus years, I found that they all (not some, not most- all) got into trouble because of denial and perseverance during a period of change. Skateboarding is going through some changes. You change with it.

 

 

Specialty Snowboard Shops and the Industry Consolidation; Who Are They and What’s Happening to Them?

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Over the last month, I’ve stopped by eight or ten snowboard retailers in the Northwest. I talked to the owner, manager, or whoever was around and not too busy to talk with me. The number of stores I went in probably isn’t large enough to be statistically significant, the stores were picked based on my personal biases, and I didn’t ask the same questions every where. I told them I wrote for Transworld Biz, so they probably thought they had to humor me rather than throwing me out when they found out I wanted to waste their time and not buy anything.

I had three goals:
 
·         To try and reach a definition of a specialty snowboard shop.
 
·         To find out what the snowboard business has been like for retailers so far this season (I’m writing this in early December).
 
·         To hear from retailers how the industry consolidation was affecting them.
 
Here’s what I think I learned and some conjecture on what it means for the industry.
 
An Attempted Definition
 
We all know one when we see it, but defining the specialty snowboard shop isn’t easy. The word “shop” is important. REI is a specialty store, but it’s not a shop. The consumer also looks at a retailer differently than we who are in the business do. Zumiez’s may look like a specialty shop to some consumers, but with 143 stores, it’s business issues and competitive strategies are a lot different from the sole proprietor with one storefront.
 
Okay, now we’re getting somewhere. A specialty snowboard shop typically has one location, though I guess it could still qualify with a couple. I’d say it occupies something like 2, 000 square feet, though there’s a wide variation in that number. Fifty to seventy five percent of its total annual sales are snowboard related. It usually also sells skate boards and related products. Shoes and surf products are other common lines that are used to round out its offerings and improve summer cash flow.
 
SIDEBAR
 
Street Shoes
 
Everybody is carrying them and everybody is making them. New brands seem to pop up all the time. Distribution is starting to get screwed up and discounts are becoming more and more prevalent. There are no barriers to entry, and no fundamental differences among many shoes except for cosmetics. Differentiating a brand is getting harder. Does this sound familiar to anybody besides me? 
 
END OF SIDEBAR 
 
It’s highly seasonal (I bet you’re all stunned to learn that) and there’s a greater or lesser dependence on supplier financing to manage inventory and seasonality. It’s not located in high rent retail space at the mall. It depends on customer service and a carefully calculated reputation among its clientele to make it a shop people trust and are willing to go out of their way to get to.
 
The owner is running the place or, at the very least, is around an awful lot. Snowboarding is important to their life style. Their customer base, and what they have to do to succeed, is changing as snowboarding gets mainstreamed. If you’re a traditional “core” shop, you may be missing out on growth opportunities that result from the homogenization of the market, because a declining percentage of the total market is the traditional core.
 
So Far This Season
 
At least one thing hasn’t changed in this business- product still arrives late. Nobody told me about boards being late (maybe nobody cares?) but I heard stories about boots, bindings and outerwear. But there’s a difference from previous years. It use to be that if it came in, the specialty shops got it first. I’m getting the impression that the specialty chains with their large orders and resulting leverage with the suppliers are being given some priority. This is another confirmation of how the market is changing.
 
When asked what boards were selling, Burton was named everywhere it was carried and nobody else got consistent mention. The racks were stocked with the usual brands. Literally nowhere, except occasionally on the closeout racks, did I see any boards from any really small brands. At least in the Northwest, literally none (zero, zip, nada) of the small brands that appeared in the feeding frenzy seem to have survived. 
 
The closeout racks weren’t as stocked as I had expected. The smallest number of closeout boards I saw was six. I’d estimate the largest was around thirty. I didn’t get to peek in the back rooms, but it seems like old product (not just boards) was more or less under control in the shops I visited.
 
Boots and bindings are selling well, and clothing seems to be doing better than anything else is. Retailer enthusiasm is directly proportional to gross profit margins. With boards it’s, well, lousy coming in at around thirty to thirty five percent. Boots and bindings are better, and outerwear is king both in terms of sales and margins. The demise of certain clothing companies coupled with selected late delivery by others seems to have balanced supply and demand pretty well, and clothing is moving at keystone.
 
 Retailers are getting fewer calls than they were at this time last year offering them this year’s product at closeout. I heard a number of comments about certain brands already being sold out of product, especially the high-end stuff.
 
More than ever, the shops have to be inviting to boarders’ parents, and prepared to deal with ignorance of the sport and the whole culture. One owner had to stop talking with me to help somebody’s mother pick out a beanie. She wanted to know if it was a snowboarding or skateboarding beanie. He explained it could be used for either, sold it to her with a smile, and continued our conversation.  
 
SIDEBAR
 
Calculating Gross Margin
 
Let’s say you bought a board for $225 and sold it for $346. You’ve earned a thirty five percent margin. Not great but what do you expect for a board? You’re happier if you remembered to take into account your discount and terms when figuring your per item profitability. Reduce your item cost by your volume discount. That’s easy. Now figure out how much money your supplier is lending you at zero interest and what your bank would charge you if you had to borrow that money. This isn’t strictly part of your margin calculation, but it’s an “avoided cost” you should calculate and consider in figuring out what an acceptable margin is.
 
END OF SIDEBAR
 
Impact of Consolidation
 
There are no surprises here. Retailer leverage with suppliers has grown as witnessed by increased terms, better discounts and lower prices. However, as noted above some of that leverage has migrated from the specialty shops to the specialty retail chains because of the sheer size of their orders.
 
Many fewer brands are being carried. There are fewer to carry, and a retailer doesn’t have to be patient with any brand that doesn’t offer product, prices and programs that he doesn’t like. One retailer told me about dropping a brand because they didn’t feel like they saw the rep often enough. 
 
Especially in boards, margins are tougher to hold. This is the result of over supply, and a more sophisticated consumer who has a lot more information and choices and, because she has been overwhelmed by brand claims and counter claims, is less likely to be swayed by advertising.
 
One retailer who also sells skis and other sporting goods equipment but has a separate snowboard shop also pointed out how the relatively small size of the snowboard industry impacts his margins. “Look,” he said, I sell 700 pair of Rossignol skis a year. I sell 400 snowboards total from five brands. Which supplier do you think gives me the best prices and where do you think I earn the higher margin?”
 
A specialty snowboard retailer, then, if they are facing declining margins, has to sell more product and invest more working capital in the business to make the same profit. The implication is that maybe they need to expand their customer base.
 
Which they can probably do. My perception is that the mainstreaming of the snowboard business also means the mainstreaming of the snowboard specialty store. The hard core part of the market is declining as a percent of total business and the retailer can’t ignore that. The fact is that a grungy store with lousy customer service and stuff lying around isn’t going to appeal to what will be, if it isn’t already, the largest part of the market.
 
Successful snowboard specialty shops seem to be entering the mainstream right along with the rest of the industry. No surprise- they’re going where the customers are. If they’ve lost some margin to a more discriminating, less excitable consumer, they’ve gained terms, service, and predictability from a stabilizing, though far from stable, supplier base. Now if only they could have an accurate weather forecast.

 

 

Snowboard Industry Evolution; Is It the Survival of the Fattest?

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The snowboard industry is changing so quickly that I find myself looking back at articles that haven’t been published yet and wondering if I’ll agree with what I wrote by the time it’s in print. When Adidas buys Salomon, Quicksilver buys Mervin, Elan talks about putting its own name on a board, and Nike makes a deal for hard goods with DNR, last month’s immortal truth can become this month’s fatuous blather faster than you can say “Isn’t Animal cute!”

Valid business principals don’t change. But the arena in which you have to apply those principals is changing rapidly with growth, new players, and the challenges of consolidation. In a strategic sense, what are these changes, why are they happening and what are your choices in dealing with them?
The first time Elan, to pick a convenient example, put their name on a snowboard and it didn’t sell well we all smiled and said, “They don’t get it.”   And they didn’t. It wasn’t just about sliding down the mountain, but about lifestyle and attitude as well. You could make a good product but if you weren’t connected to the culture it wasn’t going to sell.
That at least hasn’t changed. It’s still about lifestyle marketing and we can hang our hats on it. But as the sport has grown and its energy become diffused, the lifestyle it represents is being interpreted and caricatured into a mass-market phenomenon. Witness Fila’s two page outerwear ad in the November, 1997 issue of Freeze with the punch line “BE CORE in two inch letters.
Nike, Solomon, Fila, etc. are going to show us what lifestyle marketing is all about by going after and attempting to tie together the pieces of that market in a way few companies in the snowboard industry can match. The ski business has finally remembered its roots, and is trying to regain some its previous energy and focus by reintroducing the youth market to skiing, recreating their own core market.
The big players aren’t going to dominate the core snowboard market (The core market consists of enthusiasts for whom participation in the activity of snowboarding is an integral and validating part of their lifestyle and self image.). But it won’t matter. They will try, and to some extent succeed in redefining and expanding “core.” Fila wants you to believe that if you “Buy Fila Skiwear” you’ll “BE CORE.”
 Nike’s sales alone, remember, are something more than 10 times those of the entire snowboard industry at wholesale. The traditional industry’s combined marketing and promotional budget could probably be doubled if we just had the cash from the experiments and false starts Nike probably made and is making in figuring out what to do with, to, and about snowboarding.
The second strategic change, then, is that we’ve got the attention of the big boys. The “they don’t get it” barrier to entry is diminishing because the market has gotten so much bigger. It’s now on the radar screen and worth a few missteps to decipher. And if they can’t decipher it, no problem; they’ll change it.
The third strategic change is that the borders of what is the snowboard business and what is not are getting less distinctive. As ski companies start marketing to the youth market, big companies try to grab a piece of and redefine the snowboarding vibe, and resorts have accepted (become dependent on?) snowboarding, the business we’re in and the customer we’re after is less clear than it use to be. Whether that’s good or bad depends on what you do with it.
Get yourself a little perspective. The March-April 1997 issue of The Harvard Business Review has an article by George S. Day called “Strategies for Surviving a Shakeout.”   I spoke with Professor Day, who has basically never heard of snowboarding. But if you changed a few words, his article could be about our industry cycle (damn-why didn’t I think of that sooner). I described our industry’s circumstances and the only thing that surprised him was the speed with which the consolidation was occurring. Somehow it wasn’t very comforting to learn that we were exceptional only in that way.
The good news is that though the sport will inevitably get homogenized, it will also grow and be legitimized to a whole new group of participants. The uncertainty is in how existing companies will participate in that growth. The newcomers to snowboarding won’t be completely successful in the traditional core market. Nobody can please all of the people all of the time, and it is exactly these inevitable inefficiencies in larger companies that result in the market niches where smaller players can thrive.
As the large players change the market, who are the new snowboarders going to be? To what extent will they care about the values of the core market? Can the core market grow and still be a core market? If it doesn’t grow, what are the growth prospects for existing companies who have positioned their brands to appeal to that market?
Traditional business strategy suggests that snowboard companies have two choices. They either can get big, or they can attempt to dominate a niche. Dominating a niche implies reduced growth prospects. Getting big in the snowboard industry, where big implies an ability to compete with the very large players, is probably unrealistic for many snowboard companies. The solution, if you’re unwilling to accept a niche position, even a profitable one, is growing in product areas related to snowboarding. I am anticipating, as a result, that snowboard companies will focus on making acquisitions in related action sports industries or will end up as subsidiaries or divisions of larger companies. There will, of course, be the exceptions that are satisfied with and can defend a profitable niche.
But how many niches are there? The one everybody has seemed to focus on are “high end boards to specialty shops.”   Others may be in leading edge technology and in image (Mervin?).
Don’t despair; there’s room for more than one company in a niche. But there’s not room for 300 and that’s one fundamental reason so many companies have fallen by the wayside. The competition to claim a piece of the most obvious and attractive market niches has been, and continues to be, intense.
I’m afraid that snowboarding is a bit of a flea on an elephant. The elephant is going to go where it wants and the flea can only ride along, get a tasty meal, and try not to be in the wrong place when the elephant roles in the dust. But fleas always get enough to eat, breed like crazy, are notoriously tough to kill, and can be really annoying to their host. In fact, the reason the elephant roles in the dust is to try and get rid of them.
But he never does.