The Financial Impact of Consolidation; Why Is It So Hard on Smaller Companies?

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It’s conventional wisdom that smaller companies are having an especially tough time meeting their financial needs, or even surviving, in the snowboard industry shakeout. It’s so conventional it’s taken for granted; even chanted like a mantra at times.

And it’s true. But why exactly? What are the specific changes in the financial operating environment of smaller companies that’s made life so difficult for them?
 
It’s 1993. The glory days when a snowboard company could sell all the decks it could get at full price if they could only find a competent manufacturer who would deliver on time (well, at least not too late) a quality (okay, reasonably decent) product. The mythical Burp Snowboard Company is on a role. The company did US$4 million in sales this year and its income statement looks like this for the 12 months ending 31 December 1993:
 
Net Sales                                  $4,000,000
Cost of Goods Sold                  $2,400,000
Gross Profit                              $1,600,000
 
Expenses:
Sales and Marketing                  $    400,000
Commissions                            $    280,000
General and Administrative        $    500,000
Interest and Miscellaneous         $    100,000
Total Expenses:                                    $ 1,280,000
 
Pretax Profit                             $    320,000
 
In 1993, snowboarding is a nice clean business. The balance sheet at the same date is a thing of beauty. There’s cash in the bank. Receivables are pretty low because a big chunk of sales were COD and terms, when offered, didn’t extend past 60 days. Product is flying off the retailers’ shelves, so retailers have paid you as agreed and bad debts are minimal.
 
Inventory? Not much more than what you think you need for warranty and some stickers and T-shirts. If you’re lucky, some samples for next season have already arrived.
 
Cash flow wasn’t great at the beginning of the season. But half of sales are to Japan and they paid for at least half their $1,200,000 order in advance. The rest showed up in the company’s bank account a few days after shipment. Your creditors (excluding some of your suppliers) are giving you terms of 30 to 60 days and retailers are paying you before you have to pay them. Snowboarding is so hot that raising a little money from some wealthy friends of friends was pretty easy. That and the money from Japan allowed you fund your operating expenses from January through July and to make required supplier payments.
 
Burp’s employees and you, the owner, are all thrilled to be in the snowboard business and are working your asses off for not too much money. Customer service, sales management and warranty are all pretty minimal expenses. Retailers and customers are just happy to get product and aren’t demanding much in return. You increased your prices 10% over last year and nobody so much as raised an eyebrow.
 
Ain’t life grand?
 
Fast forward to 31 December 1996.   Who knows what happened to Burp, but the New Guy snowboard company has also done US$4 million in the calendar year that has just ended. Their income statement looks like this:
 
Net Sales                                  $4,000,000
Cost of Goods Sold                  $2,720,000
Gross Profit                              $1,280,000
 
Expenses:
Sales and Marketing                  $    400,000
Commissions                            $    280,000
General and Administrative        $    500,000
Interest and Miscellaneous         $    100,000
Total Expenses:                                    $ 1,280,000
 
Pretax Profit                             $               0
 
The only change shown above is that the gross profit margin has been reduced by 8 percent from 40 to 32, reflecting competitive pressures and the resulting product pricing. In fact, as discussed below, you can also expect some increases in operating expenses.
 
Your balance sheet has changed from a thing of beauty to a nightmare. Cash is kind of scarce. Inventory isn’t. You’ve got a bunch of it left and it’s worth less by the day. If you sell it at all, you’ll be lucky to get your cost out of it. This is the result of order cancellations and over supply that has allowed retailers to buy product in season at great discounts (great for them anyway).
 
Your receivables look about as good as your inventory. Retailers have demanded terms with the result that, as of 31 December, a bunch of your receivables aren’t even due yet. Those that are due aren’t exactly coming in right on time, and some significant bad debt seems inevitable. Unless you’ve built up a hell of a bad debt reserve over the last couple of years, your pretax profit of $0.00 is going to be a loss if only because of collection problems.
 
Japanese orders were only a quarter of your total sales this year. The market there, and in the rest of the world, is moving towards more recognized and reliable brands from larger companies. There was no cash up front from the Japanese distributor and you felt fortunate to receive a letter of credit that got you paid within a week or two of shipment.
 
You had to sell more product units to achieve the same net sales due to price competition and as a result had to finance an additional $320,000 in cost of goods sold. Because of collection problems, you have to finance it for longer. Your suppliers, feeling some of the same competitive pressures you are feeling, helped out some by offering some better terms, but the net result of higher cost of goods sold and slower collections is more interest expense.
 
Administrative and selling costs have increased as retailers have demanded better warranty and customer service and reliable, timely delivery. You had to add a customer service person, offer point of purchase displays, and upgrade your computer hardware and software. You had to front your reps some more money so they could be every where they needed to be and look good being there. Shipping expenses increased as you worked hard to make sure everything got to the retailers on time.
 
You can’t just be an order taker anymore. Sales have to be earned and that means time and expense.
 
All these changes didn’t catch you completely by surprise. In order to adjust to them, you actually reduced your sales and marketing expenses by 25% during the season. Unfortunately, you did it at exactly the time you needed to spend more to establish your brand name. Your move made good tactical, short-term sense, but was a strategic error that will only make things more difficult in the future.
 
The net affect of all these changes, then, leaves you with an income statement for 1996 that probably looks something like what’s shown below.
 
Net Sales                                  $3,850,000
Cost of Goods Sold                  $2,720,000
Gross Profit                              $1,130,000
 
Expenses:
Sales and Marketing                  $    300,000
Commissions                            $    269,500
General and Administrative        $    600,000
Interest and Miscellaneous         $    150,000
Total Expenses:                                    $ 1,319,000
 
Pretax Profit (Loss)                   $(   189,000)
 
Not a pretty picture. I’ve assumed a five percent bad debt on the non-Japanese part of sales. Your cost of goods doesn’t decline because you don’t typically get that product back. Sales and marketing expenses are reduced by $100,000 though you really ought to be increasing them. Commissions are down a little to the extent net sales have declined. General and administrative expenses are up $100,000 to reflect the increased costs of doing business and an extra $50,000 in interest expense has been added.
 
A company similar to one that made $320,000 in 1993 has lost $189,000 in 1996. That’s a decline of 159 percent. Cash flow is critical as well and investors who were so accommodating in 1993 are reluctant to provide any additional financing in 1997 because they can’t see that the risk they would be taking is justified by the potential return. Prospects for orders for the 1997-98 season look bleak because retailers are turning to larger, more established suppliers.
 
What did the management of New Guy do wrong? Operationally, nothing. This is the result they would have achieved, and the position they would be in, if they did literally everything right. Their problem is that they didn’t have a well functioning crystal ball. They didn’t look into the future and see that industry maturity was inevitable and would require either that their company achieve critical mass before the consolidation began or have a distinctive competitive advantage.
 
It’s hard to be too tough on them for that, since most of our crystal balls don’t work to perfection either.
 
The industry shakeout isn’t going to reward only operating well. Of course you have to do that, but success under the new market conditions will ultimately depend on the strength of your balance sheet and having a clear competitive advantage and market position.

 

 

Now What Do We Do? Living With the Industry’s Success

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I guess you can start by congratulating yourself. Though the snowboarding industry is still relatively small ($800 million at wholesale?) it’s continuing to grow at a rate most industries can only dream of and is clearly here to stay. You’ve been a part of that.

 
But now, you are face to face with the results of your own success. The consolidation we knew would eventually come is here. Three years ago, it was an intellectual concern for the future. Last year we could see it happening, but were hopeful it would be gradual and, therefore, manageable. This year, in the wake of the trade show season, it’s a lot like a cow pie dropping on an ant hill; sudden, stinky and overwhelming.
 
I couldn’t back this up statistically, but my travels and conversations tell me that a lot of companies lost money last year and are poorly positioned to carry themselves through another season. I’d guesstimate that retailers typically committed no more than half of their open to buy for the season and are expecting to rely on closeout product available during the season. Brands, including a couple of the larger ones, have been disappointed by their preseason orders. I view being positioned to do as much business in units as you did last year as a big success.   I suspect that quite a few smaller brands (hard and soft goods) are past disappointed and approaching scared.
 
There are a lot of deals being discussed among companies. Buyers want to give themselves the critical mass and product mix they think they need to be a successful industry player. They also see it as a time to pick up good brands cheap. Most sellers are making deals out of necessity. Ride has never made a secret of the fact that selected strategic acquisitions were part of its plan. The Silence board brand was acquired by Straight Line Manufacturing. I think you can count on some more announcements over the next couple of months. 
 
Everybody that’s having a tough time isn’t going out of business. But some are. I’ve talked to too many companies who’s strategy for surviving the consolidation is to “hunker down until it’s over.” The problem with that particular strategy is that they’ll have to hunker down a hell of a long time; by definition a consolidation isn’t over until smaller players without clearly defined market niches are gone.
 
It’s also not appropriate to assume that “getting through” one more year will be enough. Over capacity, which I see as the primary cause of the consolidation, isn’t going to go away that quickly. As soon as I get my crystal ball working again, I’ll let you know exactly how long it will take.
 
Well, I hope you enjoyed that little dose of doom and despair. Now let’s talk about what you can do about it.
 
The funny thing is that when times get hard and things get chaotic, there are always opportunities if you can just raise yourself out of the paralysis and myopia that is always the result of short term pressures. I’ve seen it time after time with companies in difficult transitions and been the victim of it myself. The effort, time and focus that it takes just to manage from day to day when money is tight takes most of your energy. You are so busy hiking through the forest that you never find the perspective to climb one of the trees and see if you’re going the right way, or are even in the right forest.
 
The good news is that the tougher things get, the less you have to lose my trying. You’re probably better off dying in a fall from the top of a tree than starving to death hiking through the wrong forest.
 
We all come to business with a clear sense of what “makes sense.” Forget it. Pull out all the apparently crazy ideas you’ve rejected out of hand and look them over. Put a sock in the mouth of the little voice in your head that says “We can’t do that.”
 
It’s time for absolute openness and absolute honesty with the people you work with. Listen, have respect for everybody’s crazy ideas and don’t reject anything out of hand. Stop worrying about people finding out things ain’t great right now. They already know it. Chances are they will respect you for your honesty and for dealing with it. Get the all the big uglies on the table so you can deal with them. The companies I have least confidence in are the ones who tell me everything is going great (“Oh yeah, we’re booking lots of orders!”) when I know they aren’t.
 
·         Cut that expense you didn’t think you could do without. What have you got to lose?
 
·         Ask that supplier for better terms and lower prices. All they can say is no.
 
·         Get rid of that old inventory at whatever price. Take the income statement hit and generate some cash. It’s not going to be worth more later.
 
·         Renegotiate your lease. Tell your landlord you need the rent to come down by 15% if he wants to have a viable tenant. Get him to give half of your security deposit back. 
 
·         Let people go if you have to, even if they are relatives and friends of long standing. How else are you going to preserve the company and jobs of the remaining employees (including yours).
 
·         Cut everybody’s salary 10%. And never pay payroll if you can’t pay the associated payroll taxes. Those taxes are a personal obligation.
 
·         Tell your creditors you can’t pay them now. Explain what happened and what steps you are taking to change things. Be honest with them. Keep them informed. Ask them for a discount and make a deal.
 
·         Get rid of the 800 number. Call the phone company and tell them you want a better rate per minute. You’ll probably get one. I did.
 
·         Stop making nice to people who owe you money and haven’t paid.
 
·         Raise your prices. Now. If you can’t survive with in your current financial circumstances anyway, what do you have to lose?
 
If you’re shocked by that last one, good. I want you to be. Maybe it’s not the right step for you. But there are a dozen other equally crazy sounding ones that are. All you have to do is think of them.
 
All these tactical steps will help as long as they are part of a feasible, overall plan. Don’t tell me it’s impossible. I’ve implemented all the steps above at one company or another. Remember that the power of enhancing revenue or reducing costs is in how quickly you do it. $2,000 a month becomes $24,000 over the period of a year.
 
So much for tactics. Unless you’ve got a workable strategy none of the above matters. Fundamentally, there has to be a reason why you are going to be able to successfully compete. If you can’t specifically define who your customers are and why they will buy your product instead of a competitor’s, you don’t pass go and you don’t collect $200 dollars. If you can’t differentiate your product and your company, you have a limited chance of being a survivor.
 
Ask 200 customers why they bought your product or why they came into your store. Listen to them carefully. Tabulate the responses and looks for trends and consistencies. Visit 20 other stores who are your customers or competitors. Have a check list of things you want to ask or note. What are they doing better or worse than you? How are they displaying your product?
 
Developing an effective strategy doesn’t result from taking everybody to a nice hotel for three days of meetings. It comes from a tedious process of collecting and studying meaningful information. Strategic planning is the process of looking at the same information your competitor can get from a different perspective and making better decisions as a result.
 
So you think you have identified a competitive advantage and have a strategy to carry out. Is it worth the effort?
 
Envision your store or company as you want it to be three years from now. What will it’s sales be? What will its customers think about it? How hard will you be working and what you will be earning? How much risk will you be taking? Ask the questions that are relevant to your circumstances.
 
Now look where you are right now. What resources will you need to get where you want to be? What are the risks? This is part of a much more detailed process but, in general, does it look like what you have to go through to get where you want to be is worth the time, risk and effort? Can you get the resources you need? If not, why are you considering doing it?
 
Nimble, aggressive companies that can identify opportunities, have a competitive advantage they understand, and have made an explicit decision about what they want to achieve and how they are going to get there will be the survivors. Don’t starve marching around the wrong forest. Climb the tallest tree and see which way to go even if you risk being killed in a fall.

 

 

US Market Conditions and the Globalization of Snowboarding

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Last year when somebody said to me “Write about US market conditions” it was easy. You could think of the US, Japan and Europe as distinct markets and approach the trends in each accordingly. But overcapacity and the slowing of growth have made that harder, and the interdependence of the three markets has become much more obvious.

Let’s at least start in the US at the Transworld industry conference in Vail. We’ll see that the issues on everybody’s mind reflected what’s happening in the US market, but that those conditions are at least partly the result of developments in the rest of the world.          
 
The 7th Annual Transworld Snowboarding Industry Conference in Vail, Colorado December 11th to 14th reflected US industry and market conditions perfectly. The familiar companies were all represented. But the number of total participants dropped to around 500 from closer to 600 last year with some smaller companies apparently not surviving. The new CEO’s of Morrow, Ride and Sims (David Calapp, Bob Hall, and Jim Weber) attended their first industry conference, highlighting a trend towards increasing professionalization of management.
 
There were attendees from a handful of record companies, some ski resorts and a couple of winter sports trade associations. They were all there to learn about snowboarding and, hopefully to help snowboarding with its inevitable move into the mainstream.
 
Presentations and seminars were better attended and the attitude was more businesslike than last year. I’m sure this had something to do with the fact that Transworld decided this year not to have open bars in the back of the rooms where the presentations were taking place. But it also reflected an emerging realization that industry over supply and some slowing of growth were making this a tougher market for everybody and creating survival issues for some.
 
Europe was represented by Harry Gunz from Rad Air and Charly Messmer from Generics and Blax. Salomon Snowboards had five representatives in addition to a contingent of four from Bonfire. Charly got some publicity for Generics and Blax the hard way, by hitting a rock in deep powder on day three. His board stopped, but he didn’t and the result was one broken ankle and one chipped one. No, of course you weren’t out of bounds Charly.
 
When last seen he was lying in bed smiling and seemingly unconcerned about the whole thing. I don’t think the pain medication had worn off. Anyway, it’s the time of year when he should be working, not riding.
 
The conditions in Japan were lurking in the back of everybody’s mind. Oversupply there (an estimated 300 to 350 thousand boards) has made it impossible to look at the three major geographical markets independently of each other. Many US companies had relied on cash deposit from Japan and/or site letters of credit to fund their production. It was clear those days are over for most companies. US retailer orders have to be expected to decline to the extent they represented gray market product shipped to Japan. Airwalk, Sims and probably others I don’t know about have seen some of their product show up in the retail warehouse giant Price/Costco and are moving aggressively to plug the leaks that allowed it to get there in the first place.
 
Good early season snow conditions in most of the US and mid November opening dates at many resorts are no doubt benefiting sales. My perception is that Burton and Mervyn Manufacturing (Gnu/Lib Tech) are overall the best positioned brands. Morrow, Ride and Sims are all dealing with the results of oversupply to the Japanese market and with management and organizational changes.
 
David Calapp joined Morrow as Chief Executive Officer only in August of this year and Dennis Shelton resigned shortly thereafter. David is experienced in sporting goods, but not in snowboarding. The brand is strong in the US but faces challenges in Europe and Japan. The recent announcement (during the Vail conference) that the company would not achieve its earnings projections for the year caused the stock to fall 27% in one day. Morrow’s response was to announce a buyback of 5% of its stock on the open market. 
 
Jim Weber, at Sims, has been in his new position almost a year. Like Calapp, he came to the job with sporting goods, but not snowboarding experience. His first major challenge was to prepare Sims to delivery a quality product on time. He believes the company is prepared to accomplish that. The second was to gain control of the brand. The lawsuit against DNR is being settled in Sims’ favor, with the company now controlling its distribution worldwide.
 
Bob Hall joined Ride as Chief Executive in August, 1996 with a strong background in winter sports including skiing and consumer goods. His immediate challenges were to rebuild the management team and restructure a company that suffered from very rapid growth and losses of key management people in many areas. The restructuring he accomplished quickly. Rebuilding of the management team is an ongoing process.
 
The major asset of most companies in the snowboarding business is their brand name. Many people, including myself, are of the opinion that a correct business strategy in the current environment is to protect that brand name through better control of distribution even though some sales volume will be sacrificed. Hopefully, the company will be compensated by higher gross margins on a product that is harder to find. As public companies, Ride and Morrow will have a harder time than other companies pursuing this strategy with shareholders looking for growth.
 
But don’t despair if you are a shareholder. The issue of which companies will be among the leading brands in the US is largely decided. They may fight for position against each other, but they will be here. It’s the smaller companies who have been dependent on Japan, who’s product lines are incomplete, and that are under financed that may have survival issues to deal with.
 
Ski Industry America’s retail audit numbers for the period from August through October 1996 seem to confirm these conclusions. They report that specialty store snowboard sales were up only 12% during the period by volume. In dollars, the increase was only 1%, indicating that average retail price of a board is continuing to drop. That average price was $294.00 during this period. 
 
What we see in these statistics seems to be confirmed by my discussions with retailers. Boards are harder and harder to sell at full margin. There is too much supply out there, and a more knowledgeable consumer has figured out that there isn’t that much difference among the major brands. I’ve heard of brands selling boards in quantity to close them out at $85 a board or even a little less. The result is that price has become a key factor in selling boards in the US.
 
As I’ve indicated, it’s become increasingly difficult to separate conditions in one market from those in another. That’s made very clear by an excellent report prepared by Robert C. Marvin and C. Heath Glennon of The Seidler Companies in Los Angeles. It’s called The Snowboard Industry 1996/97. You can call for your own copy at (213)-624-4232. Since I couldn’t say it any better than they do, let me quote them at some length.
 
“We estimate that the number of snowboards shipped (excluding OEM boards) to retailers by the five major manufacturers will increase about 26% from 1995/96 to 1996/97 and that the top five will account for about 45% of total boards shipped worldwide as compared to 35% in 1995/96. This should mean trouble for many of the other 200+ snowboard companies.”
 
“Unfortunately, it does not appear that the excess inventory problem will end with the 1996/97 season. We believe snowboard production for the 1996/97 season will again approach 1.9 million units. Add the 425,000 units of 1995/96 inventory that are still around and there will be about 2.3 million snowboards available for sale in 1996/97. Even if demand grows 25% to 1.5 million units, there will be 800,000 units left over in March of 1997.”
 
The report goes on to produce a similar analysis of boots and bindings, and concludes that there are excess inventory problems in both these categories and that “…snowboard boot inventories at retail were an even bigger problem than board and binding inventories.”
 
My own analysis suggests that board production this year probably exceeded 1.9 million and that production capacity may be close to 3.0 million boards.
 
This article started in Vail, Colorado but ends with a focus on snowboarding as a maturing, global business.  The markets can’t be viewed in isolation of each other any more. They never could, I suppose, but the illusion that they were separate was fostered, to some extent, by a demand that exceeded supply. Obviously, that period is over. Welcome to the world snowboard market. 

 

 

Show Trends and the Business of Snowboarding; “It’s Deja Vu All Over Again!”

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In 1903, 57 companies were started to make cars. 32 left the business. I recently heard it on National Public Radio, so it must be true. Snowboarding, of course, is going to be different.

In your dreams.
 
They say that when you die, your finger nails and hair keep growing for about three weeks. In Las Vegas I saw some companies who’s personal grooming was clearly not part of a fashion statement they were making (except for Gnu/Libtech of course). They sat in their booths waiting for wide eyed buyers desperate for any kind of snowboard or snowboard product to place orders regardless of price, quality, or line completeness.
 
Four, maybe three years ago, it might have worked. It did work. This year jaded buyers overwhelmed by the number of snowboard brands and companies scurried back to the familiar brands they knew they could count on for delivery, quality, terms, warranty, service and, by the way, sell through.
 
It’s 1903 all over again.
 
I asked the same set of questions to perhaps 25 hard and soft good companies. I focused on relative newcomers. The conversations typically went something like this.
 
“If you’re successful, what will your company look like in three years?”
Long pause and a smile followed by some variation on “We’ll be a lot bigger and making money.”
 
“So you’re not making any money yet? Are you paying yourselves salaries?
Longer pause and less of a smile followed by some variation on “Well, you know how it is.”
 
“How much working capital do you need to achieve your sales goals this year?”
“We’re not exactly sure yet.”
 
“Where are you going to get it?”
“We’re talking to a lot of people.”
 
“Who are your competitors and how are you differentiating yourself from them?
Inevitable answer: “We’re closer to the market and really know what’s up.”
 
“Are you really prepared to risk loosing everything you have?”
At this point they were often looking around hoping somebody else would come into the booth for them to talk to. If there was ever a messenger who needed shooting, it was me. I could see it was time to finish up, so I’d summarize by saying, “Let me see if I understand this. You aren’t really sure what your goals are, have no source of capital, no clear competitive strategy, could make more money working at McDonalds, and are risking everything you have. Why are you doing this?”
 
Finally a question they could answer. Their face lights up. “We love snowboarding!”
 
Obviously, most companies didn’t fit this extreme profile, but some came close. Almost everybody had at least one of the issues I referred to above and, to everybody’s surprise I’m sure, the most common was lack of financing.
 
There are quite a few companies with well known brand names that are much smaller than everybody thinks. They are well managed and established in their market niches. They know what they need to do, but don’t have the bucks to do it. The sad thing is that in this competitive environment, where just surviving requires an aggressive marketing posture, investors will not be able to find the returns they require and capital may not be available.
 
It’s hard to make good business decisions when you are driven by a capital shortage. More than one company had an opportunity to sell a lot of product to a chain. They need the sales volume and cash flow, but can’t risk devaluing the brand and alienating their specialty customers. If the capital requirement is critical enough, they may be forced to make a bad marketing decision for short term survival.
 
The kind of irrational competition described above is one indication of the consolidating snowboard market. Other indications I saw at the shows include:
 
1)         People trying to create market niches as a way of differentiating their product by a) having separate lines for specialty and chain stores, b) doing graphics specific to a particular region of the country and c) trying to make minor design or construction changes seem significant.
 
2)         The product is becoming more important than the booth and its presentation. As what it takes to succeed in this business hits home, price, quality, service and delivery are competing with glitz and hype in the selling equation.
 
3)         The first rumbling of price declines were seen, but not as much as I had expected. I attribute that to a shortage of quality, volume manufacturing and fiberglass in the U.S., a week dollar, the presence of a lot of smaller brands that can’t afford to sell at lower prices, and the fact that a lot of the big players aren’t really selling direct yet. If you want a peek at the future, look at the pricing on Nale’s boards (Is that Elan spelled backwards!? Gee, I wish I’d thought of that.) One new brand having its boards made at Elan bemoaned the fact that Nale was selling boards to stores for less than he was buying from Elan. How could he compete?
 
Answer: he can’t, unless he’s very well capitalized and has a well thought out marketing strategy.
 
I guess it’s just this simple. The snowboarding business is changing in predictable ways. Whether you are a retailer, distributor or manufacturer the way you do business is going to change as well. Success means being out ahead of the curve and using these changes to develop a competitive advantage. Living in the past means being buried there. “More of the same” won’t work anymore.

 

 

The Joys of Consolidation; Managing the Transition from Growth to Maturity

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It happened to skate boards and surf boards. Now, it’s the snowboarding industry’s turn.

The transition from a fast growing, hot trend to a mature industry is about more than consolidation to fewer players. It means lower margins, slower growth for many companies and aggressive competition increasingly based on price and service, not to mention savvier consumers who may care less about image and more about price. This transition will happen quicker than in most industries due to a lack of entry barriers (low capital costs, no patented technology) and be accentuated by the financial burden imposed by extreme seasonality.
 
But change produces opportunities whether you’re a retailer or distributor if you have perspective to recognize them and willingness to do things differently. Some companies will refuse to recognize the new circumstances and insist on business as usual. Acting irrationally, they will fight for sales as a temporary survival mechanism — even at the expense of future fiscal viability.
 
Realize you may not be able to count on the fast growth and high gross profit margins the industry has historically enjoyed. Your break-even point will be higher, a larger investment will be required, and payback will be further down the road. Check out Ride’s public offering prospectus and read the six pages of single spaced, small type “risk factors.” And that’s for a company that just completed a year with nearly $6 million in sales and over $400,000 in net income.
 
No matter what end of the business you are in, take a hard, realistic look at your numbers. As your margin goes down, your break-even goes up. Don’t kid yourself into thinking you’re immune from these trends. Where are you going to get the additional working capital? Can you compete? I don’t know who they are, but there are some companies who should be getting out of the business. Actually, they will be getting out. The issue is whether they walk or are carried feet first.
 
Think you can outlive the competition? Here’s a partial survivor’s checklist.
 
If you’re a distributor:
 
·         Sharpen your pencil and look closely at the gross margin of each product. There’s been a tendency to look at the overall margin and let the higher margin products carry the lower ones. Obviously, there are some good marketing reasons to do that, but the competitive environment that is emerging may not allow it. Do you really need all those T-shirt colors and designs?
 
·         If you do find yourself with too much product, write it down and move it fast. There’s never a good time in a seasonal business to get stuck with close-out merchandise but tying up working capital in bad inventory is an even worse idea than usual when an industry is maturing. The longer you kid yourself about what it’s worth, the less you’ll get for it.
 
·         When you do your financial planning, allow three percent of cost of goods sold for uncontrollable things to go wrong. Last season, I cleverly chose to ship a container of boards by train across the country rather than by ocean carrier through the Panama Canal. The goal was to save a week to ten days in shipping time. Great analysis, good plan. Then the freight company called to announce that the container was “lost” in the midwest due to the floods. Three weeks later, it showed up.
 
·         If your product is priced in currencies other than the dollar, hedge. You’re trying to make money in snowboarding, not currency speculation.
 
As a retailer:
 
·         Buy from companies you can count on. Competition is going to be based more on price and service. Deal with companies who provide them. That will often mean larger, better established companies who own the manufacturing plant or have a long term relationship with the manufacturer. A small company with presses in a garage can supply a small number of boards either because their costs are low or because they don’t really know their costs. With growth, it will run into the same cost curve as every other manufacturer, but be on the wrong end of it. Either they will raise their prices or go out of business, leaving you with an interesting warranty problem.
 
·         Give some thought to the relationship your supplier has with the manufacturer. If a manufacturer is making 1,000 boards for one customer and 10,000 for another, which one do you think is going to get the best prices, service and attention? Who is he going to keep happy when something goes wrong?
 
·         Retailers can expect margin pressure as more product is available, the consumer gets smarter, and chains push prices down. The good news is that leverage with suppliers should increase. Use your leverage to build cooperative, rather than confrontational, relationships. If you’re getting your budgeted margin from a supplier, don’t push for an extra point just because some other company offers it. You’ll get it back in service and responsiveness.
 
·         Retailers shouldn’t have a hard time getting product this year, though not always from the company you want. But even with free freight, great terms and a big discount, don’t buy it if you aren’t sure you can sell it.
 
Going into a business because you are excited about it is a good idea. Going into it without adequate capital and with unrealistic expectation of risk and return can get you unexcited real quickly. Fast growth and high margins cover up a variety of business sins. Nobody likes to change, and doing “more of the same” is the usual response. If you expect to be one of the survivors, focus on costs, build your balance sheet, make a profit even at the expense of growth, and actively select a strategy that fits your market position and financial capabilities. Lots of companies, new and established, are going to make it in this industry. But counting on selling more at higher margins may no longer be a viable strategy.