What Does the Data on Our Target Market Say About Your Business Strategy?

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It was a lot of years ago when I first started reminding you not to focus just on your gross margin percentage, but your gross margin dollars as well. Then, in 2009, with the recession in full swing, I got all excited about Gross Margin Return on Inventory Investment (GMRII) after Cary Allington at Action Watch pointed me to the concept.

I discussed it in some presentations and wrote about it. Here’s one of my articles on the subject. It’s held up pretty well.
I liked the GMRII concept because my reading of history is that debt caused recessions (if recession is an adequate word to explain what we’re going through) last a long time. This one, I concluded, was not going to be different from all the others. It seems, unfortunately, that so far I’m right about that.

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The Economy, Value of Brands, and Relationship between Brick and Mortar and Online

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I went to the Snowboard Industry Conference. I had fun. I learned stuff. I talked to people. I drank beer. I made a speech. Uh, I made the speech before I drank the beer just to be clear.

During that speech there were three pieces of information I want to pass on to you. It’s not that the rest of the speech wasn’t worthy of your consideration, but these are the three things from it that I really want you to think about because they apply to the whole industry- not just snowboarding. All have been stolen from other sources to which I give full credit.
The Value of Brand Heritage?
The question mark is intentional. The people at Trendwatching.com create a free, more or less monthly, publication on brands and trends. You should sign up for it. It makes you think. Anyway, in one they sent me a couple of months ago, they said the following:
“The reality for many brands is that the needs and wants of the new consumer often don’t align with the narrative that they’ve labored to build. For rising numbers of consumers, brand heritage and story has become at best irrelevant, and at worst an active barrier: one which prevents brands they might engage with from offering a product or service that’s right for them, today.”
 
I added the red. I think you’d agree with me that it’s a pretty significant statement. I’ve written that some older brands may have the issue of aging out, where they keep their traditional customers (who tend to start buying less as they age) but have trouble attracting new, younger customers. I’ve also said that as distribution expands, you may have trouble attracting customers in that broader distribution because they may know your brand, but not your story.
The issue if you’re a heritage brand is that you need both the existing customers and the new ones. Trendwatching.com talked about heritage brands doing unexpected things that were contrary to what their traditional brand positioning would call for. “Unthinkable” is the word they use. One example I remember is the venerable champagne brand Moet Chandon selling small bottles of their champagne in vending machines.
Conventional branding wisdom would say, “Don’t do that! You’ll confuse your customers and damage your market position.” Heritage brands don’t want to damage their market positions (no kidding) but they do have to change it. Because if all they have is the customers they grew up with, someday they won’t have any customers left.
I may have said a time or two, “The biggest risk is not taking any risk at all,” and that applies here. Follow the Trendwatching.com logic. What I think they are saying is that stepping outside of your brand’s comfort zone and doing some things unexpected and taking some apparently inappropriate actions for your traditional market position has the potential to attract those new customers you have to find. But if done well, it won’t be noticed by your traditional customers. Maybe that’s wrong. Maybe it will be noticed, but they won’t care. The goal is to have the best of both worlds.
I can’t do this justice in 500 words. Here’s the link to the Trendwatching.com report.
Lessons from Walmart
Probably not where you were expecting me to get my inspiration from. Let’s start with a quote from Mr. Gibu Thomas, SVP for Mobile and Digital at Walmart.
“With mobile, we can make a small store feel like a big store and a big store feel like the Internet. We can combine the breadth of online and the immediacy of offline to create an experience that means we can be a one-stop shop for you.”
 
In this interview in the Atlantic, he talks about how online and brick and mortar are being made to work together. Basically, what he says is selling stuff online is fine and dandy.   But what’s a lot more important are mobile influenced offline (brick and mortar) sales. He thinks that by 2016, ecommerce sales will be about $345 billion in the U.S. and that online sales through mobile devices will be 10% of that. But he thinks that mobile influenced offline sales will be (drum roll please) $700 billion. He notes that two years ago, less than 10% of the traffic at Walmart.com came from mobile devices. This last holiday season, it was more than half.
In my presentation, I concluded that how mobile influences brick and mortar sales may be more important than what you sell online. Think about that. Online and mobile doesn’t preclude or replace brick and mortar. It enables it. I’ve mentioned this article before. Go read it if you haven’t already.
One thing I thought about was the impact on specialty retailers. One of the implications is that there won’t be any reason to have a store where one third of the square footage is devoted to back stock. Inventory will move between stores and/or the customer’s home as they demand. The trouble, of course, is that there’s no benefit to be had if you’re just one or two stores. I’m wondering if that isn’t becoming another advantage of larger retailers, making the financial model of core stores more difficult.
Government Numbers
And finally, from the Bureau of Labor Statistics, I want to bring you the unemployment rate for 16-19 year olds as of February: 21.4%. For 20 to 24 year olds, it was “only” 12.7%. And I’ve reviewed a study showing that in 2000 45% of teens age 16-19 had jobs of some sort. At the end of 2011, when the study ended, that number was down to 26%. Perhaps it’s improved since then.
There’s not much you can do about that (well, maybe hire some kids) but clearly many of our target customers have less money to spend than they used to. That exacerbates our already over branded and over retailed situation. As always, the flexible, open minded companies with the strong balance sheets will be the ones who do well. Go read some of the stuff I’ve pointed you to and consider taking some risks.  You might be surprised how well they work out.

 

Billabong and Quiksilver; Two Peas in a Pod

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Billabong’s announcement last week that it was, among other things, conducting a strategic review of SurfStitch and Swell caused me to focus on the similarities of its situation to Quiksilver’s. It also made me realize that most of what has been discussed publically by both companies is what I’ll call mechanical issues. I want to remind you what those are and then move on to the way more important and difficult to manage strategic issue they both face but, understandably, don’t spend a lot of time talking about in public. 

We all know that both Billabong and Quiksilver got into trouble due to some acquisitions they paid too much for, their aggressive forays into retail and their tendency to allow units to operate independently, resulting in an unsustainable cost structure.
 
I think those things would have come back and bit them in the butt even if the economy hadn’t cratered, but the teeth marks wouldn’t have required as many stitches. With their balance sheets out of whack, both had to sell assets, raise expensive capital, change management, cut costs, push for revenue in ways they would (I hope) have preferred not to, rationalize their sourcing and reduce SKUs, consolidate and coordinate design and marketing, and revise and upgrade their information systems.
 
Now, I call those things mechanical. That’s not to suggest they were easy to do, or that exactly what to do was always obvious. But nobody doubted they had to happen (and outside stakeholders didn’t give them a choice anyway). That gives you the refreshing liberty to say, “Let’s get at it!” and start without too much analysis. There was, to use one of my favorite phrases, some low hanging fruit.
 
The process isn’t complete (it’s never really complete- it’s a long term way of thinking), but it’s well underway. Both companies will see significant improvement in their bottom lines as a result.
 
So let’s move on to the hard part. What brands should sell what product to which consumer? I’m sure I could figure out a more erudite way to say that, but why bother. They had to start to address the mechanical stuff before they could really focus on market segmentation (there- that’s a more erudite term) because some of it represented survival issues. It’s hard to care which way you’re rowing when there’s a big hole in the bottom of the boat.
 
Part of the process of keeping the boat floating through the restructuring was to press for sales in places and in ways they didn’t want to do. I assume it helped in the short run- perhaps not so much in the long run. Both companies have some recovering to do from distribution decisions they made while managing those short term survival issues.
 
In the long term, the ONLY THING THAT MATTERS competitively is their ability to figure out the market segmentation thing. The mechanical stuff is necessary but not sufficient. The what product to sell to which customer issue is existential. If they don’t do that well, they’ve got no business or at best a dramatically different business. “Dramatically different” is code for a brand that doesn’t do this well and finds itself milking its market credibility with cheaper product in broader distribution until there’s nothing left.
 
Both companies want to grow the top as well as the bottom line. (What?! Public companies focused on top line growth?!  Shocked! I’m shocked!) If they could, at least for a while, just worry about improving the bottom line (and the balance sheet) their jobs would be a whole lot easier. The mechanical issues, as I so blithely call them, are simpler to manage. And as I’ve written, market segmentation takes care of itself initially though distribution management which builds brand strength for future growth.
 
But you can’t do that for too long. You risk finding yourself stuck in a niche you can’t get out of. For some brands, that wouldn’t necessarily be a bad result. It’s difficult for Quik and Billabong because that market niche might tend to be a predominantly older customer group that has been loyal to the brand for a long time but will inevitably buy less.
 
Their challenge over the longer term is to continue to appeal to their traditional customer groups (if only for the cash flow) while also reaching the younger demographic they have to evolve towards. Not easy.
 
So that’s why I perked right up way back when Launa Inman became Billabong’s CEO and, in her initial presentation of her strategy, talked about the need to figure out what the brands stood for and how the customers and potential customers perceived them. Billabong proceeded to spend a lot of money on that issue. We never heard the results, but why would we? You can tell all your competitors that you’re cutting costs, improving systems, reducing SKUs and consolidating certain function. They’re doing it themselves and are probably wondering why you didn’t get on with it sooner. But I can’t think of any good reason (outside of a brain tumor or psychotic episode) why’d you’d share findings about what customers think of your brands, why they buy them, and how you’re planning to position those brands.
 
Part of that evaluation will determine product direction. It’s fair to say that when you’re trying to keep a company alive, you aren’t likely to take a lot of product risk if only because you can’t afford things that don’t work. But armed with their evaluations of who’s buying what product and why, I would expect to see both companies be more aggressive with product development and introductions. The consolidation of those functions from regional to worldwide should make that easier by making it more cost effective. It’s time to take some risks.         
 
Most of us think it’s important that Billabong and Quik do well because they are positioned to represent the surf industry in the broader market. It seems to be an industry article of faith, practically a mantra, but it has the ring of truth to it.
 
I’m not sure any more what “the surf industry” means. Don’t feel bad surf people. I feel the same way about other segments of action sports and, by the way, am not quite sure what exactly the action sports market is either.
 
But recognize that neither Billabong nor Quik is a pure surf company in the way they were years ago.   The “core” surf market is way too small to support much growth for either company. Anyway, that seahorse left the barn years ago when they both acquired non surf brands that represent significant percentages of total revenue.
 
I will always look at the numbers (I can’t help myself). But the numbers, by the time we see them, only tell you what has already happened. As I try and figure out how Quik and Billabong are going to do, I’ll be looking for clues to their product and market segmentations decisions, because at the end of the day, that’s mostly what’s going to matter. And not, you might consider, just for Quiksilver and Billabong.

 

 

Thoughts from the SIA Show

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So I confess. I’m from Seattle and there was no way in hell I was going to be on a plane Sunday while the Super Bowl was on. I left Saturday. But in my two days wandering the show, I had some thoughts I wanted to share with you. 

There was a bit more of a somber attitude at the show then I’ve ever noticed. Everybody I talked to seemed to feel the same way. I particularly noted that the noise/crowd/enthusiasm difference between snowboarding and the rest of the show wasn’t as I was used to. That doesn’t mean there wasn’t a lot of business being done- my sense is that there was. I’d also note that the “core” (still hate that term) snowboard hard goods brands were interspersed with some large booth from brands I’d label as tangential to snowboarding and the snowboard ghetto, as we’ve come to call it, was more spread out. Perhaps that accounted for it. That’s probably a good thing. It recognizes market realities.
 
There were also business reasons why the mood was different. The apparent ongoing decline in snowboarding, a recovering, but still weak economy,  lack of California and Northwest snow, some negative publicity for snowboarding (deserved or not?) and issues of inventory may have had something to do with it.
 
Which brings me to distribution. Everything always seems to bring me to distribution in this industry. At the risk of oversimplifying (I get to do that because I don’t have to actually run a winter business any more), to make money in winter sports, you have to plan for what you think is an average winter in your market and produce/buy 10% (or 15% or 20%?) less than that. You make/buy only what you think you can sell at full margin during the season.
 
You do not wail and gnash your teeth when you run out of inventory and can’t fill reorders when it dumps late in the season. You just calmly remind the buyer to order more in preseason next year (or tell the customer to come in sooner if you’re a retailer) and thank your lucky starts that your inventory is clean.
 
Because the absolute best way to guarantee you don’t make money in winter sports is to have a bunch of left over inventory you have to close out. Not only do you make little to no money on that inventory, but it might have cost you a full margin sale at some point in the future.
 
That’s a particularly important point when all product is good and there’s no reason to replace it very often (On the plus side that reduces the cost to participate). There are fewer chances to make a sale than there used to be. I talked to a couple of industry types who had been offered free boards by brands and actually turned them down. They just didn’t need them and didn’t want to break in a new setup. Getting a new board for free was too much trouble, which sounds strange when I say it.
 
 My point of view on distribution and making money in this business seemed to be validated when I talked to three established snowboard brands who manage their production and distribution carefully. They’d all had issues with west coast retailers who couldn’t move product because of lack of snow. But the brand’s inventory was clean. So clean that they had trouble filling reorders from places with snow. Their solution, which worked because their inventory was clean, was to take the product from the first retailer and move it to the second.
 
Maybe the no snow retailer didn’t really want to give up the inventory even though they couldn’t pay. They just asked for big discounts to keep it. And maybe the product coming back doesn’t exactly match what the retailer with snow wants. Maybe the opportunity happens too late in the season to pull it off. Maybe some other stuff too. There is definitely friction in the process and some cost.
 
But at least these brands had the potential opportunity to take back some inventory and place it with somebody who could move it at full margin. They weren’t in a fight to be paid with a customer they wanted to keep for next season, and they’d made another customer very happy. Maybe there was some margin given up, but it was a lot less than if you had to close the stuff out.
 
This opportunity only existed because the brand was deliberate and cautious with inventory in the first place.
 
I also had occasion to talk with Jono Zacharias who, last time I updated my Outlook, was SVP for Global Sales at Westlife Distribution (686). He told me, speaking of distribution, something interesting. Apparently their best-selling pieces were the same in Europe, Canada and the U.S. this year. And their dogs- uh, I mean styles that didn’t sell quite so well- were the same in all three geographies.
 
I’m hypothesizing that says something about the internet and social networking. My sense is that wouldn’t have been the case a few years ago. Maybe it’s just a coincidence (it wasn’t true with Japan). If I were Jono, or a sales manager for another brand, I might go back a few years and check that out.
 
First, of course, you have to have the systems to do that. I’ve noted in my various articles all the companies spending money on systems to accumulate, integrate and analyze sales and inventory data. If there is some growing cohesiveness among styles and trends across geographies, then the implications for production, distribution and the numbers of SKUs you need could be significant. Just something to think about.
 
You know what? In spite of our industry’s macro problems, snow sliding is still FUN and SIA’s show does a great job reminding us of that. We’ve got something good to sell. The pace of change is disconcerting, but that usually means opportunity. Let me know if there’s a geographic convergence among your successful products. What can you do with that to run your business just a bit better?   
 
          

 

 

What Happens If (When?) Apparel Prices Rise?

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We sell a lot of apparel. It’s where we, as an industry, make somewhere between a lot to most of our money. We’ve benefited over many years from apparel prices that have risen slowly if at all, and certainly more slowly than inflation. This article demonstrates that. It further tells us that apparel prices have started to rise and that they may rise more in the future. 

The increase is due to rising labor costs in China, and the cost of inputs, especially cotton. What happens if the cost of getting a garment made continues to rise or even does some catching up with general price levels?
 
We’ll do what we can, of course, to keep that from happening. You are all aware of some movement out of China to lower labor cost countries. However, you’ll note in the article how much apparel still comes from China.
 
We’ll try and pass on some price increases to consumers, but that has its limits. Especially in this economy. Perhaps it’s an extreme example, but you may recall that UGGs tried to pass on a big increase in sheepskin cost to consumers and the consumers wouldn’t accept it.
 
I imagine we’ll cut the number of pieces we make with the goal of increasing volume per style. That’s already happening at some companies and it’s my longstanding recommendation that you take a look at your SKU numbers anyway. There’s money to be made there.
 
We’ll try and substitute cheaper materials without sacrificing quality. We’ll design for easier manufacturing.
 
We can look hard at our customers and try to figure which ones are, or are not, sensitive to price increases and why. Your dream is to have a customer who wants/needs your product so badly that price doesn’t matter. Mine too.
 
You might find yourself taking a hard look at your distribution as price increases can mean that certain products will no longer be competitive in certain channels.
 
I can’t help but notice that these are all good things to do anyway, and I hope they are already part of your normal business processes. Let’s hope apparel prices stay under control though, of course, “hope” is never a valid strategy. 

 

 

A Sustainable Competitive Advantage: The Zumiez 100K

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I have written before about the value of Zumiez’s hiring, training, and promotion process. They take kids with a passion for the activities and brands their stores sell, train them, support them, make them compete with their peers, and promote the ones who succeed. The average age of store managers is something like 23 and pretty much all their district and regional managers started out as sales people in a store. 

This approach to culture and staffing is so important to them that it’s been allowed to impede their growth plans when they couldn’t identify enough good people to staff new stores. In hindsight, I imagine they are thrilled that happened given the way the environment for brick and mortar is evolving.
 
Anyway, it’s easy to read SEC filings and intellectualize about this, but when you walk into the annual 100K party at Keystone, where the company’s best sales people are celebrated, you look up and see a sustainable competitive advantage staring you right in the face. That’s never happened to me.  The fact that I was afraid I was the oldest person in a room of 1,300 only dampened my enthusiasm a bit.
 
A competitive advantage is only sustainable if none of your competitors can duplicate it. I suppose somebody else could do what Zumiez does, but they’d better get started. They’re 30 plus years behind.
 
I’m guessing most of the Zumiez sales people don’t read my column. If they wrote one I’d sure as hell read it to find out what brands were succeeding. If they did read it, I’d tell them how lucky they are to have jobs involved with something they love (hell, maybe just to have jobs), solid support and training, the opportunity to advance based on performance and, if they want it, a career.
 
And finally, I’d tell them what a great thing it is to be part of something that can support and validate them. Without getting too deep into generational history (read this book if you are curious what I’m talking about), let’s just say that this is a group of young people who are going to have to pull together to solve some big problems not of their making. I’m seeing it with my own kids (they don’t work at Zumiez) as they form groups and relationships outside of the immediate family that involve strong personal bonds. I see it where I went to college, where the number of students who return for reunions are much larger than they ever were in my generation.
 
So the environment Zumiez has created not only works for these young people, but for Zumiez as well and is consistent with the way generations turn over and repeat themselves in our society over decades. And it has significant implications for how any brand markets itself today.
 
But, as usual, I digress. Back at the 100K, the introduction of brand founders was particularly interesting. In groups (there’s a lot of them), they march founders out on stage and give each one a chance to say a few words. Somebody told me they’d meant to bring a decibel meter to measure the applause each brand got (or didn’t get). That would have been brilliant. I would love to publish that list with the noise levels listed.
 
Among the brands that got the loudest cheers were brands that are urban, or youth culture, or whatever word you want to use. But they were definitely not action sports brands. Not to say that some action sports brands weren’t well received, but I thought the reception of the various brands was a good indication of how the industry is evolving.

It is true that a deeply imbedded, successful culture can be destructive to a company if the culture resists evolving with the competitive and economic environment. I can’t say for certain that Zumiez (or any other company) won’t someday have that problem.  But Zumiez can minimize that potential by just letting the young sales force that is part of its target demographic drive brand selection and be the arbiter of what’s “cool.”  If they do that I think this competitive advantage can continue to be sustainable.  That’s a hell of thing and unusual in our industry.

 

 

Surf Expo from the 10,000 Foot Level- Literally

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Yesterday morning, I was in warm, humid, sea level Orlando for Surf Expo. After 14 hours of travel, I found myself at the cold, dry, and 10,000 feet high Keystone resort for the Zumiez 100K event. Whew. One beer was my limit with dinner last night, and then I went to sleep early. 

Agenda and Surf Expo are two very different shows, with Agenda more urban and apparel and Surf Expo more beach and surf. We need them both but not, if I may say it again, overlapping each other.
 
The thing that almost caused me to keel over at Surf Expo was the stand-up paddle section. I regret not counting the brands. There were a lot. In conversations with a couple of them, I heard that there were perhaps 200 “viable” competitors plus maybe another 100 who just have product made and printed with their label in China. The size, shape, and prices of product varied widely. Incredible number of choices. Amazingly, I was told that the SUP section is about twice this size at Surf Expo’s September show.
 
I know some of you have had the same thought I had- “Oh lord, it’s the SIA snowboard section in Vegas in 1996.” We know how that worked out. Honestly, I expected a consolidation sooner. It was two years ago I saw a $400 SUP board at Costco and there’s never been the manufacturing learning curve and lack of capacity issues we had with snowboarding.
 
The reason we haven’t had a consolidation yet, I hypothesize, is because SUP has a much larger potential market and is easier to learn than surfing or snowboarding. And it doesn’t require a mountain or a wave. There are lots of lakes.
 
I couldn’t help but notice how many people involved in SUP had been through the snowboard business cycle. Hopefully, they haven’t come down with a case of selective amnesia. This time will not be different. There will be a consolidation, margins will drop, there will be too much product and production capacity. I don’t know when, but I recommend that you build your balance sheets and not assume it will only impact your competitors.
 
But damned, it’s great to see a new category with some legs.
 
The skateboard section was intriguing. The skate ramp was packed (I love watching the etiquette that skaters use to keep from running over each other). Volcom was the sponsor, with its booth opening on the ramp. Every kind of skateboard was represented. Long, short, narrow, wide, various shapes, wood, plastic, metal. I particularly liked Beercan Boards, made from scrap aluminum by an auto parts manufacturer from Georgia. They readily acknowledged that they didn’t know anything about the skateboard industry, but they seemed to be having fun. It felt a little like the bike show, where anybody with a new idea is welcome and encouraged to try something different.
 
While one end of the show was dominated by skate, the other end was what I guess I’ll call resort focused gifts, for lack of a better term. I more or less walked the whole show, and found it interesting how the energy built from one end of the show to the other. Kind of suggested that they have it organized right. At first, I found it interesting that beach and surf were separate, but as you walked the sections it became clear why. Their products mostly wouldn’t sell in each other’s channel. Surf industry consumers want technical board shorts. Beach market customers want a bathing suit.
 
Oh- and I want to thank Surf Expo for giving me a badge that said “buyer.” People in booths were nice to me, and I actually had an apparent reason to stop in my tracks and check out the models because, obviously, I was a buyer with an interest in the swimsuit business. My favorite booth had to be a little one with a guy sitting at an unadorned table with some apparel hung on the back wall. The sign over the front of the booth just said “DEALS.” I thought that was refreshingly honest.
 
A company called New Trick Sports was featuring a 45 pound electric wench fitted with an 1,800 foot line that can be easily attached (and detached) from a pickup truck and can pull a wakeboarder. The videos on the web site make it look like it’s plenty fast. I guess one potential inconvenience might be that you have to swim the line out. They are working on a gun that can be used to shoot the line out for rescue purposes, but I doubt that will be available to consumers. Too bad.
 
There were some pretty large booths in the surf section. Billabong, Quiksilver and Vans come to mind. Shades of the old ASR. No second stories though. I understand The Endless Summer showing the first night of the show was a big success, though I didn’t get there to see it due to my being efficient and planning too far in advance. Do something that cool next year and I’ll be there.

 

 

Agenda Show: The New Skate Business Model

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I’m somewhere in the middle of the country between the Agenda and Surf Expo trade shows at 30,000 feet. Before I talk about the sea change in skateboarding I saw at Agenda, I have a request. Will the powers that be at both shows please figure out how to not have the shows overlap? 

Please, no explanations and finger pointing. Not interested. Yeah, yeah, I know. I don’t understand. I’m just a customer (kind of) that thinks it sucks and is inconvenienced by it. And I’m not even the customer you should care about.
 
There, I feel a whole lot better.
 
Okay, skateboarding. An English magazine product guide I picked up at Agenda listed 55 brands of skate decks. Some I knew, many I’d never heard of. And those are only the ones who have enough presence (and money?) to be in that publication. Lots and lots of small skate brands around. At the show, there were a bunch of small deck brands that were new or had only been around a year or two. My perception over two days (shared by others in the industry I asked) was that the newer brands were busier and full of kids while the older brands (guess what – I’m not going to call them the “core” brands) were slower and full of older guys.
 
Many of those older guys will remember a time when they were just kids skating who thought it would be cool to get a few decks made for their friends because they kind of had an idea for a graphic. So somewhere they got 50 decks made and, after selling them to their friends, found they had made a couple of hundred bucks.
 
Of course, it had taken them at least 100 hours of work to get them made and sold (maybe a lot more) so in fact they’d earned about fourteen cents an hour. But who cared. They had a few bucks in their pocket, had a lot fun, and sensed a new found respect from their friends. They were on to something. Next time they’d make a hundred.
 
And the guys who turned out to be pretty good at that (and committed, and worked hard, and had a vision, and managed to raise a few bucks, and were a little lucky) are the guys I spend time talking to at Agenda. I like them, I’ve known them ten or fifteen years, it’s interesting to hear what they think, and they’re my age (okay, not that old, but getting there).
 
As they built their brands, they created a business model based on a high retail priced product carefully distributed (initially) with differentiation based mostly on team riders. High gross margins and big marketing budgets.
 
That business model started to go to hell about ten years ago as skateboarding got big enough to attract outside attention and lacking any kind of product improvement or differentiation not based on marketing. As the skateboard deck became a commodity to more and more skaters, there was no way to sell enough of them at a high price to fund the marketing program. The leading brands in the industry lost their ability to control pricing.
 
But they were stuck with their business model in terms of how they thought about it and because of a corporate structure with committed overhead. And they were getting older- every day, week, month, year- in an industry where the fourteen year old if the arbiter of cool. Maybe the 12 year old. Attitude and reality was (is?) working against them.
 
Meanwhile, the kids with the new brands have discovered what the owners of the core brands once discovered. It’s cool to make 50 boards and sell them to your friends. But they aren’t trapped by an increasingly obsolete business model and overhead structure.
 
Who’s on their team? The kid who did the coolest trick caught on video at the local skate park yesterday. It was up on YouTube, Twitter, etc. and the brand’s web site before his session was over. Hmmm. Maybe web sites don’t even matter like they used to. Tomorrow it will be somebody else. Or it will be the same skater. But there’s no need to create and run a series of ads to build a single skater’s credibility.
 
Marketing budget? Practically zero. Maybe you end up with a “team” of 6,000 composed of a couple of skaters at various skate parks and neighborhoods around the country. Or maybe you don’t. And your “team” will change and you won’t know it or control it. Maybe you cobrand with local shops or skate parks. Some brands and some skaters will rise to the top just like they always have. But there’s not an initial and expensive structure and process required. It will be informal, inexpensive, and inexact. In a word, it will be surprising and the skaters, not the brand, will have a lot of control. I wonder, in fact, if you don’t try and control it at your peril.
 
But how different is this really? The heritage skate brands (Oh god, what an awful thing to call them) aren’t strangers to creating new brands. But the communications process and the cost structure are dramatically different from what they are used to.
 
The heritage brands can’t do a damned thing about this as long as they have to exist within their old cost structure. Maybe one of these brands should rename itself Phoenix and rise from the ashes by severing all ties with the parent and putting a few kids with computers and a travel budget into a small old house somewhere and start over with the same brand name. Don’t you wish you’d done that with longboarding ten years ago? Or maybe you approach half a dozen of the new brands that are thought to be the coolest and you offer each of them $10,000 for an equity stake in the business (actually convertible debt would be better).
 
I keep being told that, according to the numbers we have, skating is declining. But damn, I see a lot of people skating (Of course, that’s what I want to see). And I was reminded at the show that the industry is about due for the next demographic boost. The numbers I’ve seen bear that out.
 
So anyway, when I get to Surf Expo, to the extent they are there, I’m going to spend all my time talking to skate companies I’ve never heard of. Won’t be as much fun, but I have a sense I’ll learn more about where the industry is going.
 
Meanwhile, at Agenda, the coolest thing I saw was the tagged police cruiser with the skateboard through the front windshield and the product displayed in the trunk. That’s the kind of thinking we need. I also saw a really busy show, though not quite as busy on the second day partly, I think, because people had left for Surf Expo.
 
I visited RAEN (because they asked me to) and saw a business model I liked. They’ve got some actual product differentiation, a story to tell, and a price structure that makes sense. I was scared to death I’d break their material when I twisted the frame, but when I worked up the nerve to try, I couldn’t. I also liked the product look, but for all I know, that’s the kiss of death for them.
 
Speaking of old school, I went to Bud Smith’s retirement party thrown by NHS. I’ll miss Mr. Griptape.  Next day, retired or not, Bud was still in the NHS booth. I didn’t stay long enough to see if Denike had to have him removed by security when the show closed.   Hey Bob, maybe you can get him to sell some grip tape for free?

   

Speaking of Brand Retail Strategies…..

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Shortly after I posted my article on Quiksilver’s annual results, a reader of mine sent me this brief article (thanks YKW!). Here’s another article on the same subject with a little more information (don’t be confused because it has the same picture). Basically, what they say is that “Nike and Adidas recently dealt an additional blow to small-scale commerce by severing ties with those accounts unable to sell £25,000 GBP (approximately $41,000 USD) worth of sportswear in a 12-month time frame.”

Apparently the decision, at present, is just for shops in the London area and impacts about 50 retailers. But if Nike and Adidas think it good business strategy for shops in the London area, I’m hard pressed to think of a reason why they won’t come to the same conclusion for other shops in other locations, though perhaps with a different minimum sales number.
On the one hand, I suppose we shouldn’t be all that surprised by this development. We’ve had various brands bemoan the decline of the small shops and the difficulty of working with some of them. It was years ago I pointed out what we all already knew; that as a brand got bigger the financial contribution of small shops to a brand’s success became less significant to the point of being unimportant. And I’ll tell you from personal experience that if you’ve got a shop that orders small and then can’t pay, you don’t make any money from that shop- no matter how cool the shop is and how much you want to work with it.
It’s not like a minimum order is a new development in the industry. They’ve been used in combination with discount structures and order breadth to encourage/require not just larger orders, but a better representation of the brand. The question is whether a $41,000 order is of a size that makes it impossible for a shop to carry a brand. That is, is it Nike’s or Adidas’ intention to flat out exit these smaller shops or is it just that they don’t want to do business with accounts they can’t make money with.
Whatever the financial motivation, more interesting is the market implication. Talking about the United States, I once wrote that there might be 50 “core” shops (and maybe and number is smaller or larger) that every brand needs to be in to be credible with the core market where a brand’s legitimacy comes from. At some level, Nike and Adidas are making a statement that what used to be considered a marketing imperative just isn’t as important any more. For neither brand were the number of dollars (or pounds) they received from the affected shops ever very important, but now the financial considerations, minimal though they may be, seem to trump the market ones.
It’s also true that larger brands now have their own retail outlets and very specifically rely on those stores to present the brand image. This makes the smaller, independent retailer seem less important to those larger brands.
Neither Nike nor Adidas are action sport based companies, so I suppose they can more easily make this decision than some other brands. Nike’s credibility with its larger target market is just fine and Adidas, from my perspective, has never really penetrated the core market anyway.  I always had to smile when I walked past a booth labeled “Adidas Skateboarding” at a trade show. I’ll be sure to get by the Adidas booth at the shows and somebody can tell me why I’m wrong. Actually, I’m going to ask.
I won’t bore you by re-re-re-repeating my thesis that the real action sports market is and always has been pretty small. The internet, lack of product differentiation and a lousy economy are pushing the youth culture market into larger companies, chain retailers, and broader distribution. This announcement is just one small occurrence in an ongoing process. Pay attention independent specialty retailers.

 

Why Crocs Might Go Private

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I’ve been holding on to this article on Crocs for a while mostly because I just didn’t have time to do anything with it.  What it says is that Crocs is looking to go private because it’s just not as cool as it was.  Currently, it’s traded under the symbol CROX on the NASDAQ and is at $12.88 as I write this.  Here’s a five year stock chart on the stock’s movement.


You’ll note that the stock is trending down at a time when the market has been trending up. 

In the 9 months ended last September 30th, Crocs earned $77.4 million on revenue of $964 million.  That doesn’t sound so bad.  Okay, but in the same 9 months in 2012, it earned $135 million on revenue of $898 million. Selling more and making less.  If that isn’t a sign of being less cool, I don’t know what is. 

So what have we got here?  The gross margin for the nine months fell from 55.8% to 53.9% and selling, general and administrative expenses rose 18.3% from $350 to $414 million.  Operating income fell from $151 to $106 million.  I’m going to resist the urge to do a complete financial analysis (I hear those sighs of relief).   

My point is simple.  It seems a lot of people still want to buy Crocs, and the company can make money.  What they can’t do is satisfy Wall Street’s endless demands for the growth that makes stock prices rise.  And I’ll bet anything that if they try to do that, their gross margin will continue down and the brand will lose credibility as it tries to push its distribution harder, faster, further.  Remember it would be trying to do that in a poor economy with a lot of competition. 

Is this starting to sound at all like any other companies we follow? 

Some smart person probably said, “Hey, if we weren’t public, we could pull back our distribution, improve our brand positioning and gross margin, cut some expenses (from not being a public company and because our improved distribution would let us reduce some marketing expenses) and maybe make more money with less working capital invested!”  Perhaps they’d consider closing some of their 600 or so stores as well. 

Maybe that would work or maybe, for this brand, it wouldn’t.  But continuing to try and satisfy the requirements of the public market looks like a bad plan.  I haven’t heard that there’s a deal done yet.  I’ll let you know if I hear and you do the same for me.