Some Interesting Numbers

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I was lucky enough last week to be at IASC’s Skateboard Industry Conference. I was sorry to have to leave early, but among the things I enjoyed doing while there was making a presentation. As part of that presentation I showed some numbers provided by Snowsports Industries of America and I wanted to share them with you. Here they are for five complete snow seasons.

2007/2008
2008/2009
2009/2010
2010/2011
2011/1012
Units Sold
31,370,674
26,960,496
26,633,131
28,157,156
23,900,283
Dollars Sold
$1,980,551,677
$1,730,590,053
$1,798,552,214
$2,001,686,760
$1,854,581,370
Inventory Dollars
$487,541,750
$505,431,179
$441,593,937
$450,570,953
$571,271,999
Gross Margin
44.40%
42.30%
43.80%
46.50%
44.70%
GM Dollars Earned
$879,364,945
$732,039,592
$787,765,870
$930,784,343
$828,997,872
Remember when the economy went off the cliff in 2008 and the snow was none too good? Look what happened between the 2007/2008 and 2008/2009 seasons. Pretty much everything went south, except unsold inventory which went north. Not a pretty picture.
Then, in a completely expected and quite reasonable fear induced panic, the entire industry got rid of all that inventory. And to say they were cautious in ordering for next season is a bit of an understatement.
A funny thing happened. In the fall of 2009, when snow sliders walked into their favorite retailer to take advantage of the anticipated fall sales they found, well, nothing. It became very apparent that if they wanted the product, they needed to buy it now at full price. And that’s what they did.
Look at the numbers in the 2009/2010 column. Unit sales were down, but dollars sold, gross margin, and gross margin dollars earned all rose. That happened while year-end inventory fell 13%.
With product not quite so widely distributed and in short supply, and with limited left over product from the previous season, customers were willing to pay more and buy sooner.
Let me just say it once more. More gross margins dollars were earned on lower unit sales. With any luck at all, customers learned not to expect discounts all the time, to value the brand a bit more, and that they couldn’t wait until the last minute and expect to get what they wanted.
What I conclude from these kinds of numbers, and what I said at the conference, was that as long as the economy was weak and sales increases harder to come by, maybe you could strengthen your brand and bottom line by taking a different approach than you had in the past.
I’m all for sales increases, but don’t focus on getting them exclusively. Looks carefully at your distribution and who you are selling too. Distribution is no longer “core” or “not core.” Each new account needs to be reviewed separately for its fit with your customer base and brand positioning. You want to avoid the broad fashion industry, where you’re a small fish in a huge pond and where the customers, even if they know your brand, won’t know your story and what makes you legitimate. They may not even care.
Change your thinking a bit so you feel it’s okay for a retailer to sell out of your product and you have to tell him there’s no more right now. There’s nothing a retailer wants more than a product that sold well at full margin that he can’t get any more of. Let the consumers discover that your product is kind of exclusive and communicate that at the speed of light to their friends. Bet you won’t have to spend quite so much on advertising and promotion, your brand will be stronger, your gross margin higher, and disputes between brand and retailer fewer. There are other benefits as well.
This isn’t as easy as I make it sound in a couple of paragraphs, but I’m pretty certain it’s worth your consideration in a week economy and highly competitive market where most of your competitive advantage comes from a brand story and positioning rather than product differentiation.
I’m suggesting you could make more money with less risk. That has to be at least worth thinking about.
If you want a copy of the power point I presented at the IASC conference, let me know.

 

 

The Confluence of Internet with Brick and Mortar, and Notes from Nike’s 10Q

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Nike filed its 10Q for the quarter ended February 28th on April 4th. You can see it here. An actual analysis of their financial statements seems like a waste of time. I’ll mention a few comments I pulled out, but then I want to get on to what they are saying about e-commerce as it seems to be consistent with what other companies are saying. 

The first thing about Nike’s 10Q and conference call is what’s conspicuous by its absence. I can’t claim to have read every word, but nowhere did I see “skate,” “skateboard,” or “skate shoe.” I assume those sales are just part of footwear. Hardly a surprise. As I’ve discussed, skate shoe sales were never going to move Nike’s earnings per share. Their goal was to become credible with a piece of the market that didn’t see Nike as quite legitimate. Mission accomplished I’d say. And it doesn’t hurt Nike that the skate shoe market has evolved towards casual footwear, because they are pretty good at that.
 
Next, here’s the little bit we find out about Hurley. Nike’s “other businesses” are Converse, Hurley and Nike golf. Revenues for the quarter of those businesses totaled $615 million, around 10% of total quarterly revenues of $6.187 billion.
 
“Excluding the impact of currency changes, total revenues for these businesses increased by 9% and 8% in the third quarter and year to date periods, respectively, reflecting growth in Converse and NIKE Golf.”
 
I read that to say little if any revenue growth in Hurley.
 
“On a reported basis, EBIT for our Other Businesses increased 23% for the third quarter and 18% year to date, driven by improved profits at Converse and Hurley.”
 
So even if Hurley’s revenues didn’t increase, it’s being managed a little more rigorously to improve operating profitability. You know I like that approach.
 
Meanwhile, here’s what President and CEO Mike Parker says about their online business:
 
“In Q3 our online business grew 33% – outpacing the growth in our total DTC business and for total NIKE, Inc. We’ve delivered strong double-digit results in our e-commerce business every quarter for the last 5 years.”
 
He continues:
 
“That said, I’m not satisfied. Right now e-commerce is a relatively small portion of our total revenue. There’s a pretty big gap between where ecommerce is today and where we can take it. So we’re driving more innovation into the shopping experience, elevating the level of service and expanding customization online. At the same time we’re simplifying the user experience making it easier to find and buy our products. I can assure you given the size of the opportunity; everyone on the leadership team shares my sense of urgency around e-commerce.”
 
We’ve all watched a lot of companies get big percentage increases from their e-commerce business though sometimes those big increases were coming from small bases. We’ve wondered (or at least I’ve wondered) just what the mix of online and brick and mortar was going to be and how the two would influence each other. I think I’m getting an inkling.
 
The two channels are supporting mutual growth, but I suspect that online is going to mean fewer brick and mortar stores. That doesn’t mean there won’t be total brick and mortar revenue growth, but the number and purpose of actual stores will change. 
 
Zumiez alluded to this in their last conference call where they talked about the need for new metrics to measure comparable store sales and discussed how growth in the number of stores no longer translates in the same way into revenue.
 
It’s not that stores still won’t be opened (and closed). But the decisions may be more strategic. That is, there will be more to that decision than what sales that store can generate. The question is becoming, “How can opening a store here contribute to our reaching our customers through all available channels?
 
I don’t know how to measure that, but lots of companies are no doubt working on it. As they figure it out, I expect it to have implications for store size, location and inventory. There isn’t any doubt that e-commerce sales cannibalize brick and mortar sales to some extent, but that doesn’t mean there can’t be growth in the combined channels as well as some potential cost savings in the brick and mortar channel. I assume everybody who’s doing both (which is basically everybody) believes that.
 
We’ve also noted that brands are becoming retailers and retailers are becoming brands. We noted it, however, without really explaining why. Now we’ve got a clue. The internet and the need to be at all consumer touch points (Omni channel to use Zumiez’s phrase) requires it.
 
Uh, am I saying here that branding is becoming more important at a time when product is everywhere, it’s hard to create meaningful differences among a lot of products in a category, and the consumer knows everything and is picky? That implies high marketing costs but not always great margins and would seem to favor larger players.
 
Yeah, I guess I am saying that. I’ll be back to you after I’ve thought about it some more.

 

 

VF’s Strategy; Why it is Consistent with the Competitive Environment

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VF filed its 10K annual report with the SEC three days ago, so I’ve been able to get a more complete picture of their performance for the year and quarter. You can see that report here. As you probably know, VF is a large consumer conglomerate that owns 30 brands including Vans, The North Face, Reef and Timberland which are part of its Outdoor and Action Sports segment. Its other segments include Jeanswear, Imagewear, Sportswear and Contemporary Brands. We’ll talk about the general strategy and focus on Outdoor and Action Sports. 

Pieces of the Strategy
 
Revenue for the year rose 15% as reported from $9.46 to $10.88 billion. Not following my usual process, I want to jump right to the balance sheet and report that inventory fell 6.8% over the year from $1.45 to $1.35 billion. Partly what’s going on here is that they are getting their Timberland acquisition (purchased in September of 2011) under control. But typically, you’d expect inventory to rise some with sales and when it’s doesn’t, it’s a good thing.
 
Now let’s jump to page 1 of the 10K to see what their broad strategy is:
 
“VF’s strategy is to continue transforming our mix of business to include more lifestyle brands. Lifestyle brands connect closely with consumers because they are aspirational and inspirational; they reflect consumers’ specific activities and interests. Lifestyle brands generally extend across multiple product categories and have higher than average gross margins.”
 
Connection with consumer and higher margins. No wonder they like outdoor and action sports.
 
Meanwhile, over in the conference call, VF Chairman, Chief Executive Officer, President, Member of the Finance Committee and for all I know Czar of all the Russians Eric Wiseman talks about their other focuses.
 
“…an obsessive focus on continuously improving our operational capabilities to drive growth and strong consistent returns to our shareholders; and finally, a highly efficient supply chain that includes owned and sourced manufacturing, which gives us unparalleled structural advantages, including product innovation, speed to market, low cost and outstanding quality. Individually, any one of these strengths would be an enviable asset for any company to have. Yet together, in concert, they’re at the center VF’s DNA and what allows us to be so successful.”
 
Keeping the supply chain efficient is no simple task. From the 10K:
 
“On an annual basis, VF sources or produces approximately 450 million units spread across 36 brands. VF operates 29 manufacturing facilities and utilizes approximately 1,900 contractor manufacturing facilities in 60 countries. We operate 29 distribution centers and 1,129 retail stores. Managing this complexity is made possible by the use of a network of information systems for product development, forecasting, order management and warehouse management, attached to our core enterprise resource management platforms.”
 
I don’t want to put VF on a pedestal here. There’s a never a section in the press release, conference call or SEC filings called “Places where we really, really screwed up.” It does not always go smoothly. 
 
Nor is it ever finished. I wouldn’t be surprised if a big piece of CEO Wiseman’s job was to make sure the whole organization is thinking about incremental ways to make things better. Everybody should be empowered to ask, “If we combine production for these two brands, can we save $0.03 a garment?” “If we make it at a factory we own, will the faster turnaround time mean lower total inventory that offsets the higher cost per piece?”
 
Sales increases are swell, but it’s nice to have ways to improve your profitability by increasing gross margin dollars or controlling expenses if they aren’t easy to come by. And it’s good to have a balance sheet that lets you invests in efficiencies- especially if your competition can’t.
 
VF is trying to do what I’ve been arguing in favor of for years. No wonder I like them.
 
The Outdoor and Action Sports Segment
 
This segment generated $5.87 billion, or 54%, of VF’s revenues for the year. It had an operating profit of $1.02 billion, representing 58% of total operating profit for VF, and an operating margin of 17.4% (higher than other segments with Jeanswear being second at 16.7%). That margin is down from 19.9% in 2010 and18.2% in 2011. The decline is largely due to Timberland.
 
Segment revenues grew 28.6% from $4.56 billion the previous year. Jeanswear is second at $2.79 billion representing 26% of total revenue. It was up only 2.1%. Growth of 6.3% by Sportswear was the second fastest segment growth.
 
But there’s a caveat. Of that 29% growth, 19% was the result of the Timberland acquisition and only 10% was organic (from the existing brands). But 10% organic growth is way better than any of the other segments did, except for “other” which grew 12.5% but was only $125.5 million in revenue for the year. 
 
The North Face is the largest brand in the segment, with Timberland second and Vans third by revenue. There are 100 VF operated North Face stores worldwide. Timberland has 200 stores and Vans 350.
 
Domestically, the whole segment was up 21% but 12% of that came from Timberland. International revenue was up 37% with Timberland representing 26%.
 
The North Face and Vans grew globally 9% and 23% respectively in 2012. Their direct to consumer business, including new store openings, comparable store sales and online, increased 13% and 18% respectively. In 2013, Van’s revenues are expected to be up 20% and The North Face up in the “high single-digit” range. Timberland’s revenues are projected to be up in the “mid-single-digits.”
 
Outside of the Americas, Vans revenue growth was in excess of 30% in constant dollars. It was up 60% in constant dollars in Europe and 20% in Asia. Direct to consumer was “a big part” of this growth.
 
We also learn that Reef’s revenues were up 17%, though we aren’t told anything about what its total revenues are. This is significant only because they haven’t said anything about Reef in the past probably because there was no good news to report. 
 
VF’s total capital expenditures in 2012 were $252 million. Of that total, $156 million or 62% were in Outdoor and Action Sports.
 
Some Overall Numbers
 
VF’s $10.9 billion of 2012 revenue generated $1.09 billion in net income. They spent $585 million on advertising. International revenue was 23% of total. 5% was organic and 18% due to Timberland. Direct to consumer revenue rose 25%, but 15% of that was Timberland. It accounted for 21% of total revenues. They opened 141 retail stores in 2012 and expect to open 160 in 2013. Gross margin improved from 45.8% to 46.5% “…primarily due to the continued shift in the revenue mix towards higher margin businesses, including Outdoor & Action Sports, international and direct-to-consumer.” Hmmm. Sort of seems to leave out North American wholesale business. 
 
For the last quarter of the year, VF’s revenues were $3.03 billion and it earned a net profit of $334 million. No details provided.
 
Okay, don’t stop reading here just because I’m going to talk about pension accounting. This is important. VF made a $100 million voluntary contribution to its pension plan during the year. What’s going on in the world of pensions? Not just at VF. 
 
How much you need to contribute to a pension plan obviously depends on a whole bunch of assumptions involving how many people will get pensions for how long and how much you’ll earn on the money invested in the plan. In 2012, VF assumption was that the rate of return on its pension assets would be 7.5%. They’ve reduced that to 7% in 2013. At the same time, they’ve “…altered the investment mix to improve investment performance.” I won’t go into the details, but from their description, I’d conclude they’ve increased the level of risk in their portfolio to try and earn that lower targeted return.
 
There’s a lot of this going on. Company and government pension plans have found themselves underfunded at least partly because they’ve been stubbornly unrealistic for years about what they could expect to earn on their pension assets. I think they’re still unrealistic. If they reduce the expected rate of return, the required contributions to the plans go up.
 
This is going to be messy. Not for VF necessarily, because they earn a lot of money and can afford to contribute to their pension plan, though obviously it will have some impact on the earnings per share. You’ve already seen some governments have problems in this area. Just be aware is all I’m saying.
 
The Evolution of VF
The Outdoor & Action Sports segment is presently the driver of VF’s success. They’ve acknowledged that in the description of their strategy quoted above that describes the kinds of brands they want to own. If they can improve Timberland’s performance, this will be even truer. As a company, they’ve changed their focus through buying and selling of brands. I don’t expect that to change. They say it won’t. They sold one brand last year. If Outdoor & Action Sports continues to offer the growth and returns it’s getting now, and brands in other segments can’t offer similar ones, I would expect to see further buying and selling of brands by VF.
 

 

The Changes at Quiksilver; A Broader Industry Organizational Perspective

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On Monday, The Editors at Boardistan, posted a still evolving story about cuts to Quiksilver’s team rider programs. Here’s a link to the post. As Boardistan points out, at that time there had been no official announcement from Quik, so we didn’t know the extent of the changes. 

They then make the insightful comment that “…Hollister doesn’t spend a dime on “core teams” and they don’t seem to be having any problem in the “So Cal inspired clothing for Dudes and Bettys” space.” Good point.
 
Since the Boardistan posting, Transworld Business and Shop-Eat-Surf have reported related stories, and we’ve also learned that Quik is also cutting certain brands and staff.
 
With the management changes that have happened and are happening at Quik, it’s hardly surprising that we’d see some things done differently. Tactically, it would make sense to me to cut team programs some. I can’t find the article (I have too many articles) but it was some years ago I suggested that your very best team riders have value and the guys you flow product to and maybe pay for wins or photo credits have value, but that it was time to take a look at the value of the members in the middle of a larger team. A lot of brands have done that.
 
Strategically, if it makes sense to cut your team budgets now, then it probably made sense a few months ago or even longer. Why didn’t it happen sooner at Quik? Or, for that matter, at other companies.
 
In recent years, we’ve watched management and organizational transitions at Spy, PacSun, Billabong, Burton, and Quiksilver. In at least some cases we’re still watching and I’m sure there are some other companies that should be included in the list.
 
Remember when Burton cut The Program? In the press release, or in an interview, Jake said something like, “I didn’t want to do this, these people are my friends, I fought it and tried to figure out another solution, but the annoying and persistent finance people on my board wouldn’t leave me alone.” From time to time, I am one of those annoying and persistent finance people, so I know exactly what he meant.
 
Organizations have momentum. People don’t like to change. Successful entrepreneurs have a high level of self-confidence and capability or they wouldn’t be successful entrepreneurs.   
 
A founding entrepreneur or long time CEO is successful partly because of the values she has imbued the organization with and the consensus around what the company is about. There is a sense of “how we do things” that gives comfort not just to the stakeholders (of which the employees are one part) but to the CEO as well. People have an understanding of their place in the company and their responsibilities that goes beyond their box on the org chart. At its best, this can be liberating and create efficiencies.
 
But it only works as long as the competitive business environment it was created to function in doesn’t change too quickly or dramatically.
 
In 2008, we experienced that quick and dramatic change. We are still experiencing it. And we experienced it suddenly after the best economy for the longest period anybody has seen for, well, forever.
 
Those of you who might have followed the travails of JC Penney (Excuse me, I mean JCP) know that attempts to fundamentally change a company’s market positioning and way of doing business aren’t unique to the action sports/youth culture market, nor are they easy.
 
You’ve probably also noticed that it’s typical for the pressure to build and then for the change to begin with a defining event.  The period immediately following that event often seems a bit chaotic.
 
If you’ve reflected on my descriptions of organizations above, maybe that’s not such a surprise to you. My experience in turnarounds is that really fundamental change is resisted as long as it can be (hence the need for the turnaround. Typically, it is some outside stakeholder that forces the change. It can be the banker, the accountant, investors, or a tax authority (hint: it’s a really, really, bad idea to use payroll taxes as a short term source of working capital).
 
Prior to the defining event that leads to the organizational change there’s almost always, as I’ve described it before, “more of the same” going on. “If we do the same thing, but work harder, we can solve this problem,” is the way the thinking goes. I have also called it “denial and perseverance in a period of change,” and I think that’s a damned good phrase. That will often extend to claiming that required changes are being made, but they are tactical rather than strategic and don’t truly address the new business environment.
 
But what would you expect when you’ve got an organization created to function under a set of assumptions and positive business conditions that have lasted for decades that suddenly, in a few months, change so dramatically that in some sense those business conditions cease to exist? The existing organization, the existing management, the existing relationships, may simply not be capable of coping with the new environment and making the required changes. That’s not what they were optimized for.
 
When you’re dealing with a difficult business situation, it starts to wear on you after a while. Where it used to be fun to get up and go to work (most days- there is no perfect job), now it’s a struggle. If it’s tough enough, you spend most of your time talking with suppliers, bankers, and investors and worrying about cash flow. It takes an incredible amount of time and energy, but doesn’t do anything to help you address the new business environment. The management team, and the entire organization, starts to get a little beat up. Attitudes can turn negative.
 
Interestingly, that’s the moment when you can get the most accomplished in the shortest amount of time. The CEO’s I respect the most are the ones who figure out what has to happen but decide they don’t want to be the ones to make those changes and aren’t the right ones to do it.
 
So you end up with a new CEO. That CEO has incredible situational authority, at least for a while, exactly because the change has been resisted long enough that things are tough. He doesn’t have the personal relationships or vested interest in the organization that the previous CEO had. Look, when you walk into a company and they say, “Welcome Jeff. We can’t make payroll next week. What should we do?” it’s incredible liberating because there’s nothing you can’t try.
 
Inevitably, the changes are a bit chaotic because they’ve been put off too long, change fundamental things about the company, and usually happen fast. Insecurity among employees can also be coupled with a sense of relief, because they all knew something had to happen.
 
When we hear about these dramatic and maybe unexpected changes from Quik or any other company going through this process, let’s by all means feel bad that people are losing their jobs. Let’s also remember that the goal here is to keep Quiksilver a successful, profitable company that supports the surf industry and provide jobs and careers to the people still working there.
 
For the reasons I’ve described above, the change process in companies facing a dramatically new business environment can often by chaotic and look pretty awful at first. Typically, however, it’s happening for a good reason and needs to happen. To that extent, I look at it as positive.

 

 

Trade Show Evolution: The Boardroom with the Vans U.S. Open. I Like It, I’m There.

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Over the years I’ve had a lot (some would say way too much) to say about Trade Shows. I’ve suggested there were too many, that they were too expensive, that the internet made them less necessary, that they’d lost focus, weren’t efficient, and that the way product was sold into broader distribution made them less important. 

The poster child for most of these issues was ASR which, as you all recall, went away a couple of years ago. I don’t think my concerns are all resolved, but there’s been progress.
 
And the smartest thing anybody did in the wake of ASR’s closing was, well, nothing. Absolutely nothing. This brilliant doing of nothing was conceived and implemented by Surf Expo.
 
You remember all the noise and wringing of hands that accompanied the closing of ASR. Everybody wanted to know what was going to “replace” ASR. There were various proposals and discussions among all the usual suspect organizations about doing a new trade show. Happily, in my judgment, nothing happened.
 
I say happily because the last thing we wanted to do was replace ASR which, I think it is generally agreed, had become a flawed model. But when ASR went down, people lost streams of income. Having carefully studied this for many years, I have determined that nobody likes it when they lose a source of income, and they will flail about madly trying to replace it.
 
Flailing there was, but no new event emerged. A little time needed to pass, things had to settle out, and we had to get a better idea of just what it was we needed, because it sure wasn’t to “replace ASR.”
 
In the fullness of time, the Agenda show evolved to be part of the solution for the street and skate part of ASR. I never saw Agenda as a surf trade show and, frankly, how well did having skate and surf under the same roof at ASR work out anyway?
 
Then enough time passed. Nike walked away from the U.S. Open, Vans (owned by VF) became the title sponsor for the event owned and operated by IMG and GLM Fashion Group that runs Surf Expo and LAUNCH LA bought The Boardroom. The stars became aligned (and a bunch of people worked really hard).
 
The result is that we get the event announced today and described in this press release. I’m saying event because trade show doesn’t do it justice and I don’t yet have a better word to describe it. Here’s what the press release says in part.
 
“A celebration of surfing, surfboards and the shapers who make them, The Boardroom will be held within the Vans US Open of Surfing in a 50,000 square foot freestanding pavilion that will be floored, carpeted, and fully climate controlled. It will feature shaping competitions, seminars, entertainment, autograph signings and hundreds of booths filled with surfboards, legendary and contemporary shapers, surf apparel and accessory companies. The Boardroom will be a hybrid trade/consumer event with two days exclusively dedicated to retail buyers and media as well as two days also open to the general public.”
 
Here’s an event, then, that involves the surf industry, its customers, the media and the world’s best surfers.   It will be all about surfing and, I hope and assume, we won’t have an Invisilign tent on the beach this year. I don’t know- I just had a hard time seeing their connection to surf.
 
The industry needs this kind of focus and excitement.   Whatever this thing is, I’m enthusiastic about going to it like I’ve haven’t been about a trade show in years. I’m expecting to have fun, which is kind of why I got into this industry in the first place. 

 

 

Aunt Jenny’s Egg Beater, Hoodies, and Water Heaters; The Evolution of Manufacturing, the Future of Fast Fashion and the Impact of the Internet

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My Aunt Jenny died maybe 12 years ago at the age of like 97. I helped clean out her house and one of the things I saved was her egg beater. It was made by the Dazey Manufacturing Company in St. Louis. I don’t know if it’s 60 or 90 years old. The company is out of business. 

I didn’t keep it for sentimental reasons (I mean, it’s an egg beater). I kept it because it’s the best damned egg beater I’ve ever seen and I wouldn’t know what to replace it with. It’s made of heavy duty stainless steel. Except for some paint chips on the handle, it looks and works like the day it was made. It spins so effortlessly and smoothly that it keeps going for north of half a dozen turns after you release the handle and is well balanced and almost vibration free.   No planned obsolescence here.
 
I really miss products like this. I believe that paying more for a product that lasts a long time (if you can find them) is a better financial decision than paying less and having to replace it often.
 
So I was intrigued to find this article on a hoodie made by American Giant. I’ve ordered the full front zip one for $79.00 (shipping included). It’s made in the U.S., only available online, and is supposed to last a long, long time. The product is backordered due, I assume, to all the favorable publicity they’ve had.
 
They started by redesigning the hoodie from scratch, as you’ll read in the article. CEO Bayard Winthrop “…argues that by making clothes in America, he can keep a much closer eye on the quality of his garments, and he can make changes to his line with much more flexibility. An Asian manufacturer wouldn’t have been able to do all of the custom, intricate work that American Giant’s clothes required.”
 
Okay, hold that thought. Let’s move on to the water heater.
 
The December issue of The Atlantic has an article called “The Insourcing Boom” by Charles Fishman which you can read here. Anyway, General Electric owns something called Appliance Park in Louisville, Kentucky. It includes six factories, each as big a suburban shopping center, and it’s where GE use to make all its appliances. It employed 23,000 at its 1973 peak, but only 1,863 by 2011. They tried to sell it in 2008 but there were no takers.
 
But in February, 2012, they started a new line to make their high end GeoSpring water heaters there. On March 20, they started making high end French door refrigerators there. By now, they’ve probably started making a stainless steel dishwasher and they are working on an assembly line to make front loading washers and dryers, the article says.
 
Bringing certain products back to the U.S. to make has to do with higher Chinese labor costs and, for better or worse, lower U.S. ones.   But that’s not the whole story. When they took a close look at the GeoSpring water heater, they found it was a manufacturing nightmare that could only be justified when labor was $0.25 an hour. In their redesign, they cut out 20% of parts and reduced the cost of materials by 25%. They cut required labor hours from 10 in China to 2 in Kentucky. Quality and energy efficiency improved.
 
Okay are you ready for this? The Chinese made product retailed for $1,599. They were able to cut the retail price of the U.S. made one by 19% to $1,299. I assume they are holding their margins or they wouldn’t have done it.
 
Here’s what I said in a recent article talking about U.S. manufacturing.
 
“Once the labor cost differential isn’t so dramatic, then other costs become more important. Travel, freight, time to market (which impacts the amount of inventory you have to hold), communications issues, surprise delays, custom duties, control of intellectual property and quality control are among the costs that may be higher with foreign production. But most general ledgers aren’t set up to isolate those costs.”  I missed, by the way, energy costs which are also making the U. S. more attractive.
 
“It’s an accounting hassle, and no fun. But if you take the time to figure out those costs, you may find there’s a certain logic to making some formerly foreign produced products in the U.S.”
 
I’m guessing the CEOs of both General Electric and American Giant would agree with me.
 
The American Giant business model works because the product is only sold through their web site. They have no brick and mortar retailers. I may be willing to pay for quality, but if you had to add a retailer’s margin in there, it would be out of my price range.
 
Pretty clearly, the internet can facilitate the sale of higher quality products by avoiding a level of distribution and cost. I’m not quite sure if that’s completely good or bad, but it’s a fact. I’ve written before that I thought we were early in the process of figuring out the model for internet and retail coexisting. Here’s an impact I hadn’t thought of until now; it might facilitate U.S. production and higher quality. The benefits of having design, production, marketing and fulfillment in one place are, I suspect, significant. 
 
Let’s distinguish between fast fashion and supply chain and inventory management. Fast fashion (which I define as rapid turnover of artificially supply constrained product) is a marketing idea. Good supply chain and inventory management is necessary to fast fashion, but it would be a good idea even if nobody ever came up with the fast fashion moniker. It can never be bad to be able to react quicker to the market and hold less product in inventory.
 
Every company I write about these days is talking about managing their supply chain better, reducing their time to market and “micromanaging” their inventory. They don’t all use the term fast fashion, but to some extent that’s what they are reacting to or trying to emulate. It’s so universal it seems like a bubble.
 
I’m wondering if fast fashion isn’t a trend that will run its course. I understand the excitement it can generate, but once the novelty wears off, I am uncertain shopping more often for product that isn’t really that well made just because it’s “new” will support a long term business model. 
 
In the days of our ongoing economic malaise, it can be hard to find a lot to be positive about. But as I use Aunt Jenny’s eggbeater to make an omelet, wait with anticipation for a hoodie I expect will last a long, long time and wonder if I should be replacing my water heater, I’m feeling kind of hopeful about what might be an important long term trend back towards higher quality products and domestic manufacturing.

 

 

I Went to the Know Show. I’m Back

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I haven’t been before, and I didn’t stay long, but that’s a really good thing because it’s an indication that the show is accomplishing just what it’s supposed to be accomplishing.

The show was full of focused retailers paying close attention to presentations by reps and, as far as I could tell and from what I was told, writing orders.  Sometimes there would be ten or twelve people sitting in a booth as the rep went through the line.  They were quiet and attentive.

The aisles weren’t jammed, there was no carpet on the floor and the booths were mostly not big and fancy.  There were no competing sources of loud music and not much in the way of in-booth parties and craziness.  Relax, it’s not like you couldn’t find a beer here and there.

If it wasn’t as upbeat at other shows I attend, that’s because it’s not supposed to be.  It’s not a marketing extravaganza.  It’s a place to attend to the nuts and bolts of business and people seemed to be doing just that.

So you can see why I didn’t stay long.  I wasn’t going to meet consulting clients there, senior executives were generally not attending, and the reps in the booth were busy talking to people who wanted to buy product from them, so why waste their time with me?

The Know Show was a preview of the snowboard product I’ll see at the end of the month at SIA’s show in Denver.  I saw Volcom’s shoes for the first time.  I knew they’d be making them, but I walked by wondering if there was anybody who wasn’t making shoes at this point.  Which made it about perfect when I walked by a booth for a company called Generic Surplus that also makes shoes.

There are so many nice shoes out there, and mine are so uncool (as I got told at my last trade show- you know who you are).  I am just going to have to break down and buy some new ones.  Boy, that will be a market top.

DC was exhibiting their snowboard hard goods under the slogan, “Snowboarding: Defined by DC.”  I don’t even know where to go with that.

I saw Canadians doing business with Canadians in a solid environment for doing business.  I liked it.

 

What’s Going on With Rip Curl?

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I don’t generally have a way to get good information on Rip Curl, but somebody sent me the interview below with Rip Curl co-founder and owner Brian Singer. Why don’t you read it, then I’ve got a comment for you. 

Rip Curl co-founder and owner Brian Singer speaks exclusively to the Surf Coast Times about Rip Curl sale.
 
Rip Curl will only be sold to a company that looks after brands and the communities in which they reside and to which they are connected, according to one of its owners.
 
Following the announcement last week that the board of Rip Curl has appointed financial advisors Merrill Lynch to assist the business in exploring opportunities for whole or partial sale, company co-founder and part-owner Brian Singer spoke exclusively to the Surf Coast Times to reassure the community that Rip Curl would only be sold to a company that has the business’ and community’s best interests at heart.
 
“Merrill Lynch has got a clear objective in this,” he said.
 
“We’ve told them we’re interested only in a company with a track history of looking after brands and the people involved with them.
 
“We’ve had a couple of approaches from a couple of companies that have that track record, which led us to appointing Merrill Lynch to explore the opportunities on our behalf.”
 
Mr. Singer said should the business be sold, he could see no reason as to why the purchaser would change much about how the business is run – including maintaining Rip Curl’s global headquarters in Torquay.
 
“We see no reason to believe anything would change. If somebody or (a) company purchases it, why would they upset the apple cart? The company was born there (Torquay). Why mess with a formula that’s worked?
 
“The company’s had a long association with Torquay and the (Easter Rip Curl Pro surfing) competition at Bells Beach. We expect that the building would remain there and the people will remain there.”
 
Last week, Rip Curl issued a statement saying the company had grown its revenue compared to the year prior – in contrast to general surf industry performance – and the board had appointed Merrill Lynch to assist them in exploring opportunities available as well as assessing the merits of introducing a third-party investor to the group.
 
“The board recognizes that if any such investment were to occur it would need to be consistent with our objectives of ensuring our company values and brand values are respected – supporting our staff and being in the interests of our shareholders,” the statement read.
 
The company is valued between $480 million and $500 million and employs 260 staff in Torquay, making it one of the biggest employers on the Surf Coast.
 
Surf Coast mayor Brian McKiterick said he had spoken to Mr. Singer who had reassured him that the company would continue in Torquay if it were sold.
 
“He confirmed that they’ve been looking at some companies who made approaches,” Cr McKiterick said.
“He was adamant that it would be business as usual; the Rip Curl Pro would continue at Bells Beach and the business would remain operational in Torquay.
 
“He said they were very conscious that if it was sold it would have to be to a company who didn’t have a history of breaking up brands. “It’s very welcome news for the town, the surf industry and the shire as a whole.”
 
What I find intriguing about this is that it’s hard to imagine a buyer or investor paying full price for Rip Curl, or any other company, and agreeing in the contract not to move it or break it up and that it would be “…looking after brands and the people involved…” regardless of what assurances they might give outside of the contract. One has to believe that Merrill Lynch has told Rip Curl’s principals exactly that, as typically investment banks only get paid if the deal closes.   
 
I personally admire what Mr. Singer is saying and hope he can pull it off. Maybe Rip Curl doesn’t really need a deal or is so attractive that Mr. Singer can be very selective as to who he makes a deal with. If that’s not the case, he’d better lose the rose colored glasses. 

 

 

More on Winter Resorts Targeting Baby Boomers: I’m Not the Only One Who’s Worried

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You may recall (or not) that about a month ago I wrote an article expressing some concern that winter resorts were targeting baby boomers. My point was that dependence on high income baby boomers couldn’t be an exclusive, long term strategy because, inconveniently, those people are going to get older sooner and stop snow sliding. When that happens, it would be nice if we had some other customers. 

Now, a gentlemen I’ve never met named Roger Marolt, a columnist at the Snowmass Sun in, unsurprisingly, Snowmass, Colorado has written a really good rant (I mean that in very positive way) on the same subject. He makes some points I didn’t make and it’s a pretty fun read.
 
So here it is. Go and read it.     

 

 

Trade Show Season or, “Hi Ho, Hi Ho, It’s Off to Sell We Go!”

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My list this year includes Agenda, The KNOWSHOW in Vancouver, and SIA in Denver. Part of me would like to go to others, especially Surf Expo, part of me wouldn’t and, like all of you, I figure it out based on schedule, resources, expected results and, frankly, my tolerance for travel. 

I liked Agenda as usual. Also as usual, people think it’s a bit early but on the other hand it doesn’t conflict with another show and I expect they get a hell of a good price on the space given those dates which I hope they pass on to the exhibitors.
 
Here are a couple of things I noticed at the show:
 
Thinking About U.S. Manufacturing
 
I talked to four brands that are considering starting or increasing their manufacturing in the U.S. I’ll have more to say about this in an upcoming article, but I wanted to highlight it now as something maybe you should be thinking about too. Partly, it’s because Chinese wages have risen something like 17% a year for five years and are continuing to rise. And some of their factories have started to automate. But it’s also because U.S. wages, for better or worse, have fallen.
 
Once the labor cost differential isn’t so dramatic, then other costs become more important. Travel, freight, time to market (which impacts the amount of inventory you have to hold), communications issues, surprise delays, custom duties, control of intellectual property and quality control are among the costs that may be higher with foreign production. But most general ledgers aren’t set up to isolate those costs. 
 
It’s an accounting hassle, and no fun. But if you take the time to figure out those costs, you may find there’s a certain logic to making some formerly foreign produced products in the U.S.
 
The Great Skate Divide
 
When I go to Denver for SIA, I’m pretty sure I won’t find the snowboard companies that make pipe boards in one part of the show, and the ones that make all mountain boards in another. But at Agenda, I find the street skating companies in The Berrics, and the longboards mostly in one aisle far away.
 
Perhaps it’s just because of how the Berrics was organized and set up with Agenda. You know- institutional inertia. But I wouldn’t be surprised if there was still some left over and nonproductive stuff (I’m struggling here for a good word. You know me, I always want to be careful what I say) going on. A bit of a hangover from longboarding growing so much and street skating continually hoping it would go away?
 
I would like to remind us all (including myself) that we will never be the arbiters of how a twelve year old decides to roll down the street and have fun. The “stuff” we’ve got going on doesn’t matter to them. Can anybody say “plastic skateboards” or “scooters?”
 
I know longboarding is different from street skating like snowboarding in the back country or on groomed runs is different from being in the half pipe. But the snowboard companies all think they are in the same industry. I’m not sure I know how to get there, but the skate industry needs to think the same. Most of our retailers already do.
 
IASC
 
And speaking of progress, it isn’t a new development but it was great to see Steve Lake from Sector 9 and Monica Campana from Transworld sitting up there with the IASC board of directors at the open board meeting at the show. The meeting was well attended, but then they had a keg so what would you expect. They introduced a great new insurance product for skaters from Aflac at the meeting which is probably worth the cost of membership all by itself. You can find a link to it at the bottom of this page.
 
Hoodiebuddie
 
Hoodiebuddie is a couple of years old, but I chatted with them at the show and discovered some interesting business things (Full disclosure- they gave me a hoodie which I passed on to my kid, so he thought I was cool for almost 20 minutes).
 
As you probably know, they make the hoodie with the ear buds built in and you can put it through the laundry without removing them. The technology that allows them to make buds that can withstand the wash and dry cycle is patented.
 
That’s cool, but what really caught my attention was their business strategy. First, they do all the design, product development and marketing themselves. But they have a business partner that handles production, accounting and most of the back office. And the partner is big enough to defend their technology around the world as people try to rip it off. I like that arrangement.
 
More importantly, the company isn’t really just about a hoodie with washable ear buds. That’s their entry product that establishes their market position and gets them recognized as a brand. But longer term, they are building a product line that expands out from the basic hoodie, but is based on it. Essentially, they are trying to make hoodies into a category with a fashion component to it. This isn’t all that different from Clive in back packs and Nixon with watches.
 
It might be that they could have a nice little company just selling hoodies with ear buds, but I doubt that would be of much interest to their partner. The lesson for all of us is that the focus needs to be on the market position the product gives you, not just the product.
 
Okay, that’s it. See you at the next show.