My Wife’s Cosmetics and Skateboarding

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My wife uses Bobbi Brown cosmetics and I doubt most of you really care. Like me (and I’m guessing all the guys who read this), until right now, you’ve probably never heard of Bobbi Brown. Maybe some of my women readers know it. 

I care that my wife looks great but not what brand she chooses.
 
Hmmm. That sentence is probably worth some discussion, but first I’d like you to check out Bobbi Brown’s foray into skate. It’s seems they made some pink skateboards “…to empower women to try something that isn’t typically thought of as a woman’s sport.” They got pro skater Eli Reed “To teach a bunch of fashionable newbies how to skate in two hours’ time.” It doesn’t look like too bad a job.
 
Anyway, go take a look at the brand’s blog post on the subject. If you don’t hit your mute button, you’ll have to listen to “I Feel Pretty” from West Side Story as the background music. Oh what the hell- don’t mute it. You ought to get the whole effect (The music on the actual video of the session is better).
 
First I laughed. I mean, it’s not like this is the first time any of us have seen skateboarding used in a way that’s not precisely consistent with its roots as most of us think about it. Then I got a little morose and thought about how much I missed skateboarding being kind of dark, underground, urban, mysterious, exclusive. Maybe that’s a long way to say core.
 
Finally, I got around to thoughtful and thought, “Hell, if something is getting new people to skate, do I really care what it is?”
 
Now it gets complicated. I guess if I’m a core skate brand, I do care. Because “getting people to skate” doesn’t mean they are going to go out and buy a branded deck. A skateboard won’t be a statement to most of these people. It will be a tool they use to do something they enjoy. Like, I suppose, a snowboard has become. Or a basketball? Or golf clubs? Pick an activity.
 
It is the duty of every brand manager to convince her customers and potential customers that her brand is “better” than the competitors’ brand even, or maybe especially, when meaningful differences are hard to discern. But as quality improves (plateaus?) and distribution broadens it gets harder and harder to convince people that product differences, even if real, matter.
 
The skate industry spent many years and a whole lot of money explaining to people that a “real” skateboard was made of seven plies of laminated Canadian maple and nothing else. They succeeded. Then two things happened.
 
A lot of people said, “Well, we can laminate those seven plies of Canadian maple too, and we’re willing and able to sell it for less.” And they did.
 
And some skaters, especially those just discovering the sport (and they did think of it as a sport- not a lifestyle) said to the industry, “You’re right- a skateboard is made of seven plies of laminated Canadian maple just like you said and just like these cheaper decks.” Excuse me if I don’t go through the entire industry lifestyle cycle, product becoming a commodity argument again here.
 
That brings me back to my earlier comment about caring how my wife looks, but not what brand of cosmetics she uses. The only thing I experience with cosmetics is the result. I don’t care about Bobbi Brown, its secret sauce, or the fraternity of users. My wife, on the other hand, could tell me in so much detail that I’ll never ask (though maybe I will now just to see what answer I get) why she uses the product. Part of the answer may be that she got a good price on it, but that won’t be the whole answer.
 
There is, of course, and will always be, a “core” skate market. That market, I expect, will come and go with demographics, because it usually has. And it won’t include just people who buy branded decks.
 
But now that product quality is high and distribution broad, a lot of, new skaters will experience skating like I experience cosmetics. As long as it works, I just don’t care about the details.
 
Bobbi Brown, I assume, is interested in selling cosmetics- not skateboards. They just decided, “Oh this might be fun. Look what we’re doing.” It could have been something besides skateboarding. I’m sure it will be in future blog postings. Was there a business calculation there? Of course.
 
Bobbi Brown’s skateboarding experiment felt inclusive and nonjudgmental. They were just having fun which I think is what you’re supposed to do when you skate.
 
Remember when we all (including me) mocked scooters when they came out? I thought they’d be a flash in the pan. They went through an amazingly accelerated business cycle and became a commodity. But it seems that some kids don’t care about that and just think scooters are fun. Somebody is making those things and selling them for, I’m guessing, a profit.
 
What if some core action sports company, skate or otherwise, had branded those things and started to sell them with a longer term perspective? Big risk? For sure. Leads to being mocked by your peers? Probably. Alienates some of your existing customers? Almost certainly. But who knows what might have happened. Business is a risk.
 
The core skate market has always had a sort of insular arrogance to it that was part of its marketing positioning and, for a long while, served it well. But the whole action sports industry, if that’s what we still are, has evolved to a point where being inclusive and nonjudgmental makes a whole lot more sense.
 
Longboards come to mind. They came out of nowhere, were kind of ignored in a “You’re not cool wish you’d disappear” sort of way by the core skate market and are now a big, big chunk of the skateboard market. Half? Part of that is because of demographics. But part is because they are inclusive and nonjudgmental. However you want to ride down a hill and whatever strange looking contraption you can design is fine with them. In fact, they will probably want to know more about why, exactly, your  contraption is strange looking. This does something to advance the technology and keep the product fresh. As I’ve written before, it feels a bit like the bike market.
 
Cosmetics is a cut throat industry with, as far as I know- and that’s not very far, most product differentiation created by marketing. And they have the advantage of every woman in the world wanting makeup. I gained great insight into this when my mother, fresh out of hip surgery and still groggy from anesthetic, asked for her makeup kit. I don’t understand it, but I acknowledge it.
 
Maybe inclusive and nonjudgmental has become more important than “cool.”

 

 

Winter Resorts Targeting Baby Boomers: I’m a Little Worried.

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Well, you know me. I’m always a little worried about something. But hopefully, the fact that I have a tendency to bring up issues people wish would just go away is part of the reason you read me. 

We’ve all known that winter resorts tend to be dependent on the baby boomers for a big chunk of their business. You need a lot of disposable income and free time if you’re going to visit them regularly. I just took that as a fact and didn’t think much about it until I saw this article called “Best Ski Resorts for Senior Skiers.” It talks about programs that resorts have in place for senior skiers/boarders.
 
“Well, that sounds great,” I thought. But then I read, “All the marketing to boomers seems to be paying off as the National Ski Areas Association reports an 11 percent increase in skiing and snowboarding for people 45 and older. Strangely, on the flip side, there’s been a decrease in skiers 35 and younger.”
 
I kind of new that too. But seeing the two statistics in juxtaposition made my alarm bell go off. I wondered if by doing marketing, building facilities, and holding events that targeted the baby boomers, you weren’t guaranteed to be turning off younger (and more importantly potential) boarders/skiers. I wonder what the decrease in skiers 35 and younger is, what the size of that group is, and how it compares to the 11 percent increase in the over 45 crowd.
 
I’m sure you can see where I’m going with this. The over 45s are going to stop visiting winter resorts a lot sooner than the under 35s and I don’t think there’s any amount of marketing or new programs that can change that. Every resort is different, and it may be a great tactic to attract older people with lots of money. But strategically, if you look beyond some limited number of years, it’s kind of a recipe for self-destruction. I mean, I don’t ever want to get the point where there are emergency medical care facilities on the mountain instead of bars, most skis are sit down, and some visitors need minders on the mountain so they don’t get lost (Oh-shit-I’ve gotten lost a time or two).
 
Haven’t we been spending, as an industry, a whole bunch of money and effort to attract new participants? If we’ve had so little success, why is that? Or maybe we’ve been successful, and the decrease in the under 35 crowd would have been a whole lot worse without it. But even if that’s success, it’s not enough success.
 
The devil is in the details, and it’s certainly possible for a given resort to balance its programs and facilities to appeal to a wider demographic spread. And yet, I would not be the only person who believes that if you think everybody is your customer, then nobody is your customer.
 
Maybe the Mountain Rider Alliance has some good ideas about how to manage this. Look at the way they are defining their potential customers. Full disclosure; I’m on the Mountain Rider Alliance (unfortunately unpaid) Advisory Board.
 
Hell, maybe resort managers have decided they can milk the boomers until global warming turns some of them into summer resorts. I don’t really think that’s true, but some years ago I had occasion to attend and make a presentation to the scuba diving association. They had some issues remarkably similar to the winter sports business. I learned a lot, and got quite a good perspective. You know, it wouldn’t hurt for NSAA to start a conversation with the golf trade association if they haven’t already. Golf is another sport that takes a lot of time and money to participate in (In my case, without much in the way of results). I’m not suggesting this because I believe all winter resorts can or should build golf courses (though of course some have) but because I think the cross fertilization of ideas concerning attracting participants might be valuable.
 
What I guess I’m reminding you of is that dependence on baby boomers cannot be a long term strategy. And dependence may reduce your ability to transition away from them as demographics will eventually require (is requiring?). It is also possible (I think likely) that this country’s economic profile over the next couple of decades may require winter resorts to rethink their offerings and financial model.

 

 

Another Possible Retail Future

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We’ve all been watching for a while now as online and brick and mortar retail have collided and converged. We know it’s here to stay and that there’s a lot of evolving left to do. None of us know what the end product will look like (though maybe it’s better to acknowledge that there is no end product- just way points along the path). 

I think I might have stumbled on one of those way points. There’s a new concept store in the Seattle area called Hointer. No idea where the name came from or what it means, but it’s a fascinating combination of internet and brick and mortar.
 
 When you walk in the store (which at this point is men’s pants only), you download an app on your smart phone. There’s one pair of each style of pant hanging in the store. You scan the tag on that pair, put in your size in the app, and the pants shows up in the changing room for you to try on in what they say is 30 seconds. If you want to purchase after trying it on, you swipe your credit card in the scanner in the fitting room. Your receipt will be emailed to you. If not, you just put the pants in a chute in the changing room and as it falls to wherever it goes and is automatically removed from the pants you’ve selected and returned to inventory.
 
Unless you want to, you never need to interact with a sales person. I’m not quite sure if that’s good or bad. Depends on the shopper I suppose. And of course, the store keeps up to date track of its inventory and that inventory is shared with its suppliers.
 
I’ve had a tendency in recent years to harp on the importance of inventory management and operational efficiency. This store seems to make that a virtuous part of the selling process which I really love.
 
I haven’t been in the store yet. I’d want to know a lot more about the cost of the required technology, the impact on operating expense, and the comparative price points of the product. I’m also curious about the complexity that will occur as the product line is expanded.
 
Here’s a link to a news story where the reporter goes through the purchase process. I hope you’ll watch it.   Sorry about the short commercial at the start of the video.

 

 

Paul Naude Explores Billabong Leveraged Buyout

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I suppose you have all heard that Billabong Director and President of the Americas Paul Naude has stepped aside from his duties for six weeks to try and pull together a leveraged buyout of Billabong. You can see the Billabong announcement and the conditions under which he is working here at Billabong’s investor web site. It’s the first link under Recent News called Company Update. 

To be clear, I have no information that’s not public. However, I thought it might be useful to review just what a leveraged buyout is and how it works. And, I’ve got a couple of questions.
 
In a leveraged buyout, the buyer (or buyers) purchases the target company by using some of their own money (the equity portion) and borrowing the rest. The loan amount is secured by the assets of the target company.
 
You might reasonably ask, “How much of the purchase price is equity and how much is debt?” It used to be that you could borrow most of the purchase price, but that was back in the good old days. I’m not close to the leveraged buyout market, but I’m guessing you have to put up more equity now. That’s both because lenders are a bit more cautious then they use to be and because it’s harder in this economy (in general- I can’t speak to the specifics of Billabong) to put together a plausible business model that shows fast revenue growth to be used in paying off the debt.
 
On the other hand, interest rates have come down to historically low levels even, or maybe I should say especially, for lower rated debt. People seem to be forgetting again that there is an inevitable relationship between risk and return. You may recall that’s what got us into our current economic/financial mess in the first place.
 
Anyway, the point is that lower interest rates make it easier to make a deal pencil out. Once a leveraged buyout is complete, the new owners have to pay down the debt. They typically try to do that by some combination of asset sales, expense reductions, improved efficiencies and revenue growth.
 
You remember that Billabong had to sell half of Nixon and then a few months later raise additional equity to address concerns about their balance sheet. By definition, in a leveraged buyout, their balance sheet would deteriorate again as they added the debt used to purchase the company to it. The former owners and banks won’t care, because they will get their cash and be gone. The new owners will understand that they are taking higher risk but hey, that’s the business they are in and their plan will have convinced them that the risk is justified by the potential return.
 
We also remember, of course, that a couple of potential buyers evaluated Billabong to see if they might be interested in buying it and choose not to. Why? Well, we don’t know specifically but I think it’s fair to say that they didn’t see the risk as justifying the potential return.
 
Below is a chart of Billabong’s stock price from an article in The Australian that will remind you of the series of events.
 

       
 
One would assume that Paul Naude knows why Bain and TPG pulled out, but on the other hand maybe they had no obligation to explain it to the Billabong Board of Directors.
 
That doesn’t really matter anyway. When I evaluate a company, as you know, I do my own analysis and don’t pay attention to anybody else’s conclusions. Perhaps after I did that with Billabong I’d:
 
–          See the risks and returns a bit differently than Bain and TPG.
–          Think I could get it for a lower price because of the performance of the stock since the October 12th withdrawal of TPG.
–          Believe that the transformational strategy had the potential to drop a lot of Australian dollars to the bottom line pretty quickly.
–          Be prepared to be more aggressive in selling assets to pay down debt.
–          Think that the Australian dollar was going to depreciate a bunch over the next year.
 
Paul didn’t take this step without thinking it through. His experience with the company, reputation in the industry and, I assume, willingness to be CEO and put up some of his own money, is at least going to get him listened to. His agreement with Billabong keeps him from disclosing any confidential information, so I wonder if he won’t go back to TPG and/or Bain and show them a different vision of reality. They’ve already got the confidential information.

 

 

Some Lessons From Zara; How Fast Fashion Fits Today’s Economy

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Zara has 5,900 stores in 85 countries. Only 45 are in the United States. I’ll get back to why that is. I’ve been aware of Zara for a while of course, but when my ever vigilant research department sent me this article, I decided there were some lessons we could all learn.

Because I don’t want to rehash the whole article, this will be pretty short. Zara, headquartered in Spain, has factories and a distribution center right across from its corporate offices. Their template is “…trendy and decently made but inexpensive products sold in beautiful, high-end-looking stores. “ Sales people are trained to gather information from customers. That information goes to headquarters daily, where trends are identified, clothing designed, and manufacturing orders placed.
 
The production time is two to three weeks. There’s never an over production issue. The company does not advertise. I may have said a time or two that selling through at full margin and telling your customer, “Sorry, it’s all gone!” is the best advertising.
 
Typically, stock turns over in like 11 days. The result is that “…every purchase is an impulse buy” because you know it won’t be there when you come back.
 
Think about the quality and efficiency of operations, including inventory management, required to operate like this. I’ve been writing for a while now that operating well was no longer a competitive- just a requirement of being in the market. Maybe in fast fashion it is an advantage.
 
Here’s another quote you should pay attention to. “A business model that is closely attuned to the customer does not share the cycle of a financial crisis.” You know, we all knew that. But it’s so obvious I, at least, have never thought about it quite in that way. I guess the closest I’ve gotten is to say focus on the gross margin dollars you generate rather than sales growth.
 
Zara’s business model encouraged its customers to visit their stores often, to spend less on each item, but to buy more items because they know they won’t have each of those items long. It’s not a perfect comparison, but the moment I read about spending less on items you know you won’t have long, I thought about how the popsicle skateboard market has evolved.
 
I wonder if, at some point, an unexpected reaction to fast fashion might be for consumers to get tired of constant shopping and turnover. Maybe the next retail chain will be “Timeless Concepts” offering apparel that tends to not go out of style, at least not so quickly. Or maybe I have no clue how men and, especially, women think about fashion.
 
And why does Zara have only 45 stores in the U.S.? Partly because they are aware that foreign brands have a long history of failing here. But it’s also because the Americans “…don’t fit in the clothes. So why do it?  Having to make larger sizes makes production so much more complex.”
 
Well, that’s embarrassing. Maybe having an extra-large burrito and a milk shake for lunch will make me feel better.           

 

 

Let’s Review; Lessons for Being in the Winter Sports Business

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Well, here we are in the middle of a new snow season. Among the things people are probably thinking about are:

“It can’t be any worse than it was last season.” That seems statistically likely to be correct.
 
“What am I going to do with last year’s product?” Probably something brands and retailers are both still thinking about that.
 
“I am never, never, ever going to order (or produce) more than I’m absolutely certain I can sell.” I do hope you stick to it.
 
“Wow! Am I glad I wasn’t over inventoried when last season started.”
 
And, if you’re a smaller, single season company, there’s the ever popular, “I hate having to finance this business and I’m really, really tired of personal guarantees.”
 
With those in mind, I thought it might be useful to review the things you have to do to be successful in a one season business. Most of these ideas I’ve written about before, but I don’t think I’ve ever pulled them all together in one place.
 
Be Cognizant of What Is and Is Not Controllable
 
Business is good when it snows and bad when it doesn’t- and there’s nothing we can do about that. That means you’ve got to assume and prepare for an average season at best (though you might need to think about what you mean by “average” in a lousy economy with global warming).
 
You Have to Make Money 
 
I know this sounds kind of obvious, but if you can’t make money, don’t be in the business. We’re all aware of retailers who have pulled out of snowboarding after doing that analysis. Though I don’t like to see that, I say good for them for facing the reality. I guess the good news is that it helps those who remain in the business by reducing distribution a bit.
 
Unfortunately, the analysis is not as cut and dried as I just made it sound. You mean make money every year? How do you allocate your overhead to winter sports if that isn’t all you do? Is it cash flow positive even if it isn’t bottom line profitable (I doubt it)? Will it cost me customers who buy other stuff? Can I make it profitable by carrying different brands or inventory mix? Etcetera. 
 
Don’t Be a One Season Business
                               
I suppose the only snow only retailers left are shops associated with resorts, and they close in the summer. Except that winter resorts have figured out that not being a one season business is a good thing. Water slides, zip lines, mountain biking trails, golf, and other activities are allowing them to generate at least a bit of cash flow in the summer. What significant snowboard brand hasn’t, or isn’t trying to create year around revenue or isn’t owned by a larger company that has that year around cash flow?
You’d be stunned at what getting just 10% of your total revenue in the off season does for the ability of your finance person’s ability to sleep at night by improving the cash flow.
 
Basically, there’s no good way to finance a one season business except to make it less seasonal. You can do it with equity, but you really don’t need to tie up all that money all year and your return on equity will probably suck. You can do it with debt and pay it down in the off season but lenders, especially now, want to see a strong balance sheet (implying lots of equity) before they will lend you the money. It’s a bit of a conundrum.
 
I’ve been responsible for the financial management of a couple of snowboard companies and the only solution I see is increasing off season revenue.
 
Inventory Management
 
I would always prefer to bemoan a sale I didn’t make than inventory I had to liquidate. It was years ago I suggested that a focus on the gross margin dollars you generated rather than the gross margin percentage was a good idea, and it’s only gotten more important as the economy has become and remained soft. Sales growth is harder to come by, but maybe you can improve your bottom line anyway by growing your gross profit.
 
In a more formal sense, this method of looking at your inventory is referred to as gross margin return on inventory investment. To over simplify, it makes you confront the fact that you’d rather sell an item with a 35% gross margin that sells for $175.00 than three items with a 50% gross margin that sell for $12.00. 
 
That’s worth thinking about in any business, but especially in the seasonal snow business. To put it as directly as I can, if you’re stuck with much inventory at the end of the snow season, the chances of your making an overall profit in snow that season are slim to none.
 
And there are other advantages to managing inventory a bit more tightly and in a more sophisticated manner, as if making more money shouldn’t be enough to convince you. You tie up less working capital. You create a perception of value through scarcity. I think “Sorry it’s all sold!” does more to create value in the eyes of the consumer than all the advertising in the world. What exactly is wrong with selling a bit less, but paying the bank less interest, generating more gross margin dollars, and perhaps being able to spend a few less bucks on advertising and promotion?

I thought this was going to be a way longer article.  I know, I know.  Conceptually simple sounding, but not all that easy to do.  But much of what I’m describing just represents good business practices that these days you can’t ignore.

 

 

Miscellaneous Stuff; Not Your Typical Market Watch

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I read a lot of stuff. From time to time I come upon something I want to share with you. Often I hold on to it until it fits into something I’m writing. But at this point, I’ve got a few articles I’ve been saving that it’s just time to spring on you in the hope you might find them interesting or even useful. 

The first, and the most eclectic of the three, comes from the investor George Soros. It’s entitled “The Tragedy of the European Union and How to Resolve It.” Soros has been a hell of a successful investor over many years and at this point is worth bazillions. Part of the reason for his success, I think, is his sense of history and culture and his ability to look beyond the next month or year or more. As an investor, that has allowed him to see more clearly than most and to have some patience.
 
This is written at a high level, but the quality of the writing makes it a pretty easy read, and there are no graphs or mathematics. Obviously, it’s not about action sports or youth culture or fashion. But many of you do business in Europe, are already impacted by what’s going on there, and know there’s a great deal of uncertainty about a how it all work itself out.
 
Soros has an opinion about what the choices are, or at least should be. Whether those seem reasonable to you or not, his historical analysis of how Europe found its way to its current mess is about the best I’ve seen in the space he uses. I recommend turning off your cell, disconnecting from the internet, locking your door and reading this thoughtfully.
 
The second article is called “A Seasonal Business Aims to Survive the Off-Season.” I imagine this might strike a little closer to home for those of you in the snow business. The business in question is a restaurant and specialty food store, and its lean months are October through April. Still, I think you’ll find some of the issues they face and actions they consider to improve their off season and manage their cash flow recognizable. From time to time, I’ve said that we spend, as an industry, way too much time talking to each other and confirming what we already think and want to believe. Here’s a chance to see how a small business not in our industry deals with a similar issue.
 
“Building a Brand When You Can’t Afford an Ad Agency” will strike a chord with everybody in our industry who has built a business from scratch. Interestingly, it’s not about social marketing and the internet.   I like it of course because what this guy did is pretty much consistent with what I’ve told people who’ve called me to ask how to build their new brand.  If I can find some Tito’s Handmade Vodka, I might have to change from Grey Goose (straight up with a twist).                   
 

 

 

The Possible Rip Curl Deal

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A couple of readers were thoughtful enough to send me articles on the possible sale of Rip Curl. You can read them here and here. What’s intriguing from my perspective is that the offers came along at the same time as the conditional TPG offer for Billabong. As you know, that’s in due diligence right now, though there’s no certainty a deal will be made. 

Rip Curl is a private company, but according to one of the articles it earned AUD 7.9 million in the year ended June 30, 2011 after making AUD 15.5 million for the year ended June 30, 2010. No numbers are given for the latest fiscal year results, but we do learn that, “During the 2012 financial year Rip Curl acquired 24 Rip Curl branded and multi-branded stores in Australia and South Africa.”
 
For all I know, Rip Curl had a spectacular fiscal 2012 and just thought it would be a good time to sell the company, but that seems unlikely given what we know about conditions in Australia. And if I were going to sell, I don’t think I’d look to do it at the same time a direct competitor was up for sale.
 
Anyway, just thought you might want to see these articles.      

 

 

Nike’s Annual Report and Some Suggested Reading

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Two days ago, Nike filed its 10K annual report with the SEC and I’ve been through it. I’m not going to spend a bunch of time doing a detailed analysis of their already reported results if only because there wouldn’t be a lot of insight to be gained. But there were a few comments in the fine print of the report and in the conference call that I thought were relevant to thinking about the business environment.

As part of that process, I want to point you to a book called The New Rules of Retail, by Robin Lewis and Michael Dart that Roy Turner at Surf Expo turned me on to. It’s also available for Kindle. Let me make the connection between the book and Nike by starting with a quote from Nike Brand President Charlie Denson talking about how the Nike brand achieved a 21% increase in revenues during the year.

“We did it on the strength of our product innovation, the power of the brand, and the differentiation we create through distribution,” he said. Nike Inc. President and CEO Mike Parker notes, “There’s a strong appetite for authentic brands and genuine innovation. Digital technology is just beginning to show what’s possible in products, services and at retail. And new partnerships continue to advance how products are manufactured and distributed.”
 
You might be tempted to say, “Well, no kidding” but having just finished the book, I heard more in that statement than I otherwise might have.
 
The New Rules of Retail (published in 2010) makes a number of predictions we can already see coming true. It says that just to be in the game, you have to do all the operational stuff well. Not just well- really well. And you have to keep improving. That’s no longer a strategic advantage, but the price of entry. I’ve been saying that for a few years, though not with such strategic eloquence, so you can begin to see why I like this book. Like all of us, I’m partial to people who confirm what I think.
 
They also say that “The ultimate collapse of the traditional retail/wholesale business model is now clearly visible.” I’ve said retailers are becoming brands and brands are becoming retailers.  I’m liking the book more and more.
 
They think that as much as 80% to 90% of traditional department store revenues will be generated by their own or exclusive brands. They suggest that retail stores “…will become hybrid enclosed ‘mini-malls’ for increased traffic and higher productivity.” They think Amazon will open stores. They expect preemptive strategies like pop-up stores to “…become proactive strategies as opposed to marketing opportunities.” They expect big retailers “…will accelerate the roll out of their smaller free-standing ‘localized’ neighborhood stores.”
 
They say some other intriguing (or maybe scary?) things too, but I’ll let you read them for yourself and look at the examples they provide.
Why is this happening? Because the consumer has near perfect information and an almost endless number of choices. What to do?
 
The authors suggest that successful companies will do three things. First, and as a condition for accomplishing the other two, they will control their value chain; especially at points of contact with the consumer. This does not mean owning your whole value chain.
 
Second, with consumers expecting more and better all the time and to get things the way they want them, companies have to far exceed the consumers’ expectation. They will accomplish this by creating a “neurological connectivity” with their customers. I know that sounds a bit like voodoo, but the book explains it very well. Think Starbucks or Trader Joes. Or Vans, though that’s my point of view.
 
Third, they will have “…to gain access to consumers ahead of the multiplicity of equally compelling products or services, and precisely where, when and how the consumer wants it.” They call this preemptive distribution.
 
Now, with those three actions in mind, go back and read the quotes from the Nike conference call I started with. The book’s authors note that in all the companies they interviewed, none used their exact words, but the successful ones were doing what they suggested. By the way, they spend quite a bit of time talking about VF and how it’s following their prescription. That’s an interesting read.
 
My immediate reaction on finishing the book was that doing what they say is required was damned expensive and required a strong balance sheet; especially in a lousy economy. Though they don’t address the financial cost of their strategy, I suspect they would agree as they believe “50 percent of retailers and brands will disappear.”
 
They don’t talk about a time frame, so it’s hard to know what to think about that prediction. And they don’t say anything about new brands being created. If their prediction is over three years, it’s pretty harsh. If it’s over 40, it’s probably a low estimate given normal brand cycles.
 
So probably you’re not as big as Nike and might not have their balance sheet. The message isn’t, “If you’re not big you’re doomed.” The message is, first, business was way more fun and easier in the 90s and I really miss that. Second, rapid disruptive change is never something any of us really like, but it’s full of opportunities for the people it doesn’t paralyze.   Some of that opportunity comes from the fact that your competitors may be paralyzed.
 
Third, Lewis and Dart wouldn’t disagree that you still need to know your customers and give them what they want. It’s harder than it used to be, but you also have some technology tools you didn’t have before. In that sense at least, nothing has changed.
Okay, wasn’t this supposed to be about Nike or something?
 
Nike’s revenues for the year were up for almost all categories and brands to $24.1 billion (including Cole Haan and Umbro which they are selling). Sales at Hurley fell from $252 million to $248 million. Nike reports total action sports sales at $499 million, up from $470 million the previous year. That’s 2.1% of Nike’s total sales for the year. I guess “action sports sales” means Hurley plus Nike Skate. Maybe it includes some Converse sales.
 
We know that Hurley lost money, though they don’t say how much. Lower gross margins as well as higher selling and administrative expenses as a percentage of sales contributed to Hurley’s loss. But they are still confident in Hurley’s future. Mike Parker noted in the conference call, “…we’re confident our NIKE, Converse, Jordan and Hurley brands have virtually unlimited growth potential.”
 
Nike’s gross profit margin fell from 45.6% in 2011 to 43.4% in the year ended May 31, 2012. The decline was “…primarily driven by higher product input costs, including materials and labor, across most businesses. Also contributing to the decrease in gross margin were higher customs duty charges, discounts on close-out sales and an increase in investments in our digital business and infrastructure.”
 
I found the mention of higher customs duties interesting. They note in the 10K, “The global economic recession resulted in a significant slow-down in international trade and a sharp rise in protectionist actions around the world. These trends are affecting many global manufacturing and service sectors, and the footwear and apparel industries, as a whole, are not immune. Companies in our industry are facing trade protectionist challenges in many different regions…”
 
On pages four and five, they talk about issues with importing into the European Union, Brazil, Argentina and Turkey and about trade relations with China. Among the reasons the Great Depression lasted so long was the imposition of various “beggar thy neighbor” trade policies (including the Smoot-Hawley tariff act in this country) that reduced worldwide economic activity.
 
Looks like all the world’s helpful and friendly politicians are at it again. You know, I knew they would, but I really hoped they wouldn’t. I better move on. Oh- 58% of Nike’s revenues are from outside the U.S.
 
Well, this is interesting. I’m looking at an income statement with no restructuring charges, goodwill impairment, or intangible and other asset impairment. There’s no “adjusted earnings” offered as an explanation for something or other. No EBITDA reconciliation to GAP. No discontinued operations (There will be next quarter because of the plan to sell Cole Haan and Umbro). There’s hardly any interest or “other” expense. Just net income that rose for the year from $2.13 to $2.22 billion, or by 4.2%. That decline in gross margin really hit them hard.
 
Okay, I’m worried. If too many companies start just reporting what they earned without resorting to various explanations, reconciliations, and obfuscations, who’s going to need me to figure it all out? Where will I be if we have straight forward, easy to read financial statements? I sure hope this isn’t a trend.
 
Revenue in North America rose from $7.58 to $8.84 billion, or by 16.6%. Earnings before interest and taxes were $2.01 billion, up from $1.74 billion the previous year. Revenue from Western Europe was up 7.1% to $4.14 billion, but earnings fell 18.2% from $730 million to $597 million. China sales rose from $2.01 billion to $2.54 billion and earnings rose 17.3% to $911 million.
 
Nike ended the year with 384 retail stores in the U.S., but 109 of those are Cole Haan which will go away when they sell the brand. Hurley had 29 stores. Non-U.S. retail stores totaled 442 including 69 Cole Haan. Direct to consumer revenues totaled 17% of total Nike brand revenue (not Nike, Inc.) And comparable store sales grew 13%.
 
If Nike starts renting space in a Macy’s and stocks and manages the inventory itself, will they call that a “store?” For all I know, they are already doing that. The distinction between brand and retailer just keeps blurring.
  
Nike’s balance sheet is more than solid, with $3.7 billion in cash, a current ratio of 3.0, almost no long term debt and $10.4 billion in equity against $5.1 billion in total liabilities.
 
Nike’s doing well given economic conditions not even they can shrug off. Most importantly, I think they have a clear vision of where brands and retail are going.

 

 

Retail Evolution and Industry Conferences: What’s the Connection?

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Maybe ten days ago, I wrote this article that talked about JC Penney’s new pricing policy and strategy and referred you to an article on that strategy and why it might not work. I thought that article had some implications for our industry and I discussed them. 

Now, my ultra-sophisticated research department (thank you dear) has identified another article called “Retailers Rethink Stores to Fight Online Competition.”   It talks about all the things retailers are trying and concludes with a quote that from Wendy Liebmann, CEO of WSL Strategic Retail saying, “If retailers aren’t experimenting, then they are doomed to fail.”
 
The way you’ve heard me put it is, “The biggest risk is not taking a risk at all.” I’m thinking Ms. Liebmann and I would agree.
 
Meanwhile, speaking of retail chaos, my ever vigilant research department also forwarded this article on foreign fashion brands aggressively moving to open retail locations in the U.S. Well, I guess somebody has to fill up all that empty retail space.
 
You know, it’s funny- the suggestions in the above referenced articles seem equally applicable to retailers from Costco down to a 750 square foot specialty shop.
 
Being reactive in a changing environment has often been a bad idea, but now it seems like it’s damned near impossible given the pace of change in retail. You’re on to change number two before you can react to number one. Do what’s right for your own business.
 
That probably includes spending some money on technology, having the best numbers you can have about what sells (and what doesn’t) and the gross margin dollars you earn, taking chances on brands, taking a new hard look on who your competitors are (finding out where else your customers shop would be great), making decisions with an eye to your balance sheet, and not stressing too much about distribution (as the cat is largely out of the bag).
 
Don’t worry so much about what the other guy is doing. I think I might have first suggested that approach back in 2002, when I wrote after the Surf Industry Conference that maybe they should focus on running their own businesses rather than worrying about skateboarding. Ten years later, it holds up pretty well. You can read it here.
 
Speaking of industry conferences, the snow, skate, and surf conferences for the year are history.   I only made it to the skate conference. I’ll do better next year. Assuming the people that run the companies are attending, that is.
 
But here’s the dilemma for me. Let’s call it a suggestion for conference organizers.
 
I am not expecting many calls or emails telling me that I’m wrong about the changes in retail and the speed at which it’s changing. I don’t even expect to get told my “what to do” list is out of line (though if somebody told me that listing them is a hell of a lot easier than doing them, I’d have to agree).
 
But if the retail and competitive environment (with its implications for brands as well as retailers) is changing as much and as quickly as I think we all agree it is, why is it our conferences still have a tendency to feel like membership meetings at a private club?
 
Look, I love seeing friends I’ve known a long time and don’t see that often. It’s low key, low stress, and fun. We have a great time validating each other’s point of view in a non-threatening environment. I want more people there, as both speakers and attendees who will rattle our comfortable cages.
 
Where’s the skateboard buyer from Amazon? How exactly does the offer of ten blanks for $100 end up right next to the branded deck for $48.95?
 
Can we get somebody from PPR who’s not Volcom to talk about their perception of and plans for our industry? Just how many branded stores for their luxury brands are they going to open in the U.S. and who’s their target customer?
 
Is the Chinese manufacturer of soft surfboards there?
 
How about a retail panel made up of representatives from Sports Authority, Target, Costco, and Dick’s? Or maybe Zumiez, Journeys, and Tilly’s.
 
Have companies in our industry moved their production out of China due to higher prices? Let’s put them on a panel and find out where they moved and how it went.
 
How about a sociologist talking about how long, leveraged caused recessions impact consumer attitudes and spending over decades and maybe generations? There are marketing implications that could be valuable right now. Get Neil Howe, one of the authors of The Fourth Turning, which you should all read, as a speaker.
 
It’s possible nobody could afford Mr. Howe. Well, unless of course we had one conference instead of three. And looking at the strategic issues I’m suggesting we should be addressing, maybe that’s not so silly. Consider the overlap across customers in the industry.
 
I want to invite people to conferences who, whether we wish it or not or like it or not, are powerful players in our space but don’t usually attend. I want us to address issues we’re uncomfortable with, or hope will just go away- because they won’t. I don’t want what I already think to be validated because I’m talking only to like-minded people I’ve known a long time.
 
I’d like all these industry players that make us uncomfortable to be there not just as speakers or panelists, but just as participants. I don’t know if they’d want to come or if they’d be interested in telling us the kinds of things we want to know, but we’ll never know until we ask. They’d be a like more likely to come if there was one large conference instead of three.
 
I didn’t have the idea of consolidating conferences in mind until, honestly, the last paragraphs. I know that by raising the idea, I’m blithely stumbling into issues of industry politics, relationships and revenue sources. Yet it seems to make some sense if my premise about the issues we should be addressing at conferences is reasonable.
 
Don’t you agree?  Or not?