Learning from JC Penney: Their Transparent Pricing Debacle (So Far)

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As you are probably aware JC Penney, struggling to find a sustainable market position, hired a high powered Apple executive as CEO. He got rid of all their sales and started offering everyday low prices in an attempt to regain some customer attention and loyalty. Based on their recent earnings release, it’s not working, though I hope everybody would agree that this kind of dramatic positioning change can’t be expected to turn things around in a quarter or two.

Now, here comes a gentleman named Bob Sullivan who looks at some research that might explain why it isn’t working and, worse, probably won’t work. Here’s a link to the article. I strongly suggest you read it.

Basically, the article says that we, as consumers, like complex pricing and believe, to paraphrase the article, that a pair of shoes from Macy’s at on sale at 25% off has to be a better deal than Penney’s everyday low price. It also says there are people who will spend hours to save $20 and people who will gladly fork over an extra $20 to get the hell out of the store, and you have to cater to both. Penney’s strategy does not.
 
If true, things don’t look good for Penney’s new strategy or its CEO’s job. It seems to me the same research, if true, is valid for any retailer no matter how small or how large and how many store fronts.
 
My conclusion after reading the article (which I hope you’ve done) is that if you believe the research it references, then running a retail store or stores is inevitably more complex than it used to be. By a lot. And retailers don’t have any choice but to participate in this competition with consumers over information and pricing because, strangely enough, consumers want it that way.
 
Obviously this has something to do with the internet, wireless devices, and the instant availability of information. But it’s more complex and longer term than that.
 
It wasn’t really that long ago where there were just a few retailers, a lot fewer products, and a lot fewer choices to make. Sales were maybe occasional. Go back just a little earlier and your only choice was to order it from the Sears Roebuck catalog and wait for it to be delivered in a month or two by stagecoach.
 
Product research was prohibitively time consuming if it was even possible and there were few products to compare. We’ve come a long way, I guess.
 
Now, a retailer apparently needs to create complexity in pricing. Customers, Mr. Sullivan says based on the research he references, prefer it.
 
Complexity in pricing creates complexity in retail management. One of the justifications for the changes at JC Penney was to eliminate all the cost this artificial complexity created. Think about the costs of having and tracking sales. Especially when you have to keep doing it, and doing it, and doing it just to keep the customers’ attention.
 
Here are some of the costs I can think of: designing, printing and running ads; changing store signs and layout to correspond to the sales, changing prices in your accounting system; keeping your sales staff informed; the impact on the sale of other products from putting certain ones on sale; coordinating with vendors. In addition, I’m sure there’s a certain friction from constant change that has a cost even if it doesn’t show up as a specific line item on your income statement.
 
I can think of two consequences to this. The first is that it’s even more reason to focus on gross margin dollars generated rather than gross margin percentage. That I think that way is not news to anybody who’s read my posts.
 
The second consequence (I’ll call it a hypothesis- I’m not quite sure of this one) is that perceived product differences may be more important than real ones except in the cases where the real ones are particularly significant. You’re trying to create differentiation in an environment where information moves at the speed of light (Okay, slightly less because we’re not operating in a vacuum, at least most of the time). If you wait to do that until there’s a real, fundamental, difference in the product you’re carrying, it won’t happen that often. Even when that difference appears, it won’t last long in our industry and it won’t be exclusive.
 
We’re kind of forced into what Mr. Sullivan calls “shrouding.” It sounds like the more we do it, the better off you are as a retailer.
Can it be that the only way to manage your store in a time of a rapid change is to try and change even faster? I hope not. 

 

 

The IASC Skate Industry Conference

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The International Association of Skateboard Company’s conference week was, as usual, well attended by the people you want to see there. That’s a lot of what makes it worth attending for me. I enjoyed the Hall of Fame awards. It was great to see and hear some of these people I’ve only read about. I left before the bitter end, but heard that there was no hotel bowling or arrests this year. Oh well.

There wasn’t a presentation I didn’t learn something from, but I’ve highlighted some below where something they said struck a particular chord with me.

Transworld Business’ Mike Lewis started the conference with a review of data Transworld had collected on skating. Two things stood out for me. The first was the graph that showed the decline in skate participation in recent years in spite of the growth of longboarding. While the data is a bit controversial, the trend is clear. Partly, it’s the result of demographics, and the good news is that those demographics are starting to turn around. There’s a group of kids moving into the age at which kids take up skating. 
 
The success of long boards was highlighted by the presence at the conference of Concrete Wave publisher Michael Brooke, and by the appointment to the IASC Board of Directors of Sector 9 cofounder Steve Lake. Seems to me that long board representation at IASC is overdue.
 
Longboarding has succeeded not only because it appeals to a broader demographic, but because it’s been nonjudgmental about how you should have fun on a skateboard and its participants are very interested in new technology. I wrote about this after I visited the Interbike show and compared the bike industry to longboarding.
 
The second thing that stood out in Mike’s presentation was one of the answers to the question, “What’s selling?” One comment was “Anything longboarding!!”
 
From what I hear, that’s probably true. But there’s always a market top.  For any industry. The sheer exuberance of that statement reminded me a bit of the projections of the DOW going to 30,000 or the attitude of the 300 or so snowboard hard goods companies at the SIA show in 1995.
 
It’s not time to cut back on longboards as either a retailer or brand. But there will be a time when growth will at least slow and I doubt its five years away. So watch your inventory, control your distribution, maintain a strong balance sheet and keep innovating. That way, when the downturn does come, whenever that is, your company will be in a position to benefit from your competitors’ troubles.
 
SIA President David Ingemie discussed how SIA helps its members with a particular emphasis on quality research. An important part of David’s message was not to ignore the research because you don’t like what it concludes. Research, for all its flaws, is always better than anecdotal evidence. Just because you don’t believe it doesn’t mean it’s wrong.
 
University of Utah Economist Dr. Peter Philips kept us entertained and focused even while he gave us some sobering economic news. I’d seen it before, but the highlight of his presentation for me was the chart that shows employment decline and recovery in all recessions since the Great Depression. The message was that employment in the Great Recession has declined further and is taking longer to recover than any recession since World War II. Not news we want, but something we need to be aware of.
 
That, by the way, is how it’s always been in recessions caused by too much debt.
 
He also reminded everybody of the inevitability of the business cycle, and urged us to keep innovating as a way to push that cycle out as much as it can be.
 
The last speaker at the conference was Oliver Percovich, the founder of Skateistan in Afghanistan. The story of the five years he’s spent so far (he’s committed to ten) using skateboarding to give kids in Kabul, Afghanistan some fun, hope, education, and opportunity kind of makes whatever problems we in the skateboard industry think we have pale in significance. The industry has supported his program and I am sure it will continue to do so as he expands into other countries.  

 

 

PPR Earnings Release and Volcom- Exit Strategies for Core Brands

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This article was occasioned by PPR’s release of its quarterly results, but that’s not really what it’s about. When PPR, or Decker’s or VF or Jarden releases earnings we’re interested in what happened mostly because we’d like to know what’s going on with Volcom, or Sanuk, or Reef, or K2/Ride. We never find out very much. 

Volcom is in PPR’s Sports & Lifestyle Division which includes Puma and Volcom (including Electric). Puma did 821 million Euro in the March 31 quarter and “other” brands in that division, which means Volcom, did 65.6 million Euro. That’s about $87 million at the March 31 exchange rate.
 
Maybe ten days ago, I wrote about Nike’s quarter, indicating it was kind of a waste of time for me to analyze Nike’s financials. Instead, I tried to focus on some comments Nike’s CEO made about sources of product innovation. The goal was to try and provide a little perspective that maybe helped smaller companies in action sports (or maybe it should be called active lifestyles?) think about how to compete and succeed in the eight hundred pound gorilla era. I think that approach is valid not just for NIKE, but for all the large companies that have bought up companies in our industry.
 
PPR management made clear in the conference call that they were disappointed in Puma’s results, and that they were working hard to improve them. At the time of PPR’s acquisition, there was speculation that Volcom might help Puma become “cool” and that we could see a Volcom shoe line created with Puma’s help.
 
At the time of the acquisition by PPR, Volcom was a company that was very strong in its market niche but, in my analysis, didn’t have anywhere to go. It was so closely identified with its niche it didn’t have the strength to break out of it. PPR, with about 4 billion Euros of revenue in the recently completed quarter, and the owner of such luxury brands as Gucci, Bottega Veneta and Yves Saint Laurent, didn’t buy Volcom for its 65 million Euros of revenue (1.6% of PPR’s total) and its growth potential in the “core” market. They didn’t buy it just to help Puma or to do Volcom shoes.
 
What do they have in mind? What do any of these behemoths have in mind?
 
At the most obvious level, PPR saw what VF has done with Vans and The North Face in its action sports segment and the associated growth rates and said, “We want a piece of that too.” If nothing else, you might expect that PPR will be interested in additional acquisitions in the space, perhaps in competition with VF.
 
Neither Nike, nor PPR, nor VF is interested in a brand that has no potential beyond the “core” market. It would just be too small to temp them. When the PPR/Volcom deal went down, I suggested, only partly in jest, that maybe PPR would expand Volcom into upper end boutiques. I (probably) don’t see any product collaboration between Volcom and Gucci. But I’ve watched brands like Nixon get some traction in that upper end market with some of their higher priced product, and I just wonder what’s possible. With PPR’s help, could Volcom open some stores that carried some new classes of Volcom product? Go and see what WESC is doing. 
 
A brand, like Volcom, that’s secure in its niche and roots has the potential to grow out of that niche without confusing its customers and destroying its market. It’s not a sure thing, and it’s not easy. It’s management’s challenge every day.
 
For better or worse, we created that opportunity when we chose to pursue growth across markets and expand distribution. We created a much larger market, but one we couldn’t take advantage of on our own.
 
Large, successful companies in action sports are small, inexperienced players in the broader fashion business. As Volcom discovered, even going public and shoring up your balance sheet doesn’t solve that problem.
 
I’m sitting here trying to think of companies who have smashed through that barrier without help. I’m not doing very well. Everybody who is thought to have the potential to go from core to fashion seems to be acquired.
 
That, I guess, is the strategic point I started to think about as I read PPR’s quarterly report and looked for information on Volcom. A successful exit strategy for an action sports brand owner, in general, will require a revenue size that is proof of concept and is big enough to be interesting to a possible buyer. There also has to be an indication that you can hope, with the right support, to move past the core market and into the much larger fashion space. You can see that’s an issue for hard goods brands.
 
In the future, then, when I review the reports of Nike, VF, Decker, Jarden, VF and any other big companies involved in our industry,  I’ll try and pull our trends and ideas that are more interesting than the change in the current ratio. More fun for me to write. Hopefully, more valuable for you to read.         

 

 

Tilly’s IPO Moving Forward; Another S1 Amendment is Filed

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Not much is different in this filing, but we do get a few additional pieces of information. You can review what I wrote about their initial filing last July here. I updated that analysis in March of 2012 when they released their numbers for the year. My opinion hasn’t changed and I think the analysis is still valid.

What we learn from the newly amended S1 is that the share price of the offering is expected to be between $11.50 and $13.50. They expect to raise about $86.4 million (assuming a $12.50 a share price). Of that amount $84 million will go to the existing shareholders and only $2.4 million will be available to be utilized in the business. Here’s how the filing puts it:

“The principal purposes of this offering are to obtain capital to pay all undistributed cumulative earnings to date to the current shareholders of World of Jeans & Tops [the former corporate name of Tilly’s], obtain additional capital, create a public market for our common stock and facilitate our future access to the public equity markets….We expect to use $84.0 million of the net proceeds from this offering to pay in full the principal amount of the notes, as well as any accrued interest. Therefore, our stockholders immediately following this offering, who were also the shareholders of World of Jeans & Tops prior to termination of its “S” Corporation status, will receive most of the net proceeds from the sale of shares offered by us.”
 
When the offering is done, there will be Class A and Class B common stock. Purchasers of the offering will get the Class A, which has one vote per share. The Class B common stock has ten votes per share.
 
As a result, “The Shaked and Levine family entities [current owners of Tilly’s and the only ones who can own the Class B shares] will control approximately 96% of the total voting power of our outstanding common stock following the completion of this offering. As a result, the Shaked and Levine family entities will be able to control the outcome of all matters submitted to a vote of our stockholders…”
 
Tilly’s numbers for last year, as I discussed in my March article, were strong. It will be interesting to watch how the offering is received. 

 

 

Trying to Think About the Junction of Retail, Brands and the Internet.

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The more I think about it, the less I feel I know for sure. I know the internet and brick and mortar are changing each other, that brands are becoming retailers and retailers brands, that easy information and product availability is making most products commodities at some level, that brands are really pushing product extensions, and that consumers are making long term changes in their purchasing behavior. But stirring this soup of change just makes it cloudy. 

Yet we all have to be thinking about it, and I’ve had a few experiences in recent months that are at least helping with the thinking and, to my surprise, are turning out to be related. Why don’t I tell you about them and we’ll see if they turn out to be related for you too.
 
At the Mall
 
Bellevue Square is a large regional mall here in the Northwest. It’s anchored by a Nordstrom, Penney, and Macy.   I’m in it occasionally and usually take the time to walk through some of the retailers firmly in our industry to see if I can learn anything. For some reason, at my last visit I determined to make a list of those retailers and see just how long it was. Here’s the list I came up with:
 
7 For All Mankind
Abercrombie & Fitch
Aeropostale
American Eagle
Billabong
Buckle
Element
Forever 21
Helly Hansen
Hollister
Lidz
Lucky Brand
Lululemon
Oakley
PacSun
The North Face
True Religion
Vans
Zumiez
 
I didn’t include Nordstrom or Sketchers. Maybe I shouldn’t include Lululemon. There are a few other fashion retailers I might have added. I know the list is shorter if I include only committed action sports brands. Yet I think that would be deluding ourselves. Every store on this list tries to get at least some of the dollars from customers of the core action sports/youth culture market. And I’m sure they all sell on line.
 
That’s a lot of stores for one mall. Bluntly, I’m not sure there are enough market niches to go around especially given that there’s nobody on this list whose niche isn’t determined largely by advertising and promotion.
 
Buckle
 
Buckle, headquartered in Kearney, Nebraska (don’t ask me), has about 430 stores in 43 states and had revenue of $949 million in the fiscal year ended January 29, 2011. The first time I walked into a Buckle store, it had the action sports/youth culture vibe I was familiar with from various other industry stores. But there was something different, and I literally walked around for a minute or two trying to figure out what it was.
 
You know how most action sports retailers have fixtures, posters, and other promotional aids representing the brands they carry? Buckle, I realized, didn’t have as much of that as most retailers. If you look at the list of brands they carry at their web site, you’ll recognize many of the brands, but those brands don’t overwhelm the merchandising of the store. They kind of get equal billing with Buckle’s owned brands, which are not named Buckle.
 
PacSun carried and promoted the brands we’re all familiar with. Then they added their store brands as a way to generate some more margin dollars and to offer more price conscious customers a choice. The way they handled their private label felt tactical and financial- almost like an afterthought- rather than being part of a strategy. I think that choice, along with over expansion, poor merchandising, and a weak economy, was what got PacSun in trouble.
 
Now, PacSun is being more thoughtful in how they handle their mix of brands.  We learn in their recent filings that their mix is about 50/50 between private label and brands owned by others.
 
Buckle, on the other hand, has what I take to be a deliberate strategy of building its image based on all its brands combined- owned and bought from other brands. In their merchandising, there almost isn’t a distinction made between the two. Buckle is a retailer making itself into a brand (or maybe creating brands?) through this approach.
 
I have often thought of store label brands in terms of what percentage of revenues they could safely represent. Perhaps that was short sighted. Buckle’s premise seems to be that it’s the mix and merchandising of the brands that matters given the target customer; there’s no percentage that’s “too much” or “too little.”
 
I wonder if the day will ever come when we see a retailer that has created brands get enough traction with those owned brands to sell them to other retailers. Maybe internationally.
 
Kohl’s
 
I’d characterize Kohl’s as a discount department store with quite a broad array of merchandise (Here’s a link to their investor relations site, which is full of all kinds of good information). Among the brands they carry are Vans, Hawk, and Zoo York. I was struck by the good selection and attractive pricing. Interestingly, they’ve moved from 75% national brands and 25% “private and exclusive brands” in 2004 to 52% national brands and 48% “private and exclusive brands in 2010.” I guess Buckle isn’t the only store that has the idea of melding owned with national brands.
 
“Private” and “exclusive” brands are not the same thing, and it’s important to understand the difference. A private brand is just what you expect; created, owned and controlled by Kohl’s. An exclusive brand is not owned by Kohl’s, but is available exclusively in Kohl’s stores. The Hawk brand is such a brand for Kohl’s.
 
I noticed a poster in the store advertising the Hawk brand, but featuring a skater who was not Tony Hawk. Makes sense to me. That’s what you do when you’re trying to give a brand credibility and longevity beyond an individual.
 
Target has the same kind of deal with Shaun White. Say, I’m going to have to rush right out a nd get me some of those Shaun White window curtains at Target. There are 237 Shaun White items on Target’s web site. Well, good for him. I would have made the same deal even though at some level I hated to see it happen. But I wouldn’t have minded if they’d not done the curtains.
 
Kohl’s has revenues of almost $19 billion generated from over 1,100 stores plus their web site.
 
Reaching Everybody, Everywhere, All the Time with Everything
 
I noted after SIA that everybody who was selling hard goods was making apparel, and apparel makers were making hard goods. I recently commented on Quiksilver’s foray into board shorts for NBA teams and suggested that just because a market extension was possible didn’t mean it was a good idea. Referring to the trends in online shopping, I’ve suggested that consumers no longer feel compelled to have a product they want the same day, so one perceived barrier to internet shopping is falling. About 2008 I started to point out that it was going to be tough to get sales increases, and it was years before that I suggested that perhaps a focus on gross margin dollars was appropriate since that was what you paid your bills with. Even earlier than that, I noted that where to sell or not sell your product was something brand managers focused on every day.
 
It’s just interesting how all this is coming together, at least in my mind. In a weak (though slowly improving) economy with cautious consumers and an environment most companies describe as “highly promotional,” many companies are trying to reach new consumers through product extensions that may or may not widen distribution. And it’s funny, because I see this as the hardest kind of economy to do that in. Almost by definition, you’re moving into a space where other brands are stronger than you are.
 
This trend is driven partly by a need to find sales growth somewhere, especially for public companies. It’s facilitated by technology and the internet, improved logistics and information systems, and a sense, I think, that the distribution cat is already out of the bag so what the hell.
 
Just to be clear, product extensions and distribution expansion aren’t by definition bad. Nike can sell some product at Costco without crippling their brand. Think about what Sanuk did. I expect to see Nixon do some interesting stuff once Billabong’s deal to sell half of Nixon closes and I think they will succeed because of how Nixon is already positioned with their customers.
 
These Days, What is “Positioning?”
 
If you ask me what “we” should do about this, I’d say, “nothing.” It is, as usual, up to individual companies and brands. The first question in the everybody, everything, everywhere all the time chaos is, “Has positioning changed and is it still meaningful.”
 
I’ve thought about that a bunch, which is why this article was actually started before Christmas but is just being finished. I hope it’s being finished. I’ll know in a couple of paragraphs.
 
The tools you use to build your market position have changed in ways we all know. But the concept is still valid and maybe more valid than ever. You build and defend your market position by doing what you do well and communicating that to your customers.
 
When I wrote about companies in snowboarding pushing into apparel from hard goods and hard goods from apparel, I suggested that companies that didn’t do that might find themselves with an advantage. I want to expand on that a little.
 
Maybe effective market positioning is now at least partly a matter of doing less. That is, let other companies pursue dubious product extensions. To exaggerate a bit to make the point, let them try to sell everything to everybody everywhere all the time. I wasn’t even born the first time somebody said, “If you think everybody is your customer, nobody is your customer.”
 
That doesn’t mean never do a product extension. But, more than ever, come at it from a solid foundation of knowing who your customer is and why they buy from you. Never go after a new market because, “We need more sales!” And don’t over simplify the analysis by going, “Well, we’re in business X, and all our competitors in business X make product Y, so we should make product Y too.” That ain’t analysis.
 
If you take the time to really understand how customers perceive you and why they buy your products, you won’t ever be tempted by the wrong growth opportunity, and you’ll immediately recognize the good ones when they come along.
 
I guess that at the junction of retail, brands, and the internet what we find is a slightly different way to think about old, still valid concepts.

 

 

A Minor Mind Dump

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I’ve had a few ideas lately and come across some information I wanted to share. None of them seemed worthy of its own article, so I thought I’d just spew them out as they sprang into my mind. I have no idea how this is going to turn out.

First, a housekeeping issue. I know that Quiksilver, Zumiez and PacSun have come out with earnings reports. I am greedily collecting their press releases and conference call transcripts, but won’t have anything to say until they release their 10Qs or 10Ks. I just don’t think it’s worth your time to read, or my time to write, an analysis that doesn’t include the unbiased and completer information of the SEC filings. Hope that makes sense to you.

Next, I want to talk about the evolution of consumer habits as they relate to the internet. It wasn’t that long ago that I wrote about how being able to buy something and take it home was an advantage that brick and mortar retailers had over the internet. Somehow, last week I realized that probably wasn’t true anymore. I’m now perfectly happy buying on line and waiting a few days or even longer for the item to arrive rather than go out and buy it. And having asked a few other people (hardly a scientific sample I admit), it appears that I’m not the only one.
 
Now, if the price is lower or there’s no sales tax well or shipping is free, even better. And I don’t mind that delivery services have gotten better. But I don’t think those are the deciding factor. I think I’ve somehow just gotten comfortable with the fact that most of the stuff I need (think I need?) I don’t need the same day I decide to buy it.
 
If I’m right, and most people are thinking that way, then it would help to explain why small retailers are struggling and internet sales for most brands are growing so quickly.
 
But it’s not that one day people wanted to buy at the store and get their stuff and next day they were content to wait. It’s an evolutionary process that’s happening over years. The question is why it was only last week that I went, “Oh shit, how could I not have noticed this before?”
 
Maybe you all already knew this. But I haven’t seen any discussion of it, and I’ve always been kind of fascinated by how trends evolve and finally get recognized in business as a competitive opportunity (or problem).
 
I like to spot what I think are meaningful competitive trends and wish I could do it more often. I try and improve my odds by doing things like turning off the internet when I’m writing/thinking. Like now. Truth is, our brains aren’t designed for multitasking and there’s no email that’s going to arrive that can’t wait until I’m through writing.
 
I pretty much flee the mainstream media because I consider it to be mostly human interest stories and noise rather than hard news and analysis.
 
I thought I would share with you this article about Spain on a web site called Stratfor.  If you do business in Spain, I think you’ll find it valuable and you’ll get more good information about conditions in Spain in the 15 or 20 minutes you spend reading it than you will get anywhere else. If nothing else, you’ll probably notice that the unemployment rate of Spaniards age 25 and under is 45%. We kind of sell a lot of stuff to that group.
 
I pay for Stratfor, but it’s free right now. It seems they got hacked by Anonymous and are still trying to recover. Very embarrassing to be a global intelligence/security firm and have to admit that your subscribers’ passwords weren’t encrypted.
 
Okay, I’m done. I’ve editorialized a bit but enjoyed it. As long as I’m doing this for free, I’m allowed to have some fun. Go check out Stratfor. It’s worth a few minutes of your time every day.    

 

 

SIA’s Numbers Through January: The Silver Lining

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Like me, you probably got the SIA press release this morning with the snow sport industry’s numbers through January. And, if you’re like me, you know that SIA always cherry picks the good news and leads with those numbers, so you immediately clicked through to the Leisure Trends web site where, as an SIA member, you can see the actual top line numbers.

What those numbers show is that through January, sales in dollars were down 4.5% to $2.657 billion compared to the same period last year. What you will also see, however, is that unit sales for the same period are down 12.2%. In chain stores, the dollar decline was 10.6% while units fell 17.2%. Specialty dollar sales fell 7.5% while units were off 15.6%

I’m sure you’ll all be stunned to learn that internet sales grew 12% in dollars and 10% in units.
 
If you break the numbers down by equipment, apparel and accessories, you see the same pattern.
 
Well, not a great year. But we all knew when our snow dances didn’t work that it wasn’t going to be.
 
What I want to point to, however, is that for all three categories in chain and specialty, the decline in dollars was less than the decline in units sold. Why? Because we’re genius sales people in tough conditions? I hope so, but doubt it.
 
Prices held up because two year ago and more as an industry we made some decisions to control inventory. We benefitted this year from decisions we made way back when. How would we be talking right now if the revenue decline had equaled the unit decline? Ugly would be an understatement. Imagine having lower revenue and higher inventories.
 
I’m not trying to cheer you up in what’s a poor year no matter how you look at it. But this is a clear example of the benefit of considering the impact of your decisions beyond a week, a month, or even a season. True, we were all kind of terrorized by the economy into managing our inventories better, but look at the long term benefits in terms of inventory, working capital investment, and consumer perception of the product.
 
Find some time to think longer term. The benefits are amazing.            

 

 

Notes on SIA’s Denver Show and Thoughts on the Trade Show Slog

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It was nice to walk to the Snow Show the second day when it was actually snowing. I think I’m completely acclimated to Denver, though I do miss playing blackjack with friends. And I still get confused when one of the people who works at the convention center says, "How are you today, sir? Have a nice day and enjoy the show." They actually seem to mean it. After so many years in Las Vegas, you can understand why I’d be startled.

Inside the convention center, the thing I heard most often was "I’ve got to leave for ISPO tomorrow." This was typically spoken by somebody with a resigned tone to their voice and slumped shoulders. It often included phrases like "Six shows down, two to go!" or "I don’t remember what my children look like."

The more things change, the more they stay the same. I wrote about the trade show schedule back in 2002 and much of the article has held up pretty well.  People complain about the trade shows and the schedule, but they all go. I’ll get back to that after mentioning a related issue.
 
Trade Shows and Outerwear
  
The related issue is that there seem to be mighty few snowboard industry companies that aren’t making snowboard outerwear.   Seems like all the hard goods companies are making apparel and many of the apparel companies are making hard goods. I suppose the logic of becoming a full line company is irresistible. "Well, we’re already selling them product X, so as long as we’re in front of them, and it’s consistent with our image as a snowboard company, we might as well sell them product Y."
 
Retailers, of course, already can’t/don’t/won’t carry more than a fraction of a large brand’s line, and I doubt that a brand expanding its product line will change that. Lacking some market growth, it’s just more good quality product that lacks fundamental product differentiation chasing the same customers. The scramble for market share and a source of growth continues. It’s not that there’s no innovation in the snow industry, but whatever advantage it confers doesn’t last long, as innovations are copied across the industry in about one season.
 
Who might be the winners of the rush to do outerwear? I think it might be companies like Arbor and Never Summer who, I’m pretty certain, won’t be doing outerwear.  I’m only half kidding when I suggest that companies like those may find their market positions strengthened and better defined as a result of all the other companies doing full snow product lines. Maybe I’m not kidding at all.
 
Let’s get back to trade shows. So you’ve expanded your product line. You’d probably like to sell some of this new product. This might require some new customers unless your existing ones are extraordinarily cooperative. How do you find those new customers if, as I’m suggesting, your existing retailers may not automatically just order your new stuff and throw out your competitors?
 
 Maybe by attending some new trade shows? If, for example, you’re in the snowboard business and make outerwear, going to Outdoor Retailer probably makes sense. Lots of people seemed to think so at any rate. But there’s diminishing return from going to more and more shows given the inevitable overlap in customers. We also need to remember that larger brands especially are seeing customers more and more outside of the trade show environment.
 
 Where going to all the related trade shows can probably makes sense is when you’re a new brand- especially one not limited to the snowboard or winter sports business.   The sock brand Stance comes to mind as a company that could benefit from extra trade shows. John, Ryan, hope you’re having a good time in Munich, or wherever the hell you are now. More coffee, less beer!
  
To summarize what I might have said in the last four or five paragraphs, the decision to expand a product line, with particular focus in this case on outerwear in the snowboard industry, is made at least partly with the expectation of expanding your market beyond the core snowboard niche. Especially as a larger company, and even more as a public company, you know (at least I hope you know) that the growth you can reasonably expect in the snowboard market probably doesn’t justify the effort and expense of creating and marketing an outerwear line. So you’re off to various other trade shows that have retailers who, to a greater or lesser degree, overlap snowboarding and you’ll look for some growth there.
 
And those dynamics are at least partly the reason why we’re so willing to go to so many shows.
 
Things I Noticed at SIA
  
I guess I’ve talked enough about everybody making outerwear, so let’s move on.
 
 I loved the 686 concept car, though I was disappointed to learn it’s probably not street legal. Oh well, I guess I’ll have to look for another ride.
  
There was some talk about booths getting bigger again. Mostly from people like me who remember the two story Morrow booth with the helicopter on top at the absolute peak of the snowboard madness in probably 1995. The concern is that we’re getting profligate in spending on booths again.
  
I had a different take. While there did seem to be some size expansion, I saw a lot of less expensive soft sided booths and many of the booths reused the same components and materials they had used in previous years. Still, if one of you guys wants to put a main battle tank or maybe a small, temperature controlled, enclosed hill where you make artificial snow in your booth that would be okay with me.
  
The Mervin Manufacturing surf boards. Behind Mike Olson’s always smiling, happy go lucky, endlessly positive, demeanor is a guy who’s always smiling, happy go lucky, and endlessly positive. However, he’s also a guy who knows a thing or two about materials and manufacturing. He’s been working on surfboards for a long time, and if he’s ready to sell these I’m pretty sure it makes good business sense. This is going to be fun to watch. I hope the guys at Quiksilver, who owns Mervin, are as excited as I am.
  
I really liked the Recon system that installs in specially adapted goggles made by goggle brands. They have a built in computer that connects to GPS and shows you where you are on the mountain, how fast you’re going, and how high you jumped. It also gives you access to your phone, music and other functions. You wear a little control module on your wrist, but view it through a small screen below your right eye in the goggles. It does not interfere with your view.
 
It looks like it will take a bit of training to use it well, and some people may just not want to be quite that connected while on the mountain. But it also makes sense for other markets, and I suspect in some form it’s a piece of the future.
  
Then of course there was seeing former and long time- very, very long time- Burton senior executive Clark Gundlach over at the Quiksilver booth where he’s now in charge of the company’s snowboard program. Of course I knew the change had happened, but it still felt almost odd to see him there. Proof, I guess, that nothing is forever. Probably felt a bit odd for Clark too.
  
But when you think about it though, who else was Quik going to hire if they are serious about building their snowboard business? You can kind of imagine the conversation at Quiksilver. “Hey, we need an executive who has mountains of experience in all aspects of building a successful snowboard program in a large company environment. Let’s make a list of possible candidates.” Short list.
  
We came to the SIA show this year disappointed in the snow, though we got a storm the previous week and things seem to be picking up. SIA reported that sales through December were $2.2 billion, just 2% below last year’s record sales. Unit sales fell 10%, showing some discounting, and specialty store inventories were, inevitably, up 16%. Still, that’s not as bad as I feared it might be, and it’s definitely recoverable with improved snow conditions.
  
I want to point out that it would be a lot worse and not necessarily recoverable if, as an industry, we weren’t doing a much better job controlling our inventories. Keep up the good work.
  
Well, I’m home with no more trade shows on my horizon. The kids didn’t miss me because one’s away at college and the other is living on his own and has A  REAL JOB! My wife claims to miss me, but it may because I do most of the cooking. The cats definitely miss me.
  
Hope you all have a good trade show season.

It’s Tradeshow’s Season. I Started with Agenda, But I’m also Thinking About SIA.

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Among the things I liked at Agenda, the one I liked the most was Shmooza Palooza, the jobs fair jointly sponsored by Agenda and Malakye.com. 500 people preregistered for it and it was busy every time I looked in. It’s great to sell a few more T-shirts or another snowboard, but it’s even better to help somebody put food on the table. The guy who probably didn’t get a job at this job fair is the one who told one of the recruiters he had gotten a college scholarship and taken the money to use for a surf trip. It’s somehow troubling he apparently thought that would make him sound credible.

On a personal note, I have a kid who graduated from college last spring and has an actual job with benefits and 401(k) plan. Most of his peers are not so fortunate and I think he knows how lucky he is. My wife and I feel like we won the lottery.

The other things I liked at Agenda included flying into a small airport, $100 hotels, and the food trucks. It was a pleasure to get good food at a fair price instead of bad food at an expensive price. I also liked having the booth numbers at the top of the booths where they were easy to see, though I understand this isn’t new. And as always, I liked seeing some new brands, or at least brands I haven’t seen before. I hope they do well.
 
I didn’t like it when people referred to Agenda as the "new ASR," because I remember what happened to the old ASR. I had written before, when ASR first closed, about the pressure Agenda, or any other trade show, might come under as it succeeded and grew. That analysis, I think, is still valid. But Agenda has done at least two things that should mitigate those pressures to some extent. First, they got the hell out of San Diego to the more attractive cost structure of Long Beach. Second, they are keeping the feel of the show more or less the same as it grows by keeping most booth sizes the same. Or at least keeping them from getting too big.
 
Yes, I know a few brands had larger booths. I noticed it too. But I don’t think that’s different from how it was in San Diego. It’s just that a new location makes you see perceive things differently even if they ain’t.
 
The new location makes it difficult to compare last year’s Agenda this with year’s. But then I’ve always been cautious about reaching conclusions based on how busy a given booth was at the moment I walked by or how crowded the aisles felt. The question is do brands and retailers feel like the show is a good place to get business done, and nobody at Agenda complained to me about that.
 
Next, I’m off to the SIA snow show in Denver. Nothing could improve that show more than a lot of snow during the next 10 days. Last year, as you know, was an epic snow year.  I never expect two great years in a row, but I was really hoping that this year would at least be okay.  Last year’s great show, coupled with the residual fear from the recession, meant that retailers have been cautious on their inventory and most of the old stuff was gone. There wasn’t much left over product at deep discounts, and customers learned they had to buy quickly and at full price to get what they wanted. The result was a great year not just for sales but for profits as well.
 
Though it hasn’t always been the snow industry’s mindset, you really can sell less and earn more, and I was hoping for another year to cement that kind of thinking.
 
What I’ve heard so far is that brands, in general, didn’t over produce and retailers didn’t over order due to over enthusiasm from last year. That’s good. We should never let ourselves be deluded into believing we’re great managers and sales people just because it snows.
 
Still, it appears likely that we’re going to get to Denver with some of the dreaded inventory overhang in the one season snow business. Hmmm. Maybe an overhang is a non-alcohol induced hangover.
 
My guess it won’t be as bad as it has been in past years because there won’t be as much product to deal with, and discounting didn’t start in August. Yet, inevitably, brands will want to get paid on time, won’t want to offer discounts, and won’t want to take product back. Retailers will want to delay payment, get discounts, and send back product.
 
I’d note that retailers, generally, haven’t panicked. From what I can tell, there’s been more resistance to discounting early and often than in prior years. No doubt it’s partly because there’s less inventory, but I also trust it’s because we’ve learned a few things. 
 
There have been some instances recently where brands (not just in snow) didn’t necessarily replace their whole product line every year. Certain pieces got carried over. I guess it’s mostly in apparel, but I’m wondering if it might not work with select hard goods.
 
Let’s start by acknowledging that there are no bad hard goods out there anymore. Everything’s durable, functional, and more or less good looking. And hopefully, you’ll also agree with the following:
 
·         Though the economy appears to be improving a bit, sales increases are still not easy to come by and generating additional gross margin is important in increasing profits.
 
·         Inventory scarcity improves product perception and makes consumers less price sensitive. It also reduces working capital investment, which we finance oriented people like.
 
What I’m asking/hoping is that the tension between brands and retailers not be allowed to turn back into the zero sum kind of game it’s been in some past years. Can some product that sold well this year and is maybe in short supply be kept in the line for next year?  Can retailers and brands share the burden of a poor snow season such that product doesn’t turns up at the wrong time, in the wrong place, and at the wrong price? At least not too much.
 
I get to look at this from the 10,000 foot level and don’t have to worry about keeping a factory busy or generating enough cash to pay the bills (though I have had to do that with snowboard brands. I mostly didn’t enjoy it). Except in the very short run, we are all better served by holding prices where reasonably possible and keeping product scarce. Please remember that when all those meetings start in Denver.  Let’s build on what we’ve started.

 

 

Follow-up on my Last Article; the Nau Example

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My last article, “Do Retailers Really Need to Carry All That Inventory?”  garnered quite a response. One of those responses was a link to an article about a brand called Nau. Their web site is here. The link to the article is here.   The article was written back in 2007 and the brand is still around and, judging from the list of stores where they are available, successful.

Here’s how the article starts:

“Meet Nau, the ultimate over-the-top, high-concept business. It makes striking, enviro-friendly clothing. It gives away 5% to charity. Can it save the world–and give us the perfect twill capri?”
 
They are distributed through what I’d characterize as high end specialty shops but, according to the article, also had four of their own stores (and sell on line). Here’s a description of those stores from the article:
 
“It starts with a retail concept that combines the efficiencies of the Web with the intimacy of the boutique. Called a "Web front," the Nau store integrates technology in a striking gallery-like setting. The central mechanism is a self-serve kiosk that transfers the online shopping experience to a touch screen and encourages customers to have their purchases sent home, with the incentive of a 10% discount and free shipping.”
 
“The advantage: If customers use the store as a fitting room and push purchases to the Web, Nau can build smaller stores (2,200 to 2,400 square feet compared to the traditional outdoor specialty store’s 4,000-plus square feet), reduce in-store inventory dramatically, and slash operating expenses. Plus, it consumes less energy and materials.”
 
Essentially, this is what I was suggesting in my article. Nau had the advantage of starting from scratch, so they didn’t have to change their store size and redo the whole store which, I acknowledge in my article, has some costs and takes some time. Anyway, the point is that here’s a brand that was trying to do more or less what I suggested with their retail stores. How has that worked out?
 
When I couldn’t find the store addresses on the web site, I called the company and found that all the stores had been closed.
 
A lot has changed in five years. Smaller retailers are going to have to find a more efficient way to integrate on line with brick and mortar. But here’s at least one example where it appears not to have worked out.