Do Retailers Really Need to Carry All That Inventory?

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I suppose that seems like a stupid question. But having just been through another Christmas shopping (and return) season, I’m not so sure it is. I’ve shopped on line. I’ve been to too many malls too often (I confess it- I hate shopping). In those malls I saw way too much product on sale at way larger discounts than I like to see before Christmas.

As an aside, I’m wondering if the increased holiday sales being trumpeted by the media were at prices which will generate bottom line profit which, I take as a matter of faith, is still the idea.

I’ve made an effort this week, as I usually do this time of year, to catch up on my reading. Some of that reading included retail trends, pop up stores, inventory management, Sears closing 100 plus stores, and various other mostly business and action sports related topics. It all got me thinking about the retail environment.
 
Inventory is where retailers tie up most of their working capital. Retailers (and brands) have made heroic efforts to control inventory in recent years, but I think there might be still an opportunity for improvement by following the ongoing process of integration between brick and mortar and online retailing. I want to talk about that and ask what you think.
 
The Online Experience
 
I’m not going to tell you anything here you don’t know, but I want to build a (hopefully) logical argument. Consumers like online shopping because it’s efficient, it allows ease of comparison, it may be cheaper, and you don’t have to leave the comfort of your desk chair.
 
They dislike it because they can’t physically interact with the product (which is more or less important depending on the product), and they don’t get it the moment they buy it. They may also miss the personal interaction with a sales person. Or not.
 
The improved functionality of web sites and the development of logistics to get products to the customer (and back from them if necessary) faster and easier has accentuated the reasons for the consumer to shop on line, and reduced the reasons not to. You need look no further than the growth in online sales in a soft economy to know that’s true.
 
Brands and retailers (remember it’s getting harder and harder to differentiate between the two) see a role for web sites and social media in brand building. The competitive environment requires them to be on line and sell there either independently or in coordination with retailers.
 
Building, maintaining and keeping fresh a quality web site with ecommerce capabilities cost a bunch of money. The expense is not just in designing and creating it, but in keeping it up. Servicing online customers generates additional expense.
 
See- I told you I wasn’t going to tell you anything you didn’t already know. Let’s continue.
 
Is the brand building from being online worth it? That is, does it generate enough new customers, or increased sales to existing customers, to pay for all the incremental expense? Being the way I am, I guess I’d ask if it generated enough gross profit dollars.
Maybe you sell to new customers who are too far away to get to your store. Maybe your online communications program increases traffic and/or the average sale. Maybe, as a brand, you sell products in your line that retailers didn’t typically have room to carry and consumers didn’t previously know much about. Maybe a lot of things. Or maybe not.
 
So, competitive pressures require you to be online. Being online in a competitive way is expensive. You have to earn enough incremental gross profit to at least pay for the cost of being online. Cannibalizing brick and mortar sales for online won’t do it. If you accept those points, then you have to agree that total sales, including online, have to rise enough to pay for the online expense or overall industry profit will fall.
 
Let’s say that again in a slightly different way. With the existence of online retail, in the absence of any change in the brick and mortal expense structure, sales have to rise just to break even because of the additional expense of being online. And not, I’d estimate, by a trivial amount.
 
But consumers don’t automatically and graciously just spend more just because we’ve boosted our expense structure. What might we do about that structure?  
  
A Lesson from the Airport
 
Last time I was at the airport (not over the holidays happily), I was struck by how the airlines have learned to use online to manage their business “in their store” so to speak. Pretty much everything happens at the monitor unless you’re changing your flight, checking baggage, or have some other variety of crises. You can do most of it at home, or you can wait and do it at the airport. At the airport or at home is pretty much the same for the airline and its passengers. They’ve gone a long way towards integrating brick and mortar, if I can call it that, and online. And they’ve done it in a way that the passengers seem to like. Although now, instead of standing in line at the airline counter, we stand in line to get through security. Oh well.
 
How does this translate to our retail business?
 
Taking Trends the Next Step
 
Retailers are already giving consumers the online or in store choice. They are dealing with the brands they carry (when the brand and the retailer are not one and the same) through not only the traditional model of purchasing inventory but of taking it on consignment or even having the brand run its own store in their existing store. My point (and once again, you already know this) is that the traditional model of see it, order it, receive it, sell it, pay for it is evolving. 
 
In general terms, what I’m seeing is independent retailers take less and less inventory risk. The brands may not like this but have been dragged towards supporting it. Bluntly, they can’t afford to sell product to retailers who can be hard pressed to pay them, may dispose of the merchandise at prices and through channels the brand would prefer they didn’t use, and can’t really merchandise the complete line the way the brand wants. 
 
We’ve got retailers becoming brands and brands becoming retailers. Zumiez, to use one example, thinks of itself as a brand. And go look at a Buckles someday. I’ve got to write about that.
 
We’ve got the merging of online with brick and mortar and the rapid growth of online sales. Through pop up stores, renting space in existing retailers, consignment and other gyrations we’ve got inventory risk migrating to brands. The relationship between brands and retailers is more codependent than it used to be. Brands want to capture the higher retail margins, and have the ability to better control and accelerate the process of creating and getting product into stores. Retailers are selling their own brands.
 
We tend to look at these developments as independent events. I don’t think they are. How might they be addressed in a positive, structured way?
 
Here’s a Wild Idea   
 
What if a brick and mortar retailer cut the inventory it kept in half? Maybe by two thirds. Like the airlines, they let their customer decide whether they want to “check in” at home or at the airport (the store) and handle various purchases or changes at either place. The customer can come into the store, see the product and decide what they want to buy, but it gets shipped that day to their home (or they can come back to the store and pick it up).
 
Yeah, yeah, I know, I’m crazy. And the world is flat and real estate prices only go up. Maybe I am crazy. That’s why I’m asking you.  
Maybe for the first time a retailer, due to the much lower inventory I’m proposing, is able (and can afford) to display most of a brand’s line rather than just the pieces they bought because they thought that was what would sell and it was all they had room for. The quality of the presentation, and the customer experience, might increase significantly. Part of the reason brands want to get into the retail business is so their brands can be controlled and presented the way they want.
 
The customer would come to the store either because they want help and like the in store experience (which I’m suggesting would improve), or because it’s a product they don’t want to buy without seeing and touching it. But they wouldn’t necessarily walk out with it. The very broad but not deep inventory would mean that the product would not necessarily be available for the customer to take home. The customer, after having had the opportunity to look at the biggest selection of a particular product they’ve ever seen, would make a selection and have the clerk swipe their card and tell them, “It will ship to your home tonight.”
 
The biggest objection, I suppose, is that customers who come into stores want to take the product with them. But we know that more and more customers are making the decision to wait a few days for their product. We also know that they are coming into stores to evaluate products then going home and ordering on line. And there is some benefit to not having to carry the product around with you.
Another interesting problem would be for the retailer to determine (in consultation with the brands it carries) exactly what to carry in inventory and how to price it. Do you charge some percentage more for product people walk out with? Which products will people be most determined to take with them? How do inventories get replenished under this situation of in store scarcity? Will you need to replace the product on the floor because people are playing with it so much? The gross margin return on inventory investment approach I’ve discussed before might be a tool that could add some value in figuring some of this out.
 
What I’m proposing is an approach to brick and mortar retailing where the role of online and the melding of brands with retailers is recognized. The retailer would tie up a bunch less working capital in inventory. The quality of their merchandising could improve and I think the customer would have a better experience. Thinking globally for a minute, this might also play to the U.S.’s competitive strengths in logistics and distribution.
 
Brands would take less collection risk and would be better presented at retail. They’d have more inventory risk but, as I said, that seems to be where we’re heading anyway.
 
I don’t want to trivialize what I’m suggesting. There would have to be some interesting negotiations between brands and retailers to sort out a lot of details. Retailers would have to invest in some new fixtures and other merchandising expense. In addition, I imagine there’d be some in store technology costs. Hopefully this is more than made up for by a massively lower inventory investment.
 
I’m suggesting this brick and mortar low inventory internet fulfillment approach because that’s where I see the trends taking us anyway. I figure you might as well ride the wave rather than have it break on your head and drive you into the sand. If the trends I’ve highlighted are valid, I’m not sure there’s much of a choice.

 

 

Heinz’s New Ketchup; New Product Introductions and Social Media

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I came across this a few weeks ago (actually, my wife sent it to me and if I don’t give her credit, I’ll hear about it), but have been busy reading quarterly filings. Heinz, it seems, has introduced what it considers to be upmarket ketchup blended with balsamic vinegar. Read the article here. No, no, no, there’s no surfer on the label or anything really stupid yet amusing like that.

What’s interesting is that they have introduced it and made it available initially only on Facebook, where they have 825,000 followers. At $2.49 for a 10 ounce bottle, it’s $0.60 cents more expensive than their standard product.

And the question I find myself asking is whether this product would even be introduced if it wasn’t for the internet and social media.
 
Heinz, the article says, has 59% of the ketchup market and has been making the stuff since 1876 so I guess they can do anything they want. It will show up in stores in late December and be available through March as a “limited edition.” If it’s selling well, they’ll make it a regular offering. I guess it will become an “unlimited edition,” so to speak.
 
The development and packing costs are the same no matter how they introduce it.   But if there’s no social media, they have to distribute it, they have to advertise and promote it, they have to follow up with the supermarkets they tested in to see how it went, and they get no direct consumer feedback and unless they work really, really hard to get it. There’s a lot of cost there.
 
By introducing it on Facebook, they get immediate consumer feedback on the concept (though it will take some work to find out if they liked the taste), and they don’t have to distribute it immediately to markets. There’s not necessarily an advertising program. For all I know, they don’t even have to bottle the stuff until they get orders. Hopefully, when they do put it in the markets, it’s already sold well enough that there’s some demand from “committed” Heinz fans, whatever that means. If only because they charge $2.00 to ship each $2.49 bottle if you buy it online.
 
I don’t expect that Heinz’s bottom line is going to move much even if limited edition balsamic ketchup succeeds beyond their wildest dreams. (If I wanted balsamic ketchup, I’d probably just mix a bit of balsamic vinegar with my ketchup and see how it tasted, even though I’d be missing out on a limited edition). But this makes me think about the process and rationale for introducing a new product and the evolving and increasing impact of electronic interconnectedness.
 
I wonder if companies might start introducing new products because they can. With the cost of test marketing, if you want to call it that, so low and the feedback so immediate, what do they have to lose? Well, I suppose they might get laughed at if it’s a lame product. Negative opinions are transmitted just as fast or faster than positive ones on the internet. But there’s always that risk with any new product.
 
I’ve written over the years that there’s some value in products that everybody talks about even if they don’t sell that well. Maybe the internet lets new products have an advertising and promotional component that could justify the lower expense even if the product doesn’t turn out to be hit.
 
But then again, there’s a danger of introducing too many new products if it’s that easy (probably is for ketchup, toothpaste, deodorant, laundry detergent, etc.) and creating some consumer confusion.
 
You also have to wonder if your Facebook followers represent more than a small segment of your customers. I imagine they do in our Action Sports/Youth Culture market, but maybe not in ketchup, where 97% of people have it in their homes.
 
Most of you know a hell of a lot more than I do about using the internet and social media. I’m sure what Heinz is doing isn’t unusual. But I can’t help but think that there’s a danger in introducing a product just because you can and technology has made it cheaper and easier to do. No matter how cool the technology gets, it still matters that you offer value to your identified customer base. Make sure your version of limited edition balsamic ketchup does that before you fling it on the market via social media.

 

 

What Will You Do When Your Greek Receivables are in Devalued Drachmas?

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There are lots of public company quarterly reports I should be writing about, but I am going to step off that track and think, for a bit, the unthinkable.

Or at least it was the unthinkable. But at this point the Eurozone seems to be moving towards two choices, either of which has huge implications for managing any international business.

Let’s review for a minute. What are the three things you can do to get rid of debt? You can pay it off. You can default (a “restructuring” is basically an agreed on default). And finally, at least if you’re a government, you can inflate it away by printing money.
 
The third approach has always been the favorite among governments, because it’s kind of sneaky and doesn’t require politicians to directly take anything away from anybody. It’s happened many times. But don’t take my word for it. Go and read This Time is Different; Eight Centuries of Financial Follies. The point, of the book, of course, is that it’s never different. It won’t be this time. I reviewed the book on my site and you can buy it here.
 
Next, let’s talk about Iceland. Iceland thought it had turned itself into a financial capital, and its banks borrowed lots and lots of money from various British and other European banks. They were, of course, heavily leveraged. So when the cash stopped flowing and they couldn’t renew any of those loans, everything went to hell in the proverbial hand basket. The British and other Europeans howled that Iceland’s government had to make good on their banks debt. Unlike the Irish government, Iceland said, “Uh, actually we don’t.” And they didn’t.
 
Their economy went south and their currency devalued dramatically. It was ugly. But with the competitive boost of a devalued currency, they’ve started growing again.
 
That’s how it’s supposed to work. But Greece, and Ireland, Italy, and Spain, can’t devalue their currencies because they are part of the Euro.
 
Next, let’s talk about the bond market. The bond market is the biggest, meanest, son of a bitch on the continent. It has decided that there’s more risk in these country’s debt, and has pushed their interest rates way up. Italy is up over 7% even with the European Central Bank buying Italian debt (increasing demand and theoretically driving the cost down). Inevitably, higher interest rates make the debt burden even higher and paying off the debt harder. Spain is around 7% as well.
 
So what is Greece, or Ireland or Italy, to do? Austerity! Fiscal Responsibility! Which might work if they could devalue their currency as it is working in Iceland. It’s painful, but it can work. But with this much debt, and no devaluation possible, austerity in the form of spending cuts and tax increases just reduces the economy’s growth, which reduces tax collections, requiring more austerity. It’s a pretty vicious cycle.
 
Here’s the bottom line. There’s too much debt to be paid off. Somebody is going to lose money. They’re just fighting over how much and who.
 
If you’re a debtor nation like the Southern Europeans, you like the inflation solution, because it effectively reduces your debt. If you’re a creditor national like Northern Europe and Germany, you aren’t so enthusiastic because you know inflation also reduces the value of assets. And the Germans, of course have an institutionalized fear of inflation from the hyperinflation of the Weimar Republic. There’s the story of the cup of coffee that cost more when you had to pay the bill then it cost when you ordered it.
 
Remember when Fed Chairman Ben Bernanke told us the subprime crisis would be contained? Then Lehman Brothers collapsed and it wasn’t. I don’t know what will happen in Europe, but it can happen just as dramatically and just as suddenly. Most people seem to think the European banks are a bigger mess than ours ever were. There are simply not two to six trillion Euros (estimates vary) available to bail everybody out (unless they just start printing those Euros) and if there were, it wouldn’t solve any of the competitive issues that lead to this mess.
 
Long term Greek government debt is priced to yield about 30% right now. I’m sure it’s obvious that they can’t pay that, or anywhere near it, and actually service their debt. Something is going to happen. I think it’s either going to be inflation, or one or more countries leaving the Eurozone and defaulting on their debt on the way.
 
In not one quarterly report or conference call I’ve read so far have I seen any discussion of the management of this possible risk. It feels like it’s too uncomfortable to consider. Maybe it’s just concern that talking about it might make it happen. Perception does matter.
 
I doubt any of our major industry players’ sales to Greece are make or break for it. Still, if you’re selling and holding receivables in Euros and have assets denominated in Euros there and Greece suddenly goes back to the Drachma, what exactly happens? Nobody knows. Well, we know the lawyers would make a lot of money.
 
I assume companies are trying to hedge their exposures (not just in Greece) but I’ll bet that’s getting really expensive. I might consider offering discounts for prepayments. I guess you could try and denominate your contracts in dollars, but that might not help. There’s no mechanism for a country to exit the Euro, so they’d be making it up as they go along.
 
I’m not projecting a breakup of the Eurozone, but the possibility of some countries leaving it is certainly higher than it used to be. Frankly, I think they’ll resort to the good old printing press. That’s what’s happened historically, and the powers that be are all issuing coordinated statements about how they will “manage” it; that is, not let inflation get out of control.
 
What am I asking you to do? As always, just to consider the possibility, it’s impact on your company, and your strategy to manage it.

 

 

WeSC’s Annual Report; Numbers and Strategy

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I didn’t spot WeSC’s annual report until Shop-Eat-Surf did a story on it. Now, I’ve been through it. The Swedish approach is an interesting combination of a U.S. style annual report and our 10K SEC filings. I’ll start with a review of the numbers, but more interesting (I hope) will be a discussion of WeSC’s strategy and market position.

A Few Numbers

WeSC is a Swedish company, so their functional currency is the Krona. All numbers are in Swedish Krona unless I say otherwise. By way of reference, there were six Krona to the U.S. dollar at the end of the company’s April 30 fiscal year. A year earlier, it was 7.62.
 
WeSC’s revenues for the year ended April 30 were 408 million. At the end of fiscal year exchange rate, that’s about US$68 million, up 11.2% from 367 million the previous year. In constant currency, it grew by 20%. Gross profit margin was 45.9% down from 46.9% the previous year.
 
Pretax profit fell 28% from 56 million to 41 million. Net profit was down 40% from 48.8 million to 29.4 million. I should note that the income tax rate jumped from 13.1% to 27.7% and that pushed net income down more than you would have expected. Earnings per share fell from 6.6 to 3.98 Krona. The lower tax rate last year was due to booking a tax loss carry forward.   It was a one-time event (hopefully). 28% is a normal tax rate.
 
WeSC explains that “For the full-year 2010/2011 the dollar was an average of approximately 4.2 percent lower than in 2009/2010,” and “…the euro was an average of approximately 10.5 percent lower than in 2009/2010.”
 
“The lower dollar and euro exchange rates against the Swedish krona have had a positive effect on gross profit in the form of lower production expenses. At the same time the lower dollar and euro exchange rates against the Swedish krona have reduced revenue, because of which the total effect on gross profit was negative (the majority of purchases are in US dollar and the majority of sales are in euro).”
 
WeSC also notes that higher cotton and shipping prices had a negative impact, though they passed on some part of those increased costs as higher prices. 
 
WeSC’s lament about higher costs and exchange rates sounded an awfully lot like Billabong’s. At least WeSC didn’t have droughts and floods to worry about in their home market and isn’t as dependent there on owned retail as Billabong is. 
 
Only 18% of the company’s revenues are in the U.S. In U.S. dollars, it’s about $12.1 million at the April 30 exchange rate. Its next largest markets by revenue are Sweden, Germany, France and Italy with 16%, 10%, 9% and 9% of revenues respectively. The company reported it was in 2,410 retailers in 21 countries. 626 of those are in the U.S. The next largest is Italy with 320.
 
One of the things we’ve noticed in reviewing other company’s results is that they are focusing on growth outside of the U.S. due to better margins and growth opportunities. WeSC seems well positioned to take that approach as well. They’ve just started their program to enter China. U.S. sales for the April 30 year generated an operating loss of 2 million Krona.
 
57% of revenues come from distributors. 35% is through wholesale with the remaining 8% from direct retail sales. Like many other companies, WeSC is bringing its distribution in house as it grows. In the last fiscal year, it acquired its Danish distributor. Previously it had done the same in Germany and Austria. As of April 30, WeSC had 28 retail stores it calls concept stores. It owns eight of them directly. They plan to open more (don’t say how many) and I’m wondering how many you open before you’re seriously in the retail business and not just doing concept stores any more.
 
On the balance sheet, I noticed that inventory fell over the year from 28 million to 24.5 million. That’s interesting with the increase in sales and the acquisition of one distributor, which normally causes inventory to increase. I imagine some of it has to do with the strengthening of the Krona, which would reduce the cost of product bought in other currencies when translated back into Krona. It probably also reflects the brand exclusivity the company wants and an effort to make the distributors keep the inventory.
 
Accounts receivable rose 46% from 71.4 million to 104 million. Some or that would occur naturally with sales growth, but the strengthening of the Krona would reduce the value of receivables in other currencies, so I’m unclear as to the reason for the increase. WeSC notes the company has 57 million in overdue receivables (compared to 28 million at the end of the prior year). They have those “…without impairment losses being considered necessary.” Of this 56 million, 7.8 million is more than 91 days overdue and another 7.4 million is 61 to 90 days overdue.
 
The company’s “provisions for impaired accounts receivable at year-end” has fallen from 3.3 million to 2.6 million even as total receivables and total overdue receivables have grown significantly. I’ve seen language like this before (I think in Billabong’s financials) and it just doesn’t make sense to me that you can have a lower provision with that kind of increase in receivables. You can’t conclude that there is not an increased receivables risk, even if you assume you aren’t going to have to collect your Greek receivables in Drachmas.
 
The footnote goes on to explain that the company has 14 customers who owe the company more than a million Krona and together make up 80% of receivables. Five of those owe WeSC more than five million Krona each and account for 56% of receivable. I imagine some of those are independent distributors.
 
WeSC has no long term debt. Current liabilities rose from 52.9 million to 68.5 million as a result of a 22.3 million liabilities to credit institutions. This represents money they’ve borrowed that’s secured by receivables. The current ratio has fallen from 3.1 to 2.4, but is still more than adequate. Total debt to equity is 0.57, up from .40 a year at the end of the previous fiscal year.
 
Strategy and Some Interesting Comparisons
 
WeSC talks about its strategy as being more penetration of existing markets, entering new markets, launching new product groups, and opening more retail stores. That, of course, is more or less the same strategy that a whole bunch of other brands have. Why might WeSC succeed at it?
 
In a word, “street fashion.” It now seems like an obvious thing, but it was some time before 2000 when CEO Greger Hagelin thought of it. Or at least I think he thought of it. Reminds me of Skullcandy’s Rick Alden wandering around one day some years ago and thinking, “cool, stylish, earphones for the exploding portable electronics market.” Both seem obvious now, and I’m sure I’m not the only one who’s said, “Why didn’t I think of that?”
 
If you’re a street brand or an action sports brand, it’s hard to become a fashion brand. Ask Burton. Ask Volcom who, in my opinion, sold to PPR at least partly because they so solidly owned their own market niche that they couldn’t break out of it and continue growing without help from a fashion player.
 
But if you’re starting from scratch, selling “…streetwear with style, a cross between traditional streetwear and contemporary fashion…,” maybe you can have a foot in both markets. “Because of WeSC’s unique identify, other brands carried by retailers are seen more as complements than direct competitors.”
 
That might be a bit arrogant. But if it’s true, it’s pretty damned powerful.
 
The result, CEO Hagelin says, is that “We are one of the few brands that can sell our products in everything from action sports stores to fashion boutiques, to some of the world’s best department stores…” And they are able to “…broaden our distribution with watering down the brand…,” he goes on to say.
 
Street fashion does fit in a lot of places, and allows for product extensions, because of the brand’s positioning, that an action sports or street wear brand would have a hard time accomplishing. WeSC’s foray into high end headphones and luxury sneakers are two examples of such extensions. The company tries not to compete on price.
 
But I have to note that public companies pressured to grow seem to have an almost innate ability to screw up distribution eventually. It’s uncanny.
 
CEO Hagelin’s letter to shareholders also notes that, “The basis for our success, as well as our biggest challenge, is to continue to enlist skilled employees and outstanding WeActivists, who will help us strengthen and spread our brand and corporate culture.”
WeActivists are “…informal brand ambassadors.” They “… are strong-minded, successful individuals who are dedicated to their professions and to WeSC. WeActivists range from artists skaters and snowboarders to photographers, musicians, DJ’s and others who are extremely good at what they do, whether famous or totally unknown. WeActivists share a “street mentality,” and each one serves as an individual ambassador for their subculture.”
 
That sounds a lot like what Skullcandy does with its own extensive group of informal brand ambassadors. The focus on employees who can spread the brand and strengthen the culture sounds like Zumiez’s outstanding employee development program. There is no reason to reinvent the wheel.
 
The one thing I didn’t see in the annual report was a discussion of the competition. I hope that’s just an oversight. I’m intrigued as I think about who their competitors are, and I can’t really name them. Obviously, it’s not that they don’t have any. But if my observation that there are some barriers to being either street or fashion and moving into street fashion is accurate, then maybe WeSC has a head start.
 
But first movers, if that’s what WeSC is, aren’t always the ones who ultimately succeed in a market. It might be that WeSC is just now getting big enough to be noticed by the big fashion players, and that could force the company to pay more attention to competition. I have no knowledge of this, but perhaps the company’s longer term strategy is to get purchased by one of the very large players. I can imagine that WeSC’s positioning might attract some big multiples if those potential buyers consider it valid.   

 

 

The New LAUNCH LA Trade Show; I Wondered When This Was Going to Happen

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Well, what a long strange trip it’s been.

It was just about a year ago that the demise of ASR was officially announced. Since then, as the trade show environment has evolved and people have worked to figure out how to adapt, I’ve written a few times about trade shows. Here, here, here, here, here, here, and here actually, from oldest to most recent.

You would think that would be enough, but yesterday’s announcement of the new LAUNCH  LA trade show has compelled me to take pen to paper (metaphorically speaking) and review the events of the past year. At some level, the launch of LAUNCH (sorry- somebody had to say that) kind of represents the end of this phase of our trade show evolution. Let’s see why this is by reviewing a little trade show history and evaluating the LAUNCH concept.
 
Since ASR Died
 
Remember how the announcement that ASR was folding was kind of a surprise, but not really once you adjusted to the initial shock? Agenda saw (correctly) an opportunity and I’d say they’ve benefitted from ASR closing. I’ll be curious to see how it works out as they move to Long Beach and grow to the next level.    Outdoor Retailer has tried to get some refugees from ASR to exhibit at their show. One thing we all agree on is that the goal of whatever happened next was not to replicate ASR.
 
Our various trade associations all found that funding they had been receiving from ASR went away with that show. Naturally they wanted to replace that, but they were also concerned where their members were going to gather, exhibit, and go to see products and do business.
 
There were I gather a lot of gyrations and conversations among the trade associations and existing trade show organizations, but obviously they weren’t able to reach a cooperative agreement on a new show. As I wrote in one of my earlier articles, the surf and skate disagreements over ASR contributed to the skate hard goods companies pulling out of ASR, and it wasn’t quite clear to me why they were going to get along now in a trade show environment. Skate’s sort of found a home at Agenda for the time being.
 
I also asked in my writings if we needed a replacement for ASR and noted that starting a trade show from scratch required a whole bunch of money, experienced people, and a long lead time. In other words you had to finance and build an organization and not expect it to bear any fruit for maybe a year. 
 
Meanwhile, lurking in the lichens, was Surf Expo whom we haven’t mentioned yet. I guess I’ll start by noting that Surf Expo Show Director Roy Turner is on the non-elected SIMA Advisory Board, as you can see here on SIMA’s web site. I wonder what advice he gave them about trade shows.
 
Surf Expo did a few things right. First, they didn’t try to rush in to fill a perceived void left by ASR. Second, they stayed away from all the gyrations as all the other players tried to negotiate a coalition that would create an ASR replacement.
 
Now, I’m sure there were various calls from various organizations to Surf Expo asking them to be part of that coalition and the third thing Surf Expo did right was to recognize that if they wanted to do some kind of West Coast show, they didn’t need help to do it. They already know how to put on trade shows.
 
Fourth, and most strategically, Surf Expo figured out that the only thing that really mattered was whether they could create a show format that retailers and brands found valuable. If they couldn’t do that, who cared?
 
Finally, they determined that the show needed to be a youth culture rather than action sports show. And that brings us to……….
 
LAUNCH  LA
 
LAUNCH will be held next July 25th and 26th in Santa Monica and given the timing, I imagine most of the product there is going to be seen for the first time. It is not a West Coast Surf Expo. It is not an action sports show. It is not a replacement for ASR. Here’s how they describe it.
 
“LAUNCH LA is a juried event and our panel of experienced and influential experts will screen each company based on quality, design and originality in order to ensure the best product assortment from leading men’s and women’s contemporary fashion labels, footwear and accessories brands, lifestyle and action sports lines, as well as swim, apothecary, and technology collections.”
 
It was probably inevitable I’d like the idea since I more or less suggested it back in July when I wrote: 
 
“If I were going to create a youth culture trade show from scratch, I’d start by developing the list of brand’s I’d want to have exhibiting. Would it include some surf/skate/snow brands? Sure. But I think I might want Apple there (who knows if they’d want to come). And Facebook. And some music companies, and some game companies, and some other brands and activities that I don’t even know about because I’m not quite as cool as I used to be.”
 
“The show I envision wouldn’t be about skate or surf or moto or fashion though I suspect it would include elements of all of those and more. It would be about ‘STUFF THAT’S IMPORTANT TO PEOPLE AGES 14 TO 25.’”
 
If they do this well, it will be a badge of credibility to be allowed to exhibit at LAUNCH. That, of course, implies some limits on growth, but I don’t see that as a bad thing. I also note they’ve chosen to call it “LAUNCH LA,” implying there might be, for example, a “LAUNCH NY.” Maybe they’ll eventually hit some other cities as well. I don’t know this, but it feels like they might be starting down a road towards a group of similar regional shows featuring the most relevant brands and products from those regions.
This will get particularly interesting if (when?) the jurors they have chosen as the arbiters of who gets to exhibit turn down some of the larger, well established brands. If they don’t do that, and we end up with most of the same old brands exhibiting the usual products, it will jeopardize the credibility of the whole concept. From the web site, I get the feeling they are going to require the selected brands to focus on one or a few products that in some way are innovative, technically or otherwise.
 
It also appears to me that there’s no limitation on which companies from which industries might end up exhibiting. I like that. A really cool and well-designed product from an industry we don’t usually associate with our world could show up. I hope there are some surprises. It will help the show’s cachet.
 
And as long as they’re going to have jurors for innovation and design, maybe they should have some to vet the brands for their business practices. Retailers would know that any company exhibiting at Launch could probably be counted on to deliver. Performance is typically a concern of retailers when they choose new brands.
 
For some years now, I’ve been asking what industry we were becoming. I’m still not sure I know the answer, but when a show like LAUNCH LA is started focused on design, fashion, and innovation- coolness if you will- rather than skate, snow surf, or another sport, I know I’m not the only one thinking along those lines.
 
The announcement of LAUNVH LA marks the end of the reverberations caused by ASR going away. I suppose I shouldn’t just assume that this new show will be successful, but there is a hole to fill and I’m pretty sure the people bringing us the show didn’t decide to announce it without researching the concept and how it would be received.
 
I’m looking forward to hearing more about how, exactly, exhibitors will be chosen.

 

 

September’s Leap in Outdoor Sales

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The Leisure Trends Group does a lot of good work. On October 20th, they sent out an email you may have seen announcing record September outdoor retail sales of $462 million up 17% over a year ago. Leisure Trends analyst Scott Jaeger said it was the strongest September since they started keeping records in 1998.

Great news obviously. But I’d like to offer a perspective on those results that’s a bit different from what Leisure Trends offers. Here’s a quote from the release.

"As we have seen over the past several years in both our consumer studies and the retail tracking numbers, consumers will spend on their passions, even in uncertain and difficult economic times," states Jaeger. Jaeger continues "Most Active Americans recently shared with us their current attitudes towards their favorite outdoor recreational activities and the products they buy to do those activities, and the following quotes sum up this willingness to spend on what matters." 

"These are the things that bring our family and friends together. They are very important to us."

"My sports are not a luxury, they are a necessity. They keep me healthy, both physically & mentally, make me more effective & competitive at my work, and improve my family relationships."

"I am so pumped to be able to actually spend a little bit more money this winter on my favorite gear."

I’m not saying this is wrong. But there is a sense of glorying in our own wonderfulness that bothers me a bit. Actually it bothers me a lot, but I’m trying to be subtle here. Not my strong suit.
 
Back in April I wrote about SIA’s end of year sales report. SIA (using numbers provided by Leisure Trends, he points out with only a minor sense of irony) reported that through February for the season, winter sports sales were up 13% in dollars but only 8% in units. In February, unit sales fell by 2% and dollar sales by 1.5%, but gross margins rose by 8%. I suggested the results were at least partly because, as an industry, we were controlling inventory. I wrote:
 
“Won’t it be fun when customers start coming in [next fall- as in now] looking for cheap stuff and you can tell them that not only isn’t there any, but if they don’t get what they want now, they may not get it? You’ve already improved your gross margin by next year just by not having a bunch of inventory left and we’ve collectively improved our brands’ images.”
 
“As an industry, we go to conferences, hold trade shows, create learn to ski/ride programs, run all sorts of programs, do studies advertise and promote, and spend overall millions of dollars trying to get people to try riding/skiing and stick with it.”
 
“But I’d hypothesize that we could forgo a bunch of that if we just didn’t get so damned greedy and continued to control our inventories. Oh, and we- you, that is- could make more money with less risk.”
 
“Now, I’m the guy who’s always said every business is going to (and should) make the decisions that they perceive to be in their own best interest. That’s true. But it looks to me right now that what’s good for your business is probably good for the industry in at least this one instance. Everybody left standing in the ski/board industry has figured out, finally, that there’s no way to make money in winter sports if you’ve got a pile of left over inventory. And also you won’t be able to pay your bills.”
 
Leisure Trends is talking about the outdoor industry and I’m talking about the winter sports business, a subset of outdoor. Still, I don’t think winter sports is the only industry that has had to learn the hard way the lesson, and opportunity, of inventory management since the economy went south. And in September, I suspect a whole lot of outdoor sales are winter sports related.
 
We do ourselves a disservice if we conclude that our customers bought our products because they really, really love us and can’t get along without us. I hope that’s part of it, but I think what you’re seeing is more the result of your smart business practices last year then a renewed gushing of affection.
 
Your customers are responding to a lack of closeouts and an understanding that they need to buy what they want at full margin now if they want to get it.
 
Keep up the good work.    

 

 

Peak Resort’s Initial Public Offering. What’s Going On?

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Back on April 18th, Peak Resorts filed an S-1 with the Securities and Exchange Commission (SEC) to take the company public. There have been four amendments since then, with the latest filed September 19th. Here’s the link to that most current version of the S-1. The company is not yet public but, based on that filing, is still working on the process.

It is, by any measure, not an easy time to take a company public. Skullcandy, you’ll recall, had to delay their offering a while due to market conditions. I don’t think Peak Resorts is facing any better conditions.

Peak Resorts operates 12 ski areas in the Midwest, Northeast, and Southeast U.S. They had about 1.8 million skier/boarder visits in the 2010/2011 season. Total revenues for the fiscal year ended April 30, 2011 were $98 million. Mount Snow generated 40% of Peak’s revenue and Attitash, 12%. None of the other areas generated more than 8%. Lift tickets were 52.2% of total revenue and food and beverage, 15.5%. Hotel/lodging represents only 6.5% of total revenue because Peak’s areas are overnight drive ski areas and day ski areas. They don’t have any of the areas characterized as fly destination areas.
 
That’s part of their strategy as all their areas “…are located in or near metropolitan areas and target a regional market.” They think their experience in acquiring, integrating and managing areas is one of their competitive strengths, and they expect to look for more acquisitions.  
 
Numbers
The S-1 still has a lot of the usual holes in it. They expect to raise about $75 million, but we don’t have a proforma balance sheet yet showing what it will look like after the offering. Neither do we have an estimate of the share selling price, or specifics as to how the proceeds will be used, though they note that a chunk will be used to pay down debt. We’ll get back to that.
 
We do, however, have historical financials. Revenues for the three years ended April 2009, 2010, and 2011 were $84.3 million, $89.8 million, and $97.6 million respectively. Earnings from operations for the same three years were $9.9 million, $13.8 million, and $16.8 million. As a percentage of revenue, earnings from operations have grown from 11.7% to 15.3% to 17.2% over those three years.
Note that their latest acquisition, Wildcat Mountain, was completed October of 2010, so its results are included in the April 30, 2011 numbers.
 
Interest expense, at $10.8 million, was 12.8% of revenue in 2009. In 2010, it was $11.4 million or 12.7% of revenue. The numbers for 2011 are $11.3 million or 11.6% of revenue. Those numbers exclude, for 2009-2011, $2.1 million, $2.2 million, and $2.6 million of interest that was capitalized rather than expensed.
 
Taxable income was a loss of $492,000 in 2009. There were profits in 2010 and 2011 of $2.8 million and $6.4 million respectively. In 2009 and 2010, Peak Resorts was a subchapter S corporation, so there’s no corporate income tax on the income statement. Those earnings, or the loss, flowed through to shareholders who are responsible for paying the taxes in 2009 and 2010. Net income is therefore the same as taxable income for the company. For the 2011 fiscal year, as part of doing this stock offering, they converted to a C corporation and had to book a $10.4 million income tax provision. That resulted in a loss of $4 million for the year. But there’s some funky deferred tax stuff going on, so if you can’t ignore the number, you can’t take it as typical of their tax rate going forward either. That is, their tax rate will not be 163% of income in future years.   That would be discouraging.
 
Ok. Balance sheet. There was a time when I wrote a lot more about winter resorts for SAM. Back then, I used to tear my hair out trying to decipher balance sheets with negative current ratios and other interesting stuff. Finally, I reconciled myself to the inevitable gyrations of winter resort balance sheets and focused more on cash flow.
 
Peak Resorts has $107.6 million in long term debt as of April 30, 2011. As part of current liabilities, they have an additional $34.8 million representing the current portion of long-term debt and capitalized lease obligations. That is, they’ve got to pay or refinance $34.8 million of debt before April 30, 2012. Basically, it’s one big payment due April 1, 2012.
 
Also at April 30 2011, they had $27.7 million of cash on their balance sheet. If a winter resort was ever going to be flush with cash, it would be at April 30. $11.3 million of that cash is restricted. That restricted cash is the “…interest due on our outstanding debt with EPT, our primary lender, and rent under the lease for the Mad River resort for the 10 months following April 30.” So that $11.3 million is not available for paying down the debt due this fiscal year. 
 
A little footnote diving tells us that this is the only year through the 2016 fiscal year where Peak Resorts has to pay off a big chunk of debt. In none of the other years through 2016 does the amount of principal due even get to $1 million. In the S-1, Peak Resorts says they “…have $28.3 million under various loan agreements to fund expansion and capital expenditures at our ski areas. We expect that our liquidity needs for the near term and the next fiscal year will be met by continued use of operating cash flows (primarily those generated in our third and fourth fiscal quarters) and additional borrowings under our loan arrangements, as needed.”
 
Peak Resorts is telling us they can pay off the $34 million in long term debt due this year from resources created or available to them from the normal operation of their business. Good, but I’ve got questions.
 
We know the $11 million in restricted cash isn’t available for debt repayment. The $28 million available under existing lines seems to be for expansion and capital expenditures and that would be borrowings from basically the same people they already owe the $34 million to (EPT- see below). The Consolidated Statement of Cash Flow for 2011 shows net cash provided by operating activities of $12.2 million. But they used $13 million in investing activities, most of which was additions to property and equipment and land held for development. Capital expenditures in the current fiscal year are projected to be $11-$13 million. We also know (because they tell us) that “…the repayment of this debt will not result in additional borrowing capacity under these credit facilities but may create available collateral for future borrowing if necessary.”
 
Overall interest rate on the debt is around 10%, and some of it is escalating. Given that interest rate, and the amount of interest they are paying (as described above) you can see why they are planning to use some part of the offering proceeds to pay down debt. It will do wonders for their cash flow and bottom line.
 
Who’s EPT?
Entertainment Properties Trust is Peak Resort’s only lender. It describes itself as“…a specialty real estate investment trust (REIT) that invests in properties in select categories which require unique industry knowledge, and offer stable and attractive returns.” It’s traded on the New York Stock Exchange under the symbol EPR. If you go to the link above and click on “Portfolio” along the top, you’ll come to a map that shows all their properties. If you then click, on the left side, on “Metropolitan Ski Parks” the map will show nine ski areas that are all part of Peak Resorts.
 
I’m told by people wiser than I that what’s happened REIT wise in the winter resort business is that there was a trend for REIT operators to buy areas and then lease them back to the operator. These resorts are shown as part of EPT’s portfolio, but they aren’t all owned by EPT. If they were, then Peak Resorts wouldn’t have on its balance sheet the debt from buying them. It would just be making lease payments and be responsible for running them.
 
The debt that Peak Resorts has to repay to EPT this fiscal year is the “Mount Snow Development Debt.” It’s due April 1, 2012. It “…represents obligations incurred to provide financing for the acquisition of land at Mount Snow that is in development stages.” Under an agreement dated April 4, 2007, EPT lent Peak Resorts $25 million which I assume was used to buy that land. An April 1, 2010 modification to the agreement increased the amount to $41 million. That increase included $8.7 million in accrued interest to the date of the modification. $25 million plus $8.7 million is more or less the amount that’s due next April.
 
You may have noticed that the economy hasn’t exactly improved since April 4, 2007. I would guess that any land Peak Resorts bought is worth a bit less than it was. I suppose it’s unclear if it would make economic sense to develop it. Peak Resorts balance sheet shows $28 million in land held for development. I wonder if that’s the Mount Snow land. If so, then none has been developed and sold. If it had been, the proceeds are required to be used to pay down the debt.
 
On October 30, 2007 Peak Resorts entered into an option agreement with EPT Ski Properties, Inc. (a subsidiary of EPT) giving EPT Ski Properties an option to purchase Hidden Valley, Snow Creek, Brandywine, Boston Mills and the part of Paoli Peaks owned by Peak Resorts at prices specified in the agreement. The same agreement would allow them to assume Peak’s leases at Big Boulder, Jack Frost, and Paoli Peaks. It could exercise any or all of these options on or after April 11, 2011. If EPT did exercise any of those options, it would, under the agreement, immediately lease the areas it bought back to Peak Resorts.
 
One wonders if the prices in that agreement under which EPT could exercise its options are as attractive to EPT now as they were when the agreement was signed in 2007.
 
So What’s Going On?
All I know is what I read. Nobody at Peak Resorts can talk to me because they are in the middle of the offering process. Down to the earnings from operations line, Peak Resorts results look good and improving, and the Peak Resorts managers are known as good operators.   But the interest burden is substantial and they’ve got $35 million in principal to pay off by next April 1st. It looks to me like the deal made with EPT in 2007 doesn’t seem quite so good in 2011’s economic reality and hasn’t worked out the way both sides hoped it would.
 
I heard on CNBC yesterday that the first IPO in two months had just been completed; a testament to how tough this market is. I would expect you wouldn’t try to do one now if you didn’t need to. I hope the next amendment gives us not only a proforma balance sheet showing some debt repaid from the offering proceeds, but a proforma income statement that shows what will be significant improvement of their bottom line from a lot less interest expense and a normalized tax rate.  

 

 

I Like Market Data

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Even before they contacted me to ask if I was interested in writing about it, I’d seen that Krush had released the Executive Summary for the Krush Buyers Report and it seemed an intriguing idea. Most of my five loyal readers know I think three things about market research and data.

First, that we don’t get enough of it, though that seems to be changing. Second, that when we do get good data, we, as an industry, sometimes don’t know how to make use of it so don’t really understand the value. That’s a particular problem if you’re a company trying to sell the data you worked hard to collect. Third, you have to drill down on the methodology to understand the strengths and weaknesses of the collection and analysis process. That’s true for any process; not just Krush’s.
What Krush did was invite “…a select group of brands exhibiting at AGENDA to preview their upcoming Spring 2012 lines to their consumer fan base using KRUSH technology.”  Then they had, “Consumers – thousands who represent brands’ trend setters as well as their “mall-shopping” followers – rated each item from new collections in an online SneakPeek™ event on KRUSH. “ They generated 135,217 ratings of 1,059 different products that included pretty much everything but hard goods.
The idea is that Krush can take this data and generate a report for each brand that indicates what is likely to sell (or not sell) well when the product hits the retailer, thereby allowing the brand to positively influence retailer buys and sell through and perhaps adjust what they produce.   The question I asked immediately, that you are no doubt asking and, to be fair, that Krush acknowledges in their summary as key is, “How do we know these results will really be predictive of what people will buy?”
Krush has done this before with scores of brand, and tells me the data is “predictive” of what’s actually sold. But of course as a brand, you won’t “know” how it worked until the product hits the retailer and you compare what sells with what the reports said would sell. Let’s take a closer look at their methodology as they describe it and see if there are some obvious questions we might ask.
Here’s how Krush starts its description of its methodology:
“KRUSH uses proprietary Crowdsource™ technology that leverages proven predictive models, game theory and online social networking technologies to capture, systematize and analyze large amounts of data designed to assist brands in improving demand forecasting and sales of goods in the Action Sports and Lifestyle industry.”
Well, that sounds impressive and seems kind of intuitively reasonable. Trouble is, I have no idea what it means. They go on to say their “Web-based platform allows manufacturers to preview items from upcoming lines to consumers and fans of the brand up to one year before market introduction in an online SneakPeekTM event.”
Now we’re getting somewhere. Consumers see the product on line and tell you what they think about it. I understand that, though the process is much more complicated than I’ve glibly described it. Here’s what Krush says:
“…manufacturers submit their line-ups to KRUSH which are entered into our system and tagged for features such as color way, material, style, trim, accents etc. KRUSH then leverages social networking communities to identify consumers and fans of the brand, then invites selected individuals to preview and rate the latest items. Using an intuitive rating system, consumers indicate whether they like or dislike each item in the line. Within days there are enough ratings to produce accurate predictive data…”
Now, I think, some of the questions you might want to ask about the process become obvious.
1.       The participants are “self-selected” as fans of the brand. They are, for lack of a better word, “core” customers. Does that selection process bias them towards the brand? Maybe that’s a good thing.
2.       What exactly do they see on line? One piece? All the brand’s pieces? A brand’s piece compared with comparable pieces from other brands? Line drawings or actual photos? In one color? Which color? On a model or just the item by itself?
3.       Is the comparison valid across categories?  That is, should we be asking just if the consumer likes this hat better than another hat or is the right question if they’d chose the hat over the t-shirt or the pair of pants or another brand’s hat?
4.       Will what a consumer is disposed to buy based on what they see in the survey be what they are disposed to buy in an actual store or an online site?
5.       Are suggested retail prices featured in the online survey and is price taken into account in estimating probability of purchase?
6.       Why do we believe that months later a customer’s bias will remain the same? I suppose that’s a problem we have to deal with no matter what.
7.       80% are male and 63% are between the age of 15 and 20. What do you do with this data if that isn’t your market?
Krush goes on to say, “Each item within a SneakPeek and the SneakPeek as a whole are then scored using a combination of proprietary popularity and ranking algorithms that incorporate preferences, passions, purchasing intent, demographics, influence, and other factors. The items are then normalized and ranked, with the highest scores indicating the most popular items and the lowest scores reflecting the least popular items in the line.”
You can see from that quote they are trying to deal with some of the questions I raised. In fact, if you go to this link and then hit “continue browsing” you can see the brands they are, have, and will be collecting information on. In fact, you can rate the open brands’ products.
When you do this, you’ll be asked if you “like” or “dislike” the product. The price is given and you can “Buy It Now” or reserve it if it’s not yet available. There’s also a box for a comment.   Go do it yourself. It’s better than my description.
Spending a couple of minutes doing this answers a few of the questions I asked (and suggests that maybe I should have spent time on the web site before asking them) and raises some new ones. For example, it seems that I can give my opinion on any product I want. Trouble is, cool as I am, I am not the target demographic. My opinion messes things up. But then, when I try to say I “like” something, it makes me login to my Facebook account. Krush wants access to my information on Facebook and wants permission to email me. I wasn’t prepared to do that. Maybe that helps to self-select against people they really don’t want in the sample.
Where the item is available now, the price is shown and you are offered the chance to buy it. You see a standalone picture of the item. Sometimes it’s on a model. As you can see, each brand apparently has considerable flexibility in how they show their products. And of course, you’re being asked to like or dislike a single product in isolation from other brands, colors, and merchandising presentation. Well, nobody is suggesting that isolating and figuring out consumer motivations is easy.
You, as a brand, have some beliefs, probably both anecdotal and empirical, about who your customers are and why they buy your product. Maybe Krush’s process will allow you to test those. In any event, you’d certainly want to know something about how the different factors are ranked, which is given more or less emphasis, and why. As Krush notes, the participants identify themselves as “core” (not Krush’s word) consumers. Is that your market?
While we’re on the subject of trying to ferret out consumer motivations, you might go read a book called Blink, by Malcolm Gladwell. He’s the guy who brought us The Tipping Point. Here’s the ubiquitous Amazon link to Blink.
I think what Krush is doing is a good idea. Of course, if it works well, you won’t have any choice but to use it because everybody else will be. It could become sort of like, “Show me the CarFax!” That would have to be Krush’s wildest dream.
My guess is that it will be like all the market research I’ve ever seen. Not a panacea, but useful if you’re thoughtful about how it’s done and how you use it. To use Krush’s word again, it’s “predictive.” It’s not going to tell a brand precisely what and how much to make and a retailer what and how much to buy. The point of this article is that with Krush’s market research, or anybody else’s, you’ve got to dive deep into the details before deciding to participate and if you decide to participate to get real value out of it.

 

 

Get Out of the Office! It’s Amazing What You Can Learn

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Yesterday, I had occasion to meet up with Jaimeson Keegan, who’s the President/Floor Sweeper (according to his business card) of SUPERHEROES Management. It offers athlete and entertainment talent representation combined with social media strategies and some other stuff that I thought was a very sensible aggregation. Anyway, we’re both up here in the Northwest and just thought we should get together and meet each other. Not being from Southern California, we get lonely and don’t have that many people to talk to.

And since we both knew where it was and there was a great coffee place down the street, we met at The Snowboard Connection in downtown Seattle. Owners John Logic and Adam Gerken weren’t there. John, it seems was over at the storage unit at their old location finally cleaning the thing out. They are apparently putting a wrecking ball to that old building, so there was just no way to put off cleaning it out any longer. Adam was off on his first vacation in three years. I took that as a sign the business was doing well.

I saw the Skullcandy display in the store. The sales person was raving about some new, customized display Skull was going to give them that would wrap around the post, or something. I asked if they carried any other headphones and the only thing they had was one pair of Nixon headphones in the case with the other Nixon product.
 
It made for an interesting comparison. Nixon started out in watches and has diversified their product line rather dramatically. Skullcandy has quite a line of tees, sweats, and beanies, but the focus is clearly on buds and headphones. We’ll see if that changes. One reason it might not change is because of different distribution strategies. Skull’s two biggest customers are Target and Best Buy. I’ve seen their product in Fred Meyers and, well, kind of all over the place. Their challenge, as I’ve written before, is to be cool even in wide and widening distribution. I’m prepared to believe you might manage that with headphones (ignoring, for the moment, the issue of inevitable competition). Not with apparel or other products.
 
I didn’t look for Nixon in Fred Meyers and don’t expect to see them there. But I’d expect their brand strength would allow them to sell a broader range of products than Skull but in a more limited distribution. Think of it like this. Skull has broader distribution in a narrower product line. Nixon has narrower distribution with a broader product line.
 
As long as I was downtown and had time on the parking meter, I thought I’d walk across to REI and see what was going on there. The first thing I noticed was that there wasn’t all that much merchandise in the store. I don’t mean it was poorly merchandised or looked bad. I just mean the store could have held a lot more product and not have been even close to cluttered. I’d chalk that up to the economy. As a member of the industry, I say, “Great!” Carefully managed inventory means fewer markdowns, less investment, and consumers anxious to buy. As you know, I think you can sometimes earn more selling less.
 
The ski and snowboard hard goods were right next to each other, more or less forming one section of the store. I really liked the snowboard racks. Ever shopped for area rugs? You know how they hang from a rack and move them from side to side like turning the pages of the book so you get a good look at them? That’s how these racks worked. Great idea.
 
I also noticed that the racks weren’t full. Hope that’s due to good inventory management rather than late shipments.
 
The winter apparel was nowhere in sight. I had to go upstairs to find it. It was pretty much all together with no ski/snowboard differentiation. Patagonia with Marmot with Burton with Nike with Betty Rides and some others. I’ve known Betty Rides owner Janet Freeman for more years than I’m prepared to admit. I don’t think this is the brand’s first year in REI, but it was great to see. Janet, you’ll be glad to know that your brand was as well represented as much larger brands, though it was a bit in the corner. It was interesting, in fact, to notice that no brand had all that much more space than any other. I was also told that REI does no private label.
 
So anyway, that’s what I learned just because I got my ass out of my office chair. I should do it more often.

Lessons From Interbike: Focus In or Focus Out

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I had occasion to be in Vegas on business while Interbike was going on. The company I was working with was exhibiting there, so I took the day to wander around the show. I’d never been to Interbike before. There was something different about this trade show from all the others I’d ever been to. It took me a little thinking time with my favorite adult beverage after I got back to begin to figure it out.
 
What I did notice at the show, of course, was that everybody there- exhibitors, buyers, hangers on- were about riding bikes and making riding better. That’s not a completely unique observation. I’ve made a similar comment about SIA’s snow show in Denver where everybody is somehow or other associated with sliding on snow.
 
But I wouldn’t want to push that comparison too hard. Technology, and improving the technology, in the cause of better riding, was king at Interbike. I guess that’s partly because the technology is so visible and touchable and, apparently, constantly changing. I don’t claim there’s no marketing component to this, or that all the “new technologies” really represent significant changes. But it seemed to my bike uneducated eye that product evolution and improvement was very real.
 
And when I looked at the prices of bikes, it appears the consumer agrees and is willing to pay for it. When a friend told me that the price of a top end bike could be $10,000.00 or even more, I almost peed my pants. It’s been a while since I bought a bike and yes, I do know there are also cheap bikes out there.
 
The other thing that my friend told me was that he had bought his bike some years ago, and still had it. But various parts had been replaced as they wore out or he found an upgrade he wanted. It was the same frame, but not necessarily the same bike.
                   
There’s market value in this kind of focus and community of interests. It tells you who your customers are (and who they are not). It invests the customers in their relationship with the retailer and provides reasons to visit that retailer. It gives the consumer an ownership of the product you can only get when the product is upgradeable, not a commodity, and long lived.
 
It’s not that there isn’t a fashion component to all this, but I didn’t seem much “after biking” clothing or “casual” bike shoes. That’s kind of where the comparison to the SIA show falls apart. Obviously, there’s a huge fashion component there.
  
Where else have I seen the kind of commitment to technology and community of interests I saw at Interbike? The only place that comes to mind is in longboarding. Longboarders, like bikers, seem to be an inclusive, group of people who are accepting of anybody who uses any kind of longboard for any purpose. They share an interest in longboard technology and product improvement. That’s probably why they’ve become as big a chunk of the skateboard market as they have.
 
I had a chance to talk to a bike retailer about skateboarding. He didn’t do skate, but was considering picking up longboards. Not short decks- just longboards. He said he wouldn’t know how to sell short decks and they just wouldn’t fit in his shop. He meant “fit,” I think, in a couple of ways. There was no way he could do a wall of short decks, and his customers wouldn’t be interested. But long boards, as a community with improving technology, and as a mode of transportation as well as competition he could relate to.
 
Biking also has the advantage of being something you can do from oh, I don’t know, ages 5 to 75? And, like skate, you can do it anywhere.
 
But where surf, skate, and snow break down, at least compared to biking and, I suppose, longboarding, is that they have diffused their customer focus. Much of the market (most?) is apparel, shoes, and other products, sold to non-participants. Biking has a broad community of common interest defined by participation. Action sports uses participation to attract nonparticipants to its “lifestyle.” Isn’t it interesting that biking, except for BMX, isn’t considered to be part of action sports?
 
Action sports works hard to keep its core distinctive and maybe even exclusive. You, the uncool person, can’t really belong to that core but you can sort of emulate it if you want by buying this shirt. That’s seen as a marketing strength and for some companies it certainly is.  Biking is about hard goods and everybody is invited in as in longboarding. Hmmm. Is longboarding action sports? Maybe how we label it doesn’t matter and I don’t care.
 
Because of its inclusiveness and focus on participation, you compete in the bike market by making a product that helps the rider participate better. When you do that by definition you join and support the community. If you can’t do that, nobody cares. Energy in the industry is concentrated and focused inward.
 
In actions sports, on the contrary, our growth efforts have inevitably become focused outward. Our energy is diffused and bigger, stronger competitors can break in as the distinction between action sports and fashion becomes blurred.
 
I’m not saying that action sports have done it “wrong” and biking and longboarding have done it “right.” At the end of the day, more people are going to bike at some point in their life than are going to surf.  It’s just the way it is. But there’s food for thought here. Is it better to build your market, like bike and longboarding seem to do, by welcoming anybody who wants to participate or can contribute to better participation? Ultimately, you create some limit to your market.
 
Or should you, as action sports has done, go for the much larger market of nonparticipants, recognizing that as you diffuse your energy over this larger market you invite serious competition and make the exclusivity that was initially your greatest competitive advantage less important?
 
I’ll be damned if I know, but the comparison is certainly intriguing.