Cyberboutiques. I Don’t Know if this is a Great Idea or a Waste of Bandwidth.

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My wife sent me this article from the New York Time’s Fashion and Style section. For some reason, I don’t read that section regularly. Not enough graphs, charts, and numbers to get me excited I guess.

I played around a bit with the application at the web site. It was a bit jerky and slow, but I could certainly see the potential. Either that or I couldn’t, and I guess that conundrum is what’s leading me to write this.

On the one hand, maybe this is the next step in integrating online with brick and mortar retail. What might happen if each store in a chain had its own virtual store with avatars of the actual sales people who worked in the store? What is the customer could chat with the actual people in the store through their mobile device and the inventory online reflected the inventory in the store? Or you could click on an icon to talk with the actual sales person on a web cam.
 
Or maybe I’m over thinking this and nobody would care. Just because you can do something doesn’t always mean it’s a good idea. Like all of you, I learned that when I was very young.
 
I can imagine some kind of temporary marketing advantage here due to the immediate “that’s cool” factor. But I also felt like it had the potential to slow down my shopping. I don’t necessarily want to wander around a web site the way I wander around a store. And there seemed to be some glitches in the navigation. Make sure you go up the stairs (though it isn’t clear that you can at first and I sort of stumbled on it). 
 
Of course, I’m looking at version 1.0 so we need to consider the general concept and not be too critical of the specifics. You know the software will improve if the concept is well received.   But what’s the purpose? I’m not sure it adds to the shopping experience and nobody expects a web site to be the same as a brick and mortar store. Do they?
 
I guess I think that if it doesn’t improve web site navigation, make shopping more efficient, or give me some new information I want then I don’t care. No doubt there are people working right now to make those very things happen. It will be interesting to see what they come up with.      

 

 

Popup Playgrounds; An Intriguing Marketing Idea

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It’s not like I look to the New York Times for all my good industry advertising and promotion ideas. Still, once in a while, they come up with something that gets me thinking. Their “Presto Instant Playground” article is one such idea. You may have to register to read it, but it won’t cost you anything.

“During a two-month period last year, seven civic coalitions in New York neighborhoods like East Harlem and the South Bronx got permits from the city to close certain local streets to traffic for designated periods of time — say, between 10 a.m. and 3 p.m. on a summer weekday. Working with the police and other city agencies, they re-designated the areas as temporary “play streets,” encouraging neighborhood children to use them for exercise and offering a range of free games, athletic activities and coaching.”

My immediate reactions was that this was an especially good idea for skate brands because a skater’s playground is the street and brands already have connections with skate parks and park and recreation commissions. But I really liked it because it connects with parents and kids, doesn’t appear to cost much if you don’t want it to, involves the local community, and gets kids outside and active. We have a business as well as a social reason to want to see that happen.
 
I know retailers and brands (sometimes in cooperation) have done some similar things. And I recognize it might be a little harder for a snowboard or surf company to make the connection. But the approach I was thinking about was not for a brand to do it themselves, but to contact their local civic organizations and see if they could do something similar in cooperation with those groups.
 
I’d start by contacting some of the groups that did it in New York and find out just how they pulled it off and if they had contacts in other locations that might also be interested. My hope would be that the civic organization would do most of the organizational work using already existing contacts with the local government and other stakeholders. The brand, or retailer, would be left to provide maybe a bit of cash, some product, the presence of team riders perhaps, pop up tents, and maybe some food and drink. I don’t know- it would depend on the specifics.
 
I also recognize that a snowboard company, for example, might have to be a bit cautious in their approach if they were doing it with lower income, inner city kids whose chances of going snowboarding were poor. But maybe, for example, you give some of those kids a chance to go and maybe you’re just there to get the kids outside and active at a low cost and you hope for some brand benefit somewhere down the line.
 
Anyway, it just seemed like a low cost, positive, valuable thing to do, so think about it.

 

 

The 2010 SIMA Retail Distribution Study

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The first thing to say is thanks to SIMA for making this study happen and to Leisure Trends Group for doing the research. We don’t get access to near enough industry and market data.

As I’m not a member of SIMA, I don’t have access to the complete study. I’m working with the “Media Highlights” package that came out after the press release on the study.     

Two years ago, when the previous study came out, I did the same kind of analysis I’m going to do now. You can see that analysis here.
 
As usual, I’m doing this to try and identify trends and information that will help you run your business better and make you think about important issues. But the Media Highlights weren’t constructed with my needs in mind. SIMA’s goal in producing the highlights is to promote the industry to the broader market and to make it look good. I do not, by the way, fault them for a moment for doing that. It’s part of their job.
 
Anyway, keep that in mind here as we proceed.
 
The Headline Numbers
 
I’m sure most of you all saw these numbers in the press release. The “core channel” sales at retail (all these numbers are at retail) fell 13.5% between 2008 and 2010 from $5.32 billion to $4.6 billion. Sales at skate focused stores were down 11.6% from $2.85 billion to $2.52 billion. At surf focused stores, they fell 15.8% from $2.47 billion to $2.08 billion.
 
Footwear in core channels rose 8.2% to $1.5 billion and represents one third of total sales. Hard goods sales over two years were up 35.3% to $1.46 billion and represent another third. Well, if footwear and hard goods were up, but total core sales fell 13.5%, then apparel must be, well, not specifically too good. Down 41.1% actually to $1.0 billion. Interestingly, men’s/boy’s apparel accounted for 57% of overall apparel sales. Even with the weakness in juniors, that surprised me.
 
So if you’re like me you looked at these numbers and went, “Huh?!” On the face of it the hard goods increase and apparel decline seem just impossible even though it’s over two years. Then there’s the “other” category of sales which fell from $498.8 million to $18.4 million in two years. I hypothesize that there are some changes in classification and what’s included or not included going on here.
 
Core stores do not include military exchanges, company stores, and national department stores. I know what a military exchange and a national department store are. But when it excludes company stores does that mean, for example, that the Billabong store in my local mall is excluded?
 
That’s just what it means and, having discussed it with SIMA, I can see their point of view. If you called a company owned store, SIMA said, and asked them what their best-selling board short was, what might you guess the answer would be? The weighting towards company owned brands in company owned stores, SIMA argues, would skew the data.
 
You can see the difficulty SIMA and Leisure Trends have in decided who to survey or not to survey. The other side of the argument, of course, is that those board shorts sold in a company owned stores are real board shorts sold to real customers. Surveying them might skew the results, but all the brands who have company owned stores are working every day just as hard as they can to do just that.
 
Then there’s the issue of company owned stores that carry brands in addition to those brands owned by the company. What would SIMA do with Billabong owned West 49 and its 125 or so stores if it was a U.S., rather than Canadian, retailer? On the one hand, it carries other brands. On the other hand, Billabong is working to increase the owned brands component of those stores to as high as 60%. Would that skew the sample in such a way that West 49 stores shouldn’t be included in the survey?
 
I don’t know.  I’ve got an opinion, but I don’t know in a definitive way. You don’t know either. Neither do SIMA or Leisure Trends. They make the best decisions they can make given the information they have.
 
Internet and catalog sales contributed 16% of the total, compared to 14% in 2004. 55% of retailers are now selling on the internet. That’s double the 2008 percentage of 24%. I’m surprised it’s only 55%.
 
SIMA also estimates that surf and skate sales in all channels (including company stores, military exchanges and national department stores) fell 13.6% from $7.22 billion to $6.24 billion.
 
There’s a chart on page 5 called “Putting Things into Perspective-Retail Size of Other Sports/Recreational Industries that I didn’t agree with.” It lists that all channel estimate for surf/skate and shows 2010 retail sales for Outdoor (core), including paddle sales at $5.70 billion. Bicycle comes in at $3.2 billion, snow sports at $2.92 billion, scuba at $658 million, snowboard at $481 million and paddle by itself at $360 million. Next to the chart it says the following:
 
“Based on other work completed by Leisure Trends Group, surf/skate is impressively positioned among other retail industries.”
I don’t know what “impressively positioned” means. And I would dispute the idea that an industry’s size is determinate of its competitive positioning against other industries. I wish that could have been stated a little differently.
 
Definitions and Methodology
 
Just what is “core,” we’ve all wondered. In doing the research for this study SIMA says, “The CORE channel includes retail operations that classify themselves as specialty, lifestyle or sporting goods stores. Core stores do not include military exchanges, company stores, and national department stores.”
 
I asked SIMA if surveyed stores really did classify themselves and if that meant that Sports Authority could be “core.” They clarified that sporting goods stores are, in fact, included in the core numbers but couldn’t tell me about specific retailers because of confidentiality reasons. I can understand that. You aren’t likely to get much cooperation if the retailers submitting data don’t think it will be confidential.
During January and February of 2011, Leisure Trends did 446 telephone interviews with surf and skate retailers in the U.S. This sample was taken from a list of retailers reviewed and provided to Leisure Trends by SIMA. “The list of core shops that are surveyed is a list that has been compiled by brands’ accounts.” The brands provided the list.
 
“By being on the list, and qualifying for the study by having at least 10% or higher of their operation’s overall sales coming from surf and/or skate products they are considered within the Core Surf/Skate Channel,” SIMA told me.
 
That 10% bar seems kind of low for me. Especially as that’s for surf and skate combined. I wonder to what extent setting the bar that low expands the size of the total market?
 
I also wonder how they measure which retailer makes it to the 10% bar and what products are included in the calculation. It sounds like the retailers decide if they are 10% skate/surf. If a sporting goods store thinks they sell 10% skate/surf by including boogie boards, beach umbrellas, various brands of apparel, cheap complete skate decks, every swimsuit in the place and sun tan lotion, can they end up classified as being in what SIMA calls the core channel? Okay, kind of an extreme example but you can see my point.
 
SIMA clarified for me that they weren’t trying to define what a “core shop” means by the study and use the word only to define the shops that were surveyed. They suggested that something like “surveyed stores” might be a better term. I think it might be and hope they consider using it in two years.
 
Just to say it again, every study like this one has methodological and statistical challenges to deal with. There are tradeoffs and choices you make as you do your best to collect good data. But my readers know I think the core market is a lot smaller than this study suggests and I suspect many of you agree with me. If so, do me a favor and put a comment to that effect on my web site please.
 
Some Interesting Trends
 
The most interesting thing I found was that chain stores represented 35% of the total list of stores compared to only 9% in 2008.  The report notes that “Independent stores closed many doors in the past two years. Most of these were replaced by specialty chain stores causing a less than expected drop (-1.7%) in total surf and skate doors to 4,826 in 2010.”  That speaks more eloquently than I can to the way the industry is changing; or maybe it’s better to say the way larger brands are evolving out of the core action sports space.
Consistent with this, 81% of all surveyed retailers use a point of sale system, up from 60% in 2008. I conjecture that’s because a lot of the smaller, unsophisticated stores are gone, replaced by chains with good systems. SIMA points to two other trends that are probably driven by the growth of chain stores in their sample.
 
The first is the increase in the average number of store employees from 6.5 to 7.7. I’m guessing this could also reflect some recovery from the depth of the recession.
 
They also note more stores carrying snowboarding, wakeboarding, motocross, BMX and other sporting goods and suggest this is because more chains are in the sample. Probably true.
 
I’ve spent more timing writing and rewriting this than you would believe. It’s kind of old news, I’m working with incomplete data, and while SIMA was as cooperative as they could be, there was just some data they aren’t allowed to give me and questions confidentiality prevented them from answering. Why am I doing it?
 
As usual, because I think there’s a business lesson to learn. You just can’t look at the headline numbers and say, “Oh, this represents how the industry has changed.” 
 
The dramatic changes in certain categories (hard goods up so much, apparel down so much, the “other” category) gives me pause. They are indicative of huge changes in our competitive environment. They reflect vertical integration, the rise of chains, specialty shops going out of business, a broader definition of what our industry is, the use of systems by the survivors (and probably some different classification of product as a result), a lousy economy, and some others as well.   
 
You shouldn’t be depressed because the industry is smaller than it was two years ago. There’s good news for some segments, and for some companies, in there.    At the same time, you shouldn’t be giddy with joy as a hard goods company just because hard goods were reported to be up 35%.
 
What we can learn, as a reader of the press release and even the media highlights or the whole study if you have it available to you, is that you have to be cautious in drawing conclusions from summary data lacking a thorough understanding of how the study (or any study for that matter) was conducted. 

 

 

The Agenda Trade Show, U. S. Open, and Other Trade Show Comments

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As I walked around the Agenda Trade Show last week, I saw a lot of people sitting across tables from each other in the booths obviously doing business. That is the definition of a successful trade show. The sample of company executives I talked too seemed to confirm that.  People were surprised by the number of buyers. 

I’m not that worried about the vibe.  How busy or crowded a show is is hard to judge.  It’s impacted by things like the size of the aisles. And I don’t care how much free beer there is.

Okay, wait, I lied. I do care about free beer. But that’s neither here nor there. What’s important is that retailers and brands got together to do business. Whatever other good things happen at trade shows, without that there would be no adequate justification for any show.
 
We also continue to be over, I’m happy to say, the “My booth is bigger than your booth” syndrome that plagued us for so many years. Though there were a few larger spaces at the end of Agenda’s main hall, mostly booths were what I’ll call 10 by 10s that I’m told companies paid $2,500 for. One satisfied executive told me the total cost to attend the show was $5,000 and that they was doing the same amount of business as when they spent $120,000 on a show. He may have been exaggerating, but I’m sure he’s got a point.
 
If I’m Agenda show executives Aaron Levant and Seth Haber, I just perk right up when I hear that, because it implies a show value they aren’t getting compensated for yet. You might want to see another article I wrote on trade shows before ASR died that discusses towards the end the pressures any growing, successful show might be subject to.
 
I think Agenda management will be cautious about how it grows the show and try to have some continuity in who attends and how the show is focused. It’s not that they don’t want to make more money- I don’t actually know anybody who doesn’t- but they watched ASR and I’m guessing learned something from that. Growing too fast, getting too diffuse, charging more than the market can justify; these are all things we learned don’t work.
 
Meanwhile, speaking of how Agenda might evolve, there are the still ongoing conversations among various industry trade groups about putting together an industry week, part of which would be a trade show. I should say I’m not quite clear on what exactly an industry week would encompass besides the trade show which, I trust, wouldn’t last a whole week. But I like the industry week idea if it’s a way to involve consumers, do some educating, and introduce others to our industry.
 
If I were putting together an industry week, I’d be talking with Agenda, and maybe Surf Expo as well, about doing the trade show portion of that week. There’s no need to reinvent the wheel.
 
Surf, of course, needs some replacement for ASR. Skate seems to have found all they need in Agenda as currently configured, or at least that was what some people told me. I hope it isn’t indelicate of me to point out that skate companies left ASR at least partly due to differences with surf. I don’t have an opinion as to who was right or wrong, but I am unclear why skate companies, who seem to have found a good trade show situation at Agenda, would be quite so anxious to do a show with surf again. Reminds me of that old definition of insanity.
 
I’m probably lacking some facts here. Hope somebody calls and gives them to me.
 
And then I walked down the street to the U.S. Open with its air conditioned retail store and Invisalign tent, where you could learn how to get your teeth straightened without unsightly braces showing. I could see the obvious tie-in to surfing because, uh, well,….. Oh- right- the tent was on the beach.
 
Am I the only one who wandered around that place and was worried that all those stores and exhibits would have drawn most of the same people even if there was no surfing contest?
 
But then to approve my attitude I went across the street to Jack’s Surfboards to see a real specialty retailer doing what they do well. Jack’s, in business since 1957, certainly highlights the importance of location, but it was more than that. I felt like I was in a real surf shop. I could feel the echo of the places I frequented as a kid. It was well organized in a comfortable and attractively relaxed way and they had all the inventory they could possibly have without making the place feel confining.
 
So anyway, after a transition period since the closing of ASR, the skate and some youth culture brands have found a home at Agenda and the buyers are showing up. Like I said, that’s the definition of successful show. 

 

 

Trade Shows Re Re Re Re Re Visited; I Got an Idea. A Couple Actually. Hope One is Good.

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Since ASR closed, and before that actually, we (well, me at least) have been struggling to figure out the role of trade shows as the economy, technology, and the industry changed. How do you get retailers to attend shows (paying them isn’t a good long term strategy)? Should consumers be involved somehow? What sports and products should be represented? Are shows about buying, or networking, or seeing new product or all of those or none of them? Do people even need to go to shows? How big should shows be and how long should they last? How do you keep the costs down? Do we even need another one?

Various organizations in the industry have been focused (and as far as I know, are still focused) on doing their own show individually or as a group. I’ve had a call from an organization that’s not in our industry but that does trade publications and shows for other smaller industries that wants to publish an action sports business magazine and maybe do a trade show. The existing trade show organizations are thinking about growing, or starting new shows, or just benefiting from the fact that companies that were at ASR need to exhibit somewhere else (I’m not sure that’s true).

I fell into the same thought process everybody else seems to be going through. Then I had a conversation last week with Roy Turner at Surf Expo. I always enjoy talking with Roy. He’ll tell me when he thinks I’m full of shit, though as a Southern gentleman, he’ll do it in such a way that I’ll somehow like being told. I’ve got to learn how to do that.
 
After I talked with Roy, I was thinking about what the action sports business really was (and has always been, actually), the role of fashion, consolidation, the impact of vertical retailing, and SIA and Agenda. I also reread an earlier article I wrote on trade shows right after ASR died.
 
I decided that I, and everybody else I think, have been focusing on the tactics of trade shows. That’s not necessarily a bad thing to do, but it keeps you from answering the fundamental strategic question of why ASR failed and what, if anything, should replace it. It’s kind of like when you buy an old house, you can remodel it. But it often makes more sense (financially as well as stylistically) to tear it down and start from scratch to get just what you want.
 
But we’re a pretty incestuous industry and momentum, resistance to change and cognitive dissonance (god, I love that term), makes it hard to throw out the old model and try something new.
 
What works? SIA seems to be doing really well. Why? First, because they are a one season business and just need one show. I’ve said that before. But what I’ve never realized, or at least what I so took for granted that I never thought about it, is that everybody there is somehow connected to sliding on snow. That’s strategic. It defines their purpose and who should attend.
 
The further ASR got away from that, the more they got in trouble. Like the old saying goes, if you try to be important to everybody, you end up important to nobody. Their attempted fixes were tactical, not strategic. It feels like as an industry some of that same mistake is being made because we want to dance with who we brung.
 
I’m not sure we can because there are a lot of party crashers out there. Maybe there’s a need for an “action sports” trade show but the real action sports industry is composed of those brands and retailers who cater to the participants in the sports and the first level of non-participants that associate themselves with the athletes and lifestyle. It’s pretty small. Most of the customers of most of our brands and retailers don’t fit into the action sports definition I used above.
 
What do they fit into? I’m tending towards youth culture. Hardly a new phrase, but I think very powerful if you think of a trade show in those terms, and begin painting with a blank canvas. Right now, Agenda seems closest to focusing this way and it’s interesting to watch them grow. But I’ve got a little different approach in mind.
 
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. Okay, maybe I never was cool. Different issue.
 
Now if you ask me why Apple would want to attend, well, I’m not quite sure they would. This concept is not completely formed in my head. Maybe what I’d do is visit all the coolest retailers in the country, or otherwise compose a list of them (online included) and create a list of the brands they carried. 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.”
 
Is it possible to do a show that would kind of cross over industries like this one would? I’m not sure. Figuring out what brands to invite and explaining how they all tied together and could benefit wouldn’t be easy. Getting retailers to decide to attend a show that wasn’t completely relevant to what they sold might be a challenge although, as I think about it, maybe retailers who see themselves focused on youth culture would come precisely because this would be the best place to find new products and brands.
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I’d also invite to attend (not to exhibit and maybe only for one specified day?) large companies who want to reach this demographic. And I’d charge them a lot of money to come. Maybe retailers wouldn’t be there that day and it would be a chance for brands to look for tie ins with large corporate players desperate to be cool.
 
A specifically action sports show made sense when we were all about action sports. Now, most of our business seems to be about youth culture (I’m open to a better term) so why aren’t we creating a youth culture trade show?
 
Partly, of course, because we can’t expect a trade organization to create a show that doesn’t cater directly to its members. But if trade shows are a waste of time unless retailers attend, then we damned well better create one that focuses on those retailers’ customer. Are they mostly action sports customers as I’ve defined them? Nope, they are youth culture customers.
 
It seems kind of obvious now and I have no idea why it took me so long to figure it out.  Please speak up if you think I’m crazy.

 

 

Dick’s Sporting Goods; Insights into the Development of the Action Sports Retail Environment

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Never thought I’d be looking to Dick’s for that. Dick’s, which has been around since 1948, had revenue of $4.9 billion in 2010 from 525 stores. The 444 Dick’s stores are around 50,000 square feet each though there are some two level ones that go up to 75,000 square feet. The 81 Golf Galaxy stores are between 13,000 and 18,000 square feet. The word action sports isn’t mentioned anywhere in their most recent 10K.

What’s intriguing is their business strategy. It’s intriguing because there’s a lot that would fit right into Zumiez’s annual report. A good independent specialty retailer will tell you that he tries to do a lot of the same things.

Let’s take a look at what Dick’s business strategies are and how they compare to the generally agreed on best practices in our industry. This may tell us something about how our industry is evolving.
 
Dick’s refers to itself as an Authentic Sporting Goods Retailer.
 
“Our history and core foundation is as a retailer of high quality authentic athletic equipment, apparel and footwear, intended to enhance our customers’ performance and enjoyment of athletic pursuits, rather than focusing our merchandise selection on the latest fashion trend or style. We believe our customers seek genuine, deep product offerings, and ultimately this merchandising approach positions us with advantages in the market, which we believe will continue to benefit from new product offerings with enhanced technological features.”
 
The focus on performance and enjoyment rather than fashion is what I’ve argued action sports is really all about, though we got away from it in the good old economy days and thought everybody who carried some hard goods was a “core” retailer. I might be putting words in their mouth, but it sounds like Dick’s thinks you can be “core” for a whole bunch of sports at the same time in 50,000 square feet. Our specialty retailers try to do it with two to maybe five sports. In their most recently completed fiscal year, 54% of Dick’s revenues came from hard goods. 
 
Dick’s second strategy is Competitive Pricing. They specifically do not try to be the price leader but will match competitors’ prices.
 
“We seek to offer value to our customers and develop and maintain a reputation as a provider of value at each price point.”
 
Their sheer size gives them some pricing (and costing) leverage that action sports retailers typically don’t have. No independent specialty shop can compete on price. Dick’s also has the advantage of selling product in nearly two dozen sports and activities, with the result that they can better manage their inventory to respond to seasonality and even out cash flow.
 
Dick’s carries a Broad Assortment of Brand Name Merchandise.  “The breadth of our product selections in each category of sporting goods offers our customers a wide range of price points and enables us to address the needs of sporting goods consumers, from the beginner to the sport enthusiast.”
 
What I particularly like about this is the obvious customer definition. Dick’s thinks it’s the place to go if you’re a participant in any of the sports or activities they support. You can be a beginner or an expert and they’ve got what you need. That sounds like something an independent specialty retailer in action sports might say.    Trouble is, you can imagine Sports Authority saying it too. But Dick’s differentiates itself from Sports Authority in ways that action sports retailers would recognize. Let’s look at some more of Dick’s business strategies.
 
They offer Expertise and Service.  “We enhance our customers’ shopping experience by providing knowledgeable and trained customer service professionals and value added services.”  “We actively recruit sports enthusiasts to serve as sales associates because we believe that they are more knowledgeable about the products they sell.”
 
This means having professional golfers in the golf part of the store, certified fitness trainers helping you buy workout equipment, and trained bike mechanics to sell and service bicycles. It may be a 50,000 square foot store but in your little part of the store, where you’re buying stuff for the sport you’re committed to, you’ll be working with experts who are just as committed as you are.  That will sound familiar to any action sports retailer, chain or single store.
 
Dick’s creates Interactive “Store-Within-A-Store.” 

"Our Dick’s Sporting Goods stores typically contain five stand-alone specialty stores. We seek to create a distinct look and feel for each specialty department to heighten the customer’s interest in the products offered.”
 
Once again, that’s not exactly an unfamiliar concept. A typical store will include a pro golf shop, footwear center, fitness center, hunting and fishing area, and a team sports store with appropriate seasonal equipment and apparel.
 
Their last business strategy is Exclusive Brand Offerings that “…offer exceptional value and quality to our customers at each price point and obtain higher gross margins than we obtain on sales of comparable products.”
 
Those would be shop brands. We all recognize and understand that. But Dick’s seems to go further. They work with existing, well known brands to develop products that are available exclusively at Dick’s under that brand’s name. That’s possible only because of their size and market power.
 
Though Dick’s isn’t active in action sports, you can’t help but look at their business strategies and get some understanding for why specialty retailers are having such a hard time. Dick’s has all the advantages that come with size; purchasing power, efficient distribution, access to capital, good systems. But they’ve gone further and are applying many of the competitive techniques we use to think of as being available only to the specialty retailer to the large format business. And they can do it without having the highest prices.
 
Dick’s isn’t a direct competitor for action sports retailers, though inevitably there is some crossover of brands. But if Dick’s can do it, so can other retailers. The good news is that if you really an independent action sports retailer (that is, your customers are participants and the first level of non-participants that are serious about the lifestyle) you’re got your location and your community connections as a point of differentiation. The bad news is I think that’s all you’ve got, so you better do that right.

 

 

Tilly’s is Going Public- A First Look at Their Registration Statement (S-1)

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Tilly’s started in 1982 with a single store in Orange County, California. The company name is World of Jeans & Tops, but it does business as Tilly’s. It was founded by Hezy Shaked and Tilly Levine. As of April 30 2011, they had 126 stores in 11 states averaging 7,800 square feet each. They filed last week for their initial public offering.

As is normal, the initial filing  has some important blanks not filled in yet. They will be completed as the process moves forward. In the meantime, we can look at the historical financial statements. I also want to talk about the impact of changing from an “S” corporation to a “C” corporation, the ownership structure post offering, and their competitive strengths and brand strategy. Let’s get started.

Sales have grown from $199 million in the year ended February 3, 2007 to $333 million in the year ended January 29, 2011.   During the same period, they went from 51 to 125 stores. Comparable store sales rose 17.3% in the first year of that period. They then rose 8.7% before falling 12.5% and 3.1% in the next two fiscal years and rising 6.7% in the year ended January 20, 2011. E-commerce revenues have grown from $15.4 million to $32.8 million in the last three complete years.
 
One has to wonder these days, in evaluating any consumer based IPO, whether the company can hope to return to its pre Great Recession growth any time in the next few years. It’s not the company’s fault; it’s just the economy.
 
The gross profit margin was 37.1% in the year ended February 3, 2007. The following year, it was 37.2%. For the January 31, 2009 year, it fell to 32.5% and for the most recent two years it was 30.9%. Selling, general and administrative expenses have of course grown in absolute dollars with sales, but as a percentage of sales has been more or less constant around 23.3% in the last three complete years.
 
Of the 126 stores Tilly’s has as of April 30, 72 are in California and 16 in Florida. There are also 17 in Arizona. The other 21 are distributed in 8 states with New Jersey, at 7, having the most. I would be particularly interested in learning something about the performance of the stores by location (which isn’t included). As we’ll discuss, part of their growth strategy is to increase their number of stores, and I wonder if performance has been similar in all geographies.
 
“C” and “S” Corporations 
Tilly’s has always operated as an S corporation. What this means is that the earnings were distributed to the owners who reported the income on their personal income tax returns. It also means that “No provision or liability for federal or state income tax has been provided in our financial statements except for those states where the “S” Corporation status is not recognized and for the 1.5% California franchise tax to which we are also subject as a California “S” Corporation.”
 
The chart below shows Tilly’s Operating Income and Net Income as reported on their financial statements. The Pro Forma Net Income line shows what their net income would have been over the last five years had they been a C corporation accruing tax at typical rates. Big difference. They will transition to a C corporation before the company goes public. This is disclosed in the registration statement of course. But the point is that you would not want to purchase the stock expecting Tilly’s to report net income going forward at the levels of the past.     
     

FISCAL YEAR ENDED (millions of $):
   

Feb. 3

Feb. 2

Jan. 31

Jan. 30

Jan. 29
   

2007

2008

2009

2010

2011

Operating Income

$31.5

$39.7

$23.8

$21.4

$24.9

Net Income (as reported)

$31.4

$39.9

$23.6

$20.9

$24.4

Pro Forma Net Income

$19.1

$24.2

$14.3

$12.7

$14.8
 
Post Offering Ownership and Control and Use of Proceeds
Buyers of this common stock will receive Class A shares and will be entitled to one vote per share. There will also be Class B shares that will be entitled to ten votes per share “on all matters to be voted on by our common shareholders.” The Class B shares will be owned by the founders and their family. When the offering is completed Mr. Shaked, who is Chairman of the Board, will control more than 50% of the total voting power of Tilly’s common stock. We don’t know from this first draft of the registration statement exactly how much he’ll control, but it says more than 50%.
 
“As a result, Mr. Shaked is in a position to dictate the outcome of any corporate actions requiring stockholder approval, including the election of directors and mergers, acquisitions and other significant corporate transactions. Mr. Shaked may delay or prevent a change of control from occurring, even if the change of control could appear to benefit the stockholders.”
 
Tilly’s will be considered to be a controlled company according to the rules of the New York Stock Exchange. As a result a majority of the board of directors don’t have to be independent. And the corporate governance and nominating committee and compensation committee do not have to be composed entirely of independent directors, as would otherwise be required.
 
Tilly’s says they will comply with these listing requirements anyway, but they don’t have to.
 
The company leases its 172,000 square foot corporate headquarters and distribution center from a company owned by its co-founders. It leases another 24,000 square feet of office and warehouse from one of the co-founders.
 
As usual, there are a lot of blank spaces in this early version of the Use of Proceeds section. We’ve seen from other sources that the goal is to raise $100 million. What’s going to be done with that money? The registration statement tells us the following:
 
“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.”
 
We don’t know what “most” is at this point.
 
After spending 30 years building a successful business, the owners deserve the benefits. But if they are getting “most” of the proceeds of the offering, where’s the money for growing the business to the 500 stores they are planning going to come from? At least that would be my perspective if I were a potential investor.
 
Competitive Strengths and Growth Strategy
Tilly’s lists six competitive strengths:
  • Destination retailer with a broad, relevant assortment.
  • Dynamic merchandise model.
  • Flexible real estate strategy across real estate venues and geographies.
  • Multi-pronged marketing approach.
  • Sophisticated systems and distribution infrastructure to support growth.
  • Experienced management team.
Their growth strategies are:
  • Expand our store base.
  • Drive comparable store sales.
  • Grow our e-commerce platform.
  •  Increase our operating margins.
If you read the discussions of their competitive strengths, you’ll note a great deal of similarity to other retailers in our space. Maybe that’s why they call them strengths and not advantages. Their growth strategies are exactly the same as every other multi store retailer.
 
It seems to me that an investor in this stock is basically betting on Tilly’s ability to operate better than its competitors. Of course they do have a successful operating history, but I don’t see an obvious competitive advantage here. I don’t think their plan to grow to 500 stores is necessarily unrealistic, but that most of the offering proceeds are being paid out to the owners makes me wonder how they’ll finance the growth.
 
We’ll get some more information as the amended S-1s show up.

 

 

There Is No Action Sports Industry. Or Maybe It’s the Same as its Always Been

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Sometimes I just can’t help myself. Many years ago, I wrote an article called “Are There Any Core Shops Left?” My good friend and editor at the time Sean O’Brien thought enough of it to put it on the Transworld web site for discussion. Without telling me. In hindsight, his instincts were good, but I was the slightest bit confused when I started seeing posts and getting emails that either told me how smart I was or hung me in effigy.
 
I think I might be about to do it again. What I want to tell you is that many of you who think you’re in the action sports business are wrong. And if you don’t act accordingly, things could become difficult. More difficult. I want our old economy back!
 
This has been in my head for a while in unformed ways. The launch of Nike’s Chosen campaign, their investment conference yesterday, an email I got from somebody who’s had a lot of success in our industry, and my evaluation of some of the recent industry deals including Volcom and Sanuk has caused neurons to fire and thoughts to coalesce. So let’s look at just what this industry is and has become, what I think are the major, long term, strategic trends, and the implications for how this industry, whatever it is, will change.
 
What Is the Action Sports Industry?
 
I’ve expressed an opinion about this before, but want to do it a bit more forcefully. The action sports industry is a small industry composed of businesses that sells products to participants in a number of individual sports and to the first level of non-participants that closely associate with the lifestyle and athletes. If that isn’t who most of your customers are, then you’re in the youth culture or fashion or some term I haven’t thought of business.
 
That doesn’t mean that your roots can’t be in action sports, and I’m not trying to imply any kind of criticism of a company that’s graduated out of action sports (we are way, way past any concerns about “selling out”. That almost sounds laughable now). But if you think you’re selling to action sports customers, as I’ve defined them and you’re not, you’ve got a challenge because you’re probably trying to punch outside of your weight class.
 
Why did we ever believe action sports was a bigger industry than it is? That’s easy; it’s due to 20 or 25 years of THE BEST ECONOMY EVER. With rising incomes and asset values, easy credit, and low inflation you can, as the saying goes, sell snow to the Eskimo. So any shop that sold hard goods could be known as a core store. But it wasn’t.
 
As I suggested in the title, then, the real action sports industry is a lot like it’s always been. We just thought it was different. What made it change?
 
Trends We Should Pay Attention To
 
How do you know when a successful brand has graduated out of the action sports market? That’s easy- they get acquired. Somewhere around $40 million in revenues, to pick a number, they start to get big enough to be attractive to a strategic buyer that makes it worthwhile to sell.  Hopefully, they also get smart enough to know that they don’t really have the resources, expertise, or competitive advantage to step outside the action sports market they came from without help. Expect more CONSOLIDATION as the trends I’m discussing here play out. 
 
Volcom pretty much said in their filings that industry conditions and difficulty growing meant it was time to sell while they could get a good price. Look at the deal Sanuk got. Notice that PPR’s CEO specifically said in an interview they didn’t pursue Quiksilver because they didn’t see the growth potential. Buyers want growth potential. Successful sellers know they have it, but that they can’t do it themselves.
 
And that means, if you try and grow out of the real action sports space, you’re going to face some big honking competitors. Bigger all the time. Nike’s almost its own trend. I’ll get to them. Think about Burton in the snowboard space a few years ago. Why did Burton own the hard goods market?
 
First, great product.  I’ve never heard anybody say different. Second, financial strength. That strength meant the best athletes and the biggest advertising and promotion program. So consumers wanted the product and it checked at retail at good margins as long as the distribution was well managed.
 
In its snowboard niche, Burton was like Nike in the athletic footwear market; unless they screwed up everybody was fighting over second place. But Burton has a problem Nike doesn’t have. Nike’s concern, they say, is about picking the best of their growth opportunities. Burton, as best as I can figure it out, hasn’t been able to grow much outside of its core snowboarding franchise. Even if it were for sale, Burton would not be attractive to a strategic buyer lacking that growth opportunity.
 
The lesson? Either plan to stay in the core action sports market, or be prepared to sell when you threaten to break out of it. 
 
Let’s talk about NIKE, THE ONE COMPANY TREND. At the start of this article were a couple of links to Nike that may interest you. Here’s another one to a press release on a conference they held last year. It’s worth a read. I actually have the transcript of that conference, though I can’t find it on line any more. It’s 75 pages long but worth reading. If you’re really interested, let me know and I’ll send you a copy.
 
Nike is $20 billion in revenue. As you’ve no doubt read, they are now taking the Nike brand directly into surf, skate and snow. They think they’ve now got the credibility to do that, having been somewhat cautious in their approach for a couple of years.
 
I have to say their timing surprised me a bit. For years, Nike flopped around the action sports space screwing up their attempts to get in it. Then they got a little realistic and decided to exercise some patience. They hired a few of the right people and used their unmatched product capabilities and financial strength to edge their way in cautiously. I thought they were doing fine. But it feels like they might have run out of patience sooner than they should have.
 
It will be interesting to see if the Chosen campaign is seen as authentic or arrogant.     
 
In its investment conference, Nike talked about its ability to market and merchandise a product or brand down to the city level. They pointed to their focus on customizing product for individual consumers (try it on line!). They discussed the process where an innovation from one product makes its way to other products and brands. They were very thoughtful about the integration of brick and mortar and digital and expect growth there. The analysis they’ve done about what kind of stores to put where is intriguing. And they had a good discussion of their integrated systems for managing costs and inventory, which I love.
 
Of course, it’s their investment conference, so you’d hardly expect them to highlight where things hadn’t worked out so well. Still, it was impressive. There was a clear analytic framework that I think gives them unusual flexibility for a company their size.
 
And that brings me to the email I received from the gentlemen with a lot of success in our industry who said, in part, “Based on how they [Nike] have single handedly destroyed the competitive brand environment in sports like Football, Tennis and Golf does this mean that Action Sports brands have to work on the basis that they will be relegated to being a fringe player in a culture and sport they created?”
 
Well, maybe. But let’s not over dramatize this. There’s nothing we can do about how Nike (or any of the other large companies) runs their business except, in this case, maybe learn some lessons from them based on the things they do well. I might have said this a time or two, but don’t worry too much about what the competition is doing- just run your own business well. If you adopt just a bit of Nike’s thoughtful, analytical approach to your market, you’ll be doing a good thing.
 
One thing you might think about is whether Nike is trying to ‘take over” the action sports market or just use legitimacy in that market to be credible with customers outside of what I’ve defined as action sports customers. See, this is why explaining what action sports is and being aware of how it’s changed is so important.
 
One way you need to do that is to FOCUS ON THE ECONOMY. I know it’s hard when you have to run your business on a day to day basis, but look beyond, the day, week, month, quarter and even the year. Recognize that, historically, the “good old days” were an aberration we’re not returning to in the foreseeable future. Want to know why? Go read this book so I don’t have to make a long speech. It’s a pretty easy read. The bottom line is that this is a financially caused, global recession and they last a long, long time. Always have. You must build your business around that assumption. Most of you, I hope, already have.
 
One of the economic things you’ve got to think about is inflation. You are going to see some product cost increases, and it’s not clear how much you will be able to pass through to your customers. Factor that into your financial model.
 
Next, we can’t forget VERTICAL RETAILING, which I expect will continue to grow and even accelerate. Vertical retailing is a financial and merchandising strategy that is viable partly due to changes in consumer perceptions and habits and because we’re selling a lot of product to a different consumer. You don’t have to be “core” anymore to be cool and most of our customers aren’t action sports consumers as I’ve defined them.
 
Where does this leave the “core” retailer? Well, kind of where they’ve always been if they are really core retailers; servicing the group of customers I’ve described above for whom community and expertise are the most important factors. That was never a huge market.
 
Specialty shops and small chains that really weren’t core retailers have mostly gone away. Even some really good retailers who have been around for many years are struggling. Partly that’s because we’re no longer in the best economy ever. But it’s also because they are dependent on customers outside the traditional action sports niche as I described it and don’t have an adequate advantage with those customers over the vertical retailers and large chains for the reasons we’re discussing here.
 
Some years ago, I created a list of things I thought core retailers had to do well to succeed. The list included good systems and financial data, close connection with the community, a reasonable internet presence, quality, trained employees to whom you could offer a career path, revenues in excess of $1 million and a willingness to take some risks in the product you carried as a point of differentiation.
 
It’s not a bad list, but when I wrote it I thought a specialty retailer who did all that would just kill it. Now it’s kind of a minimum bar to succeed. And doing all that isn’t enough if you’re trying to compete with the big, vertical brands for the non-action sports customer.
 
Price has become more of an issue than it ever was and (forgive this gross generalization) there is no financial model that makes sense for a specialty retailer that carries the same brands as the chains and vertical retailers and serves the same customers. This is going to be especially true as product costs rise.
 
Related to vertical retailing is distribution, or rather NOT DISTRIBUTING. Here’s a link to an article I wrote after SIA posted its sales report in March. Basically, SIA members reported higher margins and better sell through with lower sales. They sold less but earned more and created perceived value through scarcity. I’ve been beating the drum for focusing on gross margin dollars rather than sales or gross margin percent for years. It took the worst recession since the Great Depression to scare them into controlling inventories. I really hope they don’t screw it up next year.
 
Around 2000 when I took my first close look at THE INTERNET and its impact on the industry, I thought it was just another distribution channel. Maybe that was an adequate answer then, but it’s way more now.
 
It’s your most important point for customer contact and information. It’s a tool for managing and controlling inventory. There is no successful brick and mortar retail without a closely integrated internet presence. I could create a much longer list, but just imagine running your business without the internet and we’ll leave it at that. It’s no longer a choice and I guess it really hasn’t been for a long time.
 
So What?
 
Determining whether you are “action sports” or “not action sports” is obviously not as clear cut as I’ve made it sound. Most retailers and brands fit somewhere along a continuum. Yet determining who your customers are is critical (duh) and maybe the distinction I’ve made is a good way to start thinking about it. For most of you, it’s not the same customer you used to have.
 
For better or worse, big companies have learned to buy brands in our industry and support them without killing what made them special. Consumers won’t know that Volcom is owned by PPR. More importantly, if they did, they probably wouldn’t care anymore. 
 
The buyers of industry brands can’t justify their purchase prices unless those brands grow at a pace that means they take market share. So you, as an independent brand or retailer, are competing with businesses that were successful in their own right but are now backed by various 900 pound gorillas committed to growing them. Sophisticated, well managed gorillas at that.
 
Don’t despair. Just recognize the market you’re in and who you’re competing against. Then plan accordingly. Like the old saying goes, “Call on God, but row away from the rocks.”           

 

 

Sanuk Gets Bought, Who’s Deckers Anyway, Analysis of the Deal, Broader Industry Implications, and Related Ramblings

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Three times sales?!?! They sold a $43 million company for $120 million cash plus an earn out?!?! Not in the middle of snowboard industry lunacy in the mid 90s did a company go for three times sales. Okay, there are three possibilities. First, the team at Sanuk (here’s the website link) is a bunch of silver tongued negotiating devils. Second, the management team at Deckers went drinking with the management team at Sanuk and the Sanuk team won. I suppose that’s just a variation of the first one.

The real second possibility, then, is that the guys at Deckers are desperate to be cool and didn’t know what they are doing. As you’ll see below where I describe Deckers, that’s unlikely. Decker’s history makes that clear.

The third possibility is that Sanuk’s margins justify this kind of purchase price. As much as I would like it to be one of the other two (because that would make a much better story) I’m think that’s probably it; Sanuk’s margins are through the roof.
 
Let’s look at the buyer, the seller, and the deal in a little more detail and see why I think that and what we can learn.
 
Deckers is a billion dollars company (2010 revenues) founded in 1975. In 2010 it earned $160 million. In 2006, revenues were $304 million and net income $30 million and yes, I wish I’d bought the stock back then. It owns the Ugg, Teva, Simple, TSUBO, Ahnu and Mozo brands. In 2010, Ugg was $875 million of its revenue and Teva $100 million. Obviously, the other brands are pretty small. Probably smaller than Sanuk.
 
25% of their business is international, and that’s where they see the most growth potential. They have 27 stores worldwide, and can see that growing to 150 in five years.   Here’s how they describe their business:
 
“We strive to be a premier lifestyle marketer that builds niche brands into global market leaders by designing and marketing innovative, functional and fashion-oriented footwear developed for both high performance outdoor activities and everyday casual lifestyle use. We believe that our footwear is distinctive and appeals broadly to men, women and children. We sell our products, including accessories such as handbags and outerwear, through quality domestic and international retailers, international distributors, and directly to end-user consumers, both domestically and internationally, through our websites, call centers, retail concept stores and retail outlet stores. Our primary objective is to build our footwear lines into global lifestyle brands with market leadership positions. We seek to differentiate our brands and products by offering diverse lines that emphasize authenticity, functionality, quality and comfort and products tailored to a variety of activities, seasons and demographic groups.”
 
You can see why Deckers would be interested in Sanuk and why Sanuk might feel it was a good match.
 
Deckers is another billion dollar company with solid brands that plans to expand internationally and into retail and wants a solid entrée into the action sports/youth culture market. Well, there’s a new strategy none of us have ever heard of.
 
Sanuk is a strong, some would say unique, brand that, to use the old cliché, got a deal they couldn’t refuse. Let’s look at that deal as best we can and see why they got it.
 
What do we know?  Not much, but why let that stop me from a little financial fantasizing.  Purchase price of $120 million cash plus a five year earn out. 2010 Sanuk sales of $43 million. Deckers says the deal will add to their earnings this year. Even at that price.
 
I picked myself up off the floor after I initially saw the price and called somebody who’s familiar with our industry and has been both a strategic and a financial buyer of companies like Sanuk. Strategic buyers pay more and Deckers is definitely a strategic buyer in the case of Sanuk. What she told me is that the price discussion might start somewhere around eight to ten times EBITDA (earnings before interest, taxes, depreciation, and amortization) for this kind of deal.
 
I don’t know how to value the earn out, so let’s just work with the $120 million purchase price and assume they paid nine times EBITDA. That means that Sanuk’s EBITDA was $13.3 million.
 
I’m not going to try and get specific because, let’s face it, I’m creating this analysis with very limited information. But I’m guessing Sanuk’s depreciation and amortization is pretty low because they haven’t bought any companies and I don’t think they own a factory. With the margins Decker’s purchase price implies, they may not have had to pay much interest expense either. The biggest number below EBITDA, then, would be taxes. Pick a tax rate and remember this is California. Whatever reasonable rate you pick, you’ll see there’s a bunch of money going to the bottom line.
 
Let’s wander back to the upper part of their income statement. What do you think Sanuk spends for selling, general, and administrative expenses? I have no idea. What if we assume $10 million? That would be 23% of 2010 sales. Amortization and depreciation would be included in that. That would suggest that Sanuk’s gross margin is north of 60%. How much? You decide.
 
While we’ve been talking about 2010 numbers, it’s almost June of 2011. I’m guessing sales might be up for Sanuk this year, and that was certainly part of the discussion. Buyers don’t like to pay sellers for what might happen in the future. Hence the earn out. But significant growth in 2011 would help explain why the deal would add to Decker’s earnings this year.
 
Let’s talk strategically about some of the deals we’re seeing. The Wall Street Journal’s online Market Watch (catchy name) reported PPR CEO Pinault as saying, during his discussion of the Volcom acquisition, that “PPR didn’t make an offer for Volcom’s larger rival Quiksilver Inc. because Quiksilver has ‘reached a level of maturity.’” I agree with him and have raised the issue myself of where Quik’s growth could come from.
 
There’s kind of a perfect storm forming. Sellers remember that during the financial crisis and associated recession there were just no buyers out there unless you wanted to give your company away. They are also sitting there and wondering just how strong the economic recovery is and will be in the future. And they recognize that as the action sports business evolves into the youth culture business or maybe just the fashion business that they need some help breaking through in a number of areas that a large parent can provide.
 
Buyers need to reach the demographic our industry represents. Not just by age, but by culture and attitude. There’s some evidence that growing that kind of business internally is hard. Nike finally got it right, but it took them a lot of tries and a long time.
 
If you need to be in this market, and you can’t build it internally, it looks like you have to buy somebody. Should you buy somebody big? Well, there aren’t very many big ones and those that are big may have reached “a level of maturity” that makes them less attractive. Besides the intangibles you want to acquire aren’t necessarily related to the size of the acquired company. Is Volcom seven and a half times cooler than Sanuk just because it’s that many times bigger by revenue? Nah.
 
You are also making this acquisition because, as a strategic buyer, you believe that through your sourcing, back office, financing and existing distribution you can help the acquired company grow and be more efficient. A larger acquisition may not need that kind of help and the synergies you’re expecting may not exist. If there are no synergies, you probably can’t afford to be a strategic buyer and the price you’re willing to pay has to go way down.
 
You can see why more deals like this are happening in our industry. The economy is at kind of an inflection point where they make sense and market dynamics make them attractive to buyers and sellers.

 

 

Notes from the Skateboard Industry Conference and Hotel Lobby Bowling Event

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IASC and BRA did a great job putting on the annual skateboard industry conference this week at the Doubletree in Orange, CA. The attendance was good, the subjects all worthy of attention, and the beer sponsor much better than last year. Credit also has to go to Steve Van Doren and Vans for providing some food, some goodies, and use of their skate park which, happily, was within walking distance of the hotel.

There was also a floor show Tuesday night at the hotel (technically, it was Wednesday morning).   I’m told it involved some conference participants, four cop cars, and a red bowling ball that was prominently displayed the next day in the conference room. My only real complaint about the conference is that if there’s going to be entertainment, could you try and schedule it before I go to sleep?

Oh- and it would have been nice to have more than five or six retailers at the conference.
 
I wrote last week about distribution in anticipation of running the distribution panel at the show. But we spend north of an hour on distribution in the round tables and the conference was running an hour late, so the actual panel was cancelled by acclimation. As that panel was all that was standing between the participants and food, drink, and skating and it was the last panel of the last day, I won’t be surprised if it was the favorite panel of the whole conference. Thanks to Frank Messman from Blackbox, Timothy Nickloff from Sole Technology and Darin O’Brien from Nike Skate for being ready to participate. Maybe next year.
 
Now, I want to get the slightest bit serious. And probably way, way too direct for some of you. Please don’t shoot the messenger. Or shoot him- but do it in a cogent and thoughtful way from which we all learn something.
 
These are the assumptions on which my argument is based:
 
1.       There is way too much skate hard goods product out there and with the availability of blank skateboards and deck printing machinery, there are essentially no barriers to entry.
 
2.       The “core’ brands continue to pursue much the same business model they have always pursued where pro riders (of which there are also too many) form the basis for differentiating the brand.
 
3.       There’s less margin and margin dollars to go around and not enough to split between distributors and brands if the brands are going to continue to follow the same team based business model. The brands can’t afford to carry out their traditional marketing models at the level they used to.
 
4.       Long boards are taking a certain percentage of the traditional skate market to the extent that skaters who just want to cruise are choosing longs over short. They may be less influenced by the pros.
 
5.       Distributors allow some brands that would otherwise not be in business survive- at least for a while. This creates a cash flow dependence on the distributor.
 
6.       Companies who had confidence that their brand was competitively distinctive in the market and who had the balance sheet to survive the transition might tend not to sell through distributors.
 
7.       If the hard goods market isn’t healthy, the skate shoe and apparel market will suffer.
 
No brand has shared with me their financial statements, and no doubt there are exceptions to what I’ve described above. Each brand is different. But in general this model of doing essentially what’s been done before and hoping things get better can’t continue. How might it change in a positive way?
 
Demographics might start favoring skateboarding again. Angel Ponzi from Board-Trac told us that the drought of new kids of skating age is ending and that we’d see a surge in skate age kids. That’s good news, but it’s obviously a very gradual, multi-year process.
 
Technology may be increasingly accepted. As it was explained to me, pros who want nothing to do with new technology are finally retiring and are being replaced by riders who have grown up with it. This is also not a short term process, but I’d say we’re a couple of years anyway into it and it might start getting some traction. It’s not a panacea. It won’t work for every brand and it’s going to require some retailer rethinking and retraining by the brands. Let’s call it clinicing, like they do in the snowboard industry. That came up at one of the round tables.
 
Most sports (don’t mean to offend anybody by calling skate a sport) have something new every year that, even if it isn’t a major breakthrough, is at least a talking point that allows some differentiation and, hopefully, improves performance. In a lot of industries, it means higher prices and margins due to increased consumer interest and limited availability. It also increases barriers to entry. I heard one suggestion that skate boards were already so refined over many years that it was hard to improve on them. I hope that proves to be wrong.
 
There could also, theoretically, be some mergers among brands. That’s financially efficient because it allows you to spread your overhead, but it doesn’t solve the problems of no barriers to entry and lack of product differentiation. Along those lines, there was awareness at the conference of what Mike West, owner of the 686 brand of snow outerwear was doing. He’s recently announced that he’s going in to the fulfillment business in partnership with a Canadian company he has a long term working relationship with to help small industry brands operate more efficiently. He expects to spread his overhead and make a few bucks.
 
I suspect mergers are unlikely due to the long term personal relationships among brand executives. Oh hell, let’s just say egos. I am not quite certain that the owner of one brand would step aside to let his long term competitor run it, and I suspect that there is inadequate liquidity for buy outs.
 
My personal belief, and I’ve been saying this for some years, is that product differentiation via technology is the answer. Or at least, I don’t know another viable choice.
 
I do know that a small business with no barriers to entry and limited product differentiation and a business model that needs big advertising and promotion expenditures and shares its revenue with distributors over whom it has no control is unlikely to prosper in the current and foreseeable business environment- no matter how healthy skating is as an activity.  I’ve been known to say that not taking a risk is the biggest risk of all.  I think that might be relevant here.