Notes From the SIA Show in Vegas, Uh, I Mean Denver

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The beer is a lot cheaper in Denver, assuming you don’t actually consider the beers they handed you at the gambling tables in Vegas to be free. The hotels are more expensive and getting to said hotels from the airport takes longer.   Most of the people I talked with (by no means a scientific sample) would have preferred the show was still in Vegas but I’m sure we’ll all adjust. I have never had so many friendly people ask me if I needed help finding anything and tell me they hoped I had a nice day. If that happened in Vegas I’d probably think I’d done something wrong. They were certainly glad to see us in Denver.

But was it a “good” show? You know, I have certainly gotten old enough, and maybe wise enough to know that you can’t judge a show just by walking around it, though we are all guilty of that to some extent. It was a good show for me, and snowboard industry booths seemed busy enough. I have to confess I didn’t spend much time in the ski part.
So I’ll leave the show analysis to others who have more and better data than I have. At the end of the day, the question is was it a good show for your company? But I do have a few observations we might have some fun with.
Happiest Company
Had to be Never Summer. Not only is their factory in Denver (they were offering tours) but economic conditions have suddenly made their long term business model of high quality, good margins, and limited distribution that leads to strong sell through something that absolutely everybody understands. They swear they won’t screw it up and I believe them.
Best Show Favor
Betty Rides party panties. Owner Janet Freeman gave me a couple of pair, but they were a little snug so I had to give them away.
Interesting Business Model
I ran into Cec Annett, formerly with Adidas, who’s now the CEO of The Clymb (www.theclymb.com).   It’s a membership site where they sell, for only a couple of days for each item, quality overstocks of product at big discounts from industry brands. There’s no charge to be a member, but an existing member has to recommend you. The brand doesn’t have to worry about the product showing up on Ebay, and the presentation is very professional- the brand image is supported. The financial model is also intriguing. Cec, please remember this nice plug when you’re rich and famous and, in the meantime, can you get me signed up as a member?
Small Booths
A number of major brands had much smaller booths than last year and I say good for them. A trade show booth should be exactly the size you need to do whatever business you do and not influenced by the size of your competitor’s booth. I guarantee that if you have a product that sells well at retail with good margins your customer will buy it even if you don’t have a two story booth the size of a house with a helicopter on top (who besides me remembers that?)
Large Booth
Burton and its associated brands took up around 10% of the total floor space in the snowboard area. The Burton brand by itself had the largest footprint of any company there. Things must be going really well at Burton for them to have paid SIA’s standard rate of $11 per square foot for premium members for all that space.
Guy with the Best New Job
It has to be Ryan Hollis who, after 12 years with Quiksilver, is now the General Manager of Mervin Manufacturing. Guess this means Mike Olson can give up doing the accounting.

In Case You Have Trouble Sleeping: A Report from the Bureau of Labor Statistics

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You can go here http://www.bls.gov/news.release/ecopro.nr0.htm to see the report. If it does help you sleep, it will probably give you nightmares. You can see in the first line of the report, released last Thursday, that they expect total employment "…to increase by 15.3 million, or 10.1 percent, during the 2008-18 period…"

Now, that may sound encouraging, but if you push a few calculator buttons, that’s on average about 125,000 jobs a month over ten years. Well maybe that sounds good to you too, but it sounds less good if you realize that 125,000 jobs a month is more or less what we need just to provide the jobs required by an increasing population.
You do yourself a disservice if all you do is listen to the monthly unemployment number thrown at us by the talking heads in the mass media. Earlier this month, for example, they announced that the unemployment rate had fallen from 10.2% to 10%. Obviously, lower is a good thing, but the reason it was lower was because 98,000 people who had stopped looking for work (the "discouraged" workers as they are called) were taken out of the unemployment calculation.
It’s a little more work, but I really suggest you try and get at least some of your news somewhere besides the popular press.

My Office Chair, Customer Service, and Expense Control

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 It’s a nice leather chair. I’ve had it less than two years.   So I wasn’t happy when it started tilting side to side as much as it rocked from front to back. It felt like it was going to leave me on the floor any day and, besides, it was practically making me seasick.

The nice people at Staples, where I bought it, gave me a copy of my receipt, the five year warranty, and the number of the Sealy company to call. I figured I was screwed. “Sorry to hear about your chair,” I could hear them saying. “Just package it up, ship it back, and in a couple of months we’ll send it back fixed, though the freight cost will be more than you paid for the chair and we have no idea what you’ll sit on until then.”
But determined to go through the motions, I called them anyway and told my story, then waited for the ax to drop. I’d already picked out my new chair.
“Sounds like you’ve got a broken weld in the pneumatic cylinder assembly. We’ll send you new parts and some instructions.”
I waited for the bad news. “You don’t want proof that the chair’s under warranty?” “No.” “You don’t need to see the chair first to confirm that it’s a manufacturing issue?” “No.” “How much do I have to pay for shipping and handling?”  “Nothing.”
I was pretty flummoxed, but I hung up and sure enough, ten days later (Christmas was in there) the parts showed up. I wouldn’t say the instructions were written perfectly, and there did turn out to be a sledge hammer involved, but here I sit in my repaired chair writing this and not swaying side to side.
Sealy’s has made a friend, and I’ll probably look for their chairs the next time I need one. But they’ve also saved themselves some money. They didn’t spend long on the phone with me. They didn’t have to manage a chair coming back or forth. They didn’t have to do the repair themselves. There was no administrative warranty management cost, and damned little accounting and tracking. Somebody threw some stock parts in a box and shipped them to me and they were done. They got me to do the work for them, and I was basically thrilled to do it and solve my problem.
From time to time I suppose they get had, and send somebody some parts who doesn’t have a valid warranty claim. But they don’t care, and I’m guessing not that many people want chair parts if they don’t have a broken chair. Sealy’s has calculated that the cost of those parts and shipping pale in comparison to the cost of carefully evaluating each claim, making repairs themselves, and making sure nobody gets parts they don’t deserve.   So their process makes sense even ignoring the customer service benefits.
It’s not easy to figure out what warranty claims cost you. The expense is hidden in and divided among customer service, cost of goods, freight and shipping, general and administrative, salaries and probably other categories depending on your particular accounting set up. Maybe that’s why more companies, as far as I know, don’t take Sealy’s approach to warranty claims.
There are some characteristics of Sealy’s business model that make their approach to warranty claims viable. I’m not suggesting every brand or retailer can honor every warranty claim for snowboards, skate shoes or board shorts that’s made. But I suspect that if you do the hard work of estimating what your warranty service costs really are, you’ll find you can save some money and make some customers happy at the same time.     

 

Alternative Camber; An Idea Who’s Time has Come- Again

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A couple of weeks ago, I was paging through Transworld Snowboarding’s Gear Guide, and I came upon the page on alternative camber. I read it with interest to try and keep with the latest technological trends, but paused when I saw the illustration of the cambered medley snowboard.

Something about the cross section of the board, showing camber at both ends, jogged my memory. I went down to my garage, ventured into the storage space under the house, and came out with my dust covered Inca snowboard, circa, I want to say, 2000.
It’s a 157 and was called a dual camber but you know, it looks identical to the cambered medley profile pictured in the gear guide. Back when I actually rode the board (because I thought the technology worked for me which seemed like a pretty good reason), the reaction of people, at best, was tolerance and sometimes it ran to ridicule. Granted, the graphics were ugly. And entrepreneur Jerry Stubblefield, the founder of Avia, didn’t come with a lot of snowboard credibility or cool factor. But damn it, I thought the thing worked.
So I was a bit perplexed to read that in three years the gear guide had gone from 0 to 170 snowboards having some kind of alternative camber and that “…their sweeping popularity can be attributed to one thing: it can make snowboarding easier.”
To my untrained eye, it looked like the dual camber of 2000 was essentially the same as the cambered medley of 2009, but what did I know. I mean, obviously they must be different because everybody who knew anything about snowboarding seemed to hate it in 2000 and love it in 2009.
I thought I’d better call in an expert, so I reached Mike Olson at Mervin Manufacturing. Mike has been designing and building snowboards for multiple decades, and it was the Mervin designs that lead and are leading the alternative camber charge.
I love talking with Mike and need to find more reasons to call him. Our nearly hour long conversation ranged all over the snowboard and action sports business. It was part history lesson, part standup comic routine, part “how to” guide for entrepreneurs and from time to time we actually got around to talking about the technology of camber, some of which went right over my head. Subtleties of materials and manufacturing that Mike takes for granted kind of escaped me as I tried to absorb it all. And of course the conversation tended to remind each of us of other topics, so we sort of careened from issue to issue.
Anyway, the bottom line is that Mike knows Jerry and has spoken with him on a number of occasions. If Lib Tech’s C2 Banana isn’t exactly the same as the Inca due to improvements in technology and materials, it’s certainly conceptually similar. According to Mike, “Inca has 2 huge cambers centered under each foot (which is what Gnu tried for a season in 1986) while we now have a giant rocker (Banana) between the feet with minute cambers out on the ends of the snowboard.”
But the clincher was when I described to Mike the complaints I got from people when I showed them the Inca and they (you know who you are) universally complained that it was too flexible. “Like a noodle,” as one industry insider put it as he trashed the concept.
“Of course it’s flexible,” says Mike. “That’s part of the cambered medley concept and without the flexibility, the construction wouldn’t work.”
Mike reports that Mervin’s sales have doubled from three years ago. 
I guess this is a cautionary tale about the dangers of stereotypes and preconceptions. If Mike Olson, who has been experimenting with alternative cambers for decades, had come out with as cambered medley snowboard in 2000, would it have been a big hit? Don’t know. But I’ll bet that no matter when Jerry Stubblefield came out with one (even without bad graphics) it wouldn’t have taken off no matter how good the technology.  Anybody want to claim we’re not in the fashion business? 
Just something to think about.        

ASR and Crossroads Make a Deal; What a Surprise!

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This is good news because it makes things easier for the retailers, which I may have said a time or two is what trade shows need to be about. Crossroads needed retailers, which ASR can help supply, and Jamie Thomas doesn’t want to have to manage the logistics that will be required if Crossroads grows. ASR needs the skateboard industry. I don’t think Andy Tompkins wants ASR to be thought of as “a surf show” when apparel, style, and fashion are so much a part of where the whole action sports industry is going (has gone?). Hmmm. By that logic, Surf Expo should consider changing its name. And ASR would like to bring back the additional exhibitors and revenue that the skate industry represents.

This is being billed as an experiment over the next two ASRs. I’m guessing, especially when the economy improves, that it will be extended and the relationship will become closer. At some point, I expect to see the skate companies back in the convention center if the economics can be made to work.
It’s kind of an open secret that there have been some disagreements between the skate industry and ASR about how the show could best serve the skate industry. When times were good, those disagreements were easy to paper over. But then things got tough and, to some extent, the Crossroads show was the response. I’m glad to see them working out their differences in the interest of the industry and the retailers.

What Does the Skate Industry Want From Trade Shows? I Think I Know.

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Transworld is trying to get an on line discussion of this topic going, and that’s a good idea. So far, it hasn’t generated much discussion and that’s too bad. Maybe the problem is that they’ve asked the wrong question by focusing on the skate industry. If they’d just asked, “What does a company- any company in any industry- want from trade shows?” they might have gotten some better answers.

 At the risk of oversimplifying, what any company wants from a trade show is to know that the benefit to their business, in terms of sales generated, or market positioning, or whatever, justifies the cost. If you ask any executive of any brand, you’ll find it really is conceptually that simple, though measuring the benefits can be hard.
Obviously, right now a lot of skate brands, and other action sports industry brands as well, feel the cost exceeds the benefits. Between tough economic decisions and changes in how we do business that isn’t surprising. 
I wrote in my recent article on trade shows that the role of trade shows was to make things easy for retailers, and that we weren’t doing that by creating more shows. I said that the internet, free communications, changes in order cycles, selling to non participants through expanded distribution channels and other things were changing the role of the trade show. And not just for skate.
How do we make trade shows most effective? Well, aside from having fewer of them, I’m not sure. To find out, I’d want very specific answers to the following questions:
·         What role do shows play in generating orders compared to ten years ago?
·         How has the cost of attending or exhibiting at a trade show changed?
·         Is there any relationship between size of booth and measureable success at a trade show?
·         To what extent is brand attendance and presentation driven by competitor behavior?
·         What are the measures of a successful trade show for a brand and for a retailer?
·         How long does a retailer need to be at a show?
I’m sure this list should be longer.   I assume that ASR, SIA and Surf Expo have asked these questions and others.  Trouble is, in this environment it’s no longer possible (or at least it’s a lot harder) to reconcile the needs of brands and retailers to the show formats the trade show companies need to make a buck and I imagine the answers to some of the questions above might demonstrate that.
Vested interests will, understandably and inevitably, make it tough to reach a consensus on what an appropriate trade show format is in the current environment where there’s no longer the cash flow to permit an easy compromise.
What industry companies want from trade shows is something that the trade show providers are having a harder time providing at a cost that makes sense to the companies. This cognitive dissonance is likely to continue to exist and leave us with our current, somewhat dysfunctional, trade show situation.            

Opportunities for new Labels and Small Brands. What, Exactly, Should You Do?

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I’ve been chanting for the last few months, and maybe longer, that our current economic environment represents a great opportunity for new and smaller brands. At an ASR seminar in September, somebody actually, finally, asked me, “What do you mean by that exactly?”

My answer was that if you were a specialty retailer, and were still standing, you weren’t likely to succeed by relying on big, national brands as much as you use to. I think I cited four reasons this was true.
 
First, a lot of that product has become available in different channels cheaper than you can afford to sell it. Second, a specialty retailer can’t differentiate itself (which it has to do) by carrying the same product everybody else carries. Third, the percentage of revenue large brands get from specialty retailers is declining and even though those brands may be supportive, specialty retailers are simply financially less important to them then they use to be. Fourth, the size of some of the offerings from the large brands makes it tough as a smaller square footage store to carry and effectively merchandise a selection from that brand that meets customer expectations. And of course, we’re not talking about just one brand.
 
I think I’ll add a fifth. If those big national brands are the focus of your store, then you risk being defined by the brands you carry, and I like to think it should be the other way around. The specialty retailer should give credibility to the brands they carry.
 
What Specialty Retailers Want
 If you’re a new label or small brand, and you agree with my above points, what should you do? First, consider this from the specialty retailer’s perspective. I think the ones I’ve talked with would mostly agree with what I’ve said. But that doesn’t mean they are ready to throw out the big national brands they have long term relationships with and make money on. The ones they don’t make money on are another issue, but that’s for a different article.
 
What do they get from, or at least expect to get from, the established, larger, brands?
·         An advertising and promotion campaign that, hopefully, creates demand.
·         Discounts and extended payment terms.
·         Maybe some POP and other kinds of in store support.
·         Reliable, though certainly not always perfect, delivery.
·         Some level of customer service.
·         Margins and a merchandise selection you can make money on. Hopefully.
 
And they also get a comfortable, long term relationship that has a certain momentum to it. I’m not quite sure if that’s a good thing or not.
As a new label or small brand, you might look at that list and think, “Well, I’m screwed. No way can I match that.” You are, I suppose, partly right. But if we cut to the chase, what does a retailer really require?
 
You have to be able to reliably deliver a quality product that offers the retailer some exclusivity and differentiation and that turns well at a good margin. That’s it. And if the retailer is sophisticated, or maybe has read an earlier column of mine, they might also be interested on the possible gross margin return on inventory investment.   If you can do that, I guarantee all the other stuff will fall into place.
On the other hand, if you can’t do that, forget it. You’re not in business.
 
A Checklist
Life’s a whole easier once you’re brand with a track record, so I’ll address my comments to people with new labels that they want to turn into brands. However, most of these items are appropriate to small brands as well.
 
First, we’re assuming you can make and reliably supply a quality product and have identified some trend or point of differentiation that makes the product relevant to the specialty retailer. You’re on your own as far as doing that goes. You also have to have access to some working capital. One of your advantages- maybe your biggest- is that unlike a large brand, you don’t have much to lose by trying something really innovative, creative, and maybe even a little controversial.
 
Second, you’ve got to prepare a business plan. This document will be important not just in clarifying your own thinking, but in building credibility with stakeholders. More on that later.
 
Third, you have to solidify your relationship with a supplier. A known, reliable one would be good. This is not a matter of a few emails and a phone call. It requires visits and takes some time. Show potential suppliers your plan. Explain to them the market opportunity you see. Make sure they understand how they will get paid, and what the longer term potential can be. A supplier can be a crucial source of support.
 
Fourth, figure out your initial target market. Are there three skate parks where you first want to show your product around? What local influential people do you know that can help you build a little credibility?
 
Gotcha founder Michael Tomson, in an interview in the last issue of Transworld Biz, pointed out that when you start, you don’t have a brand- just a label. “You become a brand once you develop equity in that name and label,” he said. That takes time. Maybe five years he suggested.
 
He’s right, and it’s a great distinction. But of course you’re not a label one day and suddenly a brand five years later. There are baby steps along the continuum of brand building. As a new label, you have to pick the place or places where you want to become a brand first. On a mountain, in a skate park, at a couple of local retailers in a club, or some combination of these and others. You aren’t a brand because you call yourself one. You’re a brand when people recognize the name and attribute certain characteristics to it and the product it’s on.
 
Now, it’s time to make some product, and because of all the work you’ve done educating and building your supplier relationship, that hopefully goes well. Or as well as production ever goes. I don’t mean you’re going to make three samples. That’s already happened. It’s time to make enough product to make a quality presentation to potential retailers (assuming you’ve decided you’re not strictly internet) and to begin to build some support and awareness in the local community you’ve chosen as your first target. If somebody says, “Okay, we’ll take it,” you need to be ready to supply and service your new account. “Great! I’ll have product for you in three months,” is probably not the answer you want to give.
 
The steps I’ve listed above don’t happen as independently and sequentially as I’ve listed them. But they all have to happen. Now comes the big moment.
 
Meeting With the Potential Customer
This cannot be a casual meeting where you talk in off the street.  And it cannot be with the second string, substitute, relief buyer. Because of all the work you’ve done, the owner/decision making buyer may have heard of you and your label. Maybe they’ve even had a few kids ask for it. You schedule half an hour or 45 minutes or maybe more and when they say, “I don’t have that kind of time for a brand I’ve never heard of,” you say, “Mr. Owner, we both know it’s a great time to look at new labels, but I have no idea how you’d decide to take a risk on one without spending that kind of time on it.”
 
And no matter what they say, you do not just “drop off a few samples” or let yourself be pushed down to somebody who isn’t in charge.
Now comes the hard work. You have to get ready for this meeting. Find all you can about the shop. Prepare a meeting agenda and send it to them in advance. Put together a folder or a power point for the meeting that might include, but is not limited to:
 
·         The executive summary of your business plan.
·         An explanation of your points of differentiation and the niche the product is going to fill. Why are you going to be competitive?
·         How you are financed and why that financing is adequate.
·         Information on your suppliers. Who they are, how long they’ve been around, who else they produce for. Perhaps a personal letter   to the owner of the shop explaining how you’ve been working with them and that they are prepared to provide product.
·         Personal and business references.
·         An explanation of your distribution strategy. Who else in the area will have the product and when?
·         A copy of your insurance certificate, business license, etc.
·         Brief biographies of the principals and investors.
·         A suggested order, terms sheet, and explanation of how you’ll support the shop in merchandising the product. If you’ve done your homework, you should be able to suggest where in the shop the product should go, and how much space it will take.
·         Your marketing and promotional program- what you’ve done, and what you plan to do.
 
This list isn’t all inclusive, and not everybody will be able to make equally strong presentations of all the items. But if you do this, and you’re making the presentation (which you have practiced for hours and hours) to a business person, I can pretty much guarantee you will blow their socks off. Because for some unfathomable reason, in this industry, they will generally not have seen this level of professionalism from a new label.
 
This whole discussion started with the premise that it’s a great time to be a new label or small brand. Here’s a link to an article in the New Yorker that talks specifically about why opportunities exist right now. http://www.newyorker.com/talk/financial/2009/04/20/090420ta_talk_surowiecki.

 

 

Inventory Risk and Inventory Management; Our Own Version of Musical Chairs?

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Janet Freeman, owner of the small but well established women’s snowboard apparel brand Betty Rides, has a problem. On October 17th, she told me, “It’s weird but Betty Rides has ALREADY been getting lots of re-orders for snowboard jackets and pants. We cut to order, and are sold out on most things.”

Naturally, I was sympathetic to her terrible problem and said, “Which means that you are holding margins, selling through at good margins at retail, creating demand without running a big promotional campaign, being important to your retailers, and minimizing your (and the retailer’s) inventory risk?  I predicted some products shortages a while ago and I think, for the industry overall, it’s a great thing.  I think you are also seeing that small retailers are dependent more than ever on small brands that have not blown up their distribution and on which they can make good money.”

Better ringing your hands over sales you missed then inventory you can’t sell. Of course, I recommended this strategy for smaller brands especially years ago but, for some reason, it’s suddenly gotten popular. You can track the article down on my web site if you want.
 
What’s Inventory Risk?
I imagine most of you don’t need that question answered, but there are a few points I want to make and that seems like as good a subheading as any. Mathematically, I suppose your total inventory risk is the cost of everything you purchase or make for resale. If you want to eliminate that risk, you don’t make or buy anything. But that seems a little extreme. Instead, let’s define inventory risk as the potential decline in the value of your inventory from what you expect it to be; from the anticipated selling price, that is. Once you sell it, it’s no longer inventory risk. It’s credit risk if you weren’t paid before you ship it. Retailers, of course, are typically paid before “shipping.”
 
Inventory risk gets managed in two ways.  First, by buying well. Hopefully, that helps you with the second part of inventory risk management- selling well. My last article for Canadian Snowboard Business actually talked about that. Maybe they’ve put it up on their web site and could put the link HERE?  I’ve also written about using a concept called Gross Margin Return on Inventory Investment (GMROII) as a tool to increase your gross profit dollars and, incidentally, reduce your inventory risk and you can see that on my web site here. 
 
You can never get rid of inventory risk, but if you’re buying well and using GMROII, you’ve probably done everything you can reasonably do to minimize it.
 
Who’s Inventory Risk?
It’s impossible to completely eliminate inventory risk and be in business. In a perfect world, a retailer would love it if the brand could give them only the stock they need to merchandise their store and then have replenishments show up over night. Oh- and they’d prefer it if everything they got was on consignment. The brand, sitting on the other side of the equation, wants the store to buy everything all at once and pay cash in advance. Obviously neither is going to get their way.
 
The original premise behind this article was that inventory risk was a zero sum game. That is, it existed and somebody- the retailer, the brand, or the manufacturer- had to shoulder it. Zero sum means that you can pass it around, but not reduce or eliminate it. The only question is who takes the risk.
 
I’m not so sure that’s completely true. After some thought, and some conversations with some smart people, I’m beginning to look at inventory risk as an indivisible part of systemic business risk. You can manage it, but it’s just not independent of overall business conditions and your relationship with your customer or buyer. It’s not zero sum because you can work together to reduce it.
 
Some Real Life Examples
 
“One you find the demand line and are honest about it, and start producing under it, you really start building your brand,” Jeff says.
And of course both the retailer and the brand reduce their inventory risk because they aren’t kidding themselves about demand. You can see where I’m going with this. Good demand planning at all levels of the supply chain can reduce the inventory risk for everybody- not just transfer it from one player to the other.
 
Sanction is a snowboard and skate retailer with shops in North Toronto and the Kitchener/Waterloo area. Co-owner Charles Javier says he dropped a lot of the larger snow related brands or lowered the quantity he bought this year. He’s been bringing in smaller brands, and does better with them than with some of the larger ones. In fact, they upped their total buy this year. “How we manage inventory risk isn’t about how we put risk off on the brand, but about how we buy,” he told me.
 
And he’s not particularly concerned that his smaller preseason orders with some brands will keep him from having enough product later in the season. “There’s always going to be inventory available,” he said.
 
A consistent theme in my conversations has been brands warning that they aren’t making product much beyond orders, and that retailers who want it better have gotten their orders in, and retailers not quite believing them, or not quite caring, or thinking they could substitute another brand. I guess by the time you read this, we’ll know how it worked out. I hope to hell there are some product shortages that make some of this stuff a bit scarce and special again.
 
Darren Hawrish is the president and owner of No Limits Distribution. Located in Vancouver, it handles Sessions, Reef, Osiris, Capita, Union and other brands in Canada. He and Charles at Sanction would probably get along just fine, as Darren, like Charles think you manage your inventory risk by how you buy. He’s been more diligent on inventory this year, looking at it weekly instead of monthly.
“Inventory is the make or break part of your business,” he told me. “You can’t increase sales [which they expect to do, though not as much as in previous years] without it.” But posted on their walls is a sign that says, “Inventory Is Death” so it seems they have a healthy balance in how they handle it. “The discount doesn’t matter if you can’t sell it,” he reminded me.
 
He’s seeing tightness all along the supply chain. He thinks it’s a lot tougher to make in season buys than it was 18 months ago or so. His goal is to sell what he gets in. On the face of it, that sounds kind of obvious. But in his mind inventory and buying are closely tied to having clearly defined growth and margin goals, so there is a strategic component to inventory that a lot of people may not be thinking about. And that is another way that Darren works to reduce inventory risk.
 
I’m not quite sure the musical chairs analogy I used in the title holds up. Inventory risk can’t be isolated from general business risk, and it’s not a known quantity that just gets passed around. A brand that sells its product and gets paid for it still hasn’t eliminated its inventory risk. What happens when all that inventory doesn’t sell and the retailer has to dump it? What’s the impact if they go out of business and aren’t around to buy anything next year? What if the value of the retailer’s inventory goes to hell because of the distribution actions of the brand? What’s the brand suppose to do when a retailer grey markets stuff outside of normal distribution channels?     Seems to me that inventory risk exists all across the supply channel and we’re all in it together.
 
It gets minimized when the sales plan is realistic and consistent with the brand or retailer’s market position and strategic goals. Not to mention market conditions. It is further minimized when you buy based on your best estimate of demand regardless of terms, discounts and or other incentives.
 
Current economic conditions are requiring us to reduce our inventory risk and to pay closer attention to all the management accounting and operations management things that, frankly, aren’t much fun. But we’ll be a much better run industry as a result and might even bring back to at least some of our product the sense of exclusivity it has lost over time.

 

 

Zumiez’s Fireside Chat

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Rick Brooks, Zumiez’s CEO and CFO Trevor Lang held a half hour question and answer session today at the Thomas Weisel Partners Consumer Conference in New York. Previously, Zumiez had announced on September 2nd that “…total net sales for the four-week period ended August 29, 2009 decreased 2.9% to $51.7 million, compared to $53.2 million for the four-week period ended August 30, 2008. The company’s comparable store sales decreased 12.1% for the four-week period, versus a comparable store sales increase of 0.2% in the year ago period.” Their comps for September were positive.

They started by defining themselves as an action sports lifestyle retailer (duh) and went on to explain what you had to do to be one. To Zumiez, that means you have to carry hard goods and all the brands (not only in hard goods) that you find in independent shops. They characterized their customer as “very smart” and as knowing what’s authentic and what’s not. Those customers are 12 to 24 years old and more male than female.

They focus on making their employees people who are living the lifestyle and they try to build a distinct culture that empowers these young people to localize product for their stores and create a vibe around it.
 
Their description of their business makes perfect sense. It also leads me to two questions. The first is what does it mean to be an action sports company? That’s a strategic question for every brand and retailer in this industry and one, I have to admit, for which I don’t have a good answer. That label, which has been around a long, long, time, might be seen to suggest that we are the same industry now that we were 15 years ago. But we’re not. If only because of the breadth of distribution and the number of non participants who buy our products we’re a lot different. I guess I’m not against the term as long as you don’t fall into the trap of thinking it means the same now as it did then.
 
The second question is more focused on Zumiez, but not only for them to think about. As they create this focused culture of cool kids who are committed to and invested in the lifestyle, are they defining themselves in a way that might restrict their growth or their attractiveness to certain consumers?
 
The answer, of course, is yes, they are. But every company decides who they want their customers to be and what they want to mean to them. Or at least they should. And any company that tries to be meaningful to everybody probably ends up meaningful to nobody. Unless, I guess, they are an electrical utility, for example. Interestingly, I wonder if Zumiez hasn’t helped themselves manage this issue by being mall based.   They can work to make their stores what they consider core while at the same time exposing themselves to a much broader spectrum of potential customers in an environment that is not intimidating to those customers.
Zumiez noted that their smaller brands are continuing to gain share and specifically that brands need to be careful with distribution and how quickly they grow. They indicated they hadn’t seen any bankruptcies from any of these brands and hadn’t had to do anything special for any of them because of financial difficulties.
 
I have been arguing for a while now that current economic conditions represent an opportunity for new and small brands. It appears Zumiez agrees with me.
 
One of the questioners noted that Zumiez use to talk about an operating margin target in the low to mid teens and asked if that was still a reasonable objective. Zumiez indicated it was, though not in the current environment. They said they were growing selling, general and administrative expenses at half the rate they had been before and spending $85,000 less on each store. Because of these adjustments, they think they can get to those margins with less sales per square foot, but not until sales turn around.
To me, that sounded like an acknowledgement that they have no expectation of sales returning to previous growth rates in the foreseeable future, an assumption I agree with.
 
Zumiez’s growth plans are somewhat restricted right now, and management pointed to the failure of landlords to be more realistic about the rents they could expect as a major reason for this. My belief is that the commercial real estate market is going to get worse before it gets better, and I expect Zumiez will eventually get the cooperative landlords it needs to open more stores. They seem to think so too, as they acknowledged the “capacity rationalization” (what a benign sounding term for something that can be so difficult) that was going on not just in action sports but in all retail sectors. In other words, we’ve got too many retailers and too much retail space
.
The last thing I’ll mention that really caught my attention was their description of how they were working with individual brands on strategies that were appropriate for them. They might, for example, ask a brand to explore a new product or category where Zumiez saw an opportunity. I don’t know how much of that they’re doing, but that guidance could be really useful for a smaller brand and might explain why Zumiez is having success with such brands.

 

 

Trade Shows. There Can Be Only One?

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 So let me see if I understand this. At a time when economic conditions are leading us to fewer brands and fewer shops and consumers spending fewer bucks, and those brands and retailers that are left want to spend less money and send fewer people to trade shows, we have more trade shows.   Will somebody please explain to me the economic model that says you increase supply when demand is falling?

I’m sure the people who bring us all Agenda/ASR/Crossroads/Surf Expo would all agree that one show is a great idea- as long as it’s theirs. The snowboard/ski industry can be more efficient in their approach. They have one national (and they might argue international) show followed by smaller regional shows. They can do that because a) SIA owns the show and b) they are a one season business. Never thought I’d hear myself giving a reason why the snowboard industry’s seasonality was a good thing.
 
Over on the skate/surf side of things we’ve got two sports, shoes, and a lot of apparel sold to non participants, and shorter product cycles, so if somebody wants to suggest that those differences might justify other shows, I can imagine they can make a reasonable argument.   Still, it seems like a good time to talk about the role of trade shows and how it has changed. And how it hasn’t changed.
 
It’s Still About the Retailer- Isn’t it?
There wouldn’t be any trade shows if retailers didn’t show up. I know there are other reasons to go to trade shows, but without the chance to see and sell to customers, brands aren’t going to want to shoulder the cost and effort of a show. That, at least, should be pretty non controversial. Let’s talk, then, about how retailers are best served.
 
At the risk of oversimplifying, they are best served by having to go to the fewest possible shows for the fewest days it takes to get their work done and seeing the most brands in the industries they are in. As I said, that doesn’t necessarily mean one show- issues of seasonality and geography may make it logical to have others, but having shows in related industries that run essentially at the same time and in the same place seems counterproductive. If you’re a local retailer, maybe this isn’t too much of a hassle. I once heard a retailer tell an industry person, “Hey, if you put on that show, we’ll come.” He wasn’t saying, “That’s a great idea! We need another show.” He was saying, “Oh what the hell, we’re located here anyway, it’s not much of an inconvenience, it won’t cost much, and I need to see those brands, and these guys seem determined to do it whether I want them to or not.”
 
Retailers also want to see new brands and get the “vibe.” I wouldn’t want to have to define that, but we all know what I mean. I think they can do that better in larger shows with more brands and retailers. And while I acknowledge that the vibe is different in skate than in surf, I’d remind everybody that the skate shoe business has become the casual shoe business, we’re increasingly in the fashion/apparel business, and most of our sales as an industry are to people who are not participants in the sports- especially in surf. That’s the reality of the selling environment most of our retailers deal with. If shows are going to help retailers make good buying decisions, and thereby stay relevant, doesn’t it seem logical that they should reflect the selling environment the retailer has to operate in? All trade shows might start from that perspective as they consider changes/improvements in their shows.
 
Trade shows have also become less important to big brands and retailers, and more important to small ones. I guess I should say that’s my perception and not state it as a fact. Less buying for large brands and retailers happens at shows because large brands are servicing large retailers much better outside of trade shows than they use to. The internet and cheap to free communications has played a role in this. It’s also true that the percentage of sales to small retailers has declined for big brands.
 
The trouble is that the big brands, with their huge footprint and big trade show budgets allowed the trade show producers to spread their overhead and effectively subsidize the smaller brands. But the recession, and the evolution I describe in the paragraph above, changed that.
 
How Did We Get Here?
IN THE BEGINNING there was ASR (I don’t know what the first show was- just go with me here). And the snowboarders, skateboarders, and surfers looked and saw that it was good. Also, it was their only choice. And they said, “Let us go forth to the temple [convention center] and use our many shekels to build altars up to the sky [trade show booths] that we may convert the consumer, gain market share, impress our competitors, and act 10 times bigger than we really are. And they smoked burnt offerings and saw that it was fun.
 
Then the prophet Ingemie came down from the snowy mountains and spake to the snowboarders saying, “Nothing shall ye sell in September, and only one show can you afford anyway.” And they saw that he was righteous, and made a great pilgrimage unto the desert, and lay down with the ski companies and made offerings to the gods at the many altars there, for the acolytes gave them free sacramental wine.
 
Then the God of Commerce sent the twin plagues of oversupply and lack of product differentiation, and they were laid low. Most of them had just been hoping to get laid.
 
But the skaters were unafraid. “For the third time, we have risen from the dead, but we have been perfumed and no longer stinketh, and are beloved of parents and park and recreation departments everywhere.” They chose as their symbol The Hawk, and it was much worshipped in the land. Their followers multiplied beyond reason, for the skaters were cool.
 
In their sanctuary in the land of Cabo, the surfers gathered and were troubled. “Who are these skaters who are said to be cooler than we and who try to take from the people the offerings that were surely meant for us?”
 
They didn’t have to be troubled for long.
 
For the high priests of the skaters had sent forth a decree so that all would know and love the skateboard. “Of Canadian maple shall thy deck be made with from 7 to 9 plies. Neither six plies nor ten plies shall it have.   Of no other wood shall it be constructed and whoa be to he who uses other materials or technologies.” And the high priests sent out unto the land the lesser priests (team riders) to carry the message to the faithful. There was a plague of advertising and promotion and the high priests grew content.
But the God of Commerce saw their hubris and said, “The high priests of skate have turned their faces from me. For I have sent unto them a great market, and they have prospered, but have forgotten the humble consumers, who are the true gods of commerce and always get what they want.”
 
Then the God of Commerce did send forth a disciple to the Land of Buddha. And he gathered followers and lifted up their faces saying to them, “Behold! I bring you great tidings of a new market. Surely you whose labor costs are lower than the belly of the serpent crawling upon the firmament can help the humble consumer?”
 
Then the people of the Land of Buddha saw clearly. And so they spake: “If we can manufacture integrated circuits, we sure as hell can make a skateboard.”
 
And they made many. And the prices were low. The high priests of skate were visited by a plague of blanks and shop decks. And they saw that they were fucked. There was much wailing and gnashing of teeth. But many consumers rejoiced. For they could spend fewer shekels to do what they loved.
 
Then the surfers rejoiced. “See!” they said. “The skaters are struck down but we are still mighty and definitely cooler than they are for people still flock to join our church though they live in Oklahoma.”
 
The God of Commerce heard this and sent surf boards from the Land of Buddha as a warning, but it was not heeded. And when skate, surf, and snowboard product had covered the world, even unto the land of Costco, the God of Commerce said, “Oh the hell with it,” and he sent The Great Recession.
 
Reboot
I’m sorry about that. I wrote “in the beginning” actually meaning to talk about trade shows but it just got out of control. Can’t wait to see what the editors do about this. How can I recover?
 
Trade show companies want to make money.   So do brands and retailers. So do I. Nothing wrong with that. How do you make money as a trade show? One way to do it is to charge more (and provide more services) when times are good and everybody is focused on revenue growth and market share and not quite so focused on expense management. You can be more efficient because you’ve got more exhibitors taking more space and you’re spreading your overhead. We all spend a lot of time figuring out pricing and try to charge a little more from time to time if we think conditions permit it. Why wouldn’t a company putting on a trade show do the same thing?
 
Suddenly times get a little tougher. Either for skate, or for surf, or for snow, or for everybody. Some brands decide to reduce their booth space. Retailers don’t bring as many people. Maybe one segment of exhibitors feels that the show isn’t quite supporting their needs or is favoring the other segment. Not that that would ever happen in our industry.
 
The trade show, with its revenues squeezed, may initially raise its prices. This, of course, just makes the problem worse. This is an especially big problem for small and new brands that had previously, to some extent, been subsidized by the larger brands. Ultimately, the show has to cut services. Brands who already thought the show was too expensive or that it wasn’t meeting their needs see this as proof that they are right. They may pull out or reduce their presence further.
 
You can see we’ve got a huge negative feedback loop going here.
 
Meanwhile, to meet what they see as a demand, somebody rents a hotel or puts up some tents and has a trade show. The brands say, “Hey, we can afford this!” and some of them who are unhappy with the big show or don’t think they can afford it, flock to these shows. This, of course, makes it even tougher for the big show, reinforcing the negative feedback loop and, by the way, making it tougher on the retailer.
 
Maybe at some point the big show starts to lose money. They don’t like that. They cut everything they can, invest as much as they can afford, but the negative feedback loops keeps working. Finally they say, “That’s it, we’re done.”
 
When that show goes away, you have probably lost most of your retailers who came from out of the country or even from out of the local area. And I am certain there would immediately be pressure on some small show to expand to meet demand. Guess what will happen?
 
The growth process will be painful, and when it’s done the little show will have to be in a convention center somewhere and guess what their cost structure will look like? It will be just the same as the old big show and the whole thing can start over again.
 
And the retailer, who’s suppose to be the most important reason for having these shows, will have been jerked around and inconvenienced. Don’t we want to make it easier for them to see and buy product- not harder?
 
I don’t care how it happens or who does it, but there needs to be one main trade show. If you believe that shows are for the benefit of retailers, I don’t see how you can disagree with that.