The Post Recession Role of Company Stores

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When a brand said, “We’re just going to open a few flag ship stores to build the brand image and collect some good consumer information,” I was okay with that. Made sense.
When it said, “We’re just going to open a few outlet stores to keep stuff that didn’t sell well out of the wrong channels,” I was okay with that too. In both these instances, I even bought into the idea that it wouldn’t hurt, and might even support, their specialty retail customers.
But when opening stores started to evolve into a vertical integration growth strategy, I got worried. It suggested saturation of the market and a lack of other growth opportunities. It was like the canary in the coal mine for the distribution issue. It might turn out to be good for consumers (if price, rather than any kind of “specialness” was the main purchase driver for them) but it certainly wasn’t good for the industry. Not for a moment did I think that somehow it was good for specialty retailers. I don’t think anybody actually did.
That’s not to say I think opening retail stores was a bad decisions for some brands. No more than I think it’s a bad decision for a retailer to decide to stop carrying a popular brand when they realize they can’t make any money on it because of how it’s distributed. One of my business mantras is that every company does what it perceives to be in its own best interest. That’s the way it should be. The interests of “the industry” come in second.
Well, wherever you go, there you’ll be. And here we are.
The market has changed. Some brands have closed stores, and certainly they are all thinking long and hard about how quickly and how many to open. Sales increases are going to be harder to come by. Gross margin dollars and expense control are going to be where businesses look to increase their profits. What does this suggest for the role of company stores?
By the way, I consider a brand’s internet sales another type of company store, and I think what I’m discussing here applies to the internet as well.     
Why Brands Open Stores
As a brand, the traditional ways to grow are by taking market share, by getting your piece of a growing market, by acquisition, by adding products, and by extending your brand franchise, under which I guess opening retail stores might fit.
When times were good and the cash was flowing, brands could look at all of those. Though of course, only larger brands generally had the capability to make acquisitions and open stores. From a strict financial perspective, having your own retail stores looks like a no brainer. If Gertrude’s Skate Shop can make money selling $1 million of product, they have to buy it from us (and other brands), and they carry lower margin hard goods, can’t we make even more? We can probably control certain expenses better, we can merchandise our stuff the way we want and, with luck, we won’t have any trouble collecting receivables from ourselves.
Now, I trust the actual analysis was a bit more sophisticated than that, but you can see that the initial financial analysis would be compelling—especially if you needed some more growth and didn’t know where else to get it. And if you figured times were so good and sales growth and cash flow so robust that the “fat and happy” syndrome, from which we all suffered and would no doubt like to suffer from again, meant that any business blowback, including dissatisfaction from your specialty retail customers, would be minimal.
Like managers at winter resorts who believe themselves to be great managers when the snowfall is good, we were all a bit deluded by many years of good times.
It’s Not Quite That Easy Any More
In the same way that no battle plan long survives contact with the enemy, no business plan gets far into implementation unscathed.
In the first place, you have to find people to manage and work in your new stores. I don’t care how well you know the product and the industry—running a retail store takes a different skill set than running a brand. How hard is it to get and keep good people? Look at the effort Zumiez puts into finding, training, and keeping good people for their stores. It’s one of their top priorities and never something they take for granted.
The best retail managers, of course, are already working at retail stores; stores that probably buy product from your brand. Call me mean spirited, but I’m just not seeing specialty retailers being happy about a brand they have worked to build hiring their people to work in the brand’s new store. Though perhaps there are now some good people available from retailers that have closed.
Next, you’ve got to stock your new store. VF Corporation has enough brands to comfortably diversify its store offerings, if you believe that enough of their brands belong in the same retail environment. Other companies may not, depending on what you believe about consumers’ retail preferences. Do they want to shop regularly in a store with only one or a few brands even if the assortment is very broad? Should you carry brands you don’t own in your stores?
What’s the impact on your overall sales? Will you increase sales, or will you just cannibalize sales from other places now that sales increases are harder to come by? Perhaps you’ll be happy if you just hold your sales levels, as this would improve your profitability based on the much higher margins you earn at your stores.
Assuming we’re not talking about an outlet store, how do you handle pricing? As an image store, you want to hold full retail. In fact, you’ve probably assured your other retail customers that you will. That’s all fine until those specialty retailers start discounting your product. Now what? Do you truly not care if nobody buys the stuff in your company owned stores because it’s cheaper in other specialty retailers? Tempting, in this environment, to cut those prices but still make a great margin, isn’t it? Maybe those stores you own become part of your strategy for reducing the excess inventory you got caught with last fall.
Before our economic circumstances changed, company stores posed some issues, but they somehow seemed manageable. Now, they require some harder decisions.
Like, for example, what is a brand’s relationship with specialty retailers? There are, of course, fewer specialty retailers, and fewer retailers in general. Though this was starting to be true long before the economy went south, big brands with wide distribution are and will find themselves getting a smaller percentage of sales and profits from specialty retailers.
The surviving specialty retailers aren’t going to be that excited about selling brands they really can’t compete and differentiate themselves with due to that brand’s broad distribution. I had an email from a specialty retailer a couple of weeks ago telling me about a certain brand he could buy at a big multi store retailer at their discounted retail price cheaper than he could order it directly from the brand. If that’s true, it’s hard to imagine him carrying that brand for long.
Specialty retailers will have no choice but to focus on smaller brands, or limited distribution offerings from large brands that give them enough margin and differentiation to survive. You just don’t stay in business by selling stuff you lose money on, no matter how cool it may be.
Specialty retailers and company stores are going to have less competition because of the decline in retailer numbers. Whether this makes up for the decline, or at least slower growth, in overall sales we’ll have to wait and see. If you’re a large brand looking to maximize your gross margins dollars in a period of slower sales growth, company stores can make a lot of sense-—if you can manage the (admittedly incomplete) list of issues I outlined above.
A large brand may tend to look at specialty retailers as a place where you want to be well represented, but not as the source of a lot of growth and profitability. Years ago, I suggested that brands should have a list of the 50 or 100 specialty stores they thought they just had to be in for brand integrity and credibility and make sure they were in them. I still think they should be doing that.
The corollary is that larger brands may have a preference for their own stores over smaller retailers that the brands perceive can be hard to work with and offer limited opportunities for growth. After this recession ends (whenever that is), and the associated retrenchment, I expect to see more company stores selling the more widely distributed brands.
The numbers almost demand it.

A Tale of Two Surf Shops. Kind Of.

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I grew up spending all my summers on Long Beach Island, New Jersey. That’s where I learned to surf. And just before anybody makes the comment yes, the surf is generally lousy and for anything really good we have to pray for hurricanes and a change in the prevailing south winds.

We still have a family beach house there, and I was back last week on vacation. We left, naturally, on Friday, the day before Hurricane Bill hit. So instead of getting surf, I got stuck with a five hour weather delay in the airport. Life is not fair.

Enough bitching and moaning and explaining. Naturally, since I was on vacation, I took the best part of a day and visited surf shops and I wanted to contrast two of them.
 
The first is Farias, which has been on the island for 35 years and has three locations. I was in the largest location in Ship Bottom. It’s open all year. It was attractive, well merchandised and well lit. The large selection of boards was upstairs.
 
It’s a big store and they carry, well, all the soft goods brands you would expect them to carry. Go look at the list on their web site here. http://www.fariassurf.com/products/surf-gear/ Even though Farias was large and carried all the requisite stuff you have to carry when you’re on the main street of a summer vacation town, it did a good job feeling surf focused- because it is.
 
The second shop was the Brighton Beach Surf Shop. According to Michael Lisiewski (who’s business card says, “Owner/ Surf Instructor,” the shop was opened in 1962, giving them 47 years under their belt. I’m assuming it was his father who started it- either that or Michael is the best preserved guy I’ve ever seen. They also started Matador Surf Boards around the same time.
 
Here’s the link to their web site. http://brightonbeachsurfshop.com/   Check out the list of soft good brands they carry- oh wait, they don’t have one. That’s because they don’t carry any of the usual soft goods brands. Not one of the 22 industry standards that Farias carries are sold at Brighton Beach. Of course they have some soft goods- sweat and hats and t-shirts. Many of them say Long Beach Island on them. There are probably some store t-shirts as well, but I don’t specifically remember them. Hey, I was supposed to be on vacation.
Why don’t they carry them? First, because merchandising just one of these brands the way Farias can do it might come close to filling the whole Brighton Beach store. If I’m exaggerating, it’s not by much. The place is a bit small.
 
Second, that’s not what their focus is. As I stood there, the kids came in and went out asking about surf boards and surfing. According to Mike, these are his key customers.
 
At Brighton you can get “Everything you need for a day at the beach.” You can get that at Farias too. Like Farias Ship Bottom store, Brighton Beach Surf Shop is open all year around. Unless Mike is out surfing or isn’t there for some other excellent reason. 
So we’ve got two surf shops, both focused on surfing, but very different in terms of how they do business and where they make money. Is one better than the other one? Nope. At 35 and 47 years, it’s pretty clear that they both have strong business models.
But what fell on me like a sack of hammers after my tour was that you can’t be Brighton Beach Surf Shop if you try and carry even one or two of the brands that Farias carries. And you can’t be Farias if you carry only one or two of those brands either.
 
Maybe I just don’t get out often enough, but it suddenly occurred to me that there might no longer be room for shops caught in the middle. You either carry a large assortment of brands (or you’ve got to figure out which ones to carry and that’s a crap shoot) or you carry few to none of the broadly distributed brands (because you can’t merchandise them well or compete on price).
Perhaps that’s already been obvious to everybody but me. Who says you don’t learn anything on vacation?

 

 

Boardshorts from a Vending Machine

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If you read this http://www.nbcnewyork.com/blogs/the-thread/Swimsuit-Vending-Machines-to-be-Stocked-in-Hotel-52089002.html you’ll see that Quik has partnered with Standard Hotels to sell cobranded swim suits at boutiques and poolside vending machines for $75 a pair.

I’m not writing this to express an opinion (though I’m usually not loathe to do that) but just to let you know it’s happening and to talk about the general implications.

Just when you think there are no new distribution channels, up pops another one. I don’t know where the next one will come from, but I know it will appear. Is it at the expense of some other distribution channel? Sure. To some extent. But might it also create some new customers? Sure. To some extent.
 
Sales at resorts or hotel shops and pools are often to people who need something they need right now. I’d say you fit into that category if you want to swim and don’t have a suit.
 
Every time you choose a new way to distribute your product- each time it can be found somewhere different-, you change your customer base and the market’s perception of your brand. To some extent. Can you manage that so you get more customers than you lose? How many different distribution channels, partners, products and price tiers can you have before your brand evolves from what it started as to what it needs to be to attract those new customers you need for growth? Can you keep the old customers? To some extent. Figuring this kind of stuff out is what the best executives do.
 
I lied. I do have an opinion. I might not go as far as the writer of the linked article and say its “brilliant,” but I think it’s a good idea which might grow and is consistent with how Quik has evolved their brand. Even if it grows, it doesn’t feel like it will have much downside for other parts of their distribution. I imagine there are some specialty retailers already shell shocked by the recession and distribution issues that might disagree. But Quik, like all brands and all retailers, has to do what it perceives to be in its own best interest. I think they made a good decision.                           

 

 

The New Management Environment- A Few Ideas

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In 1995 I wrote a Market Watch column called “Getting in Deep Trouble.”   For those of you who might have accidentally misplaced your copies it talked, as the snowboard industry was starting its (first) consolidation, about what led companies to face survival issues and how they could save themselves. I started with the following:

“All businesses in trouble share two characteristics: denial and perseverance in the face of inescapable change. It’s easy to believe in what worked in the past, and hard to step outside our comfort zone and do things differently.”
It does look as though we have some inescapable change going on. And as difficult as that change is and will continue to be, I’d point out that issues of distribution, hard goods margins, lack of product differentiation and others existed long before the economy went south. Growing sales and free spending consumers made it easier to manage (or maybe ignore) them, but they were there.
Last year, and especially in the fourth quarter, we reacted by cutting orders, reducing expenses, and controlling inventories. That’s what you do when customer demand declines. I guess. Maybe I mean that’s the first thing you do. Some of that attention to detail would have been, and is, appropriate to all business conditions. Perhaps some businesses wouldn’t be having such a hard time if they’d been focusing on those management nuts and bolts all along. And maybe they would have had the balance sheet to take advantage of the opportunities the existing conditions present.
Now, we’re all waiting for the recession to end. And it will end, though I probably think that’s going to take a little longer to happen than some of you do. The concern I have, speaking of denial and perseverance, is that there are still some people with unrealistic expectations as to what a recovery will mean.
So I’m going to give you my perception of what the recovery may look like, what appropriate management behaviors could be if I’m right, and tie it to some interesting emails I’ve received and conversations I’ve had.
The New Normal (and Other Overused Clichés)
I’ve written some of this before, so I’ll be brief. But I’d like us all to be on the same page as far as the expected environment goes.
Growth, when it comes, will be a lot slower than we’re use to. Overall sales increases may be harder to come by, but there will be some fewer retailers and maybe fewer brands to share them. I expect consumers to continue to save. The time it will take to complete the ongoing deleveraging will be measured in years, not months. The Federal Reserve has cut interest rates as low as is possible and done everything they can to expand the money supply. Their goal is to get banks lending and people borrowing. Trouble is, banks are busy rebuilding their capital base, and consumers, having turned cautious, aren’t in a rush to borrow any more money. They’ve got to deal with the mortgages, credit card balances, and car payments they already have.
I think it gives you some good perspective to realize that what got us into trouble in the first place (excessive consumption and debt) is what some authorities seem to be hoping will get us out of trouble. I don’t think that’s going to happen. The Bush tax cuts expire in 2010 and I don’t expect them to be renewed. That’s going to take a lot of purchasing power out of the economy at just the wrong time.
Unemployment, always a lagging indicator (and worse than the number looks when you add the number of part time employed people who can’t find full time work), may be slow to decline. I’m concerned this recovery isn’t going to produce a lot of good jobs.
Well, that was cheery. Sorry. Feel free to send me lots of emails telling him I’m too negative. Hope you’re right. If you do email me out of annoyance, please tell me why you disagree with my analysis- not just that I shouldn’t write stuff like that. Hey- we’re trying to run businesses. We need the best information we can get- good or bad.
Some Things You Can Do
I wrote with enthusiasm last month about Gross Margin Return on Inventory Investment (GMROII) as a tool to help you increase those gross margin dollars and choose your inventory more carefully. I noted in that article that taking the best advantage of it required that you had and maintained quality management information systems. Last week, I asked a pretty senior manager of a major brand if they knew about GMROII. “Sure!” they said, “But our systems are so bad we can’t pull out the information we need to really take advantage of it.” That was disappointing.
Especially in a slower sales growth environment, whether you’re a retailer or a brand, there’s a lot of money on the table if you can manage your inventory and improve your inventory turns. There is some expense involved in buying the software and hardware you need to establish or upgrade your systems. But the real costs come in converting the data, training, and making maintenance of the system and its data a priority. I can’t say this strongly enough. You’ve got to have and use good systems. Please make the investment.
My online article on SIMA’s retail study and core snowboard retailers lead to an interesting exchange from a retailer whose sales were down 20% but whose profits were actually up due to better management including ruthless expense and inventory control. Not up a lot, they hastened to point out, but up nevertheless. I believe that kind of result is possible with good management practices for both retailers and brands. However, this retailer pointed out that at least part of their success was due to a level of cooperation and enthusiasm from the staff in controlling expenses that just couldn’t be sustained over the long term.
You know what else you can do? You can remember that nobody who’s a manager in this industry (or, for that matter, in any other industry) has ever managed under these conditions. In a lot of ways, we literally don’t know what to do. You know what the good news is? There are no rules. If change in the business environment is dramatic and long lasting, as I think this is, then you’ve got to blow up your preconceptions, be willing to take new approaches, and bring your entire team along with you.
There’s a limit to analysis. When I did turnarounds, we’d refer to “just working the deal.” We weren’t quite sure what the right thing to do was, or what exactly was going to happen when we took an action, but we knew that not trying some stuff and going along the way we had been was fatal. So what did we have to lose? Question your preconceptions. When Target is hiring team riders, they may need a close look.
One of the best ways I know to do that is to go talk to people you haven’t known for 20 years and who aren’t in this industry. Tell them about your problems, issues, and opportunities and see how they react. We spent way too much time talking to each other. I think that tends to reinforce our preconceptions.
Ed Seymour, the Director of Global Sales for Westbeach, emailed me about an interesting approach they are taking with some of their core retailers. As he describes it, under their Affiliate program, they don’t sell any product to certain key retailers, but end up making more money. I suppose that require some explanation.
They work with each store they have this relationship with and agree on a display and a location in the store. They train a key staff member as their brand champion and share the margin with the store after the product is sold. The store never owns the product. He didn’t tell me exactly how they split the margin.
After closeouts and the end of the season, Westbeach takes back the unsold merchandise and puts new stuff in. Stores with their own web sites can banner link to the Westbeach site. They track sales and share the margin with the store the same as if the customer had made the purchase in the store. They also give the retailer 12% of any product sold to somebody in their area directly through Westbeach’s web site.
Ed says Westbeach gets paid faster, the store is more willing to take risks with merchandise, and Westbeach knows right away when a shop starts to get in trouble.
Consignment, of course, isn’t a new idea. But it sounds like the structure Westbeach has built around it is making it more effective.
If you are uneasy from my description of the emerging economy, maybe my description of what others are doing, and what you can do, will help lift you up. You’ve got to get out of the denial and perseverance way of thinking and find the opportunities that are always out there when things change. Get out there and try some new stuff.

Gross Margin Return on Inventory Investment A Tool for Our Times

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Since last fall, as our new economic reality has evolved, I’ve had a few things to say about what to do. They’ve included building your balance sheet, controlling your inventory and other expenses, focusing on the gross profit line, looking at gross margin dollars as well as percentages, and making good use of your management accounting system, which I consider a strategic tool in this environment.

All very sage and business like stuff I’m sure you’ll agree. Trouble is, I didn’t really have a method to help you do it all. Problem solved.
Serendipitously, Cary Allington, President of ActionWatch, the collector and supplier of sophisticated, detailed retail information on what’s selling at what prices and margins in our industry sent me an article on the Gross Margin Return on Inventory Investment concept (GMROII). He was pretty excited. So was I after I’d read it.
 
The concept isn’t new. It’s valid for brands and retailers. It comes as close as I could hope to drawing together most of the ideas I’ve been talking about lately. Hopefully, you’ll read this and say, “Oh hell, I already know and do all that.” But I don’t think so. Neither does Cary, who spends a lot of time talking with retailers and brands about the data they have or want and its quality.
 
What Is It?
GMROII is a conceptually simple method for measuring which inventory items (or categories, or brands) give you your best return on your investment in that inventory. It combines gross profit with inventory turns in a way that allows you to compare the profitability of snowboards (or a particular snowboard) with, say, surf wax at the gross profit level. It’s not perfect, and we’ll discuss the caveats below, but it looks like it can be very useful.
 
Just as a refresher, inventory turn refers to how many times you have to replenish your inventory for a given level of sales over the year. It’s important because the more turns you have, the less inventory you can carry for a given level of sales. And the less chance your inventory will have to be marked down. Carrying extra inventory costs you money in lots of ways including cost of capital, overhead, and opportunity cost when you have money tied up in something that takes a long time to sell and has to be discounted instead of in fast moving, full margin inventory. 
 
The GMROII calculation itself is simple. It’s just the number of gross margin dollars you make selling a product (or category or brand) over whatever period of time you choose to measure it divided by the average inventory at cost over the same period. Typically, it’s done over a year. The result is a number (in dollars- not a percentage) that tells you how many gross margin dollars you earned for each dollar invested in inventory over the period.
 
Having calculated these numbers, what might you do with them? For the first time, you’ll be able to compare what I’ll call the inventory financial efficiency (I just made that up! Kind of like it) of any item you sell with any other item. You can also do it for a brand or a category. You can actually say, based on the example above, I’d rather sell the same amount of Item A than Item B even though one sells for $600 and the other sells for $12.00 and they are in completely unrelated categories. You can see which ones you’re wasting your time selling (or at least recognize that there’s no financial reason to be selling them). You can eliminate too much emphasis on gross profit margin, which I think you can see in the table below can be misleading. You may significantly reduce your inventory investment.
 
Below is a table supplied by ActionWatch that calculates the GMROII for a number of categories using data they collected from their panel of retail shops.

 

 

The GMROII is the number of gross margin dollars generated for each dollar of inventory you had in that category over the period of a year. If you could plan your whole business around GMROII, obviously you’d get rid of everything but long completes and just sell them. But your customers probably wouldn’t go along with that.

That shoes are at the bottom of the list isn’t a surprise, at least to me. Given all the color, sizes, and styles you have to carry the inventory investment is pretty significant. The opportunity is to calculate the GMROII for each SKU and figure out how you can change your mix to drive that shoe GMROII up.
 
I was kind of surprised to see the GMROII for accessories as far down on the list as it was. We’re all favorably disposed to accessories and think of them as a high margin, profitable product. This particular analysis suggests they aren’t quite as spiffy as we thought.
That skate hard goods all had GMROIIs higher than soft goods was kind of a surprise. I’d especially note the high values for short decks. We bitch and moan that the gross margins need to be higher, but because of the speed at which short deck inventory turns, they look pretty good in a GMROII analysis. This analysis doesn’t break out branded from shop decks. That would be interesting to see.
Notice how increasing the annual inventory turns boosts the GMROII even when the gross margin percentages are lower. You’d rather have an extra half turn on that inventory than a couple of gross margin points any day. But how many of you calculate the inventory you buy based on the dollars you have to spend and the percentage gross margin you expect to make? You can’t ignore those factors, but pretty clearly turn needs to be part of the analysis. 
 
The basic calculation for GMROII is conceptually simple as you can see. But I’m afraid it requires some work. What an inconvenience.
 
The System Thing
You won’t be doing a lot with GMROII unless you have a quality management information system. For the calculations to be meaningful, your sales history and inventory tracking have to be solid. If you want to track it by category or brand, your chart of accounts has to have been set up to aggregate the numbers. And of course this isn’t a onetime activity. You need to keep it current as product comes and goes, as credits are processed, as write downs occur. You get the picture.
 
I’ve talked about the need for good systems before. I’ve gone so far as to say you can’t get by without one- especially now. Some systems do the GMROII calculations for you. I’ve been told that these include Cam Commerce, which offers it in their Retail STAR and Retail ICE applications. Win Retail also offers it. I’m not sure which systems for brands might offer it.
 
Other Considerations
You can’t just keep the products with the highest GMROII. Total dollars generated matter and there are other reasons besides financial to stock a product. You can have products with huge GMROII that wouldn’t generate enough gross margin dollars to cover expenses (and some bottom line profit besides would be nice).
 
You have to already have been carrying a product for a period of time before you can do the calculation. If you want to conduct a GMROII analysis at the item level, it works best for items that you replenish rather than replace. If you’re out of inventory for a period of time, that will impact the value of the calculation.   In general, the longer you’ve carried the product, the better the calculation will be because the average inventory number will be more accurate. 
 
Come to think of it, for those of you who are statistically inclined, I recommend calculating the mean inventory and the standard deviation (dispersion around the mean) rather than just average inventory. That would give you a good sense of whether or not you can calculate GMROII for shorter time periods. Though I suppose you’d need to calculate it for the same period for all products to get comparable results.
 
If only because it gives a result in dollars, GMROII is not a traditional return on investment calculation and should not be confused with one. It’s a way to manage your inventory- not your whole business. But inventory is often the biggest number on your balance sheet, so managing it well pays big dividends. How might you start?
 
To take the greatest advantage of the concept, you really do need the good system and data I describe above. Just to work up some enthusiasm, assuming your system isn’t quite set up to make the calculations, get a pencil, calculator, paper and inventory and sales records going back a year. Pick, oh, I don’t know, sunglasses. Choose a brand. Or a style or color. Whatever it’s easy to get the data for.
Figure out the total gross margin dollars (after all allowances and markdowns) you earned on that product or product group over the year. Now add up the inventory at cost of the product or product group at the end of each month over the last year and divide by 12. Divide the gross margin dollars by that average inventory number and you’ve got your GMROII.
 
Next, depending on what you decided to do the first calculation on, do it again for another brand, color, or style. Now you’ve got the GMROII for two groups of products. Is the result similar? If not, why not? Was a style you ordered the most of just a dog? One brand just cooler than the other? Did the order get screwed up?
 
What adjustments should you make in your purchasing so you’re selling more of the higher GMROII stuff?
 
Now, for even more fun, do the same calculation for surf wax. Or whatever. Which should you want to be selling more of; the sunglasses or the surf wax? Bet you didn’t have a way to figure that out before.
 
It won’t be as simple or clear cut as I’m making it sound here. It will never be exactly accurate, but the more you use it, the more useful it will become. It’s clearly harder to do with seasonal merchandise and changing styles, but I think it’s worth the extra work, though the quality of your information won’t be as good.
 
Cary has put a link to the article I referred to on the ActionWatch web site. You can access it in the section called “POS Tips Links” at www.ActionWatchReports.com.   The GMROII concept is worth some of your time. There’s a bunch of money on the table.

 

 

Here’s a Chart Worth Seeing

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After my post on SIMA’s 2008 retail study yesterday, I got curious about the percentage changes quarter over quarter it implied. The Media Highlights gave me total core sales for the year and the percentage of sales in each quarter. SIMA gave me the same information for 2006. The rest of the calculations are mine and I used them to create the table below. The numbers don’t exactly add because of rounding, but that doesn’t really matter.

 

 

 

 

 

 

 

 

Fourth quarter skate/surf core sales were 17.5% lower in 2008 than in 2006. We don’t have 2007 numbers because SIMA only does the survey every other year, but I’m guessing the 2007/2008 comparison would look worse. SIMA has now told me that this information is in their full report, but I don’t have that and I’m guessing a lot of you don’t either.

I don’t think that number will surprise anybody who’s actually running a business, and I don’t believe it’s worse than other consumer related businesses. I look forward to improvement from this point on.

 

 

Blowback From the 4th Quarter; The SIMA Study and Snowboard Retailers

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I received The 2008 SIMA Retail Distribution Study (highlights only) about the same time I got yet another phone call from another snowboard focused, core retailer that had been around a long time and was in trouble. I hate those calls because these are shops that I would like to see do well.

My little accidental, informal, snowboard shop survey can’t hold a candle to SIMA’s study. But I thought there was some value in talking about them together.

 
SIMA does its study every two years. 2004 was the first year and the current one is for 2008. It’s great information. We all need more of this kind of stuff to run our businesses better.
 
The retailers surveyed “…carry either surf product alone or a combination of both surf and skate product.” No snowboard focused shops included. It focuses on stores that have been labeled as “core.” “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.”
 
 Total core channel retail sales are reported to have fallen 3.45% to $5.32 billion in 2008 compared to 2006. We don’t have 2007 numbers because, obviously, they only do the survey every other year. Nor do we have a quarterly breakdown of sales changes in 2008, at least not in the summary I received.
 
If we did have a quarterly breakdown, I’m guessing we might see sales increases in the first three quarters of 2008 compared to 2006, and probably to 2007, and then a big decline in the 4th quarter. Which brings me to the calls I’ve been fielding from snowboard focused core retailers.
 
Last fall represented the convergence of trends that put a lot of pressure on snowboard retailers. First, they were operating in a market that wasn’t growing (There- I said that tactfully). A lot of brands, especially larger ones, in an attempt to move inventory and make money, expanded their distribution.   Awareness of the recession hit full force and consumers stopped spending. Meanwhile, discounted product was all over the internet and finding that product got easier and easier.
 
Snowboard retailers found they couldn’t hold prices almost from the day their preseason orders arrived. In a one season business, where most of the product (even a lot of the apparel) is useful mostly when actually participating in the sport, and participation is expensive at a time when consumers are cutting back, it was a perfect storm.
 
The SIMA report says that core skate and snow retailers didn’t have near as hard a time as core snow shops did, though I think maybe the press release headline, “Surf Industry Riding Out the Economic Storm” overstates the case a bit. I suppose that’s SIMA’s job. Certainly skate and surf retailers are better off than snow. Their categories are in better overall shape, they aren’t as dramatically seasonal, and lots more people need an attractive, comfortable shoe than need an attractive, comfortable snowboard boot.
 
But I wish we had some comparative fourth quarter numbers. Certainly there were over inventoried issue for skate and surf just like for snow. I wouldn’t call those issues easy to manage, but they are easier than in snow where if you don’t sell it, you have to practically give it away or keep it until next year.
 
SIMA includes a table that shows product mix contribution to retail sales for the three years the study has been done- 2004, 2006, and 2008. The two largest categories, each about $1.1 billion in core retail sales out of a total of $5.32 billion, are Surf/Skate Shoes and Surf/Skate Men’s Apparel. Third at about $1 billion was Surf/Skate Equipment, down 4.5% since 2006. There are a total of 13 categories, of which only five were up between 2006 and 2008.
 
 My point is that the 4th quarter of 2008 wasn’t just the worst quarter most of us have ever seen. It was the fulcrum of change from the old to the new economy. I’ve been writing that for a while, so I don’t suppose I need to go into detail again.
 
The one good thing that may come out of all this is that I can imagine some product shortages this fall and during the holiday season. Doing what they “perceive to be in their own best interest in the short term” retailers have cut orders and manufacturers have cut production. I know that doesn’t sound good, but read on.
 
Most everybody in this industry who sells stuff has suffered from over distribution. It turns products into commodities and reduces gross profits. It occurs because all companies, in their competitive zeal for more sales, do what they “perceive to be in their own best interest in the short term.” But at this stage in our industry’s development, it turns out not to be in anybody’s best interest.
So for a change, everybody dong what they “perceive to be in their own best interest in the short term” may turn out to work for the industry though obviously not for individual companies. Unless of course, they are managed very, very well.
 
The consumer may find that the product they want isn’t 20% off and isn’t available everywhere. They may find that if they don’t buy it now, they won’t see it. They might actually start to see more of our products as special again, and worth having even at a higher price. Retailers and brands alike will of course tear their hair out when they find they have a hot product they can’t get any more of. But as they’ve adjusted to this new economy, they’ve probably started to manage for gross margin dollars and not just for sales. They might find that the adjustments to their operating structure they’ve made leaves them with more net income even with lower sales. 

Or maybe I’m just dreaming. I guess we’ll find out.  

 

A Little Random Perspective on the Financial/Market/Credit crisis

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Once upon a time, way back in 2003, an investment bank could only have leverage of up to twelve to one. In 2004, the Security and Exchange Commission gave five investment banks, and only five, the ability to leverage up to 30 or 40 times or so. Guess which five they were? I almost don’t want to bother listing them, because the list is so obvious. But for the benefit of all the readers who have just awakened from a coma they’ve been in for most of the year, they are Bear Stearns, Lehman Brothers, Merrill Lynch, Morgan Stanley and Goldman Sachs.

There’s a lesson there somewhere.

On my last posting on Zumiez, I wrote about how they had to classify their various investments under the terms of FASB 157. Basically, companies are required to “mark to market” their various securities. The problem arises when you know your securities are worth something, but you have no idea what because they aren’t trading. Should you carry them at $0.00?
Back in the early 80s, I was an international banker living in Sao Paulo, Brazil and having a hell of a good time. All the South American countries had defaulted on their debt to the American banks. It was a lot of money and if the banks had been required to “mark to market” all those loans, they would have been broke. A bank’s ability to lend depends on its capital ratios. If they have to write off all their loans, they have no capital and can’t lend. The Fed decided that would be bad so they let the banks keep those loans on their book, writing them off bit by bit as they earned profits to cover them. Eventually, they did get some payments. The loans were certainly impaired, but they weren’t worth zero.
 
This mark to market provision needs to be changed. Just because there’s not a market right this minute doesn’t mean the loans are worthless, and we shouldn’t treat them as if they are. And we can’t afford for our banks’ capital to all go away.
 
Which reminds me- as you hear this number of a bailout costing $700 billion being bandied about, remember that these loans do have some value. We’re not quite sure what the number is, but it’s not small and the net cost will eventually be a lot less than the gross number. In fact, because of all the fear out there, some killer investment opportunities in some of these securities exist and anybody who knows how to tell the good from the bad and the ugly should call me.
 
This morning I read that a local Seattle utility had only been able to refinance $28.5 out of the $30 million in debt it wanted to refinance. And it had to do it at 5.5% instead of 1.5%. The possibility that these additional costs would be passed through to utility customers if the credit markets didn’t get unstuck was mentioned, in case anybody out there thinks this might not impact them. If you’ve tried to get a credit card, mortgage, car loan or home equity line of credit lately and your credit isn’t pristine, you’ve probably already figured it out.
 
The discussion about the bailout is not about losing money. The money, however much it turns out to be, has already been lost. The discussion is about who’s going to absorb the loss. I’m afraid it will largely be you and me.
 
My reading of history is that the Great Depression happened largely because of a bubble that was left to correct itself and the paralysis that followed. Chairman Bernanke and Secretary Paulsen, no slouches when it comes to reading history themselves I’m thinking, have followed the drop in commercial paper issued, saw the sudden spike in its cost just in the last ten days, and decided this wasn’t something to fool around with. Hence, the package that’s before Congress right now. I’m hopeful it will be passed quickly and without a lot of other stuff tacked on.

 

 

Subprimes, Teen Spending and the Economy; Yup, It’s a U.S. Recession. Can’t Europe Just Ignore It?

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Daniel is my favorite economic indicator. He and his guys install wood floors. To get him to do some work at our house last summer, we had to book him two months in advance. When I called him to do another room not long ago he said, “How about next Tuesday?” He told me people were becoming more cautious and pulling back on projects.

With the Daniel Indicator in the caution zone, I decided it was time to look at the rationale for and impact of a U. S. recession for a second time in my writing career. The first time was, I think, in 2001 in the midst of the Great Skateboard Boom. Shops I talked with about any softening of their sales pretty much laughed uncontrollably after they realized I was serious. The recession was short and shallow and the only damage done in our industry was to my reputation for asking retailers such stupid questions.

I’m going to try again. Let’s look at some current U. S. economic indicators with particular attention to the subprime mess and its worldwide ramifications. Then I’ll review the latest stock market results for the publically traded big retailers as well as the companies that are specifically in our industry and see what the stock market thinks is going on.
     
Housing and the U. S. Economy
Consumer spending represents 70% of U. S. gross domestic product. Keep that in your mind while we talk about the subprime situation.
 
I need to describe in a few hundred words something people are writing books about. Since a picture is worth a thousand words, check out the chart below.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Source: “The Mortgage Pig in the Python” by John Mauldin. August 3rd, 2007. You can see the article at John’s http://www.2000wave.com/article.asp?id=mwo080307.   I recommend signing up for John’s newsletter.
 
What this says is that without people taking lots of money out of their rapidly appreciating homes and spending it, U. S. gross domestic product growth would have been a fraction of what was reported, especially in recent years. Now, here’s another cheery table from the same source.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
This table shows the dollar amount of adjustable rate mortgages that reset, or will reset, each month in 2007 and 2008. You can see that the peak isn’t until next, well, now. These resets are partly what lead to foreclosures because people suddenly have a payment they just can’t afford to make and the expected refinancing is no longer available. The other piece of the puzzle of course is the decline in housing values. It was just announced nationally that they were down 10.7% in major U. S. cities compared to a year ago. Of course in some markets, it’s worse than that. Much worse. And it isn’t over. I’ll discuss the impact below.
 
Okay, so sitting in Europe, why the hell should you care about the U.S. housing market?
   
The house price run-up started with low interest rates and a generally strong economy. It accelerated when banks stopped being banks.  It has historically been the role of banks to evaluate credit, make loans based on that credit, and then get paid back. Then they learned how to “securitize” loans. They bundles them all together, got one of the rating agencies to rate them AAA, and sold them to all kinds of investors who relied on that AAA rating. Suddenly, they’re earning their money from making the loans and servicing them- not from collecting them. They don’t care about the credit risk. Neither do the loan brokers or the appraisers or the escrow companies. Neither do the investors who are buying the bundled loans, because the rating agency says they are AAA. And through some financial magic, you can package some AAA rated loans with a bunch that aren’t AAA rated and still end up with an AAA rating on the whole security. Go figure that out.
 
Lots of money available, lots of fees to be earned, no worries about credit and everybody wants to get on the house buying band wagon. So they did. And, as you’ve read, many of the loans that financed this spree, especially in the last couple of years, were interest only, or nothing down, or no income verification, or/and adjustable rate. No worries about those low teaser rates on the adjustable loans though. When it’s time for the rate to adjust upwards, you’ll be able to refinance because of all the easy money and the fact that your house will be worth even more.   
Opps. Didn’t quite work out that way. Foreclosures have doubled since the 3rd quarter of 2006. The National Association of Consumer Advocates reports that four million subprime borrowers will see their monthly mortgage payments increase by an average of 40% in the next eighteen months.  House prices have fallen a little or a lot depending on where you live, lending standards have tightened as a result of loses on subprimes, and refinancing your mortgage has gotten more difficult, assuming you can even do it. If you put no money down and your house is worth less than at the time you purchased it, what’s the motivation for the bank to refinance the house since they know they won’t be able to sell the loan? You probably aren’t surprised to learn that the market for bundled loans, even ones that the raters say are AAA (whatever that means now) isn’t what it was some months ago.
 
As you know, this isn’t just impacting the subprime market in the U.S., but credit markets worldwide. And that means you. There’s no lack of liquidity- central banks all over the world have pushed cash into the system. There is a lack of confidence. Even perfectly good corporate debt has taken a hit. Between the various forms of these bundled securities and the derivatives associated with them, there’s real confusion about how big the risk is and who is holding it. How do you decide how much a security is worth if it’s not trading? The cash is there, but it’s not flowing. Banks that are caught in this have to raise capital and tighten lending standards. That’s as true for Union Bank of Switzerland as it is for Bear Stearns (May it rest in pieces). Basically, securitization let the U. S. subprime problems evolve into a global credit crunch.
 
Let’s say you were a hedge fund. You have $100 million in capital. The banks (in the good old days) would lend you $2 billion on that, leveraging you twenty to one. And they’ll lend it at, say, 5%. You turn around and lend it for, say, 6%. On the difference between the 5% cost of funds and the 6% earnings of the assets, you’re earning $20 million a year. You have a $100 million in capital, so you’re earning 20% a year on that. And hey, those securities are all rated AAA, so what can go wrong? Life is good.
 
But suddenly there’s a glitch in the system. The value of those securities you have falls one percent. You’re leveraged twenty to one, so you lose 20%, of your capital, or $20 million. As some panic and a little paralysis sets in, you’re easily and suddenly down 5% (Since these AAA securities are no longer trading, it’s actually kind of hard to know how much you’re down) and all your capital is gone. You get the margin call from hell. You can’t meet it, so the bank steps in and tries to sell the underlying securities. But there’s no market for them. The hedge fund is out of business and the bank is facing serious loses. Cue the lawyers.
 
You’ve seen some write downs of these securities and you’re going to see more.   But so what? All we want to do is sell a few decks, some pairs of shoes, and various jackets, t-shirts and beanies. Should we be worried that the consumer spending is going to slow is our little part of the world?
 
Stock Market Wisdom
 The University of Michigan Consumer Sentiment Survey in the U. S. fell to 70.5 in March, down from 80 in October. That’s the lowest reading in 16 years. The survey also reported that inflation expectations rose sharply, but I don’t suppose that’s a surprise to anybody who buys food and gas.
 
Meanwhile, consumer spending is falling, and the people who watch the stock market seems to think that decline is for real. The S&P 500 retail index (symbol $RLX) is down 25.6% during the nine months ended 31 March. The stocks of Dillards, J.C. Penney, Nordstrom, Kohls, Sears and Macy’s (large US mainstream retailers focused mostly on apparel) are each down between 22% and 48% over the same period. The average decline was 37.7%
 
But we can argue, and I think accurately, that those retailers don’t necessarily represent our market. Let’s look at some US publically traded companies that do. In alphabetical order, let’s see what’s happened to the stocks of American Eagle, Dick’s Sporting Goods, Ho t Topic, Pacific Sunwear, Quiksilver, Urban Outfitters, Volcom and Zumiez over the same period.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
The average decline here is 33.1%. That’s not much better than the average of 37.7% for the general retailers. If you eliminate Urban Outfitter’s positive result, we’re actually worse with a decline of 44.2%.
 
Some months ago, when I did this exercise over a six month horizon, it looked like Wall Street expected the action sports market to hold up better than the general retail industry. It’s always been an article of faith in the industry that we would. Now, it’s not so clear.
       
It’s A Small World After All
When I spoke to U.S. retailers months ago, they were cautious, but hoping they didn’t need to be cautious. During trade show, I found this caution had become greater.   Before, they hoped to avoid a recession. Now, they hope it’s not too bad a recession.
That we’re going to have, or maybe are having, some slowing in consumer spending seems obvious to me. Especially since the morning paper announced that Starbucks saw a 1% falloff in store traffic last summer. We in Seattle take stuff like that seriously and that seems as good as the Daniel indicator I started this column off with and that we’re somehow protected because we sell fun.
How vulnerable is our industry? The evidence says we can expect some impact- more than it looked like a few months ago. First, we hoped the problems would be limited to the U.S. housing market. Then, to the U.S. economy in general. Then we hoped that the rest of the world would make up for U.S. economic weakness. But unfortunately it looks like the process of deleveraging the world (which is a good and necessary thing in the long run) is a worldwide phenomenon.
 
If you run your business carefully, and you have a strong balance sheet, you’re going to find yourself with opportunities while others struggle. Recession or not, people want to have fun.

 

 

Can We All Please Just Calm Down? A Business Perspective on Blanks

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I can’t believe I’m doing this. Oh lord, how many people am I going to piss off this time? I mean, I could just lay low and let the slings and arrows fly back and forth but no, I just don’t have the intestinal fortitude to keep my mouth shut. Instead, there’s this almost pathological need to try and reduce a highly controversial and frankly emotional issue to a series of business bullet points. I guess I’ll console myself by remembering that I’m not going to say anything here I didn’t say some years ago in Market Watch.

I might as well get it over with. Maybe it will help me sleep at night.
For those of you who live at the United States Air Force weather station three miles from the South Pole (and don’t have an internet connection), IASC and the leading skate hard goods companies created and wrote the 32 page insert called “Under Fire” that you all received in the recent issue of Transworld Business.
My hats off to them for achieving a level of efficiency and cooperation that, honestly, I wasn’t sure they could pull off. And they succeeded in highlighting what I think most of us would agree are the major issues confronting the skateboard hard goods industry today and identifying some action items. What I’m going to do is review those issues and then go a little deeper into the business implications of what they are saying and advocating.
Remember that “Under Fire” is a consensus document. That is, not everybody who was represented in it would agree with everything everybody else said. Still, I thought there was remarkable consistency across a number of key points.
And the Key Points Are……
The bedrock of the whole argument is that pros are the foundation on which skateboarding is built and that their influence is key to getting kids excited about and continually committed to skating. Okay, I agree that pros have big influence on the core of skating. How much? As much as they use to? Don’t know.
The next point is that the brands’ marketing activities, including their support of pros, is critical to the health of skateboarding. If skaters are buying blanks and shop decks (I consider those separate categories, and will discuss why later) rather than the more expensive branded decks, the brands can’t afford the same marketing programs. That’s simply a financial equation. Can’t argue with it.
And, the argument continues, if professional skateboarding and the associated promotional activities aren’t strong and can’t be continued at the same level skating, as an activity, a lifestyle, an attitude, and as a business is fated to decline.
Well that would suck if it actually happened. What do the brands want to do about it?
First, they acknowledge that it’s time to introduce some technology and innovation into skate hard goods to give skaters a reason to buy the more expensive branded decks. We’re already seeing some of that start to happen and you’ll see more. But of course it’s not an instant solution. The industry has spent a lot of time, effort and marketing dollars to convince skaters that a skateboard is a seven to nine ply laminated product made of hard rock Canadian maple. Skaters seem to believe it. Getting some of them to pay more for something that ain’t quite that, even when the benefits seem obvious, will take some persuasion and some time.
I guess where we’d like to be in where, for example, golf is. You know- they come out with “new and improved” models every year and people buy them even though there’s nothing wrong with their old stuff and the new stuff is expensive and doesn’t necessarily make a difference in their game. Or like in automobiles- where the newest technology appears in the top of the line product and works its way down year by year.
This will require, however, that the pros be in lock step with their sponsors.
Second, they recognize the shop’s need for a better margin on branded hard goods. What are they going to do about it? Somewhere between lots and nothing. There are brands already offering better margins and some that just don’t want to compete at the lower price point. There is, by the way, nothing wrong with a business decision to not offer a less expensive product if that’s what your market position and targeted customers require.
“Under Fire” is only “the first step in IASC’s plan to continue educating and informing the industry about this issue.” There will be additional steps in the program. The supplement ends with a call to action suggesting some tactics that all the industry’s stakeholders should consider.
So, Where Are We Exactly?
You remember all this from a few years ago. Skating takes off, skate parks start to sprout like mushrooms, brands can’t keep up with demand. Everybody’s happy. Then the market gets big enough for the foreign, low cost manufacturers to notice it. “Hey, we can make this cheap,” they say. They’re right. The usual startup problems. Problems resolved. Eight bucks landed cost for a blank skateboard if you’re buying in quantity. Maybe less. Consumers get the idea that the quality of blanks and shop decks are the same as the branded deck. Big price difference. Product wears out. No fundamental change in the product in 20 years or so. Percentage margins decline. Worse, total margin dollars earned on a deck decline. Fifty to seventy percent of deck sales world wide (you pick the number you believe) are blanks and shop decks.
So after a period of rapid growth, the industry matured a bit and started to consolidate. Product becomes a bit of a commodity, price and margin pressures, volume matters, etc. Look, I’m not going to go through this for the 14th time. All the usual things happen that happen to any industry in its life cycle. Big surprise. It’s so predictable it’s boring.
Anyway, wherever you go, there you’ll be. And here we are. There are some business issues implicit in Under Fire that it didn’t specifically discuss. Well, you can’t blame them- if they had, you’d be confusing this thing with the telephone book. But me, I always wanted to write a phone book.
Why People Buy
As far as I know, there are three things that motivate people to purchase a product. They are advertising and promotion, product features, and price. It appears, right at the moment, that advertising and promotion isn’t working too well for branded skate decks. If it was, there would be no Under Fire and I wouldn’t be writing this. Which, frankly, would be fine with me. There must be a better use for a Saturday morning. I mean, I could be doing yard work. Never mind. I’ll write and send the two teenagers out. Same to you kids. No, you can’t play with the chain saw.
New product features? Well, uhh, there really haven’t been any that have caught on, though hopefully that’s starting to change.
That, I am afraid, leaves us where we really, really didn’t want to be. At price. Let us then discuss the elasticity of demand with regards to price. If the blank/shop deck is, say $20.00 and the branded deck is $50.00 and you’re a fourteen year old without a lot of money or the a parent of a fourteen year old who knows you’re going to be back in this shop in a month, that’s a big difference. Apparently, too big a difference for a lot of people.
How big a difference wouldn’t be too much? Judging from the discussion of the demand for the $35 branded deck in the sacred supplement, the retailers seem to think that’s a price point at which they can sell branded product. But would $40 also work? Or does it need to be $30? What kind of and how much advertising and promotion and product innovation can change that?
We don’t really know. Or at least I don’t know. Actually, I guess I do know the answer. The answer is, “It depends.” Isn’t that helpful? It depends on the brand. It depends on the shop. It depends on buyer motivation. Has anybody out there rigorously asked 500 skaters, or even 100, why they bought the skate board they bought?
Right at the moment, if we asked a bunch of skaters, we know quite a few of them (fifty to seventy percent I suppose) would say that price was a big factor, as is their belief in a lack of meaningful product differentiation. More troubling, I suspect that if we asked our questions just right, we’d find that many are indeed influenced by the pros- but that doesn’t translate into buying a branded deck.  Finally I’d expect to hear, “I support my local skate scene.” And that brings us to our next topic.
Blanks and Shop Decks
Let’s define a blank as a skate board either with no graphics at all or with graphics with absolutely no legitimate connection to skateboarding. There will always be a market for both. Some percentage of the market, especially lacking any real or perceived product differentiation, will always want to buy the cheapest thing they can. It’s true in any market. And somebody will always supply it.
I’d like to say that again- If the customer wants it, somebody will always supply it. Lacking a change in skater perception and motivation, every store and shop that stops selling blanks creates an opportunity for somebody who does sell them.
The non branded board with graphics has been the province of the larger chains and sporting goods stores, often as completes. There’s no possible reason for a “real” skate retailer to carry them, if only because they’d make more money on their shop decks as well as promoting their shop. They are going to be around, and I imagine the quality has improved.
Shop decks, though, are a different story. What I hear, and what I suspect is often true, is that a shop deck, in a good shop’s neighborhood, is essentially a lower priced substitute for the traditional branded product. It offers a certain customer the same sense of legitimacy, belonging, and connection to skating and the skate culture that they use to get from the branded pro deck. And it’s cheaper. And shops make good money on them. I wonder how many shops put out their own pro models. Shop decks are not going to disappear. In fact, they may get stronger. And as I said, I don’t think the success of shop decks is just a price issue.
Maybe, with the right technology and promotion by the brands, shop decks can become the entry level boards.
It would be interesting to collect some good information on sales of shop versus blank decks as I’ve defined them. They really are separate categories, but they’ve been lumped together.
The Role of the Pro
I suspect there are some people who feel no need to collect any data on buyer motivation. They believe they already know the answer they’ll get back. In Under Fire, most of the brands say their companies are rider driven, or words to that affect. Always have been, always will be. That’s a valid statement of principal, but it may not be an adequate basis for a business, judging from the decline in the sale of full price branded decks.
I would not try to push a comparison between snowboarding and skateboarding too far. But I will point out that snowboarding use to have a pile of pros and sell lots of pro decks. Once the industry matured, that started to decline until today, the number of pro snowboards sold is vanishingly small.
That doesn’t mean that the pros don’t still influence snowboarders. But what the snow board brands finally figured out was that the best pros were worth whatever you had to pay them. The ones that you just flowed product to and maybe offered contest and photo incentives were influential at their local scene. All the riders in the middle? Not worth what they cost was the decision, and they are gone.
By the way, my definition of the best pro is not just the one who’s the best skater. It’s also the one who’s personable, responsible, professional, and shows up on time.
The other things that happened, in surf especially, is that the apparel and footwear companies picked up most of the team/pro sponsorship and other marketing expenses.
Is this how skateboarding will evolve? I don’t know. Skate hard goods companies have historically been the bedrock of skate boarding.   Certainly shoe and apparel companies are spending plenty of money supporting skateboarding.
So here’s the marketing matrix. Some skaters are influenced by the pros and buy pro decks. Some are influenced and buy the pro’s brand. Some are influenced, but still buy what’s cheap, maybe spending their money on shoes and clothing again. Some are influenced and would like to buy the pro deck but can’t afford it. Some don’t give a shit and buy whatever is cheapest as long as they perceive the quality is equivalent.
Well, we’re back to buyer motivation. Let’s talk to those few hundred skaters and figure out just where the industry (and individual companies) should be spending its advertising and promotional dollars.
Distribution
Everybody gets together to discuss distribution, tries to blame the other guy for the so called mess, and nothing changes. I’ve seen it too often, and I’m not talking just about skateboarding. Anybody who runs a company in the action sports business sits at their desk and ponders distribution every day. They know who they can absolutely sell to. They know who they should definitely not sell to right now. They try and figure out when and what and how much they can sell to all the accounts that don’t fit neatly in the “sell” or “don’t sell” categories. They ask themselves, “What will other accounts think? How will it impact the brand? How much money can I make? What’s the potential for growth? Is it consistent with my brand’s market position and brand strategy?”
So distribution evolves as companies grow and brands change. It just does. There is no mess. There’s just normal industry/brand/retailer evolution. Do what’s right for your business given this inevitable fact. Don’t look for somebody to blame, and don’t wait for it to be fixed.
Industry Evolution
Industries change. They just do. Companies adapt or die.  The customer always gets what they want. You can influence them, but not always as much as you’d like. An industry succeeds when the companies that make it up compete. Part of that competition is always innovation. Some do well, some don’t. But the industry itself progresses; sometimes kicking and screaming, but it progresses. I guarantee that every company will do what it perceives to be in its own best interest.
I went to the Park and Recreation Convention here in Seattle last October. Basically this is the convention of people who sell stuff to playgrounds, and I can only say that I wish I was a kid again. Lots of cool stuff that’s beyond what I could have imagined when I was of an age to use it.
I saw Per Welinder from Blitz there, manning the IASC booth and promoting skate parks. I walked around a corner and came face to face with Beau Brown, formerly of Sole Tech and now COO of Radius 8, a seller of portable skate ramps. His face was all aglow from the huge number of business opportunities he thought he had at the show. As we talked, a guy from some municipality came up and, apparently amazed to learn that portable ramps existed, asked how quickly he could get some. He guessed at the price, kind of suggesting that one might cost $3,000 as I recall. Beau, who seems to have a nasty ethical streak he needs to get over, told him that no, the one he was looking at was only $300. The guy scurried away to get his boss.