Make Love, Not War; Blanks and the Park and Recreation Convention. What’s a Skate Brand to Do?

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First time I’ve ever had two subtitles. That must be meaningful. Either I’ve been thinking a lot about this, or I’ve got nothing to say and am desperate to use up space. I suppose each reader will decide which it is.

 Not long after I read Cullen Poythress’s article “The War on Blanks” in the September issues of this publication, I went to the Park and Recreation Convention here in Seattle. 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.
 
Anyway I know this article is about something besides vignettes from a trade show. I guess I’ve got to go back to Cullen’s article to get to it.
 
I thought it was a good article. Balanced, dispassionate, and talking about an important issue. I would have liked to see some numbers comparing costs, prices and margins on blanks and branded decks, but that was really my only criticism of the article. And I agreed that the brands are critical to building and supporting skating and that blanks undercut their financial ability to do that.
 
I talked to some other business people in the industry who seemed to share my perspective, and were as surprised as I was by the outpouring of concern and criticism the article engendered. That got me thinking and the convention helped that thinking to jell.
 
What would I do if I was running a skate brand?
 
Congratulations!
 
First thing I’d do is recognize that I’d had something to do with skateboarding having broken through and becoming a growing, recognized, and broadly accepted activity. I’d made some money, had some fun, and did it while being involved in something I loved. I’d helped position skateboarding so it probably wasn’t in danger of disappearing like it nearly has before.
 
Good stuff.
 
But after the sweet glow of success had worn off, I’d recognize that the “good old days” weren’t likely to come back, that blanks would be here to stay as long as skaters wanted to buy them, that hard good brand have had a hard time being successful in shoes or apparel (Fallen and Element are the exceptions I can think of), and that the financial model in the “core” part of market, where most hard goods brands are positioned, has gotten tough.
 
And that’s bad stuff.
 
But you know, it’s just business. And when an industry evolves, as it always does, the question isn’t usually how do you turn back the clock, but how you react to the new circumstances to make your business successful. I’ve got a couple of ideas. Maybe not the best ones, and certainly not the only ones, but you got to start somewhere.
 
New Areas of Focus
 
In 1995 I wrote in TransWorld Snowboarding Business (May it rest in peace) that it was time for every serious snowboard brand to hire a Director of Resort Relations. In what can only be characterized as a flash of brilliant insight I said, “Uh, don’t a lot of people snowboard at resorts? Maybe you should be doing something with the people who run them.”
 
I know that people do an awful lot of skating at places other than skate parks. I wouldn’t begin to try and estimate how much skating is done where. Still, the skate industry is doing everything it can to support the improvement and growth of skate parks. There must be some business opportunities there.
 
How about appointing a Director of Skate Park Relations? That person might start by identifying the 100 most important skate parks in the country. Find somebody who regularly skates each park. Make him/her your representative. They get free equipment and a commission on anything they sell at the park. I’ll bet you’d find a few who would really shine. They might find kids they know who would take responsibility for smaller parks in their area. Hell, pretty soon you’d have the Amway of skateboarding going on.
 
Consider creating a Director of Park and Recreation Commissions Relations. Visit the people who run them. Find out their level of commitment and plans for skating. See how you can help them. Help them make good buying decisions. Offer to sell them some decks co branded between your brand and the new park. Call Microsoft and see if they’d pay to have the Xbox logo on the bottom of a skate bowl, and keep a piece of the action while helping the Commission pay for part of the cost of the park.
 
I have no idea what opportunities there might actually be, but I bet 20 meetings with different Park and Recreation Commissions would turn some up. It’s worth a try. If you’re already doing it, never mind.
 
Improving Brand Positioning
 
It’s all about your brand. At the end of day, still lacking any meaningful product differentiation as perceived by consumers, your brand is all you have. Skate companies may be well positioned in the core skate market. But I think that market is a shrinking percentage of the total skate market as I would define it.   Taking advantage of skate’s growing, and more diffused, audience requires you to expand your market positioning.
 
The people who skate, or who just like skate, but are outside the core market need to know who you are and understand why you are credible. How do you do that? Depends on your brand. I’d suggest you start by studying other companies who have done it. How does Reef manage to sell its sandals at Nordstrom and still be a core surf company? Why can Burton sell its hard goods almost anywhere and still be so credible in snowboarding? What’s Volcom’s plan for expanding its very successful franchise without losing its core credibility? How do the skate shoe brands do it?
 
Now if somebody was to say, “It’s not the same. Skate is different,” I’d probably agree with you but with two caveats.
 
First, it’s never the same. Nobody’s business model is ever exactly the same as your’s and soft goods are different from hard goods. But these companies have made, or all still making I guess, a transition that skate companies probably need to make. So you might think about how they’ve done it.
 
Second, skate is different, and that’s part of the problem.   It’s different enough that it’s impeding the ability of brands to break into the wider skate market. Over twenty plus years, skate brands have made an implicit decision to stick to the core market. For the longest time, there wasn’t much to decide because that was the whole market. Now it’s not, and there are two choices.
 
You can stick to the core market and figure out ways to get skaters to buy more branded product. Or you can do what other successful action sports brands have done and expand your brand’s recognition and franchise to the larger market you’ve helped create. Any skate brand that was able to do that could be successful in the soft goods market. The Tony Hawk brand comes to mind.   
 
If you study the action sports brands that have made the transition to the broader market, the first thing you will notice is that none of them did it quickly. They were all around years before it happened. At some point in the action sports business, when you’ve been around five years or maybe longer, it’s suddenly possible for you to expand your distribution without losing your credibility with your historical customer base. Skate brands mostly qualify from this point of view and then some and that’s good news.
 
I was talking to Jamie Stone at TransWorld on another subject and he had what I thought was a good idea about building skate brands. Jamie’s concern was that pro graphics were changing too quickly. There was never a chance for the skater to build a bond among the brand, the skater, and the graphic. “What if the graphic lasted a year?” Jamie asked. “Then wouldn’t you have a chance to build a marketing campaign around it?”
 
Good question. It reminds me a bit of when the snowboard companies kept expanding their lines in response to what their competition was doing. They were focused on their competitors- not their customers.     
 
I hope there’s a strategy that reverses or at least halts the rise of blanks and shop decks. I know the industry is working hard to find one. But I came out of the Parks and Recreation Convention blown away with the new opportunities there can be for skate brands. Think about it. And go to that convention next year.

 

 

The Relationship Between Marketing and Business Risk; Do One and Reduce the Other

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Have you ever noticed how often the group of people who create ads, run promotions, and manage sponsorships are called the marketing department? That’s always struck me as kind of odd. I think marketing is the process of figuring out who your customer is, or can be, and why they buy your product. Advertising and promotion are the tactics you use to reach and attract those customers after you’ve reached some decisions about your customer based on your marketing.

I suppose it’s so obvious it shouldn’t have to be said, but if your advertising and promotion isn’t based on solid marketing you can spend a lot of money and damage the only real asset you have in this business- your image. We’ve all seen retailers and brands do it.
 
The thesis of this article is that good marketing reduces business risk and the perception of business risk, perhaps helping you to think in a way that facilitates recognizing new customers and markets.  It’s critical if you’re shop or brand is going to stand out in a crowded and highly competitive market.
 
The Status Quo and Its Downside  
 
 Right now, in this industry, everybody pretty much does the same advertising and promotion stuff. You all know what’s on the list of the ways we compete and I won’t bother repeating it here. I recognize that sometimes somebody’s ad is cooler than somebody else’s, or a particular team rider breaks out from the crowd for some period of time. But at the end of the day if we’re all doing the same stuff, and our products are more or less all the same, how do you, as a shop or a brand, break out from the crowd?
 
Answer- you don’t. If you’re doing the same as everybody else, and your product is no better, the best you can do is to be as good as they are. The exception, of course, is that you can do more of what all the others are doing. It may not be better or different, but it has an impact. But to do more, you have to have more- dollars that is. Then it’s only the big guys who win.
 
It probably hasn’t escaped your attention that the big are getting bigger and controlling more and more of the market. I’m suggesting that’s inevitable- in any industry- if, lacking solid marketing, the only basis for doing better over the long term is to spend more on advertising and promotion and cut prices. That tendency is exacerbated by the fact that it’s the larger businesses that are most likely to really do good marketing.
 
The Perception of Risk
 
I suppose this article had its genesis over a year ago when I talked to Santa Monica based ZJ Boarding House co-owner Todd Roberts at ASR. In the course of talking about a whole bunch of stuff, we got around to the ongoing travails of smaller retailers and what they needed to do. Todd said, “Jeff, you can’t be afraid to take some risks.”
 
I thought he was right. Still do. But at the time, I didn’t know where to go with it. It didn’t seem useful to say, “Take more risks!” unless I could explain why the risk was worth the potential payback and how it could be controlled.
 
Still, it seemed an important point, so I put it in whatever the part of my brain it is that holds ideas to be thought about and addressed later. It recently popped out more fully formed.
 
In helping businesses in this industry manage transitions, I’ve known for a long time that we all, including me, like to do what we’re comfortable with and have done successfully in the past. It’s human nature. So we go with the flow in running our businesses, following the annual schedule for developing ads, sponsoring events, attending trade shows and all the other stuff. It feels low risk, doesn’t it? That’s because it’s what we’ve always done.
 
Conversely, from time to time, really new ideas for advertising and promotion come across our desks. But they don’t fit our frame of reference. There isn’t a place for them in the annual advertising and promotion schedule. Other companies aren’t doing them. Doing the new things seems risky. Doing the same old stuff doesn’t.
 
Granted, it’s also a matter of available funds. It’s much less risky to do something new when you don’t have to cut out something old to try it. Another advantage to bigger companies with strong balance sheets.
 
We tend to perceive low risk in doing what we’ve always done. We perceive higher risk in doing new things. I think it’s the other way around. Industry conditions and the difficult competitive environment require that you do some of these new things if you are going to succeed. If you don’t, you have no opportunity to be better than anybody else.
 
And that gets us to marketing as a competitive tool, a money saver, and a way to fix your perceptual problems.
 
Doing Marketing
 
Sometimes I just have good karma. I’d been working on a talk I had agreed to give on how we compete as an industry and how we can do it better. Before I finished preparing, I flew off to ASR. I walked into the room late, but managed to hear most of Mikke Pierson’s (the other co-owner of ZJ Boarding House) talk on how to utilize your data base effectively. I know this article is turning into a damned ZJ Boarding House promotional piece, but sometimes you just have to go with the flow.
 
So here I am, thinking about how the industry competes, why brands and shops need to take some risks, and why they often seem reluctant to do it. Having managed to put off my article deadline until after ASR, I was getting desperate for a good way to tie this all together in the real world.
 
And Mikke saved my ass.
 
To make a longer story short, he said, “We spent $4,000 with Customers First to clean up our mailing list and plot our customers on a map so we knew where they were coming from. We did our usual promotional mailing at a cost of $16,000 and it generated $135,000 worth of business. The cost of doing the mailing was a whole lot lower because we knew who we were mailing to and why. We didn’t have to pay the post office for returns, and we didn’t waste money on duplicates, people who weren’t interested, or who were too far away to come to the store.”
 
The $4,000 spent with Customers First is real marketing. And I want you to notice the following things.
 
  • It wasn’t some esoteric, company wide, long term, epic undertaking that produced a ream of data that nobody knew what to do with. It was practical, cheap, quick, and the return was immediate and measurable.
 
  • It reduced risk. They knew much better who they were doing a mailing to and why. Maybe just as importantly, it also reduced the perception of risk.
 
  • It generated additional sales- quickly.
 
  • It didn’t cost them money- it saved them money.
 
  • It wasn’t some change of direction, risk the company strategy. It was a fairly minimal, common sense sort of thing. If it hadn’t worked out they would have been out $4,000 and a little time and would have learned something.
 
  • It focused on their customers- not on their competitors and not on the industry.
 
What I said I was trying to do at the start of this article was demonstrate the relationship between marketing and business risk. The relationship is both perceptual and practical. Good marketing reduces your business risk. It also reduces the perceived risk because your actions and decisions are based on good data. That means you are more willing to try some new things.
 
And I don’t think you have much choice. Focus on your end customer and why they buy from you. Think of a dozen questions you’d like to have answers for and how those answers would make it easier to reach those customers. Answer just one and see what you can do with the information. The risk of not trying is just too big. Like Walt Disney said, “You don’t build it for yourself. You know what the people want and you build it for them.”

What Forward Thinking Retailers are Doing: Trends That Probably Won’t Surprise Anybody

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The issues that smaller retailers are facing haven’t changed much. There are too many retail stores, pressure from chains, brand stores and big boxes, a tough financial model, the challenge of keeping margins up, lack of product differentiation, increasing costs, over distribution.

 
That’s a cheery environment, isn’t it? You’ve got a choice. You can bemoan the unfairness of it all or you can take advantage of this tough environment that’s putting a lot of pressure on your competitors and do some things to stand out and that help you address these issues.
 
Here’s what I’m seeing successful retailers doing.
 
One- They Are Growing
 
Higher costs, more competition and margin pressure, too much similar product in too many places means that you need more revenue to make it. This seems so non controversial as to make this a really short section. It’s basically an equation; a fact. It just is.  But I’ve put it first because it’s the ultimate motivating factor for the other actions I discuss below. You have to make a profit if you expect to be around very long.
 
Two- Making Themselves Important to Their Brands
 
How does a shop do this exactly? Well, for a start, it pays its bills to the brand on time. It’s absolutely honest with the brand’s sales reps and management. It merchandises the brand well. It includes the brand in its own promotions. It provides feedback (good and bad) on what’s selling, why, and on trends it sees emerging. It does not abuse the brand’s warranty and return policy. And finally it does not let the brand talk it into buying products it doesn’t think will sell well or order sizes it doesn’t think it can move. As we all know, the season end conversations such moves engender are not helpful in building a relationship.
 
It may have occurred to you that growing (point one) contributes to making a shop important to the brand (point two). Could be a trend emerging here.
 
Three- Gives Credibility to the Brands They Carry
 
The best shops are the ones the brands just have to be in. The shop gives the brand credibility- not the other way around. Any brand carried by the shop is, by definition, credible. For a shop this can translate into flexibility in your relationship with the brand. That may mean, among other things, better terms and conditions, priority in new product and shipping, patience from the brand if you hit a rough spot, support for your community based activities, faster and more positive response from management, and more ability to pick the products and categories you carry. Obviously, it’s kind of a subset to point two above. However, I chose to separate it because at the extreme, when a shop really does this well, there is pretty much no brand they absolutely have to carry to be successful. And that ties in with……………….
 
Four- Expanding Their Circle of Influence
 
When it’s the shop that gives the brand credibility it’s because the shop has become acknowledged as an arbiter of trends and technical product attributes. They are a destination store for their customers. They are part of their community, but of course the definition of that community has changed. It no longer means just the geographic community, but a community of people with shared interests and lifestyles.
 
A customer’s awareness of an established brand is typically the result of that brand’s advertising and promotion programs. Those programs may have a lot to do with getting the customer into the store. But the decision to purchase that brand, in a shop with this kind of stature, can be heavily influenced by the experienced and knowledgeable sales people. You can hear the conversation in your head- “Brand X is a great brand and that deck would certainly work for you, but here’s a couple of others you might consider based on what you’ve told me about your style and level of experience.”
 
And that product, whatever it is, doesn’t necessarily have to be one the customer has ever heard of. If it’s in this store, it must be good. Kind of frustrating to a big brand, I suppose, to think that all their work advertising and promoting their brand and getting the customer into the shop turned out to be a chance for the sales person to sell a brand the customer has hardly heard of.
 
On the other hand, it might give hope to smaller, new brands. The support of shops like this ideal type shop I’m describing may be the best chance such brands have to prove themselves.
 
Five- Buying Together
 
I can’t tell you this is a wide spread trend, but I did have a conversation with one European retailer who was very happy with the result. He was a specialty shop in, I think, Southern Austria. He was practically chortling as he explained to me the happy circumstance he found himself in as part of an 11 store buying group. You see, it happens that the other ten stores were all in Northern Austria. So while all eleven stores got the benefit of better prices from buying together, the ten in the north suffered from the possible disadvantage of all having the same product. He, happily segregated in the south of the country, didn’t have to worry about that. No wondered he positively glowed as he described the scheme.
 
Of course, if you’re getting better pricing through some cooperative buying, maybe the pressure for growth (point one) declines a bit, and lord knows you’re becoming more important to the brands (point two). Maybe not more popular, but more important.
 
Interestingly, my advice to brands has always been, “Europe is different from the US. You can’t think of Europe as one market. You can’t even think of Germany as one market.”
 
That’s still good advice, and I expected it to apply to specialty retailers as well. I thought retail in Europe would be “different” from retail in the US. Imagine my surprise when, in the two years I just spent in Europe, I discovered that it really wasn’t- at least not in terms of the challenges European retailers were facing.
 
 Wow- wherever you go, there you’ll be.
 
By which I mean Europe seems to have the same damned problems we have, and I suppose if we can take any comfort from that it’s because it means we here in the US haven’t done anything egregiously stupid that Europe somehow avoided.
 
Finally- Taking Risks, But Not Really
 
I hope I’ve made the point that these five operational imperatives, to coin a really pompous sounding phrase, don’t stand in isolation from each other. Nor do they stand in isolation from the specialty shop’s retail environment I briefly described at the start of this article. There are as many tactics as you are clever enough to think of that you can try to move your shop towards the market position I’ve described.
 
I’ve talked to lots of retailers who were cautious about trying them. They cost “too much,” had never been tried before, there wasn’t time to do them, etc. In a word, they were risky.
 
And you know what? They are risky- especially if you try and implement them on a piece meal basis. It might even be true that it would be a waste of time.
 
What I’ve tried to demonstrate in this article is that the operational imperatives are related to each other and in fact support each other. Each of them is comprised of a group of tactics that each shop needs to identify based on its particular circumstances. There is a certain momentum you build as you support a tactic from one imperative with a tactic from another. You don’t increase risk by doing more- I think you reduce it.
 
Or look at it another way; If you agree that you got to have a financial model that makes sense, and you are struggling with your current one, and you agree that your business environment isn’t getting any easier and calls for some change, then even if there is some risk here, isn’t it less risk than doing nothing?
 
I’m going to use a word here I usually avoid because (at least for me) it frequently engenders serious confusion about what it means accompanied by a sense that it’s futile to try and figure it out and implement it. The word is strategy.
 
But of course we’re all following one even if we don’t know what it is, speaking of risk taking. And if, like me, you’re just a bit intimidated by “strategy” because you’re not quite clear what the hell it is, maybe we can get some clarity by just considering it a bunch of related tactics.
 
My five operational imperatives, or rather the tactics that would make them up, are a strategy to deal with the existing retail environment. You don’t have to say, “It’s time for a new strategy,” but you might consider picking some appropriate tactics for each operational imperative and start doing them. Might be fun, probably wouldn’t cost much, you might find that the results are cumulative and often quick to see, and there’s not much risk involves. Your business environment requires you give it a shot.

 

 

The Last Intrawest Annual Report: One Benefit of Being Bought

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I’ve always admired Intrawest’s ability to combine and coordinate its real estate activities with the development and management of its mountain resorts. It always seemed like they managed to choreograph the two to maximize the value of both. That didn’t mean, however, that I looked forward to reading their annual  Form 40-F filing with Security and Exchange Commission and now that they are about to be acquired by Fortress Investment Group (probably a done deal by the time you read this) I guess I won’t have to do it any more.

 
But I’m a sentimental kind of guy. Just for old time’s sake, I decided to slog through the last one when it came out. And as long as I was being sentimental, I thought I might as well try and figure out exactly why Intrawest decided to sell to Fortress.
 
This all began with a February 28, 2006 press release in which Intrawest announced “…that it had initiated a review of strategic options available to the company for enhancing shareholder value…” Intrawest Chairman Joe Houssian is quoted as saying, “It makes sense for us at this time to evaluate all of the different ways in which we can capitalize on the opportunities in front of us for the benefit of shareholders, and to ensure that we have the bets possible capital structure in place.” Here’s a link to the Intrawest site where you can click through to see the press release: http://www.integratir.com/newsrelease.asp?ticker=IDR
 
Okay, well enhancing shareholder value is a fine thing. Who could argue? But my question was why they thought they had to go through this process to do it. Couldn’t they just run the business themselves? Did they need more capital than they could raise on their own? Were they concerned about softness in the real estate market? Did the diversification of their business (only 32% of revenue now comes from mountain operations) require a different kind of support? The release didn’t say.
 
By way of background, Intrawest went public in June of 1997 at $16.75 a share. The stock bounced around for some years, closing at $18.94 at the end of September, 2004. From there, it moved up smartly, closing at a high of $37.60 the week of May 5, 2006. It then reversed course and went down for eleven of the next thirteen weeks, closing at $26.70 the week ending August 4th. Then the sale of the company was announced and the stock rocketed up to $34.50 ($35.00 a share is the purchase price) and has stayed near that price since.
 
The June 30, 2006 balance sheet is hardly changed from the previous year and the changes are positive. Total assets are almost identical, while liabilities are down and equity is up.
 
Net income rose from $33 to $115 million. The contributions from resort and travel operations fell 11% to $89 million. Management services contribution fell 14% to $37 million. The real estate contribution, however, more than doubled to $143 million. That component of Intrawest’s income can swing around a lot from year to year. I guess it’s normal for that business, but it makes year to year comparisons a little difficult.
 
I thought a telling section of their Form 40-F was the section called “General Development of the Business. It listed what they consider to be “key developments” during the last three fiscal years. There were thirteen accomplishments listed and every single one of them was raised money, sold this, bought that, refinanced this, retired that debt, started our review of strategic options. No doubt these were key developments, but I thought it was interesting that not a one was focused on running and improving the core business operations. I mean, they must have done some good things in those areas. They’ve been doing them for years. 
 
You read the press releases, scour the documents, and listen to the conference call. You still don’t get a specific and satisfying explanation for why Intrawest sold.
 
But if you go to the web site of the Fortress Investment group (http://www.fortressinv.com/) and spend just a few minutes reading about it, you will learn that they are a large, diversified organization with access to capital and the ability support companies in putting in place financial structures that allow those companies to take maximum advantage of their opportunities. Whatever Intrawest can accomplish on its own, it can do more with the support of Fortress. With the support of Fortress, management’s time won’t have to be focused on refinancing, buying, selling and restructuring. They can worry about running the business.
 
If you read a bit about Fortress, the apparent generalities which Intrawest used to explain the motivations for the transaction make a whole lot more sense.       

 

 

What’s Happening to Core Retailers? Things We Won’t Argue About- and What They Mean

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Not long ago, I finally came up with a definition of core retailer that I liked. I was really proud of it because it had taken me about 13 years to settle on one I thought was accurate and useful.

Now, not all that long after I accomplished that feat, I’m not sure it really matters. I’ve begun to be concerned that the traditional concept of core stores is of diminishing importance (or at least they are being treated like they are of diminishing importance), and changing that is what this article is about.
 
I’d been thinking about this for a while.   But there were three pieces of information that finally made me decide to tackle it even though I knew it might not be too popular a point of view. In my endearing naiveté, I think that what’s important is that you consider the business issue being raised regardless of whether you believe I’m right or wrong. 
 
The Three Pieces of Info
 
Anyway, the first piece of information was the announcement that VF Corporation, the owner of the Nautica, Lee, Jans Sport, Vans, Wrangler, Reef brands, and a whole lot of others for that matter, was planning to go from 600 to 1,200 retail stores over five years. I didn’t even know they had 600 retail stores.
 
The second was a Business Week online article that talked about brands opening their own stores as a “survival strategy” response to big department store chains having fewer store fronts due to consolidation and chains getting better and better at designing and selling their own higher margin private label brands.
 
These two pieces of information made me realize how wrong I’d been two years ago when I asked a panel of specialty retailers at the Surf Industry Conference what they were going to do when there were 5,000 company stores in the U.S. I should have said 10,000.
 
The third was reading through the prospectus for Zumiez’s very successful initial public stock offering and noting that the company’s gross margin for its last complete fiscal year was 32.8 percent. Pac Sun’s, by way of comparison, was 36.4 percent. Both are doing a fabulous job and they do it with a gross margin that would put a traditional specialty retailer out of business in about 20 minutes. Don’t like Zumiez or Pac Sun for whatever archaic, incestuous action sports reason? Get over it. Their many customers like them and that’s what matters.
 
The Things We Won’t Argue About
 
So small core shops can not sell the same product as specialty chains at anywhere near the same gross margin and expect to survive. That’s the first thing in this article that I don’t think anybody can argue with.
 
Just for clarification, when I say “small core shop,” I don’t mean the guy with five store fronts or with one store doing $6 million annually. It’s not like it’s a walk in the park, but they can do well or even prosper. The second thing we can agree on is that there are fewer of these small core shops than there use to be. A lot fewer I think. I wish I had numbers on that. And no, I don’t know how many store fronts you have to have before you become a chain.
 
The third thing I don’t think anybody will argue with is that fewer brands are accounting for a larger percentage of total sales. Next is that these brands all want to grow. How’s that for a blinding glimpse of the obvious? And I don’t think I’ll get much disagreement if I suggest they are very interested in the broader lifestyle market as the major source of that growth- because after a certain size, that’s the place much of it has to come from.
 
The Brands’ Perspective
 
Given these “things we won’t argue about,” what might the motivations of larger brands be. How might the specialty stores fit into their plans?
 
The law of large numbers tells us that it gets tougher and tougher to get big percentage growth as your base starting number gets bigger and bigger. What that means is that even if a larger brand gets good increases from core retailers, it just won’t move the revenue or profit numbers as much as it use to. If you just talk about the small core retailers, it moves those number even less- perhaps not enough to really matter? I suppose, though you may be getting tired of my saying this, that that’s another thing we won’t argue about.
 
From a strict financial point of view, then, I can imagine that the larger a brand gets, the less it is focused on the core shops- especially the smaller ones. Most brands believe, I think, that core shops still have an important role to play in developing new brands, identifying industry trends, creating excitement, building the foundations of the sport, and defining the lifestyle. They want them to succeed. 
 
But there’s all this qualitative stuff and then there’s the sales manager sitting there with a budgeted sales increase she really needs to make. And the larger the company, the bigger the number in dollars. Where’s it easier to find those additional sales dollars? From a bunch of small shops or from one chain of 50, or 500, stores?
 
The sales and marketing people recognize the importance of the qualitative factors in establishing their competitive position and keeping on top of the market. Maybe the brands with their own stores think they can get some of the same kind of input through those stores that they can get through core shops. I don’t happen to think that’s true.
 
If I were a larger brand, I’d select, let’s say, 50 shops in Europe that are established, well run, influential, and on top of their market and its trends. We’d all probably pretty much pick the same shops for that select list.  Maybe it’s shorter than fifty. The greater your presence in those shops the better. I’d make sure my brand was well represented in those shops even to the extent of making some deals I would not necessarily make with a shop that’s not on my list. I’d utilize my relationships with those shops to gather much of my core market and retail trends information.
 
If your brand’s sales increases are less likely to come from smaller core shops, your customer base is increasingly broader than those that they appeal to, you believe you can get the marketing and trend information you need from a smaller, select group of shops and the dangers of broader distribution have declined dramatically, where would you focus your time and effort? I know where I’d focus mine.
 
The Good News
 
Maybe I should have started with this section so small shop owners weren’t rushing to their doctors for lithium prescriptions for depression by the time they got here. 
 
There’s no advice leading to a miracle fix here. Hard goods are tough, shop owners need to run their shops like businesses, margin and competitive pressure is real, and your revenue level needs to be higher than it use to be for you to have a viable financial model.
 
But I want you, on the other hand, to consider the size of the potential market out there and all the people who want cool shoes and clothing but aren’t ever going to buy a skate board. My god, it’s huge. If it wasn’t, frankly, you wouldn’t have these problems- or these opportunities.
 
Do what I do from time to time- wander into a shop in a chain you think is doing a good job. Not for a five minute walk through. Talk to the sales people. Engage the manager in a discussion about how they do things and why. Look at their layouts and their use of wall space. Watch who their customers are. Make some notes about their pricing. Rigorously compare what you carry with what they carry. I do this to gain information (not often enough) without saying I’m writing an article or making an appointment or anything. I just engage whoever’s around in a conversation about the store and the industry.
 
Who on your list of the absolutely best shops is in your area? Go visit them and do the same as with the stores above. How come the biggest brands are so focused on those stores? It goes beyond sales volume I think you will find. Ask the owners, who will probably be willing to talk to you if you call them in advance and if you aren’t too direct a competitor, how come they are so successful.
 
Look, you do have a certain level of legitimacy that the chains don’t have and there’s a huge potential market out there. You can go after your piece of it without losing your vibe, or coolness, or whatever the word is to explain your distinctiveness. In fact, you have too. It may look risky, but consider the alternative. Do what you have to do to be one of the stores that major brands feel they just have to be in.

 

 

Margins- Percentages and Dollars; Where to Focus?

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I always looked first at gross margin percentages when I was running a business. Before revenue, before anything. Because those percentages were what determined how many dollars I had to pay all the salaries and operating expenses. Higher had to be better. It just had to be.

 
Except that I was never dealing with major price differences in nearly identical products when I did my analysis. And I think maybe that changes the calculation for skate hard goods. Let’s see.
 
One Shop’s Numbers
 
I called a shop. It’s not just a skate shop- it does snow too. I talked to one of the guys who runs it and he gave me some rough numbers off the top of his head (You know who you are- thanks!).
 
They sell two to three hundred branded decks a year. They charge $50 to $55 for each one (more than some shops I think) with grip tape. Those decks each cost them a bit north of $30 each, he estimated. Let’s say $32.00.
 
They also sell around 500 blanks a year. Those sell for $30.00 each with grip tape, and cost them around $16.00.
 
If they sell branded decks for $53.00 each, and sell 250 of them, then their annual revenue from those decks, according to my antique but trusty Hewlett Packard HP22 financial calculator is $13,250. Their gross margin percentage is 40. Their total margin dollars earned on each branded deck is $21. The total margin dollars earned after they sell all 250 is $5,250.00. The total cost is $8,000.
 
Now let’s take a look at those 500 blank decks in the same way.
 
The first uncomfortable but unavoidable fact, of course, is that the shop is selling twice the number of blank decks as branded.   Two-thirds of this shop’s skate deck buyers think that a branded deck is not worth $23.00 more than a blank. Or they think it’s worth it, but can’t afford it.
 
Companies who are cutting their prices on branded product better hope it’s the later, and they better hope their brands are “cool” and they better hope they can earn at least the same number of margin dollars to afford the programs that keep or make a brand cool.
 
I’ll leave it to all your arbiters of coolness and fashion to figure out which brands are cool. Hell, I buy most of my jeans at Costco. I’m so uncool I’m even willing to admit it.
 
But I digress. That’s too kind a term, actually. I’m wandering around in the wilderness here, and better get back to the 500 blank decks the shop is selling.
 
So anyway, they’re selling these 500 blank decks at $30.00 a pop and getting revenue of $15,000 annually. That’s more than from the branded decks. The gross margin percentage is 47 percent. Total gross margin dollars earned is $7,000. Total cost of these inventory decks is $8,000- the same as for the branded decks.
 
I swear to god that I didn’t figure out these percentages and stuff in advance to make a point. I did it as I wrote it, unclear what I was going to come up with and what it would suggest. Much as I hate struggling to create a table, I think this is worth while one. I’ll leave it to the poor layout people at TransWorld to make it legible.
 
 
 
Branded
Blanks
Number Sold
250
500
Selling Price
$53
$30
Cost
$32
$16
Total Revenue
$13,250
$15,000
Total Cost
$8,000
$8,000
Gross Margin Percentage
40%
47%
Total Margin Dollars
$5,250
$7,000
  
 
A Little Analysis
 
There are a couple of caveats to this. First, I didn’t specifically include the grip tape. As both branded and blanks include it, I don’t think it changes the analysis. Second, different stores have different costs, selling prices, and mixes of branded and blank decks. Change those things and you obviously are looking at different results. Which means, as will be clear when I discuss the implications of this below, that every shop should be using this table to take a look at their own numbers. Not just for decks, but for every product where there is a non-branded alternative.
 
At the risk of inflicting a blinding glimpse of the obvious on you, I’m going to point out some things that the table already makes very clear.
 
The total investment for the shop over a year of $8,000 is the same for both branded and blank decks. I’m pretty confident that having to handle twice as many blank as opposed to branded decks doesn’t increase the cost of selling the product. If you invest $8,000 in branded decks, you earn $5,250 in gross margin dollars. Invest the same $8,000 in blanks and you earn $7,000. From a strict financial point of view, which would you rather do? Which is the best use of your $8,000?
 
If it didn’t affect how their customer viewed the shop, if they didn’t recognize that what the brands do is critical to the popularity and growth of skating, if branded product wasn’t important in getting customers into the shop and if those customers didn’t buy stuff besides skate decks, then this shop would rather sell blanks than branded decks. The return on investment is just better. Thirty three percent better.
 
Those are a lot of ifs. Important ifs. In spite of what the raw, maybe oversimplified numbers show, there is no way, not even in a strictly financial sense, that shops can not be committed to carrying branded product. Without it, they just aren’t skate shops.
 
But that doesn’t mean you can ignore this analysis.
 
What’s To Do?
 
For this shop, at least, these are not big revenue numbers. But each shop has to do this analysis and, as I said above, not just for decks. There is no retailer out there who does not want to sell more of whatever makes them more money. At least, I hope there isn’t and if there is, they won’t be around long.
 
Financial considerations never exist in a vacuum. After you do this analysis for your shop you have to ask:
 
  • Does the customer who buys a blank buy as much other stuff as often as the customer who buys the branded deck?
  • Does the customer buying the blank replace their deck more often and, therefore come in the store more often?
 
If the answer to those two questions is clearly “no,” then what the retailer wants to do becomes quite clear. Looking at decks in isolation, you may earn more selling blanks compared to branded decks overall. But you earn more margin dollars selling each branded deck than on each blank ($22 compared to $14 in this case). And the customer who buys the branded deck spends more money on other stuff and comes at least as often as the customer who buys the blank if, in fact, the answer to these questions is no. You certainly don’t get rid of blanks, but under these circumstances you recognize the value, in a broader sense, of the customer who is committed to a brand or brands.
 
What is that value? I don’t know! Figure it out. Ask your sales people. Look at your sales journals and see what went out the door with the branded, as opposed to the blank deck. Surely your point of sale system allows you to track customers by phone number or something. This is an important thing to quantify. It is a strategic issue especially if you are concerned that hard goods prices may move down. 
 
If the answer to those two questions looks like it might be “yes,” then the role of branded product changes. You don’t have to try and carry as many graphics from as many brands as you can plaster the walls with. It’s not that you don’t want to carry and sell branded decks, but some part of that space may be better used to sell other products.
 
The shop referenced in this article sells twice the number of blank as branded decks. So the return on investment calculations, focusing on just the decks in isolation, favors the blanks. In a shop where the numbers were more equal, that would change. The gross margin percentage on the blanks would still be higher, but the total margin dollars earned would favor the branded product.
 
So what we have here is a situation where gross margin dollars may be more important than gross margin percentage.  I thought we might get to this point.  But then again, depending on product volume and customer buying behavior, it might not be.
 
Do the little table above for your shop wherever you have a branded and a blank product. Figure out the typical buying behavior for customers of branded versus blank product. You will make some better decisions that will make your shop more money.

 

 

Action Sports; Are We Still in That Business?

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Seems a silly question I suppose. Action sports are what we do. It’s what we’ve always done. It’s what we love. Our trade shows are more fun than anybody else’s. We get to take vacations and call them business expenses or, even better, product testing. Uh, not that I’ve ever done that, Mr. Tax Man, sir. But I’ve heard about it.

I’m not quite sure that’s the business we’re in any more. Or, to put it more precisely, I’m thinking that action sports is only part of our business. A smaller part for many of us. Maybe I’m just playing with words. “What’s in a name?” somebody once asked. Maybe a lot if that name determines how you think about who your competitors and customers are, how you need to do business, and the market where you position your product. Put like that, it’s a survival issue.
If you’re going to make money in this industry, you need to recognize how it has evolved and run your business accordingly. By reviewing that evolution, and talking about how you might redefine the business you’re in, I’m hoping some things you should be thinking about doing differently will become obvious. Or, at the very least, you can start to move in the direction of identifying those issues and opportunities.
Can It Be This Simple?
I thought this would be a nice easy article to write. Just sort of review some industry evolution. You know- how we use to sell mostly to participants and tended to be focused on a single sport, but now we’re selling across the sports, increasingly to non participants who just want to look good and maybe feel some connection to the lifestyle and account for the majority to most of our sales and even more of our profits. Then pronounce we’re in the fashion industry and be done.
Wouldn’t it have been great? “Wham! Bam! Thank you ma’am!” [good luck translators] and Boardsport Source would send me a check, and I could move onto my next project. But then I realized two things. First, that Boardsport Source pays by the word.  This was looking like a damn short article, and that wouldn’t do.
Second, and arguably more importantly, pronouncing that we are in the fashion business wasn’t much help to anybody. It was kind of like saying the goal of a business was making money. True, you need to do it, but it doesn’t say a thing about how to go about it.
So it appears I’m stuck at my computer a bit longer.
Still, my blazingly short description of our evolution as an industry- from participant to non participant as main customers and towards the fashion business- is generally accurate, though not adequate as I explain below.
Fashion Business- What’s That?
Are you thinking, “We all know what the fashion business is, so there’s no need to discuss it?” Well, you’re smarter than I am because I’ve decided I don’t quite know what it means, at least not in a useful way. Have you ever noticed that when the consensus is that “everybody knows,” you’ve probably got something worth digging into?
Here’s what I think characterizes the fashion business:
  • All product differentiation is created by advertising and promotion (branding) and design.
  • No functional product difference remains exclusive for long.
  • The fashion business is huge. The action sports business is tiny.
  • The fashion industry encourages product replacement. If we all wore our shoes and apparel as long as we reasonably could, the fashion industry would be a hell of a lot smaller than it is.
  • In a product we are encouraged to replace from season to season, function can become less important than form.
  • The customer base is no longer easily identified or segmented. Marketing (the process of figuring out who your customer is and why they buy from you) is critical. And challenging.
  • Your relationship with core participants is different. You want to sell to them, but they may be more important to you for the legitimacy and brand power they can give you with all the non participants who represent your biggest opportunity for growth.
If you think about these points, you may come to some of the same conclusions I came too. The one that sticks out like a day glow, skin tight orange/lime green ski suit on the slopes (Those aren’t fashionable again yet are they?) is that it is absolutely futile to say, “We’re in the fashion business,” because that business is too vast and varied and massive to tell you anything useful.
Which bring us to marketing.
Marketing- No Way to Avoid It.
 
Remember that we all use to be our customers. Market segmentation? If they boarded, they were a potential customer. If they didn’t they weren’t. Marketing done. It was easy, accurate and damn near perfect. It was seductive because it didn’t require any effort and didn’t generate any uncertainty.
Like an archeologist digging down through the layers of a civilization, we can find the remains of those days in some companies, where the people who manage the still critical advertising and promotions function continue to be called The Marketing Department. I have no idea why. If you accept my definition of marketing above, they don’t do any marketing. But somehow the name hangs on.
“What’s in a name?” I asked at the beginning of this article. Maybe a lot if you think you’re doing marketing, but what you’re really doing is running ads, supporting riders, and sponsoring contests. Lacking effective marketing, you have no way to judge if you’re running the right ads, supporting the right riders, and sponsoring the right contests.
If you agree with me that you’re now in the fashion business to some extent, your first job is to find out just what part you are in. You have to do some real marketing. You have to find out who your customers and potential customers are and why they buy from you.
Competitor Identification
As soon as you recognize you aren’t just in the action sports industry, but in some (clearly identified) segment of the fashion business as well, then the lists of companies you are competing against changes. Those non board sport participating customers that you are selling to are comparing your product to those of brands that have nothing to do with action sports.   Why might they buy your product? Why will a particular non skating customer buy Brand X of skate shoe rather than a Nike if they are just looking for a comfortable, casual shoe?
Obviously, if this wasn’t an issue skate shoe companies wouldn’t be making casual shoes less closely tied to actual skating.
So, you may have some different competitors. I wonder if those advertisements and promotions being churned out by your non marketing department are as relevant as they once were? You might wonder too. Are you spending all that money in the right place?
Then There’s the Customer
Just who is your customer? For most brands and retailers it’s not just core skaters, or surfers, or snowboarders anymore. It hasn’t been for quite a while. I think we’d all agree on that. If you want to grow your business to a serious size, there just aren’t enough of them around.
Look at your distribution and how it’s changed. There are a lot of clues about your customers there. Go ask your fifty largest customers to describe the person who buys your product. Don’t accept a vague answer. Work to collect some of that data if you don’t already have it.
Consider what you might learn. When you sell to a core participant, your customer tends to be  knowledgeable, function oriented, possibly less price sensitive, and knows about the competitor’s product. When you are selling to somebody who’s a lifestyle customers they are, well, not necessarily like that. They perceive themselves to have choice of brands beyond what the core customer may consider.
This has huge implications for how you advertise and promote your brand. Just as one example, the core customer may recognize and identify with specific sponsored riders and how they perform. The broader market “fashion” customer is less likely to recognize the rider or the trick, but may be attracted to their perception of that rider’s lifestyle and the places they go.
If that’s true should your ads be less technical? Does it change your choice of sponsored riders and how you compensate and present them? Etc.
For most brands and retailers, it’s no longer accurate to say only that, “We’re in the action sports business.” There’s an important and growing (maybe dominating) fashion component to your business, but describing your company as being, “In the fashion business” is too broad a statement to be useful, even though it’s true.
Chuck out the old habits. Recognize that your market is changing, and you have to do some work to figure out how and what that means. It’s no longer handed to you on a silver platter. And if you’re calling your Advertising and Promotions Department “Marketing,” will you please change that? You’re driving me crazy.

 

 

The Impact of Consolidation; Wasn’t That Over Years Ago?

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Yes. And no. The snowboard industry consolidation that started around 1995 or 96 could probably have better been called extermination. Literally hundreds of brands went away either because their founders got tired of losing money or because the Japanese stopped paying cash in advance for snowboards. Though there were exceptions, these brands didn’t get subsumed under the multi-brand umbrella of a large corporation. They just ceased to exist.

A Business Week article in September talked about the fact that prices on recent acquisitions of apparel makers have been at cash flow multiples 20% higher than what companies were purchased for just a few years ago. Some of the recent, richest deals have closed at multiples of cash flow that are twice what public apparel makers trade for. A graph in the article shows the value of mergers and acquisitions in the apparel sector were around US$ 6.5 billion in 2000 and are projected to be nearly US$ 40 billion in 2005.
 
Quiksilver has announced that it’s earning for the year ending October 31, 2006 are expected to be US$ 0.87 to US$ 0.88 cents a share. Analysts had been expecting US$ 0.98 per share. Earnings are expected to be US$ 0.86 to US$ 0.87 for the year ended October 31, 2005.    They said the integration of Rossignol, acquired in March, the strengthening of the dollar and higher interest expense were responsible for their projection of essentially no earnings per share growth in the coming year.
 
These two things got me thinking. Sometimes that leads to an article.
 
The 90s snowboard consolidation was largely confined to the small world of the snowboard industry itself. And as I said above, consolidation maybe wasn’t the right word for it. This consolidation is different. It’s not confined to snowboarding, or even to what we have called action sports. It’s taking place in the context of the much, much larger lifestyle/fashion/apparel (pick your favorite term) market. It’s big companies buying companies that we in action sports use to think of as big, but that are turning out to be small compared to the companies buying them and the markets the acquirers are in. Hurley bought by Nike, Quik bought DC and Rossignol, VF Corporation bought Vans, Addidas bought Salomon (and has now sold it to The Amer Group). I’ve forgotten all the brands K2 has bought. I don’t mean to suggest this is new, but I expect it to continue. It has ramification for brands and retailers.
 
Let’s see what they might be.
 
Stuck in the Middle
 
The conventional wisdom is that you either need to be a niche brand, or a big company with a low cost structure. If you’re stuck in the middle, you’re screwed. We could talk, I think, about how that may have changed or be changing due to the role of brands, how marketing has evolved, and the internet and the leveling of the information playing field, but that’s a topic for another day. For the moment, let’s go with the conventional wisdom.
 
We continue, thank god, to see the regular emergence of new action sports brands. Some of them get some traction in the market. We all know why. Committed snowboarders, for example, who think of snowboarding not just as a sport but a lifestyle are interested in buying brands different from the ones anybody could buy pretty much everywhere. I’d argue that this group of committed snowboarders, as a percentage of total snowboarders has shrunk, but it’s still a basis for a new brand to get a toehold.
 
I look at these companies as niche brands who, due to their small size, flexibility, limited availability, coolness factor, and cost structure control, have a way to compete. Remember when one of these brands ran the ad telling kids how to fake lift tickets or something like that? Boy were the resorts pissed off and you couldn’t hardly blame them. But it generated a lot of talk. Can you imagine a large snowboard brand with close ties to resorts using that kind of marketing?
 
At the other extreme are the big players. But if I try and list the big snowboard only companies (or the big surf only companies, or the big skate only companies) I end up with a damn short list. Not even Burton, even with the leading position in the snowboard market, is a snowboarding only company any more. Quik’s’ certainly not just surf with acquisition of Rossignol.
 
The big players are increasingly multisport, year around businesses with a significant and growing presence in the apparel/lifestyle market. K2 Corporation, Amer Sports, VF, Nike, Quiksilver come to mind. There are others you might name. I think the companies stuck in the middle are those with revenue of, oh, let’s say under $1 billion who don’t have defendable and competitive lifestyle/fashion/apparel brands.
 
Got your attention with that number did I? Good. That was the idea. Want to say $800 million? Okay with me. But whatever the number it’s at least one order of magnitude bigger than what we usually think about when we say “big” action sports companies.
 
The idea I want you to come away with is that many of the companies with the potential to be “stuck in the middle” are now much larger and the revenue range of such companies much wider. In this much larger market, you can be stuck in the middle at $25 million. Or at $400 million.
 
Remember action sports- especially in hard goods- is an industry where you have to do everything right just to be in the game. And, in contrast to how it use to be, doing everything right doesn’t give you a long term competitive advantage (I’m not sure there are any of those anymore unless they are related to brand)- it just gives you a chance to compete and make it to another season.
 
A further factor in catching companies in the middle is the squeeze on hard goods prices and margins that has resulted from wide distribution, lack of product differentiation, and the availability of cheaper, quality, manufacturing. Downward pressure on prices can mean less margin dollars even if the margin percentage remains the same. Nobody is immune to this.
 
So What?
 
Because of the encroachment on action sports of the lifestyle/fashion industry, and the fact that there seems to be more money to be made in soft rather than hard goods, companies in the middle face a tough competitive challenge. Much (most?) of their growth potential is in selling soft goods to the lifestyle market. But their competitors in that much larger market have resources and advantages that the pure action sports companies can’t even come close to matching. What can they do?
 
Well, they can sell. For many, that will be by far the best financial decision they can make. So we will see this continuing wave of consolidation. As usual, there will be those companies who will have been mismanaged and need to find a deal. But even solid companies, looking at their market position and circumstances, will rationally decide it’s time to sell.
 
They’ve grown steadily, are profitable, and respected in the core market. They are a trend leader with a serious cool factor. The next step in growth requires them to begin to expand their distribution into the broader market. Potentially, they may begin to erode their image. They will begin to run right into the much larger competitors who have them out resourced by ten to one. Even if they are successful, they may not have the working capital they need to follow through.
 
Typically it’s right at this point where the company’s value will never be higher. The Business Week article suggests that might be right now. It’s not easy to recognize, and there are damn few successful entrepreneurs who don’t think next year will be better than this year. But making a deal right then, with your market aura in tact and your financial statements pristine and before you start to run head long into the 500 pound gorillas who will be your competitors is where the deal needs to be made. And that’s why I think we’re going to see more deals.
 
But who to buy? If, as I’ve suggested, the core market of actual participants who define themselves and their lifestyle by their participation is shrinking then the niche brands, while they may be successful, don’t have the room to grow they use to. So why would they be attractive to a larger company if they can’t contribute substantially to growth and profitability? They probably aren’t. So the number of attractive acquisition candidates shrinks, and the price, as seen above, gets bid up.
 
And the Retailers?
 
Four things. First, we seem to have been through, and maybe we are still going through, the extermination phase with retailers. I have no numbers, but I think we all share the perception that a lot of individual retailers have gone away and comparatively few have opened.
 
Second, I expect the “stuck in the middle” analysis above for brands to apply to retailers as well. We’re already seeing some consolidation and I’d expect more. As I’ve written, the only financially attractive exit strategy for a core shop run by the founder/owner seems to be to open enough additional stores to create a size, management structure, and ”proof of concept” that makes the mini-chain attractive to buyers. This is consistent with the discussion above of why a brand would sell.
 
Third, I can imagine that purchasing inventory is going to get interesting for shops as the companies they buy from have more and more things to sell them. Remember that the days of the single sport/activity shop are long gone. I wonder if K2 will want you to buy both your snowboards and your football equipment from them. Okay, granted I don’t know of a snowboard shop that sells football equipment in the summer, (and I don’t know if K2 sells it) but there must be one. What kind of incentives might they offer you to consolidate your buying for various activities with them? Hmm. Maybe I should ask them.
 
Fourth, are you sure you’re still an action sports retailer? I mean, a lot of you are selling an awful lot of soft goods that aren’t really sports functional to people who don’t participate. Maybe, for some retailers at least, it’s time for you to reconsider how to redefine yourself to take better advantage of the whole lifestyle/fashion/nonparticipant thing. Could be there are some opportunities you’ve been scared to look at that make sense? 

 

 

Doing Marketing; What, How and Why?

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At the Skateboard Industry Conference earlier this year and in these hallowed pages, I’ve argued:

 
1.     That advertising and promotional tactics like running ads and hiring teams pass for marketing in this industry but aren’t.
2.     That marketing (maybe better called market research) is the process of finding out who your customer is and why they buy your product.
3.     That few people in skateboarding (or in action sports) do marketing well if at all.
4.     That favorable demographics and large company interest in the skate vibe are creating opportunities that we aren’t taking advantage of.
5.     That good marketing will make you more efficient in the use of your advertising and promotional dollars, a good thing at a time when this is a tough business financially.
 
Marketing costs a little money, takes some time, and will leave you with as many new questions as answers if you do it right. It isn’t a one shot deal. Its value increases as you continue it over time and, indeed, as you institutionalize it within your organization. How might you do some marketing in your organization? Here’s one general approach. Not by far the only one. Not necessarily the best or the right one for your organization, but one I think you can implement and get some value out of.   
 
The Right Questions
 
It’s easy to come up with a list of questions that, on the surface, seem relevant. General questions like “Who’s my customer?” You could create a list of good, general questions like that in about twenty minutes and walk away thinking, “Yes sir, there’s not much to this marketing stuff.”
 
Instead, begin with the goal in mind. Let’s say the goal, as mentioned above, is to make more efficient use of advertising and promotional dollars. Ask questions that help you do that. Go through each of your advertising and promotion expenditures and develop specific questions- questions that will help you know where to spend your money and what you’re getting for it.
 
One such question might be, “Do people buy our boards because of the team?” Well, duh, yes of course they do. Or at least that’s always been your assumption. Ever tested it? In several industries I’ve been amazed at the number of once true assumptions that have been institutionalized in industry lore even when they were no longer valid.
 
Among winter resorts, for example, the current assumption seems to be “If we build it, they will come.” My guess is that snowboarders would come regardless of whether or not the resorts build new trails, facilities and lifts and the number of skiers will continue to decline in spite of all the capital investment.
 
I’m not suggesting teams aren’t important to skateboarding, but if I had to prove it in a rigorous way, I couldn’t. Not unless I’d done some marketing. Use marketing to test your traditional assumptions. If you find something has changed, it’s a potentially huge opportunity.
 
Based on a specific statement of what you are trying to accomplish, get more specific in the questions you ask. “Do people buy our boards because of the team?” is too general. No answer you’re likely to get will help you do anything better or differently unless, I guess, everybody says no.
 
Maybe “Whom do you know that rides for Brand X?” would generate some useful information if your goal is to focus your team spending on the riders who create the most brand visibility. If nobody knows a rider you’re spending serious bucks on, or if lots of people know somebody who only gets product, you’ve got a chance to spend your money more efficiently, or maybe just to spend less. Or to spend more but feel good about it.
 
Marketing’s biggest challenge is in asking the right questions based on specific goals.
 
Gathering the Data
 
I’m a big believer in quality and consistency over quantity. I’d rather have 200 thoughtfully and consistently completed surveys than 2,000 incomplete warranty cards where there was no contact between the customer and the company. Send team riders or employees to skate parks on weekends. Make a deal with some of your retailers to approach customers in their store in exchange for sharing some of the data with them. Let the retailers add a few questions they’d like answered. Give every consumer who works with the interview to complete a questionnaire a T-shirt and turn the collection of market data into a promotion.
 
Do some training before you send people armed with good intentions and clipboards out to talk to customers. Make sure they understand why you’re asking the question, what you expect to learn, and what the benefit of having the data is. Get them to practice a little with other employees or friends so that their lack of experience doesn’t skew the data collection.
 
Exercise some common sense. It might not work to ask team riders to collect data about team performance. A rider isn’t going to be anxious to report that nobody ever heard of him. Consider the possibility that young males might consider this as an opportunity to do something besides collect market data and return surveys predominantly from the best looking girls at the skate park that day.
 
The data doesn’t all have to be collected in one massive effort. A couple of people in a couple of shops for a couple of hours a couple of times a months will build you a big data base faster than you think.
 
The experience the data collectors have can be as important as the information they come back with. They’ve just spent some serious face time with customers or potential customers. Sit down with them right after the session. What did they feel/see/think? What interesting comments did they hear that didn’t make it into the survey? What questions appeared to have been a complete waste of time? Did they hear gripes? New product ideas?
 
Most people from companies don’t spend enough time with the customer. Take advantage of people who are. In fact, spread the wealth- get as many employees as possible to take a turn gathering market data.
 
Your data collection is going to be biased in some way no matter how hard you work to collect it in a consistent and dispassionate way. The way the interviewers dress, the locations you select, the time of day, the different ways interviewers approach the customer and a bunch of others we can’t even conceive of will all affect the quality of the data. You strive to minimize these influences in the way you develop the survey, train the interviewers and select the locations. At the end of the day, with enough good interviews completed, you recognize, or at least hope, that the biases will have been statistically reduced to background noise. That brings us to what to do with the data.
 
Analysis
 
If you’ve gone through the process correctly, data analysis should be almost an anti-climax. From the process of designing the survey, you know specifically what you are trying to find out and what kind of decisions you hope to make from the data you collect. You know before collecting the first piece of data exactly what the analysis process is going to be. It will have become clear in the hard work you did establishing goals and developing the right questions.
 
Responses will be counted, and percentages calculated. Maybe you will have asked the same questions in a couple of different ways and will want to compare the responses. But when the simple counting and calculating is done, there are a couple of statistical techniques that will help you get the most out of the data.
 
Not all the questions you ask will require this kind of analysis. But when appropriate, the concepts of “mean “ and “standard deviation” are powerful tools that are not tough to use once you understand them.
 
A standard distribution is represented by a bell curve. Bells can be taller or flatter depending on how the data points are distributed. The vertical line that divides the bell exactly in half represents the mean on the curve. The mean is the point where half the data values are greater and half are smaller. Simple so far.
 
The standard deviation is a statistic that tells you how tightly all the data points are clustered around the mean . When the points are pretty tightly bunched together and the bell-shaped curve is steep, the standard deviation is small. When the bell curve is relatively flat, you know you have a relatively large standard deviation. One standard deviation away from the mean in either direction on the horizontal axis accounts for somewhere around 68 percent of the data points in this group. Two standard deviations away is roughly 95 percent. Three accounts for about 99 percent of all the data points.
 
So who cares? Just for fun, say you ask 200 customers how old they are. Their mean age is calculated as 14 with a standard deviation of one year. So you know that 68 percent (one standard deviation away from the mean in either direction on the horizontal axis) of your customers are between 13 and 15. 95 percent 12 and 16.    You can see how this might help you focus your marketing efforts.
 
Mean and standard deviation are calculations that lots of cheap calculators can do. Excel will do it for you on your computer. So, as I started out by saying, you can do this yourself. On the other hand, time is money, and there lots of companies around that specialize in designing surveys, collecting data and interpreting the results.
 
Any masochists out there who actually want the formula for calculating a standard deviation should let me know and I’ll be pleased to provide it. 
 
Even if you get some professional help and trade some money for time and efficiency in the process, your customer and industry knowledge will still be required to make sure the right questions get asked of the right people.
 
Somebody once said that half of your advertising and promotion budget is wasted- you just don’t know which half. Marketing can help you figure that out. Just to pick a number, if you spend $20,000 to do a survey that helps you save only $5,000 a year, a return on investment of 25 percent, isn’t that a great deal? My guess is that you’ll do better between more efficient spending and better customer focusing. Do the marketing yourself or get help. But please do it.

 

 

Conversations with a Skate Retailer; A (Pretty Much) True Story

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Some month ago, I got a call from an actual skate retailer. “It said at the end of the article that you work with companies in transition,” he asked almost as a question. “It’s true,” I told him.

 
“Okay,” he said. “Help me with mine.”
 
The story unfolded like this. He’d been in business for a bunch of years, and loved the business. He was doing about $500,000 a year but increasingly it was a struggle to make ends meet. He seemed to be feeling a little run down and beat up from the constant pressure of making ends meet financially and working long hours without enough help. Anybody out there sympathize with him?
 
Breaking the primary rule of having a consulting business, I started asking questions to try and figure out his situation and help him before he’d agreed to pay me anything. Oh well, so I’m a pushover. He seemed like a nice guy.
 
The conversation revealed that his product mix was about 60 percent decks, trucks and wheels and 40 percent apparel and shoes. Margins were “good” on the apparel and shoes and “not so good” and declining on hard goods. He couldn’t be much more specific than that, and didn’t even want to hazard a guess about which brands gave him the best margins and what they were. Nor was he real clear with me on which products and brands were turning how quickly.
 
The finance guy in me perked right up. I started ranting and raving about his need for point of purchase registers, new computers and advanced accounting software, and revising his chart of accounts forgetting for a minute that this was a $500,000 retail store, not a chain or huge stores. The long pause on the other end of the phone line brought me back to earth. It was clear that a big investment in equipment and hiring a financial controller wasn’t going to happen.
 
“Let’s try it another way,” I suggested. “Ignoring the small stuff and what you don’t sell much of, so you know what you sell everyday by category and brand?”
 
“Sure,” he said.
 
“And you know what it costs you, right?”
 
“Of course I do,” he said a little frostily, beginning to think I was suggesting he was an idiot.
 
Then I asked, “And you can come up with a pencil and paper, can’t you.”
 
Before he could tell me to go directly to hell and hang up, I said, “Well, then you can figure this thing out!” He was still unsure what to make of me, but at least he was still listening.
 
Every Sunday evening, I told him, he should get his sales records, dealer invoices, the pencil paper, maybe a calculator and a cold beer and sit down at a table. “Get the beer first,” I corrected myself, “And don’t put the beer on the pad of paper. It’ll make a big wet circle.”
 
List your dollar sales by category and brand.
 
Get your costs for those sales from your supplier invoices. Pretty soon, you’ve got a neat, one or two or maybe three page document that shows you your sales and gross profits by brand and product category. Do what works for you. Might look something like this.
 
Week Ending:
 
 
 
 
 
 
COST OF
GROSS MARGIN
 
SALES
GOODS
Dollars
percent
 
 
 
 
 
Decks
 
 
 
 
 Brand one
 
 
 
 
 Etc.
 
 
 
 
Total Decks
 
 
 
 
 
 
 
 
 
Wheels
 
 
 
 
 Brand one
 
 
 
 
 Etc.
 
 
 
 
Total Wheels
 
 
 
 
 
 
 
 
 
Shoes
 
 
 
 
 Brand one
 
 
 
 
 Etc.
 
 
 
 
Total Wheels
 
 
 
 
 
 
 
 
 
Apparel
 
 
 
 
 Brand one
 
 
 
 
 Etc.
 
 
 
 
Total Apparel
 
 
 
 
 
 
 
 
 
Total Sales
 
 
 
 
 
 
 
 
 
 
Small business owners have a lot of this information in their head. But usually not all of it, not accurately, and not in a way where they can see the relationships. As your business gets bigger, keeping it all straight in your head gets, first, more difficult then impossible.   But with a weekly chart like this one, you can see which brands are moving, how your margins are, and how sales of one brand compares to another.
 
Consider the decisions you can make after you’ve been doing this for maybe a couple of months and have accumulated some data. Where are you actually making your money? Should you be carrying more of that product or brand? What is it time to discount and get rid of? What are the financial results of changing your product mix and increasing your gross margin by a couple of points?
 
If you want to get a little fancier, include columns for cumulative sales and margins from the first week you start doing this. There will be nothing to it if you’re doing it on a computer and using a spreadsheet. One last iteration might be to show the total inventory you’ve got in each brand and category. Obviously, sales have some relationship to what you’ve got in stock, and you wouldn’t want to condemn a brand for poor sales when you’re low on inventory.
 
Such an analysis isn’t just financial in nature, but is the starting point for evaluating some important operating issues. In the case of this particular retailer, we pretty quickly got around to asking how and if he could change his sales percentages from sixty percent hard goods and forty percent soft goods to the other way around. We knew, though we couldn’t be specific during the conversation, that the change would have a major impact on his financial situation.
 
I asked him some questions about his store layout and merchandising. It seemed like it had been a while since he’d changed some of his fixtures. His lighting, he acknowledged, might not be quite up to par or focused on the products he was most interested in moving. It sounded like some reorganization of his selling space was overdue and that product access could be improved. I don’t know a hell of a lot about merchandising and layout, but people who do know have told me that changes in these areas almost always result in sales increases and need to be done on a regular basis.
 
I wasn’t telling him to throw out all his fixtures and displays, trash his lighting, and redecorate his whole store. It wasn’t in the budget. But maybe some of those fixtures could be spray painted and put in a different place. Maybe the light bulbs could be changed to a higher wattage. Perhaps a coat of paint on one wall would help highlight some of his higher margin, but slower moving product. Couldn’t he use some of what he’d learn in the simple financial analysis described above to make some inexpensive but effective merchandising and marketing changes in places where they would do the most good? I mean, just changing things in your store from time to time is a good idea, but tying those changes to specific opportunities for financial improvement makes it an even better idea. 
 
The point, I guess, is that financial analysis doesn’t exist in isolation from other aspects of your business. The analysis isn’t difficult if you have some simple systems and doesn’t require a complex knowledge of accounting. It shouldn’t be looked at as forensic. That is, it’s not just something you have to do at the end of each month, quarter and/or year to satisfy your banker or the tax guy.
 
Besides, standard financial statements by themselves will not give you all the information we discussed above. But you need it to make day to day management decisions.
 
So improvise a little.  Get out the beer, pencil and paper and calculator. You live or die by your gross margin. Use the information about it that’s at your finger tips to make better business decisions that are responsive to the changing skate market.