New Stuff to Do More; New Strategies are Critical as the Snowboard Industry Evolution Continues

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I remember when this was a simple business. Or at least I thought it was a simple business. You had a pro team, ran some ads, built relationships with core shops, sold C.O.D. or on 30-day terms, and were thrilled if you could get enough product to fill orders.

With supply shortages, the fact that quality wasn’t always very good was less crucial. Margins were better anyway.
 
Your team is still valuable, but successful team riders have to do more than rip up the hill. Apparently, they also have to look good in their underwear. Riders have agents now, for god’s sake.
 
Your choice of where to run ads has expanded dramatically. We used to laugh at people who ran an ad anywhere but the usual places. Now we wonder if we’re missing an opportunity.
 
Thirty-day terms are pleasant memories and selling some product at a decent margin is tougher than climbing out of a tree well after a ten-day dump. You can’t just focus on ‘core shops any more. Hell, it’s getting hard to even find one if you define it the way we used to.
 
Not only does a snowboard company have to do the same old things better, but my contention is that it has to do a whole bunch of new things as well.
 
Endless Product Lines
 
 SKUs are getting out of control. Product lines have gotten enormous- largely as a competitive response to what other companies are doing. I’m not against responding to your competition, but recognize that such a response is strictly defensive in nature. Rather than differentiating you, it makes you look like you’re simply copying your competitor. 
 
This is yet another example of our talking and listening to ourselves, rather than focusing on the customer. It also costs money. Making and managing more SKUs is expensive. In some cases, it may even drive up costs of other products by shortening production runs.
 
The situation requires a little zero-based product planning. Don’t start by looking at your competitor’s product lines. Begin by looking at what your customers are buying and what you think the market trends are. Design your product line in response. Figure out all the hard costs of an extra product- molds, samples, employee time, short production runs, etc.
 
Now, what are the specific benefits of another length of one style of board or an extra color in a jacket? Will you actually increase sales or will you just cannibalize another part of your line? Are you making it even more difficult for the store to carry and merchandise your products? Will your reps really understand the whole line and will they be able to make a cogent and complete presentation to the poor retailer before that retailer keels over in confusion and exhaustion?
 
The hard costs are real. The soft benefits are tougher to quantify.
 
Public Relations and Co-Branding In Advertising
 
Snowboarding has been turned into the poster child of the cool, young generation every advertiser wants to reach. Snowboards and snowboard products are turning up everywhere. Are any of them your products? If not, you’re missing an opportunity.
 
Does a particular board’s base graphic turn up on a resort’s promotional brochure by accident? Did K2 team members just happen to be standing around in their Jockey underwear, boards in hand, when a photographer happened by, took a picture, and sold it to Jockey?
 
Most of this exposure is not accidental: taking advantage of all these opportunities is a full-time job for somebody. And the work that’s done now probably won’t have an impact until next year due to the lead times involved. So get started sooner rather than later. Prepare and distribute a press kit. Include photos anyone can use. Make contacts with companies that are interested in your customers and make it easy for them to get the images or the product they need. 
 
One note of caution: it’s easy to believe that free or inexpensive exposure is good, no matter where it occurs or in what association. Not true. Make sure the opportunity is appropriate to your brand and its market position. To use an extreme example, how many snowboard brands rushed out to have snowboarding’s furry Olympic mascot Animal seen on their boards?
 
Resorts Are Our Friends
 
I think we’re to the point where the director of resort relations is probably a full-time position for a snowboard company.
 
Ignoring rental possibilities for a minute (because they’re a whole separate issue), there are an almost endless number of things you can do to help resorts focus on snowboarding and the kids they want to attract and retain.
 
Are you maintaining a database of key resort employees and contacting them from time to time? Do you have a program to flow a little product to the right people?
 
Are you having a couple of team members spend a day at the resort and then sending an unsolicited letter to the appropriate resort executive telling them what a good time they had and maybe suggesting a few things they could do to improve the snowboarding experience?
 
Have you sat down and thought specifically about how the needs of resort shops are different from city shows and, besides giving different terms, how you can meet them?
 
I don’t think I’m even scratching the surface here. I’ll bet your new director of resort relations, a snowboarder who’s spent some years in resort management, would have a whole lot of ideas.
 
Rentals
 
The trouble with rentals is we don’t know why we’re doing them. Are they a loss leader that gets people on our product and ultimately selecting our brand when they buy? That is, are they justifiably part of marketing and promotion budgets? Or are rentals supposed to be moneymakers?
 
As long as I’m restructuring the sales and marketing organizations of snowboard companies, may I suggest a sales manager of rentals?
 
I know rentals are growing dramatically. I suspect they’re no longer just for people trying snowboarding for the first time. They have become a convenience, like takeout food. Done well, as it increasingly is, the equipment is always new and tuned and the boots are dry. All you have to do is show up.
 
Why buy if you’re a typical participant who’s only on the slopes for a few days each year?
 
I think the rental trend is going to catch us by surprise, at least partly because we in the industry spend too much time talking to each other instead of to our customers. This is an interesting problem. We sell rentals cheap, or offer ridiculous terms, or agree to take the product back next year. We do it because we believe that ultimately it helps sales. But by providing cheap, new product each year to rental shops we make it increasingly easy and economical for participants to rent. Aren’t we helping the rental shops to build their businesses and killing ourselves? Yet another example of irrational competition in a maturing market.
 
I wonder if any snowboard company really makes money in rentals. By embracing snowboarding, the resorts have given themselves tremendous leverage over the industry. I suspect your new sales manager of rentals and director of resort relations will be working closely together.
 
Wherever You Go, There You’ll Be
 
In a maturing industry, you either find a defendable niche, or become a low-cost producer. Considering the trends discussed above, it’s obvious this is true for snowboarding.
 
Margins have declined, but the cost of doing business has increased. There are too many things you have to do to succeed. Which means your break-even point has gone through the stratosphere. And the working capital investment required in this highly seasonal business has grown even more.
 
My perception is the entire business model is changing. Snowboard companies have to do things they haven’t done before. There is a new group of stakeholders who aren’t just the people who snowboard. The snowboard industry has lost a lot of the control it had over snowboarding. Getting that control back, if it’s possible, requires new organization and a new way of thinking.

 

 

The Dilemma of Being “Core;” Identifying and Managing the Conflict.

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A few years ago I wrote a column called “Are there Any Core Snowboard Shops Left?” It generated a good discussion, though I got burned at the stake by quite a few people. Happily, I was wearing my asbestos underwear.

The question, however, is still valid because of some of the problems core shops are having and how important they are to the industry. I want to talk today about why the snowboard business for a core shop is either easier or harder than other action sports businesses and why it may be a tougher business proposition to be “core” in snow than in other businesses.
I also think, much to my amazement, that I’ve come up with a working definition of what a core shop is and I’ll present that to you later. Only took me fourteen years.
Having a definition is important if we want to say anything meaningful about what core shops do, why it is meaningful, and how they might do it better. Like the resorts and the suppliers, they have a role to play in resisting the snowboarding business degenerating into a more and more price driven game and in continually finding new participants. In the long term all three groups have the same interests. In the shorter term, these issues are most important to the shops.
Easier and Harder
Extreme seasonality defines snowboard retailing. You get just one chance. So, if you’re a flinty eyed business person, you order cautiously, thinking that you’d rather be pissed that you didn’t order enough than if you had to pay for it and carry it over until next season. You buy mostly mainstream stuff that you think is likely to sell best, and your selection is heavily influenced by prices, terms, discounts, and other similar goodies. If it doesn’t snow, or doesn’t sell, you discount it ruthlessly and early. It’s got to be gone by the end of the season. Once the season is over, say the early part of February, that snowboard stuff disappears and the floor space is largely filled with whatever season is next.
That was easy, and as low a risk as you could make it. But it was hardly core. We’ll get to the official definition. Among other things being core requires that you carry enough stock in enough brands to really serve serious snowboarders even if they aren’t most of your customers and that you take some chances on brands that maybe aren’t mainstream or haven’t been around long. probably means some other things that increase risk and cost. Like having employees with enthusiasm for snowboarding and its lifestyle. And supporting the local community.
At the end of the season, even a good season, at least some of that snowboard stuff probably still sits there, gobbling up floor space and working capital. It generates some occasional sales, though not near what you could get with different product. But you’re core so you do it and it costs you money. That’s harder.
I’ve illustrated two extremes. The magic of successful retailing, of course, is finding the sweet spot in between those extremes that works for the customers and doesn’t blow your bank account.
Still it’s obvious that being a core retailer in snow is a lot harder than in a retail business where participation doesn’t stop dead for eight months of the year even if it slows down. Like skate or surf. But it’s not only harder because of the seasonality. People who don’t skate or surf still buy skate or surf brands to wear. Certainly some of that goes on in snow, but I suspect that most snow soft goods (or at least a higher percentage than in surf or skate) are sold to people who want to use them snowboarding. That makes for a much smaller possible market.
Which, we can probably all agree, is why shops don’t just do snowboarding anymore. There’s no business model that makes sense. Looking at a single season, it probably doesn’t make financial sense to try to be “core” in snow. It just costs too damn much.
The Definition
A core retailer is one that has a primary focus on customers who are drawn to the lifestyle and keyed intothe trends associated with the activity they participate in. This focus is shared by the shop owners and employees. Many of its customers tend to purchase more often and be less price sensitive than others. Though it is not necessarily true that core retailers are small in size, it is reasonable to say that being a core shop becomes more difficult as your size and number of storefronts increases.
What I’ve suggested above is that, due to being a one season business, and for other reasons, there are some risks and costs to being a core snowboard shop that don’t exist in the same way or to the extent they exist for skate or surf. That’s bad because we need the core shops, we all say. Just to refresh our memories, we say that because they are the first ones to spot trends, have a role in incubating brands, and in creating and maintaining a bedrock of excitement that supports the industry through good times and bad.
Where Do Enthusiasts Come From?
From the womb I suppose. Which is my way of saying that these lifestyle participants we, as business people, depend on tend to be younger. And as they get older, they begin to develop other priorities. What was a passion and a lifestyle becomes a sport. It competes with other uses of time and money and may no longer be the thing they find a way to do no matter what. We can market our asses off, but we’re seriously drinking the kool aid if we believe that any amount of clever marketing will change this inevitable evolution as people get older.
So that’s going to happen? We will lose participants, or at least frequency of participation and people will be less inclined to buy new stuff more often.    And they will have less propensity to buy soft goods if they are participating less. As I said above, I think surf and skate sell more broadly defined soft goods to more former or non participants than snow does. Participation is more important to snow than to skate or surf. Look at the percentage of total surf revenues represented by surf boards.
Well, okay, if snowboarders are inconveniently going to get old in spite of all our outstanding advertising and promotion, where are the new participants we need going to come from?
Like I said, from the womb. Well, this is hardly a surprise. SIA spent a whole lot of money having studies done that, in part, showed the importance of getting participants started young. Resorts and brands both have their parts to play in keeping new, young participants coming into and staying in snowboarding. But so do the core retailers. What should they do?
Action Items
First, it would be good if you stayed in business. That, by itself, would help a lot and is by no means an easy thing to do.
Second, stop agonizing over broader distribution and company stores. It’s here to stay and it’s unlikely you can do much about it, except of course take it into account as you consider how you run your store.
Third, get bigger. The numbers show that smaller shops have higher leverage (risk) and lower returns on net worth.
Fourth, even if your roots are in snowboarding, and you see yourself as a core snow shop, don’t use that as a reason to exclude other products that make sense. Try to limit your financial dependency on snow. You can be a “core” snow shop even when a lot of your total sales are from other products.
Fifth, have a cash flow that makes sense and build it with special consideration for your (I think) less predictable snowboard business. And in that cash flow, plan to pay your suppliers on time. I don’t know why, but they seem to like that. It’s also a big step in accomplishing point number one.
Sixth, though your roots may be in snow, I think retail business conditions require that you think of yourself as an action sports shop. It’s the financial model that works. Treasure the crossover customer.
Seventh, build relationships with winter resorts that help get new participants to the slopes. That’s worth another article. I can tell you from sending a few emails that some of the best stores are already all over that.
What writing this article has made me realize is that there is, in some sense, a conflict between being, thinking, and acting as a core snowboard shop and having a solid business model. Maybe that’s too strong, and I know there are some notable exceptions. Still if success requires, and I think it does, that you are active in areas besides snowboarding, can it be dangerous to think of yourself as a snowboard shop even if that is your focus? To put it in fancy business school-like strategic planning terms, if your mission statement isn’t aligned with your business model, you’re screwed.
Sorry, not allowed. We can’t have the core snowboard shops screwed if they are going to fulfill their role in developing new participants. Think about this possible conflict—we really need core snow shops, but being too core in snow alone may hurt a shop’s chances to grow, succeed, and influence new participants. Where’s the balance for your shop?

 

 

Hard Truths about the Action Sports Business; Use Them to Make Lemonade from Lemons

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As I said in the last issue of Boardsport Source, the way companies choose to compete in the action sports industry and, I suppose, in most industries, is largely responsible for the maturing and consolidation of fast growth industries. Ask the skate and snow people. People way smarter than I have acknowledged that surf’s time will come.

It wouldn’t hurt to read that last article before this one.  So if you’re one of the few people who doesn’t seal their copy of this mag in an air tight case of bullet proof glass filled with argon gas to prevent the paper from deteriorating, let me know and I’ll email it to you.
 
I have the privilege of looking at things at my leisure from the 10,000 foot level without the distraction of having to make a budget, ship a product, or figure out which brands to go how deep on. I guess what I want to tell you is just how much this industry has changed. Perhaps that seems obvious, though if we take it as a given it’s amazing how little we seem to try to manage our businesses differently to compensate. What can we do, anyway? Let’s think about some old habits we should consider breaking.
 
Hardgoods
 
Congratulations. Surfboards, skateboards, and snowboards are all well made, quality products that the consumer can rely on.   The brands have done an outstanding job of designing, sourcing, and manufacturing. So much so that the prices keep going down. In the industry’s incestuous world, we bemoan this, point fingers in various directions (usually not in the mirror, which is where we ought to be pointing at least some of the time), and discuss endlessly what we can do to increase margins to what we “need.”
 
Maybe, instead of wringing our hands over lower prices and margins, we should all be congratulating ourselves for making it easier and cheaper for the consumer to skateboard, snowboard, or surf. I’m not suggesting that cost is the only, or even the most important, determinant of participation. But as long as we, as an industry, seem determined to drive down costs and prices, don’t you think we should celebrate that service we’ve performed for our customers and figure out how to turn it into a good thing rather than complaining endlessly about something that doesn’t seem like it’s going to change?
 
Why haven’t I heard of a surf retailer giving a free surfboard ($95 ex-factory out of China) to a customer who buys a wet suit, baggies, wax, sun glasses and a surf trip from the retailer? “But we’re not a travel agent!” bemoans the retailer. Well, maybe you better consider becoming one. That’s how scuba diving retailers, in the US at least, make a lot of their money. Is there any reason a snow retailer couldn’t do more or less the same thing? Maybe skate retailers should be selling a deck at cost to a kid who buys wheels, trucks, grip tape and a pair of shoes at regular prices.
 
Brands, resorts (or skatepark owners) and retailers should be sitting and talking about how you can help the consumer rather than about who’s fault it is that it’s harder to make money. Ignoring the Japanese snowboard phenomenon of the early to mid 90s, consumers don’t want a surfboard, skateboard, or snowboard for its intrinsic value or artistic design- they want to skate, snow, or surf.
 
Rather than bitching about what’s happened in hard goods, why don’t you embrace it (since you’re stuck with it!) and do something positive with it? Don’t sell skateboards, surfboards, and snowboards. Sell skateboarding, surfing, and snowboarding. That’s what your consumer is interested in. 
 
And those margins you “need?” Zumiez, the very successful US action sports retailer with around 130 stores just launched its stock in an initial public offering and so far, the stock has performed pretty well. Zumiez gross margin in its last complete year was 31%. I guess that’s all they “need.” I know- they’ve got all those stores, and they’re a mall shop, and they get better prices from suppliers, and we’re way cooler than they are, and, and, and, and….. Guess what? It appears that quite a few of the industry’s consumers don’t care about that. They think Zumiez does a great job. So do I. If you’re interested, here’s a link to their public offering prospectus. http://www.sec.gov/Archives/edgar/data/1318008/000104746905013143/a2153924zs-1a.htm
 
Distribution
 
I don’t have the words to describe how tired I am of hearing people argue over whose “fault” our distribution problems are. Whenever you get a group of brands and retailers together, the issue is bound to come up. But no new information is ever exchanged, and nobody has any useful suggestions. Why don’t we just get over it?  Whether you’re a retailer or a brand, assume that most product, hard good or soft good, is going to be available all over the place. It mostly already is. Am I overstating that maybe a little? Maybe. But we can all agree that every brand of any size is available in many different size and quality retailers in many locations.
 
Retailers have three choices. First, if your margins are going to drop, then you have to sell more to make the same level of gross profit. Maybe you’re a brilliant retailer and can do it by increasing sales per square meter in your existing space. More likely, you’ll have to increase your floor space or open new locations or add products. Or all of those. That, of course, requires you to increase the working capital investment in the business.
 
Choice two is to carry more new, lesser known brands. Risky? Yes, but no more risky than doing nothing as your margin drops and your operating expenses stay the same or rise. Besides it fits right in with choice three, which is to do what smaller retailers are suppose to do to compete- differentiate themselves by brands carried, customer service, and expertise. At the end of the day, the best specialty retailers can sell whatever quality brands they choose to carry, because the credibility of the retailers is so high that it rubs off on whatever brands the shop has. The ability to give credibility to any brand it carries may be the best definition of the specialty retailer I’ve ever heard.
 
Actually, I suppose these three things aren’t really choices, but tactics that should be pursued simultaneously.
 
If I were a brand, I think I’d sharpen by pencil and ask what would happen to my gross margin, marketing expenses, and bottom line if I were to get a bit more cautious on my distribution and was satisfied with lower top line growth. The UK brand Animal is taking something like this approach. By being cautious about their distribution, they keep retailers happy by promoting sell through at higher margins. That exclusivity increases demand and next year’s preseason orders. It also means they can be more judicious in their marketing expenses because limited availability drives demand better than a whole bunch of paid ads. The bottom line is, well, a bigger bottom line than if they focused exclusively on driving sales.
 
Marketing
 
I keep turning back to the two page Globe ad in this mag’s spring issue. It’s an artistic rendition of a single wave breaking in a big ocean. There’s nothing else in the picture. Not a product or a team rider in sight. Nobody doing a trick that 99% of the people looking at the ad can’t do. It reminded me of what I really value about surfing- the peace of just being out there even if the surf sucked. Anyway, there was always the hope that the occasional, elusive good wave that comes through even when the surf was bad would be the next one.
 
Was it a good ad or a bad ad? I loved it, but that’s up to you to decide. At least it was different and I noticed it. And of course this was a trade, rather than a consumer, publication. Obviously if you can make your ads different so that they get noticed in a positive way that’s good. If in fact more of the consumers who buy your product are non participants interested in the lifestyle rather than the technical specifics of the newest trick maybe more of these ads are particularly appropriate.
 
The caveat is it depends where you are advertising. In core consumer publications, read mostly by core participants, (I think- that’s an interesting question! Who does read them?) I suppose tricks and pros will also be the staple of advertising, though it tends to leave everybody’s ads looking the same. But if you’re reaching to the mainstream and becoming more and more part of the fashion industry, your advertising placement may change, or at least expand, and a different kind of ad become appropriate.
 
Don’t find yourself directing too much of your advertising to the industry. Deliver an image and a message that your consumers- not your retailers or your competitors- think is cool.
 
In this article, I’m asking you to do three things. First, focus like a laser on your consumer and what they want. Don’t confuse your team riders, the industry, or the retailers for the people who buy your stuff. They overlap for sure, but they are increasingly not the same for most companies. I can guarantee you that the companies that do that will be the most successful.
 
Second, rather than bemoaning the trends in hardgoods and distribution laid out above, recognize that they are normal industry evolution stuff and figure out how to operate your business given that they are here to stay.
 
Third, do some things differently keeping the focus on the consumer in mind. Yes, they feel risky but I hope I’ve made it clear that not trying some new business approaches is even riskier. If you agree that the industry has changed, how can you possibly make the argument that you should be using the same old tactics to build your business?

 

 

Look! New Brands. That’s Great! Or These People Are Crazy. Or Both.

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Probably both. It’s not like brands haven’t been coming and going for years beyond count in skateboarding.

Historically, there have been two categories of new brands. The first was the truly new company started by some skaters who wanted in on a burgeoning industry that just happened to be something they loved. The second were the new brands that came from established companies where brands came and went as their popularity rose and fell with time and the popularity of the brand’s team.
 
Let’s look at who may be crazy and who may not be, and why.
 
The list I was sent of around fifteen “new” brands turned out to be mostly brands started by existing companies. Some of the ones not clearly associated with an existing brand I tried to contact, but in a couple of cases I either couldn’t find a phone number or email address on the internet, or I didn’t get an answer.
 
The reason I was hoping to reach some new brands not associated with existing companies is because when they are popping up, skating is prospering and dynamic. The level of enthusiasm and optimism that leads to skaters starting new brands or new shops is just what we need in this industry.
 
Brands being started by existing companies, on the other hand, may or may not indicate any market growth. They may represent just that ongoing brand rotation I referred to above we all know about.
 
Certainly the almost weekly phone calls or emails I use to get from kids who were going to start shops or brands are a thing of the distant past. I always tried to encourage them to go for it, but also to do it with a certain level of business realism. I wonder if any of them ever pulled it off.
 
Excuse me as I wipe a tear from my eye, sign deeply and bemoan the loss of “the good old days,” when men were men and margins and prices were high and you could sell everything you could get or make.
 
Was I suppose to say, “People were people” to be politically correct? Oh, the hell with it.
 
Anyway, in a desperate attempt to get back on topic, let’s look at how the business model of starting a new independent brand has changed.
 
Same Old New Business Model
 
The bad news, I suppose, is that the expense side hasn’t changed all that much. At first, when you’re very small and “underground,” building one shop and one order at a time, maybe you can get away without some of the usual expenses.
 
As you begin to grow, you will need team riders. You have to begin to advertise and promote. You will find yourself giving away more stickers and promotional product. iThere are magazines to be advertised in and trade shows to go to. My guess is that none of this has gotten much cheaper, though trade show booths bigger than my house (and with more floors) are largely a thing of the past in the core skate industry.
 
You’ll have to pay rent or a mortgage when you outgrow your garage, and it’s likely you’ll need employees who will, inconveniently, want to be paid. So will the phone company.
 
And while you do what you can to control expenses like any competent business person, a lot of these expenses are unavoidable. Especially, maybe, the marketing expenses since you’re product is the same as everybody else’s and without brand differentiation you’re ultimately toast. In fact, if skate isn’t growing as fast as it use to, maybe you need even more of those marketing expenses.
 
Let’s hope, of course, that you also have some revenue. More than expenses, eventually, would be nice. And of course you’d like that revenue to come from selling full price, high margin decks that kids buy because the brand, or skater, or both, are cool. You and every other brand.
 
But I suspect that part of the market, in both percentage terms and in total decks sold, is not as big as it use to be and may be getting smaller. And prices, at both wholesale and retail, are expected to come down in the broad skate market.   You know the drill; Shop decks, China, blanks, competition, fewer core shops, wider distribution, no real product difference, blah, blah, blah, blah.
 
We’ve been through that analysis enough, so let’s just recognize the danger of less revenue from the same number of products sold even if the percentage margin is the same. You are in general going to need to sell more decks to make the same total gross margin dollars. Those dollars are what you need to pay all those pesky expenses. So breakeven is a little farther away, in terms of sales, then it use to be. Financial risk is higher and more bucks have to be invested in the business.
 
And now that I’ve got anybody who was actually thinking about starting a new, independent brand standing in a puddle of their own making, let me tell you that you should go for it. But plan for it and recognize the changes in the business as a way to improve your chances of success.
 
Old New Brands
 
It’s not a surprise that of the 15 or so new brands on my list, no more than three or four are really independent new brands. And it may not be that many. We all know of cases where somebody has started their “own new brand” that is distinct from a marketing point of view but is supported financially and logistically by an existing skate company.
 
Which, by the way, makes a hell of a lot of sense. Starting from scratch is a pain in the posterior region. If you’ve already got a warehouse, accounting system, and product source, there’s not a reason in the world not to take advantage of it. Especially since the consumer will probably never know the difference and will be just impressed by a correctly marketed new brand supported by an old company as a new brand from a truly new company.
 
And many retailers, I suspect, would prefer to have a new brand from a company they know they can count on for quality, delivery, service, and marketing. For better or worse, they aren’t prepared to take the same risks on new brands they use to be.
 
Just to confirm that, I spoke with Craig Nejedly, President of the wheels and soft goods brand Satori Movement. Within the last year, the company has launched the new skateboard brand Creation.
 
“Some of our retailers had been asking for a deck for while,” he indicated. “Finally, we couldn’t see any reason not to accommodate them.”
 
But it isn’t a blow out the doors, grow at all costs kind of approach. Far from it. Unsold inventory is kept to a minimum. Growth, at this point, is determined by pull from the retailers, not by demand created by marketing. Between the terms he gets from the factory and the way the retailers pay, Satori hasn’t had to invest a whole lot of capital in the new brand to make it fly. And marketing dollars only go out the door based on sales dollars coming in. Marketing, at the moment, is based more on limited distribution and scarcity than on advertising and promotion.
 
I’ve always thought that was a good plan. Demand creation through some level of scarcity is probably better marketing than, well, marketing.
 
When Taking a Risk Isn’t
 
From the consumer’s point of view whether a new brand is independent or not may be irrelevant since the consumer doesn’t know. But when I see new independent brands, I know the market is more vibrant and optimistic and probably growing. So my advice to those interested into getting to the skate business is to listen, but not be intimidated, by people like me telling you how hard it can be. That’s true but it’s not the whole story.
 
As a new brand, you can do things the existing brands wouldn’t even think to do. In fact, if you come out of the shoot doing exactly what everybody else does but trying to do it a little better or differently, with your goal being to take somebody else’s market share, you reduce your chances of success and for sure you don’t do much to grow the market.
 
Why don’t you make a deal with the local skate park so that a pass to the park comes with each deck you sell? How about arranging a skate demo where people wouldn’t expect it? Include a coupon that’s good for a discount off a deck if you’re over 40. Okay, maybe that’s a retail strategy. Think of the parents that would get dragged into the shop. My point is that as a small brand, there are few rules about what you can do and can’t do.
 
Forget what all the other brands are doing. As a new brand, don’t benchmark yourself against your competitors. Figure out something new you can give the skater. It’s what the customer wants that matters. Create a new market instead of fighting over a crumb of the existing one. It’s your best, and maybe your only, chance.

 

 

The Basis of Competition; How Do We Sell More Stuff?

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It’s funny how the fundamentals of business never change. Three years ago at the Surf Industry Conference in Cabo, I facilitated a panel of people from the skateboard industry because skate was going off and the surf guys thought skate was going to have them for lunch or something. Then skate sales plummeted though, happily, they are recovering now.

Many of us were around when snowboarding was going to take over the world. It didn’t.  And last week at the first ever and hopefully annual Snowboard Industry Conference at Laax, there was a great gnashing of teeth and ringing of hands over the fact that snowboarding didn’t seem to be growing and might even be declining.
Business cycles are immutable and inevitable. That’s especially true because of the way companies in an industry choose to compete with each other. They bring those cycles on themselves. This article will look at how we bring this death spiral of competition on ourselves, how we compete, and finally suggest a general approach (there’s no room to outline it in detail) that describes how an individual company might change that and sell more stuff.
This article had its genesis on the last evening of the Snowboard conference, when Tim Petrick of K2 was kind enough to buy a couple of bottles of just excellent red wine.  We were talking about the snowboard market’s perceived stagnation. In a BGO (blinding glimpse of the obvious) I spewed out something like “We got to do some things differently!”
Well, everybody was kind enough not to say, “What the **** does that mean?” Still, it seemed they were waiting patiently (and reasonably) for me to explain what I meant and perhaps even to say something useful. I tried. I really did. But my thoughts were unformed. An attempt to expand on the idea just sort of died and the conversation moved on.
Still, the initial impulse was right. We do need to do some things differently so that our sales and margins can increase.
The Death Spiral of Competition
We’ve done it to ourselves you know. Declining prices, over distribution, some say stagnant participation, high marketing expenses, and the commoditization of the product. Inevitably there’s some search for blame. But at the end of the day we can all point the finger at each other and we’d be right. Every company does what it perceives to be in its own best interest. Of course. Me too.
 We all do things to try and grow the market, but at the end of the day we find ourselves battling each other for scraps from the other company’s table in a market that isn’t growing that much. And even if we succeed what have we accomplished? Probably just pushed prices down further or increased marketing expense. We’re left with the same circumstances and maybe we’ve made it even a little tougher to succeed. There’s no “sustainable competitive advantage” from anything we do. All we can think to do to grow is expand distribution, open retail stores, diversify or acquire somebody (often just a form of diversification).
It’s no wonder that maybe a little of the optimism has gone out of snowboarding. This is a hard business we keep making harder by our competitive actions.
How We Compete
Here are the things we all do to one extent or another: They aren’t listed in any particular order.
·         Sponsor contests and events
·         Teams
·         Advertising
·         Give away product
·         Prices, terms and conditions
·         Strategic alliances
·         Graphics
·         Product features
·         Distribution
·         Trade shows
·         Films
Are any of us really doing any of these things much, much better than our competitors? I’d say no, though some have the resources to do more, which doesn’t necessarily mean better.
And those larger companies seem to be applying more and more of those resources to diversifying or expanding into the larger fashion/lifestyle business.
Our competitive environment is largely a zero sum game. What one gets, the other loses.
When we’re not busy diversifying to reduce our dependence on this hard industry, we’re focused like a laser on what the other companies are doing. To some extent we go to trade shows because they go and make sure our displays are comparable. We price according to their pricing. We run similar ads in the same magazines. We benchmark our product lines against theirs.
We’ve expanded distribution so much that we’re putting the specialty shops, which we all seem to believe are a bedrock of snowboarding, at risk. We’re eating our young. Is this any way to run an industry? You bet it’s not.
 Has anybody noticed that my entire diatribe here hasn’t even mentioned the snowboarder? Kind of odd isn’t it?
The Consumer
You remember them. The person who actually buys the product and, hopefully slides down the mountain? The one without whom we would all have to get real jobs? How can I possibly have written two thirds of an article on how we compete and not have even mentioned them? Doesn’t that bother anybody? It sure bothers me.
The goal here, as I understand it in my simple way, is to create more snowboarders who snowboard more often so that we can sell more stuff (thanks Tim). Sorry to be quite so mercantilist about it, but that’s what we all want to do I think. Otherwise we’ll be working in industries that have their trade shows and conferences in Kansas City. I’m quite sure I like Laax better.
I’m not quite sure I think going to trade shows where we all talk to each other helps us sell more. I get concerned when companies say they only sell product their team riders approve, because I don’t think team riders, or riders of that caliber, make up a very large percentage of the customers to whom we want to sell more. I know that making stuff cheaper in China because everybody else is and so we have to do it (which is true) doesn’t help us sell more. I hate it when we make it cheap and convenient for people to rent equipment, make no money on it, and excuse that by calling it marketing. And end up selling less.
How Do We Sell More?
 
The first thing I’d ask you to do is stop focusing quite so much on your competitors. They aren’t the ones you need to impress. I know that sounds risky. But on the other hand, what’s more risky than trying to compete in an industry that, if you believe the people at the conference, is stagnant to declining and where the process of competing is apparently making things worse, if you think my analysis has any validity.
Second, I want you to figure out who your consumer is and why they buy your product. You already know that? Great. But if you were to explain it to me and it involved reps opinions, anecdotal evidence, and a discussion of the kinds of stores where your product is sold, I might think you didn’t really know, or at least that you weren’t really sure.
Third, look very, very closely at how you compete. Start by creating a list of the ways the industry competes. Include on the list things that you do that others don’t, if any. Which of these are more or less important? How does the way your company competes in these areas differ, if at all, from your competitors?
This is not quite so obvious at it seems.   You would put team riders on the list I’m sure. But sponsoring team riders is something you do- not how you use them to compete. “Why are they important?” I might ask. “They influence kids purchase decisions,” you declare. “Prove it,” I say. “How exactly do they do that?”
“Everybody knows” can not be part of an acceptable answer.
The slicing and dicing would continue. Do they just influence kids? What do you mean by “kid” anyway? What are the things they do that create this influence? What makes them successful at it? How do you measure that? How many riders do you need?
As you can see, the list of how you compete evolves pretty dramatically over the process and become more focused. Some things will come and some go. General competitive ideas will be broken down into a number of more specific ones.
And so would your sense of what was actually important. And what was not. When you were finished, and if you did it right, your spending would have become much more efficient.
That is a good thing, and it might even help you sell more stuff, but it doesn’t get your out of your competitive space and mindset.
The process of evaluating your competitive strategy in detail and of being forced to question sacred assumptions generally leads to new ways to compete. It also tends to eliminate unproductive ones and put more focus on those that really work. It changes your company’s strategic profile.
There was package delivery before Fed Ex. There was ocean shipping before somebody thought of containers. There were winter sports before somebody decided one plank might be more fun than two.
Overnight package delivery, containers, and snowboarding kind of seem like common sense now, don’t they? But they didn’t to industries that were focused more on their competitors than their customers and potential customers.
Want to sell more? Take a hard look at your customers, what they want, and why they buy from you. Just for the moment, forget your competitors. If the process leads to a new market space your issues with competitors will take care of itself.

 

 

Small Brands Are Cool! How Can They Stay That Way?

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Actually, the question is not how small brands can stay cool. It’s how they can stay at all. As in stay here- alive, in existence, solvent. Not toast.

I have been so encouraged by the number of small brands I’ve seen in snowboarding recently. I love them. There was a bunch at the SIA show in Vegas. There were some of the same ones at ISPO and some different ones that I’d never heard of. At ISPO there were some small brands with skis and snowboards with the same branding and graphics.
 
There were even a couple of new kinds of snowboards. I have to admit that I don’t think they have a chance in hell, but it was great to see somebody trying and may they prove me wrong.
 
If snowboarding is going to be something besides a sport, which is good for business, then we need the enthusiasm and excitement that these small brands represent. But, I wouldn’t want all this enthusiasm and excitement to overwhelm good business practice.
 
That’s the other thing I’m seeing that I like. When you talk to the people running these brands, they refer to balance sheets and cash flow without being prompted and without their eyes turning brown from trying to bullshit you into thinking they know why that’s important.
 
Josh Reid, one of the founders of Rome Snowboards, demonstrated the benefit of a solid financial approach when he told me, ” Our close attention to our budget and balance sheet allowed us to come out with our binding a year early than we expected to.” 
 
So some of these smaller brands, partly because of a businesslike approach to financing, have a real chance to succeed. Here are some things they might want to consider doing to improve their chances and a few ideas about why that’s important to us. I can’t believe I missed the strippers in the Atomic Booth.
 
Normal Business Stuff
 
Just a reminder- building a quality product with great detail and finish, pricing it right, delivery it right, servicing accounts right, and supporting it with appropriate advertising and promotional programs gets you nothing more than the right to try. Market positioning and branding is what will make you successful. Along with having enough working capital to get through the year.
 
Adopt a Shop
 
If I were a small brand, I’d identify one, or maybe a handful, of really successful retail shops and I’d adopt them. By which I mean it would be just my first goal to have my product in those shops. Then I’d be all over them weekly or daily to figure out how my product was doing and why. I’d work like hell to learn from that shop or few shops. I’d watch their sales people sell my product. I’d try to talk to the customers who bought my stuff. I’d talk to the retailers about what they bought and why. I wouldn’t leave it only to my rep- I’d do it as the owner of the brand. I’d take these bits of information and develop a short manual about why the brand was successful in the shop, identifying anything that was unique about that shop’s situation. 
 
Then I’d take whatever I learned and develop it as training and selling tool for my sales force, doing my best to create a shop development approach that in some ways was the “signature” of the brand’s approach to working with shops. In the meantime, I’d probably try to convince the shop owner that he should be an investor in my brand.
 
I’ve heard too many retailers complain about this brand or that brand, their reps, and a general lack of attention once the products in the door. Here’s a chance to distinguish yourself in a way that maybe larger brands can’t and to learn a few things in the process.
 
The Buying Cycle
 
 Not the trade show buying cycle we all agonized about some years ago. The consumer buying cycle for snowboard goods. I’ve heard that skiers buy equipment something like every six years. Maybe it’s less or more. But whatever it is, I think (or maybe I hope) that snowboarders buy stuff more often. Or at least they use to. My guess is that they are moving towards the ski model. Products are all of solid quality right now. They just don’t wear out as quickly. Expansion of distribution, price declines and general product availability means there’s not quite the same urge or need among many snowboarders to get the newest thing.
 
If the number of snowboarders doubles, but they only buy half as often where are we as an industry? Do the math.
 
I see this as a big problem that nobody is really talking about. From a strict financial point of view the skateboard guys have it right. Make sure the product wears out pretty quickly and that it’s cool to break it. Of course, it’s also a lot cheaper to replace, so we can’t quite follow that model.
 
Small brands obviously can’t change this trend, but they have a role to play in resisting it by being cool and not quite so easy to get. It is, obviously, also a way in which they can differentiate themselves- at least for a while. So, small brands help themselves and the industry by restricting their distribution. It needs to be the big brands- who have encouraged retailers to buy with pricing and volume discounts and terms- whose product is left to be discounted after the holiday season. The small brands’ retailers need to more or less sell through at full margin if the small brand is going to differentiate itself and succeed. Further, the shops that carry the small brands need to be a destination for customers who want to buy that brand. What’s the value of the brand to the shop if the customer has to come to their shop to get the brand because it’s the only place in town that carries it and the shop has the chance to sell them some other stuff as well?
 
Obviously, the small brand and the shop have common cause here and it is a source of advantage for small brands. At least for a while.
 
Expectation Management
 
There’s never enough marketing dollars and there are always too many ways to spend what you have. If a new brand does everything right, and it grows in the correct way, it will create expectations on the parts of its customers, its retailers, its employees, its investors. But do too little, and you disappoint. Do too much, and you go broke. How to manage that? Well, my experience is it’s more an art than a science. But you can start by spending some time- actually a lot of time if you do it right- on developing a quality brand positioning statement for your brand. If you do it right, it will be a filter through which all your opportunities are passed, and you won’t waste time trying to figure out which one is right or money on the wrong ones.
 
Like Nikita’s “For Girls Who Ride.” Best one I’ve ever heard. I wish somebody would send me their brand positioning statements so I could plug them. I keep using the Nikita example and I’m giving them entirely too much free publicity.
 
Growth Problems
 
Someday, if you succeed, you won’t be a little brand any more. You will lose some of the possible competitive advantages I’ve described above. As every company wants to grow, those of you who prosper are likely to face this to some extent. So there you are- too big to be small and too small to be big. What are you going to do?
 
Interestingly enough, the answer is almost completely financially driven. I don’t care about marketing, I don’t care about distribution and pricing, I don’t care how cool you are. None of that will drive your strategic business decisions when you get to that point of being somewhere between big and small.
 
What you’re going to find is the extreme seasonality of the snowboarding business means that the risk return ratio is out of line if you are just in snowboarding. Most of you already know that because while you probably love snowboarding, you aren’t naïve kids who only want to be in the business because it is cool.
 
Working capital comes from either debt or equity. Okay, from retained earnings too, but that’s just another form of equity. In snowboarding it doesn’t make financial sense to finance with equity, because you don’t need it year around. But lacking all that equity and the strong balance it give you, debt that isn’t prohibitively costly can be damn difficult to find.
 
So you’re going to try and find a way to become, or become part of, a company with year around cash flow. Because for most companies, it’s the only solution that effectively balanced risk with return and makes working capital requirements manageable.
 
I would dearly love to get an email from some new small brand telling me I’m crazy and explaining what their financial plan is and how it will work differently. Because it would be great if that plan were out there. In the meantime, all you small brands keep up the good work but remember the wonderful problem of too much growth that you’re going to have when you succeed.

 

 

Living in the Past- Or Not; The New Old Skateboarding

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I can’t be the only one it’s occurred to that skateboarding seems to have dodged its historical cycle of disappearing and being reborn every ten years. I think that’s a good thing, though shrinking to nothing and more or less starting over had the advantage of letting everything be fresh and rediscovered.

True, sales fell from their peak by maybe a third. But a third is better than nine tenths. And sales are growing again though inevitably not at the rate of three or four years ago. And I suspect, though I can’t quite prove it, that they’d be growing even if it wasn’t for the BAM phenomena.
Somehow, skateboarding has broken through and is established and accepted in a way it never has been before. At the same time, at least for the moment, it’s still got a bit of an underground, urban edge to it.
Strangely enough, the fact that skate didn’t follow its pattern of completely cratering is both a good and, in some ways, a bad thing.  This article will expand on that (guess I better since it sounds a bit crazy to suggest that there are benefits to crashing) and look at some ways that maybe our business model has to change given that we didn’t crash. No doubt I will have thought of some before I get much further along here.
In The Beginning
The cosmologist, mathematicians and particle physicists tell us that the universe began in a “Big Bang.” Whatever that is. It started as a point particle of infinite density and temperature. Whatever that means.   It’s been expanding in all directions since then and if the string theorists can get their nine dimensional act together they may be able to unite electromagnetism and the weak and strong nuclear forces with gravity and tell us if there’s enough dark matter to ever stop the expansion and I’m sure you all understand that as well as I do.
Yikes, that sounded like something Jim Fitzpatrick would have written. I miss reading his stuff.
So anyway, in a few billion years we could have a real problem (I mean aside from the sun dying) but my point is that when you start from nothing, like skateboarding kind of has done in the past, you can create whatever you want and a lot of people won’t understand it. Or care. Or even know it’s there.
You can see why that might be kind of a good thing for a small industry. The people and companies who are the bedrock of the industry are in control.   The 800 pound gorillas don’t even know you exist or, if they do, they don’t care. Customers, retailers, and brands share certain common interests and perception. As competition emphasizes marketing, prices and margins tend to remain high.
Clubby little deal isn’t it? And it works great until people start to discover you, or somebody wants to grow.
Our Universe Expands
Skateboarding has had its Big Bang and there’s no going back. Skate parks, cheaper, quality hard goods, fashion focus, national media attention, maybe the Olympics, blah, blah, blah. You know it all. Good or bad? I don’t know, but apparently it’s irresistible. But, to continue the cosmological analogy, when Copernicus announced that apparently the earth went around the sun and wasn’t the center of everything, some people weren’t anxious to accept the new reality and the same may be true in skate,
To be honest, I’m not all that anxious to accept it either. I liked the business model where skaters controlled skating for skaters and, in the process, could make a few bucks themselves. I thought it kept the industry about the act of skating, rather than blowing it up into the echo of a fashion trend I’m afraid it might become. I don’t want skating to be just a sport.
On the other hand, I tend to be a bit of a green eye shaded kind of business guy and I’ve learned that sometimes when industries change you either have to go with the flow or go away. What does that mean?
Remember Snowboarding?
  • After a phenomenal period of growth, snowboarding consolidated down to the point where five or so large, multibrand companies sell most of the hard goods.
  • Hard good prices have fallen and continue to fall. Everybody makes good product differentiable only by marketing and most of them make some of in China, or somewhere like China, as a competitive necessity.
  • Sales of pro rider snowboards now account, I’m told, for only around five percent of total deck sales.   It use to be more.
  • Soft goods and accessories are an important- maybe the most important- source of income and potential growth for snowboard companies. Seeking opportunities for growth that hard goods won’t provide, some snowboard companies interested in moving into the much larger and more profitable fashion business. That means they are running into some heavy duty competitors with more resources and fashion industry knowledge.
  • Distribution was allowed to expand dramatically. Looking for growth, or with the rationale of building market share, brands became available at more and more locations, causing some decline in the perceived value of the snowboard product in spite of the brands’ marketing campaigns.
  • Snowboarding started as an outlaw sport, with some resort’s first action with regards to snowboarding being to ban it. In short order they embraced it and started building terrain parks all over the place.
  • Snowboard shops became multiactivity action sports shops. Hard goods were no longer as profitable as soft goods but were critical to the shops market position. Sales of apparel, shoes, and accessories to non participants interested in the lifestyle, or just in the trendy clothing, because critical to shop success.
I didn’t think I’d get seven items when I started the list. But the comparisons are compelling.   I don’t claim snow and skate are “the same.” Snowboarding is a highly seasonal, destination sport with generally older participants requiring a big cash outlay. Still the comparisons are obviously valid to some extent and we’ve been seeing those trends in skate to a greater or lesser extent.
So What?
Shit, I’m out of clever cosmological analogies. Oh well.
Most of this you already knew this stuff and probably didn’t really enjoy being reminded of it. Don’t blame you. But besides sit, suffer, and bemoan industry evolution, there are some things I think we should try and do.
Let’s agree that any brand, distributor, or retailer that starts arguing with another about how the other guy has screwed up distribution or pricing has to immediately donate $1,000 to IASC.   Elvis has left the building on this one. Cheap decks are going to keep coming in from China and retailers are going to carry blanks and shop decks if their customers want them. Every shop and brand is going to do what they perceive to be in their own best interest.
Cherish, identify and follow those customers who still buy branded decks at full (whatever that means) retail. Give them a discount they didn’t ask for because they come in so often. Be nice to their friends. Give them first shot at new products. The companies and maybe their pros should be contacting them and thanking them. Imagine the loyalty a single email might build. These kids are worth a fortune not just in what they spend but because they are the bedrock of what keeps skateboarding cool.
Go and look at your marketing budget from three years ago. How much have you cut it back and where? Were there some things you should have cut and didn’t, and some things you did cut, maybe because they were easy to cut, and wish you hadn’t? Which ones are working and how do you really know? Tough to figure out, but worth the effort. If you can’t do as much, at least make sure you’re doing the right things.
Where a brand is part of a larger company, try and insulate the brand from the larger corporate circumstances while stealing all the marketing resources and other forms of financial support you possible can. We aren’t starting from nothing anymore and inevitably the “larger corporate structure” is going to cramp your style a bit.
But what I know is that a hand full of relatively small companies have had an amazingly high level of influence and control over skateboarding. Because the people who ran those companies were skateboarders, they did good things for the industry and for their companies. As we grow, and get diluted by the 800 pound gorillas, that influence and control will be reduced to some extent.
On the one hand, no matter how much it’s fought, the cool/urban/underground factor in skate gets diluted by over exposure and mainstreaming. On the other hand, with growth and general awareness of skate, the industry acquires some strength and survivability it didn’t have before. What’s the net? I don’t know. But there’s some business opportunities in there if we don’t automatically stick to what worked before.

 

 

A Living, Breathing Thing; Cash Flow Management

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That’s actually the way he put it to me. Many years ago, the CEO of a company that had been in deep financial trouble and had clawed its way out said, apparently in frustration with my failure to understand his concept, “You don’t understand, the cash flow is a living, breathing thing.”

 Now I know he was right. You don’t just create a spread sheet and manage cash. Especially in conditions of seasonality or fast growth you massage, tweak, manipulate and coerce it. You plead with it and threaten it. You spend too much time trying to get the numbers just right even though you know they will be different the next day.
 
Like a complex computer program with some interesting bugs, cash flows sometimes seem to have personalities. Once you learn about the dynamics of that personality, you’ll be an effective cash manager.
 
In the beginning, most small business owners, be they retail or brands, manage their cash flow out of their back pocket. They know their bank balance and checks outstanding. They understand what bills have to be paid when and can estimate their cash receipts pretty closely. When the numbers are small, sales steady, and the business relatively simple, this works fine.
 
But things change with seasonality and growth. Other people are involved in decisions about receipts and disbursements. The sheer number of factors means keeping it in your head gradually, almost imperceptibly, becomes impossible. A business owner’s tendency not to share critical financial information with others can exacerbate the situation.
 
If you now recognize that you’ve gotten to the point where you have to take a little more formal and proactive approach to cash management, what should you do?
 
First, let’s talk about what we mean by cash flow. We don’t mean the traditional financial analyst’s definition of net income plus non cash expenses like depreciation. Regardless of adjustment for traditional non cash items, the accounting measurement of net income has very little to do with cash flow as I’ll explain below. You can have income and no cash. Not all that unusual a situation in the snowboard industry I’ve noticed.
 
Instead, look at your balance sheet. The assets are what you have and the liabilities are what you owe. The balance sheet is calculated at a particular point in time. Think of your balance sheet as a telephone pole on your street (bear with me on this analogy for a minute). Down the street is another telephone pole. It’s your balance in, say, two months. There’s a bunch of wires strung between them. Instead of electric current, the wires, in this analogy, carry the transactions that result in the changes from the balance of the first telephone pole to the second. Your cash flow is like a voltmeter. It measures the current and changes in the current in the wire.
 
How could you have lots of income and no cash? Let’s say that in the two months between telephone poles one and two you sell $300,000 dollars of merchandise. But the terms under which it is sold don’t require payment for 90 days. Two months later, your accounting based income statement will show sales of $300,000 and profit of whatever your margin after expenses is. But you won’t have a cent in a bank from those sales. Income, but no cash flow. Retailers, of course, are fortunate in not having to worry about that exact scenario since they don’t typically sell on terms, but it’s still important to understand the principal.
 
Now of course if you’ve sold $300,000 in the previous two months under the same terms with the same expense structure, then you could expect to collect that money in the current two month period. So you would have cash flow. And as long as your sales and expenses were the same from months to month, your net cash flow would basically equal your accounting income.
 
I guess everybody who has the same sales and expenses each month of the year can stop reading now. But in case your business isn’t quite so consistent, let’s talk about a simple way to begin to forecast your cash flow and develop good instincts about it.
 
First, let’s look at our two telephone poles. In the two months between one pole (balance sheet) and the other, the dollar amounts of what you own and what’s owed you will change. The net change in those amounts represents the result of all the transactions that occurred during that period of time. For example, let’s look at the inventory number on the two balance sheets. Say that at the first balance sheet date, inventory is $500,000 and at the second it’s $600,000.
 
It probably didn’t make that jump in one mighty leap. Product came and product went with the result being an inventory level of $600,000 at the date represented by the second telephone pole. At different times in the period, inventory may have been well over or under either of those numbers. But at the end of the day, you know you’ve got an extra $100,000 tied up in inventory. So you’ve used an additional $100,000 over that period to buy stuff. Had inventory gone down during that period, you would have a source of cash because less was tied up in inventory. That is, you would have converted inventory into cash.
 
Now, let’s look down at the bottom of the telephone poles in the what you owe section (liabilities) At the first telephone pole you owe the bank, say, $100,000 and at the second, $150,000. If you owe more, than you’ve taken in more money to work with. You’ve increased your cash by $50,000. If bank borrowings had gone down $50,000 instead of up, you would have decreased your cash position by $50,000, though you might be sleeping better at night because you owed the bank less.
 
You can see that the “what you own” (asset) accounts at the top of the telephone pole work exactly the reverse of the “what you owe” (liability) accounts at the bottom. Increase the asset accounts and you tie up cash. Increase a liability and you create cash to work with.
 
Decrease an asset and you free up cash. Decreasing a liability is a use of cash.
 
Probably, I’ve been doing this too long because otherwise I wouldn’t say that there’s a certain elegance in how the various accounts all work together, each related but at the same time independent of the other. Study a couple of balance sheets and think about how the accounts changed. When you begin to have some intuitive comfort with these relationships, you’re well on your way to good cash measurement and management.
 
To be really on top of things, you still need your voltmeter to measure the flow of current across the wires and the changes. Do it on a computer or a piece of paper. Here’s the format I recommend and use myself in various business situations. There’s no magic to the categories. Change them to reflect your business situation.
 
                                                            Jan.      Feb.     Mar       Etc.
Beginning Cash Balance
 
Sources of Cash
            Cash sales
            Collection of receivables
            Line of credit borrowing
            Interest income
            Other
Total Sources of Cash
 
Total Cash Available
 
Uses of Cash
            Product purchases
            Repayment of bank line
            Payroll
            Taxes  
            Rent
            Utilities
            Phone/fax
            etc.
Total Uses of Cash
 
Ending Cash Balance
 
The beginning cash balance is whatever is in your checking account plus (if you’re a larger company) any liquid investments you may have. The ending cash balance each month becomes the beginning cash balance for the next period. Depending on how quickly your situation is changing, your estimate of expenses can usually be based on your historical experience. But remember that just because you get your phone bill in July doesn’t mean you pay it that month. Typical many of your operating expenses will be paid in the month following receipts, and your cash flow has to take this into account.
 
If you’re a retailer, a lot of your product purchases are paid for well after the product is received, and the cash flow has to reflect that.
 
If you already have a budget and are creating and tracking it on a spreadsheet, use the program to adjust your budget to manage the differences between the budget and cash. If you don’t have to pay for your product for 90 days, reflect product costs from August as a cash expense in November.
 
Don’t get too caught up in the process of creating a perfect model. Get it done and work with it. Modify it as you learn more. Look at your projections versus what actually happens. Creating the model isn’t really where you get the benefit. Using it and watching the variables change with each other is. It’s a lot like learning a language. You only get better with practice and as soon as you stop speaking it, you start to lose it.
 
Print it out and hang it on your wall. As changes occur, use a pencil to change entries. Consider the impact of each change on future months. When there are so many pencil marks that you no longer can have a feeling for the cumulative result of all the changes, make those changes on a clean version, print it out and start over again.
 
You’ll quickly find that it is a living, breathing thing that responds to your attentions by surprising you less and less.

 

 

Self Help for Core Retailers; The Coastline Model

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Hi, I’m back. This was just too interesting not to inflict myself on. And I imagine O’Brien couldn’t find anybody else willing to touch it. 

From the last issue of TransWorld Biz, you may remember that our hero, Sean Kennedy of New Zealand, had started a company called Coastline owned by, so far, 42 core surf shops in New Zealand. The purpose of Coastline, as reported earlier, was to provide small retailers with the scale and collective resources to allow them to create and sell, just like the larger chains, their own store brand (Coastline) which they could control and earn a higher margin on. Seems simple, but I imagine that organizing a group of independent retailers and getting them to cooperate is a lot like herding black cats in the dark. But you know what? I like it.
 
I like it because it’s retailers taking the bull by the horns and helping themselves to deal with the issues we know exist for specialty retailers. I like it because it represents a realistic evaluation of how the retail market is evolving. I like it because it may be the difference between success and failure for some of the specialty surf retailers we all seem to believe are critical to the industry.  I like it because it can evolve to be much more than it is right now. I like it because after talking with Sean, I’m convinced it’s being done in a professional and businesslike way.
 
And I like it, truth be told, because I love anything that stirs up the pot like this. This is not “more of the same” to quote me.
 
Why Now?
 
This ought to be a really short section. Being a specialty shop in surf, or in any action sport has become a really tough business. People who aren’t either growing, or increasing their gross margins, or both, are going out of business. Growth happens, and if the market is growing I guess you can expect to get your share if you do things right. If it’s not, or if you want to grow faster then it’s hard work and costs money.
 
It would sure be easier to make money if fifteen or even a higher percentage of your sales were from a product that made you a 60% gross margin instead of 38%. It would be even nicer if some of those sales were incremental because this product represented a great value for your customers.
 
Let’s see, 15% of sales of one million is one hundred fifty thousand. Twenty points on that is $30,000. But if, let’s say, $50,000 of those sales are new, then you get $20,000 on the incremental gross margin plus 60 percent of those $50K in new sales, so the bottom improvement, more or less, is a total of $50,000 in additional gross margin. Granted, I just pulled those numbers out of my posterior parts (or “arse” as they call it in Dublin). But it’s kind of an interesting calculation, don’t you agree? 
 
So that pretty much deals with “Why Now?”. Hey look, I did keep it short.
 
How Do They Do This?
 
A few years ago, I had car insurance with what was called a mutual insurance company. That meant I paid my premiums, based on how much insurance I wanted and how many little old ladies I’d run over while intoxicated, and at the end of the year, depending on how the company did, I got some money back. It could be more or less depending, for the company as a whole, how many of those little old ladies were unhappy about being crushed.
 
Sean wasn’t all that forthcoming about details, but said my insurance analogy wasn’t too bad. Basically, the stores that are owners put up capital each year based on how much product they want. The company designs, gets made, and delivers the product. Coastllines also has to pay its people and own expenses. But it isn’t trying to show a big profit- it’s goal is to help its owners/members make more money. 
 
Coastlines is a bit cautious about what kinds of shops they allow to join the company. For now, they have to be surf shops, but equally important, they have to have a certain level of financial strength. Coastlines is no more interested than any brands in customers, even if they are owners, who can’t pay their bills. Makes sense to me.
 
Of course, that means that the shops who most need this kind of help are less likely to get it, but I’d hate to see the whole concept endangered because of the problems of a few owners, so I guess that comes under the heading of “oh well.”
 
The design work is all done by Coastlines, but they aren’t looking, in Sean’s words, “To create the image for 16 year olds. That’s Quiksilver’s and Billabong’s job. We just want to make an attractive product that sells well and gives the retailer a good margin.”
 
So they are going to be a bit behind the curve and look for what they consider to be the best and safest ideas they see. I suppose that might annoy some people but I can’t say that I see that as being different from what major retail chains do when they do private lable.
 
Sean was, as I would have been, tight with his numbers. That is, he didn’t give me any. But let’s generously assume that his 42 stores average $1,000,000 each annually in sales. Let’s say 20% of their business so far is Coastlines. If those numbers were anywhere near accurate, total retail sales of Coastlines would be (42 x 1,000,000) x 0.20 or $8.4 million New Zealand dollars. I want to emphasize again that I have no idea what the real numbers are, but I’m working towards making a point here.
 
Of course, Coastlines is selling the product to its owner shops at its cost plus some mark up. You pick the markup you think is appropriate and decide for yourself what Coastlines’ sales as a company are.
 
My point is that Coastlines needs to get bigger before it can really take advantage of economies of scale and have buying power with factories. Still, it’s way beyond what a single shop could hope to do already, and that’s why Sean thought it was so necessary.  How might they get bigger?
 
Future Plans
 
This is the intriguing part isn’t it? Sean was closed mouth about how Coastlines might evolve, but that was fine with me. I’ll have a lot more fun envisioning possible futures for Coastline without being encumbered by facts. He did let a few things slip. He allowed as he’d had some calls from different people in different part of the world and in different sports. And when I asked about having other action sports shops as owners, he said, “Not yet.” So he’s thinking about it and, I’m expecting, will be pulled toward growth and other avenues of expansion besides surf. It will be fun to watch.
 
One thought I had was that there wasn’t any reason that Coastlines couldn’t easily function as a trade association as well and offer benefits and services similar to the Board Retailers Association in the US (Join BRA if you haven’t already). And many months before I ever talked to Sean or heard of Coastlines, I had heard rumblings of some form of retailer cooperation from some pretty solid US retailers. If it works in New Zealand, I can’t see any reason it shouldn’t also work in the States. 
 
Right now, Coastlines’ product line consists of wet suits, some simple mens’ and women’s apparel, and a couple of pairs of shoes and sandals. The point is that it’s soft goods and, with the exception of wet suits and maybe sandals, the design and sourcing translates from surf to skate and maybe to some other places with little difficulty. Most retailer, even core surf shops, are selling lifestyle street wear to non participants. I can’t see any reason why Coastlines couldn’t move in that direction and find an attractive source of growth that would be consistent with its core mission. If surf shops, in the midst of unprecedented growth in surfing, need this kind of support, how much more must other kinds of sports specialty shops need it?
 
And the Brands?
 
Well, hell, I assume they would prefer that everybody buy their stuff and that there was no private label business from anybody. And they are probably still watching BRA out of the corner of their eye to see if Roy Turner is going to turn it into a buying group, which he keeps saying is not his goal. They’d also like it if all shops always paid their bills before their due dates and never returned any warranty product. And myself, I’d like to win the lottery, but I’m not holding my breath.
 
Sean and I, and maybe even most of you, agree that it’s too bad that distribution has become as wide as it has. And we wish the specialty retail environment hadn’t gotten quite so tough and competitive. And we’re not quite sure we’re thrilled with all the company stores being opened.
 
And then we shrug our shoulders and go, “If I was a brand, I’d be doing the same things.” We hope it turns out to be good for the industry. We know it’s the nature of competition and will be good for the brands who do it best.
 
But unlike some other people, Sean isn’t hoping brands won’t open stores. He isn’t bitching and moaning to his supplier when it open a shop down the street from him. He’s said, “Okay, this is how it is. How can we respond in a positive way that supports the shops that everybody in the industry thinks are critical to our industry’s future?”
 
If the shops aren’t incubators for new ideas and brands, if they aren’t aware of trends, if they and the brands don’t keep the lifestyle alive, then it’s just a sport and is less of a priority to the participants. And then it’s price that matters.  Let’s hope Coastlines continues to succeed.

 

 

“Hey Look! Real Retailer Numbers!” What’s to Learn From Them?

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For a while now, I’ve been carrying around in my back pocket the National Sporting Goods Association’s 2004-2005 Cost of Doing Business Survey.

I have no idea why they call it that since it obviously doesn’t contain any numbers from either 2004 or 2005.
 
Well, never mind. They do it every other year and collect actual financial date from sporting goods retailers of various types and sizes. They got 314 responses to their survey. 226 of these responses were from what they called “specialty” stores. 217 (not all “specialty”) were from retailers with only one storefront. Now, these aren’t skate shops. They are bike, ski, camping, and exercise/fitness stores. Look, I’m sorry and if any of you know of a detailed survey of the financial performance of skate shops you should by all means write an article about it.
 
But as I’ve argued on a number of occasions in, uhh, well, another magazine…….. Ohhhh, I feel pangs of guilt.  I’ll get over it.
 
Anyway, I’ve argued that the problems of specialty retailers in sporting goods are more the same than they are different at this point so deal or do your own survey. Based on the survey, here are some things you might want to think about as you manage your shop.
 
Earn 4% With No Risk!
 
That’s the current pretax yield on 10 year U.S. Government treasury securities. Generally that’s considered to be a risk free investment. Junk bond funds, according to one source, typically yield about 8% higher than Treasuries, or around 12% currently.
 
For all 314 of the surveyed retailers, not all of which are specialty, the before tax return on net worth  (which is a lot like yield) was reported to have declined from 15.8% in the 1993-94 survey to 9.2% in this survey. That’s a decline of 42% and brings us well under the junk bond fund yield I’ve included for comparison purposes.
 
For non financial people, the word “junk” can have a negative, almost personal, connotation. But it’s just a low rated bond that has a greater chance of default than an investment grade security. Those of you have had to borrow money to run your shops and could only do it with a personal guarantee know that however your risk compares with a junk bond fund, the lender didn’t consider the risk low.
 
The survey also shows that, over the same period, the before tax return on assets for all 314 respondents fell from 5.7 to 3.9 percent. In the intervening surveys it fluctuated at higher levels of from 6.4 to 9.9 percent, but 3.9% is where we are in the latest one. The return on asset number is not necessarily comparable to a yield, but you can see that the trend is the same.
 
Net profit before tax as a percent of total revenue fell during the same period from 3.0 to 1.8 percent, though it was higher in the intervening surveys.
 
On the positive side, gross margin rose from 36.4 to 40.8%. That’s an indication, I think, of increased sales of shoes, apparel and other soft goods. I’m not prepared to believe that hard goods margins have increased. Inventory turnover improved from 2.4 to 2.7 times.
 
Wait a minute- if gross margin is up and inventory turns improved, how come profitability is shot to shit? You don’t have to be Sherlock Holmes to deduce that the cost of running a retail store has gone through the roof. But you already know that, don’t you?
 
The survey only supplies these kinds of time series numbers for the complete sample- and they don’t supply balance sheet numbers across time. But I will tell you that the risk associated with running a shop has grown. You’ve watched as people open fewer shops and more close and you know the same thing.
 
So, higher risk and lower returns. That risk free 4% return is starting to look sort of interesting. What can you do about this?
 
Grow, Damn It.
 
Just to get right to the heart of the matter, below is a chart you should look at with data taken from the analysis of the 226 specialty shops in the survey.
 
Store Revenue
Owner Comp. & Profit to Revenue
Total Debt to Total Assets
Less Than
$500,000
7.6%
79.7%
Greater Than
$2,000,000
8.8%
56.2%
 
 
In percentage terms, bigger stores earn more and take less financial risk. Their profit margin is almost 16% higher and their leverage is 29% lower. Be bigger. And recognize that it’s hard to see a financial model that makes sense for very small stores. For those of you who are small and are making it, I’d love to hear from you to find out how. That would be worth an article.
 
Be Important to Suppliers
 
I suspect most shops get a big chunk of their sales from a relatively small number of brands. Those brands are critical to your shop’s success. Bluntly speaking, you can’t survive without most of them. But as they grow, and as their distribution widens, the financial importance of your sales to their success inevitably declines. You can’t differentiate yourself with your numbers, but you can with your input.
 
Tell them what’s selling or not selling and why. Give them insights into trends. Send them a list of comments kids have made about their brand- or about other brands. Don’t just wait for the rep to come in. Go right to the sales manager, or higher in the organization, and tell them. Don’t do just what they expect or what they ask for. Do more. Surprise them. I bet it’s not really much work because not that many retailers do it.
 
Oh, and pay your bills on time. If you don’t, your credibility is shot to hell no matter what you do and you’re just another problem. By the way, my definition of “on time” is that the check arrives at the supplier on the due date.
 
Tell the brand what you’re doing to support it. Be perceived by the brand to be important to its success in your local area. Become the shop the senior managers want to visit when they are in town. In turn you can expect?  Well, what would you like? Ask for it. Now, you have the credibility to get it.
 
Not for a moment am I suggesting that this can, by itself, overcome the apparent financial disadvantage of being a small retailer. Indeed, it probably only helps once you are well established.
 
Live the Numbers
 
I recognize it’s inconvenient when some pencil pushing, number crunching, calculator carrying, green eyeshaded SOB like me comes along to present you with inconvenient facts. If you feel like it, shoot the messenger. Lord knows, I’ve been shot often enough. I await your slings and arrows.
 
It’s difficult, I suppose, to deal with some of this stuff because we didn’t get into this industry as a clever shortcut to becoming accountants. Still you need to be one now more than ever. Look dispassionately at your numbers. How does your business compare to the NSGA numbers? If the industry, and the retail environment, continues to evolve as it is now, and the financial trends in the NSGA report continue, how, to put it bluntly, will you survive and prosper? You can, you know. And the industry needs you to. But you have to plan for it.
 
The NSGA can help you. So can the Board Retailers’ Association and the Retail Owners Institute. Don’t sit on your ass and wait to be swallowed by the whale (hell of an accidental analogy) like Queequeg in Moby Dick.
 
About the Numbers
 
It’s my personal belief that it’s the retailers who are doing fairly well, and who have the systems to provide the requested numbers without too much work, who are likely to respond to surveys. If so, it skews the numbers towards showing better performance. Also remember that in small businesses, the owner’s financial position and the business’s are synonymous. Return on investment may look lousy only because the owner is taking a bunch of money out. That’s why I used owner’s compensation plus profit to revenue in the table above. Finally, beware of small sample size. 314 retailers may sound like a big sample, but once you start dividing them up into full line and specialty, by store size, by revenue, by type of store, some of the group sizes can begin to get a bit small. That’s why the NSGA has used the median, rather than the mean in its calculations. The mean can be distorted by a couple of extreme values- especially as sample sizes get smaller. The median doesn’t have this problem.