Now What? The Established Shop Owner’s Dilemma

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You started it because it was going to be fun. You were younger- a lot younger. And perhaps just a bit naïve and optimistic. You didn’t know what it was about margins that made everybody think they were gross, but what the hell. If you could hang with your friends, do what you loved and have a few beers at trade shows, starting a retail shop obviously made sense.

A bazillion years later, your stop is still here and successful. You’ve gotten some of the things you wanted out of it. Along the way, you’ve become something of a businessperson. You’ve got good systems and know your numbers, are involved in your community, know your customers and why they buy from you, have managed to have some competent and semi-stable employees, and are actively involved every day in running the shop.
 
As is typical of most small businesses, you and the shop have become synonymous and therein lies the rub. Somehow, working six or seven 12 hour days doesn’t seem quite as attractive as it use to. There’s children, a spouse who for some unknown reason wants to spend time with you, some actual interests outside of action sports and, frankly, you just don’t have the stamina you use to have.
 
What use to be the thing that kept you going has the potential to become something of an albatross if it hasn’t started to already. What can you do? What are the choices, and how are some people in this situation thinking they might manage it?
 
I talked to some shop owners who, if they aren’t all in this situation already, are sure starting to think about it. I expect to quote some people, but I’m not going to identify them. Some of the things they said, that I want you to hear, are just a bit too personal for attribution. 
 
Choices
 
Most of your assets, a lot of your time, and a piece of your self-image are tied up in the shop. Someday, maybe now sooner than later, you are going to want or have to sell it, or at least make a management transition happen. You have basically four choices. Sell it all. Sell part. Don’t sell but get some management help. Or close it.
 
Selling it is easy to say, and seems an obvious choice. But you’re likely to run up against some significant roadblocks. 
 
 
Having partners who share the shop’s equity with you can be it’s own interesting challenge. What happens when you and your partner (s?) don’t agree about something important?
 
Just bringing in management and continuing to own it 100 percent kind of makes sense, but how comfortable will you be with somebody else making decisions with what’s still your money?
 
Closing the shop solves the issues of partners and management, but why would you shut down a perfectly good shop?
 
As we look at each of these, remember that these kinds of decisions lifestyle as well as business decisions, and must be viewed from both perspectives.
 
Sell!
 
“For the 150 to 200 thousand dollars I could get, I can work really hard and maybe make that much in two years.”
 
The statistics suggest that you haven’t necessarily gotten rich owning a specialty shop. I forgot which retailer it was who told me, “Hey I paid the bills and snowboarded a hundred days this season, so I guess it was a great year!”
 
The sad truth is that from a strict financial point of view, a specialty shop isn’t usually worth that many dollars. “I tried to sell a shop I owned years ago, but all they offered was half the fixture value,” was one comment I got.
 
Much of its value to the owner is in the flexibility and lifestyle it offers. Financial buyers won’t focus on that. They will see how hard the owner works and how relatively little they pay themselves. They will recognize how critical the owner is to the business and know it’s at best difficult to replace them. It’s likely they will conclude that while some modest growth is possible, it’s not likely the business will double in the next few years.
 
To the extent you have more than one shop, this changes a little. Multiple shops suggests some growth potential and indicates you have made some progress developing management that might fill the hole left by the departure of the owner.
 
One owner has a plan to expand the number of shops and put management in place with the goal of having the option to sell for a reasonable price some day in the future. “That’s it,” he says, “That, or I work until I’m seventy.”
 
Partner Up
 
Yeah, but with who? And just what does it mean to have a partner?
 
“As far as I can tell, I’m kind of stuck here,” the owner said. “I took five weeks off and things got kind of sloppy.”
 
Did they really get sloppy, whatever that means, or were things just not being done the way the owner wanted? Could he stand it if somebody was making decisions differently from how he had always made them? Where and how do you find somebody you trust?
 
If you are truly sharing the equity in the business in a meaningful sense, then this is somebody whose judgment you are comfortable with. That means two things- they have been in action sports business for a while and you have known them long enough (measured in years) so that you have a high level of confidence in them. Even then, once you are both owners of the business, the relationship will change. Now, it’s their money too.
 
Sharing the company’s equity with a partner requires a lawyer. Sorry, no choice. You need a buy/sell agreement and a dispute resolution procedure not to mention the paper work by which the actual equity sharing occurs. And how, exactly, is that going to happen? Is your new partner going to pay you cash? Do they have any? Are you willing to take a note collateralized by the equity, which of course may not be worth shit if they screw up? How are you going to work together? Who’s responsible for what?
 
It’s not to say that it’s impossible, but equity sharing agreements can be damn tough and this is probably my last choice for an owner unless it’s part of a longer-term exit strategy where the new partner eventually becomes the one hundred percent owner.   
 
Management Help
 
How many hours a day do you work? I asked. “Fuck!!!” was the beginning of the answer. When the smoke cleared, he allowed as how he’d like to get down to twelve. A second owner estimated 200 to 250 hours a month. A third just moaned. A fourth, when asked how you got off this treadmill, said, “You don’t.”
 
Not surprisingly, all four of these owners are focusing on developing competent management for their businesses. One already has two good people he thinks/hopes might be buyers of the store in the future. Right now, he’s just glad there are there to take some of the load off his shoulder.
 
A second is “Waiting for somebody to step up to take over more responsibility.” He’s willing to give up some equity or more money when he sees that happen.
 
The person on the treadmill said he’s “delegating stuff that doesn’t matter as much” and “Not trying to do everything anymore.”
 
It’s my opinion that there’s nothing you can do that’s more important than develop some management. In the short term, it can take some of the load off of you. In the longer term, it may be the single most important thing you can do (besides make sure the business makes money) that will position the business to be sold someday- either to those managers or an outsider.
 
Close It Down
 
Somehow it isn’t very psychologically satisfying to talk about closing down a perfectly good shop. Yet, if there are no buyers at a reasonable price, for the reasons described above, it might be the most financially sensible solution. Are you better off selling for “half the value of the fixtures” or liquidating the inventory through a big sale and then selling the fixtures? Who knows, but it’s worth thinking about
 
Not Just for Old Owners
 
Or maybe, rather than having to contemplate closing down some day, you should start to think now about what you’re going to do with your shop. How are you going to make sure you have some options in the future when you need them?
 
We learned at least two things above. First, the single most important thing you can do to give yourself options and flexibility is to develop management. Second, we learned that it takes time- years in fact.
 
So even those of you who aren’t old enough to be worried about an end game for your business should start thinking about it now. If you’re lucky, some day you’ll get old enough for it to be an issue. And in the meantime it will make running your business a lot more fun, unless you just love spending every waking hour in your shop.

 

 

One Possible Future; An Industry Model for Skateboarding

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Last month, I wrote about surviving a downturn, suggesting that this wasn’t just a downturn but a fundamental change in industry structure, requiring a change in the way successful companies competed. This month, I’d like to be more specific about how I see the industry evolving.

It’s perhaps a bit pompous to do this, because my crystal ball is no better than yours. But my recent study of China’s fixed exchange rate and the September 21 cover of the New York Times Magazine made me decide to give it a shot.
 
Perhaps that needs some explaining.
 
Chinese Exchange Rates
 
I took a whole column in SnowBiz to write what I’m summarizing here. It should be out by the time you see this, so for more detail refer there. Basically, China keeps its exchange rate fixed at 8.3 Yuan to the US dollar. Most currencies are managed from time to time and to some extent, but the major ones change against each other daily based on interest rates, trade, general economic conditions and other factors. The Chinese government makes sure its exchange rate doesn’t change.
 
The result is that the Yuan is between 10 and 40 percent undervalued against the dollar. That is, stuff we buy from China is between 10 and 40 percent cheaper than it should be. Great for consumers and companies that import from China. Not so good for U.S. manufacturers and people who want to sell to China.
 
And there’s not much you, as a US manufacturer can do, given the artificial undervaluation of the currency. It may be, as some have claimed, that you can beat low labor costs with technology. But add the artificial exchange rate advantage and you’re screwed.
 
It’s unlikely that the undervaluation of the Chinese currency will go away in the short term. Among other reasons, we need them to invest a chunk of their trade surplus with us in U. S. Treasury securities so we can finance our budget deficit.
 
We all know that more and more skate hard goods (not to mention soft goods) are being made in China. Lacking some kind of meaningful technological change in skateboards, expect that to continue and grow. If the quality of Chinese made skate hard goods is still an issue, and I’m not sure it is, it won’t be for long.
 
So the stuff gets made a lot cheaper, and the quality is fine. Lacking product differentiation, those lower prices eventually, through normal competitive dynamics, get passed along to consumers. Good for the consumers, and perhaps for the general growth of skate. Bad for manufacturers and retailers.
 
Because even if sales of hard goods grow (unless they grow an awful lot) and even if percentage margins remain the same, the total number of margin dollars realized from hard goods sales declines.
 
Margins dollars are the dollars available to pay for team, marketing, rent and telephone, salaries and bunches of other stuff excluding product. Whatever left is profit, more or less.
 
I am not suggesting that there will be no skaters left willing to pay higher prices for branded decks, but I expect the number of such skaters to decline as percentage of the total. And, at the end of the day, there’s no reason higher end branded decks can’t and won’t succumb to the same competitive pressures as any other deck.
 
So if you’re a seller of skate hard goods, manufacturer or retailer, your financial model may change. In hard goods, you’ll have to sell more to make the same money.
 
Boy, I’m just full of good news today, aren’t I?
 
The Kid on the Cover
 
I think he was four. He was a skateboarder and he was on the cover of last Sunday’s New York Times Magazine. The story was about how really young kids are becoming sponsored and managed.
 
Seeing him there didn’t tell us anything we didn’t already know about the mainstreaming of skateboarding, but it sort of galvanized me into saying the following:
 
The skate market will increasingly be driven by the apparel (including footwear) brands. They can sell product to anybody who thinks that skateboarding is cool. Hard goods brands can only sell to people who skate. The apparel market, which I suppose includes everybody who needs shirts, pants, and shoes and is over four and under 50, is simply a couple of orders of magnitude bigger than the hard goods market. And, for successful companies, margins are and will be better in apparel than in hard goods.
 
They will influence skateboarding, to put it bluntly, because they will be bigger and have a lot more money than most hard goods companies. Hard goods skate companies already know everything I’ve said here. They have the following choices:
 
1)            They can try and use the strength and remaining cash flow of their established brands to transition into soft goods and, ultimately, make those soft goods the bigger part of their business. You saw that process already going on with some brands at ASR. Soft goods are tougher to do well than hard goods, and skate brands that take this approach will (for the most part) be competing with companies that are larger and better financed than they are. They will also have to decide whom they are trying to sell to- the core skaters who buy their branded product, or the larger mainstream market. Obviously, it starts with the core and has the possibility of being extended from there. The art is in figuring out how to expand distribution without damaging the brand’s credibility.
 
2)            They can sell their companies. But if they wanted to do that, they should have done it two years ago at the peak of the frenzy. Element is the only brand I recall that really did that. Companies selling now won’t get near the prices they would have gotten. Still, it may turn out to be the only financial choice for some and certain brands may have more value as part of a larger organization than as stand alone companies.
 
3)            They can remain as independent “core” skate companies. Whether there is a financial model that can support that strategy is unclear to me.
 
If you want some confirmation that this kind of industry evolution is a reasonable possibility, look no further than the surf industry. It’s dominated by a handful of soft goods companies. Mainstream sales, for both brands and retailers, are where the sales volume and profit is. Many to most industry customers don’t surf. Hard goods are having problems with cheap product from China, and nobody seems to make any money on them. Hard goods have hardly been discussed at the last two surf industry conferences.
 
Under the scenario I’ve suggested here what, exactly, is skateboarding? Fairly clearly, it’s not the kind of urban, underground, at the fringe activity it use to be. Time was when it was in the interest of the major hard goods brands to position it like that and hell, that’s how it was anyway. But if the picture of industry evolution I’ve painted here is valid, that no longer makes sense at least in terms of the business strategy. Because, as I’ve tried to explain above, the sales, growth and margins are in the other, much, much larger part of the market- the mainstream, if you will.
 
You can be a successful, profitable $20 million company with a significant marketing and advertising program if your margins are 45%. If those margins fall to 25%, I’m not so sure that works. Okay, I’m pretty sure it doesn’t actually.
 
More and more of my articles could be written for any of Skate, Snow or Surf Biz. There’s a lesson there somewhere about how the industry is evolving. In line with that, I want to suggest that skate retailers who haven’t seen it get hold of the September 2003 issue of TransWorld Surf Business and read the “When It’s Time to Change” article on the cover. It’s an interview with K-Five Boarding House owner Jurgen Schultz. He’s much smarter than I am because he started reacting, as a retailer, to the changes I’ve described here a couple of years ago. He took some risks to do it, but he saw doing nothing as a worse risk.
 
That’s a good way to think in this market.

 

 

How to Survive a Downturn And Take Advantage of the Opportunity It Represents

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In previous articles, going back to when skating was growing like the proverbial weed, I’ve talked about issues related to a downturn. Things like expense control, if you should sell your business, characteristics of a maturing market, cash flow management, the impact of a recession, and the potential impact of foreign competition. Given the continuing, current conditions in the skateboarding industry, it’s kind of time, and probably well past time, to bring it all together.

 
This isn’t necessarily a completely cheery subject-companies do go out of business in downturns- and I’ve learned over the years that the practice of shooting the messenger is alive and well. Still, I know from my consulting practice that denial and perseverance in a period of change is what gets good companies in trouble in the first place. Getting them to recognize that continuing to do what they’ve always done successfully when the business climate changes is more of a risk than doing new and apparently risky things is hard.
 
This is important, so I guess I can deal with a little hate email.
 
The Good News
 
Let’s recognize that downturns are opportunities for companies with sound competitive market positions and strong balance sheets. As weaker competitors go into crisis mode and spend all their time managing cash, cutting back on commitments, not delivering well and scurrying around looking for money, solid player can, and will, and do, move in.
 
That’s not to suggest that the soft market isn’t impacting even solid brands. But at the least they can continue their ad campaigns, deliver product when promised, pay their team on time and service customers better than their weak competitors. If others can’t, that puts you ahead of the game even in a soft market.
 
Now consider taking the next step. If you have confidence in your market position and branding, this might be the time- when your weaker competitors can’t respond effectively- to take that next step. Come out with that new product. Introduce new POPs. Go aggressively after those retailers who’ve been carrying other brands instead of yours.
 
Established skate retailers have for sure taken a sales hit- especially in hard goods. But some established stores have watched competing newcomer retailers disappear, and they’ve found some better deals available from brands.
 
Do I know that from careful market research and talking to dozens of retailer? Nah. I’ve talked to a few, and what I’ve heard has been pretty consistent. But this is what happens in every industry after a big growth spurt. As the industry matures, margins decline (temporarily or permanently), retailers have more power, consumers get smarter (so marketing may not work as well), product differentiation gets harder to come by, overcapacity can be a problem, competition shifts to a greater emphasis on cost and service, and international competition increases.
 
Aside from that, nothing changes.
 
These structural changes are different from industry to industry, but they are always present. Think of how each can be applied to skateboarding and I think you’ll see my point.
 
Retailers, even if they are skate focused, are usually not just skate retailers. They also sell surf, snow, bike and/or others in some combination. Surf, of course, is hot right now and taking up some of the slack of a soft skate market for retailers.
 
The decline in skate hard goods sales isn’t as traumatic for retailers as it would be if those were high gross margin items. Obviously, any sale with any positive margin contributes to overhead. But if you could pick where sales were going to suffer, you’d pick the lower margin items. In skate, that’s typically hard goods. Besides being diversified across sports, retailers have the added advantage of selling shoes and clothing to people who don’t participate in the sport but still needs soft goods.
 
Bad News
 
Companies are almost organic is their single-minded focus on survival. Even when any objective analysis of risk versus potential return suggests they should go quietly away, they don’t. Well, people who are pessimists don’t start businesses or rise to lead them so maybe that’s inevitable.
 
If you’ve got a few spare minutes, go to the Harvard Business Review web site (www.hbr.com) and buy a copy of an article in the July 2003 issue called “Delusions of Success; How Optimism Undermines Executives’ Decisions.” What the authors say is that “In planning major initiatives, executives routinely exaggerate the benefits and discount the costs, setting themselves up for failure.” That consistent with what I’ve seen in my practice.
 
During the kind of fast growth and seemingly endless product demand that skateboarding recently experienced, managers could do no wrong. The truth is that growth and cash flow cover up a weak balance sheet and lack of a sustainable competitive advantage admirably. When the cash flow and fast growth goes away, so does the illusion that everything is working fine.
 
I can’t think of a single company owner who, recognizing that the ride was over said, “Say that was fun. Let’s pick up our chips and get the hell out of Dodge.”
 
They believe that what they were doing before can still work, so they try harder. But more of the same is rarely the answer. Some succeed. But many, and perhaps most, just prolong their agony. In the process, and this is why it’s bad news, the market actions they take hurt other companies better positioned to succeed. They discount product. They extend terms. They sell into discount channels. They don’t pay suppliers. They flood the market with product that devalues all brands’ products. In their attempt to return to the glory days they take action which encourage the industry structural changes I allude to above that make their survival unlikely. The HBR article referenced above specifically mentions competitors’ response as one of the things executive tend to underestimate the impact of.
 
What’s a “Downturn?”
 
The implication of “downturn” is that there will be an “upturn.” Fair enough. I guess there will be. Soon would be good. But lurking in that thought process is the suggestion (or the hope) that the upturn will take us back to skateboarding growth rates of a year and a half ago. I don’t expect that to happen, though I would be thrilled to be wrong.    .
 
I don’t expect it to happen because of the structural changes in the industry I refer to above. They don’t have to be permanent- but they often are. What is going to change about skateboarding that’s going to take us back to the days when it was a small, underground, sport? Is there some technology out there that won’t just make skateboarding easier or better, but will fundamentally change it? It has to be something like what the invention of the microprocessor did for the computer.
 
If you are concerned that we aren’t going back to the “good old days” then your job isn’t to survive the downturn, but to succeed in the new skateboard business environment. What does that mean?
 
I guess it depends what you think the skateboard business environment is and is going to be. There’s no reason to believe I can see the future any better than you can, but if you feel that a return to fast industry growth is unlikely, even when the economy improves, then you might consider the following in creating a viable business model.
 
Control your expenses better. Duh. As far as I can tell, most skate industry brands and, to a lesser extent retailers, are already doing a pretty good job at it.
 
Understand clearly and specifically why your customers are buying your product. Adjust your spending to conform to that understanding. For example, if price should turn out to be critical, maybe you should look hard at your marketing budget since you might end up with a better bottom line by reducing some of those expenses and cutting price a bit more.
 
Or maybe it’s your team, and you should be promoting the hell out of them and raising prices. But when you do that, of course, you’re making a decision to limit yourself to that segment of the market that’s highly team influenced. How big is that market?
 
Build a financial model that tells you what volume you need at what gross profit to succeed. No denial and perseverance please. Look at it hard and without the rose colored glasses. When you project growth, have really good reasons for expecting it. May I suggest again the Harvard Business Review article mentioned above?
 
Look for brand extensions that won’t damage the quality of your brand. In this business, that brand is all you’ve got.
 
Retailers, don’t stop taking chances on carrying some new product. But at the end of the day if it doesn’t check and it doesn’t have a good margin be ruthless in your pruning. And make sure you have the systems to give you the information. Skate retailers no longer have the ability to screw up their buying and survive.
 
Consider the possibility that you may need more volume, as a retailer or a brand, to succeed. With a lot of product, hard and soft goods, that’s all high quality and pretty much all the same, and smarter consumers who are no longer quite as likely to be swayed by marketing, you may not have a choice.
 
This new skate industry structure may be temporary- or not- and it may suck. But if you manage your business starting right now for the new conditions, you can succeed and even prosper. Get to it. Your job isn’t to wait out a downturn but to succeed in it.

 

 

Product Line Size; The Impact on the Way We Do Business

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It began, I suppose, a couple of months ago when somebody at Burton sent me their complete catalog, buying book, whatever you want to call it, including prices and terms. Damn near five pounds it weighs according to my handy, dandy bathroom scale including colorful blue binder. It contains all of the Burton Company’s brands and certain product for international distribution that won’t be seen in the States, so sure it’s big.

Ride’s catalog isn’t as big by weight, but it comes with two CDs full of product images and photos.
Well, you get the picture. Big product lines and lots of information to digest. I wouldn’t be surprised if there were more products to choose among than when there were 250 snowboard companies.
Big product lines aren’t new, and at least for the larger brands, no retailer buys everything the brand offers. But what struck me like a blinding bolt of the probably obvious is how much the business of snowboarding has had to change just because the product lines have become so large. Over the last eight or ten years in snowboarding we’ve studied changing competitive conditions, discussed diversification as a way of overcoming seasonality, the impact of foreign production, the role of chains, and “fixing” the buy sell cycle. I’ve been in the middle of some of those conversations.
Imagine my chagrin when I considered the possibility that a simple thing like the increased size of product lines may have been as or more important to industry evolution than the other apparently more important and more complex business factors we’ve taken so much time and energy to discuss and try to manage.
There is the chicken/egg factor to consider. I’m arguing that certain industry changes happened because of the increased size of product lines. You might also argue that product line increases were largely a response to the other changes mentioned above. I’ve previously suggested that to some extent increases in the size of product lines were a response to what competitors were doing rather than an attempt to meet identified customer needs. To the extent that is true, I am comfortable suggesting that large product lines have changed the way the industry functions.
Where are these changes? In general, the process of getting a specific order takes more preparation, a more cooperative and business oriented relationship between the company’s rep and the retailer, and more time if only because there are more factors to consider. Specifically, the role of trade shows, the selling process, and the reps function and relationship with the shop are all different. Let’s see how.
Trade Shows
How long, exactly, do you think it would take one of the major brands to present its whole product line to a retailer? Three hours? A day? After that presentation, assuming you can still hold your head up, how much do you think you’d remember? How long would it take to figure out your order and get it written? No retailer should be allowed into a product presentation meeting without first chugging two Red Bulls and presenting a notarized affidavit that they got a good night’s sleep.
For many brands it’s difficult at best (Impossible for most brands in my opinion) to show what they need to show to all the retailers they need to show it to, at Vegas alone. Mervin Sales Manager Greg Hughes says that the SIA show has become more important for them because it’s a preview show. “But we have a hard time showing all our product to all the retailers who want to see it at the show, and we’re smaller than a lot of other guys.”
If you think about the sheer time commitment, and logistics of getting an order together from a major brand it’s pretty clear why SIA adopted the “See it, try it, buy it” approach for the buy sell cycle and why Vegas is more “See it” than “Buy it.” If you do complete your buy there, it’s likely that a lot of preparation went into it before the show.
Burton National Sales Manager Clark Grundlach says Vegas is not about writing orders any more. “It’s an opportunity for dealers to review previous decisions and maybe see some late stuff. Sixty percent of our dealers will have seen the line before Vegas. We can’t show the line any other way given its size. The six weeks between Vegas and when everything has to be wrapped up just isn’t enough time.”
Clark didn’t say, but I’ll bet sixty percent of dealers means north of eighty percent of total sales.
The regional shows seem to be either more or less important, depending on who you are. For Burton, with eighteen territories and its own showrooms, the regional shows are a good place to sell accessories and to see some smaller dealers who didn’t get to Vegas. According to Mervin’s Hughes, on the other hand, “Mervin gets a lot of solid orders at the regionals. We can show our whole line there.”
Rossignol Marketing Manager Christine McConnell sees it a lot like Hughes. “They see it in Vegas, and buy it at the regional shows,” she says, but notes that around forty percent of accounts have seen at least some product before Vegas.
Selling Process
Remember the days when your whole product line (nine decks, one binding and some ts and hats) fit on a trifold? Assuming the retailer had decided to carry your brand, you could show the line and get the order in about twenty minutes. Then you both just had to pray the stuff actually showed up somewhere near when promised and that the quality wasn’t too bad. Some of you are smiling as you read that, remembering a very different snowboard industry. Some of you (your loss I’d say) don’t know what I’m talking about. God, it was more fun then.
Sales meetings tend to be in early to mid December now. Especially with soft goods, which typically have to be delivered before hard goods, an early start and on time delivery is more critical than ever. Limited showing of product lines seems to take place in December. According to Rossignol’s McConnell, smaller retailers have their hands full trying to sell everybody’s current product. “The reps have their samples in December and are ready to go, but don’t really start showing product until January. They don’t want to get in the retailer’s way.”
For chains and large accounts, where the selling and buying isn’t done by the same person, I suppose you can do a December presentation without disrupting the selling process. Still, if I were a retailer, big or small, I’d like to know what my sell through was like before I talked about new buys. And that doesn’t happen until the holidays are over, at least in hard goods.
Role of the Rep
More and more, it seems to be the rep’s role to consult with and recommend to shops what product they should carry. Armed with a lot more detailed information then they use to have on last year’s purchases, sell through and the retailer, they can and often do propose a buy for the customer that fits their size, open to buy dollars, and customers.
Mervin’s Hughes put it this way. “Good reps suggest what to buy. They know the shop, and they know what’s going to be highlighted in ads and videos, and that drives sales.”
In hard goods, I suspect retailers, especially smaller ones, are inclined to listen to a well-prepared rep. These days, all hard goods are highly functional. Brand choices are a lot fewer than they use to be, and brand switching, as a result, less common. Hell, what are you going to switch to that’s going to make any difference?
A decline in product differentiation from brand to brand means the reps can be an important competitive tool in placing product with a retailer. The quality of the business relationship between the rep and the shop buyer may have a lot to do with the brand’s success in the shop. Rossignol’s McConnell puts it succinctly: “Between the rep and buyer, they know what’s up in the shop. Their combined efforts go a long way towards insuring the right purchasing strategy.”
This relationship helps the process of getting the order together. There should be broad, early agreement on what parts of a large line are or are not appropriate for a given retailer. In some cases, the brand simply isn’t prepared to sell certain product to a retailer. The retailer’s size and open to buy for the brand may also dictate where to focus the buy in a product line they can’t possibly carry all of.
Finally, the rate of change in snowboard product simply isn’t as great as it use to be, and that takes some of the angst out of trying to pick the “right” product and reduces the difficulty of working through a huge line. Inertia can be seductive, though dangerous.
I suppose the possible downside for the brand comes at the end of the season if the rep recommended product didn’t sell through which, at the end of the day, is what it’s all about. “Hey, your rep told me to buy this stuff, which is still sitting here, and you’re pushing me to pay this bill?! Back off.” I’ll bet that conversation is the basis for a deal or two in the annual snowboard industry rite of spring- settling accounts.

 

 

China’s Fixed Exchange Rate; What It Means for Snowboarding

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My very first article for TransWorld, which became Market Watch, was on foreign exchange. I guess in some sense we’ve come full circle. But it’s never much fun ending up where you started, so I want to ask your help in keeping Market Watch valuable to you and occasionally controversial.

It use to be, when the pace of change and general dynamism of snowboarding was greater, that my problem was picking among a bunch of topics I felt should be addressed. Now, for better or worse, the industry is a little less dynamic than it use to be. What are the issues that Market Watch should be focusing on now? Is there a continuing need for the column? Leading edge topics seem fewer and farther between. Got any ideas? Want me to just shut up and go away? I don’t want to write Market Watch just because I’m in the habit of doing it. Email me at jeff@jeffharbaugh.com. Thanks.
 
Meanwhile, back on China and its exchange rate. Maybe a month ago, somebody emailed me about an article I’d written in SkateBiz on production in China. They said, “Hey, what about the fact that the Chinese currency (the Yuan) maintains a fixed exchange rate of 8.28 Yuan to the dollars?”
 
They have a point and I really wish I could find that email to thank them by name.   I also wish I’d thought of it first.
 
Fixed Exchange Rate
 
Most major currencies (the Japanese Yen, Eurodollar, British Pound to name a few) float against the dollar. That is, the amount of foreign currency you can buy for one U.S. Dollar changes daily based on productivity, interest rates, economic growth, etc. Not so with the Yuan. By buying and selling currencies on the open market, the Chinese government maintains a stable exchange rate against the U.S. Dollar. So what?
 
Estimates are that the Yuan is as much as 40% undervalued against the Dollar. So What?
 
Let’s imagine for a minute that the Chinese suddenly allowed their currency to float and that over some period of time, it revalued by 40%. That is, your crisp greenback would, at the end of that period, buy 40% less from China for the same number of dollars than it had before. Another way to look at it is that the Chinese could buy 40% more U.S. goods for the same number of Yuan. Would that be a good thing or a bad thing for the snowboard industry? Would you be surprised to learn that the answer is, “It depends?”
 
The Chinese like this arrangement. It has been critical to the growth of their economy. Their exports to the U.S. doubled between 1997 and 2002 from $67 to $125 billion. During the same time period, U. S. exports to China have grown only from $13 to $19 billion. It means that Chinese capital tends to stay in China, rather than be used to purchases various foreign products, and that additional investment flows to China.
 
The general consensus, however, seems to be that floating exchange rates promote the efficient allocation of capital. Over the long term, it makes things better for everybody.
 
But in the words of the economist John Maynard Keynes, “In the long run, we are all dead.” He has a point, and he should know ‘cause he’s dead. Most currencies are managed to some extent by open market operations, tariffs and/or quotas. The U.S., the world’s greatest proponent of free trade, is no exception, so let’s not be throwing too many stones here. Well, let’s face it; it’s not always the role of a national government to make things better for the whole world. And imagine the outcry from consumers when everything they had bought from China was suddenly 40%, or even 20%, more expensive. Politicians aren’t necessarily great at dealing with stuff like that.
 
At a time when more and more snowboard product (hard and soft goods) is coming from China, who would be the winners and losers in a revaluation of the Chinese currency? Let’s look at a couple of specific examples.
 
Winners and Losers
 
I don’t think there’s a company in the industry that doesn’t get some product or product component from China. But to me there are a couple of companies that make for an interesting comparison.
 
K2 spent a whole lot of money and put forth a lot of effort to move their snowboard production to China. I didn’t necessarily like seeing it happen, but I thought it was probably the correct business decision given that they already had an established facility there. If the Yuan was suddenly revalued by 40% (which I don’t see happening as I’ll discuss below) what would be the impact on K2’s Chinese production? Assuming they kept the same price structure, their price in the U. S. would have to go up by 40%. Actually, I guess a little more than that, since the duty would go up based on the higher import price.
 
I don’t know what they’d do- move their production back to Vashon Island maybe? Kind of doubt it. To use the international technical financial term, they’d be shafted.
 
In obvious juxtaposition (god, I love that word) to K2 is Seattle based snowboard manufacturer Mervin Manufacturing. Mervin has used every technique of technology, waste reduction, process engineering and a generally positive attitude to keep making snowboards in the U.S. “Made in the USA” has been the major focus of their advertising. Now, even they are looking at bringing in a price point, Chinese made board. They don’t much like it, but they feel like it’s a necessary competitive move.
 
A 40 percent revaluation of China’s currency maybe wouldn’t solve all their problems, but it would sure make them more competitive, at least against Chinese made snowboards. I mean, if they are making ends meet now, what could they do if other companys’ products suddenly cost them 40% more? Assuming a substantial part of that cost increase was passed on to retailers and, ultimately, to consumers, Mervin’s products would look pretty attractive.
 
Yes, I know that China isn’t the only cheap place to buy product. Yes, I know that just because your costs go up doesn’t mean, especially these days, that you can raise your prices by the full amount of the cost increase and expect consumers to swallow it. But it’s pretty clear that the undervalued Chinese currency had a lot to do with K2 moving production to China and Mervin moving to get some boards from there.
 
And the interesting thing is that everybody has always focused on low Chinese labor costs as the driver of production moving to China. What I’m saying is that it ain’t. I recently read about another company (not in the snowboard business) that said, “Hey, we can beat their labor cost advantage with technology, but we don’t have a chance against that artificially undervalued currency.” My guess is that the guys at Mervin might echo their sentiments.
 
Kind of puts a new spin on things doesn’t it?
 
Don’t Hold Your Breathe
 
Waiting for the Chinese to revalue their currency to make competition “fairer,” that is. In the first place, they’re kind of happy with the way things are. In the second place a lot of American companies love buying cheap stuff from China. A lot of consumers (including all of us I imagine) like buying cheap Chinese stuff. The issue of the value of China’s Yuan is actually getting quite a bit of press these days. The consensus is that there might be some gradual revaluation, but nothing quick and dramatic.
 
One of the reasons is that the Chinese, as they like to remind our government, is the second largest buyer of United States Treasury debt securities. With our record deficit approaching $500 billion this fiscal year, we’d kind of like them to keep buying them, so we should back off, thank you very much. To buy them, they need all the dollars they get from selling us stuff cheap and not buying much in return, which requires a week Chinese currency. So snowboards are made in China.
 
Kind of a complicated, mercantilist, financial house of cards isn’t it. Didn’t work for the Dutch or the English or, come to think of it, for the Romans. Guess I’d better move on before it starts to sound like I’m taking a political position.
 
Floating exchange rates really do help level the competitive playing field, more or less. But in snowboarding don’t hold your breath.

 

 

“Say, That Sounds Like a Good Idea!” The New Board Retailers’ Association

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Like the web site (www.boardretailers.org) says, the idea for the Board Retailers’ Association (BRA?) goes back to the mid eighties and has been discussed annually. But for the past year, Roy Turner, the owner of Surf City Surf Shop in Wrightsville Beach, North Carolina, and Mike Duncan of Sage Corporation, a web applications firm with roots in action sports, have been making it happen. Roy’s been in the surf industry for 25 years. He’s been a snowboard dealer for over ten years.

And yes, I know this is Snow Biz, not Surf Biz, but I wanted to make a point, which I try to do from time to time, so bear with me.
 
If the organization had its genesis among some surf focused people, it quickly became clear that the issues they felt needed addressing were universal to snow, skate, surf and wakeboard retailers. The web site reflects that and this article could be appearing in Snow, Skate, or Surf Biz and would be just as relevant. .
 
If only because of production and seasonal considerations, manufacturers/brands tend to focus on individual sports and the associated lifestyle. But among retailers, as Roy and the Association’s impressive advisory board of retailers found out, few make their living on just one activity. Even where the focus of the shop is clearly snow or surf or skate or wake, sales of soft goods, including shoes, to people who don’t participate in the shop’s core sport or, indeed, in any board sport, are necessary for survival. Most retailers sell more than one activity to manage seasonality.
 
So the perspective of the retailer is perhaps different from that of the manufacturer/brand and inevitably there’s some normal conflict of interest if only because there’s only so much margin to go around (less than there use to be) and it’s expensive to be in business (more than it use to be). The small “core” retailers (I hate that term, but haven’t thought of a good replacement) are acknowledged by pretty much everybody to be critical to the market, but at the end of the day, their orders aren’t, and won’t ever be, what make or break the major brands.
 
Wouldn’t it be great if there were an association that could bring the concerns of these shops to the attention of the brands in a professional, constructive way?
 
The first thing Roy told me was that BRA is not and won’t be a buying group. It was formed, he said, with four basic goals.
 
·         To save retailers money
·         To help insure the success of small, new shops
·         To educate shop owners and promote good retail practices
·         To give the industry a cohesive voice from the retailers on a grassroots level.
 
“The business environment made it the right time to do it,” said Roy. “The mass merchant influx, over distribution, rising costs, the dominance of a comparatively few brands and lack of product differentiation mean that your margin for error is way smaller than it use to be. I can’t afford to make a 10 percent open to buy error anymore.”
 
Let’s turn to the organization’s goals and take a look at each of them in turn.
 
Save Money
 
This should be fairly noncontroversial. Like all trade associations BRA will use its buying power to get its members discounts on services, including shipping, various forms of supplies, insurance, lower bank card rates, etc. You get the picture.
 
The association’s fee structure is straight forward- annual membership is $125.00 per storefront. It’s essentially mathematically impossible not to recoup your membership fee at least quarterly. I would expect many member shops, and maybe most, to do it monthly. BRA is a 401C nonprofit corporation, which means that any board sports retailer is qualified to join. Who knows- if the Zumiez of the world step up, maybe BRA can reduce its annual dues even further.
 
Just for fun, let’s say your shop has annual revenue of $750,000 and that 60% of that is done by credit card. If the association can get your bankcard rate down half a percent (a reasonable goal) you’ll save $2,250.00 a year. I don’t have a degree in mathematics, but I’m pretty certain that $2,250.00 is greater than $125.00. If BRA does nothing but that, you should all be breaking down the door to join. What’s the impact on your bottom line if your association can do half a dozen other things with similar impact on your costs? There is absolutely no reason they can’t. Trade associations do it every day.
 
The specifics of the discounts aren’t all known yet. The ability to offer really meaningful insurance discounts nationwide is awaiting the likely passage of a law by Congress. But check out the web site and do some rough calculations you. Bet that $125 a year membership fee looks pretty damn good to you.
 
Insure Small, New Shops Success
 
Roy’s old. He told me so. I’m old too. We try to be cool without looking stupid and to figure out what’s up, but there’s a limit to that as my fourteen year old constantly and pitilessly reminds me. “Nice shirt Dad. Why are you wearing it?” was his most recent comment.
 
“No tattoos and no holes in my body other than the ones that God gave me,” is the way Roy put it.
 
The people running the surf companies, the snow companies, the skate companies, the winter resorts and the successful core retailers are also sort of old compared to their customers.         

Mikke Pierson, owner of ZJ Boarding House in Santa Monica, California, is a member of the Association’s Advisory Board. His shop sells snow as well as surf and skate. He’s been a snowboarding dealer since 1989.  He shares Roy’s concern about the aging of existing retailers. “There’s no new blood our there,” he says. “Too many existing boardsport retailers are ‘specialty dinosaurs’.
 
Both Roy and Mikke are confident their shops will be successful no matter what happens. But longer term, they see the board sports industry’s strength and growth depending on new blood. It’s one of BRA’s goals to help that new blood emerge and thrive.
 
Part of how they will do that is by educating shop owners in best retail practices. That will start with a series of articles in TransWorld Business publications on specific best practices. “The first one will be on hiring,” says Mike. “You’d be stunned how much bad hiring practices can cost you.”
 
There’s also a “rookie buyer” seminar scheduled for Surf Expo this coming September. 
 
Roy talked about helping shops with “balance sheet management.” “There isn’t the room for mistakes there use to be,” he says. Issues of inventory control and cash management require good data and a certain level of management sophistication. “When I came along, you learned everything by showing up,” says Mikke. “Those days over.”
 
Both Mikke and Roy emphasized the importance of knowing and managing a shop’s gross margin. BRA expects to offer assistance, both in terms of education and discounts, in installing and using good financial systems that will strength a shop’s balance sheet management.
 
A Cohesive Voice
 
Over distribution, lower margins, rising expenses, insurance, mass merchants, and increased customer expectations are some of the key issues impacting all board sports retailers. BRA will address them as an industry.
 
“Manufacturers are looking at their market place from the point of view of what their competitors are doing and sometimes forget their customers,” says Roy. “We want to be able to talk in a constructive, cooperative way about issues that are of concern to both retailers and manufacturers and to have them take us seriously.”
 
I guess it takes tougher business conditions to make something that seems, in hindsight, to be such a good idea actually happen. The board sport retailers, especially the so-called core shops, have compelling common issues and interest no matter where they are located. They are competitors only when they happen to be located near each other. The immediate financial benefits should make joining a no-brainer. The Board Retailer Association’s other activities may be more important in the longer term, but for the moment saving money should be enough of an incentive to sign up.
 
There is, of course, strength in numbers and no trade association starts up without thinking that it will gain some leverage over constituencies it wants to influence. A prime constituency for the board sport retailers is obviously the manufacturers. I suspect that manufacturers are just the slightest bit concerned about the association’s proposed activities for just that reason even though it isn’t a buying group. Can’t blame them. As noted earlier, there’s only so much margin to go around.
 
Still, both the core retailers and the brands recognize that if all the snowboards are sold at Garts and all the surf boards at Costco, it’s going to be damn tough to influence people to pay prices that reflect the value of the brands and the cost of the marketing campaigns that convince those people they want to share in our lifestyle, even if it’s only through the t-shirt they wear.

 

 

Strategic Planning; Questioning Our Most Cherished Assumptions

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This article sort of popped full formed into my brain at the TransWorld Snowboard Industry Conference at Whistler in April. It happened in an elevator. A kid carrying a skateboard got in (Shows you what kind of lousy winter it was in Whistler). As the door closed, I asked him how often he replaced his deck. He said, “I’ve been skateboarding eight years and this is my fourth deck.”

 Let’s hope he’s not our average customer.  I don’t believe he is. Still, how do we really, really, know and prove, for sure, that he isn’t? What percentage of our market does he represent? Hopefully, he replaces his shoes and clothing more often than his deck. Should we be marketing to him differently? Is he really what we mean by a “skateboarder?” Does he care about all the marketing we do?
 
No doubt somebody is reading this and saying, “Well, the answers to those questions are obvious!” Maybe. But I’m reminded of H. M. Warner at Warner Brothers in 1927 saying, “Who the hell wants to hear actors talk?” Or Digital Equipment President Ken Olson, in 1977, saying, “There is no reason anyone would want a computer in their home.” Or the Yale professor who wrote, “The concept is interesting and well-formed, but in order to earn better than a ‘C,’ the idea must be feasible” while critiquing Fred Smith’s plan for an overnight delivery service (Fred went on to found Federal Express, which is showing signs of being feasible).
 
I’m sure all these guys thought what they were saying was “obvious.” 
 
Strategic planning, I’ve learned, is the process of using the same information your competitors have to make better decisions than they make. You do it, in my experience, by questioning cherished assumptions, rigorously collecting good information, and looking at that information from a different perspective. 
 
In a difficult market, the industry’s general response seems to have been to cut expenses, including marketing, and discount to get orders and keep volume up to the extent possible. I’m all for good expense management- in any market conditions- and wrote about it here some issues ago. Still, we’ve lived by marketing, and I wonder if we can’t hurt ourselves by not marketing lacking any real product differentiation among brands.
 
But marketing what to which customers? When everybody was fat and happy and selling everything they could make, we had the luxury of not worrying about that. Now, companies who prosper are going to take some risks and do some things differently. What things? Depends on the company, but let’s look at some “Cherished Assumptions” and see if we can get a glimmer. 
 
“Core Shops Are the Foundation of the Industry!”
 
 Hold the hate email please. I recognize the importance of shops and I’m not saying that statement is inaccurate, but I’ve got a couple of questions.
 
What, exactly and specifically, is a core shop? What are its attributes? It probably doesn’t sell skateboarding only, so can it be both a core skate and, say a surf or snow shop at the same time and still be “core?” Is core then not a function of what a shop sells? As the industry has involved, have others “foundations” emerged? Like televised skateboarding, the skatepark movement, the contest circuit? What’s their relative importance to individual companies? How has it changed? How is this different for apparel and shoe companies compared to hard goods companies?
 
“Riders Are the Key Influencers of Skaters.”
 
If so, why are there so many blanks and shop decks sold? It appears that price is also a key influencer. Obviously, riders don’t influence all, or even most, skaters to buy a certain brand of deck, though hopefully their prominence promotes skating in a general sense. From a company’s perspective, then, how has the relative influence of pro riders changed? How strong is the association between the brand and the rider? How strong is the tendency of kids who like a rider to buy his pro deck and how has it evolved? Or do they just buy a blank and slap a sticker on it? Interesting questions to ponder when considering issues of budget and marketing.
 
"Chain Stores Suck"
 
Well, I doubt the shoe and apparel companies would put it quite that distinctly. Chains- not all chains, but chains- move a lot of product for them and make them a lot of money. There also seems to be a certain level of conventional wisdom that says chains, by selling cheap completes, are important in getting new skaters involved in the sport. That would be interesting to research.
 
At the end of the day, though, chains are neither good nor bad- they just are. And they are more all the time. My opinion is that the Zumiez and Pac Suns of the world are going to make it increasingly tough on core shops. I hope to be wrong. No company can grow very big without an increasing percentage of its sales being to chains. That’s not an opinion, and it shouldn’t be controversial. It’s just mathematics. In a market with little or no product differentiation, where price matters, volume becomes an important survival strategy. So companies- including hard goods- need strategies for working with certain chains if they want to prosper and maybe just if they want to be around given the evolving financial equation.
 
Of course, it may be a viable strategy for some companies to not work with big chains, and to constrain their growth. But the companies that do that won’t ever be big. By way of definition, I don’t believe there are any “big” companies in skating. My information is that the shoe companies are the largest, but I still see them as pretty small. And note that getting to even that size required sales to chains. 
 
“A Skateboard is 7 or 9 Ply Laminated Canadian Maple- Period.”
 
What a remarkably conservative industry we are, and isn’t it funny to hear that? Granted, laminated hard rock maple has worked great. But it’s also true that the industry has encouraged the idea that anything not made of Canadian maple couldn’t be a skateboard, wouldn’t function right and, worst of all, might get you laughed at. For a long time, all that was true. But industry growth and visibility, coupled with advances in composite materials, engineered resins and manufacturing techniques, along with the acceptability of blanks, suggest that this may change. If it does, I hope the charge to adopt new technology is lead by the current industry leaders.
 
Lots of questions. No solid answers, though we’ve all got lots and lots of opinions. But opinions, even tried and true and generally accepted opinions, can’t be the basis for a business plan when the industry is changing. And I’m pretty certain that doing “more of the same” isn’t going to work for at least some companies. I’ve always thought that doing the same old things when the market was changing was riskier than trying something new that might not work out. The companies that feel that way, and that go through the process of questioning their assumptions, will most likely emerge as the leaders.

Consolidation, War, and a Lousy Economy;Skateboarding Will Be Fine, Thank You Very Much

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It doesn’t seem fair. Okay, after the 90s, some economic slow down was inevitable and most industries are having to deal with it. Skateboarding, after a few years of simply spectacular growth was due for a consolidation, and we’re getting it in spades. War, of course, isn’t good for already soft consumer spending- too many people staying home to watch the war on TV. And just to make things perfect, the weather hasn’t exactly cooperated. The East Coast has had its first real winter in a few years.

 
Any one of the four would have been a pain in the ass for business. All four simultaneously is downright inconvenient. Let’s put this in a little perspective and try and separate the good from the bad and the ugly, to coin a phrase.
 
Current Circumstances
 
Everything I’ve read, and everybody I’ve talked to who remembers it, tells me that skateboarding declined by something like 90% in and around 1990. It declined dramatically- some have said nearly vanished- and I guess at its nadir, only like one skate park was operating in the country.
 
That scenario will never be completely out of the thoughts of people who experienced it, but it’s unlikely that it will be repeated. There are too many skaters, too many skate parks, too much exposure, and too much involvement and dependence on the part of too many organizations for that to happen again.
 
My guesstimate, based on being in a few stores and talking to some people, is that hard goods sales are down north of 30% compared to a year ago. They may not be through dropping yet. I don’t know if traffic is down, but parents, I suspect, are less likely to fork over the dough their little munchkins, who don’t have their own money, need to buy a new deck.
 
I haven’t been able to get a solid fix on whether shoe sales are soft or not. I wouldn’t be surprised if market softness in shoes manifested itself as lower price points rather than the big volume decline that seems apparent in hard goods. You need shoes no matter what, and shoe margins are better than deck margins to start out with.
 
With those general comments as background, let’s talk about three specific issues that may give us some incite into where skateboarding is going; the number of brands, the role of distribution, China and how skate compares to other action sports. I guess that’s four. Oh well.
 
Brands
 
One thing about this market that’s neither good, bad nor ugly but just downright strange is that I haven’t seen brands going out of business. Typically, when times get tough, especially in an industry that’s grown quickly, some brands just don’t make it. I’ve heard of a couple of companies that are for sale, and I know of a brand or two that’s having a hard time, but they gone away. I wasn’t expecting mass extinction, but I thought we’d see some serious consolidation by now. 
 
I feel strongly both ways about this. On the one hand, companies that manage to hang on for a while by the skin of their teeth when they have no viable way to compete make it harder for stronger companies to prosper (though retailers may get some really good deals!). On the other hand, small companies, scrapping to build a market position and less conservative than their larger, more stable brethren can be a fountain of new ideas. That’s always a good thing.
 
Why haven’t we seen more consolidation? I have the following speculations. First, I’ve been surprised by just how well most companies have reacted to a slowdown in business. I perceive a faster than normal movement towards control of expenses and inventories.    That can prolong survival, though it doesn’t solve the basic problem of brands that don’t have a defendable market position. Second, a number of brands/companies that have appeared in recent years are backed by companies that can afford to lose a whole lot of money for so called “strategic” or “positioning” reasons. This seems particularly true in shoes and apparel. In hard goods, I don’t think we have as many small companies as we use to have. Some consolidation has already happened there.
 
I do ultimately expect to see fewer brands, especially in shoes and hard goods. How that shakes out will depend in no small way on distribution, so let’s move onto that.
 
Distribution
 
The major hard goods brands are dependent on the specialty shops and distributors for much of their sales. Specialty shops are hit by both economic softness and the decline in skateboarding sales. The successful footwear and apparel companies have diversified and expanded their distribution. The hard goods brands have generally been unable to do that. People need shoes and clothes all the time, though they may require that the stuff cost less. People don’t necessarily need a skateboard.  If they do, it’s as likely as not to be a blank or a shop deck. 
 
The hard goods industry is reaping what it has sown, by selling basically the same products for years with all the differentiation being based on marketing. Inevitably consumers got smarter and price got to matter. When skating isn’t quite as cool at it was and the economy sucks, price matters a lot. Not that I wouldn’t have done the same thing if I’d been running a skate hard goods company, but the result was predictable, and I think I’ve discussed it in this column before.
 
Meanwhile, the shoe and apparel companies, operating in a much larger market, get larger. Their sales are less dependent on the popularity of skate, or at least they are all trying to make them less dependent. When the downturn comes, they are selling products everybody needs, they are not just selling to the skate market, there’s less seasonality, and their size gives them some financial flexibility smaller companies don’t have. What I mean is that even if they should earn less money because their gross margins fall, they still earn enough gross margin dollars so that they don’t have to gut their marketing and product development efforts. Smaller companies may not have that option.
 
So distribution matters in who prospers or even survives in a consolidation. Having a bigger potential customer base and more possible outlets for your products helps. More on this when the section on other action sports below.
 
China
 
This, strangely enough, comes under the heading of “good.” In the past I’ve said that cheap Chinese decks could take over the skateboard market like in so many other wood products, if the market was big enough to make it worth while. Now it appears, until the market recovers and growth resumes, that it won’t be worth while. The Chinese can continue to have the cheap complete market in the chains as they always have, but I’m no longer as concerned that they will get a significant position in the higher end branded market.
 
I know the apparent price difference has made it compelling to try and get decks from China. But nobody had suggested to me with any conviction (except the Chinese) that the quality problem is resolved. I also believe, and have argued in this space before, that the apparent gross margin improvement is an illusion for the industry as a whole over the medium to long term. If the quality problem was resolved, and one brand started bringing in Chinese decks, other brands would tend to do the same. Natural competitive pressures would inevitably lead to somebody discounting to retailers, who would inevitably figure out what was going on and would demand some of that margin for themselves. At the end of the day, unless a whole lot more decks were sold, the overall industry might find itself with fewer total margin dollars to play with. Of course, the consumer would be happy.
 
But why bother even discussing this. If the quality’s no good you’ll kill your brand with serious skaters and if it is, you’ll just end up in the same boat as all the other brands again, though some with their own manufacturing plants might be hurting. So why bother. I mean nobody could really think this would work in the core market, could they?
 
Synthesis
 
In surfing, the subject of the actual surf boards didn’t even come up at last year’s surf industry conference. Sales in surf equal soft goods. I’m told that making money with surf boards is damn difficult due to competitive pressures, lack of product differentiation, and low volume. The soft goods brands in surf are selling their life style across a wide and widening variety of retail distribution. There aren’t and will never be as many surfers as there are people who like the idea of surfing and the surf style. That’s where the money is.  
 
In snowboarding, decks are very competitive for the same reasons. In binding, and even more in boots, there’s been continuing, meaningful, product improvement that which has at least created a basis for competition that’s other than just price and marketing. But generally product in all hard goods categories is damn good. It’s durable, functional and isn’t replaced as often as it used to be. As in surfing, soft goods and the expansion of brands into the lifestyle market are seen as an important source of profit and growth. Not perhaps as much as in surfing because a significant percentage of snowboarding soft goods are basically for snowboarding in the same way that a wet suit is only functional when you’re actually surfing.
 
In surfing, the soft goods brands dominate the market. In snow, the leading hard goods companies also have significant apparel lines that are both for snowboarding and have lifestyle components.
 
In skate, the important hard goods companies are much smaller than the leading companies in either surf or snow. They don’t have the same possibilities of expanding their distribution and, mostly, they aren’t doing a lot of soft goods business. You shouldn’t hold your breath waiting to see one of the leading hard goods companies grow to $300 million in revenue.
 
Yet these are the companies and brands that set the tone for skateboarding, because that is what they are about and focused on. In the past, when skateboarding was much smaller and not nearly as mainstream, companies and brands just vanished in a down market and mostly nobody noticed. What’s different this time is that these brands have value and are on more people’s radar screen.
 
But that doesn’t change the financial equation- at some point a decline in sales, inability to expand distribution, and a need to maintain expensive marketing/team programs with inadequate gross margins means a company is losing money.
 
So skateboarding will be fine, but I expect to see some companies acquired. As divisions of larger organizations with certain shared functions, these companies make financial sense. On a stand alone basis, some of them may not if current circumstances last very long. Let’s hope any acquirers treat what they buy with respect- if they don’t, I’ll be a lot less sanguine about the prospects for skateboarding.

 

 

Hey! Look at All the Retailers! Good News From Vegas

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Flying in from ASR in Long Beach, where the consensus was that the number of retailers was down significantly, it was a relief to get to the SIA show in Vegas and see the place jumping. It was simply the best show since some time in the mid 90s. Not just by energy level but, in my perception, business being done.

 How come? What happened? When there are still too many trade shows back to back to back, and the economy is soft, how did SIA and the snow sports industry manage to pull this off?
 
Uhhhh, well, actually, I don’t know for sure and I don’t think anybody else does either, but let’s explore some of the factors that may have made the difference and see what they might mean for snowboarding.
 
New, New, New
 
I guess we start with the new location. The food was better, the accommodations more convenient, the walking easier, the ride from the airport shorter, and the smaller footprint helped keep it exciting. Like in your high school physics class, when you compress molecules into a smaller space, they move faster.
 
It even kept it exciting, more or less, all over the show. Use to be that all the energy was in the snowboard section and up in the ski part of the show, nothing would be going on. But this show, for the first time ever in my memory, there was even some buzz, and apparently some retailers, in the nonsnow board part of the show. This extended beyond the couple of ski booths, like Line, that had a distinctly snowboard feel to them.
 
Product was new too. Oh, not so much new technically, but because of the earlier show date, most people, especially from the non chain retailers, are seeing product for the first time. That can generate some excitement.
 
There were perhaps a half dozen new, or recently arrived, small snowboard companies. There’s been lots of talk (some in this column) about the opportunity that smaller brands may have. Their arrival suggests a level of optimism and enthusiasm for the snowboarding business that may be stronger than it has been over the least couple of years. I don’t want to underestimate the business challenges they face, but I sure want to see them succeed. One of the reasons they may is that they seem more business focused than most of the many new brands that popped up eight to ten years ago.
 
One of the things that caught my eye was the quality of the decks’ fit and finish. Graphics, in a word, were generally spectacular. We went through a period of year where graphics seemed kind of taken for granted. Now, with functionality being so good for all brands, graphics may emerge again as a basis for product differentiation.
 
Nitro had a level of detail in its graphics that required a close look and careful study if you didn’t want to miss any of the points of interest and, in some cases, sheer fun that long time Nitro designer Mike Dawson had included. Arbor combined their traditional wood with eye catching screened graphics on certain models in a way that I thought gave their original look a run for its money. Volkl had a finish with two textures that made you stop and figure out what you were touching as you ran your hand over the board.
 
New exhibitors like Volcom added their unusual presentation and irreverence to the mix. I’m glad I didn’t have to clean up all those tortillas.
 
Also new was a four day show, after five days in recent years. Obviously, if you squeeze the same number of retailers and business meetings into four days instead of five, things will look busier even if the same amount of work gets done. I’m okay with efficiency- how about three days next year SIA? How long did retailers really stay at the show?
 
Trade Show Politics
 
The retailers (and the brands for that matter), have more trade shows than they want or can possibly attend. Organizations being the way they are, the companies that put on trade shows are going to keep putting on their shows and hope the other guy goes away. From what I’ve seen and heard at other trade shows this trade show season, SIA seems to be the one that gets to hang out and say “Our show rocks! And yours doesn’t.” That means, I guess, that any talk about snowboard companies exhibiting at ASR instead of Vegas won’t be more than talk. It probably never would have been anyway. Even if the snowboard companies are soul mates to the skate and surf companies exhibiting at ASR, they have to do business with the many ski shops that come to Vegas but not to ASR.
 
SIA’s successful show might also put them in a better arrangement to negotiate a merger with Outdoor Retailer, with whom I hear they overlap a day next year. A number of people I talked to about trade shows in general suggested that would be the best thing to do. But there’s still the same problem that existed last year when the two organizations talked about some kind of merger. OR is for profit and SIA isn’t. How you negotiate starting from those two completely different perspectives continues to be beyond me.
 
Business Trends
 
The earlier show dates are consistent with the strategy I see snow retailers pursuing in their purchasing. Either because they are smarter, the economy is soft, boarders aren’t buying new stuff as often, or because the brands will tend to let them get away with it, snowboard retailers are going to be continuously cautious in their ordering. I expect to see preseason orders for basically what they think they can sell through Christmas and maybe a little beyond. Then they can come to Vegas and get any end of season products they need at better prices.
 
Some brands have said they will only produce to preseason orders, with the usual increment for team, warranty, demos, etc. So some retailers may find they can’t fill in after the holidays with the product they want.
 
I don’t see selling product at large discounts after January 1 as a big money maker for anybody- especially for brands who paid preseason order prices for product. Maybe the best thing that could happen to the industry is if there was just a bit of product scarcity from time to time. So I hope the retailers are cautious in their ordering and the brands are cautious in their production. That would be the best for the snowboard industry overall.
 
In another outburst of raging optimism, I’m hopeful that the quality of the show is at least partly the result of all the time, effort and money that the whole winter sports industry, especially the resorts, has spent on programs to improve facilities, the learning experience, and the overall customer experience in the last five to eight years. That has got to be having a positive impact, and maybe we’ve seen it at the show for the first time.
 
One other thing I’d like about the early show as a brand, or at least as the finance guy for a brand, is the ability to deal with retailers who haven’t paid me in January instead of March. In January, you can have the, “Well, we’d like to take your order and give you the show and preseason discounts, but we need to clean up this old receivable first” conversation with a higher probability of success than in March. Receivables that are open in March and April tend, in my experience, to be receivables you don’t collect until it’s time to ship next summer/fall if then.
 
Finally, this was a busy, upbeat, exciting show. But it wasn’t that way, like in some previous Vegas shows, because of people who snuck in for the vibe or companies thrown out for various amusing behaviors. It was like that because the snowboard business community was excited to be there, to see new products, and to do business. That’s good to see.
 
My Quandary
 
Well this is kind of a problem. I’ve gone and written an unabashedly upbeat, glowing and positive article about the show and the prospects for the industry it seems to represent. This is going to ruin my reputation. I’ve got to complain about something.
 
Ah! The signage sucked. You couldn’t find your way around. I spend the whole time looking at the damn map and even that didn’t help. I’m going to call SIA President David Ingemie and asked him how come that was so screwed up.
 
Oh dear. Turns out they did it on purpose. David points out that the aisles and signage in a department store are laid out to “encourage” you to see more product in more locations, and they did the same thing at the show. He did agree that the restroom signs needed to be a little easier to see. I imagine I’m not the only one who noticed that problem.
 
Okay, I guess I might as well drink the Kool Aid here. I shouldn’t be this easily seduced by one good show, but I have some hope that a confluence of events in retailers, resorts, and brands may mark a turning point for snowboarding and the winter sports business in general. Perhaps business cycles are longer than we think. We didn’t just need to consolidate, but to get over and come out of it. Ski and snowboard had to, in some sense, come together. The large brands had to solidify their market positions to make room for smaller ones to emerge again. Retailers had to start and do better business and those that didn’t had to go away. Resorts had to give their customers a better experience.
 
The retail numbers don’t necessarily support this kind of perspective- at least not yet- but in a soft economy, I’m willing to see the glass half full instead of half empty.

 

 

Focus on Expense Control; A New Business Model for Skateboarding

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Well, maybe not a new business model. Expense control is always important. But somehow, in every industry I’ve ever seen, it’s always assigned a lower priority when you’re selling everything you can make. Cash flow makes it easier to not worry so much about how you’re spending your money.

 You’ve no doubt noticed that skateboarding (especially in hard goods) is going through a bit of retrenchment. Sales are down from last year. Lest this get too gloomy, remember that, as an industry, we’ve had substantial growth for a number of years and skateboarding is larger than ever. No serious business person thought that phenomenal growth rate would continue indefinitely. We may have hoped it would, and we certainly hoped when it stopped it would hurt somebody else’s company, but we knew it would end.
 
So now it’s ended? No. Our five year growth rate is still amazing even given the current decline. Being down over last year may suck, but it doesn’t make it the end of the world.
 
I should probably clarify that. Changing business conditions usually mean it will be the end of the world for some companies without the balance sheet and market position to weather the storm or recognize the changing business conditions. And there’s always the chance that kids will decide skateboarding ain’t cool any more. If that should happen, and it’s happened before, all bets are off, but that’s hardly a new consideration for the industry.
 
Old News
 
Whenever an industry goes through a period of consolidation, a number of things tend to happen to one extent or another. As I’ve written about them before in nauseating detail, I’ll just describe them briefly and move on to dealing with the new circumstances they represent. Remember these trends aren’t unique to skateboarding or action sports. They have been just as prevalent in the automobile, computer, funeral home, and waste disposal industries as they consolidated. There’s nothing surprising or unique in this list.
 
·                 Growth slows (Duh!). There’s more competition for market share.
·                 Margins decline at the retail level.
·                 Retailers have more power.
·                 Cost management and customer service become more important in competing
·                 Size matters. You either have to be big or own a very clear market position. Companies in the middle get lost.
·                 Consumers get smarter- marketing loses some of its effectiveness.
·                 International competition increases.
·                 Industry profits fall. This may be temporary. Or it may not be.
·                 Over capacity can become an issue.
 
That’s an ugly list, but you can see its relevance to the skateboard industry at this point in time. Of course, it’s not necessarily so ugly for the skateboarder, who tends to get a better product at a lower price.
 
What’s To Be Done?
 
Every company is of course different, but from the 10,000 foot level, the general strategic issue is clear, and more or less the same for everybody. If sales are down, and the product appears to be more of a commodity, then marketing is even more important is differentiating the product. In skateboarding, of course differentiation has come almost completely through marketing.
 
But as the consumer has gotten smarter, marketing has maybe lost some of its effectiveness. So you have to what? Spend more on marketing? But your sales and maybe your margins are down. But unless you were large and very profitable, that can be impossible to do without spending yourself into oblivion.
 
The interesting thing is that this is where strategy and operations come together. By that I mean an important part of a company’s strategies at this point is expense control. Unless and until margins improve, or sales start growing again, there isn’t much of a choice. You can either reduce expense or earn less, or no, money.
 
The sad part is that this fundamental change in the business model means that some companies have a hard time making it. They had the illusion of prosperity because growing cash flow allowed them to keep paying their bills. As long as the money comes in just a little faster than it has to go out, it doesn’t matter if your balance sheet- the measure of your financial viability as a company- is a disaster.
 
Now it does matter, because unless you are a very unusual business person, you didn’t foresee the change in the business climate far enougn in advance to adjust your business model. Your competitors weren’t doing it, and you sure weren’t going to cut your marketing and other expenses unless they were. So now, as you scurry to adjust spending to reflect revenue and margin levels, it’s your strong balance sheet that allows you to stay in business as you make those adjustments.
 
When I ran action sports companies that had to deal with a tougher market, here’s some of the things I did and that you should consider too.
 
·                 Reduce the trade show presence and the number of people from the company who attended. The booth was refurbished- not built new. People didn’t get to go as a reward, but because they needed to be there.
·                 Let go of people who weren’t doing an outstanding job or who weren’t needed given the lower sales level.
·                 Stop selling to people who aren’t paying. There’s no cash flow in a sale- only in collecting the cash.
·                 Get rid of old inventory for whatever it brings. Old inventory is never worth more later.
·                 Order or produce only what is pretty certain to sell. Minimize your inventory risk. Lower volume on higher margin can be better, for both cash flow and for the brand, than higher volume on lower margin.
·                 Review the team roster. Top riders are probably worth what you’re paying them. The ams and others getting maybe just product and photo incentives are keepers. It’s the mid range riders I’ve always looked most carefully at. As hard as it may be, there’s usually some money to be saved there.
·                 I cut the advertising and promotional expenses that I’d sort of done because I could when times were better, and it was easier to just pay the money than throw the rabid marketing manager out of my office for the 12th time on the same issue.
·                 Ask your suppliers for better terms. They’re probably struggling to keep customers too.
·                 Have good financial information.
 
Your goal is not just to cut expenses. It’s to have a budget that makes sense given a realistic expectations of sales and margins. Look, I understand the pressure to run the two page, four color spreads because marketing is the basis of your competitive positioning and that’s what the other companies are doing.
 
But the best advertising campaign in the world won’t save your bacon if you can’t pay your bills.
 
Hard vs. Soft Goods
 
Interestingly enough, I’m hearing that the shoe and apparel companies are holding up noticeably better than the hard goods guys. That surprised me at first, but I’ve formed an opinion as to why that might be and as long as you’ve read this far, you might as well finish the article and see if you agree with me.
 
Hard goods companies only sell to people who actually skate. Soft goods and apparel companies sell a lot of product to people who don’t skate. They are increasingly lifestyle companies even with their roots in skate. If skating is somehow not as popular, or at least growing more slowly, it’s the skaters who decide that and lead the trend; they skate less and therefore buy less product.
 
But out in the world of non skaters who buy skate influenced shoes and apparel are a whole lot of people who were late coming to the skate party and, in the same way, are later in realizing that the party is maybe not quite exciting as it use to be. Besides, they still need shoes and clothing even though they never needed skateboards.
 
So they keep buying, though maybe influenced by soft economic conditions, until their perception of skating and its “coolness quotient,” for lack of a better term, changes. When that happens, the shoe and apparel companies that have made the jump to lifestyle brand and are less connected to skate than when they started, can succeed anyway. Those too closely tied to skating may find themselves, though with the impact delayed, in the same boat as hard goods companies.
 
It will be interesting to watch. In the meantime, your job, as an owner or manager of a skateboard industry company, is to restructure and manage your business so that it operates under a viable financial model in this business reality for however long it lasts. Part of that will involve a new focus on expense control.