Wherever You Go, There You’ll Be. I Can’t Think of a Subtitle

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It’s 2002 and I think the five biggest snowboard companies, in alphabetical order, are Burton, Gen X, K2, Rossignol, and Salomon.

Gen X is owned by Huffy and Salomon is part of Adidas, so maybe I should change the alphabetical listing. But the point, and I hope this helps me think of a subtitle, is that through normal industry evolution we’ve arrived at a place where the companies that have the biggest impact on snowboarding aren’t just about snowboarding anymore. Increasingly, they have other products and product lines to consider as they build business plans and allocate resources.
Let’s look at just how wide spread this is, and then think about who it might be good and bad for in the continuing saga of snowboarding.
Who Does What?
Continuing with the alphabetical order thing, Burton is and I expect will continue to be the closest thing to a snowboard company among the five contestants. But Gravis shoes, and the delayed but imminent launch of the Korda street wear line, means that even Burton isn’t only about snowboarding anymore. Assuming you’re concerned about return on investment, and margins and growth opportunities are perceived to be better in street wear than in snowboarding, where would you choose to invest?
I can imagine the conversation, because I’ve been in it in other companies. There’s the marketing guys going, “We’re about snowboarding. No need to discuss it further.” Then growth slows and some troublesome financial guy says, “Well, okay, but there’s not much room for us to grow in snowboarding, and the margins aren’t as good as they use to be, but over in this street wear/shoe part of the world they are and we could grow and, you know, we’ve got certain financial obligations and there’s a limit to just how far we can push snowboarding distribution and we could utilize our distribution strength and leverage our overhead….”
I’ve oversimplified, and I don’t know the specifics of the process by which Burton chose to expand, but you can see the inevitable dynamic.
Burton at least started out as only, and is still mainly, a snowboard company. They’re the only one who can say that. Gen X, we know from public information, has revenues of around $150 million. Huffy, its new owner, is around $500 million including Gen X. Gen X sells, in addition to snowboards, golf, hockey and ski equipment. Not to mention scooters and whatever other sporting goods equipment they can work the distribution channels for.
In addition to Gen X’s products, Huffy sells bikes, basketball equipment, and retailer services that include in-store and in-home product assembly and repair and merchandising services. My estimate is that snowboard equipment makes up only around 10% of Huffy’s total sales.
Do you think Gen X senior management treats snowboarding as anything besides another product line that has to meet its business goals?
K2’s product line is pretty broad as well. It’s sporting goods products, of which it sold $445 million in its last complete fiscal year, includes skis, snowboards and accessories, in-line skates, fishing rods, reels and kits, active water sport outdoor products, bikes and backpacks.
Sales of other recreational products of $39.8 million in 2001 included imprinted corporate casual clothing under the Hilton brand, skate and snowboard apparel under the Planet Earth name, and Adio and Hawk skateboard shoes.  Sales of industrial products were $110.5 million in 2001 and included monofilament line, light poles and radio antennas under the Shakespeare brand.
They don’t show dollar sales by product or brand, but do you think K2 senior management treats snowboarding as anything besides another product line that has to meet its business goals?
In the year ended May 14, 2002, Rossignol had consolidated sales of 473.1 million Euros. These days, a Euro is more or less one US dollar. Of that total 50.1 million was from snowboarding, down 11.3% from the previous year. Alpine skiing, at 288 million Euros is the dominant activity. They also did 94 million Euros in golf and 25 million in textiles. Golf revenues grew 17.7% during the year and textiles 29.6%. Assuming equivalent gross margins do you think Rossignol senior management would prefer to invest in a business that’s shrinking, or one that’s growing?
You can probably see where I’m going with this, but just to make it complete, let’s finish going through the list.
Adidas-Salomon did 6.1 billion Euros in sales during its last complete fiscal year. Of that total, 79% was represented by Adidas and 9% was Taylor Made. The remaining 12% was Salomon. Of that 12%, or 730 million Euros, 8% was from snowboarding. That’s about 58 million Euros, or 1% of Adidas-Taylor-Salomon consolidated revenues.
Alpine ski products represented about 49% of Salomon’s revenues. Outdoor footwear is 14%. Skating products are 9% and cycling, 8%- the same as snowboarding.
You probably know that I have the same question here I’ve had about the other companies. As snowboarding represents less of a percentage of total revenues, and if margins and growth opportunities are perceived to be less than in other product groups, especially where it’s a very small piece of the total, what’s the incentive to invest and support it if you can’t see the best return on investment? At least, that’s the financial argument.
And if I were running any of these large, multi-product companies, I imagine I’d be making that argument too even if I didn’t completely like it.
Ying and Yang
 
Good news or bad news, or both? Certainly, you’ve got to run a business like a business. If there’s no money made, you won’t be around to fight another day. On the other hand, it’s passion and commitment that got snowboarding going and if it isn’t quite as important in keeping it going, it’s certainly critical in keeping it growing. Hopefully, there’s room for some long term perspective even when you’re worried about quarterly performance.
The winners in this corporate dilution of the snowboarding ethos are, in the first place, snowboarders. Okay, maybe there’s not quite as much hype and excitement in the air, but they can sure get a better product for less money than they use to be able to. We owe that to some of these large “corporate” snowboard companies who, in the process of competing and trying to take over the market, had to figure out how to be efficient and make product that worked. God knows it’s easier and cheaper to become a snowboarder than it use to be. You don’t even have to sneak onto the mountain any more.
Second, as I discussed in my last Market Watch, the new and existing smaller companies are winners. Almost by definition, the larger corporations abandon a chunk of the market to them. As long as they don’t harbor illusions of becoming like the big guys, and there is a significant minority of committed snowboarders who still see snowboarding as something more than a sport, there’s a market for them that the big guys mostly can’t hope to capture. And in the process, these small players might be able to keep the vibe going, to use a phrase that passed out of popular usage some time ago.
The losers? If there is one, I guess it’s kind of the snowboard industry, or maybe I mean the snowboard culture. With the diffusion of snowboarding I’ve described above, we’ve lost “good” competitors (Eureka! That the subtitle. “Where are the Good Competitors?) “Good” isn’t a moral judgment. A good competitor is a company that challenges your company not to be satisfied with the status quo while, at the same time, you are able to operate in a stable and profitable equilibrium without mutually destructive warfare. When these circumstances exist, there’s enough success and cash flow to go around so that the industry can be supported and nurtured. Okay, maybe the consumer doesn’t get the cheapest deck that can possibly be made, but snowboarding is more likely to be something people want to be part of and don’t just see as another activity.
We lose a lot of that to the extent that snowboarding becomes “just another product line.”   To those of you who are fighting that trend, thanks.

 

 

Reality Check; Input From the Outside World

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Sometimes I get accused of being too much of a pessimist. Maybe sometimes I am. On the other hand, maybe the correct question is whether or not my occasionally pessimistic outlook is justified . I’d prefer to think I’m just taking a hard look at real business issues.

 
For a change, I’m going to let somebody else raise the tough issues and, incidentally, write half my column for me. Can’t beat that. I received this email unsolicited. It is published here complete and unedited. Go read it and then I’ll tell you what I suggested when I talked with the guy (It’s below). Hurry up please. I’m late getting this column done.
 
I had lots of no doubt accurate and valuable platitudes about business cycles I recited to Dale. None of them seemed to make him feel much better. I received this email over a month ago (more by the time you read this). Thinking about it since then, I’ve come up with a couple of ideas, or maybe just helpful perspectives.
 
First, let’s all decide to call the wood from China birch. That’s apparently what it is, and there’s no reason we should be helping to perpetuate the myth that it’s anything else.
 
Second, recognize that it’s been around a long time and is going to continue to be around. For cheap completes sold in big chains it probably makes sense and may even have the benefit of getting kids skating cheaper.
 
Third, it’s clear that Chinese birch skateboards don’t hold up when used by real skaters doing real skate tricks. So while some of the major brands may be tempted by cost to try and use it, enlightened self interest will make them back off. They can’t afford to have their decks collapse on a massive scale in the way Dale describes. The issue, then, becomes whether Chinese manufacturers can procure the harder Canadian maple and make and deliver decks that are as good as what’s made currently in the US. What I’ve said is that they can and will if the market makes it worthwhile in the same way they have with so many other products.
 
If the quality is there, and the price is lower, then they will become a standard and only new technology in skateboards will slow that process down. I suppose the other thing that could happen is that the major brands could decide as a group not to buy decks from China. Aside from the issue of legality, that’s a level of industry cooperation I rarely see. Even if it exists, it can break down if business pressures get too strong.
 
The other problem is that we already know that blanks take a big piece of the market. If Canadian maple Chinese decks of good quality become available, I suspect people who are willing to buy current blanks, and maybe some others, will be more than happy to buy an even cheaper, high quality product.
 
But where will the Chinese get their Canadian maple? It doesn’t appear that they will get it from LaGrand Lumber & Veneer. It sounds like Dale would have to price it in such a way that he’d lose money if he wants the business. Well, maybe if they get in early they can corner the market, but it doesn’t sound like Dale and the other members of management at LaGrand are the kind of people who believe that you can lose a little on each piece but make it up in volume. So unless LaGrand can dramatically change its business model, it doesn’t sound like losing money selling to the Chinese while helping knock its existing domestic customers out of business makes much sense.
 
Dale might do five things- the first one of which he is probably already doing. Talk to all the other domestic veneer suppliers and find out how they are reacting. Second, he might publicize the quality issue (I guess I’m starting that for him) with an ad or two in Skateboarding Business to begin to create some awareness- sort of like “Intel Inside.”
 
The third one is to meet with the companies he sells veneer to and talk about their plans and their reaction. Is there room for some form of cooperation on new skateboarding technology? Fourth, and he’s probably already doing this too, he has to look at the source of the existing decline in veneer sales. How much does he really believe is the result of Chinese decks coming into the country, and how much is the slowing of skateboard sales?
 
Finally, and depending on the answer to four, he should certainly be looking for new markets. That’s something any business should be doing all the time. It’s worth some attention even when part of your business isn’t threatened because it positions you much better when, inevitably it seems, some threat emerges.
 
The devil, of course, is in the details. I can’t offer specific advise to Dale or LaGrand without specific information about their business. I hope my general advice is useful, and I thank Dale for sharing this very real issue with us.
 
Jeff Harbaugh is President of Jeff Harbaugh & Associates, an action sports consulting firm that helps managers and owners improve profits by focusing on the few issues that are really important. Reach him at (206) 232-3138 or at jharbaugh@msn.com.
 
SIDEBAR   
 
Dear Mr. Harbaugh:
Thank you for your insights and ideas you submit in your columns in Transworld Skateboarding Business magazine. I always appreciate your hard line on doing what is best for the business in general.
I am the sales manager here at LaGrand Lumber & Veneer, Inc. and am very alarmed by the Asian influence on business here in the States in general and especially with the Skateboard Industry. We supply Hard Maple veneer from our three mills to skateboard deck manufacturing plants throughout the US, Canada and sometimes abroad. In an average year we sell nearly *** . 25%-30% is skateboard veneer which we have been supplying for nearly 25 yrs.
As you are probably aware, the furniture industry has taken huge hits from imported components shipped in from China. Over a dozen plants have been closed forever in North Carolina because those companies now order their components and completed goods from China, idling over ten thousand workers. I have clients in the component manufacturing business here in the States that have lost 50%+ of their business to Pacific Rim countries. This is trade they’ll never get back.
Mean while, when you and I go to buy a new piece of furniture for our home, none of the cost savings benefit reaped by the mfr is gained by us. That same $3,000.00 sofa made two years ago completely in the States still costs $3,000.00 even though it cost far less to produce overseas. The mfr and the Chinese govt. are the winners.
While furniture imported from China, made from Chinese raw material may be acceptable in appearance and performance, my experience with skateboards is totally different. As was indicated in the article, Skateboard Science (Skateboarding Business, April 2002) Chinese raw material (veneer) does not match Hard Maple which has been the standard forever. The veneer, touted as "China Maple" is in fact not Maple. It is a specie of Birch. Tests performed at the Forest Research Laboratory in Madison, WI prove that this specie has approximately the same physical characteristics as Soft Maple, a specie long ago abandoned by the skateboard industry.
I have two customers who bought China Maple veneer from a sales rep here thinking they were buying North American Hard Maple. That rep should be tarred and feathered (or worse), but that’s another topic. Anyway, they manufactured the decks and sent them out through their normal distribution channels. In short order, literally thousands of decks were returned in various states of ruin and decay. Decks were split, broken, and mushy. All due to the quality of veneer used to manufacture them. One customer nearly lost his largest account because of the poor quality. He was able to salvage the account when we provided him with the necessary veneer to quickly replace the order.
My fear is that as a raw material supplier I should have seen this coming long ago and it may be too late to react. I believe that if we don’t do something soon, cheap imported decks will become the standard. Once riders become accustomed to a lower standard they will no longer know the difference and imported decks will be acceptable. I know this may be insulting to the current rider who can tell the difference, but my concern is perpetuating the business and I’m afraid the young, new rider won’t know and won’t be told.
You should know that what really convinced me to write you is an experience I had yesterday with an export agent. He called requesting a quote on container loads of skate veneer going to China. Upon quoting him our standard prices, he laughed and told me that if I wanted to do business with China, I needed to learn how to lower my prices. We price veneer based on the cost to produce plus a reasonable profit margin. I asked him what benefit I would gain from hurting my loyal US customers by selling overseas for less and loosing my profit margin. He laughed and responded that I’d have my foot in the door when the Chinese totally take over US skateboard manufacturing.
There is no doubt that manufacturing is down due to the economy. However, there is also pressure coming from beyond the economy and if we don’t react now while we are slow and have the time to react, we will all be left in the dust when the next surge (and I’m confident there’ll be one) comes.
I am venting this on you because you are a connected person who people seem to listen to. We do as much as we can to promote the industry including attending shows and working on promos with our customers. Try as I may to get the message out that quality and integrity starts with the raw material, it seems to fall on deaf ears.
Is the skateboard manufacturing business preparing to roll over and allow imported decks become the standard? Should I start looking for new markets to replace our skateboard veneer sales? Should I "learn how to lower my prices to China"?
Please advise.

Best Regards,
Dale Rosema
Sales Mgr – LaGrand Lumber & Veneer, Inc.

 

Hype, Technology And Trade Shows; Not Enough of Some, too Much of the Other.

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Slowing growth, or a decline in year over year sales if that’s what your company is experiencing, was inevitable in skateboarding. Sure, we would rather it didn’t happen. But since we all knew it was going to happen, it might as well be sooner rather than later so it’s less painful.

What I didn’t see in San Diego, happily, was what I saw at the Vegas snowboard industry show in 1995. Or was it 1996? Whatever. Vegas that year was the biggest snowboard party I’ve ever seen with lots of hype and lots of new brands. And then the snowboard consolidation wiped out most of those brands.

Skateboarding doesn’t seem to be doing that to itself. The number of brands isn’t expanding dramatically. We’re resisting, so far, “net never” dating, and there isn’t a Japan around that’s going to yank the financing many companies need to survive as there was in snowboarding.
 
Still, this setback has wonderfully focused the mind on some significant business issues. Here are some of the ones mine is focused on.
 
Hype
We need less hype. Between network television, Investor’s Business Daily, The Wall Street Journal, The New York Times, and more bad ads featuring skateboarding than I can even begin to count, it’s just too much. Maybe what I mean is we need the right kind of hype. At least part of skateboarding’s success has been its ability to be underground, a little dark and urban, and maybe somewhat unintelligible in its humor and attitude toward non-participants. That kind of hype—the kind that makes people curious about skateboarding is a good thing.
 
I’ll go a step further. The kind of hype we want encourages people to skate or learn to skate better—not just to buy a T-shirt. I recognize that we can’t do much about the people who just want to create an association between their brand and skating for the sake of selling a product and don’t really give a damn about skateboarding. I hope the skate-industry companies will look at all their advertisements and promotions through that filter—does it encourage people to skate? I think that for the most part they do.
 
Two people I respect have pointed out that the slowing of skateboard growth may be related to demographics. As they put it, we’ve got a lot of sixteen-year-old boys who are discovering girls and cars to the detriment of skating. We’ve also got a lot of seven, eight, and nine year olds who are discovering skating, but their disposable income is limited and their purchases largely controlled by their parents, who tend to favor spending less rather than more and buying pricepoint decks. The suggestion is that our slowdown/decline may be caused by the loss of older kids before the younger ones, although they are coming up, are ready to replace them. In this scenario, everything will be fine in a couple of years.
 
I haven’t checked out the census data recently, but if the numbers bear it out, I can see some validity to this scenario. The caveat, and this is where we get back to hype, is that it won’t matter how many kids there are if too many of them think skateboarding is lame because of how ubiquitous it’s become.
 
Technology
Meanwhile, cheap decks from China are happening. I’ve written enough about that and the potential (probable?) impact in previous articles. What’s the typical strategic response in any industry to lower-cost foreign competition? Technology and product improvement that can’t be matched, at least not immediately.
 
Of course, the skateboard industry has spent some years now explaining that a seven-ply Canadian maple deck is what a skateboard is, and nothing else is a skateboard. Nevertheless, if you’re a factory making skateboards and you want to compete with Chinese labor costs, you’d better figure out a better skateboard technology that gives you a competitive advantage.
 
Over at PS Stix, to nobody’s surprise, Paul Schmidt has taken a shot at that. His Featherlight technology results in a skateboard he describes as lighter and stronger. It contains a layer of new material that results in a stronger, more consistent pop back when you flex it. The new material doesn’t go all the way to the tips, and the deck will still wear out.
 
The good news is it looks just like a traditional skateboard. The bad news is that it looks just like a traditional skateboard. How do you sell something nobody can see when they inspect the product?
 
PS Stix’s answer is to have a display for the retailer that shows the cross sections of the deck. An awful lot of people tried this in snowboarding to differentiate their constructions, and it never seemed to work. Maybe the differences weren’t significant enough and maybe there were too many of them. Probably both. PS Stix seems to have first-mover advantage on this, and there won’t, at least at first, be 100 guys using cross sections to explain why their construction is better and their decks perform better.
 
PS Stix’s Featherlight deck will sell for about ten percent more than a traditional deck. That’s what you expect from a product with a competitive advantage. If it catches on and the volume justifies the effort, eventually the low-cost producers will figure out how to make it for less. Then PS Stix and the other manufacturers will have to move on to another new technology. Sounds to me like it could be good for the consumer. Oh yeah, I guess that’s what competitive pressure is supposed to accomplish.
 
How do we get notoriously conservative skateboarders to accept these new technologies as they come along? We’ve created the form of rock star known as the teamrider. We’re more or less convinced that what they ride influences what other kids buy. It’s pretty clear, then, that we have to get our teamriders to ride decks with the new technologies.
 
That shouldn’t be so hard. The company says, “Hey, you need to ride this new technology from now on and love it.” The rider says, “I don’t want to!” The company says, “Do you want to get a check every month?” The rider says, “Yes!” The company says, “Given the number of blanks being sold and the margin pressure we’ll be under if this new technology doesn’t work out, you won’t get that check unless you ride and love this new technology.” The rider suddenly feels love for the new deck welling up in his heart. People with agents should be able to see the business necessity.
 
Trade Show
Over at the International Coup D’Etat Skateboarding Exposition, sponsored by Alien Workshop and Foundation Skateboards and supported by others who showed some product and paid for some of the festivities, companies had a good time and got some business done. Tum Yeto’s Tod Swank says he spent less cash than he would have spent exhibiting at ASR and was able to make, because of the involvement of his and other companies, a contribution of at least 10,000 dollars to the Children’s Museum where the event was held. Nice.
 
Powell, Nixon, and Gravis were upstairs in rooms at the convention center. Bet they saved a few bucks with no loss of business. I thought the atmosphere up there was more conducive to doing business than it was on the floor of the show.
 
Meanwhile, various companies were spending well over 100,000 dollars to attend ASR, not counting lost business and management time. Under current business conditions, I think they have to look themselves in the mirror and ask, “If I didn’t come to the show or cut my presence way back, would I actually lose much business?” They might consider spending some or all of the money they spend at ASR on other ways of meeting their customers’ needs. If you haven’t seen it, you might check out my article (“Trade Shows Again”) in the July 2002 issue of TransWorld SNOWboarding Business. It suggests an alternative trade-show strategy used by some snowboard companies that might be appropriate for some skate companies. (If you e-mail me, I can send you a copy.)
 
Then there was the “secret” meeting called by ASR to address issues that the skate companies have with ASR. I’m told about 25 skate-company heads were invited. I didn’t go. Couldn’t find the secret room. Don’t even know the secret handshake.
 
The skate companies are unhappy because of the cost of ASR and the pressure from ASR to participate in other kinds of advertising and promotion as part of the perceived price for getting the booth you want in the location you want regardless of how long you’ve been coming to the show. They also don’t feel it’s right that ASR pays SIMA a bunch of money to support the show but don’t pay a dollar to skateboarding now that skate is arguably more important to the show than surf.
 
I guess there was also some frustration expressed with the fact that there’s no beer allowed in the booth. You know, that one bothers me, too—especially after waiting in a long line to pay four dollars for a small beer when I could have gotten a big one for free somewhere.
 
I think these concerns are justified, although I’m not so worried about the beer as the other issues. It’s getting harder and harder to justify the expense of the shows. I imagine ASR recognizes these issues as being legitimate. But they can justifiably ask, “Who, exactly, should we negotiate with?” There’s no skateboarding equivalent of SIMA, and unless IASC gets more industry support and Jim Fitzpatrick is ready to quit his day job, we can’t really point there.
 
There’s an old Chinese curse that says, “May you live in interesting times.” For a lot of reasons, including those discussed above, this would be a good time for the skateboard industry to cooperate in ways it never has before. The industry’s history is such that I won’t hold my breath. Still, imagine if we could.

 

 

You Did What !!?? Starting a New Snowboard Brand

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Your first reaction is that they must be crazy. Starting a new brand when the snowboard market is dominated by five companies fighting to take market share from each other, pushing distribution to every corner of the retail world and, to some extent, using price as a weapon in the battle doesn’t seem to make a lot of sense. You can’t meet their prices. You can’t afford their ad budget. You can’t pay big bucks for team riders.

We all remember the uncounted brands that died when these market conditions started to emerge. What’s changed? Something? Or maybe nothing, and the people starting the brands have decided they’d rather have a good time losing their money in snowboarding instead of losing it in the stock market and not having any fun.
Like the stock market, the time to get involved is often when everybody else is fleeing into the night. It’s at least possible that the market conditions that make it look like the worst possible time to start a brand actually make it the best.
Making the Case
The argument would go something like this. There are a group of smaller (or at least non chain) snowboard retailers who are, above all, snowboard shops. They need a product that everybody else doesn’t have. There are a group of snowboarders for whom snowboarding is important. That is, it’s still part of their lifestyle, they think of themselves as snowboarders and they aren’t interested in just buying what’s on sale. Maybe that group isn’t as large as it use to be, but it’s still there and it’s still big.
To succeed as snowboard shops, those retailers need a product that everybody else doesn’t have, that has roots in snowboarding, that offers them a margin they can live with and the high probability of selling it at that margin. The customer they are looking to serve also wants something everybody else doesn’t have that confirms their deeper interest in and commitment to snowboarding. The new brands, the argument goes, provide a way for these retailers and these snowboarder to do some business together based on a common need and interest. It’s niche marketing.
The downside for these new brands is that success may mean fairly slow growth and staying pretty small (Option and Never Summer are the pioneers in recognizing and implementing this strategy over many years). In fact, if they tried to grow too fast, they’d lose the market advantage they have over the large players. They can succeed because they don’t have to compete on price and don’t have to run a huge advertising and promotion program that’s required to reach the mass market.
Hell of a theory. The counter argument is that even if everything I said above is accurate, the business may still not make financial sense. You’re may be paying more for decks and other products than larger companies. Slow growth is fine, but how long can you afford to lose money while you’re true to the market strategy. At the end of the day, can you get big enough quickly enough to provide a reasonable return on investment? Maybe even for “core” shops, the terms, prices, and support they get from the big guys is just to compelling to leave much room for new, small brands.
I guess I know which side of the theory the guys at the new brands will come down on.
Rome
Josh Reid, along with Paul Maravetz the founders of Rome Snowboards, takes a philosophical approach to building the Rome brand. No, no, no, he’s not getting marketing ideas from reading Plato’s Republic (Didn’t somebody already do that and name their brand Atlantis?). But he believes that snowboarding continues to be “rooted in the counterculture,” if not to the same extent it was ten years ago and that as a result the “philosophical aspects of the brand are more important than in other industries.”
What he means is that there are still a lot of committed snowboarder who see their choice of snowboarding as more than a sport and the equipment they purchase as more than getting the best deal on what they need to participate in that “sport.”  Those people are Rome’s target customer.
Well, so far it seems to be working. The brand came out two months before Vegas- not necessarily the best timing to attract dealers for the coming season. Still, they’ve got around two hundred dealers in North America and, both last season and this season are getting requests for more product from dealers who have been surprised by demand.
Mike Arbogast, at Mountain Riders in Stratton, says there’s lots of buzz about Rome. He doesn’t know exactly why- maybe the kids are just looking for something different. Mike would probably agree with Josh’s comment about the counterculture. According to Mike, “Every kid who comes through with a Grenade sweatshirt is looking for a Rome hat [“sex, drugs, and snowboarding”] to top it off.”
It’s telling that Mountain Riders carries only four brands total. They’ve cut back on the two large ones to make room for more Rome and Allian. They’ve dropped a third large brand this year season.
By design, Rome has chosen not to meet the requests for more product. They built to orders for this season. Dealers may be disappointed at not being able to meet demand, but hopefully they’ll console themselves with good sell through at full margin and remember to order more next preseason.
In the long term, that’s probably good marketing for Rome, but it also reflects financial realism, something was often sadly lacking in the snowboard feeding frenzy of seven or eight years ago.
Rome’s on track to be profitable in the next year or two. They could have shown a financial profit the first year but decided, correctly I think, that there were some required expenses that had to be made consistent with the brand strategy.
Allian
Allian is practically an old timer among the new post consolidation brands. Their first season was 2000-2001. “It’s run and owned by people who stand on top of 100 foot cliffs and jump off them for no good reason,” is how Sales Manager John Stanos puts it. “We’ve had enough head injuries that maybe we can see a little clearer. It’s not complicated. It’s just snowboarding.”
Allian has a target market of the kids who spend a hundred days on the mountain. They are in about a 175 shops in North America and have about 20 distributors world wide. They only make what they can sell, and they try not to spend money they don’t have. The company expects to be self sustaining financially this year.
There’s a certain relaxed attitude and flexibility that I see as contributing to their success. They see their shops, reps and riders as partners. Sure they want to grow, but they don’t want shops to take product they can’t sell. Of course the reps have a sales budget, but it’s doing what’s right for the brand that’s important. “If there are five shops in town, we should only be in one right now,” says Stanos.
Boardsports in Eugene, Oregon is an Allian dealer and Jon Faulkner is one of the owners. They started looking at new, smaller brands a couple of years because the distribution of the usual brands was getting so huge, and because they don’t carry any ski brands of snowboards. John said they liked Allian right away because, “It was new, it was local, and the boards rode great for how basic they were- the company wasn’t based on hype or design or team.
What strikes me and is that the first dealer I called described the brand to me in essentially the same way Allian Sales Manager John Stanos did. It’s not about hype and craziness like it was the first time around. It’s just about snowboarding. If Allian can maintain that connection between its brand and its dealers, it should do great.
So What Do We Got?
Rome was a bit more formal in describing its business model. Given the owner’s background, that’s not too much of a surprise. But both brands have much the same strategy and market concept.
They’re both rider driven. But that doesn’t mean just team riders like it use to mean, but serious snowboarders in general. That’s both brands’ target market. They both want to grow, but not at all costs. The brand’s positioning has to be maintained. They know the mistakes other brands have made, and are going to make building a snowboard brand a lot more fun by not making them.
They won’t spend money they don’t have, make product they can’t sell, or try to be “the next Burton.” It may be snowboarding and it should be fun, but it has to be good business. There’s a sense of realism that didn’t exist in a lot of brands that aren’t around any more.
That’s a good model for success.

 

 

Resort Retention and Occam’s Razor; Keeping it simple makes a lot of sense.

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William of Occam was a Fourteenth century logician and Franciscan friar born in the English village of Ockham and, yes, somehow I’m going to get this back to snowboarding without claiming that he invented the first one. He’s the author of what’s become known as Occam’s Razor. It states, in its original form, “Entities should not be multiplied unnecessarily.” It’s been massaged and interpreted to mean that when you have multiple possible solutions to a problem, then, all things being equal, the simplest one is usually the correct one.

All things never seem to be equal. Still, I thought about Occam’s Razor at the National Ski Areas Association in New Orleans this spring. Mike Barry, NSAA’s president, was beating the drum for the group’s growth model, and talking about the issue and importance of retention. It shouldn’t come as a surprise to anybody reading this that one of the long term problems of the
winter-sports industry is that only about one of ten people who try snowboarding, or skiing for that matter, stick with it.
As consumers, maybe we can say that’s fine with us—the fewer people on the slopes, the better we like it. Of course, we also like fast lifts, lots of choices, and great amenities. And at a cheap price, too. But those things cost money, and the only way resorts can afford them is if enough people show up to cover the costs and leave at least a little profit.
If the retention rate doesn’t improve, the rate of snowboarding growth declines, and aging baby boomers drop out of skiing, then we could see a decline in snow-sliding participation that’ll leave the winter resort business in a world of hurt. That could leave us all with a lot fewer, more expensive choices. Taking a cue from Mr. Occam, isn’t there a simple way to improve retention?
Complexity
Studies have been done. Models created. Rental programs revised. Snow-sliding lessons revamped. Instructors reeducated. The competition analyzed. Lots of money has been spent. Some of it has been our money. Well, actually maybe most of it has been our money—the winter-sports industry’s that is.
This is, I guess, all good stuff. Certainly the problem’s urgent enough to require and justify some of our attention and treasure. And I even have a sense, though I couldn’t prove it, that we might be making some progress.  Buried, or at least obscured, under all this noble activity is something we all know and accept without question. It’s that the upsurge of skiing in the 70s and snowboarding in the early 90s was driven by people who started young, got hooked, and stayed passionate about the sport. Especially in the 70s they
somehow managed to have a good time without a lot of five-star restaurants, quad lifts, on-snow condos and, from our perspective at least, good equipment.
Snowboarders, generally a younger group than skiers, are still a bit like those skiers from the 70s. They just want to be there and are willing to put up with some inconvenience if necessary to get on the mountain. No doubt that tendency will decline with age—there’s something to the phrase “youthful enthusiasm.” But it seems clear that, at its simplest, what we (you, me, and
the resorts, too) have to do is get them young and create a habit. How?
Simplicity
Sometime during my stay in New Orleans, I had occasion to hear Mike Shirley, the Chief Executive Officer of Bogus Basin, talk about his resort and to talk with him. Bogus, I learned later, is a community resort—a 501C4 corporation that doesn’t pay income taxes. There are no investors or stockholders and this, according to Shirley, lets them think long term.
I didn’t know all that in New Orleans. What had caught my attention was Shirley’s mentioning of Bogus Basin’s season pass program where any kid aged seven through eleven can get a season pass for 29 dollars.
Okay, I heard that. Then I waited for more explanation. There wasn’t any. My MBA-scarred mind, accustomed to sophisticated business models and complex financial strategies, froze. Could something this simple really be an affective approach to the problem of retention? And, equally important, how the hell was I going to write a Market Watch analyzing the idea when there wasn’t anything to analyze?
This was weighing heavily on my mind a couple of months after the convention when I finally called Shirley to try and get enough information for the article. He took pity on me and gave me something to work with. It seems that Bogus, like other resorts, used to have a complicated and arcane method of pricing lift tickets and season passes. Then in the spring of 1998, they chucked it all and went with a 198-dollar season pass and the 29-dollar pass for kids seven through eleven.
The idea of a cheap kid’s pass wasn’t new. Colorado was already giving free passes to all fifth graders. Bogus now sells around 30,000 season passes a year of which around 5,000 are the kid passes. Shirley thinks the purchase of the kid passes is often associated with the purchase of other season passes, but there’s no requirement for that.
What’s the short-term financial impact of the 29-dollar kid pass? Shirley sees it as not costing money, but of course you can’t know that unless you know what the actions of the pass purchasers (and their parents) would’ve been if they hadn’t bought the passes. What we can say is that the incremental cost to the resort of putting another butt in a lift seat is more or less nothing. To really evaluate the financial impact, we’d have to be able to answer the following questions:
  1. If these kids hadn’t bought 29-dollar passes, would they’ve bought the199-dollar pass or a bunch of lift tickets?
  1. What would their parent’s behavior have been if the 29-dollar passesweren’t available?
  1. Did they spend more days on the mountain and, as a result, spend more money on things besides lift tickets then they would’ve otherwise?
Shirley can’t offer specific answers to these questions. But he did tell me Bogus Basin is full of kids, and their visit numbers have doubled in the last five years. I don’t have any information on what the resort’s overall
financial performance is. Obviously, if they’d gone from making to losing money over the last five years, the strategy would be less attractive.  “It’s so easy to convert these kids,” Shirley says. “We’re creating a lifelong habit without them even thinking about it.”
Return On Investment
Neither Shirley nor I, unless we know the answer to the three questions above, can tell what Bogus’ cost is for this program. From a cash point of view, it’s probably close to nothing, though there may be an opportunity cost as described above. Conceivably, it’s cash positive, but we can’t really tell. I’d go one step further and point out that by simplifying its pricing structure, Bogus has actually cut some administrative expenses, and that savings has to be included in any cost calculation. I don’t know if Shirley has measured that or not.
Looking down the road, the return on investment has to be huge if only because the cost is apparently so small. We can’t conclude that Bogus has doubled its visits in five years only because of this program, but it’s hard not to believe it’s worth the cost, if there is any cost. The NSAA study emphasized how valuable, in terms of dollars spent, a snow slider who started young was compared to one who started as an adult. Bogus’ 29-dollar kid pass is consistent with that thinking.
There’s another value to creating committed snow sliders early that I don’t think I’ve ever heard anybody talk about. If resorts have customers who are going to get there no matter what, come more often, and stay longer, they are going to be cheaper to get. And easier to keep. That has a favorable impact on your cost structure from top to bottom. Think of the competitive implications. Suddenly, you’re only competing with other winter resorts—not with Disneyland, cruise lines, and Arizona golf packages. Your committed snow slider has already decided they are coming to a winter resort.
I’m not prepared to proclaim such programs as the retention solution. But it’s simple, apparently cost effective, and consistent with what we all think creates committed snow sliders. I hope more resorts consider it, or other equally simple ideas.

 

The End of the Beginning; Observations from Glitter Gulch

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“Now, this is not the end. It is not even the beginning of the end. But it is, perhaps, the end of the beginning.”

Overall, Vegas showed signs of being the end of the beginning of the snowboard industry’s consolidation process. 
 
Which is convenient, since I’ve always wanted to use that quote. The first person who identifies the person being quoted by calling or e-mailing me, the approximate date of the quote, and the event being referred to will be acknowledged along with their business in the next Market Watch.
 
In Vegas, the industry shows some signs of stabilizing, but it has a long ways to go. There were few or no new exhibiting snowboard companies, but not less by my count. Prices were up, down or unchanged depending on who you talked with. But not too much either way. Careful cash management has become more important than taking market share. With a couple of exceptions, senior managers seemed to feel that they had or could get enough cash to do what they needed to do, but not what they would like to do. Significant product innovations were rare. I saw only one new step-in system. Making a profit is still tough. Retailers seemed more deliberate perhaps because there were fewer choices to consider.
 
The Good News
 
The good news starts with SIA’s retail audit, where a big increase in hard goods sales by units and dollars was reported through the end of December in both chain and specialty shops. Especially in boards, the dollar increases were generally more than the unit increases. This translates into an increase in the price per unit at retail. It’s about time. Over the same period, snowboard apparel sales plunged, but that’s more a reflection of last season’s unsustainable growth rate and poor weather than of a problem with apparel.
 
The chaotic over supply that resulted from companies producing with the goal of achieving hopelessly optimistic projections, to keep factories running, or to take market share from competitors is gone, bludgeoned by the sacred sledgehammer of financial reality. That’s not to say that over capacity isn’t still an issue (see “The Bad News” below), only that the conditions that lead to forty dollar wholesale board prices are pretty much gone. At least they are gone until confidence in Chinese production quality increases, but that’s a discussion for another time.
 
The next thing I noticed was that all the booths looked more or less the same as they each looked last year. Oh, they’d been renovated or dressed up and rearranged, but they were basically the same. Let me explain why this is really good news.
 
When an industry consolidates, managers have to start running their businesses differently if they are going to be counted among the survivors. The cornerstone of these changes in management perception and focus are financial. There’s a seminal moment when the realization hits home that all these cool marketing things would be great, but if we do them, we won’t be around to enjoy the benefits. At that moment, the competitive environment begins to get a little more rational and the tendency for new companies to enter starts to decline. We’re there.
 
I’ve always looked forward at Vegas to walking around to see who had thought up “the next snowboard.” Usually, it was some strange contraption that might have made technical sense but had no chance from a marketing perspective. It wasn’t there this year. But there was one new board with an unusual technical innovation- a double flex.
 
Nobody I talked to had ridden it, but the consensus was that it made conceptual sense and might work. It’s important that it wasn’t just a board being introduced by somebody who wanted to be involved in snowboarding. It appeared to be the result of cautious development and careful market analysis and timing. Based on the background of the owner, I expect there’s enough capital behind it and the risk has been carefully thought out. I’ll bet they wouldn’t have introduced it two years ago even if it was ready given the market conditions that existed then. In other words, it’s a rational product introduction based on a competitive advantage which the owner believe can be validated in the market. He doesn’t care if he’s cool. 
 
That’s another positive indication of a market that is starting to behave rationally.
 
I say this every year, but the show was more businesslike than the previous year. As long as there continues to be free beer in the booths after the show closes, I can stand it. I say that every year too.
 
At least partly due to SIA’s good work on the subject and its decision to cancel the Snow Show, the buy sell cycle is progressing more smoothly. There was plenty of business done in Vegas, but it wasn’t, and didn’t have to be, done in a frantic way. In the first place, it’s a lot easier to choose between fifty brands than three hundred. In addition, brands and retailers are doing more work before Vegas. More retailers, planning to carry most of the brands they carried last year, are coming to Vegas to confirm decisions they have largely made- not to begin and conclude the information gathering process in five frantic days like they use to.
 
The final piece of good news is that there are 60 million people in the United States between the ages of 5 and 20, over half of who have not yet moved into adolescence. There’s plenty of room for snowboarding to grow. We’ve also got the attention of every big company in the country with a brand name, because they know that if they can’t get the loyalty of some piece of this group, their future success is doubtful. I guess that’s good news…..maybe.
 
The Bad News
 
When a consolidation happens, profits drop. That drop can be temporary or permanent. I am not going to conclude that it’s permanent in the snowboarding industry- the demographics alone suggest there’s some money to be made- but the same handicap that has kept skiing among the financially disabled has the potential to do the same to snowboarding.
 
That handicap is too much production capacity. There are always more than enough soft goods factories. If every ski and snowboard factory in North America closed, there would still be enough manufacturing capability in Europe to supply all the skis and snowboards the world wants. Hell, there might be enough if all the plants outside of Austria closed. I don’t expect our excess capacity problem to go away.
 
The capacity problem is reflected in the actions of the (mostly) ski companies from Europe trying to establish their snowboard businesses in the United States. Unfortunately, I observed in Vegas some tendency on the part of European owners to interfere with the marketing direction the U.S. managers are trying to set, and I suspect that will be to the detriment of the brands’ success here.   Oh well, I’ve seen lots of U. S. companies have the same problems when they tried to move into Europe. People who live in glass houses….
 
The point, however, is that these companies, with tens of millions of dollars invested in snowboard and ski production equipment, really, really, really want to make product to keep those factories running. They look at the whole market from a production, rather than a market, perspective. I have some personal experience telling companies with factories that the market required less product. Their first priority is simply not brand positioning- it’s maintaining and increasing production.
 
Then there’s the fact that we’ve still got fifty plus brands competing in North America. It’s too many. I still believe snowboarding can support more brands than skiing, but not fifty. I expected to get to Vegas and see fewer.
 
The big brands, and the brands owned by big companies, making money or not, are likely to survive. They either have a balance sheet or an access to capital that insures it. The small brands that have pursued a consistent strategy and niche also have a reasonable chance to be successful. They all report anticipated sales increases consistent with their historical growth. It’s potentially a breakthrough year for them because if a retailer wants any product from a smaller brand, there aren’t many choices. Of course, sometimes the managers at these brands can be a little disingenuous when they talk to me, but I asked the same question in enough different ways that I think they mean it. I hope so.
 
As usual, being big or having a market niche seems to be the way to succeed. It’s tougher when you’re in the middle either by size or brand positioning.
 
In Las Vegas, I saw light at the end of the consolidation tunnel, but land mines on the cave floor. The demographics suggest a huge opportunity, but everybody wants a piece of it. Knowing who your customer is has gotten tougher as what use to be distinct specialty markets overlap and many new customers are as interested in fashion as they are in the sport. I am reminded of what happened to skateboarding the last time it got respectable. The kids dumped it because it wasn’t cool.

 

 

Tackling The Snowboard Industry Buy/Sell Cycle Are We Trying to Fix the Wrong Problem?

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The buy/sell cycle seems to be on everybody’s mind these days. The brands are concerned because the decline of in season orders means they have to take more inventory risk. Retailers, on the other hand, are thrilled to be able to get quality product in season at discounts, though are perhaps concerned that it’s tougher to hold their margins due to oversupply.

Everyone should be concerned; because if we follow this pattern we’ll turn into our old friend the ski industry with everybody struggling to differentiate their commodity products and nobody making much money. You should know at the outset that I’m not optimistic we can avoid falling into that same trap. There’s no reason snowboarding should be different from any other industry as it works its way through its business cycle. If we can it will be because we’re growing as an industry, are willing to ask tough, specific questions and can find some common ground between our individual competitive positions and the good of the industry.
 
The first thing we might do is to define what we mean by the buy/sell cycle. The term is thrown around pretty loosely. I’ve defined it as the process and timing of product purchases by retailers as it relates to the brands’ order and manufacturing schedule. If you don’t like my definition, please come up with one of your own. The point is that we should agree on what we’re trying to discuss and so far I don’t think we have.
 
Next, we have to make sure we’re attacking the right problem. As I’ll explain below, I believe the “problem” we have with the buy/sell cycle is really just a symptom of existing industry conditions and until those conditions change, the symptoms we call the buy/sell cycle won’t change dramatically.
 
I’ve talked about those industry conditions before and have said they are typical of any maturing industry. They include:
 
·         Overcapacity
·         Slower growth
·         Dealer margins fall, but their power increases
·         Product is viewed as a commodity
·         Competition emphasizes cost and service
·         Industry profits fall. Cash flow declines when it is needed most and capital becomes difficult to raise.
 
My guesstimate of industry board manufacturing capacity this year is three million boards. That’s not a theoretical, seven days a week, three shifts a day capacity. That’s two shifts a day, maybe five days a week. I’m not saying three million boards will be made, but that they could be. The fact that this capacity has been invested in creates a lot of pressure to put it to use. And to sell those boards to somebody. Cheap.
 
What’s being sold to retailers in the 1996-97 season? I don’t know, but I’ll put the number 1.2 million on the table. Could be higher, could be lower but whatever the number is, it’s a lot less than three million.
 
I remember waking up from my nap in an economics class when the professor said “Production increases and prices fall until marginal revenue equals marginal cost.” At the time I was pissed at him for waking me, but it seems he had a point. Each manufacturer is trying to beat out the others for market share and of course each is convinced that they are the one who will be successful. The more they invest to bring their costs down, the better price they can offer. But so can the other factory who is doing the same thing with equally blind faith that they will be the successful one.
 
Pretty soon there’s all this production capacity.   As they brought their manufacturing cost down, the price at which they could sell the board comes right down with it. Pretty soon they’ve competed their way to the point where they have to sell a lot more boards to make the same profit. And they keep cutting prices until, theoretically at least, they can sell a board for just one dollar more than it costs them to make it; just above the point where marginal revenue (what they earn from selling one more board) equals marginal cost (what it cost to make it).       
 
Each competitor has done what they perceive to be in their own best interest, and look at the fine mess they’ve gotten themselves into.
 
Basically, Pogo was right.
 
We Have Met the Enemy, and He Is Us.
 
So before we spend too much time and energy trying to fix the buy/sell cycle, let’s realize that we’re seeing in that cycle the symptoms of some more fundamental industry conditions. The buy/sell cycle problem will exist as long as over capacity exists.
 
I’ve heard basically four proposed solution to the buy/sell cycle problem. Some have been put forward seriously, and some tongue in cheek. Reviewing them offers us good perspective on how futile it can be to attack symptoms instead of the problem.
 
·         Establish a fund to purchase and close bankrupt plants.
 
The scary thing is that this may be the best solution of the four. Unfortunately, bankruptcy laws all over the world seem to start with the premise that jobs have to be saved. So factories have been like nerf balls. You can squeeze them down to nothing, but when you let them go they spring right back up.
 
·         Cooperation among brands to improve the order flow and restrict supply after the preseason.
 
Aside from being blatantly illegal, at least in this country, what I call the “You First” principal of business, where no company will do something first unless its competitor is willing to do it, makes it unlikely this can be done.
 
·         Convince the retailers to cooperate in the long term interest of the industry.
 
These get more and more unlikely as you go down the list.
 
·         Tell SIA to fix the problem.
 
They are trying with the on snow show in Salt Lake. If, as I believe, they are focusing on symptoms and not the fundamental problem, it’s not enough.
 
So far, most of this article has explained how we’re attacking the wrong problem. It has ridiculed the proposed solutions and expressed pessimism that we can do anything but suffer the fate of the ski industry. If, as a result, you’ve been persuaded to see the problem a little differently, maybe you are ready to consider a different approach.
 
First, I want to suggest that you support the show in Salt Lake. It’s not “the solution,” but it’s a start and right now it’s all we’ve got.
 
Second, nobody can measure in any meaningful way how big the problem is and how it has changed over the years. I asked maybe half a dozen snowboard companies “What percentage of your projected annual sales are booked in the preseason and how does that compare to three years ago?” Most didn’t have a specific answer or wouldn’t tell me. Some think it’s less, some more. At a middle of October in Washington State, Dave Ingemie, President of SIA, gave a presentation on sales for this season. He presented clearly the preseason bookings for skiing. When he got to snowboarding, he basically said “Sorry, we don’t have the data yet.”
 
Lacking good information and the ability to quantify the extent of the problem, it’s hard to see how we can try to manage it, or even say what it is. We’ve got to trust the company that collects data for SIA, or we’ve got to trust somebody else. It’s somewhere between sad and funny that some people are looking to SIA to take the lead but won’t help them collect the industry information they need to develop plausible options.
 
Third, companies have to look more formally at their volume versus margin assumptions. It may not be in their interest as brands to grab ever last unit of sales they can get in an endless battle for market share. If they can take that approach, then their interests and those of the industry can begin to approach each other a little.
 
It’s an up hill battle. I’m suggesting we try and do what no industry I know of has succeeded in doing. I don’t know the solution, but I am convinced that without good information we can’t hope to find one.
 
For example, saying “Let’s fix the buy/cycle” doesn’t lead us anywhere useful. But if knew what the average gross profit margins was by product for each of the last three years, at the wholesale and retail levels, and we knew what total sales by units were, then perhaps we’d begin to be able to have an intelligent conversation about how volume impacts profitability, again motivating a convergence of industry and company interests.  
 
Making broad generalizations about solutions to the wrong problem won’t get us anywhere. Carefully analysis of higher quality data may lead us to manageable opportunities to make incremental improvements that won’t seem quite so overwhelming.
 
There’s a lot at stake. I think it’s worth the effort.

 

 

Money: That’s What I Want. Sources of Capital for a Growing Business

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If your only business is snowboarding, you need money for three reasons. First, your business should grow at least as fast as the industry, and that growth translates into more cash tied up in the business. Second, extreme seasonality and the extended dating customers are demanding requires more working capital. Finally, tough competitive conditions are probably reducing margins, leaving less cash flow for each unit of product.

Adequate working capital is never enough to make a company succeed. Survive and continue, yes- but not succeed. On the other hand, not having enough capital has destroyed many businesses that were otherwise viable. Another time we’ll talk about determining how much working capital you need. For the moment, let’s assume that’s done. The subject for today is where to find it.
 
Two general comments about raising money. First, the only thing we know for sure about your estimate of capital requirements is that it’s wrong. We don’t know it you’ll do better or worse than projected, but either way, your capital need is usually greater than anticipated. Most investors, when looking at a new business, assume that twice the capital projected will be needed. Allocating an additional 15 percent for surprises may make sense if you’re budgeting a project for an ongoing, established business, but it’s wildly optimistic for a startup or fast growth.
 
The second thing to recognize about raising money is that it takes longer than you expect and requires your continuous attention, especially if you’re raising equity. Plan to be distracted from running your business.
 
The smaller and less established your company is, the tougher it is to find capital unless it comes out of your pocket. Profitable, established companies have an easier time of it, but the options are essentially the same.
There are only seven places I know of where you can find capital.
 
·         Your pocket
·         Your friends’ and relatives’ pockets
·         The bank (including bank like entities like the Small Business Administration)
·         Asset Based Lenders
·         Third party private investors
·         Your customers and suppliers
·         The public markets
 
Let’s look briefly at each one.
 
Your Pocket
 
Nobody is going to invest in your business unless you do. As a result, most small businesses get started with the owner’s personal capital. It can be a home equity loan, savings account or an advance from your credit card, but it’s going to be your money.
 
Your Friends’ and Relatives’ Pocket
 
“Joe’s starting a business!” I’m putting up $5,000 and we’re all going to get rich!” People you know well are the easiest to approach, and the most likely to be supportive. Nobody likes rejection, and you get a lot when you’re raising money.
 
People who love and trust you may not ask the hard questions a banker or third party investor would ask. As a result, your expectations and theirs may not converge. Especially when taking money from friends and relatives, make sure the relationship is defined as rigorously as it would be with somebody you didn’t know.
 
Is the money a loan or equity? Do they expect dividends? A job? Are they really prepared for the possibility of losing all or part of the money? Can they truly afford it? How do they propose to get their money out of the business? By when? It’s hard not to accept cash when you are enthusiastic about your business and it is offered with so few strings attached. But spelling out the relationship now will save you money, time, headaches and friends latter.
 
A client of mine has an exciting new product. His partner is contributing his time, professional expertise and reputation, and some cash for a stake in the business. The agreement they’ve got calls for him to receive 25% of the “net profit” after allocation of direct expenses and “appropriate overhead.” It isn’t clear if he continues to receive such compensation after he leaves the company. We’re rewriting the agreement to eliminate the ambiguities. Imagine all the fun the lawyers could have arguing over what “net profit” and “appropriate overhead” means.
 
The Bank
 
Banks are in business to earn some interest and a little fee income. They aren’t interested in sharing the risk of your business with you. The wise person who said “Banks will only lend you money when you don’t need it” was basically right.
 
What a bank will do is look at your company’s performance for stability and consistency. But even a small business that’s consistently profitable and been around for a while isn’t typically going to get an unsecured line of credit. The bank will require a security interest in inventory and receivables. They will probably also insist on a personal guarantee. From their perspective, a small business owner and his business are the same entity because the owner controls and flow of money between the company and himself.
 
A startup or company that isn’t stable and established won’t get a bank loan, though that doesn’t mean they can’t get money from a bank based on the owner’s personal assets.
 
Asset Based Lenders
 
An asset based lender functions much like a bank, but is willing to take more risk. They compensate for this by charging higher fees and interest, controlling access to the money according to a carefully defined formula, and tracking the assets they control as collateral very carefully. A bank looks at your cash flow as a primary source of repayment. That is, they analyze your company as a continuing entity. An asset-based lender is less concerned about profitability than about their ability to liquidate the company’s assets for at least as much as they have lent to you. Your business may collapse, but the asset based lender still feels they will get every cent they have coming to them.
 
Third Party Investors
 
The good news about a professional investor is that they will put you through a more rigorous legal, business, financial and market evaluation before making an investment. At their best, they will provide you with skills and experience that will help you build your business in addition to access to capital. The possible downside is that they will take control out of your hands, may have active involvement in the company, and will be looking for a big return. They will be in your business to make money.
 
It seems that everybody who knows the term venture capitalist thinks they are the place to go to finance a new business. But venture capitalists invest in, say, ten businesses expecting eight of them to fail to live up to expectations. That means they are only interested in you if you can demonstrate the potential for rapid growth with a clear competitive advantage or unique product. It also means they generally aren’t interested in investing $50,000. At a couple of million you may get their attention.
 
The reason is simple. The time and effort they put into making an investment is expensive. It represents too big a percentage of a small investment. Nor can they expect the returns they want to aim for on smaller deals.
 
Your Customers and Suppliers
 
A larger company who wants to work with you may be willing to provide some up front payments to get your product. Suppliers often offer terms to companies they hope to expand their business with if required by the competitive situation. At its best, you get terms from your suppliers such that you collect from your customers before you have to pay the supplier.
 
These business cycle dynamics can be an often overlooked source of working capital.
 
A client of mine that is producing interactive conference calls (almost like talk radio over the telephone) has found its large corporate customers so anxious to use the service that they are being paid in advance. Essentially, they can grow without raising any outside capital by utilizing the business cycle they have created.
 
The Public Market
The advantages of going public are that you get a higher valuation of your company, access to future funding, and liquidity for your personal equity in the business. The disadvantages are the reporting requirements of a public company, the fact that your company is something of an open book, the loss of flexibility, and the expense. I understand somebody else is doing an entire article on going public in this issue, so that’s enough said by me on the subject. 
 
Those are your choices. Which one is right for you depends on how much capital you want to raise, what you want it for, the history of your business, and its prospects.

 

 

Getting In Deep Trouble; Why Companies Get There, and What it Takes To Recover

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It doesn’t matter if you’re a retailer, distributor or manufacturer. It doesn’t even matter if you’re in the snowboard business. In every industry, companies get in trouble for the same basic reasons, and require the same things to recover

All businesses in trouble share two characteristics: denial and perseverance in the face of inescapable change. It’s easy to believe in what worked in the past, and hard to step outside our comfort zone and do things differently.
Businesses suffer from information overload, just as individuals do. Big surprise since businesses are made up of people. When companies get into trouble, day-to-day management of immediate crises (like finding enough cash for payroll) consume managers. Their ability to identify opportunities and problem solutions decline because they can’t see past the next phone call from an irate creditor or reluctant supplier. Pretty soon, they’re paralyzed by action. Managers and staff alike are frantic, but nobody addresses the fundamental changes that get companies in trouble in the first place.
A business owner once looked me straight in the eye as he told me that he had to sell his product for under what it cost to produce it. Why? Because that’s what his competition was doing, he said. Denial and perseverance. The fact that he was liquidating his net worth a little at a time and working for less than he could have made at McDonalds wasn’t really something he’d focused on.
The owner of a business can’t afford to shut out critical information just because there doesn’t seem to be time to consider its significance. Ignorance can kill.
Like the frog that won’t hop out of water if the temperature is raised slowly to boiling, many companies seem all too willing to cook rather than change with the business environment.
There are a lot of reasons businesses boil rather than hop out. The five most common ones that I’ve seen in my work with troubled companies include:
Failure to answer the question “What’s the Goal?”
Seems like a simple question, right? What are your goals for your business? Can you measure them? By when do you want to achieve them?
Think about it. How do you know if you’re succeeding if you don’t have tools to measure success and keep you focused on where you want to go? Most businesses that get into trouble have never answered this question and companies jumping into the snowboard business today are often prime example.
Business goals are measurable and realistic. They can always be quantified; an increase in sales, gross profit percentage or dollar sales per employee. Don’t be constrained by traditional measures. If it meets the criteria, works for your business, and keeps you focused, it can be a goal.
Failure to respond to a change in the market
Does anybody doubt that IBM could have dominated the PC market if they had decided to do it early enough? Bill Gates offered them a chance to buy the rights to MS-DOS and they turned him down. Oops.
It’s easy to keep doing what has worked for you in the past. Everybody likes to stay in their comfort zone. A dramatic change in the way your business operates involves perceived risk and is inevitably disruptive and messy. Building an organization that is receptive to change, so that change is ongoing and incremental instead of chaotic, is a critical ingredient of business success.
A character flaw in the owner/chief executive
No, we’re not talking a crook or a psychopath. Like all of us, business executives have strengths and weaknesses. The strengths that allowed Steve Jobs to establish and build Apple Computer became, in the judgment of some, liabilities when it was time to manage the larger, corporate organization that Apple became.
Perhaps individuals who establish and build companies come to believe in and depend on themselves too much. They are often right to think that they can do anything in the organization better than anybody else. Trouble is, they can only do one thing at a time, and this hands-on-everything approach creates a bottleneck at their door and discourages other employees from taking the initiative to solve problems.
Inadequate control systems
“Inadequate Accounting System Scuttles Company” isn’t the kind of headline that boosts circulation, but it should be obvious that you can’t run a business without current, accurate information.
A company I was hired to turn around was operating two businesses on one accounting system. “Nothing wrong with that!” you say. True enough, unless you use one data base for both companies. You credit one business and debit the other. At the end of the month, the books balance, but the numbers are meaningless.
As a result, monumental adjustments were required to create good, meaningful data and they were months behind in doing it. The owner, by the way, was a CPA. Before I ever got there, he’d invested close to $1 million in the venture and ended up losing most of it. Go figure.
Growing too fast
Remember the business cycle; especially in a highly seasonal business like snowboarding. You have to invest money (for salaries, advertising, inventory, whatever) before you can sell anything. The more you sell, the more money you have to invest to keep the business running. It’s called working capital. Profit is an accounting concept. Nobody ever pays their bills with profit. Companies run on cash. If you grow faster than your financial capabilities allow, you can be profitable, but still broke.
If your business is growing (even if it’s not, but especially if it is), do a simple cash projection. It can be as easy as beginning cash balance, plus sources of cash during the month, less itemized expenses for the month, equal cash balance at the end of the month. That number becomes the starting place for the next month. Make it as simple or as complex as you like; whatever works for you.
You know two things for sure about a cash projection. First, that it’s never right. Hey, it’s a projection! Second, that the more you use it, the more valuable it becomes. It’s your money. You must understand the financial dynamics of your business no matter how much you’d like to leave it to your accountant.
Find some quiet time to evaluate your business with regards to these five issues. Better still, have an objective third party whose business acumen you trust evaluate them with you. However hard it is to correct any deficiencies you discover, it’s easier to do now than after the business is in decline.
 
Company Already In Trouble?
What Does it Take To Climb Out?
 
·         A viable business
Evaluate your competitive position. Why are customers going to buy your product instead of somebody else’s? If you don’t have a good answer, ask yourself if the risk you’re taking is worth the potential return.
·         Bridge capital
There’s always a shortage of capital, though it’s typically a symptom rather than a cause of the company’s problems. There has to be cash from some source to keep the business going while the problems are fixed.
·         Management
Managing a turnaround requires a different set of skills than managing a healthy company. Often the individuals who were at the helm as the business declined are the wrong ones to rebuilt it, if only because their credibility and confidence is poor.
·         A little time
If creditors have judgments and are attaching bank accounts, the bank has called the loan, and the IRS is padlocking the place for failure to pay withholding taxes, an organized liquidation or bankruptcy filing may be your only choice. Positive changes take time to have an impact. Options decline with circumstances.
·         A plan
You have to convince yourself, your employees, customers, suppliers banker and other stakeholders that you can recover.

 

 

Dr. Jekyll or Mr. Hyde; The Dilemma of the Skateboard Factory Owner

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“Blanks are killing the industry.” “Yeah, but they give the skater a good deal.” “But pros are what builds the industry, and we can’t support pros on blank margins.” “The problem is that we have too many pros to support.” Etc., etc., etc.

In this highly emotional debate, there’s some truth to everybody’s position. A lot of people seem to feel very strongly both ways from time to time, and it’s an unfortunate source of friction in the industry at a time when it would be nice if there could be a little more cooperation.
It’s a Numbers Thing
Once you get past the strong feelings and the concern for the industry that, hopefully, drives them the dilemma for people with skateboard factories comes down to the numbers. There are two basic business models skateboard factories (or any factory, for that matter) can follow that theoretically make sense. One is higher margin, lower volume. The other is lower margin, higher volume. For companies with factories and brand names, there’s also the internal tug of war between wanting to keep the factory running and maintaining the brand’s position in the market.
Let’s look at two factories- one owned by Dr. Jekyll and the other by Mr. Hyde- and see how the operating perspectives and financial circumstances of these theoretical businesses differ.
Dr. Jekyll
Dr. Jekyll doesn’t own a brand. Just a big old money eating factory that needs to be fed. Whether he makes a single deck or not, wages, insurance, utilities, telephone, interest, and a hoard of other expenses all have to be paid. He’ll make decks for anybody who can pay him his normal price.
Let’s say his overhead (the money he has to pay every month whether or not he makes a single deck) is $50,000. Notice that he doesn’t have to support a team or pay for any ads. He’s making twenty thousand decks a month and the materials and direct labor for each one is about nine dollars.   He sells each of those decks to whoever is going to resell them for, say, fourteen dollars. Here’s how his monthly income statement looks
Revenue                       $280,000           (20,000 decks times 14 dollars each)
Cost of Goods Sold      $180,000           (20,000 decks times 9 dollars materials and direct labor)
Gross Profit                  $100,000
Overhead Expense        $ 50,000
Pretax Income               $ 50,000
Great business. If I believed these numbers were real I’d dump consulting and writing and open my own skateboard factory, which is just what the industry needs.
Mr. Hyde
Mr. Hyde has not only a factory, but also a successful skateboarding brand. It’s not that he wouldn’t accept some shop or blank or export orders, but just for the moment let’s assume he doesn’t need to.
His overhead is the same $50,000 a month as Dr. Jekyll. It costs him the same nine bucks to make a deck. But his deepest darkest secret, contrary to his advertising, is that his decks are fundamentally no different from those of his competitors. So he’s justifiably concerned with protecting his brand name, because the perception of that brand name is really the only competitive advantage he has.
He doesn’t want to flood the market with decks, because that would weaken his brand name. Let’s say he makes 10,000 decks a month.[1] Because the brand name demands a higher price, he can sell them to retailers for $30. Here’s his monthly income statement so far.
Revenue                       $300,000           (10,000 decks times $30 a deck)
Cost of Goods Sold      $ 90,000
Gross Profit                  $ 210,000
Overhead Expense        $  50,000
So far, this is an even better business than Dr. Jekyll’s is. If the expenses stopped right here, Mr. Hyde would have a pretax profit of $160,000 compared to $50,000. I want to be in the business even worse than the first one.
But the expenses don’t stop here, so let’s keep going. There are going to be operating expenses other than overhead. He’s got more customers to deal with and more selling expenses. In additional to what I’ll call administrative selling expenses, there are the advertising and promotional expenses to support the brand; team, trade shows, stickers, advertisements, giveaway product, sponsorships, printed selling materials, the web site…. Quite a list.
Just for fun, let’s say that those costs total another $60,000 a month, bringing the pretax profit of Mr. Hyde’s business to $100,000. Without claiming that these models really represent existing reality in the skateboard manufacturing business, let’s see what we can learn from them.
By the Book
 
The textbooks say both of these business models- higher volume, lower margin and lower volume, higher margin- should be viable in the same industry at the same time.
The first, utilizing a price leadership strategy, makes money by spreading costs over a larger volume and eliminating most traditional selling expenses. If Dr. Jekyll can sell 10,000 decks a month, and assuming his overhead remains constant at $50,000, he breaks even that month. Every additional deck he sells in excess of 10,000 generates $5.00 (The selling price of $14 minus the direct costs of $9) that falls right to the bottom line. In our simplified model, he should be theoretically willing to accept any order (after 10,000 decks) that pays him more than $9 a deck.   The factory is sitting there anyway with fixed overhead of $50,000 a month and if he sells a deck for $9.01 that’s an extra penny in his pocket.
Mr. Hyde’s breakeven point is 5,238 decks a month even though his expenses below the gross profit line are much higher than Dr. Jekyll’s. Shows you the power of a higher gross margin, and value of maintaining the market position of your brand doesn’t it?
Mr. Hyde has a factory to feed too and even with a successful brand, he isn’t immune to the thought that every deck he makes for more than $9.00 puts some money in his pocket once he’s past his breakeven point. He realizes of course, that he’s essentially competing against himself by making OEM decks and maybe hurting the market position of his own brand, but there’s that factory to feed
It seems at the end of the day that there’s a little Dr. Jekyll in Mr. Hyde.
The Real World
Putting the textbooks on microeconomics back on the shelf (maybe in the section marked “fantasy”), we rejoin Dr. Jekyll and Mr. Hyde in the real world.
You see, lots of other people saw those numbers in the textbook and thought they could have a business like that too. They started factories and brands. When potential customers come to see Dr. Jekyll, and he quotes them $12.00 a deck, they mention that down the street it’s only $11.50 a deck, or maybe that there’s some quantity discounts, or possibly some terms, or an extra deck thrown in for every ten you buy, or something. Well $11.50 isn’t that much different from $12.00 Dr. Jekyll reasons. He still gets a good gross margin. Of course, his break even just went up some decks, but that’s okay. He can accept a couple of shop orders he’d been turning away.
Could be that more than one customer asks for lower prices. Maybe he has to go even lower than $11.50. That breakeven volume of decks keeps going up, and the margin declines further. The lower margin means he has to invest more cash in the business. Getting more volume, from anybody who wants a deck, becomes his purpose in life.
A funny thing happens on the way to higher volume. At some point, he’s got to buy more equipment. Maybe he has to pay overtime wages to support the production volume. His beautiful business model has gotten ugly. Margin is down and overhead expense is up. What’s he supposed to do?
Maybe he can start a brand.
Back at Mr. Hyde’s place, he notices there are lots of new brands, and that it’s getting really cheap to get decks made in small quantities with or without graphics. Determined to defend his brand name and market position, he hires some more team riders, runs some more ads, or whatever. In spite of these efforts, his volume drops a little because there’s an awfully lot of product out there and it’s awfully alike. So his total gross profit is down because he’s now spreading his constant overhead over fewer decks. His expenses have increased because of the new advertising and promotional expenses.
He suddenly remembers the guys he threw out of the place because they wanted him to make OEM decks and scurries to try and find their business cards.
Dr. Jekyll and Mr. Hyde are both to be congratulated on the logical business decisions they have both made. How come things just keep getting worse? What can they do to fix this? Could it be that their existing business models don’t work under emerging competitive conditions and that focusing only on competing in the hard goods market for core (whatever that means) skaters isn’t the answer?
Tune in next issue for the continuing adventures of Dr. Jekyll and Mr. Hyde.

[1] In practice, of course, a brand with a factory doesn’t just sell decks, and its costs aren’t just those associated with the decks. Margins also vary depending on whether or not sales are to distributors or direct to retailers.   But I’m trying to make a point here, so give me a little leeway and let me keep it simple.