Don’t Worry, Be Happy, Part II; Skateboarding will Survive a Slowdown

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It was three or four months ago that I stopped getting the nearly weekly calls and emails from somebody who wanted to open a new skate shop. As weeks dragged on without the sound of enthusiastic voices eager to make their mark in skateboard retailing I wondered if that wasn’t a sign of a market top.

 
Now, as you all mostly know, sales are a bit soft. As usual, there’s not a heck of a lot of hard data, but it feels like the luckiest ones are just seeing slow growth (single digit) while the less fortunate are down from last year. Various youth oriented retailers (Hot Topic, Gadzooks, Children’s Place Retail) have reported some weaker than expected results. Vans reported that their comparable retail store sales for the quarter ended May 31 declined 7.4% from the same quarter the previous year.
 
Recent government economic statistics have confirmed what we who have to deal with reality already knew- the recession last year was a little worse than advertised. There’s some talk now that we could have a double dip recession. After the decade of prosperity it wouldn’t surprise me if we had a bit more of a counter trend.
 
Screw all that. Anybody in the skate industry who truly thought skateboarding was going to grow like a well-fertilized weed forever was not in touch with reality, to use the polite term. But our demographics are still favorable, the major brands haven’t screwed up their distribution, skate parks are popping up like mushrooms, and skating seems to be gone mainstream without, so far, losing its coolness. The people selling skate apparel to the lifestyle crowd should be sending royalty checks to the skate hard goods companies.
 
So maybe we aren’t quite gushing cash like we were. Maybe we don’t need to make skateboards 24/7 right now. That doesn’t mean you can’t have a good business, enjoy the industry and make some bucks.
 
A Lesson From the Ski Business
 
Yesterday I talked to a ski industry veteran who told me about brand name shaped skis on sale for $49 and $59 a pair. Shaped skis are the skis that pretty much took over the market a few years ago. Being easier to learn on and turn, I’m told, they relegated most straight skis to the dump. If they’re so hot, how come they’re selling for less than cost at retail? For less than a complete skateboard, come to think of it.
 
Oh, for the usual reasons. Desperation to stay alive. Willingness to exploit a formerly hot brand. Lack of product differentiation. Fighting for market share rather than focus on brand positioning. 
 
As an industry, skateboarding isn’t and won’t be immune to these kinds of shenanigans. The best thing we have going for us is that the major hard goods companies know they have to control their distribution or they’re screwed. Unlike skiing, or snowboarding for that matter, the skate companies seem to know it and are actually acting on it. In its heart of hearts, each core skate company seems to know that if one of its competitors tries to blow open its distribution, it will clobber that brand, not leave the others in the dust. The snow/ski companies knew the dangers of pushing distribution too hard, but couldn’t resist the urge to fight for market share by expanding that distribution. That’s why there are $49 shaped skis and the Vision snowboards are right next to the Burtons in Garts.
 
How can we avoid this fate?
 
Being a Successful Retailer
 
Well, apparently you read Skate Biz. Every issue, Skate Biz highlights one or more skate shops that have been successful. Get all your back issues (you do keep them in a safe and secure place don’t you?) and open them to the pages talking about these shops. Read the articles on the shops from each issue. Now make a short list of what pretty much all these shops do. In no particular order, your list will look something like this.
 
  1. They’ve all been around a while
  2. The owner is actively involved in management and is in touch with the customers.
  3. They have some kind of budget and cash flow awareness. They watch inventory and expenses.
  4. They can tell you, in a general sense, who their customers are. There is customer loyalty.
  5. They are involved with the community and the sport.
 
You’ll note that these five points don’t just apply to skate retailers, which is fine as most shops sell something besides skate.   
 
There’s one more thing I think more and more of them should be doing. Rather than running ads and doing various other kinds of non-focused advertising, they should be using email and the internet to not just reach their customers, but to have a relationship with them. I didn’t say sell on line. But most skate shop customers are email and internet users I suspect, and that’s a huge opportunity to reach exactly the right people with information they actually want at a low cost.
 
“Good” Competitors
 
I was afraid this article was going to end up as another boring discussion of things to do when business is a little soft. You know- control expenses and inventory, protect your brand, stay focused on your core customer, and stuff like that. Each business needs to do those tactical things.    But instead, let’s talk a little more strategically about something I’ve touched on from time to time- industry structure and what makes good competitors.
 
We all know that the core skate companies do and have done a lot to grow and promote skateboarding. It’s almost an article of faith that that’s a good thing, and it is. What does it really mean though?
 
It means, up to this point at least, we’ve had a group of largely “good” competitors. Though they were for sure competing with each other, they largely did it in a way that’s been good for the industry.
 
They have stayed committed to the technology that goes into making skateboards, trucks, wheels and bearings. By legitimizing this technology, entry barriers have been created by defining what a skateboard is and is not. They have made it difficult for new brands and products, even from much larger companies, to come into the market and succeed.
       
They have shared the cost of developing the market. There is no single dominant company in this industry that could have done it alone. Their common focus and direction is, in a word, remarkable. As a result, they’ve increased industry demand to the benefit of all.
 
Generally, they’ve been pretty risk averse. They haven’t gone out looking for growth and market share at all cost. They have been very conservative in adopting any new technologies. Mostly, they haven’t tried to expand outside of skateboarding and they’ve been cautious about their distribution. In fact, it’s tough for new entrants to gain access to distribution channels. Being risk adverse means they haven’t had to react to each other in ways that are detrimental to industry structure.
 
Because the companies have been risk averse, the consumer’s risk when buying a skate product has been reduced. Basically, the products are pretty much the same and work pretty well. Maybe more importantly, no skater ever has to risk being laughed at by his friends because he bought “the wrong” product. He can always find something that functions well that meets the social requirements of his circle of friends.
 
To put it simply, the strategy of the leading brands helps to perpetuate industry structure. How did it happen that everybody has been so cooperative? I don’t exactly know. I guess I could speculate that it has to do with the fact that most of the company principals grew up in skating, know each other well and share a common perspective on the industry. It’s also because they’ve got a good thing going and because the industry is pretty small. Maybe this is one of those times when “why?” doesn’t matter. It exists and it’s great.
 
But, while we’re still a small industry we’re not quite so small anymore. Or at least we’re not quite so unnoticed. The customer base has expanded and maybe isn’t composed of mostly “core” skaters in quite the way it use to be. People with less interest in keeping things the same are becoming involved in skating. Skate brands and companies will, I believe, find their way into the hands of organizations with less perceived interest in being “good” competitors. 
 
As I’ve discussed in my last article, there may be some pressures emerging that will make it tough for the skateboarding industry to continue along as it has. At the same time, I’ve never known an industry where the interests of all the leading companies were so aligned and consistently pursued for the ultimate benefit of the industry. Maybe they’ll surprise me and keep doing it.

 

 

Three Business Models That Might Work; Ideas From Vegas

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You might have thought I could have gotten around to this before now, but there were no more SnowBiz issues after Vegas, and I kind of forgot about this for a while. Sorry.

As we’ve watched snowboarding evolve, we’ve noticed how closely products of different brands resemble each other. Differentiation is based largely on marketing and making a buck requires a strong brand, adequate financing, and solid operations.
 
Well okay, that’s basically what happens in any industry as it matures and no, I’m not going to make that speech again. Seems a waste of time at this point.
 
But, the bottom line is that companies that make money tend to have what’s called a “sustainable competitive advantage.” Sustaining it is typically a lot of work. Just because you have it doesn’t mean you keep it. At Vegas, I saw three brands (I’m not suggesting there aren’t others) that I thought had a potential competitive advantage. Whether it’s sustainable or not isn’t clear. That depends not only on what they do, but also on what their competition does.
 
I thought we might learn something by looking at them.
 
Head Snowboards
 
Two years ago, Head had the beginnings of a snowboard program. This year at Vegas, they had a complete snowboard program with a product line that looked as good and as complete as some better-known brands.
 
My more recent information is that their bookings have increased substantially for the coming season, but at the time I asked them, in my usual subtle way, “So are you telling me that the best you can do is to be as good as everybody else? Doesn’t sound like the basis for a competitive advantage.”
 
They smiled and showed me their rental product with a setup time of 59 seconds. Boot sizes are color coordinated with board widths. There’s an embedded microchip for inventory control and to get people in and out fast. The boards are delivered with premounted rental discs. The step-in bindings can be adjusted in two steps for stance and angle without any tools, as can the straps for boot size.
 
Okay, I liked that. Seemed like it would make life easier for everybody. Renters move through lines quicker and get a better setup. Instructors can change things for students on the fly. The resorts save a few bucks by improved efficiency and hopefully lose fewer newbies as they go through the hazing that has too often been lessons.
 
So where should Head allocate their resources? To selling a snowboard line that, at best, will be perceived as being as good as everybody else’s to specialty retailers or pushing their rental system, with some clearly identifiable advantages, to the rental shops at the resorts? Who knows, maybe they’ll both depending on the resources available. Well, you know what I told them.
 
It isn’t of course that easy. Company size, terms, price, relationships and momentum all make a difference. The best technology doesn’t always win. Ask Apple Computers.
 
Nikita
 
“Street clothing for girls who ride.”
 
Let’s just wallow in that tag line of theirs for a minute. Six words don’t create a competitive advantage, but my guess is that some thought went into creating it. When you read it, don’t you know exactly whom their customers are? Certainly the people at Nikita know.
 
At the same time, their potential customers know if Nikita is a brand they should be interested in. Are you a girl and do you ride? If so, how can you not check out Nikita?
 
They also have what’s called “first mover” advantage. That is, Nikita is the first company that I know of that has moved exclusively into this space. First movers often have lower cost of establishing and maintaining a brand name in their chosen category and they may build a reputation that later entrants will have a harder time overcoming. The company also may enjoy temporary early profits from its position and define the competitive rules in their niche.
 
Think of Clive and Nixon. They were early movers who defined their market niches. Sure, they already had competitors. As a result of their success, they attracted more. But they are more closely identified with their target niches than most other companies that sell similar products.
 
Clive and Nixon also share with Nikita the fact that they don’t just sell to snowboarders. Their businesses are less seasonal than they would be as snowboard only businesses and the target market, much larger.
 
Nikita’s positioning statement, and the focus it represents, also gives them some advantages in efficiency and resource allocation. In the fashion business, which we are all in to some extent, you sit at your desk and are bombarded by advertising, promotion, and product opportunities and ideas. Wouldn’t it be great if you spend no more than a micro second thinking most of them? The people at Nikita can do that I think. If it isn’t interesting to girls who ride, then they don’t have to think about it. And they don’t have to spend (or misspend?) money on it.
 
The downside, I guess, is that when you position your company so specifically, you give up some potential areas of growth. In my experience, that downside is largely illusionary. Nikita certainly has plenty of room to grow. Well-defined market niches aren’t necessarily small.
 
Volant
 
Yeah, I know it’s a ski, but look around the snowboard industry and you can’t take too much umbrage at that. The point is that the transition of Volant from an independent company making its own skis to a brand owned by GenX changes the whole dynamics of the brand. My expectation is that GenX will make money on the brand where Volant couldn’t make money as a stand-alone company. Let’s talk about why and the source of Volant’s new competitive advantage.
 
You remember the Volant story. They made steel skis at their own factory in Colorado. They had some ongoing production problems, expensive labor, and difficulty getting to the volume they needed if they were going to have their own factory. In an attempt to solve these problems, they tried an ill-fated internet venture that really pissed off retailers. That seems to have been the last nail in the coffin.
 
But Volant, with the only steel ski, had a ski that was really different from all its competitors and, according to Volant anyway, worked better.
 
Certainly GenX knew that, but they also had a different business model in mind.
 
They bought the production equipment for not so much money and moved it to a factory in Europe where they were already having some of their various brands made. In one easy step, they set up that manufacturer to make the Volant ski. They hired just a couple of key people from Volant, and moved them to the GenX headquarters where they could share facilities and expenses.
 
Since the factory was already making various other skis, the cost for each pair of Volant’s, I assume, went down. GenX didn’t have to worry about running a factory. Back at their headquarters, their overhead could be spread even more efficiently over more sales. The number of pair they had to sell to break even dropped.
 
True, they still have to run a marketing campaign, and I’m assuming you’ll see some Volant ads. But I wouldn’t be surprised if the most critical part of the marketing campaign was the part where the sales manager tells the retailers, “Yes, we’re going to deliver on time, the prices will be better, the ski is really different and works, and those guys who tried to hang you out to dry by selling on the internet are gone and we won’t do that.”
 
Sounds like really effective marketing to me. Winning retailers back will be a challenge, but with the lower breakeven point, I’ll bet they can work it out.
 
It’s not like having multiple brands, sharing overhead, and having somebody else make your product is a new idea, but it’s interesting to watch it be put into affect. It’s pretty much the GenX business model.
 
There you have three businesses with three different sources of potential competitive advantage. Head gets its from product improvements. Nikita’s comes from the market niche they have targeted and their early movement into it. Volant’s is the result of GenX’s usual operational efficiencies.
 
Which is best? None. But you’ve got to have some competitive advantage or another. 

 

 

Trade Shows Again, Kind of

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Following Vegas, in the last issue for the season of TransWorld Snowboarding Business, I wrote about trade shows and the issues we have with them. To make a long article short, I basically said, “We’re screwed!”

Lot of people agreed with that, which was hardly a surprise. But I was bothered all spring and into early summer because that didn’t seem like a very productive approach to the problem.
 
Since I wrote that, I’ve been to the Snowboard Industry Conference in Alaska, The Surf Industry Conference in Cabo, and the National Ski Areas Association Conference in New Orleans. Tough job I’ve got. I’d go to the Skateboard Industry Conference if they’d just have one. Well, at least if they had it somewhere nice.
 
The surfers are worried about skateboarding taking their soft goods market. The skateboarders are worried about Chinese skateboards. The winter resorts are worried about retention of people who try snow sliding. The snowboard industry is worried about turning into the ski industry (too late?) Everybody is worried about sales in the aftermath of a (minor) recession.
 
Everybody’s worried.
 
Now’s my chance to say to the snowboard industry what I’ve already said, either in a speech or in print, to the surf, skate, and resort industries. Don’t worry; I will manage to bring it back to the trade show issue. Basically, I’m going to suggest that somebody make not going to one or more trade shows a benchmark of their marketing program and a way to differentiate their brand within the industry. More on that latter.
 
The Speech
 
Here’s what I’ve said to everybody who would listen.
 
Business is a risk. It’s a risk whether you sit on your butt and do nothing or go out and try some new things. If you do nothing new, you may get clobbered anyway.   We all know the list of brands that were around and now aren’t. Try some new things and some of them probably won’t work. But some of them will work, you’ll learn something when you fail, people will notice and you’ll be in control of your own fate instead of waiting to react to what others do.
 
In the final analysis, doing nothing and trying some new things may be equally risky- it’s just that new things tend to make us uncomfortable and therefore seem riskier.
 
I’d argue that new things aren’t riskier- as long as they are based on a careful analysis of your market and customers and are consistent with clearly specified goals. In fact, with that kind of planning as a basis for your actions, I’d expect them not to even be perceived as riskier, but as just the right thing to do.
 
Okay, end of speech. Now I’ve got to tie that rambling soliloquy (but at least a strategic rambling) back to trade shows
 
Why We Go To Vegas
 
Obviously, to see friends, drink beer and party. Uhhhh, maybe I better start again, though it’s interesting that that’s the first thing that came into my mind. I think I’m supposed to be finding new consulting clients there or something.
 
But if you sell snowboard products, you’re in Vegas to sell those products, see what the competition is doing, spot trends and meet with reps and distributors. And it’s possible you might see friends, drink beer and party a little too.
 
Those are all valid reasons to be there as an exhibitor.
 
At an even more fundamental level, however, we’re there because everybody else is! There’s concern that competitors will take business if we aren’t exhibiting right next to them. There’s worry about the inevitable rumors that will start about why we aren’t there- obviously, we must be out of business or damn close to it.
 
So we do what everybody expects us to do and what we’ve always done. We book our space at Vegas and other shows and spend a lot of money getting and being there.   It’s not exactly doing nothing, but it’s reactive as hell and it’s certainly not perceived as being risky.
 
Except, of course, that business is a risk whether, as I noted above, you do nothing or you do something. Doing what everybody else does seems closer to doing nothing than doing something.
 
Maybe that was okay when times were better, and trade shows not quite so pervasive. Now, growth and profits are hard to come by, but we keep doing the same thing in the same way, selling the same products that are an awful lot the same as the other guy’s products. Now that’s a risk.
 
New Trade Show Strategy
 
This isn’t a strategy for the industry. It’s possibly a strategy for one or two brands. I’ve already informally suggested it to a couple of people. I’ll be interested to see if anybody actually tries it.
 
Start by asking yourself where you actually write your orders. Do the reps write orders at shop visits? From regional shows? From separate presentations you do for major accounts or buying groups? At the major shows like Vegas and ISPO? Next, ask if where you write the order is where you actually made the sale. Or was the sale made due to an existing relationship or because of the success of your sales and marketing programs over the past year?
 
What’s the real relationship between making the sale and writing the order? If you weren’t at show X, and had let everybody know months and months in advance that you weren’t going to be there, how much business do you really think it would cost you? I’ve had brands tell me they didn’t actually sell anything at the show and that “All their business was done before they got there.” I wonder if they meant it.
 
As a next step, figure out just how much it costs you to go to trade shows. The hard costs are easy. We’ve all got this huge number under “trade show expense” on our income statement. But that’s not the whole number. You’ve also got to think about the management and employee time involved. What could all those people be doing if they didn’t spend all that time preparing for and being at a trade show?
 
Now, remember that business you thought you’d lose if you didn’t go to show X? How does your profit on that compare to the cost of going to the show? But of course we’ve got to be more specific than that.
 
Talk to a bunch of accounts- especially, where you can identify them- those you think have to see you at the show. Could they see you at a different show? Ask them right now- months and months before the show- if they would buy from you if you weren’t at the show and used the money you saved to promote the brand. Or give them POPs, or a better discount, or whatever.
 
Maybe the resounding answer is, “You’ve got to be at that show.” I guess that would be the end of this new trade show strategy. Still, even if that happened, you would have had another contact with important customers, solicited their opinion, learned something and have tried something new- even if this one didn’t work.
 
My guess is that if you approach them in a positive and thoughtful way, you’ll be a positive response in many cases. Get them to acknowledge that the trade show schedule is kind of tough on everybody. Suggest you’d like to work with them to make it easier on everybody. Tell them your plan and see what they think.
 
And if they agree, haven’t you just made a sale? I know it’s never for sure until that elusive paper shows up, but you’ve gotten a customer to agree to work with you to address an issue of mutual concern. Might be the easiest sale you ever made for the best reason you ever made one. Okay, you’re taking a risk. But you’ve also just changed the nature and level of the conversation with your customer. Instead of “Buy our snowboard stuff because we’re cooler” (or have known you longer, have better graphics, are dependable, have a better team, or whatever), you’re saying, “Let’s do something to address an issue of mutual concern that can help us both out.”
 
Pretty good way to create some excitement and brand differentiation it seems to me.
 
This isn’t a strategy you can just adopt a little. A decision to do it means that you announce it immediately. There are phone calls, visits, emails to all your retailers. Explain how you are going to use the money you save. Get your reps together and get them on board. Their job and schedule will change some.
 
To be honest, if I were running a snowboard company again, I don’t know if I’d have the nerve to this. I’m suggesting you try and change, at least for your company, the way the industry does business. But my gut is that that’s all the more reason to do it. Meaningful changes that fundamentally impacts the way business is done typically seem weird and impossible when first suggested.
 
Is it a risky? You bet. But less so if you plan and execute it well. And we’ve all more or less agreed that the present trade show situation is unworkable. Reducing booth size, sending fewer people, staying in cheaper hotels are all tactical responses that leave the situation more or less the same. That’s risky.
 
Don’t just react. Be in control.

 

 

Death By Purple Wrist Band; Reflections on The Surf Industry Conference

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I’m glad, I guess, that I’ve gotten to the age where I don’t feel completely compelled to take too much advantage of these “all inclusive, drink at much as you want of anything for free” conference packages. Because if I were so inclined, I suspect all the worrying going on at the conference might have driven me to strong drink.

I mean, here’s all these people who have been lucky enough to create a career and a life out of something they love and that’s fun. They have their industry conferences in Cabo San Lucas for god’s sake. Most people end up in Chicago in February.
But the surf industry is worried about skateboarding. And they’re worried about Hollister. And selling out (or not selling out). And being core (or not being core).    Having to change would be really inconvenient. Being worried makes it harder.
I just got back from the National Ski Areas Association convention in New Orleans. They’re worried too. About, oh, lots of shit. You know what I finally figured out? The problem is the worrying.
When industries succeed and get a little bigger, they become targets. When you’re in the fashion business, like surfing, trends change. Recessions happen. This recent recession wasn’t officially a recession as I understand it, but after ten or so years of growth, we’re perhaps a bit spoiled, and softening sales, which occasionally and inevitably happen, caused to us worry even more. There’s not much in the way of barriers to entry. Companies come and go. That’s life. Don’t like all these challenges that come with success? Go find a job in another industry.
But you know what? That industry is going to have challenges too. There will be lots of things to worry about over there as well. Guaranteed.
Where at the conference, by the way, was the discussion of actual surfboards and wet suits? You may remember them. I seem to recall that surfing can be a lot easier, and a lot more comfortable, if you have them. We talked about selling board shorts and shoes and t-shirts and which kinds of stores we should sell them in. Maybe if the surf industry was just the slightest bit hard goods driven, like the skateboard industry, we wouldn’t have so many worries. I don’t think we grow the surf industry when we sell more shoes and shirts and shorts. We have to sell surfboards to surfers.
Still, I mostly see those worries are just snares and delusions. Look, we’re in business. Business is a risk. It’s a risk whether you sit on your ass and do nothing or go out and attack your market, taking some risks along the way. If you sit on your ass, you’ll get fat and you may get steamrollered out of the way anyway. We can all make up a list of companies and brands that have come and gone.
It will be great if the surf industry can find its Tony Hawk. It will be great if there’s suddenly an easy way to create surf parks in Kansas. But in the meantime, I hope nobody is waiting for all our problems, real and perceived, to be miraculously solved.
It’s up to you. Go out and take some well thought out risks. Some of them will blow up in your face. So what!? At least when you fail you’ll learn something and people will notice. You’ll be in control and you’ll be leading.  You won’t be sitting on your ass waiting for the steamroller to skinny you up.
And some of your risks, if based on a good plan and knowledge of your customers, will succeed, and your company will be a leader instead of an ass sitter.
I just made this speech to the National Ski Areas Association. I just said the same thing to the skateboard industry for an upcoming Skateboarding Business article. You see, the skateboard industry has some issues and they’re worried, though not about the surf industry. Anybody catch the irony here?
I’d make the same speech to the snowboard industry, but it’s too late- it’s basically turned into the ski industry already.
Next year, when we all gather again with purple armbands in place, I hope we find some time to talk about good ways in which each individual company can support surfing to their own benefit. Let’s go out of our way to avoid speeches and panels focused on things we’re worried about.

 

 

China- Whether We Like It or Not. What’s to Do?

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 Okay, let’s review the rules.

 
1)            The consumer eventually gets what they want to the extent the market is capable of providing it.
2)            Companies do whatever they perceive will give them a competitive advantage, or at least let them survive.
3)            The less real differentiation there is among products in the same product class, the more important price will ultimately be to the consumer. Marketing can delay and reduce, but does not eliminate, this tendency.
4)            Lots of people have lots of stuff made in China and it works fine.
 
Don’t get me wrong. I am for sure not sitting here saying, “Isn’t it great that there can maybe be a lot of high quality skateboards from China!” It would be great for skaters, I guess, that they could get a less expensive product (for some reason nobody is allowed to say “cheaper” anymore) that performs well.   But this industry is sustained by a fairly small number of companies that can afford to support and nurture skateboarding because they make a pretty good margin on the product they sell. What happens to those companies and to the skateboard industry if China uses its manufacturing cost structure (that is, cheap labor) to take a chunk of industry production?
 
A Few Realities
 
First, let’s dispose of the argument that the Chinese can’t make good skateboards. I have heard all the arguments about why it won’t happen. They can’t get good wood, there’s problems with humidity, lead times are too long, production quantities required for China are too high, etc. These, and others I can’t remember, may be valid arguments at the moment. But they are tactical, by which I mean they can be solved if it’s worth the time and effort to the off shore manufacturer to solve them.
 
Low cost, foreign manufacturing has gutted (I don’t think that’s too strong a word) various U. S. manufacturing industries including wood products. Last time I checked, a skateboard was a wood product. But my guess is that until recently the segment was perceived to be too small to attract the attention of the off shore manufacturers. Now it’s not.
 
Second, it’s already happening. You know it, I know it. There have been cheap “Chinese maple” skateboard being made for a while and sold through the mass markets. Most “core” companies I have talked to are at least looking into the idea of getting decks from China or trying to figure out how to deal with it if their competitors do it. I don’t know who is or is not actually getting them now. Nobody seems too anxious to discuss it in detail.
 
Third, lots of skateboarders are willing to buy lower priced decks. Blanks and shop decks make up a big percentage of decks sold in U. S. shops. Whatever that percentage is here, it’s higher in Europe, where skateboards imported from the U. S. are even more expensive then they are here.
 
Finally, it won’t ultimately matter to consumers that the product isn’t made in the U. S. It doesn’t matter for a host of products made in China, including snowboards and skate shoes.
 
The opportunity/threat analysis is obviously a bit different depending on whether or not a company is a manufacturer. Let’s start with brands that are not.
 
Brands With No Factory
 
On the surface, it’s conceptually easy. You buy boards from an OEM manufacturer for X dollars a board now and you can get them from China for one half of X.
 
Wish it were that simple. My own experience getting stuff from China is that shit happens, and your control of said shit diminishes by the square of the language, customs and distance barriers. A solid relationship with your manufacturer, your own people on the ground where the stuff’s being made, and constant focus is required. The price may start out half of what it costs to buy it made here, but by the time it’s late and you have to air freight it, the registration is off on the screening, and the voids in the glue make every 10th board breaks, a lot of that cost advantage disappears.
 
But see rule 4 above. People are going to figure it out because the cost difference is so compelling. Maybe it’s worth it to air freight some decks. Maybe you bring blanks over and screen here. Some brand is going to do it if they aren’t doing it already. 
 
Then the issue becomes, what does that brand do with their newfound money from the portion of decks they have made in China? They basically have three choices. They can put the money in their pockets, they can cut their prices to grab share or they can increase marketing. Obviously, they can do some or all of those. Other brands, either because they want some of that extra money or because they have to respond to the competitive threat, are likely to respond by getting some decks from China as well.
 
Sourcing from China, or any other low cost country for that matter, is not a disruptive technology. It does not confer a long-term competitive advantage on anybody. To the extent it confers an advantage at all, it confers it temporarily on the brands that do it quickest, but not so quickly that it’s screwed up as described above. Pioneers are often rewarded by having monuments built on their graves. 
 
Next, what probably happens is that some of this pricing advantage inevitably begins to ripple through the market and reaches the consumer level. I can’t quantify how that will happen, but remember that if prices are lower you end up with less total margin dollars to work with unless you raised your margin percentage. Maybe as an industry we will exercise enough self-discipline so that we hold margins. 
 
Of course, I’ve never seen that happen in action sports and am not holding my breath. If, in fact, total margin dollars decline, then the volume you have to sell to make the same profit rises, and that’s what puts small companies out of business. Our existing industry business model seems to allow quite a number of smaller brands to survive, if not thrive. I think they are critical to skateboarding and we risk losing some of our market advantage, energy, and legitimacy with core customers if they go away.
 
One other thing could happen. Maybe, as they say in economics, demand is elastic with respect to price. That is, cheaper skateboards mean that more are sold. I expect that’s true to some extent, but I doubt it’s enough to prevent the compression of total margin dollars for the industry as a whole.
 
Factories With No Brands
 
Will have a problem if and to the extent that the brands they manufacture for can work out the problems with Chinese described above. At the very least, brands will use the threat of China to negotiate lower prices. Size, for any factory, will matter. Factories doing bigger volume will have an advantage. 
 
Factories With Brands
 
Will have a chance to find out just how important their teams and advertising programs really are to skateboarders in product choice. I’m not suggesting for a moment that, in the current market, they aren’t critical. We all know they are. But if a product that somebody doesn’t think is quite as cool is suddenly significantly cheaper, that can be pretty cool.
 
To the extent that Chinese production becomes viable, I expect them to have the same problems with OEM customers as any factory. To the extent their margins and volumes are higher, they have some flexibility in dealing with pricing pressures that stand alone factories and brands may not have. I won’t be even slightly surprised when I see these companies continuing to run their factories, but getting some of their production from China.
 
What’s An Industry To Do?
 
The only credible argument I’ve heard so far as to why some variation of the Chinese production scenario I’ve outlined above won’t happen is that our product cycle and process of distribution makes it impossible. I haven’t quite decided if that’s an actual barrier to entry or just another tactical problem to be overcome like the others I’ve described above. I hope to hell it’s a barrier. Keep changing those graphics and shapes!!
 
Know any other reasons? Let me hear from you and I’ll share them. The only thing I don’t want to hear is, “The skateboard industry is different.” It’s never been true in any industry I’ve seen. The worse thing individual companies, and the industry as a whole for that matter, can do is delude ourselves into believing that the usual competitive dynamics don’t apply to us.

 

 

Changes in the Skateboard Competitive Environment. Time to Run Your Business Differently?

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It’s interesting how a handful of events and business trends seem to be converging in skateboarding at this time. They have, I think, the potential to change the industry and how it does business. The consumers, as always, will get what they want. For some companies- usually those willing to take a risk and do something a little different- this will represent an opportunity. For others, it won’t.

 
Let’s look at these trends and speculate a little on how companies might be impacted and how they might take advantage of them.
 
The Trends
 
I don’t claim to know which of these is or will be most important so don’t conclude anything from the order in which I list them. More interesting than individual trends may be the way they interact. One plus one plus one plus one plus one may be more than five. It may also be three Or at least result in some surprises.
 
First is Chinese (or where ever is cheap) production. I wrote a whole article on that last issue, so ‘nuff said.
 
Second is the apparent slowing in the rate of growth of skateboarding. Look, some slowing was inevitable. If skateboarding kept growing at recent rates, soon everybody person on the planet would be on a skateboard and we’d be trying to sell to people (or whatever) on the third planet in the system of the star at the end of Orion’s Belt. Imagine a vert contest on a low gravity planet. “Dude, I’m going to go have lunch while we wait for him to come down.” Kind of boring.
 
Anyway, the third trend is the increasing willingness of kids to buy blanks and shop decks to save money. No surprise there. It’s not like that’s new. I don’t see it slowing down.
 
Number four on the hit parade is the decision on the part of certain brands to include new materials in their decks. It’s been tried before and hasn’t really taken hold. But what if it does?
 
Finally, like really baggy jeans and baseless snowboard bindings, the habit of changing shapes on skateboards every twenty minutes has run its course, at least for now.
 
A Lesson From Snowboarding
 
Seems like every four article or so, there’s a section with this title. Before snowboarding became run by a bunch of ski companies, back when it was as hot as skateboarding is now, I always looked forward to going to the SIA trade show in Vegas and seeing the latest “new” snowboard. One year it was the articulating snowboard. The next I was the dual camber snowboard. One especially memorable year it was the honeycomb snowboard. That’s my all time favorite because somebody flexed it and it broke in half. A gut splitter for me- not so funny to the guy trying to sell them.
 
Anyway, did any of these technologies actually work? Who the hell knows? It didn’t matter because they were never adopted by any of the leading snowboard brands. So they weren’t legitimized in the minds of snowboarders. So they died. Snowboarders knew what a snowboard was and these things weren’t it no matter how good they might or might not have been.
 
Skateboarders have always known that a skateboard is made of Canadian maple and glue. Now Tum Yeto, Santa Cruz and Mervin Manufacturing all have skateboards with new materials in them. They claim they work better and/or last longer. Great. But now skaters are being asked to accept that a skateboard isn’t just Canadian maple and glue. It can be something else as well, and this something else can result in a better skating experience.
 
What else can it be? What other materials might be included? How about a complete composite deck if (when?) somebody figures out how to do that? Might different woods be okay with Kevlar or fiberglass reinforcing the deck? Like Chinese maple maybe.
 
Plots Within Plots Within Plots
 
Now things get strategically interesting and we can look at some of the other trends we identified earlier. Let’s say growth slows enough to leave us with some excess manufacturing capacity. The usual result, if you’re making a product that isn’t really different from what everybody else makes, is price competition. So maybe brands without factories start shopping for manufacturers who can offer a little better price, or terms, or something. The factories with brands go, “Oh shit.” They want to keep their factory working, so maybe they try new materials in certain of their decks. The skaters like it. The decks do, in fact, last longer. But of course any factory can eventually learn to make a deck with these materials. As skaters, being bombarded with pictures of their favorite team riders on these decks, accept them as legitimate skateboards, more are produced. But they last longer, so total deck sales decline. And competition keeps margins from moving up. So unless skateboarding continues to grow quickly, total gross margin dollars available to the industry decline.
 
Maybe the good news is that the factories with brands are smart enough not to make blanks and shop decks. And early on, the new material decks might even sell for a premium. Blank sales decline as longer lasting decks with Kevlar or fiberglass take hold.
 
But advertising is lauding the functionality of new materials. Intentionally or not, part of the message is “the wood isn’t as important as it use to be.” Some factory without brands, or some smart person, sees an opportunity. Soon blanks and shop decks with new materials are pouring out of their factory. Or they went over to China and, with wood not quite as important it was, are bringing in Chinese maple decks with Kevlar or fiberglass or whatever. The price is low- like half the price- and they now have a way to deflect the wood argument.
 
Back when everybody was experimenting with new skateboard shapes every month, bringing decks in from China was even tougher. With that phase apparently over, another barrier to entry has fallen.
 
At the end of the day, when there is little real product differentiation, product changes are fairly easy to copy, and there are no effective barriers to entry, the consumer tends to get a better product at a lower price.
 
Good for the consumer. Not so good for the industry. I don’t expect skateboarding to be threatened with the kind of near total collapses in interest it has experienced in the past. I won’t say never, but not in the foreseeable future. It’s just become too accepted and too much a part of the mainstream for too many kids.
 
Still, in the scenario I paint above you can see the pressure on the industry that could be created. Some of that pressure is inevitable and already starting. I don’t claim to know which pressures will be greatest and how they will interact with each other. I, or you for that matter, could probably imagine half a dozen other ways things could get tougher for the industry than they are now.
 
On the other hand, we could also imagine ways things could get better. Maybe skateboarding can continue to grow. Demographics are still favorable. Maybe most kids won’t want to pay more for a deck even if it lasts longer. I have no idea how a twelve-year-old skateboarder thinks. Speaking from the perspective of having a thirteen-year-old boy, it isn’t even clear that they do think regularly and clearly. He, of course, feels the same way about me I suspect.
 
What To Do
 
If skateboarding continues to grow, and kids want wood decks with pictures of their favorite riders, enjoy the ride. It’s not that you shouldn’t try and run your business better, but cash flow covers up a variety of shortcomings.
 
If, on the other hand, you think, as I do, that some of these trends, individually or as a group, will make the skateboarding industry tougher than it is right now what should you do?
 
First, when you hear people talking about what “the industry” should do, smile politely and nod your head. Then remember that every single company out there will do what it perceives to be in its own best interest. You’re going to scurry back to your company and do that I bet. It’s this dynamic that always leads to somebody trying to do some of the things I outline above.
 
At the recent surf industry conference at Cabo San Lucas, the surf companies were worrying about skateboarding and the new chain of Hollister surf stores. At the National Ski Areas Association convention in New Orleans (tough spring I’ve had) they were worried about retention of new snow sliders. I remember when snowboarding was worried about the buy/sell cycle. In each case, the industry seemed to hope that the industry, or their association would collectively fix the problem for them.
 
In all three of those circumstances, and in skateboarding’s current circumstances, the message is the same. Business is a risk. It is a risk whether you sit on your butt and do nothing or try some innovative approaches to a changing competitive environment. If you do nothing, competitors may walk right over you. Or maybe not. If you try some innovative, new things some of them will probably fail and some will probably work. But at least you will be leading the way and making people react to you. It’s a risk either way, but my experience is that the companies with the mindset to take some risks are usually the winners when competitive circumstances change quickly.
 
Create your plan and execute it. Focus on what you can do right, not the stuff that can go wrong that you can’t control anyway.
 
Don’t worry, be happy. After all, you could in an industry that’s a whole lot less fun than this one.

 

 

We Win. Now What? Ruminations on the Future of Skateboarding

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The “AHAA!” moment at the ASR show came early for me. I’d just flown in from the SIA winter sports show in Vegas and literally walked in the door at ASR when I heard that the ubiquitous ASR Board Trac seminar had already started. I was fifteen minutes late. When I walked in, they were questioning ten “typical” teenagers about their buying habits and perceptions. I think it was five surfers and five skateboarders. Three or four were team riders. It was clear that being team riders skewed their points of view a bit. Nothing like getting free stuff to change your buying habits.

 
I listened for maybe thirty minutes. Then I had to turn to TransWorld Surf Biz Managing Editor Sean O’Brien and whisper, “Hey Sean, is this suppose to be just about skateboarding?”
 
Congratulations to Us
 
Skate was clearly the driver of the discussion. Surfing seemed largely a sport. Skating was somehow more. Skateboarding has, I guess, become something of an arbiter of style and fashion for a lot of kids.
 
That sounds kind of high and mighty. I wrote it pretty much from the gut and now that I think about it, it bothers me that I even had the thought. The consensus is that we’ve dodged the recession bullet with no more than a minor flesh wound (Assuming you believe it is a recession without a significant drop in consumer spending and that we’re in recovery mode. Can consumers start to spend more when they didn’t spend much less?).
 
We are skateboarding and we are immortal. Unless they cut off our head maybe? Or close all the skateparks in California. Check out the box on this page and do something.
 
What an enviable market position. What did we do to deserve it and how do we keep it- at least for a while?
 
Skate is Not Snow or Surf
 
Okay, you knew that. Perhaps I should be more specific. In snow, the top five to seven companies control maybe 85% of hard goods sales. Maybe more. Burton is first, followed, not necessarily in order, by K2, GenX, Rossignol and Salomon. Yes, I’m pretty damn sure GenX is either number two or number three by number of snowboards sold.
 
None of these companies, including Burton with its Gravis shoe brand, is one hundred per cent dependent on snowboarding for its revenues. None of these companies is under $100 million, and Salomon-Adidas is over $5 billion. They sell a significant amount of product to people who don’t participate in snowboarding. They want to grow, and are widening their distribution to do it. You can generally find their snowboard products in some places where you would have been surprised to find them a few years ago.
 
You need a mountain to snowboard (or at least a big hill). Buying all the gear you need to participate is pretty expensive (less than is use to be) and the expensive stuff is mostly special purpose. You don’t wear your snowboard boots to walk around when you’re not at the mountain, that is. You can’t do it all year around (unless you have a really big travel budget) and you are weather dependent.
 
For surfing you need an ocean. Or maybe, someday, a wave machine that generates high quality waves in an indoor facility. Let’s hope Surf Parks LLC pulls it off. You’re weather restricted (weather makes waves as I understand it). Buying what you need new probably will set you back six to eight hundred for a board, wet suit and bathing suit plus some accessories. Except for the bathing suit, its pretty much special purpose stuff.
 
It seems to me that the biggest surf companies are largely soft goods makers. Quiksilver had revenues of $615 million over its last four quarters. Vans did $353 million (I don’t know if I call Vans a surf company or not. I wonder if that’s a problem or an opportunity for them?) Surf soft goods brands are interested in pushing their distribution as well. Look, if you’re going to grow, you have to do it be expanding distribution. Once you get to a certain size, you just can’t get meaningful increases through the specialty distribution channels.
 
Meanwhile, over in our part of the world, we’re got a handful of large, multibrand skateboard companies with a primary focus on hard goods and skateboarding in general They sell some soft goods, sometimes under other brands, but it’s not their focus. The majority of f their revenue comes from selling skateboard hard goods to skaters. They have not, for the most part, expanded their distribution outside of specialty shops and smaller chains. They believe, and I think they are right, that it would kill their credibility with their core customers.
 
They aren’t giant companies. I don’t have any numbers but I’d be stunned if any of them topped $100 million in skate and skate related sales. I’ll be surprised if they are over $50 million and $20 to $30 million might be more typical. 
 
Though you can be weather constrained, you can pretty much skateboard anywhere. And, though decks wear out pretty quickly if you skate hard with existing skateboard technology, it’s a lot cheaper to buy what you need to skate then to surf or snowboard.
 
Skate shoe and softwoods companies, of course, are pushing madly into the broader distribution channels. Skate shoes are a limited market no matter how big skateboarding gets compared to casual shoes. There were 100 footwear companies exhibiting at ASR compared to around 70 six months ago.
 
So here we sit in skateboarding with a handful of hard goods companies that have been in skateboarding forever are largely run by skaters or former skaters focused, in their own best interest, on hard goods, riders, skateboarding’s vibe, and helping skateboarding progress. They are still their customers in many ways. They are still proselytizing missionaries for skateboarding.
 
That is pretty much a distant memory in snowboarding. Surf has the same problem though, in my judgment, not to the same extent as snow.
 
Shoe and soft goods companies get to sell to the general action sports, lifestyle market. Skateboard hard goods companies have to sell to skateboarders. I suspect it’s with some interest, if not envy, that the hard goods suppliers watch the shoe and clothing companies grow and diversify while they stay focused on a market that is nearly all young males.
 
ASR
 
We better hope the hard goods companies keep doing what they are doing. It is, I think, skateboarding’s unique competitive advantage over activities. ASR wasn’t able to give me the final show numbers before my deadline. What I felt was that traffic was down, things were generally a little quieter and the show was smaller. Company managers were talking about tighter budgets and “meeting reduced expectations.”
 
Given a recession, September 11th, overlap with other shows and a Super Bowl weekend, maybe that was inevitable. What troubled me more than that was my perception that the horde of new, little companies that usually come and go at ASR like the tide, weren’t anywhere to be seen. Okay, it’s probably a lousy time to be starting a business. But the presence of those companies is, to me, a barometer of just how exciting things are in skateboarding. When I don’t see them I worry. 
 
I worry that the hard goods companies that are the foundation of the industry will succumb to go big into clothing or shoes, or expand their distribution too much. I’m not quite sure that’s possible, given the start and the resources and the market positions that the shoe and soft goods companies now have. But it must be tempting.
 
It’s nice to be a big company I suppose, but it’s maybe even nicer to have a rock solid market niche that consistently earns money, keeps you close to your customer, and is a likely survivor in the event of a downturn. I hope the skateboard companies look at it that way. It would be good for all of us.
 
 
SIDEBAR
 
The law that releases California skateparks from liability expires December 31, 2002. Word is that it will be left to each skatepark manager to decide what to do and without this liability protection, a bunch seem to be saying they will close their parks. That would be a bad thing.
 
So, if you don’t want to risk having skateparks in California closed, YOU have to give California State Senator Bill Morrow, who spearheaded the original legislation, the leverage he needs to get the new law, SB 994, passed. You should tell him you appreciate what AB 1296 (the expiring law) has done by providing safe skateboarding venues for young and beginning skateboarders, and that you support SB 994, the new law.
 
You can do this at the following web site: http://republican.sen.ca.gov/web/38/feed.asp
 
Or you can write Senator Morrow at any or all of the three following addresses. Send a copy of your letter to each address for maximum impact.
 
2755 Jefferson St., #10                   State Capital Room 4048  
Carlsbad, CA 92008                       Sacramento, CA 95814
 
27126 Avenue Paseo Espapa #1621
San Juan Capistrano, CA 92675
 
This is important. Do it. Even if you don’t live in California but especially if you do.

 

 

Well, At Least It Can’t Be Any Worse Next Year; The Trade Show Schedule

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The box on this page contains, as most of you are no doubt painfully aware, this year’s trade show schedule. Pretty intimidating. But of course it doesn’t include any key account presentations suppliers might have to make. Or regional shows. Or shoe shows, or bike shows, or toy shows or whatever other shows some suppliers and retailers might need to attend. And when’s that new ASR back to school show? When’s MAGIC? Granted, these aren’t all winter sports shows, but basically all retailers and many suppliers aren’t only in the winter sports business.

  
Show                                                 Date
 
Outdoor Retailer                               January 5-6
NBS                                                    January 10-13
Supershow                                       January 19-23
Winter Sports Market                       January 27-28
SIA                                                      January 29- February 2
ASR                                                    February 2-4
ISPO                                                   February 2-5
NSIA on snow                                  February 7-8
NSIA show                                        February 10-13
SBJ (Japan)                                      February 28-March 3
 
 
Now, I guess no single person actually has to go to all of these. Well, wait a minute. I can think of one guy. The guy who gave me this schedule actually. Maybe I can talk him out of some of his frequent flier miles. He can’t possibly use them all.
 
I started writing this sometime in mid January and, at that point, it was something of an abstraction to me. Now, sitting here in Long Beach for ASR in my hotel room on a Sunday evening in early February, it’s all too real. Tomorrow will be my seventh straight day of trade shows, and I don’t even have to fly to ISPO. I had a moment of clarity as I walked into the ASR show this morning and one of the security guards looked at me and said, “Don’t worry, you’ll get through this.” Apparently, I had a bad case of trade show stare.
 
What the hell happened? How did we find ourselves in this position? What can we do about it? This number of shows of this duration this close together can’t possible be argued to be in the interest of retailers or suppliers.
 
Apportioning Guilt
 
In that great American tradition, I guess we should start by finding somebody to blame. Can’t be our fault we’re in this mess. I know- let’s blame the associations that put on all the shows.
 
I think pointing a finger there is at least partly appropriate. It’s not that all the show producers got together and decided how to make us all broke, jet lagged and exhausted. All of them, I imagine, know in their heart of hearts that there are too many shows, but it’s unlikely that any of them are going to volunteer to close themselves down. Organizations are almost organic in their tendency to survive and grow whether they should or not.
 
In a weaker economy with, as I perceive it, fewer retailers going to fewer shows and staying fewer days, the trade organizations find themselves competing with each other for “market share.” It’s no different than any other industry. In the computer industry, or the snowboard industry for that matter, too many companies fought for market share and many of those companies didn’t make it. But in the process of that fight, the customer got a constantly improving product for less and less money.
 
The customers of trade shows, of course, are the suppliers and, to a lesser extent, the retailers who attend the shows. But it’s the suppliers who pay whoever puts on the show to be there, in addition to costs for building, transporting and staffing their booth. Retailers pay to attend too, but they don’t have to build a booth or pay for space.
 
In most industries, the customers don’t rush to pay for and use more of something than they really need, want, or can afford. In the snowboarding business, where marketing is critical and many companies try to look bigger than they are, competitive pressures can make suppliers show up at trade shows, do more, and stay longer than they really want to. If they aren’t there, or their presentation isn’t what’s expected, the rumors start flying. Let’s call it the lemming affect- we all scurry in the same direction.
 
The longer shows are and the bigger the booths, the more money the organization sponsoring the show makes. Talk about a potential conflict of interest with your customers. Competition among trade show promoters doesn’t seem to result in the trade show customers getting a better, more affordable, product.
 
To the larger players, the cost, hassle, duration and number of trade shows may be a pain in the butt (an expensive pain in the butt), but it doesn’t threaten their ability to compete and survive. For smaller companies, or brands just trying to get off the ground, the need to make their presence felt at shows can be a formidable barrier to success. They just don’t have the people, booths and money to be everywhere.
 
In an industry that could use some fresh new products and brands, that’s too bad.
 
Hey, wait a minute! We can blame the economy and snow conditions. Well, that doesn’t really work. It’s true that if the economy was stronger and it was cold and dumping everywhere we might not complain as much. Cash flow covers up a variety of sins. But it wouldn’t change the existing issues with the trade show schedule.
 
This is inconvenient, but at the end of the day, I’m afraid we’re going to have to look into the mirror and accept some blame ourselves. We are, after all, the ones who show up and nobody exactly puts a gun to our head.
 
SIA and What To Do
 
Vegas is our trade show run by our association. But, as I’ve made clear above, many suppliers and most retailers have trade show responsibilities and concerns that go beyond winter sports. It’s the interplay of all the trade shows and their schedules-not just winter sports- that really creates the problems. SIA can’t fix all those problems. What might they do?
 
SIA has a board of directors run by suppliers who are also Vegas exhibitors. They are responsive to our concerns because they are us, though they may not act as quickly as we’d like. Shows like Vegas get planned and contracted years in advance, so perhaps that’s inevitable. We’re the shareholders, so money SIA takes in goes to programs that help winter sports and, according to SIA, Vegas costs us less than a comparable show put on by a for profit organization. That’s all good.
 
This year in Vegas, the number of buyers was down 10.8 percent. Given the new dates, the economy, and, maybe most importantly, a Superbowl weekend, that wasn’t too surprising. The question for me, however, isn’t how many buyers were registered. What I’d like to know (and I guess we don’t have a way to get this number) is how long they stayed. That is, if you take all the buyers who showed up, and add up the days each stayed, how many was it and how does that compare to previous years?
 
My guess is that the total number of buyer days was down and by more than the number of buyers. That’s fine because this is now a preview show. The first thing I’d like SIA to do is cut the show down to three days. That’s a number most people I spoke with seemed to think was reasonable. I understand we’re down to four days next year from January 24th through the 27th,  I further understand that existing commitments can’t be arbitrarily changed. But three days seems about right. On day four I was there and it was very quiet. On days five, I was gone but I’m told that deserted might not be too strong a term.
 
Does that mean less income for SIA? From both a financial and a management point of view, I expect suppliers would rather pay higher dues than spend two more days in Vegas.
 
Next, let’s see if SIA can merge with Outdoor Retailer. Those discussions are apparently ongoing. When OR’s numbers came out, the gossip was that SIA was in the catbird’s seat for the negotiations. At Vegas, as it became clear that show attendance would be down, the handicappers seemed to give OR the edge. If SIA had been before OR, I’m sure the opposite would have happened.
 
Anyway, I think that merger makes sense though I can imagine that reaching an agreement between a for profit and a non-profit organization will require some creative structuring.
 
OR’s on snow is January 28th and 29th next year. Their show is January 30th through February 2nd. For those who have to be at both, that’s tougher than this year unless through some miracle there’s a merger that’s effective for next year’s shows.
 
Speaking of scheduling, I hope and assume that SIA does everything it can to keep Vegas from overlapping with ISPO and ASR. In fact, ISPO is February 1-4 next year, so that’s an improvement from this year for people who want to attend Vegas and ISPO. ASR, on the other hand, is January 23rd through the 25th, offering a two day overlap with SIA compared to one this year. I’d guess that most suppliers who go to SIA don’t exhibit at ASR as well. But there are a lot of retailers who would want to go to both. They have a problem
In Vegas, I saw bigger booths. Never in my wildest dreams did I imagine I’d see that this year. In this industry, at this stage of its development, are there still companies that think that booth size correlates with sales? Maybe, and I’m only half kidding, SIA should limit booth size. Of course, that would cut into their revenue and be in the interest of the smaller companies…… Personally, I think snowboarding could stand to see success by new, fresh, smaller companies, though a viable financial model is a hard thing to achieve.
 
I just got a phone call from somebody I respect who said he thought Action Sports Retailer would start approaching the snowboard companies. In the far distant past, they all went to ASR anyway. The timing’s more or less the same as Vegas, it’s just three days, most of the retailers will be there as they also tend to do either skate or surf, and in terms of the lifestyle and demographic, snowboarding belongs with skate and surf more than with ski. Interesting idea.
 
At the end of the day, the interest of trade show producers, on the one hand, and suppliers and retailers, on the other, aren’t necessarily the same. Perhaps SIA is an exception, at least in part. Change will happen because enough attendees, at whatever show, make it clear they won’t show up if things don’t change.
 
Wouldn’t it have great if five major companies at SIA had put big tarps on their booths at the end of three days with signs that said, “We’re Done. We’re Gone.”

 

 

Stuck In A Rut; Another Recession Article

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Look, I’m sorry about this. I’d really rather write about upbeat, happy stuff. It’s not my fault we’re in a recession, or are going to be in one, or whatever. I’m not making up these lousy economic statistics we’re seeing, you now. I don’t just sit here and pull them out of my ass, damn it. Sure, sure, everybody just goes, “Why should we read this crap when he’s never got anything good to say!?” and then I’ll probably be out of an assignment. Vuckovich will throw me out on the street, my wife will leave me when we can’t pay the mortgage, but what the hell, she’ll probably get the house anyway, the dog will piss on my leg and all because of a couple of lousy quarters of negative economic growth. I mean, so what, it’s just that Hey!! Leave me alone. Give me that back. Yeah, same to you……

Editors Note: The Editors of TransWorld Skateboarding wish to apologize for Mr. Harbaugh’s egregious behavior. He’s been restrained, and locked in a small room with case of beer. He should be himself presently.
 
Though it won’t be official until another quarter of negative economic growth is announced, it is generally conceded that we are in a recession. We would have had one even without the events of September 11th, though it seems likely that either the depth or the duration, or both, will be longer as a result of those events.
 
The genesis of this recession, in my judgment, is in the decade of growth and prosperity we have experienced since the 1990-01 economic downturn and a financial markets decline (driven largely by the bursting of the technology bubble) that is unprecedented since the Depression.
 
The 1990-91 recession lasted eight months. It was relatively short at least partly because while the United States experienced economic weakness, other parts of the world economy were stronger. In 2001, Japan is entering its fourth recession in a decade and the major countries in Europe are weak as well. It was during the 1973-75 recession that the world last experienced such a confluence of negative economic forces. That recession lasted sixteen months. Its proximate cause was the oil crisis. No similar crisis is imminent at this time.
 
Questions
 
If you’re running a business in skateboarding, you have the following issues to consider:
 
1)            Will favorable demographics and industry momentum shelter skateboarding from a general economic downturn?
2)            If there is an impact, will it be different for hard goods than for soft goods?
3)            How will brands and retailers be affected differently?
4)            Are there any opportunities here and how can you take advantage of them?
 
Below, each of these questions is considered in turn. Neither I nor anybody else “knows” the answer to any of them. Your goal is simply to consider the issues as they may impact your business and draw your own conclusions. The only way you can be “wrong” is to not consider the issues.
 
Demographics and Momentum
 
My sense is that we can make short work of this one. Not only is the primary demographic for skateboarding growing, but it’s extending itself, as both younger and older participants take up skateboarding. That the sport has gone mainstream, or legit, or whatever adjective you want to use is undeniable. That doesn’t make the industry immune to recessionary pressures, but maybe it means that the impact is in a lower growth rate, instead of a decline.
 
Hard goods Versus Soft goods
 
If you want to skateboard, you got to have a skateboard. There’s just no way around it. On the other hand, you probably don’t need another pair of skate shoes in your closet. The old pair will last another month anyway, and if you don’t have the latest style of pants, you’ll get by. Or at least your parents think you can get by. But it’s tough to ollie off a board with a paper-thin tip.
 
In the economy in general, most public companies that sell casual clothing to our demographic have warned that they may not make their projected numbers in at least the fourth quarter. Granted, skateboarding is just a small part of that much broader market. Still, everything I’ve read, and everything I learned at ASR in September, tells me that soft goods sales are going to be down in at least the near future. I don’t expect skateboarding to completely avoid that trend.
 
It’s interesting how the worm has turned. The hard goods companies use to complain about the injustice of it all. Through their teams and promotional campaigns, they created and maintained the vibe which propelled the market. But it was the apparel and shoe companies, based on their size and growth rates that benefited the most from the activities of the hard goods companies. Everybody needed shoes and clothes. Not everybody needed a skateboard.
 
Now it seems like the soft goods companies are most likely to be hurt by recession. Hard goods companies, with their solid market niches, may look on any slowdown in growth as their first opportunity in a while to take care of some neglected pieces of their business. That’s how Paul Schmidt, at PS Stix, sees it.
 
“I’m only running five 24 hour days a week now,’ he says. “We’re finally able to reorganize our production line and install some new equipment that will make us more efficient.”
 
With confidence that their higher levels of production are here to stay, it’s likely that other hard goods brands will also be willing to invest in upgrading their production facilities.
 
Then there are skate shoes. It seems like we’ve had about seventy brands of shoes for a couple of years. Every six months, at ASR, ten of them have gone away, and there are ten new ones. I suspect there will be fewer brands by the end of this recession. It’s already pretty typical to go into one of the mall “skate” shops and see a pile of skate shoes on sale. The piles I’ve seen are typically so big that they have to sit near the front door, a barrier to the customer getting to the full price merchandise.
 
I’ve never understood the financial model of the newer skate shoe brands. They have to spend a passel of marketing dollars just to have a hope of making a dent. But their lower volumes means that they aren’t typically getting pricing, terms, or attention from the factory that’s as attractive as what the larger, established brands get. Look for the total number of independent skate shoe brands to decline consistent with a recession-impacted fall off in soft goods sales.
 
Retailers and Suppliers
 
The first thing we have to recognize, especially with retailers, is that there are damn few pure skate retailers. There are lots of retailers who sell skateboard products and lots of retailers who are primarily skateboarding oriented. But for the most part, they also sell surf, or snow, or BMX, or rock climbing, or roller blading or some or all of those. So things can be great in skate, but if they are off thirty percent in the spring because of a decline in surf apparel sales, they could have a problem.
 
Retail sales increased at an average annual rate of 6.55% from 1994 through 2000. Now they’re not. The whole United States, in general, is over retailed. Though demographics may to some extent shelter action sports retailers from a general decline in retail sales, it won’t protect them completely.
 
It’s also generally acknowledged that retailers earn most of their money from apparels, shoes, and accessories. Skate hard goods are simply not high margin products. A decline in soft good sales will have a disproportional impact on gross margin dollars earned at retail and on the bottom line.
 
Suppliers, as we’ve already indicated, are likely to do fine if they are hard goods companies, and see some declines if they sell soft goods or shoes. For both retailers and suppliers, the ones with the established competitive positions and strong balance sheets will come through this in the best condition.
 
Suppliers should be paying more attention to how and to whom they extend credit. Retailers, on the other hand, can expect suppliers to encourage them to buy from them and to cut some other supplier’s order, if any cutting is being done. This may translate into opportunities for some better prices and terms for retailers.
 
Opportunities
 
I can put this real succinctly. In hard times, the strongest competitors, with the best balance sheets tend to gain share and grow stronger. It’s not that they aren’t impacted by hard times, but they have the financial ability and customer loyalty to not only get through them, but to take advantage of them. 
 
They can afford to offer better terms and prices if necessary. They don’t have to cut their advertising and promotional expenditures as much and when they do cut, it doesn’t hurt their recognition with their customers as much as it hurts a less established business.
 
A little decline in volume doesn’t put them below breakeven. They have enough leverage to be able to get their factories to share the pain. Customers are more likely to cut purchases of marginal brands. They have the financial ability to buy some of their competitors when they get into trouble.
 
If you’re not a leader in your market as either a retailer or a brand, you’d better gird up your loins. Take steps to strengthen your balance sheet by cutting expenses where possible. Do it now, not later because expense reductions are cumulative over time. Dump that old inventory and stop kidding yourself about how much it’s really worth. Be cautious in extending credit and ruthless in collecting from those who owe you.
 
Take a hard look at your advertising and promotion commitments. Don’t fall into the old action sport trap of spending marketing money because you have to build your brand’s recognition no matter what. I can pretty much guarantee that your expensively bought market position won’t be worth squat if you can’t make payroll and pay your suppliers. 
 
By the time of the 1990-91 recession, skateboarding was well into a period of decline. Largely, people say, because the demographic trends of that time had run their course; not so much because there was a recession. But out of those hard times came new brands and companies that are among the leaders in skateboarding today. Those weren’t easy times. Some companies made it and some didn’t. But looking back ten years it’s pretty clear they created some opportunities by breaking down some barriers.
 
Get out your sledgehammer, but try not to hit yourself.

 

 

Well, I Guess It’s a Recession; Perspective on an Economic Downturn.

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It has been a while—ten years actually—since we endured the lastr ecession back in ’90/91. But business cycles are pretty much immutable. 

What goes up must come down. “Regression to the mean” they call it in statistics.
 
Two things have me especially concerned about our current situation.  First, the economic rubber band is stretched tight after ten years of prosperity and growth. Second, this might be the first global recession since the early 70s.
 
Maybe our customers have enough net worth that there won’t be much impact on their spending. Maybe a kid’s ability to nag his parents into shelling out bucks for new shorts is more powerful than any concern over the family cash flow. Maybe people find money for things that are fun when everything looks bad. Maybe, but maybe not.
 
September 11th has had an unknown impact on consumer confidence andour nation’s psyche. It’s accelerated the decline of an already shaky economy. Any doubt about whether we were headed toward recession ended that awful day. The question is: how deep and how long will it be?
 
Obviously, I don’t know the answer to that. But since the surf industry is based on products that aren’t necessities (although we try to make the consumer feel they are), retailers and suppliers should be examining their business models and making adjustments now to deal with the impact of an economic downturn.
 
Maybe a short history lesson, a look at some current economic statistics, and a few conversations with people in the trenches will
give us all some insight on what we can expect in the months to come.
 
A History Lesson
 
In 1990, the economy started off pretty well. Gross Domestic Product (GDP) grew at a 5.1-percent rate during the first quarter. That declined to 0.9 percent in the second quarter and fell further to a negative 0.7 percent in the third. Fourth quarter GDP fell at a 3.2-percent rate.
 
For the year, we ended up with a real GDP growth rate of 1.2 percent. In 1991, it was a negative 0.6 percent. Officially, the 1990 recession started in July 1990 and ended in March, 1991—eight months later. A recession, by the way, is technically defined as a decline in GDP for two consecutive quarters, so they can’t get much shorter than that one was.
 
Iraq invaded Kuwait on August 2, 1990. The air war began January 17, 1991. The ground war followed on February 23 and lasted four days before President Bush declared a cease-fire. The first U.S. troops began to leave on March 8. We declared victory and went home.
 
Our current conflict began September 11. I’m sure none of us knows how long it will last or what exactly success will look like, but it’s not going to be as definitive as the Gulf War.
 
I’m told that the ’90/91 recession and the year or two that followed it was a tough time for the surf industry. Surfing was in the pits, and we had to reinvent ourselves. Of course, not all of the surf industry’s malaise back then was related to the economy. But the fact that a major change in fashion trends coincided with a recession meant the surf industry was hit hard.
 
Yet that was a relatively mild recession, because there was economic strength in much of the rest of the world. The last time Europe, Asia, and the U.S. all experienced economic weakness at the same time was during the 1973 to 1975 recession. It lasted sixteen months. Once again, I’m not certain of anything, but it’s possible that we may be facing that kind of global recession this time around.
 
The Current Situation
 
Parts of Asia haven’t gotten over the 1997 currency crisis, and Japan seems poised for its fourth recession in ten years. Germany and Britain, along with other parts of Europe, teeter on the edge of recession as well.
 
From a healthy 5.6-percent rate of growth in 2000’s second quarter, GDP in the U.S. has fallen each quarter. It ended the second quarter of this year with 0.2 percent growth. My guess is that the number we get at the end of October for the third quarter will be negative.
 
September retail sales were reported October 12. They showed a drop of 2.4 percent—the biggest in nine years. Economists had expected a drop of 0.7 percent. The September employment report showed the country lost 199,000 jobs during the month. That’s the largest decline in ten years.  Most of the fallout from the attack isn’t reflected yet. September was the twelfth month of declining industrial production. That ties a record that goes back to right after World War II.
 
But there’s also a bit of good economic news. Consumer spending had been holding up fairly well, though it had finally weakened a bit even before September 11. Housing has also held up well—probably due to declining interest rates.
 
The Federal Reserve has cut the discount rate from six to two percent this year. It was last that low in 1958. Typically, it takes six to nine
months for the benefit of rate cuts to work its way through the economy. The first rate cut was in January and the most recent October, so clearly we haven’t seen most of that impact yet.
 
Finally, the stock market looks like it may have put in a bottom after the worse bear market since the depression, and the market always turns around before the economy.
 
Among the public companies in the surf market, it was Quiksilver that made me first say to myself, “Okay, we’re having a recession.” That was back on September 6, the first day of the Action Sports Retailer show in San Diego. Quiksilver held an analyst’s conference call to announce that third quarter earnings were in line with expectations, but that fourth quarter earnings would be lower than projected. This was due to weaker than expected retail orders and too much inventory that would have to be closed out at reduced prices.
 
Quiksilver said that diluted earnings per share for fiscal year 2002 would be in the range of $1.50 to $1.55. The consensus analysts’
forecast had been for $1.85 per share.
 
Of course, Quik’s situation was hardly unique among surf-related manufacturers—they were just first to announce. On September 25, Vans beat analysts estimates for its first quarter ended September 1, but expected its second quarter to be flat or down five percent due to the impact of September 11. For fiscal 2002, Vans said its earnings per share would be near the level of a year ago on a forecast revenue increase of roughly ten percent.
 
Pacific Sunwear, on October 11, warned that its third and fourth quarter earnings would miss analysts’ consensus estimates, citing lower consumer confidence and spending. It now sees third quarter earnings of 25 to 27 cents per share, compared with a mean analysts estimate of 33 cents. It sees fourth-quarter earnings as being between 33 and 37 cents, compared with the previous mean analysts’ expectation of 41 cents.
 
But let’s not look at Quik, Vans, and PacSun as though they were unusual or had done something wrong. Tommy Hilfiger, Nautica, Kenneth Cole, Jones Apparel, VF Corp, Coach, Polo Ralph Lauren, Liz Claiborne, and Columbia have all either cut their earnings estimates or had them cut by the analysts—or both. Recession and terrorism are hitting pretty much everybody who sells apparel.
 
What Are They Doing About It?
 
Steve Price at Killer Dana has been reacting to the possibility of a recession for months now. By August, he’d already backed off on some of his projections and orders. He’s booking less going into spring, and scheduling it for delivery a little further out. He’s forecasting November and December sales will be off eight to ten percent from last year (which he described as being an incredible year), and is planning to be off ten percent through spring.
 
There were a few slow days after September 11, but overall September and October sales are up twenty-five percent for Price. Customers, he says, “Aren’t afraid to spend, but are paying more attention to what they get for their money.” He’s stocked up on a lot of rubber this fall, and it seems to be paying off for him. The best-selling wetsuit has been those around the relatively low 150-dollar pricepoint. Price says this is due to both consumer caution about spending, but also the good quality of even lower pricepoint wetsuits.
 
Killer Dana, it seems to me, has done two things that will get it through hard times. First, it started planning when the storm clouds
were first on the horizon—not when the floods came. Second, it has brand recognition and a market position that should keep it a shopping choice for its committed customers.
 
Jay Wilson, vice president of marketing at Vans, reports that the brand’s high-end and signature products are still experiencing good sell through and demand. West Coast sales, he says, have been harder hit than East Coast sales since September 11. Vans’ core customers are doing fine. “It’s the mainstream retailers who are affecting our business,” he reports. They’ve had some order cancellations and some shipping postponements.
 
In response, “Vans has reallocated dollars from branding to the store level,” says Wilson. The company is doing more demos at skate parks.  It’s revved up the rep force to spend more time with the customers and it’s making more shop calls to find out how they’re doing and to help fill in product. “We’ve got ten people calling shops one to two hours a day,” he says.
 
Vans has put a hold on new advertising or promotional commitments, and expects to maintain that through the middle or end of November. 
 
Dave Juan, one of the owners of Unsound Surf on Long Island, New York must be one of the guys Vans is calling more regularly. He’s now cut his orders for spring by 30 percent—though he wasn’t worried about a recession until September 11. “Sales were impacted, but are recovering,” he says.
 
He’s getting lots of calls from reps trying to get him to change his mind. Product is coming early and orders are complete—rather than a bit at a time as has been the case in the past. His interpretation is that brands don’t want to give him the chance to change his mind, and want to get their stuff into his store before the competition. He’s seen some loosening of credit terms and additional discounting. He’s ordered some extra Ocean Minded sandals, citing that brand’s commitment to donate part of its sales to the Red Cross relief effort.
 
Pat Fraley, president of Counter Culture, says sales aren’t going down, but buyers are more cautious. Some spring orders have been delayed, but he doesn’t see ship dates slipping yet. His perception is that companies with broader distribution are feeling it more than specialty shops. “It seems like most of our retailers are doing the right things,” he says.  “They have the right attitude.”
 
To help those retailers, Counter Culture has changed its pricing structure. “We’re shifting our entire [wholesale] price structure and
price points down two or three dollars,” says Fraley.
 
Fabrice Le Det, Asia and European sales manager for Reef, says he has some distributors who are very reluctant to travel, but that his
international prebooks for spring are still strong and fall product seems to be moving. “The big test,” he says, “will be once the spring
line hits the stores beginning in March and we see how the consumer behaves.”
 
He hasn’t seen many cancellations, though there have been some minor decreases in orders or delivery dates pushed out. Overall, sales are up from last year. He blames any minor softness in international sales on weak economic conditions and competition at the low end, rather than the events of September 11.
 
Mark Price, who’s handling international distribution for Tavarua apparel, says he’s not sure how much of the domestic retailing slowdown is due to the September 11 attacks, and how much is the result of recession. “The holiday season,” he says, “will be the acid test. It will create opportunities for those left standing.” Strong brands, he thinks, will be stronger next year.
 
“But what happens,” Price wonders, “when eighty percent of the floor space in specialty shops is taken up by brands that are also distributed nationally in larger stores?”
 
Hell of a good question. If the trend Price points to, accentuated by competition and economic conditions push margins down, but your onlypoint of differentiation comes from your expensive marketing program, how the hell are you going to make a buck? Lower margins and higher costs are not typically a recipe for financial success—especially if you are a small guy. Look what happened to the snowboard industry even without a recession. When brands are ubiquitous, how do we keep them exciting and special? A recession has the potential to accelerate the same trend in the surf industry.
 
Do Something!
 
My wife and I had dinner in an established Seattle restaurant about a week after the attack on the World Trade Center. Business was off about 30 percent, according to our waiter, who predicted: “There’s going to be a bunch of restaurants in Seattle closing down.”
 
He should be in a position to know. Which ones would close? The ones with either a poor balance sheet or no established clientele—or both. It’s the same situation for businesses around he country—including surf shops.
 
During a lot of the 90s, low interest rates, high personal expenditures, low inflation and unemployment, and big jumps in net worth meant a high growth rate for retail sales (averaging 6.55 percent annually between 1994 and 2000). That kind of growth and cash flow can cover up a lot of miscues and lack of a competitive advantage.
 
At the same time, retail competition is tough, to put it mildly. There have been a lot of store closings, but the United States is still over
retailed. All of you surf retailers who have ever had cause to complain about a brand opening your competitor in the next block understand this at a fundamental level. I’m still getting pretty regular e-mails from people who want to open shops and are looking for information.
 
Just like in the restaurant business, brands and retailers lacking a solid balance sheet and a viable market position are going to be
vulnerable in a recession.
 
You can either sit there and hope, or you can minimize your chances of being a casualty by taking action now. Examine your cash flow now. See what a ten-percent decline in revenues would do to your business and adjust your business model right now. I’ve gone out of my way to sound a little economically pessimistic. Hopefully I’m wrong—but plan as though I might be right.