What To Do in a Recession? Hint: “Nothing” is the Wrong Answer

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I’m sure that everybody who was in the snowboard business during the 1990-91 recession liked that one better than we’re going to like this one. Assuming, of course, that you even noticed the one in 1990-91. Ah, those were the good old days- when suppliers and retailers could sell whatever decks they could manage to get their hands on at high prices and good margins and consumers were so grateful to get anything at all that they’d cheerfully pay what look today like impossible prices and barely complain if it fell apart after the second run.

Okay, perhaps I’m romanticizing it just a bit.
 
So let’s get back down to earth and take a look at this recession. I’m writing this at the end of October. It’s not officially a recession until we’ve had two quarters of negative gross domestic product growth, but I’m pretty certain we’re going to get there. This recession also has the potential to be a longer and deeper than the 1990-91 one. It looks like we may have the U. S., Japan and Europe in a recession at the same time. The last time that happened was in 973-75. That recession lasted sixteen months.
 
The good news, if you want to call it that, is that suppliers and retailers with solid competitive positions and strong balance sheets will be in a position to gain business. The bad news is that they are likely to gain it on the back of weaker companies that may not be around when the recession ends.
 
Snowboard suppliers have largely been through most of their consolidation and, as you probably recall, it wasn’t pretty. Retailers, on the other hand, have enjoyed high levels of retail sales growth, averaging 6.55% annually between 1994 and 2000 for the U. S. economy as a whole. But as every retailer who has ever complained when a supplier opened his competitor right down the street knows, there are a lot of retailers. My concern is that a decline in the growth of retail sales, or even falling sales, will be something weaker retailers may have difficulty surviving.
 
What are people doing about it? Are they concerned about the potential impact of an economic downturn on their businesses? I’ve talked to snowboard retailers and suppliers to see how they are working to cope with recessionary pressures.
 
A Little Perspective
 
This is the snowboard business (Don’t say you never learned anything from me). Suppliers ordered or started to make product last winter. Much of it (hopefully) had been shipped and received by retailers long before you read this, though of course there have been the usual delays and screwups on some product by most companies.
 
That’s practically a part of the industry’s tradition. If suppliers weren’t late on something and didn’t handle it badly with at least some of their retailers, often because they have to allocate scarce product, then those retailers wouldn’t get a chance to grind the suppliers for a bigger discount, better terms, or some free product and what would we do all in September and October?
 
Gregg Keeling, National Sales Manager for Salomon hard goods, says his product was eighty-five percent shipped by mid September. Dave Schmidt, Director of Sales and Vice President of Burton, says his number was 75% by the end of September.
 
The irresistible momentum of the industry business cycle means that a lot of business at the supplier level was already done before September 11th and before a recession looked certain. Well, there’s the minor matter of collecting the money, but let’s ignore that for the moment.
 
For retailers, the jury is obviously still out, though early signs look promising. A generally good snow season last year (unless you have the misfortune to live in the Northwest that is), coupled with growth in snowboarding and hard learned inventory control means that retailers seem generally optimistic, though praying for snow as usual.
 
If this was just the apparel business, or the surf business, or we had a major trade show now, there’d be a lot more public industry knowledge about general business conditions. In the apparel business, and to a lesser extent in the surf business, there are public companies. When public companies notice that their business has hit a rough spot, they have to put out a press release that says, in affect, “We’re screwed! This is why.”
 
There are few public companies in snowboarding, and those that are public don’t make most of their revenue from snowboarding. September’s ASR show, coming a week before the attack, gave the surf and skate industries a real chance to take their own pulse, and the word was that spring orders for soft goods especially were down substantially. This was consistent with what the public companies announced.
 
We’ll get a chance to take our pulse at the end of January in Vegas and in the selling season that follows. It’s then that we’ll really know what impact the recession may have on snowboarding.
 
In the Trenches
 
Jeff France, at Board of Missoula in Montana, says he saw the economic slowdown coming late last year. His part of the world suffered from a drought last year, with a result that he was left “a little heavy” on inventory when the season ended. That, and concern about the economy, led him to cut his preseason orders by twenty five percent for this season. His suppliers were “not real happy,” but understood the impact of drought. The larger suppliers, he said were content as long as they saw that their relative market share had stayed the same.
 
There are no resorts in his territory, which he characterized as a bit insulated from the national economy and “always in a recession” anyway. When he ordered, he was a little more price sensitive about really high-end board, but didn’t change his overall mix. He hasn’t had any calls from brands trying to get bigger orders, but he did get a little the other day from one snowboard company offering a five percent discount for early payment.
 
Maybe the consolidation isn’t over.
 
Jeff usually spends one percent of snowboard revenue on advertising during the season. He’s eliminated that completely. He’s comfortable doing that because of his shop’s market position. He says that, especially if they know anything about snowboarding, he’s really the only choice for his customers.
 
He’s got a defined market niche and has taken steps to safeguard and strengthen his balance sheet.
 
Adam Valedaserra is the snowboard buyer for Ski Market in the Boston area. They currently have twenty-five stores with a separate Underground snowboard department in most of them. They’ve been around a long while.
 
Business is good for Adam- up slightly from last year.
 
Overall, and not just in snowboarding, action sports seems stronger in the East and then in the West, which has caught some people by surprise. In snowboarding, the speculation is that people are still going to make it to the mountain, but they aren’t going to be as likely to get on a plane and come out West to do it.
 
Adam has kept his budgets a lot tighter. He’s not jumping so quickly into new opportunities. He’s watching his inventory a lot closer, and has made some alterations in his deliveries, delaying some and reducing the size of others just a bit. He’s seen some improvement in terms and discounts from suppliers.
 
Business is up, budgets and inventory are under control, and he’s getting some better deals. “All things considered, I’m pretty content,” he says. I guess so.
 
He’s got a defined market niche and has taken steps to safeguard and strengthen his balance sheet.
 
Dave Pascoe is the Manager of Boarderline in Bellevue, Washington. The store has been around for twenty-five years. He’s cancelled some late order, which he might have cancelled regardless of September 11th and general economic conditions. He’s also reordered some product. He characterizes deliveries as “pretty good” and has already reordered some product. His sales at the local consumer show were up twenty percent this year.
 
He got lots of good deal from various companies for the product he sold at that show. “I think this year is going to be good for that [good deals] too. If I can exercise some cancellation clauses, maybe I’ll just take half now and a month from now I can call up and it’s on sale at thirty off.”
 
His staffing promotional budgets remain the same.
 
He’s got a defined market niche and has taken steps to safeguard and strengthen his balance sheet.
 
The Supplier Side of the Story
 
GenX Sports sells a lot of snowboard product, know the distribution better than anybody, and have helped an awful lot of companies out of inventory quandaries, if I may put it tactfully.  You don’t much like them? Too bad. They have a big impact on the industry, help give the consumer what they want, and are going to be around.
 
Mark Brazier is the VP and Director of the Snowboard and Action Sports Divisions.   Their preseason orders were up slightly. After September 11th, they saw some initial calls to modify orders, but there were hardly any cancellations. They’ve already had some reorders. They haven’t changed their promotional and advertising budget in response to economic concerns.
 
However, they are not being as aggressive as they have been in the past about placing product in the market place. This goes to the heart of their relationship with their retail customers and how they compete. Mark estimates that they get eighty percent of their snowboard sales from thirty snowboard buyers. Those buyers, with whom they are in touch daily, generally see snowboard product as just another thing to sell “It’s SKUs to them,” says Mark.
 
GenX’s job is to know the snowboard market intimately and, to the extent possible, to make sure their customers have the right product at the right time. As things change over the season, it’s their job to make sure the retailer has the right product mix, in the right amounts, at the right prices. It’s a hell of a way to tie the customer to you as long as you don’t abuse the dependence. That’s where not being too aggressive in placing product comes in this year for GenX.
 
On the other side of the snowboard world, at Burton, Dave Schmidt says there’s an “Air of caution over our forecasting going into next season.” They saw a “blip” of cancellations following September 11th, but retailer confidence seems strong.
 
Burton has accelerated shipments to some big players so that Burton’s product would be on the floor. There have been no changes in their advertising and promotional budgets, and they haven’t modified their credit process as of this date. He reiterated their caution going into next year’s budget process.
 
Salomon’s Greg Keeling, just back from a tour of seventy-five shops, reports that sales on the East Coast are great, California is hurting, and Colorado is killing it because of the lift ticket price wars (Thanks resorts! Sure hope you don’t put yourselves out of business). That’s pretty consistent with what I heard from various other sources.
 
He saw the same sort of cancellation blip that Dave Schmidt at Burton saw after September 11th. Greg thinks people are going to reorder, and he’s helping them out with some incentives. There’s ten percent off standard wholesale (not on top of existing discounts), free freight, and payment on the reorders won’t be due until March 15.
 
Well, I guess by the time you read this it will be too late to cancel your orders and them make them reorders latter.
 
Salomon has reforecast down a bit for next year, but still have pretty aggressive growth plans. They have tightened their belt on credit, and didn’t ship some accounts. Greg says Salomon has a reputation of being the last to be paid, so he sees that as a positive thing.
 
It will be interesting to see how they reconcile their tighter credit policy with their aggressive growth plans.
 
So What?
 
Pay attention to your market niche and balance sheet. Expect soft goods to be hit harder than harder goods by an economic slowdown. Look for weak retailers and suppliers to disappear. Hope for a short recession, but plan for a longer one. You might want to check out the paper I wrote for SIA to see why I think that. Use Vegas and the weeks right after it to get a firm fix on the 2002-2003 season.
 
If you’re a supplier, watch your credit and collections closely. If you’re a retailer, work your suppliers for better terms and discounts.
 
Some things never change. Pray for snow and the continued growth of snowboarding- our best antidote for economic hard times.

 

 

Potential Impact of War and Recession on the Snow Sports Industry; Relevant Statistics and Possible Strategies

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We were looking at a recession before the September 11 attacks on the World Trade Center and the Pentagon and the tragedy raised the possibility (certainty in the minds of many) that the recession would be longer, deeper or both then it would otherwise have been. Economic activity has already rebounded since its nadir in the days following the WTC. But what’s a “normal” recovery from such an event? Who knows.

The snow sports industry may be as impacted by a recession as other sectors of the economy. As we represent discretionary spending, we have the potential to be impacted more. Add to that the “fear of flying” hangover and we can’t help but be nervous about the coming season, especially with the possibility of further terrorist attacks. Air passenger volume was down 50% for a couple of days after flying resumed and, as of October 4th, was still off 29%, according to the International Air Travel Association (IATA).
 
On the other hand, as you’ll see below, the last recession, with its very low resort visitor days, corresponded to the worst snow year in a long time, so it’s hard to lay that awful year only at the feet of the war and recession of that time.
 
Still, my feeling is that this recession, and the caution in traveling and vacationing precipitated by September 11 and subsequent events, will be worse than in 1990-91.   Rather than just be nervous and pray for good snow we should probably “do” something. What?
 
Where Are We?
 
Before I yield to the inevitable and start quoting economic statistics, I want to introduce you to the statistical concept of regression to the mean. Discovered in 1875 by the amateur mathematician Francis Galton, it’s the single biggest reason one might be cautious about predicting a short, shallow recession.
 
To dramatically oversimplify and avoid a really boring discussion of statistics, it says, “What goes up must come down.” And the further up it goes, or the further down it goes, the more likely and the faster, it is to go the other way. We haven’t had a recession since 1990-91, and it was mild.
 
Of course a statistical mean can move, and some of these trends can be over very long periods. Still, the economic rubber band looks stretched awfully tight, and a snap back is inevitable.
 
This is supported by the fact that Japan is going into its fourth recession in a decade. Parts of Asia haven’t gotten over the impact of the currency crisis that started in 1997. Other Asian countries depend on exports to the U. S. to support their economies, and those exports are likely to decline. Much of Europe seems on the brink of recession as well.
 
During recent U. S. recessions, some other part of the world was strong and could pick up some slack. This time, the rest of the world was counting on a U.S. that is weak itself. The last time Europe, Asia and the U. S. all experienced economic weakness at the same time was during the 1973-75 recession. It lasted sixteen months.
 
Consumer spending had started to weaken before September 11. September will be the 12th month of declining industrial production. That ties a record that goes back to just after World War II. The September employment report showed a decline of 199,000 jobs during the month, the largest decline in over a decade. Very little of that reflects layoffs that occurred after the attack.
 
September retail sales, reported October 12th, showed a decline of 2.4%, the biggest drop in nine years. Economists had expected a 0.7% drop. At the same time, consumer sentiment rose to 83.4% in October from 81.8% in September, compared to expectations of a 76.0% reading in the measure of consumer confidence.     
 
The consensus is that the fourth quarter statistics will confirm that we are in a recession if the September retail sales numbers haven’t done it already.
 
Regression to the mean, indeed. Any good news?
 
Some. Housing starts haven’t plummeted and, up to now, consumer spending has held up fairly well. The Federal Reserve has cut the discount rate from six percent at the beginning of the year to two percent now. The last time it was that low was 1958. There’s some concern that the impact of interest rate cuts may not be as powerful as it once was due to the globalization of the financial markets. However, conventional wisdom is that it takes six to nine months for the impact of interest rate cuts to be felt. The first interest rate cut happened January 3rd, nine months ago. The last was October 2nd. Obviously, we haven’t felt the full impact of all the cuts yet.
 
Another thing that tends to lead an economic recovery is the stock market. We’ve all had the pleasure of experiencing the worst bear market since the depression. The week when the market opened after the WTC looked like the capitulation week that’s normally required to find a bottom. There was high point loss on big volume. The put/call ratio reached a level not seen since 1985. The number of investment advisors bearish was higher than the number bullish (they are almost always wrong at extremes). The market broke out on October 24th, and followed through on the 28th. The follow through doesn’t guarantee a rally, but one has never started without it. Since then, the market has acted the way you want it to act, shrugging off bad news, going up on higher volume and declining on lower volume. Hope I don’t sound like an idiot by the time this is published.
 
That analysis and two bucks will get you coffee at Starbuck’s (a small one). But as I sit here writing this, I’ve put my money where my mouth is.
 
SIA’s Retail Audit, conducted by Leisure Trends Group, reported early in the week of October 8th that a sample of 277 storefronts showed September ski and snowboard sales up 19%. By the end of the week, when the sample size had increased to 376, the increase was at 6.1%. That’s still a lot better than the overall national retail numbers reported for September (see above) but I guess we better not breathe a sign of relief until we see results for the full 900 store fronts survey (due in early December).   
 
Finally, increased government spending in the wake of September 11th should make the recession shorter than it would otherwise have been.
 
We’re looking at a recession. Though there are some mitigating factors, there are reasonable arguments that it may not be as mild or short as recent (if ten years ago is recent) ones have been.
 
Right today, the winter sports industry doesn’t have to worry about its length so much as it’s impact on the season that’s starting right now. What does history tell us we can expect?
 
“It’s Déjà vu All Over Again”
 
A recession, a war, and a President Bush in the White House. The parallels are almost eerie.
 
Iraq invaded Kuwait on August 2, 1990. The air war began January 17, 1991. The ground war followed on February 23rd and lasted four days until President Bush declared a cease-fire on the 27th. The first U. S. troops began to leave on March 8th. 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. 
 
In 1990, the economy started off pretty well. Gross Domestic Product (GDP) grew at a 5.1% rate during the first quarter. That declined to 0.9% in the second quarter and fell further to a negative 0.7% in the third. Fourth quarter GDP fell at 3.2% rate.
 
For the year, we ended up with a real GDP growth rate of 1.2%. In 1991, it was a negative 0.6%. 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.
 
From a healthy 5.6% rate of growth in 2000’s second quarter, GDP has fallen each quarter. It ended the second quarter of this year with 0.2% growth. My guess is that the number we get at the end of October for the third quarter will be negative.
 
According to the IATA, airline traffic has fallen each month this year since February compared to the same month in the previous year. When was the last time airline traffic declined? It was during the 1990-91 recession.
 
1991 is the only year from 1983 through 2000 when world airline passenger growth was negative (by 5%). Obviously, it corresponded with the recession, but it also corresponded with the Gulf War. Revenue passenger kilometers (RPKs- the total number of kilometers paying passengers paid) fell 25% during the first month of the war. They were below 1990 levels from January through September of 1991. It took a year for traffic to recover to prewar levels.
 
As we all know, the 2000-01 season was a generally good snow year, and generated 57.3 million resort visits, the highest ever. The 1990-91 season saw only 46.7 million visits, the lowest of any season since 1978-79 except for the 39.7 million in 1980-81. Visits in 1989-90 were 50.0 and in 1991-92, they were 50.8 million.
 
The USIA End of Season National Business Survey for 1990-1991 reported that the average inches of snowfall per area, based on 173 reporting resorts, was 130 inches. RRC Associates in Boulder reports that for the 2000/01 season, with 187 resorts reporting, the average number of inches per resort was 185.34 inches.
 
Over the last eight seasons, according to RRC, the average number of inches per resort was 177.6. 1990-91 was by far the worst snow year for which I have data. Which is good news, because if the snow had been great in a year when visits were 46.7 million, we would have had to lay the bad year completely at the door of war and recession. So maybe we’ll find, with good snow, that people want to go do something fun with their families and forget about war and recession.
 
We are, as usual, left praying for good snow. Even with good snow, I expect to see a negative impact from war and recession. The similarity to 1990-91 is too great to ignore. It’s my judgment that the recession will probably be steeper than that of ten years ago. In addition, the war against terrorism won’t have the clear and glorious ending the Gulf War had. It started in this country with an act that has left a long-term scar on our collective psyche and potentially on our willingness to fly and take vacations. Any further acts of terrorism will only make it worse. 
 
Do It Now Rather Than Later
 
In twenty years of working with companies in transition, the last ten in action sports, I’ve worked with quite a number of financially distressed businesses. It’s a lot of fun for me when I walk in the door and am met with, “We can’t make payroll next Tuesday. What should we do?” because when you’ve got nothing to lose, you can try or suggest anything to anybody. Still, I wouldn’t wish that set of circumstances on anybody. By the time you get to that point it’s frequently too late to solve the problem except at a tremendous personal and financial cost. 
 
Without exception, and regardless of industry, companies who are so financially distressed that their survival is uncertain got there for the same reason; denial and perseverance during a period of change.
 
Universally, the owners/managers recognized the issues before they had become issues of survival. Universally, they resisted doing anything different in response to the new circumstances. Universally, they believed that doing “more of the same,” but doing it better and harder would be an adequate response to a changing business environment. For a while, this may have worked. Typically, it at least bought them some time.
 
But the business continued to decline because they simply weren’t addressing the new business conditions. As things worsened, their options, or at least their perceived options, declined. Soon, managing cash flow was taking up all of their time. They had to do it, but it still didn’t address the basic business issues. Finally, it’s typically an outside stakeholder- the bank, a supplier, a shareholder- who forces them to deal with reality. Hopefully, it’s not too late.
 
My crystal ball is no better than yours. I don’t know what this season is going to bring.    But whether you’re a resort, a supplier or a retailer, the winter sports business isn’t an easy one if only due to seasonality. Most of you, I’m sure, have already asked the question, “What if my business is off 10%? 20%? For those of you who haven’t started that process, here, in general, is how I might go about it.
 
If you were around in 1990-91, how did you fare? If you weren’t, talk to others in similar businesses and find out how they fared. What actions did they take and when?
 
Now pull out your cash flow. Cut revenues by 10%, or by whatever number you think more relevant or likely. What happens? Is your bank line still adequate? Can you pay your suppliers on time? Can you afford any capital expenditures you had planned? Does the cash in your cash flow, flow?
 
Obviously, this is also a balance sheet issue. Even when cash flow from operations turns a little negative, some companies have the financial resources, as reflected by their balance sheet, to support spending at current levels.
 
Whatever your cash flow projections show, now is the time to take any action you decide to take. Here’s why. If, for example, you need to reduce expenditures by $36,000 over six months, just to pick a number, that’s either $6,000 a month or $36,000 in the last month. $6,000 a month may be manageable through judicious expense control. $36,000 in that final month probably (typically, I’d say) damages the operational continuity of the company.
 
So whatever actions you think you need to take, if any, to cut expenses, improve efficiency, reduce inventory, or bolster sales, start doing it now. Early action is always the key to weathering hard times if they come.
 
As a retailer, you don’t just sell winter sports products- even in winter. The highest dependence on winter sports sales comes, I think, from retailers closely associated with resorts. From that point of view, I guess you’re better equipped to weather a slow season than many suppliers and resorts who make most of their money in only one season. But retailers have some problems that suppliers and resorts, which have already undergone some consolidation, don’t have. To put it succinctly, there are too many of you. I don’t think that will be a shock to most retailers. They deal with it all the time as suppliers open up competitors just down the street.
 
For most of the 90s, high personal expenditures, low interest rates, very low inflation, huge gains in net worth and low unemployment yielded high levels of growth in retail sales, averaging 6.55% annually between 1994 and 2000. Since sometime in 2000, weakening consumer confidence, slowly increasing unemployment, declining household wealth, and high consumer debt levels have begun to take their toll.
 
In the meantime, retail competition has never been tougher. There have been growing numbers of store closing. Various kinds of direct sellers are taking more business from traditional retailers.
 
As a winter sports retailer what should you be doing? Largely, what you’re already doing as far as I can tell. Watch your inventory and expense levels carefully. Focus on knowing whom your core customer is and on attracting and keeping them. Order to maximize your discounts. Have the kind of product customers are likely to want in harder times.
 
Resorts who sold lots of cheap season passes may look like geniuses if traffic does drop significantly, though I guess maybe the people who have already made the investment will be the ones who show up anyway. The issue at many resorts, in the event of a slow winter season, is financial leverage. This is an industry where extreme seasonality requires the use of borrowed money to get through the off season- often a lot of borrowed money. You have to be able to borrow enough and, inconveniently, you have to be able to pay it back and then borrow it again for the following season. Managing that debt is already the single biggest challenge some resorts have. If revenues decline significantly, it will become an even bigger challenge.
 
Suppliers have largely already ordered and/or produced for the season. They are in the middle of shipping to retailers. Some products coming into the country have been delayed by understandably more rigorous checks by U. S. Customs. Anecdotal evidence is of some cancellations from retailers, but they don’t seem very high. If I was a supplier, I wouldn’t be counting on a lot of reorders, and I’d be damn cautious about credit this year. I’d also plan my selling efforts on the assumptions that discounts will start early if retail traffic is slow.
 
Economically, the whole country has had a bunch of good years. Now, we may be in for one that’s not so good. In good times, cash flow and growth can cover up a lot of mistakes and competitive weaknesses. In bad times, the market takes no prisoners. Whether you are a supplier, a retailer, or a resort the quality of your competition position and the strength of your balance sheet are the two things (besides snow) that will determine how you do this year.
 
That’s true in any year of course, but in a recession year, you may not get another chance. My best guess right now is that this is not going to be an easy season even with good snow. Make it as good as it can be for you by starting to deal with it right now.
 
 SIDEBAR:
 
As an industry, especially on the resort side, there’s a consensus of the need to revitalize growth by attracting young enthusiasts to the slopes and keeping them coming back. Retailers, and obviously the suppliers on the snowboard side, are already on that program or, bluntly, they wouldn’t be around. Resorts recognize the same necessity, but have the understandable need to focus on the traditional customers who are older, but have lots of disposable income and provide much of a typical resort’s cash flow. In a recession, it will be interesting to watch who shows up. Will it be the young enthusiasts, who figure out a way to find money for a list ticket and some new equipment, or the older customer, who has a high enough disposable income and net worth that a little thing like a recession doesn’t change her spending habits?
 
Speaking of the kids, the most exciting new thing in snow sliding this year may be the snowskate. It has its genesis in skateboarding, which has to be as hot right now as any action sport has ever been. Skateboarding, of course, has entered the mainstream, with skate parks popping up all over the place and being funded by local recreation departments. Now, I’m hearing the first rumblings about snow parks for use, I guess, with either snowboards or snowskates being built at places other than resorts. Especially for snowskates, you don’t need that much room, and you don’t need much vertical. Gives the resorts something to think about. What if the kids don’t have to come to participate?

 

 

“Hey! How Come You’re Still Around?” Conversations With Survivors

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It’s old news, of course, that we’ve gotten to the point in this industry where probably north of eighty-five percent of the snowboards sold come from a handful of brands, mostly made by ski companies with the usual exception. And if that concentration is not how we’d like it to be, it’s how it almost always is. Don’t worry; I’m not going to give you the lecture on consolidation again- it’s too late to help anyway.

 But there are a number of small brands still out there when hundreds of others aren’t. How have they done it? Have they found the proverbial “defendable market niche?” Or did they just luck out and find an investor with too much money and not enough common sense? Or maybe, at different times, both.
 
So I’m going to call some of them up and ask something tactful like, “How come you’re still in business?” If they don’t hang up on me, maybe we’ll all learn something.
 
My Guess?
 
Okay, not completely a guess, as I’ve talked to most of these people before over the years and have watched them build their brands and companies. We’re going to find a high level of continuity in management, and a lot of support from shareholders. These are brands that have been around a while.
 
None of them ever thought they were going to be “the next Burton.” They were balance sheet aware, and never tried to grow faster than their financing allowed. They’ve generally figured out how to make money, and are bemused and perplexed when they hear about brands doing 30,000 snowboards and losing money. Advertising, promotion and team riders? It’s a good thing- as long as you can actually afford it. Having happy retailers who sell through at full margin, call for more product, and then can’t get it seems to be their approach to marketing. Oh, and, for some reason, they seem to only want to sell to people who can pay them on time.
 
They have generally discovered a market niche, and it’s typically high end. In one case, they’ve discovered that they aren’t only a snowboard company. Here they are in alphabetical order.
 
Glissade
 
“We’ve been making snowboards for seventeen years,” says Glissade founder and president Greg Pronko. “I think we might be the sixth oldest snowboard brand in the world.”
 
But Glissade no longer sees itself as strictly a snowboard brand competing only against other snowboard brands. They produce a relatively small volume of a few thousand very high-end boards, and don’t want too much volume. What they’ve learned to love is working with materials and figuring out how to use new ones. They have evolved to the point where they earn revenues from materials research and development, and rapid prototyping for other companies in snowboarding and other industries.
 
In spite of these other activities, the Glissade brand is the founder’s true love. But the love that goes into these custom, low-volume boards has a price. One of their decks will set you back a bit north of $500 at select retailers. For a little more, they’ll be happy to make you a custom board. Or you might call them and see if you can get on the list to get one of only twenty-five 195s they make each year.
 
So what have we got? Year around cash flow, a redefinition of their market niche that allows them to compete, no warranty problems, and a product that doesn’t require a big advertising and marketing campaign to check at retail. Oh- and good margins for Glissade and the retailer. 
 
Heelside
 
Heelside started as a boot company before expanding into bindings and, more recently, boards. They are heading into their seventh season. President Jim Ferguson emphasizes the continuity in investors and employees they’ve enjoyed since the company was founded. “Consistency of ownership and management has been key for us,” he says.
 
They have also enjoyed a few other advantages. Jim’s background in making boots went a long way towards getting Heelside started without some of the startup and growing pains that other companies have typically experienced. When they did decide to make boards (interestingly enough, at just about the peak of the consolidation), they purchased high quality equipment for not much money from a factory going out of business and hired the manufacturing team to make Heelside’s boards. Good for cash flow, and good for avoiding mistakes in learning the manufacturing process.
 
Growth is a good thing, but “The numbers have to make sense,” says Jim. “We’ve always lived within our means,” he emphasizes. “We do as much marketing as we can, but keep a close eye on the bottom line.”
 
Evidently Heelside isn’t sure how much being cool will help if you can’t pay your bills.
 
Of the up to 15,000 boards they expect to sell this year (depending on the snow) most will be sold in North America. One thing Heelside has in common with many of the other brands being discussed here is no dependence on the Japanese market for financing. I’m sure we all remember when Japanese prepayment for boards dried up, and one hundred plus brands vanished in short order.
 
Never Summer
 
They were profitable when they were only making 7,000 boards. That was the plan. Now, they’re making more, but maybe not as many as you might expect from a brand that’s been consistently pursuing its plan for ten years. They’re still making money. “Clean distribution, limited supply, unmatched customer service and exclusive territories for retailers,” is the foundation of their market position, explains co-founder Tracey Canaday.
 
The average wholesale price is higher than most brands, but Never Summer uses a layered, precured, pretensioned fiberglass that, according to Tracey, costs about three times as much as the glass in a traditionally made board. They also make their sidewalls out of sintered ptex. The result, according to Tracey, is a construction that makes the board more durable and responsive and gives the retailer something to sell.
 
Never Summer, located in Colorado, doesn’t sell a single snowboard in Japan. Zero, zip, nada, the big goose egg. So clearly when the Japanese market crashed, it didn’t hurt them much. Might even have helped their competitive position. Would they sell some boards there? Sure, but they haven’t been approached by the right potential partner and don’t want to be distracted from their retailer focus.
 
There’s little discounting at retail, and typically few Never Summers left over at the end of the year. Scarcity does much of the marketing for them. Want to buy a Never Summer? Better go find one now (October 3) and expect to pay full retail.
 
There are only four or five managers at the company, and two of them are owners. They are careful where they spend their dollars. For example, all new accounts are COD, no matter who they are. “This is our retirement,” says Tracey.
 
I’d be careful too.
 
Option
 
“We’re modest in our goals and live within our means,” says Option President Geoff Power. “We have really good people who don’t have stars in their eyes.”
 
Option was started in August of 1992. Geoff gives a lot of credit to the company’s investors, who have always taken the long term view, don’t need a return to live on, and have been willing to help the company over some rough spots or to take advantage of opportunities. One of those opportunities was the acquisition of the snowboard apparel company NFA at a time when lots of apparel companies were available for purchase. NFA has been able to grow and transition nicely in the direction of the street ware/lifestyle market. 
 
There was never a big dependence on Japan, so when that market cratered, it didn’t have as much impact on Option as on its competitors.
 
Option has done many of the same things as the other smaller, successful, brands mentioned in this article. They are careful with distribution. Their product cost is above the average but also, according to Option, better made. Customer service is critical. They like to be paid by the people they sell to, and control their marketing expenses consistent with their overall financial plan and capabilities.
 
It seems to be working.
 
Silence
 
One of these days, I have to remember to ask BK Norman, the lead dog at Silence, what BK stands for. Silence is nine years old. Their story is a bit different from the other brands mentioned above, but BK has been there for the whole ride. Continuity seems to be important.
 
When Silence was started, it had the good fortune to be owned by a guy who, in terms of his understanding of the snowboard business, had more money than sense. He had a whole lot of money. Like a real lot. He spent it on Silence. After all, snowboarding was hot. So they could build up the brand in a few years, go public and all retire rich. Seems like I’ve heard that story somewhere else before.
 
Never mind. Anyway, BK kept going “Uhhhhh, I’m not quite sure we can sell as many boards as you want,” but who was he to turn down all this marketing money? It’s just too much to ask a snowboard guy to do. The marketing money got spent. As BK had foretold, not as many boards as the inflated corporate plan required were sold. It was a financial mess, but the literally millions of dollars spent on advertising and promotion created brand awareness.
 
Silence has changed hands twice. The first time, it was sold to A Sports which also bought Avalanche. Now, a new investment group has picked up both Silence and Avalanche, and is working closely with BK, Dale Rehberg and Maureen ter Horst to run the brands the right way. “I always managed to find a new investor before things really cratered,” was the way BK put it. “A lot of money was wasted on huge corporate business plans that never came true. Now, we are concentrating on building our business on a grass roots level working closely with our retailers all over the world.
 
So now, well financed and with a realistic business plan, BK uses the brand awareness created in Silence’s early “drunken sailor” spending period to make some money.
 
The Japanese distribution has been kept intact over nine years. The distributor didn’t go bankrupt and the market was never over supplied. BK has stayed focused on building and selling snowboards. Most of the business is to specialty shops, but that is changing gradually. Because of the wider awareness the brand has and the presence of Avalanche, he can expand his distribution a bit more than some other smaller brands without damage. “We’ll keep Silence true to its history as a specialty shop brand and expand the distribution for Avalanche,” he says.
 
I Think I See a Pattern
 
These brands have quite a bit in common. Continuity in management would seem to be high on the list. Financial acumen with a balance sheet focus is up there too. Growth was kept consistent with their financial capabilities, and an awareness of whom their customers were. They focused on the bottom line, not the top. They tend to have their own factories. They spend a lot of time thinking about their distribution.
 
Anything there that should surprise us? Nah. Any small company that successfully competes against much larger brands has to have an answer to all those issues.

 

 

Another ASR. Anything to Learn

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Lousy time for a deadline. What am I going to say about ASR that seems relevant when what’s left of the World Trade Center towers is still burning? The most talked about issue at ASR seemed to be conjecture about what was holding up the girls’ low riser pants, and it suddenly doesn’t seem so compelling.

 
I love this business, and am grateful to be in it because it’s fun and I like the people involved in it. But at the end of the day, we’re about marketing and brand building. We succeed if we create demand for and perceived differences among products that aren’t very different from each. It all sounds pretty trivial after the descriptions of people jumping out of the World Trade Center.
 
Sorry if I’m feeling a little morose today. I imagine some of you might be feeling the same. I’m going to go hug my wife and kids, then its time to focus on some business stuff.
 
Advertising Trends
 
Speaking of marketing and brand building, it’s getting kind of hard to spot an ad that focuses on product features. They all show teams and tricks. Sometimes, it takes a second to figure out which company the ad is for. One hard goods company told me they could double their sales if they could get a couple of more leading team riders.
 
Talk about shooting ourselves in the foot. We’re working as hard as we can to demonstrate to our customers that most of our products are functionally the same. We call it differentiating ourselves from our competitors. How do you do that on a brand versus brand basis? By spending more on team, advertising and promotion. When can you afford to do that? Only if your volume and/or your prices go up. Who wins this game? Companies who are either larger, have strong balance sheets, or both. How many can win? Don’t know. But I know it’s more if the market is growing, and fewer if it’s not.
 
Maybe this accounts for the feeling I got that there was a lot of energy at ASR, but it was at a pretty even level through the skate portion. Exciting, but the same everywhere. I don’t like sameness. It’s not a good foundation on which to keep growing an industry.
 
It Is the Economy
 
Quiksilver isn’t a skate company, though I suspect a lot of people who skate buy some of their stuff from time to time. Thursday, the first day of the show, they guided earnings expectations for their fourth quarter down for two reasons. First, they said that their domestic men’s inventories are much too high and will have to be closed out at distressed prices. Second, they said reorders are coming in more slowly than plan and are being negotiated at lower prices.
 
Part of me feels like I should be able to just stop this section right now and move on, but allow me to belabor the point. In my conversations with people at the show, I frequently heard about softness at retail. This generally focused on soft goods. Hard goods seem to be holding up so far, as did skate shoes, at least for the credible skate brands.
 
My interpretation? If you’re a skater, and you want to keep skateboarding, when the tip of your board has worn down to the point where it’s paper thin, you finally have to get a new board. No choice. If the bearings fall out, you have to replace them. No choice.
 
Do you need a new pair of pants or shirt to keep skating? Nope. You’ve got a choice.
 
With shoes, my hypothesis is that the skate shoe brands with the most credibility with skaters are taking business from all the wannabee brands. So it may be that shoe sales can soften without the major brands really noticing. If they will be cautious about raising prices, this can be a hell of an opportunity for those major skate shoe brands.
 
The ASR show guide has seventy companies listed under footwear. That number is, as I recall, the same or a little higher than the previous show. Not all of those offer skate shoes, of course. But if I’m right about the more credible skate brands taking share from the others, and the economy is soft, then you might expect to see the beginnings of a consolidation in skate shoes we’ve all been expecting. Why might it not happen? Because some of the brands that are in the skate shoe business, but not as credible as the leading brands, have lots of money and big balance sheets. They could make a “strategic” decision to stay in the business and lose money for a while. It happens. Then the number of brands doesn’t decline so dramatically, but everybody’s profitability can be hit because price becomes more of a competitive factor and more has to be spent on marketing.
 
The successful, branded skateboard companies have watched the shoe and soft goods’ companies grow like mad at least partly on the backs of the hard goods brands’ support of skateboarding. Sometimes it looks like the hard goods brands have missed out. I bet they’ve all wondered from time to time if they should be making shoes and soft goods. If the economy turns, they will look prescient, because their market position, focused on the core of people who really skate, is likely to hold up better than the much broader market the soft goods aim at.    
 
Check out again the section above on Advertising Trends and what happens when the basis of competition is advertising, team, and promotion. If you’re a retailer, you might go back a couple of issues and read what I suggested you do if we are, in fact, heading into a recession. Maybe our favorable demographics insulate us from economic cycles? Or may the force be with us. Whatever works.
 
Chinese Skateboards
 
The Chinese make lots of stuff that was once made here, and they can make a skateboard. They are making them now.
 
To pick some rough numbers, let’s say there’s maybe $4.00 of wood and $1.00 of glue in a deck. There’s also labor, freight in, waste, the cost of operating a factory, administrative overhead, maybe royalties to team members. Eight dollars? Ten dollars in total? A little more? That’s before graphics and any dying of plies before you make the deck. Total cost depends on your overhead, your cost accounting, and your volume.
 
I hold in my hand an actually quote from a Chinese factory to supply seven ply Canadian maple blank decks at a little under $8.00 depending on dimensions. That’s before shipping and before the four percent duty U. S. Customs tells me would apply. It’s also for a natural colored board. This communication names a couple of brands that are making them there now. 
 
So you can buy decks from China, and probably land them for less than you can make them here. It seems to work for Variflex, who buys god knows how many completes from China and sells them in various discount chain sporting goods stores. 
 
But Variflex isn’t concerned with pro models, doesn’t have to change their graphics as often, and doesn’t, I suspect, handles quite the numbers of brands and models. Make them cheap, make a lot, and ship them out.
 
However, if you were convinced the quality was what you required, and I see no reason why it can’t be, what’s to stop a brand from bringing in blanks and screening them as and when required? You can maintain your flexibility and get a price that is lower. How much would depend on the specifics of your operation.     
 
New Products?
 
Not too much, as usual. I saw a couple of variations of the long boards with single center wheels on the front and rear that are suppose to emulate surfing or snowboarding I guess. Looks like it might be fun.
 
I heard about something coming out called Sticky. Apparently there are magnets in the shoes and metal plates on the deck so the deck doesn’t always have to be gripped during tricks. It’s not just an idea. It’s been extensively tested and, I’m told, been given thumbs up by skaters who have tried it. Guess it could open up some new possibilities. Wonder what the added weight is?
 
There use to always be “new” snowboards at the snowboard show. Trouble was, the snowboard had already been invented and none of these “new” things, good ideas or not, could ever break through what the established concept of a snowboard was. All these guys might have the same problem. You can have a great technology, but it comes down to marketing. If the riders don’t accept, it’s a bad idea.
 
Dark Horse showed me the rocket bolts and V-Beam axle, which seemed to make sense. But how do you sell technology in a market driven by team and promotion?
 
I’m sure there was some other stuff I missed. Wish I could have gotten into all the booths to see it.
 
Are we headed for economic hard times? If we are, the next ASR could be a bit different. It couldn’t hurt for you to think about what you’d do if we were before we get there. If they happen, they will be hardest on those who haven’t prepared in advance. 

 

 

Cash Flow Revisited; Why Hardly Any Successful Business is Just Snowboarding Anymore

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I know it’s because of crossover, and the mainstreaming of action sports, and because we’re selling to parents as much as to kids. I know all that. Largely, I believe it. I just did my occasional and not nearly frequent enough sojourn into a bunch of local snowboard retail stores, big and small, and looked at what they’re selling. Snowboards and snowboarding equipment, apparel and accessories- sure. But they are also selling skateboarding, surfing, skiing, wakeboarding, bikes, roller blades, tennis and/or some others depending on the time of year.

 
Have they become as diversified as they are because of “the market?” Yes, “the market” demands it. But lurking in the lichens is the financial requirement of businesses that are highly competitive and selling products that are awfully similar to each other in a given product category, differentiated largely by the brand marketing strategy. Bottom line is that the less seasonal your business is, the more money you can expect to make.
 
Let’s take a journey into fantasy land and take a look at a couple of hypothetical business that are in snowboarding (retailers or manufacturers- makes no difference) and see how their financial equations differ with the seasonality of their sales. I know you already know that it’s bad to be seasonal, and good to sell all year around. But the extent of the difference on the two company’s financial results-especially the return on investment- may surprise you.
 
Meet the Contestants
 
Seasonal Enterprises (SE) and Year Around Ventures (YAV) both sell snowboard hard and soft goods. But while SE sells almost exclusively snowboarding and snowboard related products, YAV has diversified into other action sports.
 
Both SE and YAV sell $12 million a year. SE does all its business in five months. YAV boringly sells $2 million a month, month in and month out. 
 
At the end of the year their income statements, down to the Income before Interest and Taxes Line, look identical.
 
Net Sales                                                                   $12,000,000
Cost of Goods Sold                                                 $ 7,800,000
Gross Profit                                                               $ 4,200,000 
 
Operating Expenses                                               $ 3,600,000
 
Income Before Interest and Taxes                        $     600,000 
 
Now, $12 million is kind of an awkward revenue number. It’s much more than your typical specialty shop sells, and it’s probably less than a snowboarding brand needs to do in revenue to break even (I think that number is maybe a little north of $20 million unless you have a very well established brand and market niche).
 
Just for your information, in their most recent complete years, Vans, K2, and Pacific Sunwear had gross profit margins of, respectively, 43.5%, 31.1%, and 33.5% of sales. Operating expenses, respectively, were 35.7%, 25.3%, and 22.7%. Unfortunately, no specialty shops publish their financial results.
 
This hypothetical income statement is kind of a cross between a retailer and a brand. The goal, however, is to make a point so allow me a little creative license as I set the stage to make it.
 
Balance Sheets and Working Capital
 
Working capital is the money you have invested in a business so that it can operate.   Rent, salaries, product costs all of which are incurred before you sell anything represent working capital invested in the business. To the extent that you can get terms from the supplier of the product or service you are using, your working capital requirements can be reduced.
 
The balance sheet shows, as a point in time, the financial viability of a company and its ability to finance itself. Let’s compare the working capital and balance sheet situation of SE and YAV.
 
Seasonal Enterprises
 
SE, you will recall, does all its business in five months. But it has to operate for twelve months, and buy the product it sells in a way that it has product to ship during its selling window. Assume its total expenses of $3.6 million are spent evenly over the year- $300,000 a month. In practice, selling and marketing expenses would be weighted towards its selling season.
 
It’s got to buy its product for a total of $7.8 million. Remember SE is getting some terms from its suppliers, but it may also be giving some terms to its customers. Where does that all net out in the real world?    Obviously it’s different depending on whether you’re a retailer or a manufacturer.
 
SE’s going to spend $300,000 a month for seven months before it sells a thing. It will probably collect some money from the previous season during this period, but it will also have some expenses that go out during its selling season before much comes in the door. If, then, it has to borrow $300,000 a month for seven months it will have $2.1 million in loans just for operating expenses by the time it starts selling. And of course you won’t pay it all off the day you start selling.
 
Then there’s the $7.8 million in cost of goods sold SE has had to finance. For how long? Shall we say four months?
 
The last prime lending rate cut was to 6.5 percent on August 22nd. Just to make my calculations easier, let’s say you are borrowing at 10 per cent. I know that may be high for some borrowers, but if we think about credit card fees (which I consider basically financing costs) letter of credit fees, commitment fees, etc. maybe it’s not too far off when you look at your real cost of borrowed capital- especially for smaller businesses.
 
If you assume you pay off the loan for operating costs completely literally the day you start selling, your interest charge would be $70,000. It’s more realistic to say you pay it off over a couple of months at best, so let’s say it’s really $90,000.
 
At 10% for four months, financing the cost of goods sold comes to $240,000. Total interest expense, then, is $350,000.
 
After interest, pretax income is $250,000. Assuming a 30% tax rate, the business earned $175,000 for the year, or 1.46 percent of sales.
 
Year Around Ventures
 
This is a little easier to explain. They just do $2 million in business each month. No big inventory buildup. No operating expenses to finance without any income.  They get some terms from their suppliers, and, with luck and depending on the type of business it is, may even collect before they have to pay. They don’t need millions of dollars in temporary working capital just to get through the business cycle. All they have to finance, more or less, is a month’s worth of expenses or maybe a little more. Their interest expense? Hardly anything. Maybe if they’ve got any sort of balance sheet at all, nothing. If that’s the case, and with the same 30 percent tax rate their net income for the year is $420,000, or 3.5% of sales.
 
Balance Sheets and Rates of Return
 
Income statements don’t happen in isolation from balance sheets. On your balance sheet, you (hopefully) show some equity- the total of the investment in the business plus the profit you’ve made, less any losses you’ve incurred, and less any dividends you’ve paid out. The larger the number is, the stronger the business is, and the less money you should have to borrow. So, you can truthfully exclaim, “If I’ve got a whole bunch of equity in my business I don’t have to borrow squat and I’ll have no interest expense! My return on sales will be the same whether I’m SE or YAV.”
 
True, but that’s a misleading and incomplete analysis. The financial issue is always what are you earning on the money you have invested (the equity in the company, more or less) and how much risk are you taking? Most simply stated, return on investment is net income divided by total equity. YAV, due to its year around sales, doesn’t need much equity to have basically no interest expense. It’s probably got a great return on equity, and because of the diversification that allows it to sell the same amount each month, it’s risk is lower.
 
SE, on the other hand, has to have a pile of equity if it’s going to eliminate its need to borrow money. If it does that, it will have the same net income at YAV, but it’s return on equity will be much, much lower. And its seasonality makes its risk higher.
 
As you consider your return on equity, be aware that if you’d invested your equity in an intermediate term bond fund for five years, you would have earned around eight percent a year before taxes. Over the last twelve months, with the Fed cutting rates, you would have earned something like thirteen percent. We can probably agree that the risk in an intermediate term bond fund is less than the risk of an action sports business.
 
In the market we’re in right now, is there any competitive advantage to being a “snowboarding only” business? I can think of a couple of possible exceptions but generally, I’d say probably not. If there was, it would be financially rewarding from a return on investment point of view. Isn’t it interesting how the industry’s requirements for success from a marketing and a financial perspective have come together?

 

 

Product Selection and Merchandising: The Blackjack Analogy

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I guess this is a little incestuous, but the idea for this column came from reading Sharon Harrison’s “Ten Shops, One Question” in the June issue of this prestigious rag. The question was “What type of bearings are skaters in your shop buying?”

 
What struck me was how each retailer had similar, but different answers. It made me think about how they selected and presented skate products in their shops. If you read between the lines of that article, there were, I thought, some lessons and ideas that could be generalized for decks, shoes, wheels, trucks and clothing as well as bearings.
 
What They Said
 
“It’s the brand.” It’s the price” (low or high). “It’s the packaging.” “It’s the ABEC rating.” “It’s our service and reputation.”
 
Obviously, there are some customers who want the lowest price. Period. Some just want the cool package. For quite a few, it’s the brand that dominates the purchase decision. 
 
But there’s a lot of ambiguity, and purchasers often fall within those extremes. They’d like a certain brand, as long as it’s not too expensive. They want to keep the package, so they’ll pay a bit more. They got to have what their friends’ have- unless you’re out of that in which case you can probably transition them to another product.
 
About a hundred years ago, in the first marketing book I ever read, a guy named Kotler introduced me to the concept of the four Ps in marketing; product, price, place, promotion. In traditional marketing at least, they are the cornerstone of how you sell any product. And you’ll notice they correspond pretty well to what retailers said motivates buyers of skateboard bearings.
 
I never miss an opportunity to remind us all, including me, that we may all love skateboarding, but from a business perspective it’s, well, just business. At its core, the process of choosing, pricing, merchandising and selling the product is the same as in every other business. Enthusiasm and commitment is part of business success, but so is realism and objectivity. We can’t just believe what we would like to be true.
 
But I digress. I know (hope?) there was a point I was trying to make. Maybe if I keep writing it will come back to me.
 
Ambiguity- How To Utilize and Minimize It
 
There’s good news and there’s bad news. There always is. On the one hand, you know your customers’ basic motivations. You understand in a general sense why they buy what they buy. On the other hand, for the individual customer, those motivations are often pliable depending on the choices presented to them at a given moment. If you understand your customer you can help them make good choices. I almost used the word “manipulate,” but that has a nasty connotation to it. I’m suggesting you can support the customer in making decisions that are good for him and for you. That’s not a bad definition of successful retailing.
 
Casinos love people who play blackjack but know nothing about the odds. They make a whole lot of money from that kind of person. That’s why they give you free drinks. They also like, though not as well, the person who is sophisticated enough to more or less play the so-called “neutral strategy.” The casino will consistently win around one and a half percent from that person.
 
They hate the card counter. She will minimize her risk and make big bets at the right time and, over the long run, take money from the casino. She won’t win all the time. She may not even win half of the time. But when she does win, it will tend to be big, and that can make up for a lot of small losses. She doesn’t have perfect information. But she has the best information she can get and uses it to control how she plays. That’s not a bad strategy in the stock market either.
 
I want to suggest you can use a similar strategy in skate retailing.
 
The ambiguity of customer motivations isn’t a hell of a lot different from the ambiguity of how the cards will come out in blackjack- even when you’re counting. A single blackjack hand is a statistical, probabilistic result. A single customer’s decision is not. But a lot of customer decisions, taken as a group, are.
 
Goals
 
What’s the goal of blackjack? Easy- to make money. Right? I can’t argue with that, but I’d point out that setting a goal of making money doesn’t tell you what to do or how to go about it. If you set a goal of making your bets according to the count of the cards, you will make money in blackjack.
 
In retailing, the goal of making money suffers from the same shortcoming- it doesn’t tell you what to do. Every time I look at a retail situation, I end up suggesting a focus on the same two goals:
 
1.    Get the customer to come back.
 
2.    Maximize your gross profit dollars.
 
By doing these two things, you maximize your chance of making money.   
 
Gross Profit Dollars
 
Where do your earn the most gross profit dollars by percentage and total dollars by product category and by brand? Do you communicate that to everybody who works in your shop? Do you make your purchasing decisions with that information in your hand?
 
Yeah, yeah, I know- “Well, we make most of our money on shoes and clothing.” That is not an acceptable answer. Neither is:
 
  • “Hey, I’ve been in this business a long time and have a good gut for it.”
  • “We just buy what the customer wants.”
  • “We don’t have the system to track that.”
  • Etc., etc., etc.
 
That’s all a bunch of fatuous blather and if you’re taking anything other than a quantitatively rigorous approach to figuring out where you make your gross margin dollars, you’re no different from the guy who sits down at the blackjack table in Vegas with no knowledge of the odds, has five drinks and bets in the dark. You may have fun, but it’s not likely to last for long.
 
Getting Customers Back
 
I don’t get into enough shops, but I have never gone into one and gotten a good answer to, “What factors are most important to your customers in making their buying decisions?” Everybody names all the same factors, but nobody can rank or quantify them in a valid way. What I’m always hoping for is “Well, we don’t talk to every customer, of course, but the data base of responses we’ve kept tells us that 32% come in here because they know us and we’re conveniently located. 27% know us as a shop that has the brands they want and the rest are guys trying to pick up the cute girl we’ve got on the floor.”
 
Why haven’t I ever gotten an answer like that? Because nobody asks their customers in a systematic way and tracks the answers. The more customers you ask the more valid the responses become. To go back to the blackjack analogy one more time, it’s a lot like a card counter that doesn’t keep track of how many ten value cards are left in the deck. He has no idea how big a bet to place or when to place it.
 
Now we’re getting somewhere. It’s always nice when I’m writing one of these and that finally starts to happen. There you are sitting with concise information about where you get your gross margin dollars, and some solid insights into your customer’s motivations. What might you do with that information?
 
First, recognize that there’s some inevitable conflict between giving your customers what they want and maximizing your gross profit dollars, especially where there’s a lot of price sensitivity. Welcome to specialty retail, where your success as a shop will depend on your ability to position yourself and the brands you carry so that customers don’t just focus on price. 
 
Perhaps you’ll move some product around to highlight high margin, fast moving products. Are there brands being asked for you aren’t carrying? When you’ve been out of, say, a specific deck, has the customer bought something another one and does that tell you anything about how many brands you really need to carry? If you do a lose some sales because you don’t carry as many brands, but sell some higher margin stuff instead, are you better or worse off? Maybe you should forget all this and just hire more cute sales girls.
 
Let me share a little secret with you. What I’ve been trying to do with recent article is to help shop owners prepare themselves for a recession if it happens. Last issue, I think, I suggested a few steps you might take to prepare yourself for a slowdown that made good business sense even if one doesn’t happen. This article has a couple of more. As I write this, the Federal Reserve has come out with its “beige book-“ a regional anecdotal survey of economic conditions. Manufacturing is still suffering, but the gloom is spreading to other sectors. Consumer spending is looking like it might falter and the stock market shows no signs of reviving.
 
Nothing I’m suggesting is a bad idea even if skateboarding continues to boom. Try it- you’ll like it.

 

 

A Good Snow Year Does Not Make Us Heroes of Management; A Minor Reality Check

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1980- Michael Porter, the Harvard strategy Guru published Competitive Strategy.   In it, he discusses how industries change, and how companies have to change, as they transition from growth to maturity.

 I want to look briefly at what Porter says stereotypically happens during this transition and see how it applies to the winter resort business. Like all industries, this one has become insular- we talk to each other too much. Yet basically, we are experiencing the same trends that every other maturing industry faces. Maybe if we realize we aren’t different or immune, it will make it easier to respond to these inevitable and ongoing changes. Twenty years working with companies in transition has convinced me that the sooner you respond, the easier and more successful your transition will be. There must be something to what Porter writes, because I’ve found him relevant to every industry I’ve worked with.
 
He recognizes, of course, that maturity doesn’t happen at a fixed point in an industry’s development, and that it can be delayed. He also notes that rapid growth can return due to strategic breakthroughs, and that mature industries can therefore go through more than one transition to maturity.
 
Here are eight things he says happen during this transition.
 
  1. Slowing growth means more competition for market share.
  2. Firms in the industry increasingly are selling to experienced repeat buyers.
  3. Competition often shifts toward greater emphasis on cost and service.
  4. There is a topping-out problem in adding industry capacity and personnel. Thus companies’ orientations toward adding capacity and personnel must fundamentally shift and be disassociated from the euphoria of the past.
  5. Manufacturing, marketing, distribution, selling, and research methods are often undergoing change. The firm is faced with the need for either a fundamental reorientation of its functional policies or some strategic action that will make reorientation unnecessary.
  6. New products and applications are harder to come by.
  7. International competition increases.
  8. Industry profits often fall during the transition period, sometimes temporarily and sometimes permanently.
 
Does any of this look familiar? Can we just for a moment see through the industry’s historical momentum and inbred myopia to recognize that this is us? I lived through it in the snowboard industry. I’ve watched it in computers, automobiles, and funeral homes. It’s happening right now in retail, telecommunications and, by the way, winter resorts.
 
The winter resort business is no different from any other industry in how it responds to maturity and consolidation. One good snow winter doesn’t change that.
 
At best, we’re growing slowly. Maybe demographics will change that. We’re sure as hell selling to more repeat buyers, and they mostly want to get more and spend less.
 
Cheap season passes are competition based on price no matter how you rationalize it. That’s not to say there aren’t valid business and competitive reasons for some resorts to utilize them. But hopefully, those reasons are consistent with a carefully thought out business plan- not just a response to needing to improve cash flow.
 
If you’re adding capacity and personnel and our industry growth rate doesn’t pickup, then the only way you succeed is by taking market share from other players. I’d say we’ve turned the corner as far as euphorically adding capacity and personnel goes. But competitive conditions, in the overall leisure as well as in the winter sports market, seems to require resorts to invest in new facilities and capabilities just to stay even with other resorts.
 
If you’re big enough and well enough capitalized to diversify into real estate, golf courses, conference centers, retail, theme parks or whatever then perhaps at some level it can be business as usual for you. If you’re strictly a winter resort and you make most of your money from lift tickets, then you are going to have to do business better than you’ve done it before. Tubing, snow skates, snow bikes and mini skis can all add some incremental revenue. But there’s not another snowboarding on the horizon. Like the man said, new products and applications are harder to come by unless you can change what you are.
 
What can you say about profitability when the before tax profit was only eight tenths of one percent (0.8%) in the 1999-00 season? That’s down from 5.8% the previous season (that season was six days longer). Leading short term government bond mutual funds have one year returns of eight to twelve percent with just a bit less risk.
 
If margins are lousy and competition extreme, it’s hard to justify investing in the winter sports business because of its seasonality and the financial implications of that.  On the one hand, you’d really like to operate the business with somebody else’s money, because you don’t want to tie up all year equity you really only need in the business for four or five months. On the other hand, lacking a good balance sheet and reserves for bad snow years, which I expect we all agree will continue to happen, nobody will lend you the money you need to get through the season, because they see it as an equity risk. And if they do lend it to you, and your margins and/or total revenue are too low, the interest expense will kill you.
 
You know from the number of resorts that have reported financial problems that this is a very real problem. On the other hand, there are a significant number of resorts that make money year after year. They are big and they are small and they are all over the continent. They are mostly privately held so you don’t hear much about them. Besides, a financial and management crisis is much more interesting than a low key, boring, resort that just goes along knowing who their customers are and meeting their needs in consistent and predictable, but changing, ways.
 
How do they do it?
 
In any industry I’ve ever seen, there are always a few who are in the right place at the right time. I’ve got nothing against luck, but it usually doesn’t last. What I expect you’ll find if you talk to the people running these resorts (or any manager of a company succeeding in a maturing industry) is that they mostly never heard of Michael Porter. They do know who their customers are and why they come to their resort. They know whom they compete against. They have good management information systems, and their finger is on the pulse of their cash flow. They have had to deal with most of the issues listed above, and continue to deal with them.
 
But not in a crisis mode. Not with the bank threatening to pull the line of credit and uncertainty about how they will make payroll next week. They were more or less open-minded and aware of the changes that were happening. They have responded, and continue to respond, over a period of years with changes in how they do business. For the most part, no single change represented, by itself, a life or death issue. But the cumulative impact was dramatic.
 
Paraphrasing Les Otten, “They didn’t have a problem- they had an opportunity.” It was an opportunity because they saw the need for change and dealt with it before it was paralyzingly threatening. They never had to step outside their box. They just extended it a little at a time.
 
Don’t feel comfortable because it snowed.

 

 

Questions That Retailers Should Always Have Answers To

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When I start writing these articles, I always have to remind myself who the audience is. The Skateboard Industry, of course and, based on the circulation of Skate Biz, skateboard retailers especially.

 
That’s where things get a little tougher, because what I know is that skateboard retailers don’t just sell skateboards and they don’t just sell to core skateboarders. With the mainstreaming of skateboarding, they are selling to the lifestyle crowd and making their money on the higher margins of shoes, soft goods and accessories. And they aren’t just selling skate hard and soft goods. Surf, or snow, or something else is probably part of the mix as well. So, what kind of retailer are they? What kind of retailer are you?
 
Hell, I don’t know. That use to be a lot simpler to answer back in the good old days when there were many fewer product choices and you were basically selling equipment to participants- a much more clearly defined customer group.
 
I know we’ve got skateboarding euphoria right now, but retailing is a tough business, the country is over retailed by most measures, and differentiating one store from another is hard. If I were a skate retailer, there are a handful of questions I’d be continuously asking myself to figure out what kind of retailer I was. Some of them you should always know the answer to. For others, it’s the continuing quest for the answer that’s the important thing.
 
How Do I Make Money?
 
The stock answer seems to be some variation on “Hard good margins suck and I make money on shoes, soft goods, and accessories.”
 
That’s probably correct, but not adequate. You have to calculate monthly which brands and product categories are generating how much of your sales and at what gross margin. If you’ve got a point of purchase system and a decent accounting package, you can probably calculate it every day, though I imagine you have better things to do.
 
In a past issue of Skate Biz, I presented a form you can use to calculate this. As I’m sure you carefully preserve all issues of Skate Biz in pristine condition in gilded binders, you can look it up. If you’ve misplaced your binders, email me and I’ll send it to you.
 
What might you do with this information? Let me answer a question with a question. How can you possible decide how much of which brands to carry and which products to emphasize in merchandising without it?
 
You also need a cash flow and regular financial statements (income statement and balance sheet- no less frequently than quarterly), but to me the revenue and gross profit analysis is the critical and irreplaceable document you require.
 
Who Are My Customers?
 
This is one of those questions you never really finish answering. And you can slice and dice your customer base a thousand different ways. I guess the first thing I’d want to know is how many of them are actually serious skaters. Second, I’d ask them their zip codes to find out where they come from. That has huge implications for your marketing efforts. 
 
Don’t assume that what you think you know about your customers is accurate, especially if you believe it hasn’t changed over time. The value of this data is not just in what you learn about your customers at a point in time, but in seeing how it changes over time, assuming you collect it consistently.
 
Granted, collecting this is a pain in the ass. What good might it specifically do you? Just for fun let’s show that the zip code data shows you are getting customers predominantly from a couple of high income neighborhoods, and that people are coming a long way to get to your store. My God, it’s the retailer’s wet dream. People with more money than they know what to do with going out of their way to visit your store. Maybe you could help them dispose of some of that pesky extra money by raising your prices a few points.
 
That’s an extreme example, and it’s unlikely the data will be so clear-cut. But the insights you can get will make a difference in the success of your shop.
 
Who’s the Competition?
 
Ask your customers. The beauty is that you don’t have to do this systematically. If you only remember to do it with every third customer or so, fine. “Where else do you buy shoes/decks/t-shirts/wheels?” It’s not so hard to ask. The hard part is remembering to write down and organize the responses. If you do that, you’ll probably end up with a fairly short list of often-mentioned stores where you have to go occasionally to check on their selection and pricing. Hopefully, you’re doing that anyway, and it would be great if you knew you were visiting the most important competitors. Of course, your most successful competitors are where you’d like to find new employees.
 
Compare your prices to your competitors. If you’re cheaper, do you need to be? If you are more expensive, why are you able to get away with it? Because you’re more convenient? Have a better image? Offer better service? Analyzing circumstances where you can hold a higher price will tell you a lot about your competitive position.
 
What Products and Brands Should I Carry?
 
Well, you can’t carry them all, and if you try to carry too many, you end up not doing justice to any of them. Picking products and brands to carry has to be just about the toughest and most critical thing a retailer has to do. Inevitably, it involves a compromise on a number of levels. Financially, there’s a decision between products that generate volume and those that generate margin. No doubt every retailer would like carrying only products that carry margins of 65 percent and higher. But volume would decline rather substantially, and covering overhead expense would be impossible.
 
There are also market driven product decisions. In the skateboard retail business, the predominant example has to be skateboard decks. Most retailers seem to have a wall of decks they display even while acknowledging that the product’s margin is lousy. I’m sure they’d love to be able to rip those decks down and put up a wall full of shoes, watches, and pants that offer higher margins, more margin dollars, or both. But you can’t be a skateboard shop without skateboards, so in this case marketing and image wins out, as it should, over strict financial considerations. After all, we’re serving and supporting a market- not just raking in the cash.
 
That doesn’t mean you’re helpless. If you’ve got answers to the questions posed above, you know where you make your money, and something about who your customers are, and who you’re competing against. That’s powerful information.  How can you use it?
 
Start by looking long and hard at products with low margin and volume. If you don’t have such things, great. If you do carry them, is there really a customer service or image reason to be doing that? Identify them and make a decision.
 
If you had more room, how would you use it? Which new brands would you bring in? Which brands you already carry would you allocate more space to? Your new knowledge of your margins, customers and competitors may allow you to bring in some of those products by making you comfortable with eliminating some others.
 
There will never be a time when you won’t have customers coming and asking for a product you don’t carry. Inevitably, you’ll wonder if you should have it. Armed with good data, maybe it won’t be such a hard question to answer.
 
Do twenty percent of the deck brands you carry account for eighty percent of your deck sales? The wall space those other decks take up could be used to show a lot of higher margin shoes or accessories. Your concern with such an action may be that your shop’s image as a skate shop will be tarnished if you don’t carry these brands, even if they aren’t fast movers and don’t provide attractive margins. But if you know where you make your money, what percentage of your customers are skaters and why they come into your shop, you have the ability to make a rational decision.
 
To a greater or lesser extent, every skateboard retailer goes through the kind of analysis I’ve described. Frequently, it’s informal, incomplete, irregular and based on gut instinct and experience instead of facts and a thorough analysis. It’s difficult to implement and institutionalize this kind of process. Once it’s part of the normal routine, however, it’s not much trouble. My experience is that the improvement in your decision-making process (and profitability) will more than make up for the inconvenience of having to learn to do some things differently.

 

 

Can’t Live With Them, Can’t Live Without Them; Trade Shows, That Is

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It feels to me like more trade shows are being better produced at exactly the time when we don’t need them in quite the same way we use to. Or maybe there’s the same number of trade shows, but we don’t feel the need to go to as many. Or maybe retailers, who don’t make their living on only snowboarding, could justify going to so many shows that they can’t afford to go to that they just throw up their hands. Or maybe snowboard retailers already know which brands most of their open to buy is going to be committed to. Or maybe they know there’s not as much new stuff to see as there was in the past.

Or maybe all of these.
 
Still, wouldn’t it be great if there were just one giant trade show a year for action sports? You’d go for a few more days and order all the snow, skate surf, accessories and apparel you needed for the whole year and arrange for it to be delivered when you needed it. And all the suppliers would make sure it all came on time and complete. And all the retailers would get their orders in on time and pay their bills on time.
 
But since I have a vivid imagination and it’s not going to happen quite as I describe it, let’s look instead at the current trade show environment and how retailers might react to it.
 
The Trade Show Industry 
 
It’s a business. Let’s start from there. The people who bring us Vegas, Outdoor Retailer, Action Sports Retailer, ISPO, Supershow, the regional shows and the consumer shows want to make a buck. With the exception of SIA, they are for profit organizations. SIA wants to make a buck too, but they use the money they earn to support snow sports industry consumer marketing and that’s a good thing. Still, they all, including SIA, are to some extent competing with other trade shows and they all want to prosper.
 
When the number of snowboard companies exploded, SIA boomed. ASR lost exhibitors who decided they didn’t need (couldn’t afford?) both it and Vegas. ASR took off again when skateboarding went crazy, and SIA shrank as the winter sports business consolidated. Outdoor Retailer drew some snowboard business as the action sports business homogenized a bit and brands wondered how to reach a wider market.
 
SIA moves the Vegas dates to January 29th through February 2nd to make it a kickoff show. Suppliers wonder how to do Vegas, ISPO (February 2nd to 5th), and NSIA (February 10th to 13th). I heard a rumor that cloning of sales managers is under active discussion. When’s the main Japanese show anyway?
 
The SIA move, of course, changes the dynamic for the increasingly successful regional shows if they are no longer the first place a lot of retailers see new product. But of course SIA isn’t the first place where major retailers are likely to see product. Suppliers will arrange private showings for selected customers even earlier. Meanwhile, too many retailers aren’t making enough money and there’s a recession brewing (maybe) with its potential impact on consumer spending.
 
To top it all off, Surf Expo, known for its East Coast shows, is planning a new surf apparel show for Anaheim, California in March 2002 and ASR, apparently in response, announced it is planning a new show as well for the same time. What a coincidence. Both would be focused on retailers writing back to school orders. Magic, of course, has been trying to add a board sports section to its show.
 
But wait! As I write this, a press release from SIA dated May 23rd has announced that SIA Board Chairman Hugh Harley and the SIA staff has held a meeting with the five professional sales rep associations “…to review the revised show schedule for 2002 and to work through various issues regarding the new buy/sell cycle.”
 
SIA President David Ingemie says the meeting focused on how a beginning of the season trade show is different from one at the end of the year. “It was nuts and bolts oriented,” Ingemie said. Teams of suppliers, retailers, and reps focused on ways to make the show better for everybody. Since there’s general agreement Vegas won’t be a writing show, they discussed things like digital workbooks that retailers could take with them to use in reviewing and managing product line information prior to ordering. They worked on getting food delivered to booths if desired (Say, if we could just get cots and portapotties in there, nobody would ever have to leave the booth, and think of the money you’d save on hotels).  
 
Trade show organizers have two sets of customers. The exhibitors, who pay the bills, and the retailers, who the organizers have to have show up if they want the bill paying exhibitors back. But the interests of those two customer groups aren’t necessarily the same.
 
So- more tradeshows, more complex customer groups based on broader lifestyle considerations and not just a sport, a possible recession, and retailers interested in cutting the cost of trade shows- not increasing it.
 
Doesn’t more tradeshows for the same products if the number of retailers isn’t growing and business is very competitive translate, on average, to fewer retailer days at each show?
 
In the mid 90s, snowboard companies sprouted like mushrooms on damp, warm, spring days (you should see my lawn). Each knew there wasn’t enough room for everybody, but assumed it would be the other guy who would take it in the shorts. People rush in when there’s perceived money to be made- in snowboarding or in trade shows.  
 
I’ve talked before in Market Watch about competitive dynamics, and the possible dangers of competitors reacting too much to the action of other companies instead of focusing on what their end customers want. A new show gets announced. Some suppliers commit to going. Other suppliers worry that people will talk if they aren’t there, so they decide to talk. Retailers start to wonder if they will miss seeing new styles and products they should have. Pretty soon we’re all off to a new show.
 
What is the cost of a new show to suppliers? Travel and lodging, the booth, rep time and expense, the development of a new product line and samples for the show, loss of time. That’s a lot of money. If you’re going to, defacto, create a new product cycle and introduction you better feel strongly that it will increase sales.
 
And there’s the rub of course. It may not increase industry sales, but it may increase your competitor’s sales if they attend and cost you sales if you don’t. What’s a retailer to do?          
 
What Is a Retailer To Do?
 
Retailers, of course, aren’t just snowboard retailers. They are selling skate as well. Or surf. Or camping. Or rock climbing. Or skiing. Which means they have more than just winter shows to go to, and that complicates the picture. Still, there are some things they are all doing, or ought to be doing, to make management of their trade show schedule and open to buy a little easier, and maybe less financially painful.
 
That process begins with the recognition that things aren’t changing in snowboarding as quickly as they use to. You don’t have to go to Vegas to figure out which of the 150 new brands you are going to carry. In fact, you probably know right now (it’s May 2001) most of the brands you will be carrying in the 2002-2003 season.
 
John Coffaney, the Vice President of Merchandising for Any Mountain, a ten shop retailer in central California, agrees that the process of selecting among brands is a lot easier than it use to be. “Twenty percent of the brands we carry get eighty percent of our open to buy, and we know who they are well before the shows.”
 
So you start out knowing most of the brands you are going to buy and having a pretty good idea how many dollars you are going to commit to each. When you go to Vegas in January, what’s your job? Not to place orders, according to Coffaney. For Any Mountain, it will be strictly a looking show. If he buys anything, he expects it to be current year merchandise he’ll use to finish out the season. He’ll meet with supplier executives to discuss marketing issues like coop advertising.
 
The big suppliers he’ll see again at regional shows or at their showrooms, so he’ll spend his time in Vegas checking out other than the usual suspects.
 
Retailers in Any Mountain’s situation should focus in Vegas on the small brands they won’t typically see anywhere else and expect to accomplish two things. First, they can figure out how to use that twenty percent or so (it may actually be a lot less) of open to buy that isn’t already committed. Second, they can troll the backwaters of the show to find the small and/or new companies that offer new products or styles that will help differentiate the store and keep it on the leading edge.
 
SIA President Ingemie points out that seeing new products and brands early in the season, rather than in March, gives you the information you need to accurately do your product planning.
 
Derek Miller, the owner of Bad Boyz Toyz with four shops in the Chicago area, says that’s how he came to order Capita. It was the only place he could have seen it. Besides seeing new brands, what does he get out of Vegas?
 
“Long nights and no sleep,” is his first response. Obviously, I have no idea what he’s talking about. “We look to Vegas to see what’s going on. We’ll write some large lines there, but we’ll lean on the regional shows even harder.”
 
The good news for snowboard retailers may be that if choosing lines has gotten simpler (because there are fewer choices), and this is a preview show where not as many decisions have to be made and orders written, then maybe it gets cheaper for retailers to go there. You don’t need as many people and they don’t have to stay as long.
 
By anybody’s measure, for supplier or retailer, trade shows are expensive. Retailers are looking to reduce that expense. Bad Boyz’s Miller claims he doesn’t know how much it costs to go to trade shows each year. “I’m afraid to add it up,” he says.
 
Any Mountain’s Coffaney has cut trade show expenses using in store presentations and similar mechanisms. He says that as a result, some of his soft goods buyers have not had to attend Outdoor Retailer.
 
He also points to a longer selling season that is emerging for Any Mountain. “February,” he says, “is becoming as big as December. Our open to buy goes up tremendously after President’s Day weekend.”
 
Retailers, of course, don’t want their key people at trade shows during the midst of the selling season. They think they should sell what they’ve already bought before committing to buying more.
 
Originally, I thought the new Vegas dates would be most beneficial to SIA because it made the show a kickoff show and the foundation of the buy/sell cycle. It made the show more relevant again. The exhibitors, I thought, would ultimately benefit from having to get their product acts together sooner and perhaps from some earlier orders from retailers. Retailers would be inconvenienced.
 
But if the retailer’s buying process has changed as I’ve suggested, the regional shows are continuing to improve, and the large suppliers are finding more ways to make it convenient for retailers to see and order product, then maybe we have a win for everybody. Retailers can spend less time and money and do just as good a job ordering. But as you strive to control trade show expenses, make sure you do go to Vegas. If you are a snowboard retailer, this is your show, you need it, and the competitive chaos in the trade show business doesn’t change that.
 
Oh, but then there’s the poor sales managers, who have to figure out how to be in at least two places at once. Maybe for the next Market Watch I’ll check out all those rumors of clones.
 
Jeff Harbaugh has spent 20 years finding solutions for companies managing transitions, the last 10 in action sports. Reach him at (206) 232-3138 or at jharbaugh@email.msn.com.
 
 
SIDEBAR
 
Then there’s the Nixon model of trade show management- don’t exhibit at trade shows.   Since people have no expectation of their exhibiting, not exhibiting doesn’t cause various negative rumors. Of course, they are always there and the product (watches) lends itself to being shown while walking the floor. And even though they don’t have a booth, they have a major presence by being associated with the most important piece of paper at the show- the party schedule.

 

 

Swell Raises $2 Million

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Almost as soon as my article on surf industry internet models was finished, Swell shut down its Crossrocket site and then, on May 3rd, announced it had raised $2 million in bridge financing. I hate it when that happens.

Rather than just throw up a press release that created more questions than it answered (see it below) Surf Biz asked me to track down new Swell Chairman and CEO Bob Allison and ask him what was up. It required a fairly impressive game of phone tag, but we manage to connect. Hopefully you’ll agree that the additional information was worth the wait.
 
The headline on the press release was about a $2 million bridge, so the first question was “Bridge to what?”
 
The $2 million is a loan convertible to equity. Mr. Allison confirmed that Swell had burned through most of the capital it had raised (most recently, $8 million raised last October). The $2 million “gives the investors time to evaluate how to move forward with the appropriate plan,” said Mr. Allison. He indicated that investors had committed to invest an additional $5 million in Swell consistent with the company demonstrating to them a viable business plan and revenue model.
 
So the additional $5 million is “committed” but not in the bank. It’s hardly surprising to learn that investors won’t throw money at a company until they understand the business model. 
 
The money raised towards the end of last October lasted six months or a little longer. That’s a burn rate of something like $1.3 million per month. Obviously, Swell has moved to reduce that. Part of that is the moving of the Swell media business to Huntington Beach, which Mr. Allison confirmed.
 
Swell’s actions in containing costs are consistent with what other surviving dot coms have had to do and, in any event, just make good business sense. But of course, no matter how much you reduce costs, you also have to grow revenue to demonstrate a viable business.
 
That business, according to Mr. Allison, will focus around the catalogue and ecommerce business. Brick and mortar may still be in the picture, but only in the longer term. Since launch, Swell had generated more than $1.5 million in revenue in spite of having essentially missed the Christmas season. $400,000 of that was in the last month, so it appears that revenue growth is accelerating. Their four catalogues have had a combined circulation of 1.6 million, and Swell has shipped more than 25,000 orders.
 
Still, they clearly have to grow revenue, reduce expenses and raise more money for the business model to succeed. The alternative is to make a deal.
 
Like with Surfing, for example.
 
Mr. Allison pointed out that Primedia, the owner of Surfing, had been an investor in Swell since its inception. He said that the two companies see significant potential synergies between what Swell is doing on line and what Surfing is doing off line. He acknowledged that there were discussions ongoing, but that no deal had been reached as of this time (May 11th). He expects a conclusion to those discussions in the next couple of weeks.