Recession? You’re Kidding- Right? Please?

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The NASDAQ stock market rocketed towards heaven for several years. Its decline has been equally spectacular. Four trillion dollars of value have been wiped out in a year. It’s matched its worst fall ever in percentage terms, but it’s done it in half the time. Should we be surprised? No. The statistical concept of “regression to the mean” is working like it always works. Things do tend to even out. What goes up must come down. If it sounds too good to be true, it usually is.

 
You get the idea. 
 
Now, after an unprecedented economic expansion, we’re facing, or we’re already in, a recession. Pundits are hoping for a soft landing. I’m hoping for one.
 
The skateboard market has taken off like the stock market or the economy of the 90s. Someday it will soften. A little? Or will we be facing regression to the mean? If (maybe when?) we are, what should skate retailers be doing?
 
The Word at the Retailer
 
The first thing I did was to call at random half a dozen skate shops in various parts of the country. I’d introduce myself and get the shop manager or owner on the phone. When I ask if the economic slowdown was having any impact on skateboarding sales, the responses ranged from a long pause to hysterical laughter in the background. I think I was lucky they didn’t want to offend anybody from Transworld.
 
Without exception, the response was some variation on, “What recession? You’re kidding, right?” One San Diego shop talked about sales being the same. Everybody else talked about them being up.
 
Carolyn Zuzworsky, the owner of CD Skate shop in New York, said it was “so crazy we’ve had to hire extra people.” NC Skate in North Carolina has been open three years. Manager Trey Womble indicates sales had grown every month. With a skate park opening two blocks away, he anticipates that will continue.
 
Tim and Stephanie Pogue, at Faction in Seattle, see nothing but strength in the skateboard market.
 
Reggae Destin at Push Skateboarding and Culture in Illinois told me there was a “surge of new little kids coming out of nowhere.” His only problem is the lousy Chicago weather. That would be a problem for me too.
 
Lots of happy, happy, joy, joy going around. Margins on decks are still lousy, but expensive shoes are flying out the door and a lot of kids somehow have money (nobody knows exactly where they get it) for new decks as often as every couple of weeks.
 
See paragraph one under “If it sounds too good to be true….” I am reminded that it was March of 2000 when a major brokerage house finally recommended internet stocks they had heretofore pronounced as too expensive. That was the top. Sort of like going to the last ASR show and seeing the Savier shoe brand.   
 
Still, things are great in the skateboard market at retail, and there are no clouds on the horizon. Everybody is making lots of money.
 
So stop reading. Obviously, there’s nothing to worry about. But if you don’t mind, I’m going to finish this article anyway. What I want to suggest is that there are some things you can do that are not only good for your business now, but will serve you well if someday, impossible as it seems now, things aren’t quite so good.
 
Don’t Kid Yourself
 
Everybody looks like a hero when cash flow is good. Customers are coming in without much marketing expense. Inventory is flying off the shelf. There’s less price sensitivity. Skate parks are popping up like mushrooms.
 
Made a couple of bad inventory choices lately? Got one more kid working on the floor than you probably really need? Haven’t bothered to update your web site regularly- or don’t have one? Haven’t bought new racks to replace those old beat up ones? What the hell- the lighting in the store is so bad nobody can see the racks anyway.
 
But it really doesn’t seem to matter. You’re a hero of retailing because the kids, with their parent’s money clutched firmly in their fists, keep coming in. Cash flow makes a few things you could be doing better seem unimportant. It covers up deficiencies.
 
But this is precisely the time when you should attack these issues – for three reasons.
 
First, right now you can afford to. There’s a little extra money in the till. Second, profitability will improve right now if you manage expenses like you would if times weren’t so good and good merchandising can increase your sales even further. Finally, and most importantly, you’ll be positioning yourself for when times aren’t so good. Let me explain.
 
Someday, (Next month? Next year? Next decade?) because skateboarding won’t be so hot, or because there will be less money floating around, or just because there are too many places to buy skateboards, customers will be harder to come by. They’ll still come of course, but not as often and they won’t spend as much. Why will they come to your store?
 
Maybe it will because you put in those new racks and improved the lighting. Or because you send them occasional emails on what’s new in the store. Perhaps you’re a habit for them- your shop has consistently offered them the merchandise they want and expect to see. You’re part of their lifestyle. Maybe they’ve got a personal relationship with you, or with one of the sales people (assuming you keep sales people long enough for a relationship to form).
 
However you did it, you’ve created an image of your shop in your core customer’s mind. There’s a more durable relationship there, and that relationship can survive when times aren’t so good. Your customer knows what you stand for and why they shop there. Make sure you’re building that relationship now.
 
 
Don’t Just Sell
 
Brands often get screwed up because they expand their distribution too far, too fast. Shops can get screwed up if they become willing to sell anything to anybody.
 
In both cases, the customer gets confused. He loses his motivation to buy that brand or go to that shop. Right now, you don’t even notice the impact. You’ve got a skateboarding feeding frenzy.
 
I’m not suggesting you shouldn’t be responsive to what the customer is asking for. I’m not saying its bad to grow sales. But growth of sales alone shouldn’t be your exclusive focus and only measure of success- because right now anybody can grow skateboarding sales.
 
Focus also on gross margin and select products and brands at least partly on the margin you can earn. Control expenses. Paying attention to just those two things will serve you well now and if the day comes when sales aren’t so easy to come by. 
 
Never lose sight of who your customers are and why they buy from you. Try writing that down and hanging it over your desk. Look at it every day. Make your purchasing decisions through that filter.   
 
If you find you can’t easily write that down, or if when you have written it you know in your heart of hearts it’s bullshit, or it’s three pages long, you have a problem.   
 
This will especially be an issue with new shops who have only known the good times and have never had to figure this out. If your shop has been in business more than a couple of years, you may have had the good fortune to have to succeed when skateboarding wasn’t going off. If so, this little exercise I’ve suggested shouldn’t be a big deal to you.
 
If anybody wants to email me their statements of whom their customers are and why they buy from you, I’d be glad to comment on them. If I get a bunch of them it might be the basis of an article for SkateBiz, though of course I wouldn’t identify the shops.
 
Good Business
 
The challenge, then, is to make hay while the sun shines (whatever that means exactly) but to do it in such a way that you’re ready for a cloudy day. It’s a bit of a balancing act. To some extent it goes against human nature because I’m suggesting that selling everything you can isn’t necessarily the right thing to do if you take the slightly longer view. Nor is it the only thing to focus on. I’m also asking you to recognize and react to your opportunities to do things better when there’s no pressure to do so. That’s the easiest time to do it. But I’ve learned that it’s also the time when any of us are least likely to do it. I never worry about marketing my consulting business when I’m busy with lots of consulting.
 
I think we’re about to enter a bit of an economic downturn. I don’t know how severe it will be, or how much skateboarding will be affected. The good news is that the things I’m suggesting you do to position yourself for it are good business in any economic environment.
 
What would your business look like if sales were down five to twenty percent, and margins were two percentage points lower? How would you react? What can you do to make sure it’s somebody else’s sales and margins that fall? Think about it now. Run your shop well now.

 

 

After the Gold Rush; The Internet’s Role in the Surf Industry, One Year Later

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Just about a year ago, I asked here in Surf Biz what it took to make money on the internet in the surf business. I said that if you were exclusively an etailer, and had to be both a merchant and journalist, it cost a lot of money just to operate, and you had the added expense of building a brand. I saw no financial advantage, and perhaps a disadvantage. Existing brands and retailers already had existing infrastructure and/or brand recognition. They would figure out how to use the internet to their advantage and it would become just another distribution channel, to be used or not depending on their strategy. Ultimately, they would realize that they were in control.

 
Internet e-commerce stocks were in the tank when I wrote that first article last May and things have been basically downhill since then. The Nasdaq has experienced a percentage decline that’s as bad as its worst decline ever, but it’s done it in half the time. There must be a bottom here somewhere.
 
Still moving forward with internet strategies in the surf industry are Becker, Swell, and Hub360. Becker, the four (about to be five) store Southern California surf retailer, is building its internet business based on a strong brand name and existing retail business. The retail business came first.
 
Swell is the leading (maybe the last?) combination etailer and content provider in the surf industry. It also owns and runs the Monster Skate and Cross Rocket web sites. It’s highly successful Surf Line, established in 1985 and purchased by Swell, is the genesis of the business.
 
Hub360, which has yet to launch its site, is positioning itself as a service provider to suppliers and retailers- a place where retailers and suppliers can place orders, check status, and see what’s in inventory.   Essentially, it sees itself as being able to make it easier and cheaper for suppliers to accomplish certain logistical activities and administrative activities that are important to do right, but don’t necessarily represent critical competences.
 
Three different business models. Three different ways to use the internet to build a successful company. Let’s look at each and see what we can learn, how the models might relate, and what the potential opportunities and sticky points are.
 
Becker
 
This is kind of the easiest one to talk about, because they aren’t an internet business, though they do business on the internet. They are a 20 year old, successful, core surf retailer with four (going on five) shops in Southern California.
 
And that brings us quickly to the first generalization we can make about successful internet businesses- in surf or anywhere else. There’s no such thing as a successful internet business- there are just successful businesses that can competitively provide a product or service to a defined customer base that happen to use the internet. The internet is not the source of their competitive advantage and is not their key differentiator, though it facilitates (or maybe makes possible) the delivery of their product or service.
 
Becker’s competitive advantage, according to CEO Dave Hollander, comes from the fact that they are a family of people and employees that sells the cool California culture without bastardizing it. To maintain what he sees as this key competitive advantage, they have intentionally limited their growth to preserve the company’s culture and market position.
 
Their internet site (www.beckersurf.com) first went up three and a half years ago. That’s practically back in the late Bronze Age in internet years. The brand was already credible when the internet presence was established. They didn’t have to begin with no brand recognition and spend lots and lots of time and money creating it. They didn’t have to work very hard to convince brands to allow their product on Becker’s web site due to the trust that long relationship brings. There are no discounted prices on the internet and never anything for sale, Hollander says. Some items end up selling for more than they sell for at a store.
 
They already own the inventory, and buy no inventory for the internet that they wouldn’t be buying for the stores anyway. “Well, no kidding,” I said the first time Dave told me that. But as we talked a little more, the significance hit me.
 
Dave (and, I imagine, any surf retailer who’s been in business twenty years) knows what will sell in his stores and what will not. That’s what he orders. On the internet, it’s a different story. He never knows what’s going to sell well, and where he’ll be shipping it. “The challenge of inventory management if you don’t have retail stores is overwhelming on the net,” states Hollander.
 
If you’re an internet only retailer, how do you choose and manage your inventory? If you never know who your customer is going to be or where they live, how do you order for them? If inventory selection is a crapshoot, what margin can you really expect to earn after discounting the stuff that doesn’t move? How will that discounting affect the perception of your site and brand?
 
A brick and mortar store gets its customers locally, and can learn about purchase patterns. The only thing Dave knows for sure about his internet purchasing patterns is that those U.S. accounts that are shipping to Indonesia always represent credit card fraud, and he won’t ship to them. Becker’s biggest internet problem is, in fact, credit card fraud, estimated to be ten to fifteen percent of orders received though, happily, not of orders shipped.
 
So here’s internet model number one- as an extension of an existing retail brand. With existing brand recognition and the infrastructure and inventory already in place, it’s an efficient, lower risk and cost strategy.
 
In most industries, we’re seeing existing brick and mortar retailers figure the internet out, using the same advantages Becker is using to make it work for them as an extension of their already successful brands.
 
Swell
 
Rumors about Swell being bought, running out of money, or going out of business are as common as fleas on a stray dog. Passing those rumors around seems like an industry obsession. But Swell is still here when most other internet companies aren’t and certainly at least some of the rumors are the result of the overall abysmal performance of the internet sector.
 
In response to all the rumors, Swell CEO Doug Palladini puts it this way: “Swell is not in imminent danger of running out of money. Funding was obtained consistent with a financial model showing profitability by the end of 2001
He didn’t seem inclined to answer questions like, “How much money do you have in the bank?” and “How much are you spending each month?” Well, I tried.
 
Enough of the fun stuff. Let’s get on to the business model.
 
The Swell internet site launched last October. According to Palladini, the business model, since its earliest presentation, wasn’t just about etailing- it always included the concept of brick and mortar retail. He isn’t prepared to be specific about how that will be accomplished or what the timing might be. Other revenue sources include advertising, catalogue sales (the second issue is out), and content syndication.
 
Although this is about surf, it’s a bit hard to talk about the Swell model without reminding everybody that the company includes the Monsterskate and Crossrocket sites for skate and snow boarding respectively. According to the Corporate Overview on the Swell website (www.swell.com), “Swell, Crossrocket and Monsterskate will be the definitive sources, regardless of medium, in the sports and cultures of surfing, snowboarding and skateboarding. Delivering rich content – news, information and entertainment – with extensive community applications and a robust etailing enterprises, Swell, Crossrocket and Monsterskate bring together action sports’ premier editorial talent to produce content of unparalleled quality and depth aimed at the core of each market, yet will appeal to the broader lifestyle audience as well.”
 
That’s a lofty goal. And expensive to achieve. Given the expense, how do you make money at it? Check out below the matrix of Swell’s existing or planned business opportunities.
 
Revenue
Source
                        Market>                                  Surf                Skate             Snow
                                                            Core/Lifestyle   Core/Lifestyle   Core/Lifestyle   
Etailing
Catalog
Retail Stores
Content Syndication
Surf Line
Advertising
 
Surf line only applies to surf obviously. The other revenue sources are potentially valid across the three markets. And they want to address both the core and the lifestyle markets as well. Five revenue sources times three markets is fifteen. Add Surf Line in the surf market. That’s sixteen. If you choose to look at core and lifestyle as related but distinct markets, that’s thirty-two possible market segments.
 
Not all these segments are really distinctive of course. There’s significant crossover and, Swell hopes, (oh god, here comes that word) synergies.
 
Here we are, I think, at internet business generalization number two. Few if any companies selling only to consumers will make it strictly by etailing. The internet is a tool- not a competitive advantage. Existing brick and mortar retailers have it all over etailers, especially if you’re selling fashion, and the brands control product supply.
 
Swell’s first challenge it to build its brand name. Or maybe three brand names, since they seem intent on doing the same with their skate and snow sites.
 
Its next challenge is to get customers. They are going to have to take them from somebody else, unless they believe that what they are doing creates new customers.
 
Time for internet business generalization number three. The internet does not create new customers. Okay, I know there was some kid in Northfield, Minnesota who stumbled on an etailer when he was checking out porn sites and bought something, but that doesn’t amount to a hill of beans, and I believe he probably would have bought it anyway at a traditional retailer.
 
Getting customers requires that Swell do etail as well or better than other etailers. I think they are doing surf content better than anybody, so I guess they might have a leg up there if you believe that people who come to look at content turn into etail customers. They have to do brick and mortar retail at least as well as existing retailers. They have to do catalog at least as well as existing cataloguers.
 
The third challenge is to get all this done. Somebody who’s in a position to know told me that opening a new surf shop requires between $180,000 and $225,000 in inventory plus $100,000 to $250,000 in up front expense. Just to pick the number in the middle, let’s say a total of $375,000 per store. They will have the same brick and mortar retail expense structure as any other brick and mortar retailer. They will have the same catalogue expense structure as any other catalogue retailer. They will have the same etail expense structure as any other etailer. And producing the killer content they have, which I agree is critical to their strategy, ain’t cheap.
 
To quote what I said a year ago, “Chaching! Chaching! Chachaching!”
 
Their final challenge is to make one and one equal three, or at least more than two. They are creating a brand and all these retail channels for the consumer (the same consumer everybody else has/wants) to choose from. Swell has to represent such a ubiquitous buying opportunity that the consumer who normally buys one hundred dollars of stuff buys more than that one hundred dollars. How much more? Don’t know. If that doesn’t happen, they are creating convenience for the consumer for sure but they’ve got a bigger expense structure that has to survive off the same dollar in sales.
 
But fundamentally, I like their “brand centric” concept. So do a number of important surf industry brands including Reef, Quiksilver, Billabong, Oakley and OP who have year long, not inexpensive, commitments to Swell. If they can get big enough fast enough, and create enough brand legitimacy, their different business pieces and revenue sources can feed off each other more than justifying the expense structure.
 
The idea is almost “Amazonian” in conception and I hope the market is large enough to support it. I wish Swell was doing this two years ago, when a recession didn’t seem imminent and money was easier to come by.
 
Hub360
 
When Hub’s business becomes active in the second quarter of the year Hub, as a business to business site, will allow retailers to browse catalogues on line, check inventory, place and track orders, access order history, and use online forecasting tools. Suppliers will be able to track retailer status. Hub President Dan McInerny describes it as a B2B marketplace for the action sports industry.
 
“It will bring together manufacturers, retailers, sales agents and industry organizations into one standard platform that allows them to better communicate, collaborate and conduct business,” he says.
 
Hubs customers will be the suppliers. There will be no charge for retailers to access the various supplier spaces once approved by the supplier. Hub will make its money the same way as somebody who runs a trade show. A company can have as big a presence on the web site as they want, and they will be charged accordingly.
 
Dan stresses that this is a service business that happens to do business on the internet. He’s helping suppliers by outsourcing certain tasks they have to perform, but that don’t represent critical competences to them. He believes Hub can do them better and cheaper.
 
Some suppliers seem to agree. Dan says he has letters of intent from over a dozen of the biggest companies in the industry representing apparel, footwear, optics, wetsuits and accessories. Their focus will be on surf and skate, because that’s the industry they know.   He hopes that once the concept has proven itself, they can license the idea and their proprietary software for use in other industries by people who know those industries.
 
Obviously, the suppliers won’t care if the retailers don’t come. Hub has signed letters from fifty top retailers saying they will use the site, giving the suppliers some assurance that the cash they pay Hub won’t be wasted. Dan indicated that Hub360 expects to be profitable in its first year if nothing happens except that the twelve suppliers sign on the dotted line.
 
Most suppliers may not have the time, energy, focus and/or money to develop their own site that can do everything the Hub site will do. The benefit to the retailer is that they won’t have to learn a different system and functionality for each supplier.
 
Of course, all the suppliers are already doing (well or not so well) what Hub will do for them. For better or worse, they have the systems and resources in place. Resistance to change can be a powerful force, and I’ll be interested to watch how retailers and suppliers adopt Hub’s system. Because the suppliers will still have to physically handle the product (that’s where much of the cost lies in the activities Hub will facilitate) I can imagine that the benefit from working with Hub will be from providing better customer service and having more accurate, timely information, rather than from overall cost reductions achieved.
 
At the end of the day will it work? The concept seems to make sense, but it’s a hell of a lot easier to evaluate an operating business model than it is a concept that has yet to see the light of day.
 
What’s New?
 
Well, I note that the internet stocks have gotten worse since I started writing this and several more companies have gone out of business. I guess I’m not inclined to change any of the conclusions I reached a year ago. Neither Becker, Swell, nor Hub360 are internet companies- they are just companies who use the internet. Their success depends, has always depended, and will continue to depend, on their ability to give their customers what they want- not on the internet.

 

 

Sell!? Maybe It’s Time to Think About It

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Here we all are, back from ASR and boy are we excited. More brands, more excitement, hype, orders, deals, three page ads in Skate Biz. People can’t get enough of skateboarding There’s nowhere for business to go but up, and it’s got to be even better next year.

 
Unless, of course, it’s not.
 
As a business owner, you have (or you ought to have) some goals that go beyond running your business every day. They may include spending more time with your family, buying an island in the Caribbean, working less hours, diversifying your financial position, or just getting off the damn personal guarantee for the bank loan. Clearly, these aren’t all financial goals, but they have a big financial component to them. Someday, it’s going to be time to sell your business, though it may not be now. If you were to decide that this was the time, when, why and how do you do it?
 
It was August 1996 when I wrote a column for Snowboarding Business on selling your company. Given how long it takes to sell a company, and the timing of the snowboard industry consolidation, I was probably about a year late writing it. As I write this article, I have a high level of confidence that nobody (but me) has an issue of SnowBiz from August 1996 lying around, so I figure I can plagiarize the hell out of that article.
 
A Cautionary Tale of Success
 
Doug Griffith left K2 in the early 90s to start American Snowboard Manufacturing (ASC). Len Hall joined him a little later. ASC grew and prospered. Scott came and offered to buy the company. For a bunch of money. They were going to make snowboards and be cool and would need their own factory.
 
But Doug and Len hesitated. “If it’s worth this much money now,” they thought, “How much more will it be worth after another year of growth?”
 
Doug and Len had been around a while and knew something about business cycles. They knew enough to realize that their crystal ball was just the slightest bit cloudy. One of them, and I don’t know which one, had the acumen and perspective to step away from the euphoria of running a profitable, exciting, fast growing business and say, “Well, the truth is I’m not exactly certain how long this ride is going to last.”
 
They sold.   They took the money and ran. Skedaddled. Laughed all the way to the bank. Now, I’m sure they had a little seller’s remorse initially as they worried about how much money they might have left on the negotiating table. But their remorse no doubt went away as the snowboard industry went into the depths of consolidation hell. Scott stopped producing boards for the US. They sold the factory to A Sport. I have no idea if it’s still operating.
 
Their timing of the sale was prescient. If they could buy and sell stocks like that, they’d own the world. If they hadn’t sold when they did, they would probably have had some hard times before they sold the place for not much, or just had to close it down. There are a lot of people who are (or were) in the snowboard business who weren’t as insightful/lucky as Doug and Len. They either got a lot less money (or just got debt assumed) or they went out of business with nothing to show for a lot of hard work, except maybe some creditors chasing them around.
 
I’m not claiming that skateboarding is like snowboarding and is going to go through the same cycle. Nor am I saying that everybody who owns a skateboard, or skateboard related business, should try and sell now. What am I saying?
 
  • Business cycles happen.   Someday, skateboarding won’t be as hot as it is now and your company, even if it’s exactly the same, will be harder to sell and worth less.
  • Getting a business ready to sell, and selling it, takes time. Want to have a deal done in a year and get the best deal you can? Start now. Anybody can sell a good company fast if they are willing to sell it cheap.
  • Figure out what you want to do and what you are trying to accomplish. Then decide if and when you should explore selling. It’s true that you can just wait for a buyer to show up. But you won’t be in control of the process and probably won’t get the best deal.
  • Business is a risk. Money in your pocket today is worth more than money in your pocket tomorrow. That’s why we have interest rates, a measure of time and risk. Given that time and risk, and the difference between what you can sell for today compared to tomorrow, it might not make sense to wait. Especially if you expect valuations to decline. That is, a company might be worth more today than tomorrow even if tomorrow’s company was bigger and more profitable.
  • Supply and demand matters. If times should get hard, there will be lots of sellers and fewer buyers. If you sell, you want to do it when you’re the only one for sale.
 
If you’re going to sell your business, let’s make sure you do it right and for the right reasons. You can maximize your chances of success, and minimize wasted time, by focusing on what I call the five “Gets.” Get real, get a goal, get ready, get agreement, get help. 
 
Get Real
 
It’s as predictable as the sun coming up in the morning. The owner believes in his business so much that his perception of what it is worth to a buyer is, in my experience, almost always out of line. A sophisticated buyer won’t ignore your projections, but he will discount them. He will recognize the growth potential of your business, but balance that with a realistic assessment of the competition. He will want to know very specifically why you have been or will be successful. He will base his offer to you on the potential return he objectively thinks he can earn compared with other investment opportunities he has. He will value your business in ways that are standard for valuing companies in this or similar industries.
 
He will recognize that your growth depends on increasing working capital investment in the business and that he, not you, is the one who is going to have to take that risk. He will admit that there are some synergies in combining the two companies, but will believe (probably correctly) that his organization will be more responsible for achieving them than yours. Accordingly, he will be reluctant to pay you for them. He will understand that the business is dependent on you and perhaps a few key managers, and will be concerned with your motivation once the deal is closed. So if you expect to receive the value you perceive in your business you should expect to do it in an earn out.
 
He will look closely at your historical financial statements. They will frequently be the single most important (though not the only) factor in determining the price he is willing to offer and no amount of explaining, rationalizing, projecting or shucking and jiving will change that.
 
So, to begin, make a realistic estimate of the value of your company. There are many ways to value a company. None of them give a right or wrong answer. But when you are done you will have a reasonable range of value for your company. You may also want to value it under different scenarios. For example, your company may be worth more as part of a larger organization because your sales will no longer have to support, on a stand-alone basis, all the overhead expense you currently have.   Value it, in other words, as the potential buyer would to get insight into his thought process.
 
This knowledge is a powerful negotiating tool. Make sure you have it.
 
Get A Goal
 
What do you want to accomplish by selling (besides get money)? What do you want to sell; assets or equity? How do you want to get paid? Will you take stock? Cash at closing only? Is an earn out acceptable? What will be your role be in the business after the deal closes? For how long? How hard do you want to work following the sale? What is the minimum price you will accept? 
 
There is no way to know if an offer is a good one or a bad one unless you know what you are trying to accomplish by selling the business. You always want the other side to put the first offer on the table, but you never want them to be able to control the negotiating process because you haven’t thought long and hard about what a good offer looks like.
 
The converse is that you must also know when to walk away. If you are desperate for a deal, you’ll get a bad one.
 
Get Ready
 
From the time the first contact with a serious purchaser begin, it you can generally expect it to take six months or longer to close a deal. But preparations may begin literally years earlier, when the owner concludes that her best long-term strategy is a sale of the business.
 
Try and increase awareness of your company among potential buyers. You can do this, for example, by being active in the appropriate professional associations. Get articles about your company published in trade journals.
 
Have systems that prepare consistent, accurate financial statements and information that can be easily verified or audited. It’s a critical element in determining a purchase price and an important indication that you are a competent business person the buyer can rely on to operate the acquired business.
 
Clean up your balance sheet. Get rid of old inventory and write off uncollectable receivables. It’s never a good idea to fool yourself about the value of assets, and you won’t fool a potential buyer. But by not making these adjustments you may find your own competence and credibility questioned during the acquisition process. “What other surprises are hidden here?” wonders the potential buyer.
 
Have a current business plan that validates your strategy. Make sure the warehouse is brightly lit and painted. If there’s any tax issues, litigation or disputes with employees out there, settle them.
 
You can’t put your best foot forward if it’s stuck in the mud.
 
Get Agreement
 
This may seem a little obvious, but it’s a good idea if all the shareholders agree with the decision to sell the business and have a common understanding of what constitutes an acceptable deal. Legally, it’s possible to sell a business with the approval of less than 100% of the ownership. But in a private company, with only a few shareholders, it can be difficult. A buyer may be concerned about litigation by a minority shareholder. If a dissenting shareholder is expected to continue to work for the acquired company, an uncomfortable operating situation can result.
 
While you can’t please all of the people all of the time, it’s usually a good idea to try and get acceptance (enthusiasm would be nice) from other key stakeholders. These may include customers, suppliers and key employees. They will all be asking “How is this going to affect my relationship with this company?” and you need to have an honest and accurate answer.
 
Get Help
 
Sale of a company demands an accelerating time commitment from the owner. My experience is that as the deal gains momentum, you can either manage your business or work on the deal. There’s often not enough hours in the day to do both well.
 
Let’s look at a typical scenario. You’re selling the business you built. It’s your baby. You’re proud of it, and are far from objective. To make it more interesting, you’re entering into a process with which you have little or no experience. And this deal is potentially the most important and lucrative transaction you have ever entered into.
 
Let’s say that on the other side of the table is the representative of a larger company. He’s been through this before and knows what to expect. At the end of the day, whether or not there’s a deal, he gets paid the same and goes on to work on the next deal. He’s completely dispassionate and may not have any stake in the outcome.
 
Somewhere in the course of the negotiations he looks at you and says, “I assume you’re willing to warrant that there are no outstanding disputes with any federal, state or local tax authorities except as disclosed in appendix A of the agreement?”
 
Now, a good response, assuming it’s true, is something like “I’m willing to warrant it to the best of my knowledge,” but if you’ve never done this before, you might not know that. Happily, you’ve got an attorney sitting by your side to handle those kinds of issues.
 
But if he’s the attorney who drafted your will, helps you collect from delinquent creditors, or kept you out of jail after the IRS audit, he may be waiting for you to speak up. Your attorney must be experienced in representing sellers of business.
 
Right now, there are some skateboard industry companies that are a lot more valuable today than they will be in a year or two. I don’t know who they are, or whether their decline in value will be due to industry changes, competitive pressures, or operational mistakes. But right now, I’m not aware of a single successful skateboard, or skateboard related, company that is for sale. One that was might command a lot of attention and an attractive price. I’m not saying, “sell” but I do suggest you think about it. If you decide this is the right time, make sure you do it right. You may only get one chance.

 

 

Everybody Needs a Balance Sheet; Notes from the Conference Retailer Panel

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It’s not that this group of retailers, speaking at the Transworld Industry Conference in Banff, was wrong in the comments they made about how suppliers work with them. God knows I wouldn’t want to be a snowboard retailer and, in the words of one participant, it may indeed be a good year if you manage to pay your bills and spend 100 days on the hill.

 Among the things retailers said they needed were better margins, more thoughtful distribution from suppliers, support for stores that hold prices longer, discretion in managing warranties, better communications, and complete orders shipped on time. Judging from the comments after the session ended, had it been a supplier panel, the suppliers would have spent the whole session complaining about not getting paid on time.
 
“Nobody’s right, when everybody’s wrong,” somebody sang a long time ago. In this case, everybody’s right, but it doesn’t seem to matter. I asked the first question when the session ended: “Is there anything the suppliers are doing right?” I didn’t get any specific, positive answers.
 
Why can’t we all just get along? Suppliers should get paid on time, and retailers should get complete orders on the dates requested. It would be good for everybody and for the industry. It would even be good for the consumer. Here’s why I think it’s so hard to make it happen and a few things you might be able to do to improve the situation.
 
It’s the Balance Sheet
 
It isn’t any secret that this hasn’t been an easy industry to make money in whether you’re a manufacturer, brand, or retailer. The result is a lot of weak balance sheets. Without getting into the gory details, that makes it hard to cash flow your way through a season. From the manufacturer, to the brand, to the retailer, almost everybody needs somebody to finance them. And the cheapest source of working capital is almost always your supplier, no matter where you are on the food chain.
 
If your balance sheet is weak, finding that financing can be tough, or at least expensive. Often, it’s both. I have one client who, because of his weak balance sheet, had financing costs that were nearly ten percent of sales. That’s a huge number in most businesses. It’s especially big when margins aren’t that good to start with, all your business has to be done in four months, and marketing costs are high. The way you finance your business can and does make the difference between a profit and a loss. No wonder everybody tries to get the other guy to pay for it.
 
The bad news is that it’s sort of a zero sum game- what one side gets, the other side loses. No wonder the retailer panel had an “us against them” feel to it and was so focused on complaints by both retailers and, after the presentations, suppliers.
 
What can we do? I’ve got no magic wand for weak balance sheets or seasonality. But I do think there are a few things we might do to at least improve understanding between suppliers and retailers and maybe make things work a little smoother.
 
Warranties
 
Are a pain in the ass for everybody, but I doubt they are going to go away. We tend to spend a lot of time negotiating what is and what is not a warranty, and how it should be managed. Retailers want total discretion, authority, and support from the supplier in managing them. Suppliers aren’t quite sure they can trust the retailers to deny an unjustifiable claim from a good customer if they know the supplier will back them up and replace the product.
 
How about if suppliers and retailers negotiate a warranty allowance equal to some small percentage of sales? It’s the retailer’s to use as they see fit, with the caveat that they have to return the warrantied product, or maybe just review it with the rep in the store, so the supplier can see it’s being put to good use. The bad news is that it would be a direct cost known at the beginning of the season. The good news is that if it worked right the warranty process would be reduced to an accounting entry, hopefully eliminating a good part of the hassle that goes with handling warranties. That may not be direct, visible cost like a warranty credit, but it shows up in employee time, phone calls and inventory management.
 
What percentage should it be? What if you, as a supplier, proposed just a bit less than what you already know it costs you to handle warranties every year anyway? Try it with just a few key accounts to start with.
 
Invoice Due Dates
 
Everybody wants to be paid early and to pay late. Me too. I have no suggestions for changing human nature, but I do think there’s a need for clarification. When I sat in the supplier’s chair, I always thought (hoped?) that if an invoice was “due” for payment January 15th, that was when I should have the money. Silly me. I have the feeling many retailers act as though that’s the date when they need to begin to consider paying the invoice.
 
What if you offered accounts an extra one percent discount the following season if all their payments were received by the due date? What if, with your largest accounts at least, you actually discussed what the “due date” meant and agreed on the day you’d have the money, not arbitrarily setting the due date as 120 days from invoice date, but on a date, perhaps a bit more or less than 120 days, when payment seemed to be possible and make sense.
 
Okay, okay, I know no agreement means anything if the retailer doesn’t have the money to pay and the supplier can’t afford another one percent discount. It’s that balance sheet thing again. Still, it couldn’t hurt to have similar expectations as to what a due date is.
 
Communications
 
With email and the internet, there’s probably no excuse for retailers and suppliers not to know what the other knows about inventory availability, shipping, and order status. Even if the message is, “We don’t know,” which is the case more often than you would think. With as much high quality, similar product as is out there, communication should be a source of competitive advantage for companies who do it well.
 
Retailers and suppliers can improve communication by walking a mile in each other’s shoes. A retailer might invite managers from key suppliers for a discussion about managing open to buy. Lay out a scenario where shipments come in incomplete and either later or early than what was specified. How would they merchandise with an incomplete shipment? When would they cancel and order another brand, if it’s available? What do you do when the supplier can’t tell you when it will be there?
 
Suppliers might request retailer’s insight into working with factories. Want the best prices? Let’s reduce the breadth of product lines and let the factory make the longest possible production runs. Oh, but you also want complete mixes in four different shipments in lots of new colors? Well, then the factory has to stop and start production so that we have some of all sizes and shapes of boots, boards, bindings, or outerwear to send you. There go the lower prices from efficient production. Unless we have them make it all really early and ship it to us. But there’s that balance sheet thing again. Who’s going to finance that inventory while it’s sitting around?
 
Our bank only loans us forty percent of the value of inventory, but they’ll finance seventy-five percent of current receivables, so we’d really like to ship it all to you retailers right now.
 
Distribution
 
The retailer, of course, wants an exclusive territory extending 300 miles in all directions and doesn’t want anybody who discounts before Easter opened. The supplier wants to open everybody his major competitors are in and see his existing dealers increase their orders significantly every year. Retailers looking for any kind of geographic exclusivity probably need to work with smaller brands. Option, for example, has built dealer relationships that involve a certain level of exclusivity. They have decided that full price sell through and higher margins for themselves and their dealers is more important than the highest possible growth rate. At the other extreme, Burton has the market position, and advertising and promotion programs to be aggressive with distribution.
 
There will always be a distribution conflict between suppliers and retailers. My suggestion is that both focus not just on sales, but on gross margin dollars earned, as a way of measuring the success of their relationship with the other.
 
I hope that at the retailer panel at next year’s Industry Conference, the discussion can focus on what we can do better to work together, not just on what’s wrong. I also hope there’s some good snow.

 

 

I Think I See a Plan. News From the Ski Industry Summit

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Okay, what was I doing at the Ski Industry Summit (formerly known as Ski Week) and why am I writing about it for Snow Biz?

Anybody got a problem with some early season turns in Vail when there’s hardly anybody here? Didn’t think so. Also, there was an open bar each night.
 
But aside from the obvious hedonistic reasons to show, the winter resort business has to do some things differently. Baby boomers are showing up less as they get older, and kids and younger people, overall, are either doing something besides coming to winter resorts or trying it, not liking it, and not coming back. The retention rates for beginners basically suck. If as an industry (and I mean the winter sports industry, not just the winter resort industry) nothing happens and demographic trends and retention/conversion rates continue on their present source, the National Ski Areas Association (NSAA) projects that total visits to resorts will drop 27.2% from 52.2 million to 38 million in 15 years. 
 
Forget the ski versus snowboarding, them versus us, “they don’t get it” stuff. If present trends continue, there will be fewer resorts around, less money to spend on half pipes, terrain parks, new lifts, and developing new runs. Snowboard hard goods and apparel sales will drop. So it’s not just their problem. We are part of the winter sports business and snowboarding’s success is related to the resorts’ success. As far as I know, nobody has figured out a way to snowboard without a mountain.
 
The Ski Industry Summit got three hundred people together to talk about this issue from December 3rd through 6th. This is hardly a new issue, but there was a sense of urgency and an attempt to focus on specifics that was positive, refreshing and to some extent overdue. People were interested in specifics.
 
In the same study that suggested what might happen if we do nothing, NSAA showed that if the industry can increase the number of beginners by 6% each year (subject to some statistical limits that keep growth rates from getting ridiculous) and boost the conversion rate of those beginners by 1% a year, we can have 69 million visitor days annually by 2015.
 
There was general agreement on the need for action, at least among the attendees. Obviously, this kind of conference is self-selecting for people who already recognize that need. And there also seemed to be a consensus that concentrating on getting more people on the slopes and working to make them stay was an appropriate focus.
 
Formally and informally, people had different ideas about exactly what should be done by whom and what the opportunities and obstacles to success might be. There wasn’t an overall program presented. Still, from the studies I’ve seen from SIA and NSAA, the comments made at the conference, and my own experience working with companies that had to change, there was an implicit program that came out of the discussion. Recognizing that I don’t know much about running a mountain resort, here’s what I think I heard the elements of such a program might be.
 
Every Mountain is Different
 
There are 300 or so people out there who use to own snowboard brands who would have killed for the competitive differences that exist among winter resorts. Each is unique, and can utilize its uniqueness in attracting and retaining customers. But how is it unique? Step one is to find out. I don’t mean from anecdotal evidence, informal surveys, or perceptions from 15 years ago. An ongoing program of carefully structured, unbiased, thoughtful market research is required.   I know it costs money, is a pain in the ass, and leaves you with more questions than you had when you started. But you still have to have that the information.
 
Marketing Schizophrenia
 
Male or female? Skier or snowboarder or neither? Day tripper or destination visitor? Young or older? Rich, or not so rich? Real estate buyer? As an industry, it seems hard for the resorts to know where to focus its marketing efforts, although, of course, individual resorts may and often do have a clearer focus. But it’s never as easy in the skateboard business, where north of 90% of the customers are male and between the ages of eight and seventeen. What can resorts do to get that kind of focus?
 
Teaching and Retention: The Customer Experience
 
My perception, reinforced at the summit, is that the winter resort industry generally agrees that the battle has to be won by getting beginners to the slopes and motivating them to come back and by attracting back lapsed participants. There’s no need to market to core participants. They show up no matter what.   What has to happen so that the others show up?
 
They have to have a good experience. Short lines. Rental boots that fit. No confusion about where to go. Warm and dry. Access to bathrooms. Minimal caught edges during lessons. There are, no doubt, 100 others I haven’t mentioned or don’t know about. What’s the magic of this? Rich or not so rich, male or female, skier or snowboarder, young or old, the visitor to a winter resort wants this kind of good experience. They want to have fun. There shouldn’t be a penalty that can border on a fraternity hazing to become or remain a snow slider.
 
Magically, this is a big step in managing the winter resort’s Marketing Schizophrenia. The confusion caused by the apparently irresolvable market segmentation problems and the conflicting demands of each segment is suddenly dramatically diminished. It may not be as conceptually simple as being in the skateboard business, but suddenly a resort can say, “All our customers want this!”
 
Ultimately, customers always get what they want- from somebody. How shall we give it to them?
 
Management Commitment
 
It starts at the top, and there’s never been a truer cliché. Well, maybe one. I’ll get to it in a minute. If you run or own a winter resort (or any other business for that matter) and you think that your future success, and maybe your survival, depends on doing some things differently, you better be leading the charge. If you don’t- if you aren’t involved and seen to be committed every day- the organization won’t change. The customers will get what they want somewhere else.
 
Andy Clurman, President of The Skiing Company, suggested that each resort should appoint a Director of Learning and Retention, or some such title. Great idea. I’d add that the new Director should report directly to the General Manager or President of the resort and have instant access to them.
 
Nuts and Bolts
 
ASC reported at the Summit that the conversion rate for beginners who participated in their new Learn To Ski program was 30%. That program emerged from a complete reevaluation and restructuring of every detail of their teaching program and from measuring the results. It had nothing to do with running ads or showing people jumping off cliffs or selling the latest and coolest technology. It required changing the compensation structure. It meant a two-day seminar where instructors were turned, initially kicking and screaming it sounds like, into sales people. It meant new facilities and processes. No detail of the teaching and conversion process was left unexamined.
 
Opportunities- Not Problems
 
ASC Chairman Les Otten, addressing the Summit, said, “We don’t have a problem- we have an opportunity.” That’s the even truer cliché I mentioned earlier.
 
I think perhaps part of the audience did take it as a bit of a cliché. I didn’t get a chance to ask Mr. Otten, but here’s what I think he meant.
 
When a company needs to change, it resists. Of all the company’s I’ve worked with, I can’t think of one where that wasn’t the case. Inevitably, in addressing the issue, they try to do what’s worked in the past to fix the problem. “More of the same,” no matter how rigorously applied, doesn’t usually work. It also grinds you down. Pretty soon, if all you do is deal with problems you can’t solve, life sucks. It’s depressing, demoralizing, and no fun. There’s no way to succeed. And the worse it gets, the harder it gets to change. You trap yourself in an endless downward spiral.
 
Unless you’ve got an opportunity. In which case, you can create a positive environment, move forward, have fun, give credit, do good things and celebrate a little bit. And by the way you may have accidentally taken a step towards solving that problem that just wouldn’t go away. Pretty soon, you don’t have to “step outside of your box” to use another cliché. You’ve created a new, bigger and more comfortable box to be in.
 
Mr. Otten and the ASC management team saw an opportunity. It just so happens that it helps solve a problem.
 
Finance and Factories
 
General Motors hates it when the production line slows down or stops. They don’t want to repaint fenders. They can’t stand sending back parts. It drives them nuts when a poorly trained employee connects a wire wrong. They moan with every warranty claim.
 
Because every one of these things costs them money.
 
People aren’t cars. Still, the process by which a resort moves a beginner, or any customer for that matter, through the process of getting to the resort, getting equipment, learning, getting on the hill, and committing to come back is a bit of a production line. And people yell louder then cars on an assembly line when you connect their wires wrong. Every customer who’s boots don’t fit, who can’t find where the lesson starts on time, who gets wet and cold in the middle of the lesson, costs you money due to the disruption of the process. Not to mention potentially a future customer.
 
I love it when the marketing and the financial strategy seem to dovetail. I’ve discovered that usually an indication that a strategy makes sense. The operationally oriented approach that the Summit suggested is required to attract and retain snow sliders seems to make financial sense. Not only because of the medium and longer-term impact on visitor days, but because it requires an efficient (i.e., customer friendly) operation that saves you money right now. I also wonder how it might impact your spending on advertising and promotion over the longer run. I note from SIA data that 87% of visitors to winter resorts have internet access. If you’ve better identified your customer, have made it easier for them to come and have fun and have their email address, perhaps some of your other marketing expenses can be reassessed.
 
I don’t want to underestimate the financial implications of some of the ideas presented at the Summit. It costs money to undertake some of these initiatives and cash flow is a hard thing in all parts of the winter sports industry. Still, I can probably guarantee that resorts that don’t start now will have a harder time starting later.
 
What can retailers and suppliers do? You share some responsibility for making sure people know how much fun we have on the mountain. If you can equip them right, and the resorts can make sure they have a positive experience, maybe we will be looking at 69 million visitors in 15 years.

 

 

Benefiting from Recent Industry Initiatives; It’s Up to Each of You

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By now, you should all have seen SIA’s study “Growing the Snow Sports Industry” and NSAA’s growth model for the resort business. They don’t claim that any industry initiative by a trade association is the salvation of the winter sports industry’s issues of participation and profitability. They say, if not exactly this way, “It’s up to each of you.”

From the 20,000 foot level, where the oxygen is thin, here’s what they said, how you can use their work, (whether you’re a brand, a retailer, or a resort) and why it’s such a hard thing to do well.
Industry Initiatives
SIA commissioned Growing the Snow Sports Industry: Marketing Analysis and Strategy for Breaking Down the Barriers. NSAA created a growth model for the snow resort industry based at least in part the conclusions of the SIA study, which you should also make sure you see.
SIA and NSAA did not position their studies as “industry initiatives.” They didn’t make any claims that their programs offered industry wide solutions. They acknowledged that previous industry initiatives hadn’t worked, or hadn’t had the funding and support to be implemented consistently over a long enough time frame.
They said, and this is the most important thing they said, here are some facts and ideas-It’s all up to you. We can’t fix the industry’s problems, but we hope we can give you some guidance and support as you do it.   They are exactly right.
I think that industry initiatives only work, or appear to work, when you don’t need them. When there is lots of growth, lots of money and less competitive pressure, everything seems to be working. In fact what’s going on is that consumer demand and cash flow can cover up a lot of shortcomings in a company’s strategic position.    When that changes, focus often becomes internal and understandably a bit more selfish. Support for industry initiatives, both in terms of time and money, is harder to come by.
In any event, in a consolidating or mature industry there is no rising tide to lift all boats. It’s up to each company to find their market position and respond to the particular needs of their carefully identified customers. The individual companies in addressing their particular circumstances can almost certainly put the resources that might be committed to an industry initiative to better use. That’s just business- in any industry.
What They Said
NSAA proposed focusing on two things; getting a 6% annual increase in beginners and increasing the conversion rate of beginners from 15 to 25 percent with the goal of increasing skier [their word] visits from 52 million to 67.2 million by in 2015. In their words, “The success of this formula for growth…lies not in any national campaign, but rather in the dedicated efforts of individual area operators consistently implementing achievable trial and conversion goals that make sense for their resorts.”
They go on to say that, “…this was developed with input parameters that reflect the national environment. At the regional level and at the level of the individual resort, the underlying dynamics of the Model change and, therefore, the specific goals also change…The great strength of NSAA’s approach toward growing the industry over the next 15 years is that it encourages individual self-gain and entrepreneurial spirit to achieve collective benefits” (Quoted from the September 2000 issue of SAM magazine, page 10. NSAA’s Model for Growth: What It Is, and What It Is Not. By Nolan Rosall, RRC Associates and Michael Berry, President, National Ski Areas Association).
Good strategy is the process of defining where you are, envisioning where you want to be and when, and filling in the time in between with appropriate tactics.   That’s what NSAA is suggesting to each of its individual members.
The SIA study recommends that each member company take steps appropriate to its specific circumstances and opportunities. Like NSAA, the SIA study is meant to support its members, not kick off any national campaign.
It starts by stating that “We must:”
  • Develop a unified understanding of the marketing problems and opportunities
  • Identify the market segments that hold the greatest “acceleration potential”
  • Focus our marketing resources on those productive audience segments
  • Apply those resources in an integrated, efficient manner
All true. For any business in any industry any time and I wouldn’t expect anybody to be even slightly surprised by that. The devil, as usual, is in the details.
They went on to “explode the industry myths that bind us to the obsolete remedies of the past.” Simplified, the five myths are:
  • That participants aspire to be “extreme.” They don’t. They are in it for the wholesome, lifestyle activities.
  • That the dominant barrier to increased participation is increased cost. It’s more complex than that and involves time, quality of experience and proficiency.
  • That we have a big opportunity with underserved populations who have never been on the hill. Maybe not. They have to be lured to the slopes, sold on winter vacations and cold weather activities, and convinced to adopt an activity their peers don’t participate in.
  • There’s a single advertising message that will work for the whole industry. There isn’t. The consumer base is too diverse.
  • That awareness of various “make it easier” technologies like shaped skis and of the technology’s benefits are high. Nope. Most are unaware of its existence or benefits.
After that we’ve got six key findings.
  • There is a strong relationship between proficiency, enthusiasm, participation and sales.
  • The industry is bleeding new triers and participants of low proficiency.
  • The biggest opportunity is in reactivating lapsed participants and upgrading light and moderate users.
  • New technology can produce marketing leverage.
  • Children can be a barrier or a motivator to increased participation.
  • Introducing consumers to skiing/boarding young and keeping their loyalty can have an exponential impact on revenue.
Based on this, they suggested a “new” approach to the market that included:
·         Looking at snow market as the sum of many segments- not as a mass market.
·         Communicating the brand snow sports in terms relevant to each of these customer segments.
·         Allocating marketing resources based on the potential value of each segment.
They go on to suggest more specific strategies and tactics for retailers, suppliers and resorts.
I’m sure most of us recognize that this “new” approach is old. It represents a pretty traditional market strategy that is new to winter sports only because it was, historically, unnecessary for success or, more recently, resisted. Why is that?
Déjà vu All Over Again
It doesn’t matter what industry we talk about. In periods of difficult transitions, all companies tend to react the same way. Specifically,
·         They do what they perceive to be in their own (short term?) best interest. They don’t ask, “How can we help the industry?” when they are dealing with gut renching issues of change and survival.
·         They resist change and tend to do “more of the same.” Change is uncomfortable and most of us dislike stepping out of our comfort zones.
·         They have a hard time just recognizing the new environment they are operating in and frequently don’t until they are slapped upside the head.
·         They focus on tactics that are responsive to short term pressures rather than identifying and reacting to critical strategic issues.
·         Typically, an outside change agent (the bank, big customers, a consultant or new CEO) is required to motivate the change process.
Before I’d ever heard of a snowboard, I’d worked with companies in banking, pharmaceuticals, light manufacturing and retail where this was the case. I can assure you it’s true in snowboarding and in all of winter sports as well.
Many of the people making skis and running resorts have been doing what they do for a long time. There’s a tremendous amount of inertia and continuity in the industry. With such long histories, established relationships, and common perceptions firmly entrenched in a comfort zone, it can be difficult to make the kinds of changes the industry required.
Those of us who got into action sports through snowboarding have the same issues, though perhaps not to such an extreme if only because we haven’t been involved as long. Like skiing in another era, snowboarding could rely in its early years on the enthusiasm of its youthful participants to overcome issues of expense, poor facilities, lousy equipment and inconvenience. If, as an industry, we didn’t handle our consolidation as well as we might have, we can plead that it happened too quickly to react to, and we’d be partly right.
Now, we’re getting older (which is fine given the alternative). Larger corporations, most of who are also in the ski business, dominate snowboarding. The snowboard, ski and resort industries increasingly have common issues, interests, and relationships.
What You Can Do
One of those common interests is making money, which has been a hard thing to do for a lot of organizations. I know we’re also interested in the lifestyle, and the product, and the experience, and supporting the sport, but if there isn’t enough money made, we won’t be here to do that. Everybody reading this knows somebody who’s committed to snowboarding, use to be in the business, and isn’t anymore as a result of financial issues.
SIA and NSAA have now provided their members with a justification and a framework, rigorously validated through actual data, for changing the way they do business in response to new competitive conditions. But they can’t (and have learned they can only get in trouble if they try to) do it for you.
That’s all they can do. A basic blue print is in your hands.   Adapt it for your organization and go and do it. You can’t “fix” the industry anymore than SIA and NSAA can. But you can sure take a shot at fixing your piece of it. Bottom line? Marketing, and customer identification and segmentation, not discounted season passes, longer terms for retailers, and discounting at retail that starts in November are the answer if we have the patience and longer-term perspective to do it consistently. Step out of your comfort zone.

 

 

Tulips

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I walked out of ASR feeling positive about skateboarding and its market and will discuss why below. Still, when things look too good to be true, it’s been my experience that they usually are and I’m as susceptible to the hype as the next person. Let’s start, then, with this cautionary tale from Edward Chancellor book “Devil Take the Hindmost- A History of Financial Speculation.” 

 
Tulip Mania
 
“Conditions in the Dutch Republic in the 1630s were propitious for an outburst of speculative euphoria. It was a period of rising commercial optimism, owing partly to the final extinction of the Spanish military threat and partly to the booming Dutch textile trade, which profited from the turmoil in Central Europe at the beginning of the Thirty Years’ War. The Amsterdam bourse [stock market] had moved into a new building in 1631. The East India Company was profitably developing its settlement in Batavia and its shares rose faster than at any time during the century. House prices were also climbing sharply, producing a boom in the construction of suburban mansions. The Dutch Republic lost some of its Calvinist austerity as its people, who enjoyed the highest incomes in Europe, became a nation of consumers. In the tulip, they found an object which enabled them to mix their love of display with the avid pursuit of wealth.”
 
Tulip bulbs were classified according to the flower colors. They were given military titles that reflected their position in the bulb hierarchy. Unknown at the time, tulip colors and patterns are affected by a virus that attacks the bulb. You never knew what pattern or colors might result. This led itself to a speculation that was essentially gambling. 
 
In late 1636 and early 1637, at the height of the market, no actual deliveries of tulip bulbs took place. A tulip futures market known at the windhandel (the wind trade- say no more) appeared. At the peak, the combination of the windhandel and paper credit “created a perfect symmetry of insubstantiality: Most transactions were for tulip bulbs that could never be delivered because they didn’t exist and were paid for with credit notes that could never be honored because the money wasn’t there.”
 
Average annual wages in Holland were from 200 to 400 guilders. A small town house cost 300 guilders. Bulbs at the top of the tulip hierarchy sold for thousands of guilders. There were examples of prices for a pound of bulbs going from the equivalent of one month’s pay to five year’s in a week.
 
On February 3, 1637, the market crashed. There were no more buyers, and existing contracts were rejected. Perhaps it had something to do with the fact that spring was coming, and most of the bulbs promised for delivery didn’t exist. The litigation dragged on until the following year, when it was decreed by the government that contracts could be settled for 3.5% of their value.
 
We Are Not in the Tulip Business- Not Exactly
 
I’m not claiming that tulips are like skateboards and skate shoes. People are delivering real products in return for real money. Obviously, there are more differences among skate decks and shoes than just color, though I can’t think of many right off the top of my head. Oh yeah- who the team riders are. See, there’s a difference.
 
Nobody will ever pay a year’s wages for a pair of skate shoes, though it seemed like some prices were tending to go up at the show in spite of the fact that sixty companies were offering footwear (not all skate shoes) up from forty-two at the last show. Eighty-two companies were selling what was classified as “Skateboard Hard goods.”
 
And nobody is going to sell to somebody for future delivery that they think can’t pay, though the use of terms to retailers appears to be growing.
 
This seemed like the busiest ASR I’ve been to in years, and the most business like. Lots of order writing going on. People with things to do- not just hanging around. It was, in a word, purposeful.
 
That’s one of the things that makes me optimistic. I remember the 1995-96 Snow Industries America Trade shows in Las Vegas, where snowboarding ruled and would never die. But that show had the feeling of people energized by hope and expecting to find the deal that would save them. Snowboarding’s imminent consolidation was a big shared secret, and nobody wanted to tell Emperor Snowboard to go and get some clothes on.
 
This ASR was about doing business, not looking for a deal to save your butt. Most of the time when the people in booths told me the show was going great, I believed them. This was a show where just moving through the aisles was a challenge if you were in a hurry.
 
Where at the last ASR, all the shoe brand offerings looked the same, this time I saw some visual differences among brands that offered the possibility of their establishing distinct personalities- call it different signature looks. Easy to copy, of course.
 
This isn’t to say that there isn’t going to be a period of consolidation in the skateboard industry at some point in time. There are too many companies selling trying to sell “me too” products. If you don’t have an established brand name or a product that can be seriously differentiated, this is the wrong time to offer a new brand in the skateboard industry.
 
But here we are with a seriously strong economy, very favorable demographics, woodshops unable to meet demand, skate parks popping up like mushrooms, skate styles influencing shoes and clothing in a way that has expanded the market to a whole lot of non skating people, and skateboarding being exposed to and accepted by a much larger group of people than ever before. What can go wrong?
 
Sector Rotation
 
In the stock market, they call it sector rotation. The industry groups that lead the market change. Not too long ago, it was the internet stocks.   A year or so ago, the health maintenance organization stocks were dead last. Now they are among the leading sectors. The issue is never if a sector is going to crash, or leap to the top. It’s when- and how long it stays down- or up.
 
Action sports is powerful right now for a variety of reasons we all know. It’s a strong market and seems likely to stay that way. But what sectors will lead it?
 
Inline skates had their day. So did snowboarding. So did surf. So did ski. Now it’s skate. For how long? Normally, I’d say until all the companies are making quality, nearly identical products and the basis of competition has been reduced to price and marketing, the consumer figures that out and the hype gets massive. But we’re already there. And it’s possible that by next ASR I’ll be hoping nobody remembers that I wrote an article suggesting that skateboarding might have some legs.
 
Skateboarding has broken out. It’s becoming legitimate without losing too much of its edge. Compared to most other sports (with apologies to those who object to that word) it’s cheap and convenient to participate in. The related shoes and clothing can be and are worn by nonparticipants unlike, for example, snowboard boots. The hard goods companies continue to support, promote, and maintain the core of skateboarding even though this may prevent them from participating in the growth of the larger market.
 
Somehow, skateboarding has made a meta-change. It has repositioned itself and become legitimate to a much larger market without letting itself be changed too much. I wish we could claim it had been an active act on the part of the industry; a strategy we chose to implement.
 
But it wasn’t. We were lucky, or maybe deserving after a long period in the wilderness. If any single event was indicative of this change (I hesitate to say responsible for, though I’m tempted) it was the changing of the liability laws that unleashed the skateboard park building boom. So if you aren’t a member of IASC, join now if only to say thanks to Jim.
 
Strategies
 
Retailers have already figured it out. Their hearts may be in skate, but when it’s some other action sport the customer is asking for, they will be offering the goods related to that sport. Much of their sales are higher margin shoes and apparel to non-participants. The clothing manufacturers, by and large, aren’t tied to a single activity/sport. Their customers are the action sports crowd- participants or not- who are tied into the lifestyle, music and attitude. The shoe brands are actively expanding their product lines to include footwear in addition to core skate shoes.
 
The skate hard goods brands have a tougher road to follow. Their focus is on the core of skateboarding, and that focus has a lot of responsibility for skateboarding’s continued strength. Yet even in this record year, I suspect (can’t prove it) that a large hard goods manufacturer is doing, say, $25 million in sales. Compare that to the sales and growth of clothing companies. Even the leading skate shoe companies are several times that size.
 
To really take advantage of market conditions, skate hard goods brands need to figure out how to move beyond their traditional market. But it may be that their movement beyond the core hard goods market if it occurs, will signal a market top in skateboarding. That’s a bit of a conundrum.
 
Schizophrenia
 
Is skateboarding going to crash or continue? Obviously, I feel strongly both ways. I think we’ve got a bit of a run ahead of us, but being bigger and having an established brand is going to be critical for success. Right now, fast growth and cash flow can paper over a whole host of competitive shortcomings. And no industry is immune from business cycles.

 

 

“I Don’t Think We’re In Kansas Anymore, Dorothy.” Skate Retailers in the Lifestyle Market

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Let me start by telling you, in no particular order, some things you already know.

 
1)            Margins on hard goods suck, but carrying them draws customers in and legitimizes you as a skate retailer.
2)            Truth be known, hard goods from different brands are pretty much the same. You may have some brand loyalties, but you’ll buy what your customers wants. 
3)            You make most of your money in higher margin footwear, apparel and accessories.
4)            You’re a “lifestyle” business. Most of you don’t sell just to skaters, but to people who want to be part of the culture.
5)            Your hard goods go beyond skate. Maybe you also sell snowboards, maybe some other stuff.
6)            A lot of your soft goods aren’t skate specific. They come from brands that are focused on the actions sports lifestyle- not just on skateboarding.
7)            With so many brands (hard and soft goods) and so little real product differentiation, price, terms, service and support from the brand plays a larger role in your product selection.
 
First, the usual caveat. Not all of the items on the list apply equally to all shops and obviously where they do apply, they apply to different degrees.
 
Look at each item on the list again and think about how each was different a few years ago. How has your customer base changed? Margins? What was the importance of footwear compared to now?
 
They say a frog will jump out of a pot of boiling water, but will boil to death if you put him in cool water and raise the temperature gradually.   All these changes have happened gradually. Sitting here, writing this, I’m struck with just how dramatic the changes are for retailers. Looks like I’ve got something good to write about this month after all. What a relief! I was kind of worried when I started this.
 
As we’re all smarter than the average frog, we should have noticed the changing temperature and clambered out of the pot before the water temperature climbed past that of a comfortable hot tub. Still, it’s been my experience that when you’ve got a business to run, the seemingly easiest thing to do is see if you can stand a couple of more degrees.
 
Let’s look at the implications of these “things we all know” and see how running a shop may have changed as a result.
 
Margins and Profitability
 
My educated guess is that soft goods and apparel account for north of 60% of sales in many shops, and a lot more of the total gross profit. You cannot succeed financially if you try and rely on hard goods sales for your turnover. It’s not possible to sell enough to have adequate gross margin dollars to pay the bills.  
 
Points one and three from the list suggest some obvious changes that have largely already occurred in response to the financial facts of life. Carry the hard goods you have to carry, but leave the most space, and the best space, you can for the higher margin footwear and apparel. Maybe it makes sense to use hard goods in displays to establish the credibility of the store. What I’ve seen happen is that thoughtful stores tend to put the decks and other hard goods towards the back of the store, making customers move through the apparel and footwear on their way to them. I don’t know this statistically, but my expectation is that skate decks are a planned, purposeful purchase. Soft good purchases can be more spontaneous. If that’s the case, then the location of hard goods isn’t a consideration in people getting to them and buying them. Might as well use that location to encourage other purchases.
 
Customer Base
 
The message from points four and six is that your customer base is probably larger and broader, and you can appeal to a much bigger group of people. I am not suggesting you can be all things to all people. You still have to know who your customer is and is not. But the days when all your customers are core skaters are gone for many shops. And if you do it right, having new customers won’t alienate the old ones.
 
In some ways, of course, life was easier when the definition of the customer of a skate shop was most likely to be somebody who skated. Appealing to a broader customer group while maintaining the edginess and legitimacy that made you successful in the first place isn’t an easy thing to do. I’ve got two suggestions.
 
First, if there’s one piece of market research you should be doing, it’s to ask each customer (when it isn’t obvious one way or another) if they skate. If you were willing to go one step further, you could mark your copy of their receipt (when they purchase something) with the answer to the question. Based on a few simple calculations involving adding up sales and calculating gross margins, you could make a good start on learning where you’re earning your money, and how your customer base has or is changing.
 
Second, in your product selection and merchandising, move towards the mainstream cautiously. But move. That’s where skating is going and seems likely to keep going. Whether we like it or not.
 
Well, it’s always great to sit here and be able to spew forth some fatuous blather like “move towards the mainstream cautiously,” sound like I know what I’m talking about and then move on. Let me try and say a few useful things on just what that means.
 
It means that the process of selecting the brands you carry, and how deep you go with each, is more complicated. You aren’t going to carry all the shoe, apparel, deck, truck and wheel brands there are. Nobody has a store that big.   It’s complicated because there are more to choose from and you have to select brands that appeal to a broader customer base, but maintain your credentials as a skate shop.
 
It means, if you want to take advantage of the broader market, that you may need more square feet, or at least creative ways to display more product.
 
It means changing your product planning and purchasing habits. Decks, trucks, and wheels can typically be gotten pretty quickly. Skate shoes and apparel have an order/production/delivery cycle that’s a lot longer. You either have to take an inventory risk, or accept the chance that you may run out, not be able to get more, and lose sales.
 
It means recognizing, like it says in point two in the list, that there are few meaningful differences among products of equal quality- either soft or hard goods- and that the differences are mostly created by advertising and promotion (teams are just one method of promotion). This has tremendous implications for how you select and work with brands.
 
Brand Selection
 
These days, most brands produce quality products. The differences the consumer perceives are largely marketing driven. If, as I’ve suggested, your customers are more mainstream and more diverse, your product offering has to be too. But you are limited in the number of brands you can carry in each product line and in the number of sizes and styles you can carry of each brand. At the end of the day, like buying stocks in the stock market, you’re going to have made some good choices and some bad ones.
 
To carry the stock market analogy one step further, there’s really no effective way for you to evaluate all possible brand purchases and combinations of purchases for your store and to select “the best.” While you can, by careful study and based on past history, make selections that are more likely to be successful, there are no guarantees. As in the stock market, you want to purchase quality brands for your shop at good prices. Most of your portfolio, as a stock market investor or a buyer in a skate shop, should be in known, quality companies.
 
New brands, like the stocks of Internet companies, aren’t likely to make you rich any longer. You are better off with a portfolio of consistent, if not spectacular winners which, if they won’t make you rich overnight, won’t leave you in debtor’s prison either.
 
These are the brands your more mainstream customers are going to want anyway. They are the ones who can afford the ongoing advertising and promotion to differentiate themselves. As a group, they are the brands the customers usually ask for and, with a few obvious exceptions, if you didn’t or couldn’t carry one of them your shop could probably get by with another.
 
The result, as it says in the list, is that pricing, terms and service move up the list in importance as you consider which brands to carry.   
 
Next Step
 
By necessity, I’ve had to discuss these issues in general terms. To bring the discussion around to your specific situation, begin with the seven items listed at the beginning of the article. Maybe add one you think I’ve missed and throw one out if you don’t think it applies to you.
 
Next to each point, write down the situation as it existed with regards to that particular issue, say, three years ago in your shop. Where have the biggest changes happened for you? How, specifically, have you modified the way you do business in response? Where is it obvious you need to change and haven’t?
 
We all know how much retailing has changed. Take a little time and evaluate how you’ve responded to those changes.

 

 

The Dot Com Equation; What Does it Take to Make Money?

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In internet years, it seems like ancient history. But it really wasn’t long ago when it was taken for granted that on line retailing represented a new paradigm in selling to consumers. Maybe it still does- or will. But so far, making money as an online only retailer has proven illusive. How come? How many pairs of surf trunks do you have to move at a “normal” margin before you show a profit?

“It doesn’t matter!” One surf retailing dot com executive was heard to say. “These companies aren’t valued that way.” Of, course that was some weeks ago, and the world has changed. As of May 12th, internet e-commerce stocks, as a group, were rated 197 out of 197 industry groups followed for stock market performance by Investors Business Daily over six months. It wasn’t many months ago that they were among the leaders.   As a group, their stock prices have declined by 48% since January 1st.
 
Mr. Dot Com surf retailing executive, they’re valued that way now.
 
What have people figured out that’s made this happen?
 
Costs
 
It costs a lot of money to develop and maintain a quality web site. Instead of hiring $8.00 an hour sales people, you need $80,000 a year programmers and have a hard time finding them. Caching! You still have to carry inventory and take the associated inventory risk. Caching! You still have to get the product to the customer, and you can’t do that over the internet. Caching! You still have to provide customer service, including handling returns, and sometimes that means actually talking to the customer on the phone. It seems to be necessary, according to the conventional wisdom, to have not only product, but content. In other words, you’re not only an etailer, but also an ejournalist, and that adds some costs as well. Caching!! Caching!! Caching!! Oh, and of course you need to spend some money on marketing to establish your brand. CA-CA-CA-CHING!!
 
Lands End, the mainstream catalogue retailer with a great web site and killer customer service, earned $48 million on sales of $1.319 billion for the year ended January 28, 2000. Of course, they spent $190 million on producing, printing and mailing catalogues. But except for that expense, how is a dot.com retailer’s cost structure different from Land’s End? It isn’t.
 
Lands End internet based revenue totaled $138 million during the year, or 10.5% of total revenue. To put it bluntly, if they didn’t mail those catalogues, they wouldn’t have a viable business. Of course, Lands End isn’t exactly known as being cool, cutting edge, and appealing to the younger generation. Still, they’d have to do an awful lot of internet business before they could stop mailing those catalogues.
 
How much? Well, I guess more than $1.639 billion. That’s how much Amazon sold in the year ended December 31, 1999 and they lost $720 million for the year. It’s interesting to note that Amazon’s gross profit margin was only 18%. Lands End, cool or not, had a gross profit margin of 45%. That’s pretty cool to me. If Amazon had Lands End’s gross profit margin, they would still have lost a couple of hundred million, however.
 
Part of the difference in gross margins comes from the fact that Lands End is just better and more experienced in fulfillment and customer service than Amazon. But the biggest difference is that Lands End is selling product it makes itself with its own brand name on it. Amazon is selling stuff it buys from other brands. Lands End has cut out the middleman. Amazon is the middleman.
 
It looks like there’s more to making money in e-commerce than a cool website and building a community. The devil, as they say, (and the expense) is in the details. 
 
Competition
 
Quiksilver had $444 million in revenue for the fiscal year ended October 31, 1999. If, just to pick a number, Quik has 25% of the surf soft goods market, then we’re looking at an industry, at wholesale, that’s something less than $2 billion, though growing. If you’re a dot com in the surf industry, with the expense structure described above, how much business do you have to do before you can turn a profit? Where are the customers going to come from?
 
It doesn’t seem to me that the etailer is creating any new customers just by being an etailer. He’s fighting over existing customers, in an over retailed environment where he can only succeed largely by taking customers from competitors, of which there are a whole lot. And he’s trying to do it selling products that are probably differentiated from his competitors largely by marketing using a brand name that isn’t as well known.
 
Before the days of the internet, what percentage of total soft goods sales did catalogue companies do? If dot coms get that percentage of the surf industry soft goods market, can they make money? Are there any specific advantages conferred by the internet that will increase that percentage? I don’t know the answers to these questions, but that’s what I’d be asking if I was considering an investment in a dot com.
 
One statistic I saw a few years ago, which may or may not be relevant, was that catalogue and telephone sales of skis had never exceeded 5% of total sales in a given year.   Just for fun, let’s hypothesize that because of the cool factor, or their content, or technology, surf etailers can optimistically get twenty percent of total sales, or something less than $400 million. How many companies can that support? Given the implied size of those companies and their growth prospects, can they expect to attract adequate capital? PacSun and Quiksilver have both experienced some softness in their stock prices due to concerns about their ability to continue to grow quickly. They are both established companies that make money.
 
My personal opinion is that etailers of surf soft goods won’t even approach 20% of the total market. They may not get over five. But even if they can get to 20%, how does the financial model make sense to investors looking for fast growth, big returns, and a public offering?
 
Another competitive issue for dot coms is that established brands will ultimately figure out how to reconcile selling their product on line with supporting their brick and mortar retailers. Dot coms competing with retailers who already know how to handle customer service and fulfillment, have their infrastructure in place, and aren’t all that far behind in web development. Once the internet frenzy wears off, as it seems to be doing, I expect brands to recognize that it’s their product, they are in control and an etailer is just another retailer they may choose to sell too. Or not.
 
Community
 
The etailers’ answer, I expect, would resolve around “community.”   It has become the rallying cry for internet retailers who see creating a community as the focal point of their strategy for getting eyeballs and, hopefully, customers. It’s a good strategy. In all non-internet businesses, it’s called marketing- the process of identifying your customers and building a relationship with them.
 
On the internet, the concept of community implies it’s not adequate to look at the dot com’s revenue model just from the point of view of product sales. There are opportunities to generate revenue through advertisement, sale of content and information, and strategic alliances. How do you create these other sources of revenue? How much revenue can they generate? I don’t know. Neither does anybody else, though there are lots of theories.
 
Some of those theories will prove to be the correct ones, and those etailers may prosper. 
 
And So…….
 
At the end of the day, I wonder if the whole retail world, in the surf industry and in most other industries, won’t just be a fluid amalgamation of brick and mortar and on line. Whatever the successful model is, it’s going to change dramatically as broadband finds its way into more homes.
 
My bottom line on surf industry dot coms is that unless a lot of revenue comes from sources other than product sales, it’s hard to see a viable financial model. I suspect the inevitable result is that the need for sales volume will drive most of them to compete in the broader action sports market along the lines of Earthsports.com or FogDog.com. 

 

 

The Retailer’s Dilemma; Are There Any Snowboard Shops Left?

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Use to be that I’d scurry home from Vegas in March with my extra backpack full of snowboard dealer packages and, like a kid at Christmas, throw myself into them to see what was new. It still takes an extra backpack (though a smaller one- fewer brands but a lot more pages per brand). This year, though, there didn’t seem to be any urgency to reviewing them. Not having to make buying decisions, in fact, I didn’t get around to really reading them in detail until, well, actually, it was late June.

I’ve also been thinking lately about what “the snowboard industry” is now and how things have changed for retailers. That thought process, and the realization that it hadn’t mattered that I waited to June to read the new product packages, led me to think about retailer strategies and buying decisions. Retailers, I think, have to make buying decisions differently. And they look at snowboarding as just one piece of their selling strategy. Here’s why.
 
The Snowboard Industry- What Is It?
 
Five or seven years ago, snowboarding lead the way, representing an emerging demographic of young people interested in individual sports. Posers were disdained. If you didn’t snowboard, you shouldn’t have been wearing snowboard clothing. Margins on hard goods were a lot higher, and retailers could build credibility around snowboarding.
 
Today, thank God for posers.   They buy a lot of high margin soft goods, shoes and accessory items. They aren’t even posers anymore. They are just people who want to wear stylish, functional soft goods. We all got to wear something, after all. Retailers carry hard goods because they legitimize them as an action sports lifestyle store. But they’d much rather sell shirts, jackets or jeans that earn them a fifty percent plus margin than a snowboard that earns them a thirty-five.
 
I’m not suggesting that retailers don’t care about hard goods, or that selling them doesn’t make a contribution to a store’s overall success. But retailing is a very tough business, and my hat’s off to those who succeed at it. Selling higher margin items to a bigger potential customer group is a significant chunk of the success equation.
 
And it’s not just true in snowboarding. There’s not a lot of margin in skateboards, wakeboards, or surf boards (or skis or roller blades) either. In all these sports, the brands produce the hard goods and support the teams, advertising, and promotion to legitimize the sport and, maybe more importantly, the lifestyle image with the target audience. But it’s the soft goods players who grow like mad and make a lot of the money because they can sell to a bigger group of consumers.
 
Retailers who are still in business figured out a long time ago that they can’t just sell snowboard product. They’ve got to have cash flow year around because their overhead goes on all year, and they generally don’t have the balance sheets to support a long period of low sales. As larger corporations and the media have grabbed hold of action sports and demographic it represents, the lifestyle has come to be, for better or worse, more of a focus than the sport in the larger population.
 
Surfers skate, skaters snowboard, snowboarders surf. A skate shoe company I know does snow influenced clothing. The commonality isn’t the equipment- it’s the attitude, music, clothing, lifestyle. The equipment is just a tool. It use to be more of a statement. The equipment makers have contributed to this by making lots of quality equipment that’s often hard to tell apart and then endlessly trying to distinguish it by claiming various technical innovations that most of the time aren’t significant. If they are significant, they are drowned out by the promotional noise.
 
If you want to know what’s happened to the snowboard retailers who’ve fought this trend, check out your local court’s bankruptcy filings. But why should they fight it? A shop may have its roots in snowboarding, but here’s its chance to sell higher margin product to a larger customer base year around in more than one sport without the former danger of being seen as “selling out.”
 
Retailers can’t set the general trends- they can only recognize and take advantage of them. Since they are operating in an environment where there are, frankly, more of them than the market can reasonably support, recognizing and taking advantage of trends is a critical thing to do.
 
I hate this, but snowboarding has become a cog in the great corporate, action sports, youth demographic, marketing machine with the result that snowboard retailers have to approach the sport differently. The sport is still distinctive, but what it represents isn’t.
 
Retailer Challenges
 
With this background, I’ll try and put myself in a snowboard retailer’s shoes for a minute. I have the privilege of ordering in March or April something I won’t receive or start selling until late summer or fall, and have only three or so months to sell at full margin. If it doesn’t snow, I could be screwed, but that’s life. The hard goods margins aren’t that great, and I’ve got to work the system for all the discounts, free POPs, and show bonuses I can get. I know all my choices aren’t going to be right, and the probability is very high that after Christmas, or even before, I’ll have to offer some discounts. I feel better than I did a few years ago that the stuff will show up more or less when I want it, but I know there will be some delivery glitches.
 
Where I am right on the product I choose, I may not be able to get any more of the hot selling stuff when I run out in early December. My flexibility in ordering is constrained, to some extent, by brand requirements that I take product in certain proportion, by minimum order requirements, or by the space I have in my store. My ability to grow my order may be reduced by the brand imposed credit limit.
 
Boy, life was almost better when you couldn’t get enough product, it was always late, and the quality was suspect. At least you could count on selling it all at a good margin.
 
Back to the Brochures
 
There you sit, having gone (or not gone) to more trade shows at the worst time of the year than you could possibly have a use for. Before you is a pile of paper two feet high with catalogues, price sheets, credit applications, terms and conditions and order forms. These are just the official snowboard brands. Now what?
 
My recommendation is to always begin with the Mervin catalog. At least you their narrative will keep you grinning as you review their product line. And it might ward off the depression you feel when you see some brands have the ski and snowboard prices in the same place. But shortly reality and inertia set in. Reality is:
 
·         You’ve got to carry the right hard goods mix, but really want to leave as much room as you can for the higher margin soft goods.
·         Your customers are probably a more diverse group, and you may not live and die by snowboarding like you use to.
·         All the major brands offer monster products lines that start, after a few hours of study, to look a little too much like the others. They all cover all the price points, have comparable terms and purchasing programs, and similar advertising and promotional programs.
 
Inertia comes from the fact that you’re already carrying – what? Burton, one or two other major brands, maybe one of the few surviving niche brand where you don’t have too much local competition, and one of the former high flyers that tanked and has been sold to somebody who’s trying to capitalize on any left over brand equity as your el cheapo model? Five brands is about the max I’d say. Merchandising them all well is going to be an effort. Three brands would be better.
 
What’s going to make you change brands? The rep from a brand you don’t carry has pictures of you at that Vegas party you don’t want to see the light of day? Okay, that might do it. A major customer service or delivery snafu? Maybe. Prices and terms are pretty comparable. A lot of kids asking for a brand you don’t carry? Yup, that would do it. Major technological differences among product? In your dreams.
 
The bottom line is that with five or even three brands, you’ve got all your bases covered. If I were a retailer, I’d try to pick brands that helped me sell soft goods, though I admit to not knowing exactly how to do that.
 
Hard goods have become props to support the apparel and shoe sales that I suspect provide more than half the revenue and gross margin a typical store earns. It doesn’t seem to me like successful retailers are in the snowboard business anymore. They’re in the lifestyle, action sports, soft goods business.