The 2010 SIMA Retail Distribution Study

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The first thing to say is thanks to SIMA for making this study happen and to Leisure Trends Group for doing the research. We don’t get access to near enough industry and market data.

As I’m not a member of SIMA, I don’t have access to the complete study. I’m working with the “Media Highlights” package that came out after the press release on the study.     

Two years ago, when the previous study came out, I did the same kind of analysis I’m going to do now. You can see that analysis here.
 
As usual, I’m doing this to try and identify trends and information that will help you run your business better and make you think about important issues. But the Media Highlights weren’t constructed with my needs in mind. SIMA’s goal in producing the highlights is to promote the industry to the broader market and to make it look good. I do not, by the way, fault them for a moment for doing that. It’s part of their job.
 
Anyway, keep that in mind here as we proceed.
 
The Headline Numbers
 
I’m sure most of you all saw these numbers in the press release. The “core channel” sales at retail (all these numbers are at retail) fell 13.5% between 2008 and 2010 from $5.32 billion to $4.6 billion. Sales at skate focused stores were down 11.6% from $2.85 billion to $2.52 billion. At surf focused stores, they fell 15.8% from $2.47 billion to $2.08 billion.
 
Footwear in core channels rose 8.2% to $1.5 billion and represents one third of total sales. Hard goods sales over two years were up 35.3% to $1.46 billion and represent another third. Well, if footwear and hard goods were up, but total core sales fell 13.5%, then apparel must be, well, not specifically too good. Down 41.1% actually to $1.0 billion. Interestingly, men’s/boy’s apparel accounted for 57% of overall apparel sales. Even with the weakness in juniors, that surprised me.
 
So if you’re like me you looked at these numbers and went, “Huh?!” On the face of it the hard goods increase and apparel decline seem just impossible even though it’s over two years. Then there’s the “other” category of sales which fell from $498.8 million to $18.4 million in two years. I hypothesize that there are some changes in classification and what’s included or not included going on here.
 
Core stores do not include military exchanges, company stores, and national department stores. I know what a military exchange and a national department store are. But when it excludes company stores does that mean, for example, that the Billabong store in my local mall is excluded?
 
That’s just what it means and, having discussed it with SIMA, I can see their point of view. If you called a company owned store, SIMA said, and asked them what their best-selling board short was, what might you guess the answer would be? The weighting towards company owned brands in company owned stores, SIMA argues, would skew the data.
 
You can see the difficulty SIMA and Leisure Trends have in decided who to survey or not to survey. The other side of the argument, of course, is that those board shorts sold in a company owned stores are real board shorts sold to real customers. Surveying them might skew the results, but all the brands who have company owned stores are working every day just as hard as they can to do just that.
 
Then there’s the issue of company owned stores that carry brands in addition to those brands owned by the company. What would SIMA do with Billabong owned West 49 and its 125 or so stores if it was a U.S., rather than Canadian, retailer? On the one hand, it carries other brands. On the other hand, Billabong is working to increase the owned brands component of those stores to as high as 60%. Would that skew the sample in such a way that West 49 stores shouldn’t be included in the survey?
 
I don’t know.  I’ve got an opinion, but I don’t know in a definitive way. You don’t know either. Neither do SIMA or Leisure Trends. They make the best decisions they can make given the information they have.
 
Internet and catalog sales contributed 16% of the total, compared to 14% in 2004. 55% of retailers are now selling on the internet. That’s double the 2008 percentage of 24%. I’m surprised it’s only 55%.
 
SIMA also estimates that surf and skate sales in all channels (including company stores, military exchanges and national department stores) fell 13.6% from $7.22 billion to $6.24 billion.
 
There’s a chart on page 5 called “Putting Things into Perspective-Retail Size of Other Sports/Recreational Industries that I didn’t agree with.” It lists that all channel estimate for surf/skate and shows 2010 retail sales for Outdoor (core), including paddle sales at $5.70 billion. Bicycle comes in at $3.2 billion, snow sports at $2.92 billion, scuba at $658 million, snowboard at $481 million and paddle by itself at $360 million. Next to the chart it says the following:
 
“Based on other work completed by Leisure Trends Group, surf/skate is impressively positioned among other retail industries.”
I don’t know what “impressively positioned” means. And I would dispute the idea that an industry’s size is determinate of its competitive positioning against other industries. I wish that could have been stated a little differently.
 
Definitions and Methodology
 
Just what is “core,” we’ve all wondered. In doing the research for this study SIMA says, “The CORE channel includes retail operations that classify themselves as specialty, lifestyle or sporting goods stores. Core stores do not include military exchanges, company stores, and national department stores.”
 
I asked SIMA if surveyed stores really did classify themselves and if that meant that Sports Authority could be “core.” They clarified that sporting goods stores are, in fact, included in the core numbers but couldn’t tell me about specific retailers because of confidentiality reasons. I can understand that. You aren’t likely to get much cooperation if the retailers submitting data don’t think it will be confidential.
During January and February of 2011, Leisure Trends did 446 telephone interviews with surf and skate retailers in the U.S. This sample was taken from a list of retailers reviewed and provided to Leisure Trends by SIMA. “The list of core shops that are surveyed is a list that has been compiled by brands’ accounts.” The brands provided the list.
 
“By being on the list, and qualifying for the study by having at least 10% or higher of their operation’s overall sales coming from surf and/or skate products they are considered within the Core Surf/Skate Channel,” SIMA told me.
 
That 10% bar seems kind of low for me. Especially as that’s for surf and skate combined. I wonder to what extent setting the bar that low expands the size of the total market?
 
I also wonder how they measure which retailer makes it to the 10% bar and what products are included in the calculation. It sounds like the retailers decide if they are 10% skate/surf. If a sporting goods store thinks they sell 10% skate/surf by including boogie boards, beach umbrellas, various brands of apparel, cheap complete skate decks, every swimsuit in the place and sun tan lotion, can they end up classified as being in what SIMA calls the core channel? Okay, kind of an extreme example but you can see my point.
 
SIMA clarified for me that they weren’t trying to define what a “core shop” means by the study and use the word only to define the shops that were surveyed. They suggested that something like “surveyed stores” might be a better term. I think it might be and hope they consider using it in two years.
 
Just to say it again, every study like this one has methodological and statistical challenges to deal with. There are tradeoffs and choices you make as you do your best to collect good data. But my readers know I think the core market is a lot smaller than this study suggests and I suspect many of you agree with me. If so, do me a favor and put a comment to that effect on my web site please.
 
Some Interesting Trends
 
The most interesting thing I found was that chain stores represented 35% of the total list of stores compared to only 9% in 2008.  The report notes that “Independent stores closed many doors in the past two years. Most of these were replaced by specialty chain stores causing a less than expected drop (-1.7%) in total surf and skate doors to 4,826 in 2010.”  That speaks more eloquently than I can to the way the industry is changing; or maybe it’s better to say the way larger brands are evolving out of the core action sports space.
Consistent with this, 81% of all surveyed retailers use a point of sale system, up from 60% in 2008. I conjecture that’s because a lot of the smaller, unsophisticated stores are gone, replaced by chains with good systems. SIMA points to two other trends that are probably driven by the growth of chain stores in their sample.
 
The first is the increase in the average number of store employees from 6.5 to 7.7. I’m guessing this could also reflect some recovery from the depth of the recession.
 
They also note more stores carrying snowboarding, wakeboarding, motocross, BMX and other sporting goods and suggest this is because more chains are in the sample. Probably true.
 
I’ve spent more timing writing and rewriting this than you would believe. It’s kind of old news, I’m working with incomplete data, and while SIMA was as cooperative as they could be, there was just some data they aren’t allowed to give me and questions confidentiality prevented them from answering. Why am I doing it?
 
As usual, because I think there’s a business lesson to learn. You just can’t look at the headline numbers and say, “Oh, this represents how the industry has changed.” 
 
The dramatic changes in certain categories (hard goods up so much, apparel down so much, the “other” category) gives me pause. They are indicative of huge changes in our competitive environment. They reflect vertical integration, the rise of chains, specialty shops going out of business, a broader definition of what our industry is, the use of systems by the survivors (and probably some different classification of product as a result), a lousy economy, and some others as well.   
 
You shouldn’t be depressed because the industry is smaller than it was two years ago. There’s good news for some segments, and for some companies, in there.    At the same time, you shouldn’t be giddy with joy as a hard goods company just because hard goods were reported to be up 35%.
 
What we can learn, as a reader of the press release and even the media highlights or the whole study if you have it available to you, is that you have to be cautious in drawing conclusions from summary data lacking a thorough understanding of how the study (or any study for that matter) was conducted. 

 

 

Dick’s Sporting Goods; Insights into the Development of the Action Sports Retail Environment

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Never thought I’d be looking to Dick’s for that. Dick’s, which has been around since 1948, had revenue of $4.9 billion in 2010 from 525 stores. The 444 Dick’s stores are around 50,000 square feet each though there are some two level ones that go up to 75,000 square feet. The 81 Golf Galaxy stores are between 13,000 and 18,000 square feet. The word action sports isn’t mentioned anywhere in their most recent 10K.

What’s intriguing is their business strategy. It’s intriguing because there’s a lot that would fit right into Zumiez’s annual report. A good independent specialty retailer will tell you that he tries to do a lot of the same things.

Let’s take a look at what Dick’s business strategies are and how they compare to the generally agreed on best practices in our industry. This may tell us something about how our industry is evolving.
 
Dick’s refers to itself as an Authentic Sporting Goods Retailer.
 
“Our history and core foundation is as a retailer of high quality authentic athletic equipment, apparel and footwear, intended to enhance our customers’ performance and enjoyment of athletic pursuits, rather than focusing our merchandise selection on the latest fashion trend or style. We believe our customers seek genuine, deep product offerings, and ultimately this merchandising approach positions us with advantages in the market, which we believe will continue to benefit from new product offerings with enhanced technological features.”
 
The focus on performance and enjoyment rather than fashion is what I’ve argued action sports is really all about, though we got away from it in the good old economy days and thought everybody who carried some hard goods was a “core” retailer. I might be putting words in their mouth, but it sounds like Dick’s thinks you can be “core” for a whole bunch of sports at the same time in 50,000 square feet. Our specialty retailers try to do it with two to maybe five sports. In their most recently completed fiscal year, 54% of Dick’s revenues came from hard goods. 
 
Dick’s second strategy is Competitive Pricing. They specifically do not try to be the price leader but will match competitors’ prices.
 
“We seek to offer value to our customers and develop and maintain a reputation as a provider of value at each price point.”
 
Their sheer size gives them some pricing (and costing) leverage that action sports retailers typically don’t have. No independent specialty shop can compete on price. Dick’s also has the advantage of selling product in nearly two dozen sports and activities, with the result that they can better manage their inventory to respond to seasonality and even out cash flow.
 
Dick’s carries a Broad Assortment of Brand Name Merchandise.  “The breadth of our product selections in each category of sporting goods offers our customers a wide range of price points and enables us to address the needs of sporting goods consumers, from the beginner to the sport enthusiast.”
 
What I particularly like about this is the obvious customer definition. Dick’s thinks it’s the place to go if you’re a participant in any of the sports or activities they support. You can be a beginner or an expert and they’ve got what you need. That sounds like something an independent specialty retailer in action sports might say.    Trouble is, you can imagine Sports Authority saying it too. But Dick’s differentiates itself from Sports Authority in ways that action sports retailers would recognize. Let’s look at some more of Dick’s business strategies.
 
They offer Expertise and Service.  “We enhance our customers’ shopping experience by providing knowledgeable and trained customer service professionals and value added services.”  “We actively recruit sports enthusiasts to serve as sales associates because we believe that they are more knowledgeable about the products they sell.”
 
This means having professional golfers in the golf part of the store, certified fitness trainers helping you buy workout equipment, and trained bike mechanics to sell and service bicycles. It may be a 50,000 square foot store but in your little part of the store, where you’re buying stuff for the sport you’re committed to, you’ll be working with experts who are just as committed as you are.  That will sound familiar to any action sports retailer, chain or single store.
 
Dick’s creates Interactive “Store-Within-A-Store.” 

"Our Dick’s Sporting Goods stores typically contain five stand-alone specialty stores. We seek to create a distinct look and feel for each specialty department to heighten the customer’s interest in the products offered.”
 
Once again, that’s not exactly an unfamiliar concept. A typical store will include a pro golf shop, footwear center, fitness center, hunting and fishing area, and a team sports store with appropriate seasonal equipment and apparel.
 
Their last business strategy is Exclusive Brand Offerings that “…offer exceptional value and quality to our customers at each price point and obtain higher gross margins than we obtain on sales of comparable products.”
 
Those would be shop brands. We all recognize and understand that. But Dick’s seems to go further. They work with existing, well known brands to develop products that are available exclusively at Dick’s under that brand’s name. That’s possible only because of their size and market power.
 
Though Dick’s isn’t active in action sports, you can’t help but look at their business strategies and get some understanding for why specialty retailers are having such a hard time. Dick’s has all the advantages that come with size; purchasing power, efficient distribution, access to capital, good systems. But they’ve gone further and are applying many of the competitive techniques we use to think of as being available only to the specialty retailer to the large format business. And they can do it without having the highest prices.
 
Dick’s isn’t a direct competitor for action sports retailers, though inevitably there is some crossover of brands. But if Dick’s can do it, so can other retailers. The good news is that if you really an independent action sports retailer (that is, your customers are participants and the first level of non-participants that are serious about the lifestyle) you’re got your location and your community connections as a point of differentiation. The bad news is I think that’s all you’ve got, so you better do that right.

 

 

Tilly’s is Going Public- A First Look at Their Registration Statement (S-1)

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Tilly’s started in 1982 with a single store in Orange County, California. The company name is World of Jeans & Tops, but it does business as Tilly’s. It was founded by Hezy Shaked and Tilly Levine. As of April 30 2011, they had 126 stores in 11 states averaging 7,800 square feet each. They filed last week for their initial public offering.

As is normal, the initial filing  has some important blanks not filled in yet. They will be completed as the process moves forward. In the meantime, we can look at the historical financial statements. I also want to talk about the impact of changing from an “S” corporation to a “C” corporation, the ownership structure post offering, and their competitive strengths and brand strategy. Let’s get started.

Sales have grown from $199 million in the year ended February 3, 2007 to $333 million in the year ended January 29, 2011.   During the same period, they went from 51 to 125 stores. Comparable store sales rose 17.3% in the first year of that period. They then rose 8.7% before falling 12.5% and 3.1% in the next two fiscal years and rising 6.7% in the year ended January 20, 2011. E-commerce revenues have grown from $15.4 million to $32.8 million in the last three complete years.
 
One has to wonder these days, in evaluating any consumer based IPO, whether the company can hope to return to its pre Great Recession growth any time in the next few years. It’s not the company’s fault; it’s just the economy.
 
The gross profit margin was 37.1% in the year ended February 3, 2007. The following year, it was 37.2%. For the January 31, 2009 year, it fell to 32.5% and for the most recent two years it was 30.9%. Selling, general and administrative expenses have of course grown in absolute dollars with sales, but as a percentage of sales has been more or less constant around 23.3% in the last three complete years.
 
Of the 126 stores Tilly’s has as of April 30, 72 are in California and 16 in Florida. There are also 17 in Arizona. The other 21 are distributed in 8 states with New Jersey, at 7, having the most. I would be particularly interested in learning something about the performance of the stores by location (which isn’t included). As we’ll discuss, part of their growth strategy is to increase their number of stores, and I wonder if performance has been similar in all geographies.
 
“C” and “S” Corporations 
Tilly’s has always operated as an S corporation. What this means is that the earnings were distributed to the owners who reported the income on their personal income tax returns. It also means that “No provision or liability for federal or state income tax has been provided in our financial statements except for those states where the “S” Corporation status is not recognized and for the 1.5% California franchise tax to which we are also subject as a California “S” Corporation.”
 
The chart below shows Tilly’s Operating Income and Net Income as reported on their financial statements. The Pro Forma Net Income line shows what their net income would have been over the last five years had they been a C corporation accruing tax at typical rates. Big difference. They will transition to a C corporation before the company goes public. This is disclosed in the registration statement of course. But the point is that you would not want to purchase the stock expecting Tilly’s to report net income going forward at the levels of the past.     
     

FISCAL YEAR ENDED (millions of $):
   

Feb. 3

Feb. 2

Jan. 31

Jan. 30

Jan. 29
   

2007

2008

2009

2010

2011

Operating Income

$31.5

$39.7

$23.8

$21.4

$24.9

Net Income (as reported)

$31.4

$39.9

$23.6

$20.9

$24.4

Pro Forma Net Income

$19.1

$24.2

$14.3

$12.7

$14.8
 
Post Offering Ownership and Control and Use of Proceeds
Buyers of this common stock will receive Class A shares and will be entitled to one vote per share. There will also be Class B shares that will be entitled to ten votes per share “on all matters to be voted on by our common shareholders.” The Class B shares will be owned by the founders and their family. When the offering is completed Mr. Shaked, who is Chairman of the Board, will control more than 50% of the total voting power of Tilly’s common stock. We don’t know from this first draft of the registration statement exactly how much he’ll control, but it says more than 50%.
 
“As a result, Mr. Shaked is in a position to dictate the outcome of any corporate actions requiring stockholder approval, including the election of directors and mergers, acquisitions and other significant corporate transactions. Mr. Shaked may delay or prevent a change of control from occurring, even if the change of control could appear to benefit the stockholders.”
 
Tilly’s will be considered to be a controlled company according to the rules of the New York Stock Exchange. As a result a majority of the board of directors don’t have to be independent. And the corporate governance and nominating committee and compensation committee do not have to be composed entirely of independent directors, as would otherwise be required.
 
Tilly’s says they will comply with these listing requirements anyway, but they don’t have to.
 
The company leases its 172,000 square foot corporate headquarters and distribution center from a company owned by its co-founders. It leases another 24,000 square feet of office and warehouse from one of the co-founders.
 
As usual, there are a lot of blank spaces in this early version of the Use of Proceeds section. We’ve seen from other sources that the goal is to raise $100 million. What’s going to be done with that money? The registration statement tells us the following:
 
“Therefore, our stockholders immediately following this offering, who were also the shareholders of World of Jeans & Tops prior to termination of its “S” Corporation status, will receive most of the net proceeds from the sale of shares offered by us.”
 
We don’t know what “most” is at this point.
 
After spending 30 years building a successful business, the owners deserve the benefits. But if they are getting “most” of the proceeds of the offering, where’s the money for growing the business to the 500 stores they are planning going to come from? At least that would be my perspective if I were a potential investor.
 
Competitive Strengths and Growth Strategy
Tilly’s lists six competitive strengths:
  • Destination retailer with a broad, relevant assortment.
  • Dynamic merchandise model.
  • Flexible real estate strategy across real estate venues and geographies.
  • Multi-pronged marketing approach.
  • Sophisticated systems and distribution infrastructure to support growth.
  • Experienced management team.
Their growth strategies are:
  • Expand our store base.
  • Drive comparable store sales.
  • Grow our e-commerce platform.
  •  Increase our operating margins.
If you read the discussions of their competitive strengths, you’ll note a great deal of similarity to other retailers in our space. Maybe that’s why they call them strengths and not advantages. Their growth strategies are exactly the same as every other multi store retailer.
 
It seems to me that an investor in this stock is basically betting on Tilly’s ability to operate better than its competitors. Of course they do have a successful operating history, but I don’t see an obvious competitive advantage here. I don’t think their plan to grow to 500 stores is necessarily unrealistic, but that most of the offering proceeds are being paid out to the owners makes me wonder how they’ll finance the growth.
 
We’ll get some more information as the amended S-1s show up.

 

 

What a Specialty Retailer Might Learn From Genesco

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I’m not really that interested in doing a full analysis of Genesco. Mostly because I doubt you’re that interested in reading it. But Journeys, owned by Genesco is 813 stores and the Journeys group of stores is over 1,000 in the U.S. and Canada so we can hardly not pay attention to what they’re up to.

 For the year ended January 29th, Genesco’s revenues were almost $1.8 billion. Of that, Journeys represented $804 million, or 45%.  Their hat retail business, Lids, is the second largest piece of their business. It has 985 stores. It and Journeys represent 80% of Genesco’s total revenue.

I did a more thorough analysis of Genesco a while ago. The approach to retail and the strategy I highlighted in that article is still very interesting to read about, and one of the reasons I don’t feel the need to go in depth here. If you want you can also view the press release on their fourth quarter and year end results. 
 
Genesco wants a brand leadership position for all their businesses. They want to be number one and have a reason to believe that their position is hard to duplicate. They believe they are number one in teen fashion footwear in Journeys, and number one in headwear through Lids.
 
In Lids, they believe that what makes their position hard to duplicate is that they will always been the competitor with the largest localized assortment. In a college town, to use their example, they will have every permutation and combination of logoed product that the college offers. 
 
They talked about teenagers migrating away from athletic footwear into “brown shoes” that still have an athletic base and construction. Their sense is that these kinds of cycles last years and that they are still very early in this one.
 
We’ve all heard about that trend before, but let’s consider the implications. First, Journeys, or other large retailers, don’t care whether the kids want skate shoes, or brown shoes, or ballet slippers as long as they can get the ones the kids want. Second, if you are in the skate shoe, or athletic shoe business you’d better be able to transition to the so called brown shoe market. That will depend on your existing market position (that is, how your customers perceive your brand) and whether you have the resources and manufacturing relationships to pull it off. I can imagine it is hard for some action sports brands to follow this brown shoe trend for either or both of those reasons.
 
Genesco goes right on to discuss that as Journeys is the biggest retailer in the space they have very strong relationships with vendors. One part of “very strong relationships,” of course, is that they can get better prices. Wonder if the vendors like that part of “very strong relationships.” Anything for volume I guess.
 
Genesco notes that these strong relationships give them access to exclusive product “on a preferred basis” and to special make up product as well. It seemed like they were talking about two different things there, but I’m not sure I understand the distinction between exclusive product and special make up.
 
Saying it as bluntly as anybody I’ve studied has, they note that “The economics improve with national scale.” Part of the reason that’s true is because you have to be big to afford the management and inventory systems that make local assortment management possible with a couple of thousand stores.
 
Genesco is refreshingly honest about rolling up the little guys in fragmented industries and using their size to compete. It was probably eight years at the Surf Summit in Cabo when I stood up and asked a panel of specialty retailers what they would do when there were 5,000 branded stores competing with them. Boy was I wrong. There are way more than 5,000. But the specialty retailers who are still standing can’t compete on price or national scale.
 
They can take a cue from Genesco and compete on localization by digging deep into their customers’ preferences. Resist the temptation to select product according to terms, margin, discount or because the rep’s an old friend (this is where having a strong balance sheet comes in). Buy what you know you can sell to your customer based on solid information. That’s what Genesco strives to do.       

 

 

Billabong Purchase of West 49 and Implications for the Industry- Questions, Questions, Questions

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Billabong’s acquisition of West 49 was the biggest retail expansion by a brand so far. We’ll see more brands buying more retailers and opening more stores. This article is about why. What are the motivations and the industry impacts? And what are some of the conflicts and contradictions companies will face as they pursue this strategy? Some of this is a bit repetitive of stuff I’ve written before, but we’re really talking strategy and industry evolution at the highest level. I want to tie it all together.

A Little History

Years ago we all knew, and I and lots of others wrote, that we didn’t need any more retailers (not just in action sports). Especially as the internet came into its own, consumers had more choices of product and place to buy than could possibly be useful. That didn’t mean a new store by brand x couldn’t succeed- we were all giddy with rising income and asset values after all- but if it wasn’t opened, no consumer was likely to care.
 
Then came the recession. If things are improving, we’re hardly out of the woods yet. U.S. Unemployment is 9.6% (a lot higher if you count people who have given up looking). The creation of 150,000 jobs in October was hailed as a big success, but that’s not much more than the number we need to keep up with population growth. Foreclosures and housing prices are still a major burden. Banks are cautious about their lending (we want them to be, I think- isn’t not being cautious part of what got us into this mess in the first place?), and consumers are still paying down debt and saving (again, hard to say that’s a bad thing).
 
Wish we were doing as well in the U.S. as in Canada. Well, this is for a Canadian publication after all and there’s nothing like a little ass kissing directed at the editor to minimize requests for rewrites.
 
Anyway, retailers across the whole economy closed when the recession hit, and the process is still continuing. We are all intimately familiar with the impact on action sports core stores. I’m sure everybody reading this knows a favorite store that’s gone away or is struggling. West 49’s public financials made it very clear it had some issues before it was acquired, and I expect its problems were part of the motivation for the deal.
 
Point one, then, is that if the economy is improving, we’re still struggling, at least south of the border.
 
Point two is that the role and numbers of “core” retailers is changing. Use to be that we thought anybody who was an independent retailer and carried hard goods was a “core” shop. Turns out we were wrong. A real core shop caters to participants and serious lifestylers who are not so price sensitive, carries the newest and best product, and is owned and staffed by people who are part of the culture and are participants themselves.
 
What does a core shop have to do to be successful?   My list is below.
 
Attributes of a Successful Core Retailer
 
By the way, I first created this list (slightly modified here) so long ago that I can’t even find it on my web site.
 
·         Good management accounting systems that they actually maintain and use
·         A quality internet presence
·         Active participant in its community
·         Sales volume high enough to make their shop financially viable (duh!)
·         A career path that helps them keep good employees for at least a while
·         Willingness to carry and promote new brands
·         They excel at selling and servicing hard goods.
 
The Rationale for More Stores
 
Things are better in Canada, so maybe it’s easier to justify new retailers there than in the U.S. Still, looking at the overall economic picture, and what I’d characterize as the apparent lack of consistent, real, growth in skate/snow/surf participation, one has to wonder why more stores make sense.
 
Answer? They probably don’t overall. But of course each company does what it perceives to be in its own best interest at the time. Especially as a public company, you’ve got to find ways to grow and become more profitable. Your choices of how you might grow haven’t changed in a long, long time.
 
You can sell more to existing independent retailers. Well, the action sports market doesn’t quite offer the organic growth potential it used to. There are fewer of those retailers, and the growth you can expect from them becomes less and less significant as a company gets bigger and bigger.
 
You can expand your distribution. I think at this point we all understand that there are limits to that unless you’re fundamentally changing your brand’s positioning- not an easy thing to do.
 
You can make acquisitions, and we’ve seen a lot of that from Billabong and others. I expect we’ll see more.
 
You can try and expand your brand franchise into other product areas. Quiksilver’s women’s brand comes to mind. You can add product under an existing brand like Electric (owned by Volcom) is doing with apparel. You can start a new brand. All of these have costs and risks as well as potential that aren’t the subject of this article.
 
You can run your business better, trying to improve your inventory management and controlling expenses in hopes of improving the bottom line even with limited sales increases. Pretty much everybody who’s made it through the recession has done and is doing this.
 
And finally, you can go vertical and, as part of that, open or acquire retail stores. Why does that appear to be so attractive right now? That question brings us to the list below. The points on the list are not of my creation. They are taken from conference calls, publications, and conversations.
 
Why Retail Locations?
·         Capture the middleman’s margin dollars.
·         Better control of our brand and image. Improving the consumer experience with the brand.
·         As a response to fast fashion; we can get new product into retail faster and we don’t have to convince some buyer to order it.
·         Collection issues and uncertainty as to the future of small, independent retailers.
·         We don’t see better growth opportunities (okay, nobody exactly said it quite that directly).
·         Ability to merchandise their offerings better across the complete product line.
·         Leverage with landlords, infrastructure and vendors.
·         As a competitive response.
 
I am not saying these points are all valid for any brand that opens retail stores- only that they have the potential to be. Or that brands going into retail believe they are. One of the things I wrote when the Billabong/West 49 deal was announced was that I thought Billabong might find integrating a 130 or so chain with some apparent financial difficulties more challenging than integrating a brand (like their previous acquisitions) that was growing, profitable, and well managed. As far as I can tell, Billabong really has left their acquired brands more or less alone. I wonder if they can do that with West 49.
 
The Strategic Conundrum
 
I’ll get to the tactical issues for brands building its retail base below. Right now, I want to take a few paragraphs to talk about how this retail focus might fit into the industry’s general evolution. It’s possible I’ve got more questions than answers, but it’s clearly something anybody running a brand or a retailer needs to be thinking about.
 
And maybe the distinction between brand and retailer is a good place to start.  Action sports began as brands selling to core retailers. Those sales expanded into broader distribution. Now brands are also selling their own (and other) brands direct to consumer through both the internet and their own stores. I expect this to continue to grow.  Brands becoming retailers, retailers becoming brands. The impact?
 
If you’re a small independent retailer, go back and read the box with attributes of a successful core retailer. If you read between the lines, you have figured out that you have to be a brand too- but a local brand in your community, not a national one.
 
But maybe I’ve spoken too quickly. There’s the internet after all. Think of a shop like Evo in Seattle. It’s got a successful retail store, but just one. Where it seems to be growing is with its internet presence. And it’s not the only one. As a brick and mortar retailer, it’s a local brand. With its internet sales exceeding its store sales is it a national brand? Can it be? Will it start selling Evo branded product to other retailers?
 
Next, it seems clear that the brand retail explosion is pretty much ending any stigma there was to being in a mall. This is working particularly well for Zumiez which, with its hard goods and action sports lifestyle committed employees, looks and tries to act an awful lot like a core shop. It’s almost like brands open retail locations in malls are validating Zumiez’s business model, but can’t match Zumiez’s history and focus. Maybe Billabong thinks West 49 can have a similar positioning and advantages in Canada.   It will be interesting to watch Zumiez does in Canada now that West 49 is part of Billabong.
 
Now, let’s talk about the action sports business. What is that exactly? For one thing, it’s a term that’s been thrown around out of habit even as the industry has evolved almost beyond recognition. Try this: The action sports industry is that group of brands and retailers who develop and sell product to participants in the sports of snowboarding, skateboarding, surfing, and wakeboarding, (arguments can be made to add others) and to a close circle of non-participants actively involved in the sports and lifestyles.
 
If you accept my definition, it becomes pretty clear that retail building brands aren’t just after the action sports market. It’s just not a big enough market given their existing size and objectives. I came up with the “lifestyle sports fashion business,” as a description of the market they are focused on growing in, but I’m not sure that captures it either. Maybe that’s why we keep using terms like “action sports” and “core.” We have no idea what to replace them with. Maybe youth culture is the correct term.
 
It’s no secret that this growth and industry evolution means we’re more fashion and non-participant oriented in our sales. I don’t say that critically- it’s kind of inevitable. The retail blossoming we’re experiencing puts companies like Billabong into a whole new market. I’ll say it again- it’s where they have to go to grow, and they face a whole new set of competitors as they go there.
 
What Will Billabong Do?
 
There are a number of issues Billabong will have to address as they integrate West 49. But I hasten to mention that any company with multiple brands and a retail presence will face similar issues.
 
How much of their owned brands will they sell in West 49 stores? Billabong’s Paul Naude suggested it might get up to 60% eventually. West 49, of course, was already a customer of Billabong’s. But given the higher margins and the leverage they get, Billabong would like to increase it. Go back and review my “Why Retail Locations” list.   In a perfect world, where it wouldn’t cost them any sales, they’d probably love to make West 49 stores all Billabong and its owned brands. With brands including Nixon, Element, Sector 9, Dakine, Von Zipper. Xcel and others, they certainly have the product to increase the proportion sold in West 49.
 
Assuming for a minute that Billabong wants to keep essentially the same levels of total inventory in West 49 stores (subject to any changes in sales levels), do they bring in more Dakine backpacks and reduce or eliminate Hurley, just to pick a brand? There are also Element backpacks. And Billabong backpacks. And Vans. Etc.
 
Billabong’s strict financial and operational bias will be to replace Vans, Hurley and other backpacks with its own brands. They can’t, however, make that decision without reference to West 49s customers and its market position. Do customers come in asking for Hurley backpacks and will they care if they end up with an Element one instead?
 
Would Billabong be okay with selling a bit less at West 49 stores if they got higher margins because of their owner brands?
If Billabong sells more of its owned brands in these stores, it will have to carry and sell less of somebody’s brand. Who’s? How much less? Will the customers care?
 
Billabong believes it can better merchandise it product and position its brands through its own retail because it can present the whole line the way it wants. Doesn’t Hurley, to continue with the same example, feel the same way?
 
When Billabong, or another brand, begins to control how much of which product is carried in a retail store, what happens to the manager/owner’s ability to change product/brands in response to changing local conditions?
 
So, if you’re Hurley and Billabong is cutting back its purchases of backpacks for the West 49 stores, how far do they have to cut it back before you begin to feel like your product is an afterthought and that there’s not enough product and selection of product to represent the brand well?
 
Might not Hurley (owned by Nike) take a look at the situation not just in terms of backpacks, but strategically in terms of the overall impact of brand owned retailers on its brand? One conclusion they could reach is that the distinction between brands and retail is disappearing and that competitive conditions require them to control more of their own retail. Go look at the list of reasons a brand might want to be in retail again. Given the advantages listed there, how can a big brand not do some of its own retail?
 
How about the implications for retail chains? If you’re going to have to compete with vertical brands with the advantages I’ve outlined. You’d better have a hell of a market position. I wouldn’t be surprised to see some more chains up for sale as this all evolves. And I wouldn’t be surprised to see some competition for buying them. The economics are very compelling. They might be equally compelling when it comes to buying a brand that would fit into your retail.
 
What would I do if I were Billabong? I’ve be crunching my numbers, looking at margins and sell through for various brands in West 49. I’d be talking about Billabong owned brands and what are possible substitutes for other brands. I think I’d probably conclude that I don’t want to carry brands that I can’t merchandise correctly. My bias would be to eliminate some brands rather than to inefficiently cut back on a lot of them.
 
Conclusion
 
Billabong’s purchase of West 49 feels like it might be the formal announcement of a new industry consolidation based on vertical integration. The competitive dynamics associated with this out in the larger world of sports fashion lifestyle product are driving it. As I said, I don’t like that term. But I don’t have a better one and I have to draw a distinction between the action sports market as I defined it above and this much, much larger market that the big, public, multi-brand companies are focused on.
 
The break between the two seems so fundamental that I can almost see a big gap between them. Maybe that’s where the “youth culture market” fits in. If you are in what I’ve defined as the action sports market, forget about what vertical brands are doing. If you are one of those vertical brands, you aren’t going to ignore the “core” market, but you are going to get a declining piece of your revenue and profitability from it and you will focus accordingly.

 

 

Another New Retail Concept. Just What We Need.

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Back in early December, I bookmarked an article I wanted to write about then promptly forgot about it with the holidays and other intriguing stuff going on. It was a short article in Stores News about Sports Authority starting to open stores called S. A. Elite.

Like the story said (read it here), Sports Authority has 450 stores of the 40,000 to 50,000 square foot size. S. A. Elite stores are supposed to be “high performance lifestyle shops.” They will be from 12,000 to 15,000 square feet in size. There are only two of them now (both in Colorado), but they expect to open another dozen in 2011. They will tend to be in city centers and high end malls.

The S. A. Elite web site says the following:
 
“S.A. Elite by Sports Authority carries top-of-the-line assortments and premium collections from elite global vendors. Our stores house performance and fashion-focused athletic apparel, footwear and accessories. If you are the athlete who requires specialized apparel and accessories to reach your goals, we’ve got you covered. If you are an individual who rocks an athletic aesthetic, we’ll outfit you in style.”
 
Sports Authority EVP Jeff Schumacher said in the article, “We’re not looking to create fashion statements. We’re looking to create performance statements…[with] products that consumers can’t find elsewhere.”
 
When you go to the web site and see featured brands that include Nike, Burton, Ray-Ban, Columbia and Adidas (there are only 15 brands listed in total) you kind of wonder what “can’t find elsewhere” means.
 
Still, I’d have a hard time disputing that the concept might be valid. Regular readers will have seen me suggest that a true “core” store is one that caters to participants in the sports and the first level of nonparticipants that closely associate themselves with the sports. That appears to be the group S. A. Elite is targeting.
 
There are, however, some differences. From the pictures on the web site, I’m guessing the stores will be a bit more boutique like and fashion focused than what we think of as core shops. I also expect that the target demographic is a bit older. Finally, it sounds like there will be a focus on performance and improving it; not just on participation like in a core store.
 
As our market gets sliced and diced by more and more people in the endless and inevitable hunt for a meaningful competitive advantage among products that mostly don’t offer one based on performance (because it’s all good stuff), the space left in the market for the traditional core shop gets smaller and smaller. I guess that’s why there are fewer of them.
 
On the other hand, that space seems to get more and more clearly defined all the time. Those who are left who feature new and lesser known brands, are part of their community, manage their inventory cautiously and have a solid balance sheet, have a quality internet presence (whether they sell or not), manage to keep at least a handful of committed employees, and are of size both in terms of revenue and square feet that make them viable, can still succeed.
 
I have to try and see this store when I’m in Denver for SIA.

 

 

A True Christmas Retail Tale

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My youngest son and I went out to get our Christmas a week or so ago. I headed towards our usual lot, expecting to pay something like $60 for a tree when we spotted a sign that read, “Christmas Trees: $29.95.” Never one to turn down a deal, I followed the signs to the lot where, indeed, all the perfectly good looking trees were $29.95.

After picking out a tree (the needles did not all fall off when I shook it), I struck up a conversation with the guy manning the lot. “How come you’re selling trees this cheap?” I asked.

“Well, it’s our first year in this business and we bought too many,” he explained. I asked how many too many and he told me, “Four times too many.”
I suggested that somebody at the company must have been sentenced to life in front of the firing squad for that one and he said it was so. Intrigued, I asked how, exactly, the buying decision had been made.
Now clearly this guy wasn’t an owner of the company that was losing its ass on all these trees because he was already starting to laugh as he told me, “The guy who sold them to us told us how many we needed.”
It got better. I asked him how they were moving and he said, “Okay, but we didn’t get the right size assortment.” I asked why not and he told me- you guessed- it, “The guy who sold them to us told us which sizes to get.”
By this point even my son, who’s only retail experience is as a customer but who has hung around me long enough to pick up a few things, was laughing hysterically.
Trying not to lose it completely, in case this guy actually cared I said, between chortles and guffaws, “So the guy selling you the trees not only told you how many to buy, but managed to sell you the ones that nobody else wanted? Is that about it?”
“Yup,” he said with a smile.
Christmas trees are even worse than snowboards from a retail perspective. The selling season is shorter and the damned things die.
Anyway, happy holidays and, be you a brand or a retailer, may you never buy four times too much of a wrong product who’s only residual value is as mulch or firewood, and have only two weeks to sell it all.

 

 

Biting to the Core: The Future of Mom-and-Pops, the Majors, and Brand Labels in the Evolving Retail Landscape

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In a rapid and rather remarkable convergence of four key trends, a lot is changing for core retailers and for retail in general. The accelerating push of large brands into retail, their reduced dependence on core shops, the decline in the number of true core shops, and the financial/management model required in our new economic environment pose many challenges but also many opportunities for those still standing. I’ve written about some of these issues before, but it’s time to pull them all together. There’s a lot to cover, so let’s get started.

Evolution of the Core Shop
Once upon a time, 20, 30 years ago (pick the timing for the sport that interests you most), a true core shop was the place you dropped in on to get your fix of whatever subculture sport you were in to. You were an active participant part of a tight community, the products were niche and exclusive, and the few other places to turn to for the goods you were looking for took some effort. The folks in the shop had thorough knowledge and the best product service not to mention they were participants themselves who really lived the lifestyle and were driving forces in the progression of the time. They were the first to see new trends and introduce innovative products.
            There was a certain interdependency between brands and shops. A bigger percentage of a brand’s sales went through the core shops, there were fewer other distribution channels, and there was more of a risk to consumer brand perception if they went outside the core shops. Further, the cost structure of the time made it easier for the small retailer to succeed. There was one land phone line. No computer and internet expenses. Insurance was a lot less. Stores weren’t open as many hours. Consumers had fewer options in terms of getting their hands on product and product information. Bottom line: It was considerably easier to be a destination shop.
            Then some time after 1980 began the great economic melt-up. At some point even further down the road, “shops” started to pop up like mushrooms on damp, warm, manure. If they carried a collection of hardgoods and stood alone as single brick-and-mortar storefronts or even small independent chains, we labelled them as “core.” Eventually, large numbers of doors emerged. But the cost of operating a shop grew. Competition exploded and put pressure on margins, distribution expanded, consumers had more choices and easier access to products and information, internet sales took off creating a space of zero travel distance between product and consumers, brands moved into the retail space, and lifestyle customers became increasingly more important than participants. Brands, as they grew, inevitably became less dependent on core shops.
            None of these emerging trends mattered so much as long as sales and cash flow grew and the economy was throwing a wild party. But like always happens, the bash ended and there were some terminal hangovers involved. All of the issues that growth and cash flow had let us work around came home to roost. Many core shops have had to scramble for cover or, worse, literally close up shop.
            Thing is, though some may have been independent of any significant financial source, many of them were never really the core shops outlined above in the first place. We called them that because we didn’t have a better term and it didn’t really seem to matter. What were they then? I don’t know. Aberrations of a hot economy? Symptoms of unsustainable consumer spending?
            Now, the overall number of shops has declined. The real core shops—the kind that were around a couple of decades back—will get a little breathing room if only because there are no longer five shops in a 10 block area. But not, in all cases, enough breathing room because the trending issues touched on above that economic prosperity allowed us to push to the side are still very much alive. And, as we’ll see below, big brands are getting very serious about retail.
 
The New Economic Model
Sales growth, though improving over last year, doesn’t seem likely to return to 2006 or 2007 levels. Credit is tougher to obtain and that issue is likely to stick around for a whiile. Being aware of risk and actually managing it is back in vogue.
            Inventory is being vigilantly managed and expenses carefully controlled. The focus should now be on generating more gross margin dollars. You can’t get anywhere without a strong balance sheet. Systems, which are pretty bad in a lot of smaller retailers and brands, are a strategic advantage and a place you need to spend money. Issues of the cost of doing business, distribution, and the internet are not going away even when the recession completely ends. And consumers, though they seem to be spending more than they were a year or so ago, haven’t reopened their wallets with the same giddy abandon we enjoyed for so long.
            What’s been really interesting are the conversations with shops and brands that have had to cut spending pretty dramatically and manage their businesses more closely. Almost universally, they tend to say, Damn! If only I’d done this 10 years ago, I’d be in great shape and have a whole lot more money in the bank. Turns out that, in many cases, these necessary actions the economic downturn required of retail to stay afloat were just smart business moves. Just because there was a long period where it wasn’t absolutely crucial to run your business well doesn’t mean there wasn’t a lot to gain by doing it. Oh, by the way, now you have to or you won’t be around.
The Eight Hundred Pound Gorillas
The conventional wisdom on why core stores are important to our industry says that they’re an early warning system for trends coming and going, they are builders of community, they provide better margins for both the shop and the brands sold in them because of who the customers are, they are incubators of brands, and they help keep the sport and culture a bit edgy and, well, special.
            Obviously, some of that isn’t as true as it used to be, but I still think core shops are important. I’m not certain some larger companies feel as strongly about that as they once did. Or, at least, they have other priorities that make them less sensitive to the role of the core shop than they once were. Among these priorities is growth. It’s a public company thing and the growth, mathematically, just can’t come from small shops.
            I’ve been pretty surprised over the last couple of months to hear what some of these major companies are saying in their Security and Exchange Commission filings and in the company conference calls where they discuss their results publically, meaning anyone can listen. All the quotes compiled below are from one of those two sources. Overall, they seem unclear about growth opportunities in core stores and, moreover, about the survival of some of those stores.
            Billabong CEO Derek O’Neill says, “I can’t sit here at all and say that all the accounts that we’re currently dealing with will still be there in three months time.” He also says his company may have to tighten credit by the end of the next six months.
            Genesco CEO Robert Dennis (Genesco owns U.S. shoe chain Journeys) notes that when, for example, a five-store chain has a lease coming up for renewal, it will find Genesco on their landlord’s doorstep taking over that space. The other thing that’s happening, as Dennis describes in discussing Genesco’s hat, uniform and sport apparel business, is that they “…are consolidating the industry,” he says. “The mom and pops are going out of business or they are credit constrained and can’t stay fresh.” I’m not so sure that’s any different than in action sports.
            It’s interesting to note how U.S. retail giant Zumiez characterizes its stores in a recent 10-Q report. Except for being in malls, it’s typical of the description a traditional core store might use: “Our stores bring the look and feel of an independent specialty shop to the mall by emphasizing the action sports lifestyle through a distinctive store environment and high-energy sales personnel. We seek to staff our stores with associates who are knowledgeable users of our products, which we believe provides our customers with enhanced customer service and supplements our ability to identify and react quickly to emerging trends and fashions. We design our stores to appeal to teenagers and young adults and to serve as a destination for our customers. Most of our stores, which average approximately 2,900 square feet, feature couches and action sports oriented video game stations that are intended to encourage our customers to shop for longer periods of time and to interact with each other and our store associates.”
            The big companies are also coming around to the idea that they can potentially merchandise their own brands in their own stores better than through core stores.
            Nike: “We will continue to invest in bringing world-class solutions to consumers who are hungry for new retail experiences. Nowhere is this more important than online. The digital lifestyle is driving dramatic change in our industry and significant potential to our company. We are attacking that in every dimension; online shopping, customization, immersing our brands in consumer cultures and telling inspiring and entertaining stories.”
            Billabong: “If you look at the wholesale level, most of the business going on, the buyers are focused on your price point category and up to your mid price print category. …In our own retail, which has definitely outperformed our wholesale side in this period, in our own retail we can showcase and merchandise a product across all the price points and we’re doing really well right across the board.”
            Billabong continues: “…we are beginning to drop product into our own retail even faster than wholesale channel. We are beginning to, on certain key styles… build product that may go into our own retail before even the wholesale consumer sees it in an indent process.”
            They see systems and operations as key. Operating well is a key advantage that can put a lot of money to their bottom lines.
            Zumiez: “We have developed a disciplined approach to buying and a dynamic inventory planning and allocation process to support our merchandise strategy. We utilize a broad vendor base that allows us to shift our merchandise purchases as required to react quickly to changing market conditions. We manage the purchasing and allocation process by reviewing branded merchandise lines from new and existing vendors, identifying emerging fashion trends and selecting branded merchandise styles in quantities, colors and sizes to meet inventory levels established by management… Our management information systems provide us with current inventory levels at each store and for our company as a whole, as well as current selling history within each store by merchandise classification and by style.”
            Nike: “To do that we committed to building our retail capabilities, smoother product flow, surgical assortment planning that focuses on key items, more compelling merchandising, stronger brand stories and more efficient back-of-house systems.”
            Billabong: “If you look at the big retail brands out there, they don’t have a buyer to get past, they just decide what they’re going to make and they put it in their own stores and therefore they could have a very short cycle.…we are looking more and more at some of our own retail stores where we can looking at touching on a more vertical model. And not having that delay with going out and having an eight week ordering pattern and then go away and ordering product, we’ll just go straight to retail.”
            PacSun talked about doing the same thing in their conference call last week. Genesco’s CEO characterized small retailers systems as being “from the dark ages.” The current overall consensus from these big brands and major retailers is that they’re looking at the vertical integration and fast fashion models of retailers like H&M and American Apparel. Essentially offering on-trend, in-season apparel at lower prices. What’s more, these retailers stock stores more frequently, but with limited quantities of merchandise, giving shoppers a reason to visit stores more often. As you can see, there’s a lot going on in the retailing world. So what’s a smaller retailer to do?
The Road Ahead
The first thing to recognize is that only you as a shop operator can change your own behavior. These big companies are going to do what they’re going to do. As the saying goes, it’s just business, and developing outward is the natural progression of economic growth. The good news is that there’s a role for specialty shops based on the original model, that is to say, a store that properly services the core participants of the sport and lifestyle. But you’re going to have to run your shop like a business. Location and community will be your key attributes, and a credible online presence is now a requirement. Running it like a business is just the price of admission.
            Another piece of good news is that there are some natural limits on just how big big chains can get while still being credible. In his first conference call as Pac Sun CEO, Gary Schoenfeld said, “Nobody needs 900 Pac Sun stores.” The company is trimming back and reducing its number. Journeys store numbers will be almost static over this year. Genesco expects to open only 50 stores over five years across the whole company. Meanwhile, Footlocker, The Gap and Starbucks are other big retailers who we’ve seen that have learned this lesson and had to close storefronts.
            Next, some of your suppliers—skate comes to mind—are able to supply you with new product regularly and quickly. Take advantage of that to the fullest extent possible. Another important element, and something that has been lost in recent years, but goes back to the historical specialty shop model, is finding and featureing new brands—even when it looks risky. It’s a point of differentiation you can’t afford to give up, and what’s even riskier is not taking chances on smaller, emerging brands. It’s always been the case that new brands grow up in the core shops and then move on into broader distribution. It’s true that it may be happening faster than in the past but that comes under the heading of something you can’t fix. That doesn’t mean you’re helpless. Favour brands that offer product exclusively for specialty shops. Do some private label (but not too much, you don’t want to completely bite off the hand that feeds you) that gives you a better margin.
            Recognize the bigger brands’ concerns with the price points you’re buying and your ability to merchandise across their line well in the space you have available (see the quotes above). You’re never going to be in a position to carry everything by Quiksilver or Burton, but sit down and work with your brands to achieve a mix you’re both happy with. I mean, what’s wrong with saying to Brand XYZ, “Look, I’ve only got x-number of square feet in the whole store and can’t do what you’d like without turning myself into a Brand XYZ store. But I’d love to sell more expensive, faster-turn product that puts more gross margin dollars towards the bottom line. How can you help me do that?” Recognize their legitimate concern and interests in this area. If they don’t have a good answer, you’ve learned something and at least your conscience is clear. And if they do have a good answer, you might make a few more bucks. Finally, remember that the best shops give credibility to the brands they carry—not the other way around. I can’t believe how much mileage I’ve gotten out of saying that.
            Okay, let’s talk systems. A lot of retailers, perhaps more than half in action sports, have point of sale systems that they don’t use as anything but glorified cash registers. That’s got to end. If you agree that your focus has to be on capturing gross margin dollars and that you can no longer rely on big sales increases, then what choice do you have? You probably already own most of the hardware and software you need. If not, it’s cheap enough to get. Yes, the training will be a pain in the ass and this management accounting stuff kind of sucks, but if you don’t know which inventory is moving (and which isn’t), how quickly, and at what margins, then you are simply screwed. At best, you’re leaving a pile of money on the table. Good for you if you can afford that. At worst, poor systems will guarantee you go out of business.
            Conceptually, the whole analysis above isn’t that hard to get your head around. Do you agree with the evolution and role of core shops I’ve described? Does the financial model make sense given the current economic conditions? You can’t argue with what big brands are doing in retail. They are doing it and they are transparently telling you they’re doing it. But don’t despair. You’ve got tools and you can compete, even prosper, if you just remember the values of what the core shop really consists of and apply these to your own retail environment.

 

 

What Are Big Brands Doing in Retail? It’s a Bit Scary

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Below is the handout I distributed at IASC’s Skateboard Industry Summit at the end of April where I talked about the evolving retail environment.  These are quotes from recent fillings and conference calls by Billabong, Genesco (owners of Journeys), Nike and Zumiez about how they see the retail environment and their involvement in it.  Except for Nike, you’ve seen these if you’ve read in detaill my most recent analysis of these company’s results.

These quotes aren’t my opinion or interpretation; they are what the senior executives actually believe and are doing.  In general, they are unclear about their growth opportunities in core stores and the survivability of those stores.  They think they can merchandise their own brands in their own stores better than in the core shops.  They like the higher margins.  You really need to read these comments.  Draw your own conclusions.

Billabong

 There is still “…a little bit of an apprehension to actually placing forward orders, and some customers preferring to do a little bit of business in season.” “I’d say that’s a trend that’s probably going to be there for a little while,” he continues.
 
Jeff’s Comment: I’d be curious to know just what he means by “a little while.”
 
“I can’t sit here at all and say that all the accounts that we are currently dealing with will still be there in three months time,” is how he puts it. He also thinks they may have to tighten credit by the end of the current six months.
 
“If you look at the wholesale level, most of the business going on, the buyers are focused on your price point category and up to your mid price print category.” “…in our own retail, which has definitely outperformed our wholesale side in this period, in our own retail we can showcase and merchandise a product across all the price points and we’re doing really well right across the board.”
 
“The cycles with our own retailers, we are beginning to drop product into our own retail even faster than wholesale channel. We are beginning to, on certain key styles…build product that may go into our own retail before even the wholesale consumer sees it in an indent (sic) process. But we’re beginning to utilize our own retail to test product a lot more and we’re just becoming a little more focused on that shortening of the whole supply side.”
 
“If you look at the big retail brands out there, they don’t have a buyer to get past, they just decide what they’re going to make and they put it in their own stores and therefore they could have a very short cycle.…we are looking more and more at some of our own retail stores where we can looking at touching on a more vertical model. And not having that delay with going out and having an eight week ordering pattern and then go away and ordering product, we’ll just go straight to retail.”
 
What percentage of total revenues could retail represent?” somebody asked. “It’s probably going to depend on what happens with the wholesale account base,” O’Neill responded.
 
Genesco
Genesco is looking at “very modest” store growth in Journeys. They say they don’t want to have happen to them what has happened to other retailers who have over extended themselves on their store count. They mention Footlocker, The Gap, and Starbucks as retailers who are closing stores because they got a bit overextended. They plan to open only 50 net new stores over the next five years across the whole company.
 
They also note that they have another wave of store leases coming up for renewal. They expect to get lower costs and more favorable terms when those leases are renegotiated. Overall, they expect that with very modest store growth and comparable store sales growing by only two to three percent, they can expand operating margins from the current five to eight percent and grow earnings per share by 15% to 20% annually. Obviously, they see a lot of opportunity in reducing costs and operating efficiently.
 
He notes that when, for example, a five store chain has a lease coming up for renewal, it will find Genesco on their landlord’s doorstep taking over that space. 
 
The other thing that’s happening, as they describe in discussing their hat, uniform and sport apparel business, is that they “…are consolidating the industry. The mom and pops are going out of business or they are credit constrained and can’t stay fresh.” 
 
President and CEO Robert Dennis talked about how the economics of their hat and hat related business has changed as they have gone from 150 to 800 stores. The difference, he says, “is enormous.” There is tremendous leverage with landlords, the companies from whom you license product, vendors, and infrastructure.
 
He also characterizes most of these small players’ systems as being “from the dark ages.” 
 
Nike
“We’re also starting to realize the broader benefits of becoming a better retailer. Over the past few years, we’ve spoken about expanding our direct-to-consumer business. We saw a huge upside to bringing innovation and excitement into the marketplace in our own stores, with our wholesale partners and online.”
 
“To do that we committed to building our retail capabilities, smoother product flow, surgical assortment planning that focuses on key items, more compelling merchandising, stronger brand stories and more efficient back-of-house systems. All balanced to produce greater consumer experiences and strong profitability. It’s a powerful mix that helped NIKE Brand Retail deliver 11% revenue growth and 140 basis points of gross margin expansion year-to-date.”
 
“We will continue to invest in bringing world-class solutions to consumers who are hungry for new retail experiences. Nowhere is this more important than online. The digital lifestyle is driving dramatic change in our industry and significant potential to our company. We are attacking that in every dimension; online shopping, customization, immersing our brands in consumer cultures and telling inspiring and entertaining stories.”
 
“Comparable sales for brick and mortar Nike-owned retail stores increased 17%, and online sales grew 25%. Profitability for the businesses grew even faster as better merchandising, lower promotions and more surgical mark downs drove gross margins up 550 basis points versus last year.”
 
Zumiez
 “Our stores bring the look and feel of an independent specialty shop to the mall by emphasizing the action sports lifestyle through a distinctive store environment and high-energy sales personnel. We seek to staff our stores with store associates who are knowledgeable users of our products, which we believe provides our customers with enhanced customer service and supplements our ability to identify and react quickly to emerging trends and fashions. We design our stores to appeal to teenagers and young adults and to serve as a destination for our customers.  Most of our stores, which average approximately 2,900 square feet, feature couches and action sports oriented video game stations that are intended to encourage our customers to shop for longer periods of time and to interact with each other and our store associates.”
 
 Jeff’s Comment: Except for the mall location, how is this different from any other core shop?
 
Zumiez pursues, on a national scale, the same branding strategy the best independent retailers pursue.  “We seek to build relationships with our customers through a multi-faceted marketing approach that is designed to integrate our brand image with the action sports lifestyle.” They spent $822,000 on advertising in fiscal 2009.
 
 “We have developed a disciplined approach to buying and a dynamic inventory planning and allocation process to support our merchandise strategy. We utilize a broad vendor base that allows us to shift our merchandise purchases as required to react quickly to changing market conditions. We manage the purchasing and allocation process by reviewing branded merchandise lines from new and existing vendors, identifying emerging fashion trends and selecting branded merchandise styles in quantities, colors and sizes to meet inventory levels established by management. We also coordinate inventory levels in connection with our promotions and seasonality. Our management information systems provide us with current inventory levels at each store and for our Company as a whole, as well as current selling history within each store by merchandise classification and by style.”

 

 

The BRA/IASC Roundtable at ASR

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As they do every ASR, IASC and BRA hosted a round table meeting by invitation only to discuss issues of mutual interest and, as usual, I attended. The meeting was well attended and the exchange lively.

The first issue on the table was Manufacturers’ Suggested Retail Pricing (MSRP) and Minimum Advertised Pricing (MAP). I’ll assume you know what those things are. People in the room were generally in favor of both and I’d have to admit that I’m not necessarily against them. Though as I mentioned in the meeting, managing distribution well is perhaps more important in keeping prices up.
What concerns me about both MAP and MSRP is that they feel like potential excuses not to manage your business well. I was impressed with the retailer in the meeting who said, more or less, “We got some belts with price tags on them but we ripped them off and priced those belts $5.00 higher because we knew that’s what we could sell them for. MAP? MSRP? How about knowing your customer, your market, and your inventory? Don’t let these kinds of tools, which may have their uses, have too much influence on your thinking.
Honestly, I’m not quite sure what the second issue was, but it ended up with the usual hand ringing about margins on skate hard goods needing to be higher.
I worked up some righteous anger, but then Don Brown ended the meeting before I could get a word in. Probably just as well.
But after the meeting I reminded everybody who would listen that the previous ASR, IASC had sponsored a seminar where a major topic of discussion was Gross Margin Return on Inventory Investment (GMROII). Cary Allington from Action Watch had presented some very interesting numbers showing that if you took inventory turns into account, the margins on skate decks were not nearly as bad as people thought.
I had been arguing for a while that our new economic circumstances required a focus on gross margin dollars- not just gross margin percentages. Actually, I first suggested that years ago.   Cary brought GMROII to me attention and I wrote an article about it. I knew that inventory turns and inventory dollars were important, but GMROII gave me an elegant and effective way to put them together and compare how profitable it to sell a skate deck compared to, say, a pair of skate shoes.
So the source of my pissedoffness was that here we were again lobbying for higher margins, while ignoring turns and margin dollars and data suggesting that on a GMROII basis, margins on skate decks weren’t half bad. And I’m sure we’ll have the same discussion at the next ASR.
The article is on my web site and has a date of August 15, 2009 on it.  Cary’s numbers are in there and I think they will surprise some of you.