Zumiez’s Fireside Chat

/0 Comments/in , /by

Rick Brooks, Zumiez’s CEO and CFO Trevor Lang held a half hour question and answer session today at the Thomas Weisel Partners Consumer Conference in New York. Previously, Zumiez had announced on September 2nd that “…total net sales for the four-week period ended August 29, 2009 decreased 2.9% to $51.7 million, compared to $53.2 million for the four-week period ended August 30, 2008. The company’s comparable store sales decreased 12.1% for the four-week period, versus a comparable store sales increase of 0.2% in the year ago period.” Their comps for September were positive.

They started by defining themselves as an action sports lifestyle retailer (duh) and went on to explain what you had to do to be one. To Zumiez, that means you have to carry hard goods and all the brands (not only in hard goods) that you find in independent shops. They characterized their customer as “very smart” and as knowing what’s authentic and what’s not. Those customers are 12 to 24 years old and more male than female.

They focus on making their employees people who are living the lifestyle and they try to build a distinct culture that empowers these young people to localize product for their stores and create a vibe around it.
 
Their description of their business makes perfect sense. It also leads me to two questions. The first is what does it mean to be an action sports company? That’s a strategic question for every brand and retailer in this industry and one, I have to admit, for which I don’t have a good answer. That label, which has been around a long, long, time, might be seen to suggest that we are the same industry now that we were 15 years ago. But we’re not. If only because of the breadth of distribution and the number of non participants who buy our products we’re a lot different. I guess I’m not against the term as long as you don’t fall into the trap of thinking it means the same now as it did then.
 
The second question is more focused on Zumiez, but not only for them to think about. As they create this focused culture of cool kids who are committed to and invested in the lifestyle, are they defining themselves in a way that might restrict their growth or their attractiveness to certain consumers?
 
The answer, of course, is yes, they are. But every company decides who they want their customers to be and what they want to mean to them. Or at least they should. And any company that tries to be meaningful to everybody probably ends up meaningful to nobody. Unless, I guess, they are an electrical utility, for example. Interestingly, I wonder if Zumiez hasn’t helped themselves manage this issue by being mall based.   They can work to make their stores what they consider core while at the same time exposing themselves to a much broader spectrum of potential customers in an environment that is not intimidating to those customers.
Zumiez noted that their smaller brands are continuing to gain share and specifically that brands need to be careful with distribution and how quickly they grow. They indicated they hadn’t seen any bankruptcies from any of these brands and hadn’t had to do anything special for any of them because of financial difficulties.
 
I have been arguing for a while now that current economic conditions represent an opportunity for new and small brands. It appears Zumiez agrees with me.
 
One of the questioners noted that Zumiez use to talk about an operating margin target in the low to mid teens and asked if that was still a reasonable objective. Zumiez indicated it was, though not in the current environment. They said they were growing selling, general and administrative expenses at half the rate they had been before and spending $85,000 less on each store. Because of these adjustments, they think they can get to those margins with less sales per square foot, but not until sales turn around.
To me, that sounded like an acknowledgement that they have no expectation of sales returning to previous growth rates in the foreseeable future, an assumption I agree with.
 
Zumiez’s growth plans are somewhat restricted right now, and management pointed to the failure of landlords to be more realistic about the rents they could expect as a major reason for this. My belief is that the commercial real estate market is going to get worse before it gets better, and I expect Zumiez will eventually get the cooperative landlords it needs to open more stores. They seem to think so too, as they acknowledged the “capacity rationalization” (what a benign sounding term for something that can be so difficult) that was going on not just in action sports but in all retail sectors. In other words, we’ve got too many retailers and too much retail space
.
The last thing I’ll mention that really caught my attention was their description of how they were working with individual brands on strategies that were appropriate for them. They might, for example, ask a brand to explore a new product or category where Zumiez saw an opportunity. I don’t know how much of that they’re doing, but that guidance could be really useful for a smaller brand and might explain why Zumiez is having success with such brands.

 

 

The Post Recession Role of Company Stores

/0 Comments/in , /by

 

When a brand said, “We’re just going to open a few flag ship stores to build the brand image and collect some good consumer information,” I was okay with that. Made sense.
When it said, “We’re just going to open a few outlet stores to keep stuff that didn’t sell well out of the wrong channels,” I was okay with that too. In both these instances, I even bought into the idea that it wouldn’t hurt, and might even support, their specialty retail customers.
But when opening stores started to evolve into a vertical integration growth strategy, I got worried. It suggested saturation of the market and a lack of other growth opportunities. It was like the canary in the coal mine for the distribution issue. It might turn out to be good for consumers (if price, rather than any kind of “specialness” was the main purchase driver for them) but it certainly wasn’t good for the industry. Not for a moment did I think that somehow it was good for specialty retailers. I don’t think anybody actually did.
That’s not to say I think opening retail stores was a bad decisions for some brands. No more than I think it’s a bad decision for a retailer to decide to stop carrying a popular brand when they realize they can’t make any money on it because of how it’s distributed. One of my business mantras is that every company does what it perceives to be in its own best interest. That’s the way it should be. The interests of “the industry” come in second.
Well, wherever you go, there you’ll be. And here we are.
The market has changed. Some brands have closed stores, and certainly they are all thinking long and hard about how quickly and how many to open. Sales increases are going to be harder to come by. Gross margin dollars and expense control are going to be where businesses look to increase their profits. What does this suggest for the role of company stores?
By the way, I consider a brand’s internet sales another type of company store, and I think what I’m discussing here applies to the internet as well.     
Why Brands Open Stores
As a brand, the traditional ways to grow are by taking market share, by getting your piece of a growing market, by acquisition, by adding products, and by extending your brand franchise, under which I guess opening retail stores might fit.
When times were good and the cash was flowing, brands could look at all of those. Though of course, only larger brands generally had the capability to make acquisitions and open stores. From a strict financial perspective, having your own retail stores looks like a no brainer. If Gertrude’s Skate Shop can make money selling $1 million of product, they have to buy it from us (and other brands), and they carry lower margin hard goods, can’t we make even more? We can probably control certain expenses better, we can merchandise our stuff the way we want and, with luck, we won’t have any trouble collecting receivables from ourselves.
Now, I trust the actual analysis was a bit more sophisticated than that, but you can see that the initial financial analysis would be compelling—especially if you needed some more growth and didn’t know where else to get it. And if you figured times were so good and sales growth and cash flow so robust that the “fat and happy” syndrome, from which we all suffered and would no doubt like to suffer from again, meant that any business blowback, including dissatisfaction from your specialty retail customers, would be minimal.
Like managers at winter resorts who believe themselves to be great managers when the snowfall is good, we were all a bit deluded by many years of good times.
It’s Not Quite That Easy Any More
In the same way that no battle plan long survives contact with the enemy, no business plan gets far into implementation unscathed.
In the first place, you have to find people to manage and work in your new stores. I don’t care how well you know the product and the industry—running a retail store takes a different skill set than running a brand. How hard is it to get and keep good people? Look at the effort Zumiez puts into finding, training, and keeping good people for their stores. It’s one of their top priorities and never something they take for granted.
The best retail managers, of course, are already working at retail stores; stores that probably buy product from your brand. Call me mean spirited, but I’m just not seeing specialty retailers being happy about a brand they have worked to build hiring their people to work in the brand’s new store. Though perhaps there are now some good people available from retailers that have closed.
Next, you’ve got to stock your new store. VF Corporation has enough brands to comfortably diversify its store offerings, if you believe that enough of their brands belong in the same retail environment. Other companies may not, depending on what you believe about consumers’ retail preferences. Do they want to shop regularly in a store with only one or a few brands even if the assortment is very broad? Should you carry brands you don’t own in your stores?
What’s the impact on your overall sales? Will you increase sales, or will you just cannibalize sales from other places now that sales increases are harder to come by? Perhaps you’ll be happy if you just hold your sales levels, as this would improve your profitability based on the much higher margins you earn at your stores.
Assuming we’re not talking about an outlet store, how do you handle pricing? As an image store, you want to hold full retail. In fact, you’ve probably assured your other retail customers that you will. That’s all fine until those specialty retailers start discounting your product. Now what? Do you truly not care if nobody buys the stuff in your company owned stores because it’s cheaper in other specialty retailers? Tempting, in this environment, to cut those prices but still make a great margin, isn’t it? Maybe those stores you own become part of your strategy for reducing the excess inventory you got caught with last fall.
Before our economic circumstances changed, company stores posed some issues, but they somehow seemed manageable. Now, they require some harder decisions.
Like, for example, what is a brand’s relationship with specialty retailers? There are, of course, fewer specialty retailers, and fewer retailers in general. Though this was starting to be true long before the economy went south, big brands with wide distribution are and will find themselves getting a smaller percentage of sales and profits from specialty retailers.
The surviving specialty retailers aren’t going to be that excited about selling brands they really can’t compete and differentiate themselves with due to that brand’s broad distribution. I had an email from a specialty retailer a couple of weeks ago telling me about a certain brand he could buy at a big multi store retailer at their discounted retail price cheaper than he could order it directly from the brand. If that’s true, it’s hard to imagine him carrying that brand for long.
Specialty retailers will have no choice but to focus on smaller brands, or limited distribution offerings from large brands that give them enough margin and differentiation to survive. You just don’t stay in business by selling stuff you lose money on, no matter how cool it may be.
Specialty retailers and company stores are going to have less competition because of the decline in retailer numbers. Whether this makes up for the decline, or at least slower growth, in overall sales we’ll have to wait and see. If you’re a large brand looking to maximize your gross margins dollars in a period of slower sales growth, company stores can make a lot of sense-—if you can manage the (admittedly incomplete) list of issues I outlined above.
A large brand may tend to look at specialty retailers as a place where you want to be well represented, but not as the source of a lot of growth and profitability. Years ago, I suggested that brands should have a list of the 50 or 100 specialty stores they thought they just had to be in for brand integrity and credibility and make sure they were in them. I still think they should be doing that.
The corollary is that larger brands may have a preference for their own stores over smaller retailers that the brands perceive can be hard to work with and offer limited opportunities for growth. After this recession ends (whenever that is), and the associated retrenchment, I expect to see more company stores selling the more widely distributed brands.
The numbers almost demand it.

A Tale of Two Surf Shops. Kind Of.

/0 Comments/in , , /by

I grew up spending all my summers on Long Beach Island, New Jersey. That’s where I learned to surf. And just before anybody makes the comment yes, the surf is generally lousy and for anything really good we have to pray for hurricanes and a change in the prevailing south winds.

We still have a family beach house there, and I was back last week on vacation. We left, naturally, on Friday, the day before Hurricane Bill hit. So instead of getting surf, I got stuck with a five hour weather delay in the airport. Life is not fair.

Enough bitching and moaning and explaining. Naturally, since I was on vacation, I took the best part of a day and visited surf shops and I wanted to contrast two of them.
 
The first is Farias, which has been on the island for 35 years and has three locations. I was in the largest location in Ship Bottom. It’s open all year. It was attractive, well merchandised and well lit. The large selection of boards was upstairs.
 
It’s a big store and they carry, well, all the soft goods brands you would expect them to carry. Go look at the list on their web site here. http://www.fariassurf.com/products/surf-gear/ Even though Farias was large and carried all the requisite stuff you have to carry when you’re on the main street of a summer vacation town, it did a good job feeling surf focused- because it is.
 
The second shop was the Brighton Beach Surf Shop. According to Michael Lisiewski (who’s business card says, “Owner/ Surf Instructor,” the shop was opened in 1962, giving them 47 years under their belt. I’m assuming it was his father who started it- either that or Michael is the best preserved guy I’ve ever seen. They also started Matador Surf Boards around the same time.
 
Here’s the link to their web site. http://brightonbeachsurfshop.com/   Check out the list of soft good brands they carry- oh wait, they don’t have one. That’s because they don’t carry any of the usual soft goods brands. Not one of the 22 industry standards that Farias carries are sold at Brighton Beach. Of course they have some soft goods- sweat and hats and t-shirts. Many of them say Long Beach Island on them. There are probably some store t-shirts as well, but I don’t specifically remember them. Hey, I was supposed to be on vacation.
Why don’t they carry them? First, because merchandising just one of these brands the way Farias can do it might come close to filling the whole Brighton Beach store. If I’m exaggerating, it’s not by much. The place is a bit small.
 
Second, that’s not what their focus is. As I stood there, the kids came in and went out asking about surf boards and surfing. According to Mike, these are his key customers.
 
At Brighton you can get “Everything you need for a day at the beach.” You can get that at Farias too. Like Farias Ship Bottom store, Brighton Beach Surf Shop is open all year around. Unless Mike is out surfing or isn’t there for some other excellent reason. 
So we’ve got two surf shops, both focused on surfing, but very different in terms of how they do business and where they make money. Is one better than the other one? Nope. At 35 and 47 years, it’s pretty clear that they both have strong business models.
But what fell on me like a sack of hammers after my tour was that you can’t be Brighton Beach Surf Shop if you try and carry even one or two of the brands that Farias carries. And you can’t be Farias if you carry only one or two of those brands either.
 
Maybe I just don’t get out often enough, but it suddenly occurred to me that there might no longer be room for shops caught in the middle. You either carry a large assortment of brands (or you’ve got to figure out which ones to carry and that’s a crap shoot) or you carry few to none of the broadly distributed brands (because you can’t merchandise them well or compete on price).
Perhaps that’s already been obvious to everybody but me. Who says you don’t learn anything on vacation?

 

 

Boardshorts from a Vending Machine

/0 Comments/in , /by

If you read this http://www.nbcnewyork.com/blogs/the-thread/Swimsuit-Vending-Machines-to-be-Stocked-in-Hotel-52089002.html you’ll see that Quik has partnered with Standard Hotels to sell cobranded swim suits at boutiques and poolside vending machines for $75 a pair.

I’m not writing this to express an opinion (though I’m usually not loathe to do that) but just to let you know it’s happening and to talk about the general implications.

Just when you think there are no new distribution channels, up pops another one. I don’t know where the next one will come from, but I know it will appear. Is it at the expense of some other distribution channel? Sure. To some extent. But might it also create some new customers? Sure. To some extent.
 
Sales at resorts or hotel shops and pools are often to people who need something they need right now. I’d say you fit into that category if you want to swim and don’t have a suit.
 
Every time you choose a new way to distribute your product- each time it can be found somewhere different-, you change your customer base and the market’s perception of your brand. To some extent. Can you manage that so you get more customers than you lose? How many different distribution channels, partners, products and price tiers can you have before your brand evolves from what it started as to what it needs to be to attract those new customers you need for growth? Can you keep the old customers? To some extent. Figuring this kind of stuff out is what the best executives do.
 
I lied. I do have an opinion. I might not go as far as the writer of the linked article and say its “brilliant,” but I think it’s a good idea which might grow and is consistent with how Quik has evolved their brand. Even if it grows, it doesn’t feel like it will have much downside for other parts of their distribution. I imagine there are some specialty retailers already shell shocked by the recession and distribution issues that might disagree. But Quik, like all brands and all retailers, has to do what it perceives to be in its own best interest. I think they made a good decision.                           

 

 

What Forward Thinking Retailers are Doing: Trends That Probably Won’t Surprise Anybody

/0 Comments/in , /by

The issues that smaller retailers are facing haven’t changed much. There are too many retail stores, pressure from chains, brand stores and big boxes, a tough financial model, the challenge of keeping margins up, lack of product differentiation, increasing costs, over distribution.

 
That’s a cheery environment, isn’t it? You’ve got a choice. You can bemoan the unfairness of it all or you can take advantage of this tough environment that’s putting a lot of pressure on your competitors and do some things to stand out and that help you address these issues.
 
Here’s what I’m seeing successful retailers doing.
 
One- They Are Growing
 
Higher costs, more competition and margin pressure, too much similar product in too many places means that you need more revenue to make it. This seems so non controversial as to make this a really short section. It’s basically an equation; a fact. It just is.  But I’ve put it first because it’s the ultimate motivating factor for the other actions I discuss below. You have to make a profit if you expect to be around very long.
 
Two- Making Themselves Important to Their Brands
 
How does a shop do this exactly? Well, for a start, it pays its bills to the brand on time. It’s absolutely honest with the brand’s sales reps and management. It merchandises the brand well. It includes the brand in its own promotions. It provides feedback (good and bad) on what’s selling, why, and on trends it sees emerging. It does not abuse the brand’s warranty and return policy. And finally it does not let the brand talk it into buying products it doesn’t think will sell well or order sizes it doesn’t think it can move. As we all know, the season end conversations such moves engender are not helpful in building a relationship.
 
It may have occurred to you that growing (point one) contributes to making a shop important to the brand (point two). Could be a trend emerging here.
 
Three- Gives Credibility to the Brands They Carry
 
The best shops are the ones the brands just have to be in. The shop gives the brand credibility- not the other way around. Any brand carried by the shop is, by definition, credible. For a shop this can translate into flexibility in your relationship with the brand. That may mean, among other things, better terms and conditions, priority in new product and shipping, patience from the brand if you hit a rough spot, support for your community based activities, faster and more positive response from management, and more ability to pick the products and categories you carry. Obviously, it’s kind of a subset to point two above. However, I chose to separate it because at the extreme, when a shop really does this well, there is pretty much no brand they absolutely have to carry to be successful. And that ties in with……………….
 
Four- Expanding Their Circle of Influence
 
When it’s the shop that gives the brand credibility it’s because the shop has become acknowledged as an arbiter of trends and technical product attributes. They are a destination store for their customers. They are part of their community, but of course the definition of that community has changed. It no longer means just the geographic community, but a community of people with shared interests and lifestyles.
 
A customer’s awareness of an established brand is typically the result of that brand’s advertising and promotion programs. Those programs may have a lot to do with getting the customer into the store. But the decision to purchase that brand, in a shop with this kind of stature, can be heavily influenced by the experienced and knowledgeable sales people. You can hear the conversation in your head- “Brand X is a great brand and that deck would certainly work for you, but here’s a couple of others you might consider based on what you’ve told me about your style and level of experience.”
 
And that product, whatever it is, doesn’t necessarily have to be one the customer has ever heard of. If it’s in this store, it must be good. Kind of frustrating to a big brand, I suppose, to think that all their work advertising and promoting their brand and getting the customer into the shop turned out to be a chance for the sales person to sell a brand the customer has hardly heard of.
 
On the other hand, it might give hope to smaller, new brands. The support of shops like this ideal type shop I’m describing may be the best chance such brands have to prove themselves.
 
Five- Buying Together
 
I can’t tell you this is a wide spread trend, but I did have a conversation with one European retailer who was very happy with the result. He was a specialty shop in, I think, Southern Austria. He was practically chortling as he explained to me the happy circumstance he found himself in as part of an 11 store buying group. You see, it happens that the other ten stores were all in Northern Austria. So while all eleven stores got the benefit of better prices from buying together, the ten in the north suffered from the possible disadvantage of all having the same product. He, happily segregated in the south of the country, didn’t have to worry about that. No wondered he positively glowed as he described the scheme.
 
Of course, if you’re getting better pricing through some cooperative buying, maybe the pressure for growth (point one) declines a bit, and lord knows you’re becoming more important to the brands (point two). Maybe not more popular, but more important.
 
Interestingly, my advice to brands has always been, “Europe is different from the US. You can’t think of Europe as one market. You can’t even think of Germany as one market.”
 
That’s still good advice, and I expected it to apply to specialty retailers as well. I thought retail in Europe would be “different” from retail in the US. Imagine my surprise when, in the two years I just spent in Europe, I discovered that it really wasn’t- at least not in terms of the challenges European retailers were facing.
 
 Wow- wherever you go, there you’ll be.
 
By which I mean Europe seems to have the same damned problems we have, and I suppose if we can take any comfort from that it’s because it means we here in the US haven’t done anything egregiously stupid that Europe somehow avoided.
 
Finally- Taking Risks, But Not Really
 
I hope I’ve made the point that these five operational imperatives, to coin a really pompous sounding phrase, don’t stand in isolation from each other. Nor do they stand in isolation from the specialty shop’s retail environment I briefly described at the start of this article. There are as many tactics as you are clever enough to think of that you can try to move your shop towards the market position I’ve described.
 
I’ve talked to lots of retailers who were cautious about trying them. They cost “too much,” had never been tried before, there wasn’t time to do them, etc. In a word, they were risky.
 
And you know what? They are risky- especially if you try and implement them on a piece meal basis. It might even be true that it would be a waste of time.
 
What I’ve tried to demonstrate in this article is that the operational imperatives are related to each other and in fact support each other. Each of them is comprised of a group of tactics that each shop needs to identify based on its particular circumstances. There is a certain momentum you build as you support a tactic from one imperative with a tactic from another. You don’t increase risk by doing more- I think you reduce it.
 
Or look at it another way; If you agree that you got to have a financial model that makes sense, and you are struggling with your current one, and you agree that your business environment isn’t getting any easier and calls for some change, then even if there is some risk here, isn’t it less risk than doing nothing?
 
I’m going to use a word here I usually avoid because (at least for me) it frequently engenders serious confusion about what it means accompanied by a sense that it’s futile to try and figure it out and implement it. The word is strategy.
 
But of course we’re all following one even if we don’t know what it is, speaking of risk taking. And if, like me, you’re just a bit intimidated by “strategy” because you’re not quite clear what the hell it is, maybe we can get some clarity by just considering it a bunch of related tactics.
 
My five operational imperatives, or rather the tactics that would make them up, are a strategy to deal with the existing retail environment. You don’t have to say, “It’s time for a new strategy,” but you might consider picking some appropriate tactics for each operational imperative and start doing them. Might be fun, probably wouldn’t cost much, you might find that the results are cumulative and often quick to see, and there’s not much risk involves. Your business environment requires you give it a shot.

 

 

What’s Happening to Core Retailers? Things We Won’t Argue About- and What They Mean

/0 Comments/in , /by

Not long ago, I finally came up with a definition of core retailer that I liked. I was really proud of it because it had taken me about 13 years to settle on one I thought was accurate and useful.

Now, not all that long after I accomplished that feat, I’m not sure it really matters. I’ve begun to be concerned that the traditional concept of core stores is of diminishing importance (or at least they are being treated like they are of diminishing importance), and changing that is what this article is about.
 
I’d been thinking about this for a while.   But there were three pieces of information that finally made me decide to tackle it even though I knew it might not be too popular a point of view. In my endearing naiveté, I think that what’s important is that you consider the business issue being raised regardless of whether you believe I’m right or wrong. 
 
The Three Pieces of Info
 
Anyway, the first piece of information was the announcement that VF Corporation, the owner of the Nautica, Lee, Jans Sport, Vans, Wrangler, Reef brands, and a whole lot of others for that matter, was planning to go from 600 to 1,200 retail stores over five years. I didn’t even know they had 600 retail stores.
 
The second was a Business Week online article that talked about brands opening their own stores as a “survival strategy” response to big department store chains having fewer store fronts due to consolidation and chains getting better and better at designing and selling their own higher margin private label brands.
 
These two pieces of information made me realize how wrong I’d been two years ago when I asked a panel of specialty retailers at the Surf Industry Conference what they were going to do when there were 5,000 company stores in the U.S. I should have said 10,000.
 
The third was reading through the prospectus for Zumiez’s very successful initial public stock offering and noting that the company’s gross margin for its last complete fiscal year was 32.8 percent. Pac Sun’s, by way of comparison, was 36.4 percent. Both are doing a fabulous job and they do it with a gross margin that would put a traditional specialty retailer out of business in about 20 minutes. Don’t like Zumiez or Pac Sun for whatever archaic, incestuous action sports reason? Get over it. Their many customers like them and that’s what matters.
 
The Things We Won’t Argue About
 
So small core shops can not sell the same product as specialty chains at anywhere near the same gross margin and expect to survive. That’s the first thing in this article that I don’t think anybody can argue with.
 
Just for clarification, when I say “small core shop,” I don’t mean the guy with five store fronts or with one store doing $6 million annually. It’s not like it’s a walk in the park, but they can do well or even prosper. The second thing we can agree on is that there are fewer of these small core shops than there use to be. A lot fewer I think. I wish I had numbers on that. And no, I don’t know how many store fronts you have to have before you become a chain.
 
The third thing I don’t think anybody will argue with is that fewer brands are accounting for a larger percentage of total sales. Next is that these brands all want to grow. How’s that for a blinding glimpse of the obvious? And I don’t think I’ll get much disagreement if I suggest they are very interested in the broader lifestyle market as the major source of that growth- because after a certain size, that’s the place much of it has to come from.
 
The Brands’ Perspective
 
Given these “things we won’t argue about,” what might the motivations of larger brands be. How might the specialty stores fit into their plans?
 
The law of large numbers tells us that it gets tougher and tougher to get big percentage growth as your base starting number gets bigger and bigger. What that means is that even if a larger brand gets good increases from core retailers, it just won’t move the revenue or profit numbers as much as it use to. If you just talk about the small core retailers, it moves those number even less- perhaps not enough to really matter? I suppose, though you may be getting tired of my saying this, that that’s another thing we won’t argue about.
 
From a strict financial point of view, then, I can imagine that the larger a brand gets, the less it is focused on the core shops- especially the smaller ones. Most brands believe, I think, that core shops still have an important role to play in developing new brands, identifying industry trends, creating excitement, building the foundations of the sport, and defining the lifestyle. They want them to succeed. 
 
But there’s all this qualitative stuff and then there’s the sales manager sitting there with a budgeted sales increase she really needs to make. And the larger the company, the bigger the number in dollars. Where’s it easier to find those additional sales dollars? From a bunch of small shops or from one chain of 50, or 500, stores?
 
The sales and marketing people recognize the importance of the qualitative factors in establishing their competitive position and keeping on top of the market. Maybe the brands with their own stores think they can get some of the same kind of input through those stores that they can get through core shops. I don’t happen to think that’s true.
 
If I were a larger brand, I’d select, let’s say, 50 shops in Europe that are established, well run, influential, and on top of their market and its trends. We’d all probably pretty much pick the same shops for that select list.  Maybe it’s shorter than fifty. The greater your presence in those shops the better. I’d make sure my brand was well represented in those shops even to the extent of making some deals I would not necessarily make with a shop that’s not on my list. I’d utilize my relationships with those shops to gather much of my core market and retail trends information.
 
If your brand’s sales increases are less likely to come from smaller core shops, your customer base is increasingly broader than those that they appeal to, you believe you can get the marketing and trend information you need from a smaller, select group of shops and the dangers of broader distribution have declined dramatically, where would you focus your time and effort? I know where I’d focus mine.
 
The Good News
 
Maybe I should have started with this section so small shop owners weren’t rushing to their doctors for lithium prescriptions for depression by the time they got here. 
 
There’s no advice leading to a miracle fix here. Hard goods are tough, shop owners need to run their shops like businesses, margin and competitive pressure is real, and your revenue level needs to be higher than it use to be for you to have a viable financial model.
 
But I want you, on the other hand, to consider the size of the potential market out there and all the people who want cool shoes and clothing but aren’t ever going to buy a skate board. My god, it’s huge. If it wasn’t, frankly, you wouldn’t have these problems- or these opportunities.
 
Do what I do from time to time- wander into a shop in a chain you think is doing a good job. Not for a five minute walk through. Talk to the sales people. Engage the manager in a discussion about how they do things and why. Look at their layouts and their use of wall space. Watch who their customers are. Make some notes about their pricing. Rigorously compare what you carry with what they carry. I do this to gain information (not often enough) without saying I’m writing an article or making an appointment or anything. I just engage whoever’s around in a conversation about the store and the industry.
 
Who on your list of the absolutely best shops is in your area? Go visit them and do the same as with the stores above. How come the biggest brands are so focused on those stores? It goes beyond sales volume I think you will find. Ask the owners, who will probably be willing to talk to you if you call them in advance and if you aren’t too direct a competitor, how come they are so successful.
 
Look, you do have a certain level of legitimacy that the chains don’t have and there’s a huge potential market out there. You can go after your piece of it without losing your vibe, or coolness, or whatever the word is to explain your distinctiveness. In fact, you have too. It may look risky, but consider the alternative. Do what you have to do to be one of the stores that major brands feel they just have to be in.

 

 

Conversations with a Skate Retailer; A (Pretty Much) True Story

/0 Comments/in , , /by

Some month ago, I got a call from an actual skate retailer. “It said at the end of the article that you work with companies in transition,” he asked almost as a question. “It’s true,” I told him.

 
“Okay,” he said. “Help me with mine.”
 
The story unfolded like this. He’d been in business for a bunch of years, and loved the business. He was doing about $500,000 a year but increasingly it was a struggle to make ends meet. He seemed to be feeling a little run down and beat up from the constant pressure of making ends meet financially and working long hours without enough help. Anybody out there sympathize with him?
 
Breaking the primary rule of having a consulting business, I started asking questions to try and figure out his situation and help him before he’d agreed to pay me anything. Oh well, so I’m a pushover. He seemed like a nice guy.
 
The conversation revealed that his product mix was about 60 percent decks, trucks and wheels and 40 percent apparel and shoes. Margins were “good” on the apparel and shoes and “not so good” and declining on hard goods. He couldn’t be much more specific than that, and didn’t even want to hazard a guess about which brands gave him the best margins and what they were. Nor was he real clear with me on which products and brands were turning how quickly.
 
The finance guy in me perked right up. I started ranting and raving about his need for point of purchase registers, new computers and advanced accounting software, and revising his chart of accounts forgetting for a minute that this was a $500,000 retail store, not a chain or huge stores. The long pause on the other end of the phone line brought me back to earth. It was clear that a big investment in equipment and hiring a financial controller wasn’t going to happen.
 
“Let’s try it another way,” I suggested. “Ignoring the small stuff and what you don’t sell much of, so you know what you sell everyday by category and brand?”
 
“Sure,” he said.
 
“And you know what it costs you, right?”
 
“Of course I do,” he said a little frostily, beginning to think I was suggesting he was an idiot.
 
Then I asked, “And you can come up with a pencil and paper, can’t you.”
 
Before he could tell me to go directly to hell and hang up, I said, “Well, then you can figure this thing out!” He was still unsure what to make of me, but at least he was still listening.
 
Every Sunday evening, I told him, he should get his sales records, dealer invoices, the pencil paper, maybe a calculator and a cold beer and sit down at a table. “Get the beer first,” I corrected myself, “And don’t put the beer on the pad of paper. It’ll make a big wet circle.”
 
List your dollar sales by category and brand.
 
Get your costs for those sales from your supplier invoices. Pretty soon, you’ve got a neat, one or two or maybe three page document that shows you your sales and gross profits by brand and product category. Do what works for you. Might look something like this.
 
Week Ending:
 
 
 
 
 
 
COST OF
GROSS MARGIN
 
SALES
GOODS
Dollars
percent
 
 
 
 
 
Decks
 
 
 
 
 Brand one
 
 
 
 
 Etc.
 
 
 
 
Total Decks
 
 
 
 
 
 
 
 
 
Wheels
 
 
 
 
 Brand one
 
 
 
 
 Etc.
 
 
 
 
Total Wheels
 
 
 
 
 
 
 
 
 
Shoes
 
 
 
 
 Brand one
 
 
 
 
 Etc.
 
 
 
 
Total Wheels
 
 
 
 
 
 
 
 
 
Apparel
 
 
 
 
 Brand one
 
 
 
 
 Etc.
 
 
 
 
Total Apparel
 
 
 
 
 
 
 
 
 
Total Sales
 
 
 
 
 
 
 
 
 
 
Small business owners have a lot of this information in their head. But usually not all of it, not accurately, and not in a way where they can see the relationships. As your business gets bigger, keeping it all straight in your head gets, first, more difficult then impossible.   But with a weekly chart like this one, you can see which brands are moving, how your margins are, and how sales of one brand compares to another.
 
Consider the decisions you can make after you’ve been doing this for maybe a couple of months and have accumulated some data. Where are you actually making your money? Should you be carrying more of that product or brand? What is it time to discount and get rid of? What are the financial results of changing your product mix and increasing your gross margin by a couple of points?
 
If you want to get a little fancier, include columns for cumulative sales and margins from the first week you start doing this. There will be nothing to it if you’re doing it on a computer and using a spreadsheet. One last iteration might be to show the total inventory you’ve got in each brand and category. Obviously, sales have some relationship to what you’ve got in stock, and you wouldn’t want to condemn a brand for poor sales when you’re low on inventory.
 
Such an analysis isn’t just financial in nature, but is the starting point for evaluating some important operating issues. In the case of this particular retailer, we pretty quickly got around to asking how and if he could change his sales percentages from sixty percent hard goods and forty percent soft goods to the other way around. We knew, though we couldn’t be specific during the conversation, that the change would have a major impact on his financial situation.
 
I asked him some questions about his store layout and merchandising. It seemed like it had been a while since he’d changed some of his fixtures. His lighting, he acknowledged, might not be quite up to par or focused on the products he was most interested in moving. It sounded like some reorganization of his selling space was overdue and that product access could be improved. I don’t know a hell of a lot about merchandising and layout, but people who do know have told me that changes in these areas almost always result in sales increases and need to be done on a regular basis.
 
I wasn’t telling him to throw out all his fixtures and displays, trash his lighting, and redecorate his whole store. It wasn’t in the budget. But maybe some of those fixtures could be spray painted and put in a different place. Maybe the light bulbs could be changed to a higher wattage. Perhaps a coat of paint on one wall would help highlight some of his higher margin, but slower moving product. Couldn’t he use some of what he’d learn in the simple financial analysis described above to make some inexpensive but effective merchandising and marketing changes in places where they would do the most good? I mean, just changing things in your store from time to time is a good idea, but tying those changes to specific opportunities for financial improvement makes it an even better idea. 
 
The point, I guess, is that financial analysis doesn’t exist in isolation from other aspects of your business. The analysis isn’t difficult if you have some simple systems and doesn’t require a complex knowledge of accounting. It shouldn’t be looked at as forensic. That is, it’s not just something you have to do at the end of each month, quarter and/or year to satisfy your banker or the tax guy.
 
Besides, standard financial statements by themselves will not give you all the information we discussed above. But you need it to make day to day management decisions.
 
So improvise a little.  Get out the beer, pencil and paper and calculator. You live or die by your gross margin. Use the information about it that’s at your finger tips to make better business decisions that are responsive to the changing skate market.

 

 

The Dilemma of Being “Core;” Identifying and Managing the Conflict.

/0 Comments/in , , /by

A few years ago I wrote a column called “Are there Any Core Snowboard Shops Left?” It generated a good discussion, though I got burned at the stake by quite a few people. Happily, I was wearing my asbestos underwear.

The question, however, is still valid because of some of the problems core shops are having and how important they are to the industry. I want to talk today about why the snowboard business for a core shop is either easier or harder than other action sports businesses and why it may be a tougher business proposition to be “core” in snow than in other businesses.
I also think, much to my amazement, that I’ve come up with a working definition of what a core shop is and I’ll present that to you later. Only took me fourteen years.
Having a definition is important if we want to say anything meaningful about what core shops do, why it is meaningful, and how they might do it better. Like the resorts and the suppliers, they have a role to play in resisting the snowboarding business degenerating into a more and more price driven game and in continually finding new participants. In the long term all three groups have the same interests. In the shorter term, these issues are most important to the shops.
Easier and Harder
Extreme seasonality defines snowboard retailing. You get just one chance. So, if you’re a flinty eyed business person, you order cautiously, thinking that you’d rather be pissed that you didn’t order enough than if you had to pay for it and carry it over until next season. You buy mostly mainstream stuff that you think is likely to sell best, and your selection is heavily influenced by prices, terms, discounts, and other similar goodies. If it doesn’t snow, or doesn’t sell, you discount it ruthlessly and early. It’s got to be gone by the end of the season. Once the season is over, say the early part of February, that snowboard stuff disappears and the floor space is largely filled with whatever season is next.
That was easy, and as low a risk as you could make it. But it was hardly core. We’ll get to the official definition. Among other things being core requires that you carry enough stock in enough brands to really serve serious snowboarders even if they aren’t most of your customers and that you take some chances on brands that maybe aren’t mainstream or haven’t been around long. probably means some other things that increase risk and cost. Like having employees with enthusiasm for snowboarding and its lifestyle. And supporting the local community.
At the end of the season, even a good season, at least some of that snowboard stuff probably still sits there, gobbling up floor space and working capital. It generates some occasional sales, though not near what you could get with different product. But you’re core so you do it and it costs you money. That’s harder.
I’ve illustrated two extremes. The magic of successful retailing, of course, is finding the sweet spot in between those extremes that works for the customers and doesn’t blow your bank account.
Still it’s obvious that being a core retailer in snow is a lot harder than in a retail business where participation doesn’t stop dead for eight months of the year even if it slows down. Like skate or surf. But it’s not only harder because of the seasonality. People who don’t skate or surf still buy skate or surf brands to wear. Certainly some of that goes on in snow, but I suspect that most snow soft goods (or at least a higher percentage than in surf or skate) are sold to people who want to use them snowboarding. That makes for a much smaller possible market.
Which, we can probably all agree, is why shops don’t just do snowboarding anymore. There’s no business model that makes sense. Looking at a single season, it probably doesn’t make financial sense to try to be “core” in snow. It just costs too damn much.
The Definition
A core retailer is one that has a primary focus on customers who are drawn to the lifestyle and keyed intothe trends associated with the activity they participate in. This focus is shared by the shop owners and employees. Many of its customers tend to purchase more often and be less price sensitive than others. Though it is not necessarily true that core retailers are small in size, it is reasonable to say that being a core shop becomes more difficult as your size and number of storefronts increases.
What I’ve suggested above is that, due to being a one season business, and for other reasons, there are some risks and costs to being a core snowboard shop that don’t exist in the same way or to the extent they exist for skate or surf. That’s bad because we need the core shops, we all say. Just to refresh our memories, we say that because they are the first ones to spot trends, have a role in incubating brands, and in creating and maintaining a bedrock of excitement that supports the industry through good times and bad.
Where Do Enthusiasts Come From?
From the womb I suppose. Which is my way of saying that these lifestyle participants we, as business people, depend on tend to be younger. And as they get older, they begin to develop other priorities. What was a passion and a lifestyle becomes a sport. It competes with other uses of time and money and may no longer be the thing they find a way to do no matter what. We can market our asses off, but we’re seriously drinking the kool aid if we believe that any amount of clever marketing will change this inevitable evolution as people get older.
So that’s going to happen? We will lose participants, or at least frequency of participation and people will be less inclined to buy new stuff more often.    And they will have less propensity to buy soft goods if they are participating less. As I said above, I think surf and skate sell more broadly defined soft goods to more former or non participants than snow does. Participation is more important to snow than to skate or surf. Look at the percentage of total surf revenues represented by surf boards.
Well, okay, if snowboarders are inconveniently going to get old in spite of all our outstanding advertising and promotion, where are the new participants we need going to come from?
Like I said, from the womb. Well, this is hardly a surprise. SIA spent a whole lot of money having studies done that, in part, showed the importance of getting participants started young. Resorts and brands both have their parts to play in keeping new, young participants coming into and staying in snowboarding. But so do the core retailers. What should they do?
Action Items
First, it would be good if you stayed in business. That, by itself, would help a lot and is by no means an easy thing to do.
Second, stop agonizing over broader distribution and company stores. It’s here to stay and it’s unlikely you can do much about it, except of course take it into account as you consider how you run your store.
Third, get bigger. The numbers show that smaller shops have higher leverage (risk) and lower returns on net worth.
Fourth, even if your roots are in snowboarding, and you see yourself as a core snow shop, don’t use that as a reason to exclude other products that make sense. Try to limit your financial dependency on snow. You can be a “core” snow shop even when a lot of your total sales are from other products.
Fifth, have a cash flow that makes sense and build it with special consideration for your (I think) less predictable snowboard business. And in that cash flow, plan to pay your suppliers on time. I don’t know why, but they seem to like that. It’s also a big step in accomplishing point number one.
Sixth, though your roots may be in snow, I think retail business conditions require that you think of yourself as an action sports shop. It’s the financial model that works. Treasure the crossover customer.
Seventh, build relationships with winter resorts that help get new participants to the slopes. That’s worth another article. I can tell you from sending a few emails that some of the best stores are already all over that.
What writing this article has made me realize is that there is, in some sense, a conflict between being, thinking, and acting as a core snowboard shop and having a solid business model. Maybe that’s too strong, and I know there are some notable exceptions. Still if success requires, and I think it does, that you are active in areas besides snowboarding, can it be dangerous to think of yourself as a snowboard shop even if that is your focus? To put it in fancy business school-like strategic planning terms, if your mission statement isn’t aligned with your business model, you’re screwed.
Sorry, not allowed. We can’t have the core snowboard shops screwed if they are going to fulfill their role in developing new participants. Think about this possible conflict—we really need core snow shops, but being too core in snow alone may hurt a shop’s chances to grow, succeed, and influence new participants. Where’s the balance for your shop?

 

 

Self Help for Core Retailers; The Coastline Model

/0 Comments/in , , /by

Hi, I’m back. This was just too interesting not to inflict myself on. And I imagine O’Brien couldn’t find anybody else willing to touch it. 

From the last issue of TransWorld Biz, you may remember that our hero, Sean Kennedy of New Zealand, had started a company called Coastline owned by, so far, 42 core surf shops in New Zealand. The purpose of Coastline, as reported earlier, was to provide small retailers with the scale and collective resources to allow them to create and sell, just like the larger chains, their own store brand (Coastline) which they could control and earn a higher margin on. Seems simple, but I imagine that organizing a group of independent retailers and getting them to cooperate is a lot like herding black cats in the dark. But you know what? I like it.
 
I like it because it’s retailers taking the bull by the horns and helping themselves to deal with the issues we know exist for specialty retailers. I like it because it represents a realistic evaluation of how the retail market is evolving. I like it because it may be the difference between success and failure for some of the specialty surf retailers we all seem to believe are critical to the industry.  I like it because it can evolve to be much more than it is right now. I like it because after talking with Sean, I’m convinced it’s being done in a professional and businesslike way.
 
And I like it, truth be told, because I love anything that stirs up the pot like this. This is not “more of the same” to quote me.
 
Why Now?
 
This ought to be a really short section. Being a specialty shop in surf, or in any action sport has become a really tough business. People who aren’t either growing, or increasing their gross margins, or both, are going out of business. Growth happens, and if the market is growing I guess you can expect to get your share if you do things right. If it’s not, or if you want to grow faster then it’s hard work and costs money.
 
It would sure be easier to make money if fifteen or even a higher percentage of your sales were from a product that made you a 60% gross margin instead of 38%. It would be even nicer if some of those sales were incremental because this product represented a great value for your customers.
 
Let’s see, 15% of sales of one million is one hundred fifty thousand. Twenty points on that is $30,000. But if, let’s say, $50,000 of those sales are new, then you get $20,000 on the incremental gross margin plus 60 percent of those $50K in new sales, so the bottom improvement, more or less, is a total of $50,000 in additional gross margin. Granted, I just pulled those numbers out of my posterior parts (or “arse” as they call it in Dublin). But it’s kind of an interesting calculation, don’t you agree? 
 
So that pretty much deals with “Why Now?”. Hey look, I did keep it short.
 
How Do They Do This?
 
A few years ago, I had car insurance with what was called a mutual insurance company. That meant I paid my premiums, based on how much insurance I wanted and how many little old ladies I’d run over while intoxicated, and at the end of the year, depending on how the company did, I got some money back. It could be more or less depending, for the company as a whole, how many of those little old ladies were unhappy about being crushed.
 
Sean wasn’t all that forthcoming about details, but said my insurance analogy wasn’t too bad. Basically, the stores that are owners put up capital each year based on how much product they want. The company designs, gets made, and delivers the product. Coastllines also has to pay its people and own expenses. But it isn’t trying to show a big profit- it’s goal is to help its owners/members make more money. 
 
Coastlines is a bit cautious about what kinds of shops they allow to join the company. For now, they have to be surf shops, but equally important, they have to have a certain level of financial strength. Coastlines is no more interested than any brands in customers, even if they are owners, who can’t pay their bills. Makes sense to me.
 
Of course, that means that the shops who most need this kind of help are less likely to get it, but I’d hate to see the whole concept endangered because of the problems of a few owners, so I guess that comes under the heading of “oh well.”
 
The design work is all done by Coastlines, but they aren’t looking, in Sean’s words, “To create the image for 16 year olds. That’s Quiksilver’s and Billabong’s job. We just want to make an attractive product that sells well and gives the retailer a good margin.”
 
So they are going to be a bit behind the curve and look for what they consider to be the best and safest ideas they see. I suppose that might annoy some people but I can’t say that I see that as being different from what major retail chains do when they do private lable.
 
Sean was, as I would have been, tight with his numbers. That is, he didn’t give me any. But let’s generously assume that his 42 stores average $1,000,000 each annually in sales. Let’s say 20% of their business so far is Coastlines. If those numbers were anywhere near accurate, total retail sales of Coastlines would be (42 x 1,000,000) x 0.20 or $8.4 million New Zealand dollars. I want to emphasize again that I have no idea what the real numbers are, but I’m working towards making a point here.
 
Of course, Coastlines is selling the product to its owner shops at its cost plus some mark up. You pick the markup you think is appropriate and decide for yourself what Coastlines’ sales as a company are.
 
My point is that Coastlines needs to get bigger before it can really take advantage of economies of scale and have buying power with factories. Still, it’s way beyond what a single shop could hope to do already, and that’s why Sean thought it was so necessary.  How might they get bigger?
 
Future Plans
 
This is the intriguing part isn’t it? Sean was closed mouth about how Coastlines might evolve, but that was fine with me. I’ll have a lot more fun envisioning possible futures for Coastline without being encumbered by facts. He did let a few things slip. He allowed as he’d had some calls from different people in different part of the world and in different sports. And when I asked about having other action sports shops as owners, he said, “Not yet.” So he’s thinking about it and, I’m expecting, will be pulled toward growth and other avenues of expansion besides surf. It will be fun to watch.
 
One thought I had was that there wasn’t any reason that Coastlines couldn’t easily function as a trade association as well and offer benefits and services similar to the Board Retailers Association in the US (Join BRA if you haven’t already). And many months before I ever talked to Sean or heard of Coastlines, I had heard rumblings of some form of retailer cooperation from some pretty solid US retailers. If it works in New Zealand, I can’t see any reason it shouldn’t also work in the States. 
 
Right now, Coastlines’ product line consists of wet suits, some simple mens’ and women’s apparel, and a couple of pairs of shoes and sandals. The point is that it’s soft goods and, with the exception of wet suits and maybe sandals, the design and sourcing translates from surf to skate and maybe to some other places with little difficulty. Most retailer, even core surf shops, are selling lifestyle street wear to non participants. I can’t see any reason why Coastlines couldn’t move in that direction and find an attractive source of growth that would be consistent with its core mission. If surf shops, in the midst of unprecedented growth in surfing, need this kind of support, how much more must other kinds of sports specialty shops need it?
 
And the Brands?
 
Well, hell, I assume they would prefer that everybody buy their stuff and that there was no private label business from anybody. And they are probably still watching BRA out of the corner of their eye to see if Roy Turner is going to turn it into a buying group, which he keeps saying is not his goal. They’d also like it if all shops always paid their bills before their due dates and never returned any warranty product. And myself, I’d like to win the lottery, but I’m not holding my breath.
 
Sean and I, and maybe even most of you, agree that it’s too bad that distribution has become as wide as it has. And we wish the specialty retail environment hadn’t gotten quite so tough and competitive. And we’re not quite sure we’re thrilled with all the company stores being opened.
 
And then we shrug our shoulders and go, “If I was a brand, I’d be doing the same things.” We hope it turns out to be good for the industry. We know it’s the nature of competition and will be good for the brands who do it best.
 
But unlike some other people, Sean isn’t hoping brands won’t open stores. He isn’t bitching and moaning to his supplier when it open a shop down the street from him. He’s said, “Okay, this is how it is. How can we respond in a positive way that supports the shops that everybody in the industry thinks are critical to our industry’s future?”
 
If the shops aren’t incubators for new ideas and brands, if they aren’t aware of trends, if they and the brands don’t keep the lifestyle alive, then it’s just a sport and is less of a priority to the participants. And then it’s price that matters.  Let’s hope Coastlines continues to succeed.

 

 

“Hey Look! Real Retailer Numbers!” What’s to Learn From Them?

/0 Comments/in , /by

For a while now, I’ve been carrying around in my back pocket the National Sporting Goods Association’s 2004-2005 Cost of Doing Business Survey.

I have no idea why they call it that since it obviously doesn’t contain any numbers from either 2004 or 2005.
 
Well, never mind. They do it every other year and collect actual financial date from sporting goods retailers of various types and sizes. They got 314 responses to their survey. 226 of these responses were from what they called “specialty” stores. 217 (not all “specialty”) were from retailers with only one storefront. Now, these aren’t skate shops. They are bike, ski, camping, and exercise/fitness stores. Look, I’m sorry and if any of you know of a detailed survey of the financial performance of skate shops you should by all means write an article about it.
 
But as I’ve argued on a number of occasions in, uhh, well, another magazine…….. Ohhhh, I feel pangs of guilt.  I’ll get over it.
 
Anyway, I’ve argued that the problems of specialty retailers in sporting goods are more the same than they are different at this point so deal or do your own survey. Based on the survey, here are some things you might want to think about as you manage your shop.
 
Earn 4% With No Risk!
 
That’s the current pretax yield on 10 year U.S. Government treasury securities. Generally that’s considered to be a risk free investment. Junk bond funds, according to one source, typically yield about 8% higher than Treasuries, or around 12% currently.
 
For all 314 of the surveyed retailers, not all of which are specialty, the before tax return on net worth  (which is a lot like yield) was reported to have declined from 15.8% in the 1993-94 survey to 9.2% in this survey. That’s a decline of 42% and brings us well under the junk bond fund yield I’ve included for comparison purposes.
 
For non financial people, the word “junk” can have a negative, almost personal, connotation. But it’s just a low rated bond that has a greater chance of default than an investment grade security. Those of you have had to borrow money to run your shops and could only do it with a personal guarantee know that however your risk compares with a junk bond fund, the lender didn’t consider the risk low.
 
The survey also shows that, over the same period, the before tax return on assets for all 314 respondents fell from 5.7 to 3.9 percent. In the intervening surveys it fluctuated at higher levels of from 6.4 to 9.9 percent, but 3.9% is where we are in the latest one. The return on asset number is not necessarily comparable to a yield, but you can see that the trend is the same.
 
Net profit before tax as a percent of total revenue fell during the same period from 3.0 to 1.8 percent, though it was higher in the intervening surveys.
 
On the positive side, gross margin rose from 36.4 to 40.8%. That’s an indication, I think, of increased sales of shoes, apparel and other soft goods. I’m not prepared to believe that hard goods margins have increased. Inventory turnover improved from 2.4 to 2.7 times.
 
Wait a minute- if gross margin is up and inventory turns improved, how come profitability is shot to shit? You don’t have to be Sherlock Holmes to deduce that the cost of running a retail store has gone through the roof. But you already know that, don’t you?
 
The survey only supplies these kinds of time series numbers for the complete sample- and they don’t supply balance sheet numbers across time. But I will tell you that the risk associated with running a shop has grown. You’ve watched as people open fewer shops and more close and you know the same thing.
 
So, higher risk and lower returns. That risk free 4% return is starting to look sort of interesting. What can you do about this?
 
Grow, Damn It.
 
Just to get right to the heart of the matter, below is a chart you should look at with data taken from the analysis of the 226 specialty shops in the survey.
 
Store Revenue
Owner Comp. & Profit to Revenue
Total Debt to Total Assets
Less Than
$500,000
7.6%
79.7%
Greater Than
$2,000,000
8.8%
56.2%
 
 
In percentage terms, bigger stores earn more and take less financial risk. Their profit margin is almost 16% higher and their leverage is 29% lower. Be bigger. And recognize that it’s hard to see a financial model that makes sense for very small stores. For those of you who are small and are making it, I’d love to hear from you to find out how. That would be worth an article.
 
Be Important to Suppliers
 
I suspect most shops get a big chunk of their sales from a relatively small number of brands. Those brands are critical to your shop’s success. Bluntly speaking, you can’t survive without most of them. But as they grow, and as their distribution widens, the financial importance of your sales to their success inevitably declines. You can’t differentiate yourself with your numbers, but you can with your input.
 
Tell them what’s selling or not selling and why. Give them insights into trends. Send them a list of comments kids have made about their brand- or about other brands. Don’t just wait for the rep to come in. Go right to the sales manager, or higher in the organization, and tell them. Don’t do just what they expect or what they ask for. Do more. Surprise them. I bet it’s not really much work because not that many retailers do it.
 
Oh, and pay your bills on time. If you don’t, your credibility is shot to hell no matter what you do and you’re just another problem. By the way, my definition of “on time” is that the check arrives at the supplier on the due date.
 
Tell the brand what you’re doing to support it. Be perceived by the brand to be important to its success in your local area. Become the shop the senior managers want to visit when they are in town. In turn you can expect?  Well, what would you like? Ask for it. Now, you have the credibility to get it.
 
Not for a moment am I suggesting that this can, by itself, overcome the apparent financial disadvantage of being a small retailer. Indeed, it probably only helps once you are well established.
 
Live the Numbers
 
I recognize it’s inconvenient when some pencil pushing, number crunching, calculator carrying, green eyeshaded SOB like me comes along to present you with inconvenient facts. If you feel like it, shoot the messenger. Lord knows, I’ve been shot often enough. I await your slings and arrows.
 
It’s difficult, I suppose, to deal with some of this stuff because we didn’t get into this industry as a clever shortcut to becoming accountants. Still you need to be one now more than ever. Look dispassionately at your numbers. How does your business compare to the NSGA numbers? If the industry, and the retail environment, continues to evolve as it is now, and the financial trends in the NSGA report continue, how, to put it bluntly, will you survive and prosper? You can, you know. And the industry needs you to. But you have to plan for it.
 
The NSGA can help you. So can the Board Retailers’ Association and the Retail Owners Institute. Don’t sit on your ass and wait to be swallowed by the whale (hell of an accidental analogy) like Queequeg in Moby Dick.
 
About the Numbers
 
It’s my personal belief that it’s the retailers who are doing fairly well, and who have the systems to provide the requested numbers without too much work, who are likely to respond to surveys. If so, it skews the numbers towards showing better performance. Also remember that in small businesses, the owner’s financial position and the business’s are synonymous. Return on investment may look lousy only because the owner is taking a bunch of money out. That’s why I used owner’s compensation plus profit to revenue in the table above. Finally, beware of small sample size. 314 retailers may sound like a big sample, but once you start dividing them up into full line and specialty, by store size, by revenue, by type of store, some of the group sizes can begin to get a bit small. That’s why the NSGA has used the median, rather than the mean in its calculations. The mean can be distorted by a couple of extreme values- especially as sample sizes get smaller. The median doesn’t have this problem.