Company Stores and Retail Consolidation; What’s a Core Store to Do?

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At the Surf Industry Conference last May, I was the last one to ask a question of a panel of very successful specialty retailers. I acknowledged that I was sure they would all continue to be successful, though I doubted they were representative of most retailers out there. And then I asked them, “So what happens in let’s say five years when there are, just to pick a number, 5,000 company owned specialty stores in the United States?”

The panel grew quiet. The microphone was removed from my hand. One panel member finally volunteered the idea that in the normal course of business, some retailers come and some go. The meeting was adjourned.
You know, I have got to stop doing that. Asking people tough questions about real business issues with political overtones in a public forum is simply no way to build a consulting practice. Still, even if I have to say so myself, it’s a hell of a good question and worth exploring further.
Lest anybody be unclear, the question is not if there are going to be more company owned stores or if chains that target the same customers as the core stores will open more stores. There will be and they will. The question is how the role of core stores changes, if it does, and how they respond.
Why is This Happening?
Oh, the usual reason. To grow and make more money. Ho hum. For some reason (and this is worth another article), companies that don’t grow seem to have a hard time surviving in the action sports business. And, come to think of it, that’s true in any business. To grow, you can grow the market, take share from competitors, buy companies, start new brands, or go into new (but usually related) businesses like retail. Those are the only choices I know of.
Leading companies in snow and surf have learned that it’s hard to increase your market share past a certain point. You can get your share of any market growth, but not increase your share. Once you get to a certain point, there seems to be a backlash from your competitors, the retailers and, most importantly, the consumers, that keeps your market share from increasing.
Markets don’t keep growing fast enough to satisfy growth requirements. Acquisitions that make sense, especially if you aren’t a publicly traded company with well valued stock to buy them with, aren’t always easy to come by. New brands take investment, some time to succeed and, at the end of day, are often just another form of trying to take share from competitors- unless you’ve spotted a new market. But meaningful new markets don’t come along every day.
So if you’re a brand, you think about opening retail stores as a new, but related, business which you can maybe grow faster than your existing business. And you notice that while your cost structure is neither better nor worse than any other retailer, your profit structure is a hell of a lot better than core retailers selling your brand. This is simply because you are selling, to a greater or lesser extent, product you, as the brand owner, were already having made.  And you are selling it to your retail outlet at your cost. It’s for this reason that retail chains not owned by brands push their own brands- the gross margin is a lot higher.
It’s also why I expect to see more consolidation of retail stores. Higher margins through private label require a certain volume of business, and unit costs do come down with size as your ability to negotiate with brands increases.
Industry Dynamics
It’s funny, because no matter whom you ask in this business, distribution is an acknowledged issue. At some point, distribution becomes too broad. “It’s not good for the industry,” most will admit, “If you can find everything everywhere.” And margins- look, for sure margins have been under pressure and they need to be higher. Just ask, oh, anybody. Core retailers are for sure important to the industry, and we obviously need new brands to lead the way. “Everybody” thinks so.
But at the end of the day, every manager of every business is going to do what they perceive to be in the best interest of their company. You will. So will I. Every damn day.
We’re going to look for ways to grow and to increase our margins.   We’ll expand our distribution because there just isn’t enough growth in core shops for larger brands. We’ll get stuff made wherever it’s cheaper because all this “me too” product means that differentiation is tough and price is an important way of competing. We’ll open more stores. And as we do this stuff, we are legitimately and seriously and really going to be   worried about the core retailers.  Brands will do some things to help them. But we’re still going to do what we perceive we have to do given a tough, competitive environment.
I’m not saying this is a good thing, though maybe it has benefits for the consumer. I’m not saying I want it to happen. I’m just saying I’ve watched enough business cycles (in action sports and other industries) to be pretty certain this one won’t be any different. Don’t just shoot the messenger- think about the issues and how your business can benefit.
Position of Core Retailers
 
In its fiscal year ended January 31, 2004, Pacific Sunwear reported a gross margin of 35%. It stated that 32% of its business in the same year was private label. I couldn’t find anywhere what the gross margin on its private label business was. But even with 32% of its business being higher margin private label, its overall gross margin was only 35%.
Quiksilver, obviously a supplier to lots of retailers, in its year ended October 31, 2003, reported a gross margin of 44.4%. Now, there are some retail sales from some of its own stores in there, and probably some other sources of revenues from things besides its core business of making stuff and selling it to other retailers. But let’s just focus on that 44% number and recognize that most of it comes from Quik’s core business.
Retailers look at Quik’s 44% margin and ask themselves, “How can I get some of that?” The answer is private label.   Private label really is not a viable idea to a small, single store, retailer. Okay, you can do some t-shirts, stickers, and decks. But the bigger you are, and the more stores you have, the more valuable it can be to you- not just in terms of the additional gross margin, but in terms of brand recognition.
But remember that we’ve got an awful lot of companies selling an awful lot of product, through an awful lot of retail outlets that’s awfully similar to everybody else’s product. So price matters. And a retail chain (I’m not going to pick on Pac Sun anymore. I admire the hell out of what they’ve accomplished) is probably going to pass some of that extra gross margin they get from being larger and having private label to their customers for competitive and growth reasons.
If you’re a core retailer, and your competition is a big chain, you have a problem. You can not sell the same brands they sell, at the prices they sell, with your comparatively tiny annual turnover and have a financial model that makes sense.  We all know that’s accurate because we’ve seen so many small stores go out of business and so few open.
So if you are a core store, you better make sure you’re positioned so that you’re not competing directly with the chains. Because you can’t.
Well right, Jeff thanks a lot for that useless bolt of wisdom. How do we do that?
First, the days of just opening the store with a few bucks in the bank and your credit card are gone. If you really have a need to get rid of your money, have a big party and please invite me. Invite me? Screw that, just send me the money. You’ll save yourself a whole lot of effort and anxiety.
Second, you need a plan that gets you to a larger turnover quickly. You need the capital to fund that. You’ll need that plan and the capital just to convince the brands you want to carry to sell to you.
Third, from the day you open, you need a quality information system and the ability to use it. There’s not the room for mistakes like there use to be. Focus not just on gross margin, but on total margin dollars. If you don’t know why that is, don’t even think about getting into this business.
Fourth, you need at least a couple of committed and experience management people who can do this right. No learning as you go like you use to be able to do. And they need to like sleeping in the shop.
Fifth, however much capital your plan shows you need, you need more. The only thing we know about your plan is that it’s wrong. Either you will grow faster than projected, or slower. In either case, you’ll need more money. If you don’t understand that, don’t open a shop.
Sixth, you need the right location and strengthening community involvement from day one. If you come from the community and already have recognition in it, so much the better.
All the successful core shops I’ve ever seen that have been around a while have all these things, but they got started when it was easier by orders of magnitude.
So having said all these discouraging things, I’m urging with you to go out and open shops. But I’m urging you to do it right to maximize your chances of success. Shops have an important role to play in identifying trends, making it about the lifestyle and not just the sport, and taking a chance on new brands. They keep the industry from just becoming part of “sporting goods.”
My concern is that chains of smaller stores that look and act somewhat like core shops are going to replace the real thing.   And as a business guy, I’ll congratulate those chains on their success even as I recognize that their actions and motivations aren’t exactly what the industry needs to stay fresh.

 

 

Business By The Numbers; Simple Questions a Shop Owner Can Ask Regularly to Stay in Control

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If your typical day is a series of disruptions and interruptions like that of many small business owners, then you may find yourself having difficulty controlling your business and knowing with certainty where you stand on a day to day basis. All businesses face challenges. Those challenges are most easily met if focused on early. What starts out as a minor inconvenience can become a survival issue if not identified and managed in a timely way.

But the disruptions and interruptions aren’t going to go away. So any system for anticipating problems and controlling your business has to be simple to develop, simple to use, and take not much time. It has to be your servant; not make you a slave to data collection. Here are some ideas on developing one that’s right for your business.
 
The first thing you need is a budget. To some people, this means a complex financial model on a computer projecting a balance sheet, income statement and cash flow. If that’s what you’ve got, great. But in the interest of keeping this simple, let’s assume you at least have a sharp pencil and some accounting paper with columns.
 
Write the 12 months of the year across the tops of the columns. Let’s start with the current month. Down the left side of the paper, enter the following row captions; sales, cost of goods sold, and gross profit.
 
Continue with the following expense categories; advertising, promotion, salaries and taxes, rent, telephone, utilities, maybe interest expense, and supplies. Finish up with pretax income for the month.
 
Now say, “I’m the only one who really understands my business” and change the categories to reflect the specifics of your shop. Maybe it would be helpful to split up sales among product type (boards, boots, bindings to use one example that comes to mind). Could be that the costs of keeping the doors open every month always total nearly the same and you’re comfortable with just one total number for these costs. Whatever works for you.
Now fill it in. Congratulations! You’ve got a budget If it took you more than an hour or two to do this in rough form, then you may have identified the first minor inconvenience that could become a survival issue; poor financial data.
Get yourself a manila folder, label it “My Control System,” and put the budget in it. You’re half way there. Now all you’ve got to do is ask a few simple questions on a regular basis and record the answers. The questions I recommend are:
 
1)    How much did we sell today? Get another piece of accounting paper, write the month on top, and the days from 1 to 31 along the left margin. Have two columns headed “Today’s Sales” and “Cumulative Sales.”   Fill in the two columns at the end of each day and put it in the folder.
2)    How much did we sell this week? Add a column to the daily sales sheet and put a weekly column every seven days. If you think it would be valuable, add another sheet of paper and look at sales by major product group weekly. At the very least, do that monthly.
3)    What’s the gross profit? Look at it weekly and at the end of the month in total dollars and record the information on another sheet of accounting paper. If you know your starting inventory, what you have received, what it cost and what you’ve sold, this is a simple calculation.
4)    How much inventory do I have? Record it weekly and at month end on another piece of accounting paper you slip into your folder. If you answered question three above, you’ve already got the answer to this one so the only additional work is writing the numbers down. A refinement you may want to consider is looking at your inventory by major product groups.
 
Now we’re getting somewhere. We have a simple budget, are tracking sales, gross profit and inventory levels. We can start to make some decisions. Trends can be spotted early and adjustments made with minimal pain. The magic of this is that the more you do it, the better those decisions will become.
 
Are inventory levels too high or too low given your sales levels? What should you try and see if you can get more of, and what should go on sale or be displayed differently? Your gross profit is higher than expected. Is sales of one brand with a particularly good margin outpacing other brands? Is this a chance to dump some stuff that’s not moving and still maintain your profitability?
Obviously, all these factors work together in a very dynamic way. With the kind of system I am describing here, you’ve got them all in front of you in a very simple format. Patterns will emerge and trends be more obvious. You don’t have to be a master of accounting to do this.
 
In fact, remember that this isn’t accounting at all; it’s management. You do not need precise numbers. I am not suggesting a physical inventory every week. Don’t count your nuts and bolts. Focus on the products that make up most of your sales.
 
Let’s move on to the expense side.
5)    What are my fixed monthly expenses? There’s a bundle of monthly operating expenses including things like rent, telephone and insurance that should stay pretty constant from month to month. Look at them monthly and don’t expect much variation. If you see it, ask why.
6)    What am I spending on salaries (including taxes and benefits)? Salaries should be reviewed weekly and at the end of the month. Weekly because they are a big expense item and can be managed relatively easily in response to changes in sales. Add another piece of accounting paper to your folder that by now has all of, oh, maybe five pieces of paper in it.
7)    What are my advertising and promotional expenses? Record them weekly or monthly depending on what right for your business. Use the same sheet of paper you use for salaries. Let’s keep this folder thin. In fact, put all your expenses on one piece of paper.
8)    How’s my cash flow? That’s probably another article, though by asking the seven questions I’ve listed above, you’re well on your way to predicting your cash flow. As a retailer, paid at the time of sale, you don’t have the collection of receivables to worry about. Your cash flow typically differs from your income statement in four basic ways. First, some taxes may be paid quarterly, though you expense them for income statement purposes monthly, as incurred.
 
Second, you’ve got terms from some of your suppliers. You recognize cost of goods sold for income statement purposes when the product is sold, but may not be paying for the product until some months later.
 
Third, you’re probably paying for fixtures and leasehold improvements at the time you receive them, but depreciate them over some period of time on your financial statements.
 
Finally, if you’ve got a line of credit from a bank, your borrowings and repayments are not reflected in your budget, though your interest expense is.
 
Shouldn’t be very hard to adjust your income statement budget for these differences and have a cash flow.
 
At the end of the month, look at your budget compared to actual and see how you did. Since you’ve been following things daily and weekly anyway, there shouldn’t be anything unexpected. As a modification, consider adding a column after each month of the original budget for inserting the actual numbers at the end of the month.
 
So here’s a tool for you to consider using. If you’ve already got a good accounting system, this can help you focus on what’s important. If you don’t, this will give you the minimum you need to control your business and anticipate problems and opportunities. This generic system should, of course, be adapted to the particulars of your business. The exact form it takes isn’t as important as using it regularly; every day, week and month. Invest a little time now and you will have more time later, and better control of your business.

 

 

Watching the Big Box Selling Process; Thoughts for the Specialty Retailer

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Store One

 
I would guess the girl was 14. She was at this big box sporting goods store with her parents picking out a board, boots and bindings. She didn’t say much and was following her parent’s lead. Their credit card I suppose.
 
It isn’t easy, you know, to hang around through the whole sales process- close enough to hear what’s being said but far enough way so that the sales person doesn’t call security.
 
In this particular case, security should have been called. Not for me but to hold the sales person until the police could show up to arrest her for impersonating somebody who knew something about snowboarding.
 
I didn’t hear any discussion about whether the girl had snowboarded before. I don’t think she had. The first criteria for selecting the board was length, determined by the girl’s height. Her weight was never asked. There was no discussion of flex or where she might be riding and how she was going to learn.
 
The second criteria was color. Blue seemed to be the mother’s preference, so blue snowboards was what the sales person showed them. She seemed to be able to distinguish blue from other colors, so at least she wasn’t color blind.
 
It was at this point I started to get a little antsy. My growing disquiet didn’t decline at all when they started talking about bindings. The mother took the lead on this. Arguably, she was the most knowledgeable one in the group- including the sales person. At least Mom knew what she wanted and why.
 
And the major criteria for selecting a binding was? You guessed it. It had to coordinate with the board. So without a word, the sales person started showing them bindings that looked good with the blue board.
 
Well, that was easy. The parents looked relieved. This was obviously going very well. Their daughter just stood there.
 
Next, the sales person asked, “Are you going to mount these yourself?” Suddenly, the father looked troubled. It was clear where even semi-mechanical duties lay in this family. After an uncomfortable pause, the sales person came to the rescue, if you insist on calling it that, by saying, “We can mount them for you for $10.00. Looking relieved, the father readily agreed.
 
“Which foot do you want forward?” asked the sales person. “Can’t you ride either way?” queried the mom.  “Yes, but most people have a preference,” was the reply.
 
There was an uncomfortable silence. Showing her great knowledge, the sales person said, “Well, most people ride with their left forward, so how about we mount them that way?” That was agreed to, and represented the end of the mounting discussion. No talk of angles or stance width. Granted, the girl probably didn’t know what angle or width she wanted, but the concept that it could make a different might have been mentioned.
 
Now, onto boots. Though I’ve never sold a snowboard in my life to a consumer, I would have started with boots, but what do I know.
 
However, I would not have started with these boots, by which I mean any of the boots in the whole store. Everybody reading this knows the kind of boots I mean. No support, a lousy lining, cheap construction.
 
This is the end of my story. I don’t know what happened with the boots, or if the sale was consummated. Though I’d seen it before, I never react very well in these circumstances. My frustration and stress level goes so far through the roof that I either have to get out of the store, or rush over to the family and beg them to let me help. That’s what I should have done.
 
There were good Oxygen boards there from last season that would have worked. They even had some blue in them. There were some perfectly serviceable bindings, but they didn’t go with blue. Oh well. Boot wise, I would have told them to flee into the night. I don’t think that would have gone over very well with store personnel.
 
I should have jumped into the middle of it. I should have fed them information until I was thrown out of the store. But I chickened out. And though she’ll never see it, I want to apologize to that poor girl who is going to have something less than an ideal experience when she goes to learn to snowboard and to her family, who think they got a good deal but really got something else.
 
Store Two
 
In a second chain retailer, arguably a step up from the first, the couple told the sales kid (who had told me he was a snowboarder) they were looking for a board, boot and binding for their 14 year old daughter who had been snowboarding a couple of years. Something not too expensive. The sales kid’s immediate response was, “Well, these are the setups we have on sale.”
He cued off the “not too expensive,” perhaps assuming if they were in his store, price must be the most important thing. That’s why you’d come into his store, right? Much of the rest of the conversation was in generalities and was driven by the customer. The sales kid responded in generalities to customer assertions like, “We want something that’s kind of medium quality.” “How about this one?” he’d ask, reaching out to pick up a binding.
I left before the conversation ended. The kid was sort of starting to wonder why I was hanging around and watching out of the corner of my eye. I don’t know if he sold anything or not. If he did, I have no reason to believe it was a good fit for their daughter.
 
What I Learned
 
Let’s do a little customer segmentation work here. Look at the admittedly oversimplified grid below.
 
                                                            NOT
KNOWLEDGEABLE           KNOWLEDGEABLE
 
 
PRICE SENSITIVE
 
PRICE INSENSITIVE
 
                                                                                                                                  
 
 
Just to save me some typing, let’s call these “ideal type” customers NKPS, KPS, KNPI, and KPI. NKPS, for example, refers to customers who fit in the box with Not Knowledgeable on top and Price Sensitive on the left.
 
Obviously, most customers don’t fit perfectly in one of these boxes. They are not, for example, knowledgeable or stupid. There are a variety of levels of knowledge and of price sensitivity. Nobody is completely price insensitive. But they give us a way to think about the customer base.
 
The KPIs are the ones that specialty shops tend to own. They will find you, appreciate your product knowledge and know they could buy cheaper somewhere else but not really care. God bless ‘em, I wish there were more.
 
The biggest challenge for the specialty retailer is the NKPS customer. The customers I’ve described above are examples of them. In the first place, they are the least likely to show up in your shop. If they do show up, they are the hardest to convince to buy because they start off knowing the least and have a predilection to spend less anyway. You can spend a lot of time educating them only to have them buy somewhere cheaper.
 
You have the same problem with the KPS types, but at least you can hope to spend less time educating them before they buy somewhere cheap.
 
The NKPI customers are the ones where you can best spend your time and hope to make your knowledge a real competitive advantage.
 
What I suggest is that your sales staff be armed with questions to determine how each customer could generally be characterized. If you’ve done your sales training, they already have most of those questions- they just need to think about the answers in terms of this classification.
 
In the first place, it would be interesting to see how many of your customers fell, more or less, into which category. I also suspect you could provide information, guidance, and help in product selection to the customer more efficiently based on how they were categorized.
 
I think what I might have just said is that you can do a better job of creating value for the customer. It is a matter of faith that the specialty shop competes by “creating value.” What I think that means is providing the most useful information in the most efficient and understandable way. I’m suggesting that this classification of customers might help you do that.
 
I’ve also visited a number of specialty shops and I think I spotted a couple of things that the successful shop does way better than the chain- and a couple they have to do as well. More on them next article.

 

 

Snowboard Company Business Models and Core Retailer Problems; A Basic Incompatibility?

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“They may put me out of business and they can’t even put a wax on a board!” said the snowboard retailer about the Zumiez down the street.

I talked to him enough to know that he wasn’t kidding and he wasn’t being sarcastic and he wasn’t just trying to make a point. After a bunch of years as a successful, core, snowboard retailer, he may find himself history. Gone, done, toast, road kill, finished.
 
And he’s not doing anything fundamentally wrong that I could pick up on.
 
The brands will all tell us, have told us, that the core specialty retailers are critical to their businesses and to the future of snowboarding. And they know that, as a group, those retailers are having problems. Granted, they are trying to give some focus and support to those retailers. But it’s my point of view, given the market characteristics we are faced with in snowboarding, that it is difficult for the major brands’ given their inevitable, justifiable, and reasonable competitive actions and strategies to support the core retailers in the way they need to even though some of their tactics do provide such support.  
 
Well, here I go making myself popular again.    I really need to get over this personality quirk that seems to require that I say what I actually think.
 
Industry Conditions
 
As an industry, we aren’t growing so fast any more. Generally, everybody makes good product in hard and soft goods. Quality snowboard product has become ubiquitous. That is, it can all be bought at lots and lots of places. People don’t buy new stuff as often as they use to. There’s no reason to unless you just have to have the latest and greatest. Price is more important in the purchase decision.
 
Mostly, you already know all that. You also know that, in general, the major brands want to grow. Some apparently at any cost. Some are a bit more cautious, or maybe I mean a bit more realistic.
 
K2 Sports Division President Robert Marcovitch puts it like this. “Sure we want to grow, but we are also focused on our gross margin. We want to make money- not just sell.”
 
Salomon National Sales Manager Greg Keeling pointed to the brand’s long standing and consistent strategic focus on technology. “Salomon has always been about the technology,” he said. “That means our average customer is maybe a little older than that of other brands.”
 
It may also means that maybe they lose a few sales to people not quite so interested in the technology, but Greg believes it means they gain in loyalty and maybe in margin as well.
 
That’s a lot the same as what K2’s Marcovitch is saying. Growth, yes- but not at any cost.
 
But still growth for all the top five companies. Four out of the five are public, which creates pressures of its own. The fifth, Burton, isn’t, but seems at least as committed to growing revenue as the others.
 
With the market conditions outlined in the first paragraph of this section, however, growth can be hard to come by. Your product isn’t really better than your competitors. You’re running out of new retailers. The existing ones can only take more in total to the extent snowboarding is growing.
 
So you try to find new places to sell- online, retail stores, retailers you wouldn’t have given a second thought to a few years ago, better deals. You fight to take shelf space from your competitors. They fight back. But lacking real product differences the consumer believes in, those fights can get ugly, though great for the consumer.
 
This is hardly a new story. We’ve watched it evolve over years now. The point is that a requirement for growth, lacking a real competitive advantage, turns into “beggar thy neighbor” tactics that kind of overwhelm any real strategy you might be trying to execute.
 
Meanwhile, Back at the Specialty Retailer
 
It is obvious, I think, that no specialty retailer can have any meaningful influence over the situation I’ve described above. Yet the whole specialty retailer business model requires exactly the things that the competition for revenue growth makes difficult to achieve.
 
First, they need higher margins. But they often, and maybe always, get higher product prices than the chains get. They don’t buy as much and they don’t have the same leverage. So to get those higher margins, they have to price higher. But it’s hard to make higher prices stick when all the product is so good and so much the same and the consumer knows it. It doesn’t help that the same stuff is available in nineteen places within a radius of two miles. Okay, I might be exaggerating there- let’s say three miles.
 
It follows that the second thing they need is more controlled distribution. Higher prices come from scarcity and differentiation. But controlled distribution implies less growth. There doesn’t seem to be much willingness to give up sales for the benefit of smaller core retailers who would rather sell what they have at full margin in season than buy more and have to put it on sale after Christmas.
 
So you can see the contradiction between what the brands are driven to do and what the specialty retailers need.
 
The Brand Financial Model
 
Are there any circumstances under which that contradiction might at least be diminished? Maybe. From the comments above, you can see that K2 and Salomon are not just interested in growth at any cost. Though I haven’t seen their numbers, I suspect their thinking goes something like this.
 
They have a certain percentage of snowboard industry sales. At this point, their market share is unlikely to change much. That doesn’t mean they can’t grow sales as a company. They may start new brands or acquire companies. And they’ll get their share of any market growth that does occur. Maybe a stream of new products with incremental improvements will give them a short-term opportunity. Certainly, they will take advantage of any opportunity that comes their way.   But fundamentally, they won’t change their market share- at least not profitably.
 
Sure, they can undercut their competitor’s prices and spend big bucks on marketing. But that won’t make money. So instead, what if they kind of acquiesced to their existing market share in snowboarding? They stop selling to some accounts that they hadn’t really wanted to sell in the first place. They cut back a bit on advertising and promotion. They work to make the product just a little harder to find. They don’t produce quite as much. They don’t try to pressure the retailers- all the retailers- just to buy more. The focus becomes helping the retailer sell through at full margin.
 
The benefits to the brand may include:
 
  • Fewer collection issues
  • Lower financing costs
  • Less close out and returns to manage
  • Lower marketing costs
  • Retailers who are more successful with the brand
  • Consumer willingness to pay a little more for something that’s not quite so common
  • Improvement in consumer perception of the brand
 
Where the rubber meets the road, as usual, is at the issue of profit. If you lose some sales, but have lower costs and maybe a better margin and market perception, will you make the same profit, or more or less? I’m not sure. I’ll leave it to the brands to crunch their own numbers and tell me. Note how this approach begins to align the interests of the brands and specialty retailers.
 
Of course, it’s hard for one brand, with the possible exception of Burton, to take this approach if others aren’t. Still, competition for market share based on price and big marketing budgets is nothing but a rush to the bottom of the pricing structure- for both the brands and the retailers.
 
A Suggestion
 
The section above presents one approach to aligning the interests of the brands and retailers. I’d like to suggest one specific thing the brands might do. And again, whether this can work depends on your specific numbers. Give the specialty retailers the same pricing as the big chains. Not the same pricing structure- the same actual prices. What I’m saying is consider giving them the same prices for lower volume.
 
Well, now I’ve put my foot right in it. I know- you’d be giving up too many margin dollars. The chains would demand even lower pricing based on their volume. We can’t do it, it won’t work, you’re crazy, blah, blah, blah.
 
Maybe. But I know we all say the core retailers are critical. I know we all recognize they are in trouble. I suspect that total sales to core retailers as a percent of total sales is not that large for the major brands. It wouldn’t hurt to figure out what it would cost and discuss the impact with retailers would it?
 
Look, I’m open to anybody else’s crazy ideas as well. How about a if the brands run retail 101 classes for retailers or maybe help them finance and install good accounting systems?
 
What I’m suggesting major brands do is look at their snowboard businesses as cash cows- not growth engines. If we do that the interests of the retailers and brands can be aligned to everybody’s interest.

 

 

Now What? The Established Shop Owner’s Dilemma

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You started it because it was going to be fun. You were younger- a lot younger. And perhaps just a bit naïve and optimistic. You didn’t know what it was about margins that made everybody think they were gross, but what the hell. If you could hang with your friends, do what you loved and have a few beers at trade shows, starting a retail shop obviously made sense.

A bazillion years later, your stop is still here and successful. You’ve gotten some of the things you wanted out of it. Along the way, you’ve become something of a businessperson. You’ve got good systems and know your numbers, are involved in your community, know your customers and why they buy from you, have managed to have some competent and semi-stable employees, and are actively involved every day in running the shop.
 
As is typical of most small businesses, you and the shop have become synonymous and therein lies the rub. Somehow, working six or seven 12 hour days doesn’t seem quite as attractive as it use to. There’s children, a spouse who for some unknown reason wants to spend time with you, some actual interests outside of action sports and, frankly, you just don’t have the stamina you use to have.
 
What use to be the thing that kept you going has the potential to become something of an albatross if it hasn’t started to already. What can you do? What are the choices, and how are some people in this situation thinking they might manage it?
 
I talked to some shop owners who, if they aren’t all in this situation already, are sure starting to think about it. I expect to quote some people, but I’m not going to identify them. Some of the things they said, that I want you to hear, are just a bit too personal for attribution. 
 
Choices
 
Most of your assets, a lot of your time, and a piece of your self-image are tied up in the shop. Someday, maybe now sooner than later, you are going to want or have to sell it, or at least make a management transition happen. You have basically four choices. Sell it all. Sell part. Don’t sell but get some management help. Or close it.
 
Selling it is easy to say, and seems an obvious choice. But you’re likely to run up against some significant roadblocks. 
 
 
Having partners who share the shop’s equity with you can be it’s own interesting challenge. What happens when you and your partner (s?) don’t agree about something important?
 
Just bringing in management and continuing to own it 100 percent kind of makes sense, but how comfortable will you be with somebody else making decisions with what’s still your money?
 
Closing the shop solves the issues of partners and management, but why would you shut down a perfectly good shop?
 
As we look at each of these, remember that these kinds of decisions lifestyle as well as business decisions, and must be viewed from both perspectives.
 
Sell!
 
“For the 150 to 200 thousand dollars I could get, I can work really hard and maybe make that much in two years.”
 
The statistics suggest that you haven’t necessarily gotten rich owning a specialty shop. I forgot which retailer it was who told me, “Hey I paid the bills and snowboarded a hundred days this season, so I guess it was a great year!”
 
The sad truth is that from a strict financial point of view, a specialty shop isn’t usually worth that many dollars. “I tried to sell a shop I owned years ago, but all they offered was half the fixture value,” was one comment I got.
 
Much of its value to the owner is in the flexibility and lifestyle it offers. Financial buyers won’t focus on that. They will see how hard the owner works and how relatively little they pay themselves. They will recognize how critical the owner is to the business and know it’s at best difficult to replace them. It’s likely they will conclude that while some modest growth is possible, it’s not likely the business will double in the next few years.
 
To the extent you have more than one shop, this changes a little. Multiple shops suggests some growth potential and indicates you have made some progress developing management that might fill the hole left by the departure of the owner.
 
One owner has a plan to expand the number of shops and put management in place with the goal of having the option to sell for a reasonable price some day in the future. “That’s it,” he says, “That, or I work until I’m seventy.”
 
Partner Up
 
Yeah, but with who? And just what does it mean to have a partner?
 
“As far as I can tell, I’m kind of stuck here,” the owner said. “I took five weeks off and things got kind of sloppy.”
 
Did they really get sloppy, whatever that means, or were things just not being done the way the owner wanted? Could he stand it if somebody was making decisions differently from how he had always made them? Where and how do you find somebody you trust?
 
If you are truly sharing the equity in the business in a meaningful sense, then this is somebody whose judgment you are comfortable with. That means two things- they have been in action sports business for a while and you have known them long enough (measured in years) so that you have a high level of confidence in them. Even then, once you are both owners of the business, the relationship will change. Now, it’s their money too.
 
Sharing the company’s equity with a partner requires a lawyer. Sorry, no choice. You need a buy/sell agreement and a dispute resolution procedure not to mention the paper work by which the actual equity sharing occurs. And how, exactly, is that going to happen? Is your new partner going to pay you cash? Do they have any? Are you willing to take a note collateralized by the equity, which of course may not be worth shit if they screw up? How are you going to work together? Who’s responsible for what?
 
It’s not to say that it’s impossible, but equity sharing agreements can be damn tough and this is probably my last choice for an owner unless it’s part of a longer-term exit strategy where the new partner eventually becomes the one hundred percent owner.   
 
Management Help
 
How many hours a day do you work? I asked. “Fuck!!!” was the beginning of the answer. When the smoke cleared, he allowed as how he’d like to get down to twelve. A second owner estimated 200 to 250 hours a month. A third just moaned. A fourth, when asked how you got off this treadmill, said, “You don’t.”
 
Not surprisingly, all four of these owners are focusing on developing competent management for their businesses. One already has two good people he thinks/hopes might be buyers of the store in the future. Right now, he’s just glad there are there to take some of the load off his shoulder.
 
A second is “Waiting for somebody to step up to take over more responsibility.” He’s willing to give up some equity or more money when he sees that happen.
 
The person on the treadmill said he’s “delegating stuff that doesn’t matter as much” and “Not trying to do everything anymore.”
 
It’s my opinion that there’s nothing you can do that’s more important than develop some management. In the short term, it can take some of the load off of you. In the longer term, it may be the single most important thing you can do (besides make sure the business makes money) that will position the business to be sold someday- either to those managers or an outsider.
 
Close It Down
 
Somehow it isn’t very psychologically satisfying to talk about closing down a perfectly good shop. Yet, if there are no buyers at a reasonable price, for the reasons described above, it might be the most financially sensible solution. Are you better off selling for “half the value of the fixtures” or liquidating the inventory through a big sale and then selling the fixtures? Who knows, but it’s worth thinking about
 
Not Just for Old Owners
 
Or maybe, rather than having to contemplate closing down some day, you should start to think now about what you’re going to do with your shop. How are you going to make sure you have some options in the future when you need them?
 
We learned at least two things above. First, the single most important thing you can do to give yourself options and flexibility is to develop management. Second, we learned that it takes time- years in fact.
 
So even those of you who aren’t old enough to be worried about an end game for your business should start thinking about it now. If you’re lucky, some day you’ll get old enough for it to be an issue. And in the meantime it will make running your business a lot more fun, unless you just love spending every waking hour in your shop.

 

 

“Say, That Sounds Like a Good Idea!” The New Board Retailers’ Association

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Like the web site (www.boardretailers.org) says, the idea for the Board Retailers’ Association (BRA?) goes back to the mid eighties and has been discussed annually. But for the past year, Roy Turner, the owner of Surf City Surf Shop in Wrightsville Beach, North Carolina, and Mike Duncan of Sage Corporation, a web applications firm with roots in action sports, have been making it happen. Roy’s been in the surf industry for 25 years. He’s been a snowboard dealer for over ten years.

And yes, I know this is Snow Biz, not Surf Biz, but I wanted to make a point, which I try to do from time to time, so bear with me.
 
If the organization had its genesis among some surf focused people, it quickly became clear that the issues they felt needed addressing were universal to snow, skate, surf and wakeboard retailers. The web site reflects that and this article could be appearing in Snow, Skate, or Surf Biz and would be just as relevant. .
 
If only because of production and seasonal considerations, manufacturers/brands tend to focus on individual sports and the associated lifestyle. But among retailers, as Roy and the Association’s impressive advisory board of retailers found out, few make their living on just one activity. Even where the focus of the shop is clearly snow or surf or skate or wake, sales of soft goods, including shoes, to people who don’t participate in the shop’s core sport or, indeed, in any board sport, are necessary for survival. Most retailers sell more than one activity to manage seasonality.
 
So the perspective of the retailer is perhaps different from that of the manufacturer/brand and inevitably there’s some normal conflict of interest if only because there’s only so much margin to go around (less than there use to be) and it’s expensive to be in business (more than it use to be). The small “core” retailers (I hate that term, but haven’t thought of a good replacement) are acknowledged by pretty much everybody to be critical to the market, but at the end of the day, their orders aren’t, and won’t ever be, what make or break the major brands.
 
Wouldn’t it be great if there were an association that could bring the concerns of these shops to the attention of the brands in a professional, constructive way?
 
The first thing Roy told me was that BRA is not and won’t be a buying group. It was formed, he said, with four basic goals.
 
·         To save retailers money
·         To help insure the success of small, new shops
·         To educate shop owners and promote good retail practices
·         To give the industry a cohesive voice from the retailers on a grassroots level.
 
“The business environment made it the right time to do it,” said Roy. “The mass merchant influx, over distribution, rising costs, the dominance of a comparatively few brands and lack of product differentiation mean that your margin for error is way smaller than it use to be. I can’t afford to make a 10 percent open to buy error anymore.”
 
Let’s turn to the organization’s goals and take a look at each of them in turn.
 
Save Money
 
This should be fairly noncontroversial. Like all trade associations BRA will use its buying power to get its members discounts on services, including shipping, various forms of supplies, insurance, lower bank card rates, etc. You get the picture.
 
The association’s fee structure is straight forward- annual membership is $125.00 per storefront. It’s essentially mathematically impossible not to recoup your membership fee at least quarterly. I would expect many member shops, and maybe most, to do it monthly. BRA is a 401C nonprofit corporation, which means that any board sports retailer is qualified to join. Who knows- if the Zumiez of the world step up, maybe BRA can reduce its annual dues even further.
 
Just for fun, let’s say your shop has annual revenue of $750,000 and that 60% of that is done by credit card. If the association can get your bankcard rate down half a percent (a reasonable goal) you’ll save $2,250.00 a year. I don’t have a degree in mathematics, but I’m pretty certain that $2,250.00 is greater than $125.00. If BRA does nothing but that, you should all be breaking down the door to join. What’s the impact on your bottom line if your association can do half a dozen other things with similar impact on your costs? There is absolutely no reason they can’t. Trade associations do it every day.
 
The specifics of the discounts aren’t all known yet. The ability to offer really meaningful insurance discounts nationwide is awaiting the likely passage of a law by Congress. But check out the web site and do some rough calculations you. Bet that $125 a year membership fee looks pretty damn good to you.
 
Insure Small, New Shops Success
 
Roy’s old. He told me so. I’m old too. We try to be cool without looking stupid and to figure out what’s up, but there’s a limit to that as my fourteen year old constantly and pitilessly reminds me. “Nice shirt Dad. Why are you wearing it?” was his most recent comment.
 
“No tattoos and no holes in my body other than the ones that God gave me,” is the way Roy put it.
 
The people running the surf companies, the snow companies, the skate companies, the winter resorts and the successful core retailers are also sort of old compared to their customers.         

Mikke Pierson, owner of ZJ Boarding House in Santa Monica, California, is a member of the Association’s Advisory Board. His shop sells snow as well as surf and skate. He’s been a snowboarding dealer since 1989.  He shares Roy’s concern about the aging of existing retailers. “There’s no new blood our there,” he says. “Too many existing boardsport retailers are ‘specialty dinosaurs’.
 
Both Roy and Mikke are confident their shops will be successful no matter what happens. But longer term, they see the board sports industry’s strength and growth depending on new blood. It’s one of BRA’s goals to help that new blood emerge and thrive.
 
Part of how they will do that is by educating shop owners in best retail practices. That will start with a series of articles in TransWorld Business publications on specific best practices. “The first one will be on hiring,” says Mike. “You’d be stunned how much bad hiring practices can cost you.”
 
There’s also a “rookie buyer” seminar scheduled for Surf Expo this coming September. 
 
Roy talked about helping shops with “balance sheet management.” “There isn’t the room for mistakes there use to be,” he says. Issues of inventory control and cash management require good data and a certain level of management sophistication. “When I came along, you learned everything by showing up,” says Mikke. “Those days over.”
 
Both Mikke and Roy emphasized the importance of knowing and managing a shop’s gross margin. BRA expects to offer assistance, both in terms of education and discounts, in installing and using good financial systems that will strength a shop’s balance sheet management.
 
A Cohesive Voice
 
Over distribution, lower margins, rising expenses, insurance, mass merchants, and increased customer expectations are some of the key issues impacting all board sports retailers. BRA will address them as an industry.
 
“Manufacturers are looking at their market place from the point of view of what their competitors are doing and sometimes forget their customers,” says Roy. “We want to be able to talk in a constructive, cooperative way about issues that are of concern to both retailers and manufacturers and to have them take us seriously.”
 
I guess it takes tougher business conditions to make something that seems, in hindsight, to be such a good idea actually happen. The board sport retailers, especially the so-called core shops, have compelling common issues and interest no matter where they are located. They are competitors only when they happen to be located near each other. The immediate financial benefits should make joining a no-brainer. The Board Retailer Association’s other activities may be more important in the longer term, but for the moment saving money should be enough of an incentive to sign up.
 
There is, of course, strength in numbers and no trade association starts up without thinking that it will gain some leverage over constituencies it wants to influence. A prime constituency for the board sport retailers is obviously the manufacturers. I suspect that manufacturers are just the slightest bit concerned about the association’s proposed activities for just that reason even though it isn’t a buying group. Can’t blame them. As noted earlier, there’s only so much margin to go around.
 
Still, both the core retailers and the brands recognize that if all the snowboards are sold at Garts and all the surf boards at Costco, it’s going to be damn tough to influence people to pay prices that reflect the value of the brands and the cost of the marketing campaigns that convince those people they want to share in our lifestyle, even if it’s only through the t-shirt they wear.

 

 

Questions That Retailers Should Always Have Answers To

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

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

 

 

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

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

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

 

 

Snowboards from Afar; The Potential Impact on Retailers

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In the early 90’s, when snowboards started pouring into the U.S. from the Austrian ski factories, there were claims that consumers wouldn’t accept boards labeled “Made in Austria.” Mostly, those claims were made by U.S. factories threatened by foreign production. If there was a marketing advantage to a board “made in the USA,” it didn’t last long, and smaller inefficient U.S. producers went out of business.

In our consolidated, mature industry, brands are taking the next and inevitable step of looking for ways to cut production costs while maintaining or even improving quality. Boards have and are coming in from China, Tunisia, and Spain, and we can reasonable expect to see numbers from lower cost countries grow.
 
In seeking lower cost product, what are the issues the brands have had to consider? What’s in it for the retailer?
 
The Cost Equation
 
There are four basic components to the cost of a snowboard- materials, direct labor, factory overhead and allocated overhead.
 
No matter where you build it, Tunisia, China or Tierra del Fuego (uhhh, there are no factories in Tierra del Fuego as far as I know) the materials that go into the board are the same. You have the same choices of where to buy them. If everybody buys their materials from the same suppliers, the material cost of making a snowboard will be more or less the same for everybody. Would it make sense to start your own factory to make, for example, cores in a low labor cost country? Maybe. If you have enough volume. If you can get the right wood. If you could actually make them for less than it would cost to buy them from an efficient, established source.  
 
Direct labor is often the major advertised justification for making a snowboard outside of Europe or the U.S. Let’s say that you’re paying somebody $13 an hour, including taxes and benefits in the U.S. to make snowboards. If they work, for example, eight hours a day, 25 days a month, labor cost is $2,600 a month.
 
For sure direct labor is cheaper in China. Jim Ferguson, the President of Heelside doesn’t make boards there, but he’s a thirteen-year veteran of China, lived there, and has a boot factory there. “You don’t pay an hourly wage in China,” he said. “You pay monthly and the cost includes room and board.” He estimates his average cost is $150 per worker per month, and indicates that he’s more generous than many employers. But from his point of view, he more than gets it back in continuity and loyalty.
 
 Well, even without a calculator, I can tell that $2,600 a month is more than $150 a month. A lot more. So clearly if you compare the cost of a worker in a less developed country with the cost of one in the developed world, you’ve got a savings that’s somewhere between significant and huge.
 
Hold on. It’s not quite that simple. There are two related issues. Training and productivity.
 
If it took 11.33 (2,600 divided by 150) workers in China to make the same number of boards that one worker in the U.S. could make in a month, then there would be no direct labor cost advantage to making boards in China.   Both factories would spend the same amount of direct labor money to make a given number of boards. And maybe, when you first open the doors in China, that’s the case. Don’t underestimate the labor training costs in a new manufacturing operation. It’s easy to find people to make skate shoes in Korea. They’ve been making shoes there a long time. Out in the fabled Isles of Langerham, though, they’ve never heard of snowboarding.
 
Let’s also dispose right now of a common delusion about labor. Just because it’s cheap doesn’t usually mean that if one worker isn’t doing the job you can throw ten more at it and fix the problem. It may be true in ditch digging, but not in snowboard manufacturing. Only one person can work a snowboard press at a time, and ten untrained people can’t resolve the problems caused by one who doesn’t know what he’s doing. 
 
Having said that, it’s important to recognize that a lot of complicated products are produced perfectly well in so called third world countries and making a snowboard ain’t rocket science.
 
Things start to get really interesting when you look at overhead. Here in the States, if we want to start a factory, we see either a contractor or a commercial real estate agent, tell them what we want, and they either build it or find it. Maybe we’ve got to make changes or improvements in a rented facility, but we can generally assume that the place will have a level floor that isn’t dirt, and that water and power is easily accessible. We probably count on a road. 
 
All the money you have to spend to get the place the way you want it is called leasehold improvements. It gets amortized over time on the income statement. It can be a huge number in a low labor cost country.   
 
What does it cost a brand to have managers live in third world country? Maybe it’s only temporary until things are up and running smoothly- like a year or two. Who will perform maintenance and repairs on complex machines? How long does it take to get parts? In the States, you get them by FedEx the next day. In a low cost labor haven, you may have the expense of keeping a big inventory to keep things going.
 
But then, there are those costs for workers again, so it doesn’t cost much to keep the place clean. Or maybe you don’t have too. No Environmental Protection Agency after all.
 
Putting It All Together
 
Obviously, there are cost savings in making many products in low labor cost environments. Everybody’s doing it. In making the decision to go for it, the brands are asking the following questions:
 
·         Is the product already being made in the country I want to produce in? If so there’s probably already some experience there, and it’s easier to get going.
·         Can I just buy from an established producer, perhaps helping them improve their technology and processes, rather than starting my own factory?
·         Am I in this for the long run, and can I build enough volume? There will likely be some surprises and additional costs, both ongoing and of the one time startup nature.
·         Are those seductive, loudly trumpeted, low worker costs enough to make up for the additional expenses and surprises? As much as anything, that comes back to the issue of volume. There has to be enough volume so that the direct labor savings per piece are greater than the additional overhead costs.
 
The Retailer Perspective
 
Assuming that, in fact, it turns out to be cheaper to produce a board (or other product) of the same quality in these new locations, what benefits can the retailer expect?
 
For a start, it should be clear from the above discussion that production in low labor cost countries is not the magic potion of higher margins. Obviously, the benefits are expected to be there. But one manufacturer I spoke with described the years it took to get it right.
 
Also, remember that the brands aren’t necessarily rolling in dough. It’s not easy to make a buck in the snowboard hard goods business right now whether you’re a retailer or a brand.
 
So what retailers shouldn’t expect is to see sudden, big price reductions on wholesale product prices.
This is especially true because not all of anybody’s boards are likely to be made in lower cost countries. Marketing and research and development considerations suggest that production at traditional sources will continue. I’m sure we can all hear it now. “Well, yes, we’re making a few boards in Nepal, but our high end stuff still comes from our hi tech factory in the states and all our R & D is done there.”
 
But retailers may benefit in other ways. If there is, indeed, more margin for brands, you could see some of that show up as better customer service and expanded advertising and promotion by the brand. Part of the extra income may just stay on their balance sheet as additional profit, making it easier for them to make and sell the retailer boards they often don’t get paid for until six or more months from manufacture.
 
Often, the relationship between the brand and the retailer, at least in terms of product wholesale pricing, seems like a zero sum game. One wins, one loses. In this case I don’t think that’s true.
 
Assuming that the brands did pass through all of their supposed cost savings realized from moving production to low labor cost environments, retailers would inevitably, in the normal course of competing with each other, begin to lower prices. Each would know they didn’t really want to do it, but would feel the competitive situation required it.
 
Do you think that such cost reductions would make your sales volume go way up if your competitors had reduced prices in the same way? My guess is no.
 
Would you rather earn your usual margin on a $400.00 board, for example, or a $300.00 board?
 
If you sell the same number of $300 boards as you were selling of $400 boards, your total margin dollars decline. That’s a bad thing.
 
Cost reductions from new production locations won’t happen overnight. When (if?) they do happen, I’d select certain select, gradual price reductions to be passed on to retailers because the brands compete with each other in the same way that the retailers do. Overall, my hope is incremental profit for the brands goes into supporting the sport and the retailers. Maintaining brand image is key to everybody making a few bucks.
 
 
Check out the table below, taken from U.S. government data, showing snowboard imports from selected countries in 1999.
 
Country                      Units                           Value                         Cost Per Unit
 
Austria                       198,535                      $14,587,818              $ 73.48
Spain                          39,679                      $   3,771,523             $ 95.05
China                          67,765                      $   3,379,457             $ 49.87
Taiwan                        39,676                      $      623,477             $ 15.71
Tunisia                           4,600                      $      581,826             $126.48
Canada                      230,326                      $12,033,129              $   52.24
 
Some caveats and warnings about these numbers. Call me naïve, but I just have a hunch that all those boards coming in from Canada aren’t made there. I also suspect, especially in the case of the product coming from Taiwan, that the goods aren’t all what we’d call snowboards. Just materials for a real board cost several times the unit cost of $15.71.
 
As a retailer, you should keep in mind that these prices include second qualities, closeouts, kids stuff, and snowboard like products you wouldn’t be caught dead with in your store. So don’t look at any of these unit costs as necessarily indicative of what you’re favorite brand is getting the new season’s first quality boards for.

 

 

Specialty Snowboard Shops and the Industry Consolidation; Who Are They and What’s Happening to Them?

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Over the last month, I’ve stopped by eight or ten snowboard retailers in the Northwest. I talked to the owner, manager, or whoever was around and not too busy to talk with me. The number of stores I went in probably isn’t large enough to be statistically significant, the stores were picked based on my personal biases, and I didn’t ask the same questions every where. I told them I wrote for Transworld Biz, so they probably thought they had to humor me rather than throwing me out when they found out I wanted to waste their time and not buy anything.

I had three goals:
 
·         To try and reach a definition of a specialty snowboard shop.
 
·         To find out what the snowboard business has been like for retailers so far this season (I’m writing this in early December).
 
·         To hear from retailers how the industry consolidation was affecting them.
 
Here’s what I think I learned and some conjecture on what it means for the industry.
 
An Attempted Definition
 
We all know one when we see it, but defining the specialty snowboard shop isn’t easy. The word “shop” is important. REI is a specialty store, but it’s not a shop. The consumer also looks at a retailer differently than we who are in the business do. Zumiez’s may look like a specialty shop to some consumers, but with 143 stores, it’s business issues and competitive strategies are a lot different from the sole proprietor with one storefront.
 
Okay, now we’re getting somewhere. A specialty snowboard shop typically has one location, though I guess it could still qualify with a couple. I’d say it occupies something like 2, 000 square feet, though there’s a wide variation in that number. Fifty to seventy five percent of its total annual sales are snowboard related. It usually also sells skate boards and related products. Shoes and surf products are other common lines that are used to round out its offerings and improve summer cash flow.
 
SIDEBAR
 
Street Shoes
 
Everybody is carrying them and everybody is making them. New brands seem to pop up all the time. Distribution is starting to get screwed up and discounts are becoming more and more prevalent. There are no barriers to entry, and no fundamental differences among many shoes except for cosmetics. Differentiating a brand is getting harder. Does this sound familiar to anybody besides me? 
 
END OF SIDEBAR 
 
It’s highly seasonal (I bet you’re all stunned to learn that) and there’s a greater or lesser dependence on supplier financing to manage inventory and seasonality. It’s not located in high rent retail space at the mall. It depends on customer service and a carefully calculated reputation among its clientele to make it a shop people trust and are willing to go out of their way to get to.
 
The owner is running the place or, at the very least, is around an awful lot. Snowboarding is important to their life style. Their customer base, and what they have to do to succeed, is changing as snowboarding gets mainstreamed. If you’re a traditional “core” shop, you may be missing out on growth opportunities that result from the homogenization of the market, because a declining percentage of the total market is the traditional core.
 
So Far This Season
 
At least one thing hasn’t changed in this business- product still arrives late. Nobody told me about boards being late (maybe nobody cares?) but I heard stories about boots, bindings and outerwear. But there’s a difference from previous years. It use to be that if it came in, the specialty shops got it first. I’m getting the impression that the specialty chains with their large orders and resulting leverage with the suppliers are being given some priority. This is another confirmation of how the market is changing.
 
When asked what boards were selling, Burton was named everywhere it was carried and nobody else got consistent mention. The racks were stocked with the usual brands. Literally nowhere, except occasionally on the closeout racks, did I see any boards from any really small brands. At least in the Northwest, literally none (zero, zip, nada) of the small brands that appeared in the feeding frenzy seem to have survived. 
 
The closeout racks weren’t as stocked as I had expected. The smallest number of closeout boards I saw was six. I’d estimate the largest was around thirty. I didn’t get to peek in the back rooms, but it seems like old product (not just boards) was more or less under control in the shops I visited.
 
Boots and bindings are selling well, and clothing seems to be doing better than anything else is. Retailer enthusiasm is directly proportional to gross profit margins. With boards it’s, well, lousy coming in at around thirty to thirty five percent. Boots and bindings are better, and outerwear is king both in terms of sales and margins. The demise of certain clothing companies coupled with selected late delivery by others seems to have balanced supply and demand pretty well, and clothing is moving at keystone.
 
 Retailers are getting fewer calls than they were at this time last year offering them this year’s product at closeout. I heard a number of comments about certain brands already being sold out of product, especially the high-end stuff.
 
More than ever, the shops have to be inviting to boarders’ parents, and prepared to deal with ignorance of the sport and the whole culture. One owner had to stop talking with me to help somebody’s mother pick out a beanie. She wanted to know if it was a snowboarding or skateboarding beanie. He explained it could be used for either, sold it to her with a smile, and continued our conversation.  
 
SIDEBAR
 
Calculating Gross Margin
 
Let’s say you bought a board for $225 and sold it for $346. You’ve earned a thirty five percent margin. Not great but what do you expect for a board? You’re happier if you remembered to take into account your discount and terms when figuring your per item profitability. Reduce your item cost by your volume discount. That’s easy. Now figure out how much money your supplier is lending you at zero interest and what your bank would charge you if you had to borrow that money. This isn’t strictly part of your margin calculation, but it’s an “avoided cost” you should calculate and consider in figuring out what an acceptable margin is.
 
END OF SIDEBAR
 
Impact of Consolidation
 
There are no surprises here. Retailer leverage with suppliers has grown as witnessed by increased terms, better discounts and lower prices. However, as noted above some of that leverage has migrated from the specialty shops to the specialty retail chains because of the sheer size of their orders.
 
Many fewer brands are being carried. There are fewer to carry, and a retailer doesn’t have to be patient with any brand that doesn’t offer product, prices and programs that he doesn’t like. One retailer told me about dropping a brand because they didn’t feel like they saw the rep often enough. 
 
Especially in boards, margins are tougher to hold. This is the result of over supply, and a more sophisticated consumer who has a lot more information and choices and, because she has been overwhelmed by brand claims and counter claims, is less likely to be swayed by advertising.
 
One retailer who also sells skis and other sporting goods equipment but has a separate snowboard shop also pointed out how the relatively small size of the snowboard industry impacts his margins. “Look,” he said, I sell 700 pair of Rossignol skis a year. I sell 400 snowboards total from five brands. Which supplier do you think gives me the best prices and where do you think I earn the higher margin?”
 
A specialty snowboard retailer, then, if they are facing declining margins, has to sell more product and invest more working capital in the business to make the same profit. The implication is that maybe they need to expand their customer base.
 
Which they can probably do. My perception is that the mainstreaming of the snowboard business also means the mainstreaming of the snowboard specialty store. The hard core part of the market is declining as a percent of total business and the retailer can’t ignore that. The fact is that a grungy store with lousy customer service and stuff lying around isn’t going to appeal to what will be, if it isn’t already, the largest part of the market.
 
Successful snowboard specialty shops seem to be entering the mainstream right along with the rest of the industry. No surprise- they’re going where the customers are. If they’ve lost some margin to a more discriminating, less excitable consumer, they’ve gained terms, service, and predictability from a stabilizing, though far from stable, supplier base. Now if only they could have an accurate weather forecast.