Make Love, Not War; Blanks and the Park and Recreation Convention. What’s a Skate Brand to Do?

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First time I’ve ever had two subtitles. That must be meaningful. Either I’ve been thinking a lot about this, or I’ve got nothing to say and am desperate to use up space. I suppose each reader will decide which it is.

 Not long after I read Cullen Poythress’s article “The War on Blanks” in the September issues of this publication, I went to the Park and Recreation Convention here in Seattle. Basically this is the convention of people who sell stuff to playgrounds, and I can only say that I wish I was a kid again. Lots of cool stuff that’s beyond what I could have imagined when I was of an age to use it.
 
I saw Per Welinder from Blitz there, manning the IASC booth and promoting skate parks. I walked around a corner and came face to face with Beau Brown, formerly of Sole Tech and now COO of Radius 8, a seller of portable skate ramps. His face was all aglow from the huge number of business opportunities he thought he had at the show. As we talked, a guy from some municipality came up and, apparently amazed to learn that portable ramps existed, asked how quickly he could get some. He guessed at the price, kind of suggesting that one might cost $3,000 as I recall. Beau, who seems to have a nasty ethical streak he needs to get over, told him that no, the one he was looking at was only $300. The guy scurried away to get his boss.
 
Anyway I know this article is about something besides vignettes from a trade show. I guess I’ve got to go back to Cullen’s article to get to it.
 
I thought it was a good article. Balanced, dispassionate, and talking about an important issue. I would have liked to see some numbers comparing costs, prices and margins on blanks and branded decks, but that was really my only criticism of the article. And I agreed that the brands are critical to building and supporting skating and that blanks undercut their financial ability to do that.
 
I talked to some other business people in the industry who seemed to share my perspective, and were as surprised as I was by the outpouring of concern and criticism the article engendered. That got me thinking and the convention helped that thinking to jell.
 
What would I do if I was running a skate brand?
 
Congratulations!
 
First thing I’d do is recognize that I’d had something to do with skateboarding having broken through and becoming a growing, recognized, and broadly accepted activity. I’d made some money, had some fun, and did it while being involved in something I loved. I’d helped position skateboarding so it probably wasn’t in danger of disappearing like it nearly has before.
 
Good stuff.
 
But after the sweet glow of success had worn off, I’d recognize that the “good old days” weren’t likely to come back, that blanks would be here to stay as long as skaters wanted to buy them, that hard good brand have had a hard time being successful in shoes or apparel (Fallen and Element are the exceptions I can think of), and that the financial model in the “core” part of market, where most hard goods brands are positioned, has gotten tough.
 
And that’s bad stuff.
 
But you know, it’s just business. And when an industry evolves, as it always does, the question isn’t usually how do you turn back the clock, but how you react to the new circumstances to make your business successful. I’ve got a couple of ideas. Maybe not the best ones, and certainly not the only ones, but you got to start somewhere.
 
New Areas of Focus
 
In 1995 I wrote in TransWorld Snowboarding Business (May it rest in peace) that it was time for every serious snowboard brand to hire a Director of Resort Relations. In what can only be characterized as a flash of brilliant insight I said, “Uh, don’t a lot of people snowboard at resorts? Maybe you should be doing something with the people who run them.”
 
I know that people do an awful lot of skating at places other than skate parks. I wouldn’t begin to try and estimate how much skating is done where. Still, the skate industry is doing everything it can to support the improvement and growth of skate parks. There must be some business opportunities there.
 
How about appointing a Director of Skate Park Relations? That person might start by identifying the 100 most important skate parks in the country. Find somebody who regularly skates each park. Make him/her your representative. They get free equipment and a commission on anything they sell at the park. I’ll bet you’d find a few who would really shine. They might find kids they know who would take responsibility for smaller parks in their area. Hell, pretty soon you’d have the Amway of skateboarding going on.
 
Consider creating a Director of Park and Recreation Commissions Relations. Visit the people who run them. Find out their level of commitment and plans for skating. See how you can help them. Help them make good buying decisions. Offer to sell them some decks co branded between your brand and the new park. Call Microsoft and see if they’d pay to have the Xbox logo on the bottom of a skate bowl, and keep a piece of the action while helping the Commission pay for part of the cost of the park.
 
I have no idea what opportunities there might actually be, but I bet 20 meetings with different Park and Recreation Commissions would turn some up. It’s worth a try. If you’re already doing it, never mind.
 
Improving Brand Positioning
 
It’s all about your brand. At the end of day, still lacking any meaningful product differentiation as perceived by consumers, your brand is all you have. Skate companies may be well positioned in the core skate market. But I think that market is a shrinking percentage of the total skate market as I would define it.   Taking advantage of skate’s growing, and more diffused, audience requires you to expand your market positioning.
 
The people who skate, or who just like skate, but are outside the core market need to know who you are and understand why you are credible. How do you do that? Depends on your brand. I’d suggest you start by studying other companies who have done it. How does Reef manage to sell its sandals at Nordstrom and still be a core surf company? Why can Burton sell its hard goods almost anywhere and still be so credible in snowboarding? What’s Volcom’s plan for expanding its very successful franchise without losing its core credibility? How do the skate shoe brands do it?
 
Now if somebody was to say, “It’s not the same. Skate is different,” I’d probably agree with you but with two caveats.
 
First, it’s never the same. Nobody’s business model is ever exactly the same as your’s and soft goods are different from hard goods. But these companies have made, or all still making I guess, a transition that skate companies probably need to make. So you might think about how they’ve done it.
 
Second, skate is different, and that’s part of the problem.   It’s different enough that it’s impeding the ability of brands to break into the wider skate market. Over twenty plus years, skate brands have made an implicit decision to stick to the core market. For the longest time, there wasn’t much to decide because that was the whole market. Now it’s not, and there are two choices.
 
You can stick to the core market and figure out ways to get skaters to buy more branded product. Or you can do what other successful action sports brands have done and expand your brand’s recognition and franchise to the larger market you’ve helped create. Any skate brand that was able to do that could be successful in the soft goods market. The Tony Hawk brand comes to mind.   
 
If you study the action sports brands that have made the transition to the broader market, the first thing you will notice is that none of them did it quickly. They were all around years before it happened. At some point in the action sports business, when you’ve been around five years or maybe longer, it’s suddenly possible for you to expand your distribution without losing your credibility with your historical customer base. Skate brands mostly qualify from this point of view and then some and that’s good news.
 
I was talking to Jamie Stone at TransWorld on another subject and he had what I thought was a good idea about building skate brands. Jamie’s concern was that pro graphics were changing too quickly. There was never a chance for the skater to build a bond among the brand, the skater, and the graphic. “What if the graphic lasted a year?” Jamie asked. “Then wouldn’t you have a chance to build a marketing campaign around it?”
 
Good question. It reminds me a bit of when the snowboard companies kept expanding their lines in response to what their competition was doing. They were focused on their competitors- not their customers.     
 
I hope there’s a strategy that reverses or at least halts the rise of blanks and shop decks. I know the industry is working hard to find one. But I came out of the Parks and Recreation Convention blown away with the new opportunities there can be for skate brands. Think about it. And go to that convention next year.

 

 

Doing Marketing; What, How and Why?

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At the Skateboard Industry Conference earlier this year and in these hallowed pages, I’ve argued:

 
1.     That advertising and promotional tactics like running ads and hiring teams pass for marketing in this industry but aren’t.
2.     That marketing (maybe better called market research) is the process of finding out who your customer is and why they buy your product.
3.     That few people in skateboarding (or in action sports) do marketing well if at all.
4.     That favorable demographics and large company interest in the skate vibe are creating opportunities that we aren’t taking advantage of.
5.     That good marketing will make you more efficient in the use of your advertising and promotional dollars, a good thing at a time when this is a tough business financially.
 
Marketing costs a little money, takes some time, and will leave you with as many new questions as answers if you do it right. It isn’t a one shot deal. Its value increases as you continue it over time and, indeed, as you institutionalize it within your organization. How might you do some marketing in your organization? Here’s one general approach. Not by far the only one. Not necessarily the best or the right one for your organization, but one I think you can implement and get some value out of.   
 
The Right Questions
 
It’s easy to come up with a list of questions that, on the surface, seem relevant. General questions like “Who’s my customer?” You could create a list of good, general questions like that in about twenty minutes and walk away thinking, “Yes sir, there’s not much to this marketing stuff.”
 
Instead, begin with the goal in mind. Let’s say the goal, as mentioned above, is to make more efficient use of advertising and promotional dollars. Ask questions that help you do that. Go through each of your advertising and promotion expenditures and develop specific questions- questions that will help you know where to spend your money and what you’re getting for it.
 
One such question might be, “Do people buy our boards because of the team?” Well, duh, yes of course they do. Or at least that’s always been your assumption. Ever tested it? In several industries I’ve been amazed at the number of once true assumptions that have been institutionalized in industry lore even when they were no longer valid.
 
Among winter resorts, for example, the current assumption seems to be “If we build it, they will come.” My guess is that snowboarders would come regardless of whether or not the resorts build new trails, facilities and lifts and the number of skiers will continue to decline in spite of all the capital investment.
 
I’m not suggesting teams aren’t important to skateboarding, but if I had to prove it in a rigorous way, I couldn’t. Not unless I’d done some marketing. Use marketing to test your traditional assumptions. If you find something has changed, it’s a potentially huge opportunity.
 
Based on a specific statement of what you are trying to accomplish, get more specific in the questions you ask. “Do people buy our boards because of the team?” is too general. No answer you’re likely to get will help you do anything better or differently unless, I guess, everybody says no.
 
Maybe “Whom do you know that rides for Brand X?” would generate some useful information if your goal is to focus your team spending on the riders who create the most brand visibility. If nobody knows a rider you’re spending serious bucks on, or if lots of people know somebody who only gets product, you’ve got a chance to spend your money more efficiently, or maybe just to spend less. Or to spend more but feel good about it.
 
Marketing’s biggest challenge is in asking the right questions based on specific goals.
 
Gathering the Data
 
I’m a big believer in quality and consistency over quantity. I’d rather have 200 thoughtfully and consistently completed surveys than 2,000 incomplete warranty cards where there was no contact between the customer and the company. Send team riders or employees to skate parks on weekends. Make a deal with some of your retailers to approach customers in their store in exchange for sharing some of the data with them. Let the retailers add a few questions they’d like answered. Give every consumer who works with the interview to complete a questionnaire a T-shirt and turn the collection of market data into a promotion.
 
Do some training before you send people armed with good intentions and clipboards out to talk to customers. Make sure they understand why you’re asking the question, what you expect to learn, and what the benefit of having the data is. Get them to practice a little with other employees or friends so that their lack of experience doesn’t skew the data collection.
 
Exercise some common sense. It might not work to ask team riders to collect data about team performance. A rider isn’t going to be anxious to report that nobody ever heard of him. Consider the possibility that young males might consider this as an opportunity to do something besides collect market data and return surveys predominantly from the best looking girls at the skate park that day.
 
The data doesn’t all have to be collected in one massive effort. A couple of people in a couple of shops for a couple of hours a couple of times a months will build you a big data base faster than you think.
 
The experience the data collectors have can be as important as the information they come back with. They’ve just spent some serious face time with customers or potential customers. Sit down with them right after the session. What did they feel/see/think? What interesting comments did they hear that didn’t make it into the survey? What questions appeared to have been a complete waste of time? Did they hear gripes? New product ideas?
 
Most people from companies don’t spend enough time with the customer. Take advantage of people who are. In fact, spread the wealth- get as many employees as possible to take a turn gathering market data.
 
Your data collection is going to be biased in some way no matter how hard you work to collect it in a consistent and dispassionate way. The way the interviewers dress, the locations you select, the time of day, the different ways interviewers approach the customer and a bunch of others we can’t even conceive of will all affect the quality of the data. You strive to minimize these influences in the way you develop the survey, train the interviewers and select the locations. At the end of the day, with enough good interviews completed, you recognize, or at least hope, that the biases will have been statistically reduced to background noise. That brings us to what to do with the data.
 
Analysis
 
If you’ve gone through the process correctly, data analysis should be almost an anti-climax. From the process of designing the survey, you know specifically what you are trying to find out and what kind of decisions you hope to make from the data you collect. You know before collecting the first piece of data exactly what the analysis process is going to be. It will have become clear in the hard work you did establishing goals and developing the right questions.
 
Responses will be counted, and percentages calculated. Maybe you will have asked the same questions in a couple of different ways and will want to compare the responses. But when the simple counting and calculating is done, there are a couple of statistical techniques that will help you get the most out of the data.
 
Not all the questions you ask will require this kind of analysis. But when appropriate, the concepts of “mean “ and “standard deviation” are powerful tools that are not tough to use once you understand them.
 
A standard distribution is represented by a bell curve. Bells can be taller or flatter depending on how the data points are distributed. The vertical line that divides the bell exactly in half represents the mean on the curve. The mean is the point where half the data values are greater and half are smaller. Simple so far.
 
The standard deviation is a statistic that tells you how tightly all the data points are clustered around the mean . When the points are pretty tightly bunched together and the bell-shaped curve is steep, the standard deviation is small. When the bell curve is relatively flat, you know you have a relatively large standard deviation. One standard deviation away from the mean in either direction on the horizontal axis accounts for somewhere around 68 percent of the data points in this group. Two standard deviations away is roughly 95 percent. Three accounts for about 99 percent of all the data points.
 
So who cares? Just for fun, say you ask 200 customers how old they are. Their mean age is calculated as 14 with a standard deviation of one year. So you know that 68 percent (one standard deviation away from the mean in either direction on the horizontal axis) of your customers are between 13 and 15. 95 percent 12 and 16.    You can see how this might help you focus your marketing efforts.
 
Mean and standard deviation are calculations that lots of cheap calculators can do. Excel will do it for you on your computer. So, as I started out by saying, you can do this yourself. On the other hand, time is money, and there lots of companies around that specialize in designing surveys, collecting data and interpreting the results.
 
Any masochists out there who actually want the formula for calculating a standard deviation should let me know and I’ll be pleased to provide it. 
 
Even if you get some professional help and trade some money for time and efficiency in the process, your customer and industry knowledge will still be required to make sure the right questions get asked of the right people.
 
Somebody once said that half of your advertising and promotion budget is wasted- you just don’t know which half. Marketing can help you figure that out. Just to pick a number, if you spend $20,000 to do a survey that helps you save only $5,000 a year, a return on investment of 25 percent, isn’t that a great deal? My guess is that you’ll do better between more efficient spending and better customer focusing. Do the marketing yourself or get help. But please do it.

 

 

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

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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.

 

 

Hard Truths about the Action Sports Business; Use Them to Make Lemonade from Lemons

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As I said in the last issue of Boardsport Source, the way companies choose to compete in the action sports industry and, I suppose, in most industries, is largely responsible for the maturing and consolidation of fast growth industries. Ask the skate and snow people. People way smarter than I have acknowledged that surf’s time will come.

It wouldn’t hurt to read that last article before this one.  So if you’re one of the few people who doesn’t seal their copy of this mag in an air tight case of bullet proof glass filled with argon gas to prevent the paper from deteriorating, let me know and I’ll email it to you.
 
I have the privilege of looking at things at my leisure from the 10,000 foot level without the distraction of having to make a budget, ship a product, or figure out which brands to go how deep on. I guess what I want to tell you is just how much this industry has changed. Perhaps that seems obvious, though if we take it as a given it’s amazing how little we seem to try to manage our businesses differently to compensate. What can we do, anyway? Let’s think about some old habits we should consider breaking.
 
Hardgoods
 
Congratulations. Surfboards, skateboards, and snowboards are all well made, quality products that the consumer can rely on.   The brands have done an outstanding job of designing, sourcing, and manufacturing. So much so that the prices keep going down. In the industry’s incestuous world, we bemoan this, point fingers in various directions (usually not in the mirror, which is where we ought to be pointing at least some of the time), and discuss endlessly what we can do to increase margins to what we “need.”
 
Maybe, instead of wringing our hands over lower prices and margins, we should all be congratulating ourselves for making it easier and cheaper for the consumer to skateboard, snowboard, or surf. I’m not suggesting that cost is the only, or even the most important, determinant of participation. But as long as we, as an industry, seem determined to drive down costs and prices, don’t you think we should celebrate that service we’ve performed for our customers and figure out how to turn it into a good thing rather than complaining endlessly about something that doesn’t seem like it’s going to change?
 
Why haven’t I heard of a surf retailer giving a free surfboard ($95 ex-factory out of China) to a customer who buys a wet suit, baggies, wax, sun glasses and a surf trip from the retailer? “But we’re not a travel agent!” bemoans the retailer. Well, maybe you better consider becoming one. That’s how scuba diving retailers, in the US at least, make a lot of their money. Is there any reason a snow retailer couldn’t do more or less the same thing? Maybe skate retailers should be selling a deck at cost to a kid who buys wheels, trucks, grip tape and a pair of shoes at regular prices.
 
Brands, resorts (or skatepark owners) and retailers should be sitting and talking about how you can help the consumer rather than about who’s fault it is that it’s harder to make money. Ignoring the Japanese snowboard phenomenon of the early to mid 90s, consumers don’t want a surfboard, skateboard, or snowboard for its intrinsic value or artistic design- they want to skate, snow, or surf.
 
Rather than bitching about what’s happened in hard goods, why don’t you embrace it (since you’re stuck with it!) and do something positive with it? Don’t sell skateboards, surfboards, and snowboards. Sell skateboarding, surfing, and snowboarding. That’s what your consumer is interested in. 
 
And those margins you “need?” Zumiez, the very successful US action sports retailer with around 130 stores just launched its stock in an initial public offering and so far, the stock has performed pretty well. Zumiez gross margin in its last complete year was 31%. I guess that’s all they “need.” I know- they’ve got all those stores, and they’re a mall shop, and they get better prices from suppliers, and we’re way cooler than they are, and, and, and, and….. Guess what? It appears that quite a few of the industry’s consumers don’t care about that. They think Zumiez does a great job. So do I. If you’re interested, here’s a link to their public offering prospectus. http://www.sec.gov/Archives/edgar/data/1318008/000104746905013143/a2153924zs-1a.htm
 
Distribution
 
I don’t have the words to describe how tired I am of hearing people argue over whose “fault” our distribution problems are. Whenever you get a group of brands and retailers together, the issue is bound to come up. But no new information is ever exchanged, and nobody has any useful suggestions. Why don’t we just get over it?  Whether you’re a retailer or a brand, assume that most product, hard good or soft good, is going to be available all over the place. It mostly already is. Am I overstating that maybe a little? Maybe. But we can all agree that every brand of any size is available in many different size and quality retailers in many locations.
 
Retailers have three choices. First, if your margins are going to drop, then you have to sell more to make the same level of gross profit. Maybe you’re a brilliant retailer and can do it by increasing sales per square meter in your existing space. More likely, you’ll have to increase your floor space or open new locations or add products. Or all of those. That, of course, requires you to increase the working capital investment in the business.
 
Choice two is to carry more new, lesser known brands. Risky? Yes, but no more risky than doing nothing as your margin drops and your operating expenses stay the same or rise. Besides it fits right in with choice three, which is to do what smaller retailers are suppose to do to compete- differentiate themselves by brands carried, customer service, and expertise. At the end of the day, the best specialty retailers can sell whatever quality brands they choose to carry, because the credibility of the retailers is so high that it rubs off on whatever brands the shop has. The ability to give credibility to any brand it carries may be the best definition of the specialty retailer I’ve ever heard.
 
Actually, I suppose these three things aren’t really choices, but tactics that should be pursued simultaneously.
 
If I were a brand, I think I’d sharpen by pencil and ask what would happen to my gross margin, marketing expenses, and bottom line if I were to get a bit more cautious on my distribution and was satisfied with lower top line growth. The UK brand Animal is taking something like this approach. By being cautious about their distribution, they keep retailers happy by promoting sell through at higher margins. That exclusivity increases demand and next year’s preseason orders. It also means they can be more judicious in their marketing expenses because limited availability drives demand better than a whole bunch of paid ads. The bottom line is, well, a bigger bottom line than if they focused exclusively on driving sales.
 
Marketing
 
I keep turning back to the two page Globe ad in this mag’s spring issue. It’s an artistic rendition of a single wave breaking in a big ocean. There’s nothing else in the picture. Not a product or a team rider in sight. Nobody doing a trick that 99% of the people looking at the ad can’t do. It reminded me of what I really value about surfing- the peace of just being out there even if the surf sucked. Anyway, there was always the hope that the occasional, elusive good wave that comes through even when the surf was bad would be the next one.
 
Was it a good ad or a bad ad? I loved it, but that’s up to you to decide. At least it was different and I noticed it. And of course this was a trade, rather than a consumer, publication. Obviously if you can make your ads different so that they get noticed in a positive way that’s good. If in fact more of the consumers who buy your product are non participants interested in the lifestyle rather than the technical specifics of the newest trick maybe more of these ads are particularly appropriate.
 
The caveat is it depends where you are advertising. In core consumer publications, read mostly by core participants, (I think- that’s an interesting question! Who does read them?) I suppose tricks and pros will also be the staple of advertising, though it tends to leave everybody’s ads looking the same. But if you’re reaching to the mainstream and becoming more and more part of the fashion industry, your advertising placement may change, or at least expand, and a different kind of ad become appropriate.
 
Don’t find yourself directing too much of your advertising to the industry. Deliver an image and a message that your consumers- not your retailers or your competitors- think is cool.
 
In this article, I’m asking you to do three things. First, focus like a laser on your consumer and what they want. Don’t confuse your team riders, the industry, or the retailers for the people who buy your stuff. They overlap for sure, but they are increasingly not the same for most companies. I can guarantee you that the companies that do that will be the most successful.
 
Second, rather than bemoaning the trends in hardgoods and distribution laid out above, recognize that they are normal industry evolution stuff and figure out how to operate your business given that they are here to stay.
 
Third, do some things differently keeping the focus on the consumer in mind. Yes, they feel risky but I hope I’ve made it clear that not trying some new business approaches is even riskier. If you agree that the industry has changed, how can you possibly make the argument that you should be using the same old tactics to build your business?

 

 

Look! New Brands. That’s Great! Or These People Are Crazy. Or Both.

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Probably both. It’s not like brands haven’t been coming and going for years beyond count in skateboarding.

Historically, there have been two categories of new brands. The first was the truly new company started by some skaters who wanted in on a burgeoning industry that just happened to be something they loved. The second were the new brands that came from established companies where brands came and went as their popularity rose and fell with time and the popularity of the brand’s team.
 
Let’s look at who may be crazy and who may not be, and why.
 
The list I was sent of around fifteen “new” brands turned out to be mostly brands started by existing companies. Some of the ones not clearly associated with an existing brand I tried to contact, but in a couple of cases I either couldn’t find a phone number or email address on the internet, or I didn’t get an answer.
 
The reason I was hoping to reach some new brands not associated with existing companies is because when they are popping up, skating is prospering and dynamic. The level of enthusiasm and optimism that leads to skaters starting new brands or new shops is just what we need in this industry.
 
Brands being started by existing companies, on the other hand, may or may not indicate any market growth. They may represent just that ongoing brand rotation I referred to above we all know about.
 
Certainly the almost weekly phone calls or emails I use to get from kids who were going to start shops or brands are a thing of the distant past. I always tried to encourage them to go for it, but also to do it with a certain level of business realism. I wonder if any of them ever pulled it off.
 
Excuse me as I wipe a tear from my eye, sign deeply and bemoan the loss of “the good old days,” when men were men and margins and prices were high and you could sell everything you could get or make.
 
Was I suppose to say, “People were people” to be politically correct? Oh, the hell with it.
 
Anyway, in a desperate attempt to get back on topic, let’s look at how the business model of starting a new independent brand has changed.
 
Same Old New Business Model
 
The bad news, I suppose, is that the expense side hasn’t changed all that much. At first, when you’re very small and “underground,” building one shop and one order at a time, maybe you can get away without some of the usual expenses.
 
As you begin to grow, you will need team riders. You have to begin to advertise and promote. You will find yourself giving away more stickers and promotional product. iThere are magazines to be advertised in and trade shows to go to. My guess is that none of this has gotten much cheaper, though trade show booths bigger than my house (and with more floors) are largely a thing of the past in the core skate industry.
 
You’ll have to pay rent or a mortgage when you outgrow your garage, and it’s likely you’ll need employees who will, inconveniently, want to be paid. So will the phone company.
 
And while you do what you can to control expenses like any competent business person, a lot of these expenses are unavoidable. Especially, maybe, the marketing expenses since you’re product is the same as everybody else’s and without brand differentiation you’re ultimately toast. In fact, if skate isn’t growing as fast as it use to, maybe you need even more of those marketing expenses.
 
Let’s hope, of course, that you also have some revenue. More than expenses, eventually, would be nice. And of course you’d like that revenue to come from selling full price, high margin decks that kids buy because the brand, or skater, or both, are cool. You and every other brand.
 
But I suspect that part of the market, in both percentage terms and in total decks sold, is not as big as it use to be and may be getting smaller. And prices, at both wholesale and retail, are expected to come down in the broad skate market.   You know the drill; Shop decks, China, blanks, competition, fewer core shops, wider distribution, no real product difference, blah, blah, blah, blah.
 
We’ve been through that analysis enough, so let’s just recognize the danger of less revenue from the same number of products sold even if the percentage margin is the same. You are in general going to need to sell more decks to make the same total gross margin dollars. Those dollars are what you need to pay all those pesky expenses. So breakeven is a little farther away, in terms of sales, then it use to be. Financial risk is higher and more bucks have to be invested in the business.
 
And now that I’ve got anybody who was actually thinking about starting a new, independent brand standing in a puddle of their own making, let me tell you that you should go for it. But plan for it and recognize the changes in the business as a way to improve your chances of success.
 
Old New Brands
 
It’s not a surprise that of the 15 or so new brands on my list, no more than three or four are really independent new brands. And it may not be that many. We all know of cases where somebody has started their “own new brand” that is distinct from a marketing point of view but is supported financially and logistically by an existing skate company.
 
Which, by the way, makes a hell of a lot of sense. Starting from scratch is a pain in the posterior region. If you’ve already got a warehouse, accounting system, and product source, there’s not a reason in the world not to take advantage of it. Especially since the consumer will probably never know the difference and will be just impressed by a correctly marketed new brand supported by an old company as a new brand from a truly new company.
 
And many retailers, I suspect, would prefer to have a new brand from a company they know they can count on for quality, delivery, service, and marketing. For better or worse, they aren’t prepared to take the same risks on new brands they use to be.
 
Just to confirm that, I spoke with Craig Nejedly, President of the wheels and soft goods brand Satori Movement. Within the last year, the company has launched the new skateboard brand Creation.
 
“Some of our retailers had been asking for a deck for while,” he indicated. “Finally, we couldn’t see any reason not to accommodate them.”
 
But it isn’t a blow out the doors, grow at all costs kind of approach. Far from it. Unsold inventory is kept to a minimum. Growth, at this point, is determined by pull from the retailers, not by demand created by marketing. Between the terms he gets from the factory and the way the retailers pay, Satori hasn’t had to invest a whole lot of capital in the new brand to make it fly. And marketing dollars only go out the door based on sales dollars coming in. Marketing, at the moment, is based more on limited distribution and scarcity than on advertising and promotion.
 
I’ve always thought that was a good plan. Demand creation through some level of scarcity is probably better marketing than, well, marketing.
 
When Taking a Risk Isn’t
 
From the consumer’s point of view whether a new brand is independent or not may be irrelevant since the consumer doesn’t know. But when I see new independent brands, I know the market is more vibrant and optimistic and probably growing. So my advice to those interested into getting to the skate business is to listen, but not be intimidated, by people like me telling you how hard it can be. That’s true but it’s not the whole story.
 
As a new brand, you can do things the existing brands wouldn’t even think to do. In fact, if you come out of the shoot doing exactly what everybody else does but trying to do it a little better or differently, with your goal being to take somebody else’s market share, you reduce your chances of success and for sure you don’t do much to grow the market.
 
Why don’t you make a deal with the local skate park so that a pass to the park comes with each deck you sell? How about arranging a skate demo where people wouldn’t expect it? Include a coupon that’s good for a discount off a deck if you’re over 40. Okay, maybe that’s a retail strategy. Think of the parents that would get dragged into the shop. My point is that as a small brand, there are few rules about what you can do and can’t do.
 
Forget what all the other brands are doing. As a new brand, don’t benchmark yourself against your competitors. Figure out something new you can give the skater. It’s what the customer wants that matters. Create a new market instead of fighting over a crumb of the existing one. It’s your best, and maybe your only, chance.

 

 

Living in the Past- Or Not; The New Old Skateboarding

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I can’t be the only one it’s occurred to that skateboarding seems to have dodged its historical cycle of disappearing and being reborn every ten years. I think that’s a good thing, though shrinking to nothing and more or less starting over had the advantage of letting everything be fresh and rediscovered.

True, sales fell from their peak by maybe a third. But a third is better than nine tenths. And sales are growing again though inevitably not at the rate of three or four years ago. And I suspect, though I can’t quite prove it, that they’d be growing even if it wasn’t for the BAM phenomena.
Somehow, skateboarding has broken through and is established and accepted in a way it never has been before. At the same time, at least for the moment, it’s still got a bit of an underground, urban edge to it.
Strangely enough, the fact that skate didn’t follow its pattern of completely cratering is both a good and, in some ways, a bad thing.  This article will expand on that (guess I better since it sounds a bit crazy to suggest that there are benefits to crashing) and look at some ways that maybe our business model has to change given that we didn’t crash. No doubt I will have thought of some before I get much further along here.
In The Beginning
The cosmologist, mathematicians and particle physicists tell us that the universe began in a “Big Bang.” Whatever that is. It started as a point particle of infinite density and temperature. Whatever that means.   It’s been expanding in all directions since then and if the string theorists can get their nine dimensional act together they may be able to unite electromagnetism and the weak and strong nuclear forces with gravity and tell us if there’s enough dark matter to ever stop the expansion and I’m sure you all understand that as well as I do.
Yikes, that sounded like something Jim Fitzpatrick would have written. I miss reading his stuff.
So anyway, in a few billion years we could have a real problem (I mean aside from the sun dying) but my point is that when you start from nothing, like skateboarding kind of has done in the past, you can create whatever you want and a lot of people won’t understand it. Or care. Or even know it’s there.
You can see why that might be kind of a good thing for a small industry. The people and companies who are the bedrock of the industry are in control.   The 800 pound gorillas don’t even know you exist or, if they do, they don’t care. Customers, retailers, and brands share certain common interests and perception. As competition emphasizes marketing, prices and margins tend to remain high.
Clubby little deal isn’t it? And it works great until people start to discover you, or somebody wants to grow.
Our Universe Expands
Skateboarding has had its Big Bang and there’s no going back. Skate parks, cheaper, quality hard goods, fashion focus, national media attention, maybe the Olympics, blah, blah, blah. You know it all. Good or bad? I don’t know, but apparently it’s irresistible. But, to continue the cosmological analogy, when Copernicus announced that apparently the earth went around the sun and wasn’t the center of everything, some people weren’t anxious to accept the new reality and the same may be true in skate,
To be honest, I’m not all that anxious to accept it either. I liked the business model where skaters controlled skating for skaters and, in the process, could make a few bucks themselves. I thought it kept the industry about the act of skating, rather than blowing it up into the echo of a fashion trend I’m afraid it might become. I don’t want skating to be just a sport.
On the other hand, I tend to be a bit of a green eye shaded kind of business guy and I’ve learned that sometimes when industries change you either have to go with the flow or go away. What does that mean?
Remember Snowboarding?
  • After a phenomenal period of growth, snowboarding consolidated down to the point where five or so large, multibrand companies sell most of the hard goods.
  • Hard good prices have fallen and continue to fall. Everybody makes good product differentiable only by marketing and most of them make some of in China, or somewhere like China, as a competitive necessity.
  • Sales of pro rider snowboards now account, I’m told, for only around five percent of total deck sales.   It use to be more.
  • Soft goods and accessories are an important- maybe the most important- source of income and potential growth for snowboard companies. Seeking opportunities for growth that hard goods won’t provide, some snowboard companies interested in moving into the much larger and more profitable fashion business. That means they are running into some heavy duty competitors with more resources and fashion industry knowledge.
  • Distribution was allowed to expand dramatically. Looking for growth, or with the rationale of building market share, brands became available at more and more locations, causing some decline in the perceived value of the snowboard product in spite of the brands’ marketing campaigns.
  • Snowboarding started as an outlaw sport, with some resort’s first action with regards to snowboarding being to ban it. In short order they embraced it and started building terrain parks all over the place.
  • Snowboard shops became multiactivity action sports shops. Hard goods were no longer as profitable as soft goods but were critical to the shops market position. Sales of apparel, shoes, and accessories to non participants interested in the lifestyle, or just in the trendy clothing, because critical to shop success.
I didn’t think I’d get seven items when I started the list. But the comparisons are compelling.   I don’t claim snow and skate are “the same.” Snowboarding is a highly seasonal, destination sport with generally older participants requiring a big cash outlay. Still the comparisons are obviously valid to some extent and we’ve been seeing those trends in skate to a greater or lesser extent.
So What?
Shit, I’m out of clever cosmological analogies. Oh well.
Most of this you already knew this stuff and probably didn’t really enjoy being reminded of it. Don’t blame you. But besides sit, suffer, and bemoan industry evolution, there are some things I think we should try and do.
Let’s agree that any brand, distributor, or retailer that starts arguing with another about how the other guy has screwed up distribution or pricing has to immediately donate $1,000 to IASC.   Elvis has left the building on this one. Cheap decks are going to keep coming in from China and retailers are going to carry blanks and shop decks if their customers want them. Every shop and brand is going to do what they perceive to be in their own best interest.
Cherish, identify and follow those customers who still buy branded decks at full (whatever that means) retail. Give them a discount they didn’t ask for because they come in so often. Be nice to their friends. Give them first shot at new products. The companies and maybe their pros should be contacting them and thanking them. Imagine the loyalty a single email might build. These kids are worth a fortune not just in what they spend but because they are the bedrock of what keeps skateboarding cool.
Go and look at your marketing budget from three years ago. How much have you cut it back and where? Were there some things you should have cut and didn’t, and some things you did cut, maybe because they were easy to cut, and wish you hadn’t? Which ones are working and how do you really know? Tough to figure out, but worth the effort. If you can’t do as much, at least make sure you’re doing the right things.
Where a brand is part of a larger company, try and insulate the brand from the larger corporate circumstances while stealing all the marketing resources and other forms of financial support you possible can. We aren’t starting from nothing anymore and inevitably the “larger corporate structure” is going to cramp your style a bit.
But what I know is that a hand full of relatively small companies have had an amazingly high level of influence and control over skateboarding. Because the people who ran those companies were skateboarders, they did good things for the industry and for their companies. As we grow, and get diluted by the 800 pound gorillas, that influence and control will be reduced to some extent.
On the one hand, no matter how much it’s fought, the cool/urban/underground factor in skate gets diluted by over exposure and mainstreaming. On the other hand, with growth and general awareness of skate, the industry acquires some strength and survivability it didn’t have before. What’s the net? I don’t know. But there’s some business opportunities in there if we don’t automatically stick to what worked before.

 

 

Chop Chop, Fizz Fizz, Oh What a Morass It Is!

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Apologies to the Alka Seltzer people for bastardizing one of their old advertising slogans. It just sort of sprang into my head the moment I saw Dwindle’s announcement on their Chop Chop Wood Shop. I assume it occurred to somebody that the name might be offensive to the Chinese, but this is probably just some form of obscure skateboard humor. Hope it turns out to be good business.

Last issue, I offered up my opinion on how the industry might evolve. That was written before Dwindle’s announcement. Dwindle may have validated the scenario I laid out, so you might want to go back and read it if you haven’t already.
Let’s not waste time being pissed at Dwindle, and let’s not be surprised by their actions either. It’s not like they are the only skate company making or planning to make product in China- they’re just the only one that’s made a big formal announcement. They should get credit for standing up and saying it. This is just kind of standard industry evolution stuff.
But that’s not to say it isn’t important. The announcement marks a symbolic divide between how the industry use to be and how it’s going to be. That sure sounds pompous, but I really, really, really, believe it.
If it’s that important, what are you going to do about it?
Break Out the Spreadsheets!
At the end of the day, how this affects your business is going to have a large financial component, whether you’re a retailer or a brand or a manufacturer. With your computer on and your budget (you do have one, right?) on the screen, decide the following things:
  • To what extent will it be possible for an established brand to maintain higher prices in the face of Dwindle’s price cuts without giving away much or most of their volume?
  • How much of these price cuts is going to filter down to the consumer? That is, do you think retailers will hold prices, or pass the lower prices on to the skater?
  • What will be the impact on sales and margin of hard goods prices besides decks?
  • What’s going to happen to the pricing and sales of blanks?
  • To the extent that retailers choose to pass on their savings to skaters, what will happen the number of decks sold? Will it go up enough to compensate for making fewer margin dollars on each deck?
  • Is there going to be any kind of backlash against decks made in China? If so, how long do you think it will last?
  • What’s going to happen to distributors? If price cuts get passed through to consumers, will there be enough margin dollars to go around?
  • What’s going to happen to brand value? That is, how will lower prices impact the consumers’ impression of a brand and its desirability to them?
Say, these are all cheery questions, aren’t they!
Make your best guess and plug the resulting numbers into your budget. What does your new financial model look like? Are you making money? If not, what are you going to start doing differently?
For Retailers
Interestingly enough, retailers may be less impacted than anybody. Most retailers have already gotten use to the idea that hard goods aren’t necessarily the biggest profit maker in the store. They have allocated more and more space to shoes, apparel and accessories because they know that’s where they make their money. Many to most are selling blanks and shop decks. Largely, they are not just skate shops either. Obviously, the more skate focused you are, the bigger the potential impact. Tactically, the most important thing retailers may have to worry about is how the profitability of their blanks and shop deck sales could be affected.
Strategically, it’s a different thing. A few years ago, Burton Snowboards expanded its distribution dramatically. Pretty soon Burton, like most of the other major brands, was available in most distribution channels from specialty shops to big chains like Garts. I thought the message this distribution by the major snowboard brands sent to the consumer was, “It’s just a snowboard. No reason not to buy it where it’s cheapest.” If Burton wasn’t special in snowboarding, then nothing was.
That was the moment when the “race to the bottom” began in snowboards in earnest, though price competition was already pronounced before then. I hope skate hard goods aren’t doing the same thing.
For the retailers, the future can probably be seen in a Zumiezs or BC store, both of which I’ve visited in the last few days. They carry skate and snow hard goods, but I wouldn’t call either one a skate or snow shop. They are either lifestyle or action sports stores, or some other name I haven’t thought of. The hard goods are there, but they are casually displayed and don’t take up all that much room. I’m sure it’s not that they don’t want to sell them, but hard goods do appear to be a badge of credibility among the racks, stacks, and piles of shoes and apparel.
They have a year around business model that doesn’t just cater to skaters and snowboarders, but to the much broader market interested in the fashions associated with the lifestyles. If, as I think, we’re sending the message that “It’s just a skateboard” like it’s been sent in snowboarding, this is where I expect skate retailing to head. I’d note that this has happened in snow in spite of big team programs, promotions, and advertising campaigns by the major snow brands.
For Brands
Tactically, of course, brands without their own factories now have some ability to get lower prices either by getting their own product from China or using the threat of doing it to get better prices from their domestic suppliers. They won’t get as good a deal locally as they can get from China no matter how well they negotiate.
The strategic financial question is the more interesting one.
When Chinese production (not just from Dwindle) works its way through the system, will a brand be selling more or less decks at higher or lower margin? I’m not concerned about the gross margin percentage as much as about the total number of gross margin dollars available. Given the total gross margin dollars the brand has available, will they be able to support their team and marketing programs (the only real source of brand differentiation) at the level they have supported it at in the past and still make money? If marketing programs suffer for financial reasons, it gets even harder to support the argument that there’s any reason to buy a skateboard based on anything but price.
For Manufacturers
In the late 80s and early 90s, there was no snowboard manufacturing capacity available. Factory after factory opened in the US. Then the big Austrian ski factories and, later, the Chinese, stepped in. Most of the US factories disappeared. Mervin Manufacturing, the producer of the Gnu and LibTech brands, survived the transition by being bought by Quiksilver. Now, even they are starting to make some low end product in China.
Due partly to a managed foreign exchange rate that keeps the Chinese currency ten to forty percent undervalued against the dollar, the Chinese have eaten the lunch of various wood products manufacturers in the United States. I hope it’s different with skateboard manufacturers.
If it is, it will probably have to involve consolidation and a highly efficient, large player. Maybe something along the Mervin model will happen, though it’s unclear to me why anybody would buy a skateboard manufacturing facility right now.
Speaking of the Mervin model of course, they also make their E-Maple skateboards with the plastihide tops that are suppose to last longer and offer more pop. Technology has been the traditional defense against low cost manufacturers. We could sure use some more right about now.
Don’t Panic, At Least Not Too Much
No doubt everybody, including me, would feel a whole lot better if I’d painted a rosier picture. Unfortunately, I have the really bad habit of saying what I actually think. Maybe I have exaggerated the potential changes just a little to encourage everybody to take a hard look at their business model and plan for how they are going to react as things unfold. Bottom line is that the Dwindle announcement and associated price cuts shouldn’t be that big a stunner because anybody who hasn’t been playing at being an ostrich knew this was coming from somewhere, though of course we hoped it wouldn’t happen. Industries change. You change with it.

 

 

One Possible Future; An Industry Model for Skateboarding

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Last month, I wrote about surviving a downturn, suggesting that this wasn’t just a downturn but a fundamental change in industry structure, requiring a change in the way successful companies competed. This month, I’d like to be more specific about how I see the industry evolving.

It’s perhaps a bit pompous to do this, because my crystal ball is no better than yours. But my recent study of China’s fixed exchange rate and the September 21 cover of the New York Times Magazine made me decide to give it a shot.
 
Perhaps that needs some explaining.
 
Chinese Exchange Rates
 
I took a whole column in SnowBiz to write what I’m summarizing here. It should be out by the time you see this, so for more detail refer there. Basically, China keeps its exchange rate fixed at 8.3 Yuan to the US dollar. Most currencies are managed from time to time and to some extent, but the major ones change against each other daily based on interest rates, trade, general economic conditions and other factors. The Chinese government makes sure its exchange rate doesn’t change.
 
The result is that the Yuan is between 10 and 40 percent undervalued against the dollar. That is, stuff we buy from China is between 10 and 40 percent cheaper than it should be. Great for consumers and companies that import from China. Not so good for U.S. manufacturers and people who want to sell to China.
 
And there’s not much you, as a US manufacturer can do, given the artificial undervaluation of the currency. It may be, as some have claimed, that you can beat low labor costs with technology. But add the artificial exchange rate advantage and you’re screwed.
 
It’s unlikely that the undervaluation of the Chinese currency will go away in the short term. Among other reasons, we need them to invest a chunk of their trade surplus with us in U. S. Treasury securities so we can finance our budget deficit.
 
We all know that more and more skate hard goods (not to mention soft goods) are being made in China. Lacking some kind of meaningful technological change in skateboards, expect that to continue and grow. If the quality of Chinese made skate hard goods is still an issue, and I’m not sure it is, it won’t be for long.
 
So the stuff gets made a lot cheaper, and the quality is fine. Lacking product differentiation, those lower prices eventually, through normal competitive dynamics, get passed along to consumers. Good for the consumers, and perhaps for the general growth of skate. Bad for manufacturers and retailers.
 
Because even if sales of hard goods grow (unless they grow an awful lot) and even if percentage margins remain the same, the total number of margin dollars realized from hard goods sales declines.
 
Margins dollars are the dollars available to pay for team, marketing, rent and telephone, salaries and bunches of other stuff excluding product. Whatever left is profit, more or less.
 
I am not suggesting that there will be no skaters left willing to pay higher prices for branded decks, but I expect the number of such skaters to decline as percentage of the total. And, at the end of the day, there’s no reason higher end branded decks can’t and won’t succumb to the same competitive pressures as any other deck.
 
So if you’re a seller of skate hard goods, manufacturer or retailer, your financial model may change. In hard goods, you’ll have to sell more to make the same money.
 
Boy, I’m just full of good news today, aren’t I?
 
The Kid on the Cover
 
I think he was four. He was a skateboarder and he was on the cover of last Sunday’s New York Times Magazine. The story was about how really young kids are becoming sponsored and managed.
 
Seeing him there didn’t tell us anything we didn’t already know about the mainstreaming of skateboarding, but it sort of galvanized me into saying the following:
 
The skate market will increasingly be driven by the apparel (including footwear) brands. They can sell product to anybody who thinks that skateboarding is cool. Hard goods brands can only sell to people who skate. The apparel market, which I suppose includes everybody who needs shirts, pants, and shoes and is over four and under 50, is simply a couple of orders of magnitude bigger than the hard goods market. And, for successful companies, margins are and will be better in apparel than in hard goods.
 
They will influence skateboarding, to put it bluntly, because they will be bigger and have a lot more money than most hard goods companies. Hard goods skate companies already know everything I’ve said here. They have the following choices:
 
1)            They can try and use the strength and remaining cash flow of their established brands to transition into soft goods and, ultimately, make those soft goods the bigger part of their business. You saw that process already going on with some brands at ASR. Soft goods are tougher to do well than hard goods, and skate brands that take this approach will (for the most part) be competing with companies that are larger and better financed than they are. They will also have to decide whom they are trying to sell to- the core skaters who buy their branded product, or the larger mainstream market. Obviously, it starts with the core and has the possibility of being extended from there. The art is in figuring out how to expand distribution without damaging the brand’s credibility.
 
2)            They can sell their companies. But if they wanted to do that, they should have done it two years ago at the peak of the frenzy. Element is the only brand I recall that really did that. Companies selling now won’t get near the prices they would have gotten. Still, it may turn out to be the only financial choice for some and certain brands may have more value as part of a larger organization than as stand alone companies.
 
3)            They can remain as independent “core” skate companies. Whether there is a financial model that can support that strategy is unclear to me.
 
If you want some confirmation that this kind of industry evolution is a reasonable possibility, look no further than the surf industry. It’s dominated by a handful of soft goods companies. Mainstream sales, for both brands and retailers, are where the sales volume and profit is. Many to most industry customers don’t surf. Hard goods are having problems with cheap product from China, and nobody seems to make any money on them. Hard goods have hardly been discussed at the last two surf industry conferences.
 
Under the scenario I’ve suggested here what, exactly, is skateboarding? Fairly clearly, it’s not the kind of urban, underground, at the fringe activity it use to be. Time was when it was in the interest of the major hard goods brands to position it like that and hell, that’s how it was anyway. But if the picture of industry evolution I’ve painted here is valid, that no longer makes sense at least in terms of the business strategy. Because, as I’ve tried to explain above, the sales, growth and margins are in the other, much, much larger part of the market- the mainstream, if you will.
 
You can be a successful, profitable $20 million company with a significant marketing and advertising program if your margins are 45%. If those margins fall to 25%, I’m not so sure that works. Okay, I’m pretty sure it doesn’t actually.
 
More and more of my articles could be written for any of Skate, Snow or Surf Biz. There’s a lesson there somewhere about how the industry is evolving. In line with that, I want to suggest that skate retailers who haven’t seen it get hold of the September 2003 issue of TransWorld Surf Business and read the “When It’s Time to Change” article on the cover. It’s an interview with K-Five Boarding House owner Jurgen Schultz. He’s much smarter than I am because he started reacting, as a retailer, to the changes I’ve described here a couple of years ago. He took some risks to do it, but he saw doing nothing as a worse risk.
 
That’s a good way to think in this market.

 

 

How to Survive a Downturn And Take Advantage of the Opportunity It Represents

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In previous articles, going back to when skating was growing like the proverbial weed, I’ve talked about issues related to a downturn. Things like expense control, if you should sell your business, characteristics of a maturing market, cash flow management, the impact of a recession, and the potential impact of foreign competition. Given the continuing, current conditions in the skateboarding industry, it’s kind of time, and probably well past time, to bring it all together.

 
This isn’t necessarily a completely cheery subject-companies do go out of business in downturns- and I’ve learned over the years that the practice of shooting the messenger is alive and well. Still, I know from my consulting practice that denial and perseverance in a period of change is what gets good companies in trouble in the first place. Getting them to recognize that continuing to do what they’ve always done successfully when the business climate changes is more of a risk than doing new and apparently risky things is hard.
 
This is important, so I guess I can deal with a little hate email.
 
The Good News
 
Let’s recognize that downturns are opportunities for companies with sound competitive market positions and strong balance sheets. As weaker competitors go into crisis mode and spend all their time managing cash, cutting back on commitments, not delivering well and scurrying around looking for money, solid player can, and will, and do, move in.
 
That’s not to suggest that the soft market isn’t impacting even solid brands. But at the least they can continue their ad campaigns, deliver product when promised, pay their team on time and service customers better than their weak competitors. If others can’t, that puts you ahead of the game even in a soft market.
 
Now consider taking the next step. If you have confidence in your market position and branding, this might be the time- when your weaker competitors can’t respond effectively- to take that next step. Come out with that new product. Introduce new POPs. Go aggressively after those retailers who’ve been carrying other brands instead of yours.
 
Established skate retailers have for sure taken a sales hit- especially in hard goods. But some established stores have watched competing newcomer retailers disappear, and they’ve found some better deals available from brands.
 
Do I know that from careful market research and talking to dozens of retailer? Nah. I’ve talked to a few, and what I’ve heard has been pretty consistent. But this is what happens in every industry after a big growth spurt. As the industry matures, margins decline (temporarily or permanently), retailers have more power, consumers get smarter (so marketing may not work as well), product differentiation gets harder to come by, overcapacity can be a problem, competition shifts to a greater emphasis on cost and service, and international competition increases.
 
Aside from that, nothing changes.
 
These structural changes are different from industry to industry, but they are always present. Think of how each can be applied to skateboarding and I think you’ll see my point.
 
Retailers, even if they are skate focused, are usually not just skate retailers. They also sell surf, snow, bike and/or others in some combination. Surf, of course, is hot right now and taking up some of the slack of a soft skate market for retailers.
 
The decline in skate hard goods sales isn’t as traumatic for retailers as it would be if those were high gross margin items. Obviously, any sale with any positive margin contributes to overhead. But if you could pick where sales were going to suffer, you’d pick the lower margin items. In skate, that’s typically hard goods. Besides being diversified across sports, retailers have the added advantage of selling shoes and clothing to people who don’t participate in the sport but still needs soft goods.
 
Bad News
 
Companies are almost organic is their single-minded focus on survival. Even when any objective analysis of risk versus potential return suggests they should go quietly away, they don’t. Well, people who are pessimists don’t start businesses or rise to lead them so maybe that’s inevitable.
 
If you’ve got a few spare minutes, go to the Harvard Business Review web site (www.hbr.com) and buy a copy of an article in the July 2003 issue called “Delusions of Success; How Optimism Undermines Executives’ Decisions.” What the authors say is that “In planning major initiatives, executives routinely exaggerate the benefits and discount the costs, setting themselves up for failure.” That consistent with what I’ve seen in my practice.
 
During the kind of fast growth and seemingly endless product demand that skateboarding recently experienced, managers could do no wrong. The truth is that growth and cash flow cover up a weak balance sheet and lack of a sustainable competitive advantage admirably. When the cash flow and fast growth goes away, so does the illusion that everything is working fine.
 
I can’t think of a single company owner who, recognizing that the ride was over said, “Say that was fun. Let’s pick up our chips and get the hell out of Dodge.”
 
They believe that what they were doing before can still work, so they try harder. But more of the same is rarely the answer. Some succeed. But many, and perhaps most, just prolong their agony. In the process, and this is why it’s bad news, the market actions they take hurt other companies better positioned to succeed. They discount product. They extend terms. They sell into discount channels. They don’t pay suppliers. They flood the market with product that devalues all brands’ products. In their attempt to return to the glory days they take action which encourage the industry structural changes I allude to above that make their survival unlikely. The HBR article referenced above specifically mentions competitors’ response as one of the things executive tend to underestimate the impact of.
 
What’s a “Downturn?”
 
The implication of “downturn” is that there will be an “upturn.” Fair enough. I guess there will be. Soon would be good. But lurking in that thought process is the suggestion (or the hope) that the upturn will take us back to skateboarding growth rates of a year and a half ago. I don’t expect that to happen, though I would be thrilled to be wrong.    .
 
I don’t expect it to happen because of the structural changes in the industry I refer to above. They don’t have to be permanent- but they often are. What is going to change about skateboarding that’s going to take us back to the days when it was a small, underground, sport? Is there some technology out there that won’t just make skateboarding easier or better, but will fundamentally change it? It has to be something like what the invention of the microprocessor did for the computer.
 
If you are concerned that we aren’t going back to the “good old days” then your job isn’t to survive the downturn, but to succeed in the new skateboard business environment. What does that mean?
 
I guess it depends what you think the skateboard business environment is and is going to be. There’s no reason to believe I can see the future any better than you can, but if you feel that a return to fast industry growth is unlikely, even when the economy improves, then you might consider the following in creating a viable business model.
 
Control your expenses better. Duh. As far as I can tell, most skate industry brands and, to a lesser extent retailers, are already doing a pretty good job at it.
 
Understand clearly and specifically why your customers are buying your product. Adjust your spending to conform to that understanding. For example, if price should turn out to be critical, maybe you should look hard at your marketing budget since you might end up with a better bottom line by reducing some of those expenses and cutting price a bit more.
 
Or maybe it’s your team, and you should be promoting the hell out of them and raising prices. But when you do that, of course, you’re making a decision to limit yourself to that segment of the market that’s highly team influenced. How big is that market?
 
Build a financial model that tells you what volume you need at what gross profit to succeed. No denial and perseverance please. Look at it hard and without the rose colored glasses. When you project growth, have really good reasons for expecting it. May I suggest again the Harvard Business Review article mentioned above?
 
Look for brand extensions that won’t damage the quality of your brand. In this business, that brand is all you’ve got.
 
Retailers, don’t stop taking chances on carrying some new product. But at the end of the day if it doesn’t check and it doesn’t have a good margin be ruthless in your pruning. And make sure you have the systems to give you the information. Skate retailers no longer have the ability to screw up their buying and survive.
 
Consider the possibility that you may need more volume, as a retailer or a brand, to succeed. With a lot of product, hard and soft goods, that’s all high quality and pretty much all the same, and smarter consumers who are no longer quite as likely to be swayed by marketing, you may not have a choice.
 
This new skate industry structure may be temporary- or not- and it may suck. But if you manage your business starting right now for the new conditions, you can succeed and even prosper. Get to it. Your job isn’t to wait out a downturn but to succeed in it.

 

 

Consolidation, War, and a Lousy Economy;Skateboarding Will Be Fine, Thank You Very Much

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It doesn’t seem fair. Okay, after the 90s, some economic slow down was inevitable and most industries are having to deal with it. Skateboarding, after a few years of simply spectacular growth was due for a consolidation, and we’re getting it in spades. War, of course, isn’t good for already soft consumer spending- too many people staying home to watch the war on TV. And just to make things perfect, the weather hasn’t exactly cooperated. The East Coast has had its first real winter in a few years.

 
Any one of the four would have been a pain in the ass for business. All four simultaneously is downright inconvenient. Let’s put this in a little perspective and try and separate the good from the bad and the ugly, to coin a phrase.
 
Current Circumstances
 
Everything I’ve read, and everybody I’ve talked to who remembers it, tells me that skateboarding declined by something like 90% in and around 1990. It declined dramatically- some have said nearly vanished- and I guess at its nadir, only like one skate park was operating in the country.
 
That scenario will never be completely out of the thoughts of people who experienced it, but it’s unlikely that it will be repeated. There are too many skaters, too many skate parks, too much exposure, and too much involvement and dependence on the part of too many organizations for that to happen again.
 
My guesstimate, based on being in a few stores and talking to some people, is that hard goods sales are down north of 30% compared to a year ago. They may not be through dropping yet. I don’t know if traffic is down, but parents, I suspect, are less likely to fork over the dough their little munchkins, who don’t have their own money, need to buy a new deck.
 
I haven’t been able to get a solid fix on whether shoe sales are soft or not. I wouldn’t be surprised if market softness in shoes manifested itself as lower price points rather than the big volume decline that seems apparent in hard goods. You need shoes no matter what, and shoe margins are better than deck margins to start out with.
 
With those general comments as background, let’s talk about three specific issues that may give us some incite into where skateboarding is going; the number of brands, the role of distribution, China and how skate compares to other action sports. I guess that’s four. Oh well.
 
Brands
 
One thing about this market that’s neither good, bad nor ugly but just downright strange is that I haven’t seen brands going out of business. Typically, when times get tough, especially in an industry that’s grown quickly, some brands just don’t make it. I’ve heard of a couple of companies that are for sale, and I know of a brand or two that’s having a hard time, but they gone away. I wasn’t expecting mass extinction, but I thought we’d see some serious consolidation by now. 
 
I feel strongly both ways about this. On the one hand, companies that manage to hang on for a while by the skin of their teeth when they have no viable way to compete make it harder for stronger companies to prosper (though retailers may get some really good deals!). On the other hand, small companies, scrapping to build a market position and less conservative than their larger, more stable brethren can be a fountain of new ideas. That’s always a good thing.
 
Why haven’t we seen more consolidation? I have the following speculations. First, I’ve been surprised by just how well most companies have reacted to a slowdown in business. I perceive a faster than normal movement towards control of expenses and inventories.    That can prolong survival, though it doesn’t solve the basic problem of brands that don’t have a defendable market position. Second, a number of brands/companies that have appeared in recent years are backed by companies that can afford to lose a whole lot of money for so called “strategic” or “positioning” reasons. This seems particularly true in shoes and apparel. In hard goods, I don’t think we have as many small companies as we use to have. Some consolidation has already happened there.
 
I do ultimately expect to see fewer brands, especially in shoes and hard goods. How that shakes out will depend in no small way on distribution, so let’s move onto that.
 
Distribution
 
The major hard goods brands are dependent on the specialty shops and distributors for much of their sales. Specialty shops are hit by both economic softness and the decline in skateboarding sales. The successful footwear and apparel companies have diversified and expanded their distribution. The hard goods brands have generally been unable to do that. People need shoes and clothes all the time, though they may require that the stuff cost less. People don’t necessarily need a skateboard.  If they do, it’s as likely as not to be a blank or a shop deck. 
 
The hard goods industry is reaping what it has sown, by selling basically the same products for years with all the differentiation being based on marketing. Inevitably consumers got smarter and price got to matter. When skating isn’t quite as cool at it was and the economy sucks, price matters a lot. Not that I wouldn’t have done the same thing if I’d been running a skate hard goods company, but the result was predictable, and I think I’ve discussed it in this column before.
 
Meanwhile, the shoe and apparel companies, operating in a much larger market, get larger. Their sales are less dependent on the popularity of skate, or at least they are all trying to make them less dependent. When the downturn comes, they are selling products everybody needs, they are not just selling to the skate market, there’s less seasonality, and their size gives them some financial flexibility smaller companies don’t have. What I mean is that even if they should earn less money because their gross margins fall, they still earn enough gross margin dollars so that they don’t have to gut their marketing and product development efforts. Smaller companies may not have that option.
 
So distribution matters in who prospers or even survives in a consolidation. Having a bigger potential customer base and more possible outlets for your products helps. More on this when the section on other action sports below.
 
China
 
This, strangely enough, comes under the heading of “good.” In the past I’ve said that cheap Chinese decks could take over the skateboard market like in so many other wood products, if the market was big enough to make it worth while. Now it appears, until the market recovers and growth resumes, that it won’t be worth while. The Chinese can continue to have the cheap complete market in the chains as they always have, but I’m no longer as concerned that they will get a significant position in the higher end branded market.
 
I know the apparent price difference has made it compelling to try and get decks from China. But nobody had suggested to me with any conviction (except the Chinese) that the quality problem is resolved. I also believe, and have argued in this space before, that the apparent gross margin improvement is an illusion for the industry as a whole over the medium to long term. If the quality problem was resolved, and one brand started bringing in Chinese decks, other brands would tend to do the same. Natural competitive pressures would inevitably lead to somebody discounting to retailers, who would inevitably figure out what was going on and would demand some of that margin for themselves. At the end of the day, unless a whole lot more decks were sold, the overall industry might find itself with fewer total margin dollars to play with. Of course, the consumer would be happy.
 
But why bother even discussing this. If the quality’s no good you’ll kill your brand with serious skaters and if it is, you’ll just end up in the same boat as all the other brands again, though some with their own manufacturing plants might be hurting. So why bother. I mean nobody could really think this would work in the core market, could they?
 
Synthesis
 
In surfing, the subject of the actual surf boards didn’t even come up at last year’s surf industry conference. Sales in surf equal soft goods. I’m told that making money with surf boards is damn difficult due to competitive pressures, lack of product differentiation, and low volume. The soft goods brands in surf are selling their life style across a wide and widening variety of retail distribution. There aren’t and will never be as many surfers as there are people who like the idea of surfing and the surf style. That’s where the money is.  
 
In snowboarding, decks are very competitive for the same reasons. In binding, and even more in boots, there’s been continuing, meaningful, product improvement that which has at least created a basis for competition that’s other than just price and marketing. But generally product in all hard goods categories is damn good. It’s durable, functional and isn’t replaced as often as it used to be. As in surfing, soft goods and the expansion of brands into the lifestyle market are seen as an important source of profit and growth. Not perhaps as much as in surfing because a significant percentage of snowboarding soft goods are basically for snowboarding in the same way that a wet suit is only functional when you’re actually surfing.
 
In surfing, the soft goods brands dominate the market. In snow, the leading hard goods companies also have significant apparel lines that are both for snowboarding and have lifestyle components.
 
In skate, the important hard goods companies are much smaller than the leading companies in either surf or snow. They don’t have the same possibilities of expanding their distribution and, mostly, they aren’t doing a lot of soft goods business. You shouldn’t hold your breath waiting to see one of the leading hard goods companies grow to $300 million in revenue.
 
Yet these are the companies and brands that set the tone for skateboarding, because that is what they are about and focused on. In the past, when skateboarding was much smaller and not nearly as mainstream, companies and brands just vanished in a down market and mostly nobody noticed. What’s different this time is that these brands have value and are on more people’s radar screen.
 
But that doesn’t change the financial equation- at some point a decline in sales, inability to expand distribution, and a need to maintain expensive marketing/team programs with inadequate gross margins means a company is losing money.
 
So skateboarding will be fine, but I expect to see some companies acquired. As divisions of larger organizations with certain shared functions, these companies make financial sense. On a stand alone basis, some of them may not if current circumstances last very long. Let’s hope any acquirers treat what they buy with respect- if they don’t, I’ll be a lot less sanguine about the prospects for skateboarding.