Focus on Expense Control; A New Business Model for Skateboarding

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Well, maybe not a new business model. Expense control is always important. But somehow, in every industry I’ve ever seen, it’s always assigned a lower priority when you’re selling everything you can make. Cash flow makes it easier to not worry so much about how you’re spending your money.

 You’ve no doubt noticed that skateboarding (especially in hard goods) is going through a bit of retrenchment. Sales are down from last year. Lest this get too gloomy, remember that, as an industry, we’ve had substantial growth for a number of years and skateboarding is larger than ever. No serious business person thought that phenomenal growth rate would continue indefinitely. We may have hoped it would, and we certainly hoped when it stopped it would hurt somebody else’s company, but we knew it would end.
 
So now it’s ended? No. Our five year growth rate is still amazing even given the current decline. Being down over last year may suck, but it doesn’t make it the end of the world.
 
I should probably clarify that. Changing business conditions usually mean it will be the end of the world for some companies without the balance sheet and market position to weather the storm or recognize the changing business conditions. And there’s always the chance that kids will decide skateboarding ain’t cool any more. If that should happen, and it’s happened before, all bets are off, but that’s hardly a new consideration for the industry.
 
Old News
 
Whenever an industry goes through a period of consolidation, a number of things tend to happen to one extent or another. As I’ve written about them before in nauseating detail, I’ll just describe them briefly and move on to dealing with the new circumstances they represent. Remember these trends aren’t unique to skateboarding or action sports. They have been just as prevalent in the automobile, computer, funeral home, and waste disposal industries as they consolidated. There’s nothing surprising or unique in this list.
 
·                 Growth slows (Duh!). There’s more competition for market share.
·                 Margins decline at the retail level.
·                 Retailers have more power.
·                 Cost management and customer service become more important in competing
·                 Size matters. You either have to be big or own a very clear market position. Companies in the middle get lost.
·                 Consumers get smarter- marketing loses some of its effectiveness.
·                 International competition increases.
·                 Industry profits fall. This may be temporary. Or it may not be.
·                 Over capacity can become an issue.
 
That’s an ugly list, but you can see its relevance to the skateboard industry at this point in time. Of course, it’s not necessarily so ugly for the skateboarder, who tends to get a better product at a lower price.
 
What’s To Be Done?
 
Every company is of course different, but from the 10,000 foot level, the general strategic issue is clear, and more or less the same for everybody. If sales are down, and the product appears to be more of a commodity, then marketing is even more important is differentiating the product. In skateboarding, of course differentiation has come almost completely through marketing.
 
But as the consumer has gotten smarter, marketing has maybe lost some of its effectiveness. So you have to what? Spend more on marketing? But your sales and maybe your margins are down. But unless you were large and very profitable, that can be impossible to do without spending yourself into oblivion.
 
The interesting thing is that this is where strategy and operations come together. By that I mean an important part of a company’s strategies at this point is expense control. Unless and until margins improve, or sales start growing again, there isn’t much of a choice. You can either reduce expense or earn less, or no, money.
 
The sad part is that this fundamental change in the business model means that some companies have a hard time making it. They had the illusion of prosperity because growing cash flow allowed them to keep paying their bills. As long as the money comes in just a little faster than it has to go out, it doesn’t matter if your balance sheet- the measure of your financial viability as a company- is a disaster.
 
Now it does matter, because unless you are a very unusual business person, you didn’t foresee the change in the business climate far enougn in advance to adjust your business model. Your competitors weren’t doing it, and you sure weren’t going to cut your marketing and other expenses unless they were. So now, as you scurry to adjust spending to reflect revenue and margin levels, it’s your strong balance sheet that allows you to stay in business as you make those adjustments.
 
When I ran action sports companies that had to deal with a tougher market, here’s some of the things I did and that you should consider too.
 
·                 Reduce the trade show presence and the number of people from the company who attended. The booth was refurbished- not built new. People didn’t get to go as a reward, but because they needed to be there.
·                 Let go of people who weren’t doing an outstanding job or who weren’t needed given the lower sales level.
·                 Stop selling to people who aren’t paying. There’s no cash flow in a sale- only in collecting the cash.
·                 Get rid of old inventory for whatever it brings. Old inventory is never worth more later.
·                 Order or produce only what is pretty certain to sell. Minimize your inventory risk. Lower volume on higher margin can be better, for both cash flow and for the brand, than higher volume on lower margin.
·                 Review the team roster. Top riders are probably worth what you’re paying them. The ams and others getting maybe just product and photo incentives are keepers. It’s the mid range riders I’ve always looked most carefully at. As hard as it may be, there’s usually some money to be saved there.
·                 I cut the advertising and promotional expenses that I’d sort of done because I could when times were better, and it was easier to just pay the money than throw the rabid marketing manager out of my office for the 12th time on the same issue.
·                 Ask your suppliers for better terms. They’re probably struggling to keep customers too.
·                 Have good financial information.
 
Your goal is not just to cut expenses. It’s to have a budget that makes sense given a realistic expectations of sales and margins. Look, I understand the pressure to run the two page, four color spreads because marketing is the basis of your competitive positioning and that’s what the other companies are doing.
 
But the best advertising campaign in the world won’t save your bacon if you can’t pay your bills.
 
Hard vs. Soft Goods
 
Interestingly enough, I’m hearing that the shoe and apparel companies are holding up noticeably better than the hard goods guys. That surprised me at first, but I’ve formed an opinion as to why that might be and as long as you’ve read this far, you might as well finish the article and see if you agree with me.
 
Hard goods companies only sell to people who actually skate. Soft goods and apparel companies sell a lot of product to people who don’t skate. They are increasingly lifestyle companies even with their roots in skate. If skating is somehow not as popular, or at least growing more slowly, it’s the skaters who decide that and lead the trend; they skate less and therefore buy less product.
 
But out in the world of non skaters who buy skate influenced shoes and apparel are a whole lot of people who were late coming to the skate party and, in the same way, are later in realizing that the party is maybe not quite exciting as it use to be. Besides, they still need shoes and clothing even though they never needed skateboards.
 
So they keep buying, though maybe influenced by soft economic conditions, until their perception of skating and its “coolness quotient,” for lack of a better term, changes. When that happens, the shoe and apparel companies that have made the jump to lifestyle brand and are less connected to skate than when they started, can succeed anyway. Those too closely tied to skating may find themselves, though with the impact delayed, in the same boat as hard goods companies.
 
It will be interesting to watch. In the meantime, your job, as an owner or manager of a skateboard industry company, is to restructure and manage your business so that it operates under a viable financial model in this business reality for however long it lasts. Part of that will involve a new focus on expense control.

 

 

Reality Check; Input From the Outside World

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Sometimes I get accused of being too much of a pessimist. Maybe sometimes I am. On the other hand, maybe the correct question is whether or not my occasionally pessimistic outlook is justified . I’d prefer to think I’m just taking a hard look at real business issues.

 
For a change, I’m going to let somebody else raise the tough issues and, incidentally, write half my column for me. Can’t beat that. I received this email unsolicited. It is published here complete and unedited. Go read it and then I’ll tell you what I suggested when I talked with the guy (It’s below). Hurry up please. I’m late getting this column done.
 
I had lots of no doubt accurate and valuable platitudes about business cycles I recited to Dale. None of them seemed to make him feel much better. I received this email over a month ago (more by the time you read this). Thinking about it since then, I’ve come up with a couple of ideas, or maybe just helpful perspectives.
 
First, let’s all decide to call the wood from China birch. That’s apparently what it is, and there’s no reason we should be helping to perpetuate the myth that it’s anything else.
 
Second, recognize that it’s been around a long time and is going to continue to be around. For cheap completes sold in big chains it probably makes sense and may even have the benefit of getting kids skating cheaper.
 
Third, it’s clear that Chinese birch skateboards don’t hold up when used by real skaters doing real skate tricks. So while some of the major brands may be tempted by cost to try and use it, enlightened self interest will make them back off. They can’t afford to have their decks collapse on a massive scale in the way Dale describes. The issue, then, becomes whether Chinese manufacturers can procure the harder Canadian maple and make and deliver decks that are as good as what’s made currently in the US. What I’ve said is that they can and will if the market makes it worthwhile in the same way they have with so many other products.
 
If the quality is there, and the price is lower, then they will become a standard and only new technology in skateboards will slow that process down. I suppose the other thing that could happen is that the major brands could decide as a group not to buy decks from China. Aside from the issue of legality, that’s a level of industry cooperation I rarely see. Even if it exists, it can break down if business pressures get too strong.
 
The other problem is that we already know that blanks take a big piece of the market. If Canadian maple Chinese decks of good quality become available, I suspect people who are willing to buy current blanks, and maybe some others, will be more than happy to buy an even cheaper, high quality product.
 
But where will the Chinese get their Canadian maple? It doesn’t appear that they will get it from LaGrand Lumber & Veneer. It sounds like Dale would have to price it in such a way that he’d lose money if he wants the business. Well, maybe if they get in early they can corner the market, but it doesn’t sound like Dale and the other members of management at LaGrand are the kind of people who believe that you can lose a little on each piece but make it up in volume. So unless LaGrand can dramatically change its business model, it doesn’t sound like losing money selling to the Chinese while helping knock its existing domestic customers out of business makes much sense.
 
Dale might do five things- the first one of which he is probably already doing. Talk to all the other domestic veneer suppliers and find out how they are reacting. Second, he might publicize the quality issue (I guess I’m starting that for him) with an ad or two in Skateboarding Business to begin to create some awareness- sort of like “Intel Inside.”
 
The third one is to meet with the companies he sells veneer to and talk about their plans and their reaction. Is there room for some form of cooperation on new skateboarding technology? Fourth, and he’s probably already doing this too, he has to look at the source of the existing decline in veneer sales. How much does he really believe is the result of Chinese decks coming into the country, and how much is the slowing of skateboard sales?
 
Finally, and depending on the answer to four, he should certainly be looking for new markets. That’s something any business should be doing all the time. It’s worth some attention even when part of your business isn’t threatened because it positions you much better when, inevitably it seems, some threat emerges.
 
The devil, of course, is in the details. I can’t offer specific advise to Dale or LaGrand without specific information about their business. I hope my general advice is useful, and I thank Dale for sharing this very real issue with us.
 
Jeff Harbaugh is President of Jeff Harbaugh & Associates, an action sports consulting firm that helps managers and owners improve profits by focusing on the few issues that are really important. Reach him at (206) 232-3138 or at jharbaugh@msn.com.
 
SIDEBAR   
 
Dear Mr. Harbaugh:
Thank you for your insights and ideas you submit in your columns in Transworld Skateboarding Business magazine. I always appreciate your hard line on doing what is best for the business in general.
I am the sales manager here at LaGrand Lumber & Veneer, Inc. and am very alarmed by the Asian influence on business here in the States in general and especially with the Skateboard Industry. We supply Hard Maple veneer from our three mills to skateboard deck manufacturing plants throughout the US, Canada and sometimes abroad. In an average year we sell nearly *** . 25%-30% is skateboard veneer which we have been supplying for nearly 25 yrs.
As you are probably aware, the furniture industry has taken huge hits from imported components shipped in from China. Over a dozen plants have been closed forever in North Carolina because those companies now order their components and completed goods from China, idling over ten thousand workers. I have clients in the component manufacturing business here in the States that have lost 50%+ of their business to Pacific Rim countries. This is trade they’ll never get back.
Mean while, when you and I go to buy a new piece of furniture for our home, none of the cost savings benefit reaped by the mfr is gained by us. That same $3,000.00 sofa made two years ago completely in the States still costs $3,000.00 even though it cost far less to produce overseas. The mfr and the Chinese govt. are the winners.
While furniture imported from China, made from Chinese raw material may be acceptable in appearance and performance, my experience with skateboards is totally different. As was indicated in the article, Skateboard Science (Skateboarding Business, April 2002) Chinese raw material (veneer) does not match Hard Maple which has been the standard forever. The veneer, touted as "China Maple" is in fact not Maple. It is a specie of Birch. Tests performed at the Forest Research Laboratory in Madison, WI prove that this specie has approximately the same physical characteristics as Soft Maple, a specie long ago abandoned by the skateboard industry.
I have two customers who bought China Maple veneer from a sales rep here thinking they were buying North American Hard Maple. That rep should be tarred and feathered (or worse), but that’s another topic. Anyway, they manufactured the decks and sent them out through their normal distribution channels. In short order, literally thousands of decks were returned in various states of ruin and decay. Decks were split, broken, and mushy. All due to the quality of veneer used to manufacture them. One customer nearly lost his largest account because of the poor quality. He was able to salvage the account when we provided him with the necessary veneer to quickly replace the order.
My fear is that as a raw material supplier I should have seen this coming long ago and it may be too late to react. I believe that if we don’t do something soon, cheap imported decks will become the standard. Once riders become accustomed to a lower standard they will no longer know the difference and imported decks will be acceptable. I know this may be insulting to the current rider who can tell the difference, but my concern is perpetuating the business and I’m afraid the young, new rider won’t know and won’t be told.
You should know that what really convinced me to write you is an experience I had yesterday with an export agent. He called requesting a quote on container loads of skate veneer going to China. Upon quoting him our standard prices, he laughed and told me that if I wanted to do business with China, I needed to learn how to lower my prices. We price veneer based on the cost to produce plus a reasonable profit margin. I asked him what benefit I would gain from hurting my loyal US customers by selling overseas for less and loosing my profit margin. He laughed and responded that I’d have my foot in the door when the Chinese totally take over US skateboard manufacturing.
There is no doubt that manufacturing is down due to the economy. However, there is also pressure coming from beyond the economy and if we don’t react now while we are slow and have the time to react, we will all be left in the dust when the next surge (and I’m confident there’ll be one) comes.
I am venting this on you because you are a connected person who people seem to listen to. We do as much as we can to promote the industry including attending shows and working on promos with our customers. Try as I may to get the message out that quality and integrity starts with the raw material, it seems to fall on deaf ears.
Is the skateboard manufacturing business preparing to roll over and allow imported decks become the standard? Should I start looking for new markets to replace our skateboard veneer sales? Should I "learn how to lower my prices to China"?
Please advise.

Best Regards,
Dale Rosema
Sales Mgr – LaGrand Lumber & Veneer, Inc.

 

Dr. Jekyll or Mr. Hyde; The Dilemma of the Skateboard Factory Owner

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“Blanks are killing the industry.” “Yeah, but they give the skater a good deal.” “But pros are what builds the industry, and we can’t support pros on blank margins.” “The problem is that we have too many pros to support.” Etc., etc., etc.

In this highly emotional debate, there’s some truth to everybody’s position. A lot of people seem to feel very strongly both ways from time to time, and it’s an unfortunate source of friction in the industry at a time when it would be nice if there could be a little more cooperation.
It’s a Numbers Thing
Once you get past the strong feelings and the concern for the industry that, hopefully, drives them the dilemma for people with skateboard factories comes down to the numbers. There are two basic business models skateboard factories (or any factory, for that matter) can follow that theoretically make sense. One is higher margin, lower volume. The other is lower margin, higher volume. For companies with factories and brand names, there’s also the internal tug of war between wanting to keep the factory running and maintaining the brand’s position in the market.
Let’s look at two factories- one owned by Dr. Jekyll and the other by Mr. Hyde- and see how the operating perspectives and financial circumstances of these theoretical businesses differ.
Dr. Jekyll
Dr. Jekyll doesn’t own a brand. Just a big old money eating factory that needs to be fed. Whether he makes a single deck or not, wages, insurance, utilities, telephone, interest, and a hoard of other expenses all have to be paid. He’ll make decks for anybody who can pay him his normal price.
Let’s say his overhead (the money he has to pay every month whether or not he makes a single deck) is $50,000. Notice that he doesn’t have to support a team or pay for any ads. He’s making twenty thousand decks a month and the materials and direct labor for each one is about nine dollars.   He sells each of those decks to whoever is going to resell them for, say, fourteen dollars. Here’s how his monthly income statement looks
Revenue                       $280,000           (20,000 decks times 14 dollars each)
Cost of Goods Sold      $180,000           (20,000 decks times 9 dollars materials and direct labor)
Gross Profit                  $100,000
Overhead Expense        $ 50,000
Pretax Income               $ 50,000
Great business. If I believed these numbers were real I’d dump consulting and writing and open my own skateboard factory, which is just what the industry needs.
Mr. Hyde
Mr. Hyde has not only a factory, but also a successful skateboarding brand. It’s not that he wouldn’t accept some shop or blank or export orders, but just for the moment let’s assume he doesn’t need to.
His overhead is the same $50,000 a month as Dr. Jekyll. It costs him the same nine bucks to make a deck. But his deepest darkest secret, contrary to his advertising, is that his decks are fundamentally no different from those of his competitors. So he’s justifiably concerned with protecting his brand name, because the perception of that brand name is really the only competitive advantage he has.
He doesn’t want to flood the market with decks, because that would weaken his brand name. Let’s say he makes 10,000 decks a month.[1] Because the brand name demands a higher price, he can sell them to retailers for $30. Here’s his monthly income statement so far.
Revenue                       $300,000           (10,000 decks times $30 a deck)
Cost of Goods Sold      $ 90,000
Gross Profit                  $ 210,000
Overhead Expense        $  50,000
So far, this is an even better business than Dr. Jekyll’s is. If the expenses stopped right here, Mr. Hyde would have a pretax profit of $160,000 compared to $50,000. I want to be in the business even worse than the first one.
But the expenses don’t stop here, so let’s keep going. There are going to be operating expenses other than overhead. He’s got more customers to deal with and more selling expenses. In additional to what I’ll call administrative selling expenses, there are the advertising and promotional expenses to support the brand; team, trade shows, stickers, advertisements, giveaway product, sponsorships, printed selling materials, the web site…. Quite a list.
Just for fun, let’s say that those costs total another $60,000 a month, bringing the pretax profit of Mr. Hyde’s business to $100,000. Without claiming that these models really represent existing reality in the skateboard manufacturing business, let’s see what we can learn from them.
By the Book
 
The textbooks say both of these business models- higher volume, lower margin and lower volume, higher margin- should be viable in the same industry at the same time.
The first, utilizing a price leadership strategy, makes money by spreading costs over a larger volume and eliminating most traditional selling expenses. If Dr. Jekyll can sell 10,000 decks a month, and assuming his overhead remains constant at $50,000, he breaks even that month. Every additional deck he sells in excess of 10,000 generates $5.00 (The selling price of $14 minus the direct costs of $9) that falls right to the bottom line. In our simplified model, he should be theoretically willing to accept any order (after 10,000 decks) that pays him more than $9 a deck.   The factory is sitting there anyway with fixed overhead of $50,000 a month and if he sells a deck for $9.01 that’s an extra penny in his pocket.
Mr. Hyde’s breakeven point is 5,238 decks a month even though his expenses below the gross profit line are much higher than Dr. Jekyll’s. Shows you the power of a higher gross margin, and value of maintaining the market position of your brand doesn’t it?
Mr. Hyde has a factory to feed too and even with a successful brand, he isn’t immune to the thought that every deck he makes for more than $9.00 puts some money in his pocket once he’s past his breakeven point. He realizes of course, that he’s essentially competing against himself by making OEM decks and maybe hurting the market position of his own brand, but there’s that factory to feed
It seems at the end of the day that there’s a little Dr. Jekyll in Mr. Hyde.
The Real World
Putting the textbooks on microeconomics back on the shelf (maybe in the section marked “fantasy”), we rejoin Dr. Jekyll and Mr. Hyde in the real world.
You see, lots of other people saw those numbers in the textbook and thought they could have a business like that too. They started factories and brands. When potential customers come to see Dr. Jekyll, and he quotes them $12.00 a deck, they mention that down the street it’s only $11.50 a deck, or maybe that there’s some quantity discounts, or possibly some terms, or an extra deck thrown in for every ten you buy, or something. Well $11.50 isn’t that much different from $12.00 Dr. Jekyll reasons. He still gets a good gross margin. Of course, his break even just went up some decks, but that’s okay. He can accept a couple of shop orders he’d been turning away.
Could be that more than one customer asks for lower prices. Maybe he has to go even lower than $11.50. That breakeven volume of decks keeps going up, and the margin declines further. The lower margin means he has to invest more cash in the business. Getting more volume, from anybody who wants a deck, becomes his purpose in life.
A funny thing happens on the way to higher volume. At some point, he’s got to buy more equipment. Maybe he has to pay overtime wages to support the production volume. His beautiful business model has gotten ugly. Margin is down and overhead expense is up. What’s he supposed to do?
Maybe he can start a brand.
Back at Mr. Hyde’s place, he notices there are lots of new brands, and that it’s getting really cheap to get decks made in small quantities with or without graphics. Determined to defend his brand name and market position, he hires some more team riders, runs some more ads, or whatever. In spite of these efforts, his volume drops a little because there’s an awfully lot of product out there and it’s awfully alike. So his total gross profit is down because he’s now spreading his constant overhead over fewer decks. His expenses have increased because of the new advertising and promotional expenses.
He suddenly remembers the guys he threw out of the place because they wanted him to make OEM decks and scurries to try and find their business cards.
Dr. Jekyll and Mr. Hyde are both to be congratulated on the logical business decisions they have both made. How come things just keep getting worse? What can they do to fix this? Could it be that their existing business models don’t work under emerging competitive conditions and that focusing only on competing in the hard goods market for core (whatever that means) skaters isn’t the answer?
Tune in next issue for the continuing adventures of Dr. Jekyll and Mr. Hyde.

[1] In practice, of course, a brand with a factory doesn’t just sell decks, and its costs aren’t just those associated with the decks. Margins also vary depending on whether or not sales are to distributors or direct to retailers.   But I’m trying to make a point here, so give me a little leeway and let me keep it simple.

 

 

Don’t Worry, Be Happy, Part II; Skateboarding will Survive a Slowdown

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It was three or four months ago that I stopped getting the nearly weekly calls and emails from somebody who wanted to open a new skate shop. As weeks dragged on without the sound of enthusiastic voices eager to make their mark in skateboard retailing I wondered if that wasn’t a sign of a market top.

 
Now, as you all mostly know, sales are a bit soft. As usual, there’s not a heck of a lot of hard data, but it feels like the luckiest ones are just seeing slow growth (single digit) while the less fortunate are down from last year. Various youth oriented retailers (Hot Topic, Gadzooks, Children’s Place Retail) have reported some weaker than expected results. Vans reported that their comparable retail store sales for the quarter ended May 31 declined 7.4% from the same quarter the previous year.
 
Recent government economic statistics have confirmed what we who have to deal with reality already knew- the recession last year was a little worse than advertised. There’s some talk now that we could have a double dip recession. After the decade of prosperity it wouldn’t surprise me if we had a bit more of a counter trend.
 
Screw all that. Anybody in the skate industry who truly thought skateboarding was going to grow like a well-fertilized weed forever was not in touch with reality, to use the polite term. But our demographics are still favorable, the major brands haven’t screwed up their distribution, skate parks are popping up like mushrooms, and skating seems to be gone mainstream without, so far, losing its coolness. The people selling skate apparel to the lifestyle crowd should be sending royalty checks to the skate hard goods companies.
 
So maybe we aren’t quite gushing cash like we were. Maybe we don’t need to make skateboards 24/7 right now. That doesn’t mean you can’t have a good business, enjoy the industry and make some bucks.
 
A Lesson From the Ski Business
 
Yesterday I talked to a ski industry veteran who told me about brand name shaped skis on sale for $49 and $59 a pair. Shaped skis are the skis that pretty much took over the market a few years ago. Being easier to learn on and turn, I’m told, they relegated most straight skis to the dump. If they’re so hot, how come they’re selling for less than cost at retail? For less than a complete skateboard, come to think of it.
 
Oh, for the usual reasons. Desperation to stay alive. Willingness to exploit a formerly hot brand. Lack of product differentiation. Fighting for market share rather than focus on brand positioning. 
 
As an industry, skateboarding isn’t and won’t be immune to these kinds of shenanigans. The best thing we have going for us is that the major hard goods companies know they have to control their distribution or they’re screwed. Unlike skiing, or snowboarding for that matter, the skate companies seem to know it and are actually acting on it. In its heart of hearts, each core skate company seems to know that if one of its competitors tries to blow open its distribution, it will clobber that brand, not leave the others in the dust. The snow/ski companies knew the dangers of pushing distribution too hard, but couldn’t resist the urge to fight for market share by expanding that distribution. That’s why there are $49 shaped skis and the Vision snowboards are right next to the Burtons in Garts.
 
How can we avoid this fate?
 
Being a Successful Retailer
 
Well, apparently you read Skate Biz. Every issue, Skate Biz highlights one or more skate shops that have been successful. Get all your back issues (you do keep them in a safe and secure place don’t you?) and open them to the pages talking about these shops. Read the articles on the shops from each issue. Now make a short list of what pretty much all these shops do. In no particular order, your list will look something like this.
 
  1. They’ve all been around a while
  2. The owner is actively involved in management and is in touch with the customers.
  3. They have some kind of budget and cash flow awareness. They watch inventory and expenses.
  4. They can tell you, in a general sense, who their customers are. There is customer loyalty.
  5. They are involved with the community and the sport.
 
You’ll note that these five points don’t just apply to skate retailers, which is fine as most shops sell something besides skate.   
 
There’s one more thing I think more and more of them should be doing. Rather than running ads and doing various other kinds of non-focused advertising, they should be using email and the internet to not just reach their customers, but to have a relationship with them. I didn’t say sell on line. But most skate shop customers are email and internet users I suspect, and that’s a huge opportunity to reach exactly the right people with information they actually want at a low cost.
 
“Good” Competitors
 
I was afraid this article was going to end up as another boring discussion of things to do when business is a little soft. You know- control expenses and inventory, protect your brand, stay focused on your core customer, and stuff like that. Each business needs to do those tactical things.    But instead, let’s talk a little more strategically about something I’ve touched on from time to time- industry structure and what makes good competitors.
 
We all know that the core skate companies do and have done a lot to grow and promote skateboarding. It’s almost an article of faith that that’s a good thing, and it is. What does it really mean though?
 
It means, up to this point at least, we’ve had a group of largely “good” competitors. Though they were for sure competing with each other, they largely did it in a way that’s been good for the industry.
 
They have stayed committed to the technology that goes into making skateboards, trucks, wheels and bearings. By legitimizing this technology, entry barriers have been created by defining what a skateboard is and is not. They have made it difficult for new brands and products, even from much larger companies, to come into the market and succeed.
       
They have shared the cost of developing the market. There is no single dominant company in this industry that could have done it alone. Their common focus and direction is, in a word, remarkable. As a result, they’ve increased industry demand to the benefit of all.
 
Generally, they’ve been pretty risk averse. They haven’t gone out looking for growth and market share at all cost. They have been very conservative in adopting any new technologies. Mostly, they haven’t tried to expand outside of skateboarding and they’ve been cautious about their distribution. In fact, it’s tough for new entrants to gain access to distribution channels. Being risk adverse means they haven’t had to react to each other in ways that are detrimental to industry structure.
 
Because the companies have been risk averse, the consumer’s risk when buying a skate product has been reduced. Basically, the products are pretty much the same and work pretty well. Maybe more importantly, no skater ever has to risk being laughed at by his friends because he bought “the wrong” product. He can always find something that functions well that meets the social requirements of his circle of friends.
 
To put it simply, the strategy of the leading brands helps to perpetuate industry structure. How did it happen that everybody has been so cooperative? I don’t exactly know. I guess I could speculate that it has to do with the fact that most of the company principals grew up in skating, know each other well and share a common perspective on the industry. It’s also because they’ve got a good thing going and because the industry is pretty small. Maybe this is one of those times when “why?” doesn’t matter. It exists and it’s great.
 
But, while we’re still a small industry we’re not quite so small anymore. Or at least we’re not quite so unnoticed. The customer base has expanded and maybe isn’t composed of mostly “core” skaters in quite the way it use to be. People with less interest in keeping things the same are becoming involved in skating. Skate brands and companies will, I believe, find their way into the hands of organizations with less perceived interest in being “good” competitors. 
 
As I’ve discussed in my last article, there may be some pressures emerging that will make it tough for the skateboarding industry to continue along as it has. At the same time, I’ve never known an industry where the interests of all the leading companies were so aligned and consistently pursued for the ultimate benefit of the industry. Maybe they’ll surprise me and keep doing it.

 

 

China- Whether We Like It or Not. What’s to Do?

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 Okay, let’s review the rules.

 
1)            The consumer eventually gets what they want to the extent the market is capable of providing it.
2)            Companies do whatever they perceive will give them a competitive advantage, or at least let them survive.
3)            The less real differentiation there is among products in the same product class, the more important price will ultimately be to the consumer. Marketing can delay and reduce, but does not eliminate, this tendency.
4)            Lots of people have lots of stuff made in China and it works fine.
 
Don’t get me wrong. I am for sure not sitting here saying, “Isn’t it great that there can maybe be a lot of high quality skateboards from China!” It would be great for skaters, I guess, that they could get a less expensive product (for some reason nobody is allowed to say “cheaper” anymore) that performs well.   But this industry is sustained by a fairly small number of companies that can afford to support and nurture skateboarding because they make a pretty good margin on the product they sell. What happens to those companies and to the skateboard industry if China uses its manufacturing cost structure (that is, cheap labor) to take a chunk of industry production?
 
A Few Realities
 
First, let’s dispose of the argument that the Chinese can’t make good skateboards. I have heard all the arguments about why it won’t happen. They can’t get good wood, there’s problems with humidity, lead times are too long, production quantities required for China are too high, etc. These, and others I can’t remember, may be valid arguments at the moment. But they are tactical, by which I mean they can be solved if it’s worth the time and effort to the off shore manufacturer to solve them.
 
Low cost, foreign manufacturing has gutted (I don’t think that’s too strong a word) various U. S. manufacturing industries including wood products. Last time I checked, a skateboard was a wood product. But my guess is that until recently the segment was perceived to be too small to attract the attention of the off shore manufacturers. Now it’s not.
 
Second, it’s already happening. You know it, I know it. There have been cheap “Chinese maple” skateboard being made for a while and sold through the mass markets. Most “core” companies I have talked to are at least looking into the idea of getting decks from China or trying to figure out how to deal with it if their competitors do it. I don’t know who is or is not actually getting them now. Nobody seems too anxious to discuss it in detail.
 
Third, lots of skateboarders are willing to buy lower priced decks. Blanks and shop decks make up a big percentage of decks sold in U. S. shops. Whatever that percentage is here, it’s higher in Europe, where skateboards imported from the U. S. are even more expensive then they are here.
 
Finally, it won’t ultimately matter to consumers that the product isn’t made in the U. S. It doesn’t matter for a host of products made in China, including snowboards and skate shoes.
 
The opportunity/threat analysis is obviously a bit different depending on whether or not a company is a manufacturer. Let’s start with brands that are not.
 
Brands With No Factory
 
On the surface, it’s conceptually easy. You buy boards from an OEM manufacturer for X dollars a board now and you can get them from China for one half of X.
 
Wish it were that simple. My own experience getting stuff from China is that shit happens, and your control of said shit diminishes by the square of the language, customs and distance barriers. A solid relationship with your manufacturer, your own people on the ground where the stuff’s being made, and constant focus is required. The price may start out half of what it costs to buy it made here, but by the time it’s late and you have to air freight it, the registration is off on the screening, and the voids in the glue make every 10th board breaks, a lot of that cost advantage disappears.
 
But see rule 4 above. People are going to figure it out because the cost difference is so compelling. Maybe it’s worth it to air freight some decks. Maybe you bring blanks over and screen here. Some brand is going to do it if they aren’t doing it already. 
 
Then the issue becomes, what does that brand do with their newfound money from the portion of decks they have made in China? They basically have three choices. They can put the money in their pockets, they can cut their prices to grab share or they can increase marketing. Obviously, they can do some or all of those. Other brands, either because they want some of that extra money or because they have to respond to the competitive threat, are likely to respond by getting some decks from China as well.
 
Sourcing from China, or any other low cost country for that matter, is not a disruptive technology. It does not confer a long-term competitive advantage on anybody. To the extent it confers an advantage at all, it confers it temporarily on the brands that do it quickest, but not so quickly that it’s screwed up as described above. Pioneers are often rewarded by having monuments built on their graves. 
 
Next, what probably happens is that some of this pricing advantage inevitably begins to ripple through the market and reaches the consumer level. I can’t quantify how that will happen, but remember that if prices are lower you end up with less total margin dollars to work with unless you raised your margin percentage. Maybe as an industry we will exercise enough self-discipline so that we hold margins. 
 
Of course, I’ve never seen that happen in action sports and am not holding my breath. If, in fact, total margin dollars decline, then the volume you have to sell to make the same profit rises, and that’s what puts small companies out of business. Our existing industry business model seems to allow quite a number of smaller brands to survive, if not thrive. I think they are critical to skateboarding and we risk losing some of our market advantage, energy, and legitimacy with core customers if they go away.
 
One other thing could happen. Maybe, as they say in economics, demand is elastic with respect to price. That is, cheaper skateboards mean that more are sold. I expect that’s true to some extent, but I doubt it’s enough to prevent the compression of total margin dollars for the industry as a whole.
 
Factories With No Brands
 
Will have a problem if and to the extent that the brands they manufacture for can work out the problems with Chinese described above. At the very least, brands will use the threat of China to negotiate lower prices. Size, for any factory, will matter. Factories doing bigger volume will have an advantage. 
 
Factories With Brands
 
Will have a chance to find out just how important their teams and advertising programs really are to skateboarders in product choice. I’m not suggesting for a moment that, in the current market, they aren’t critical. We all know they are. But if a product that somebody doesn’t think is quite as cool is suddenly significantly cheaper, that can be pretty cool.
 
To the extent that Chinese production becomes viable, I expect them to have the same problems with OEM customers as any factory. To the extent their margins and volumes are higher, they have some flexibility in dealing with pricing pressures that stand alone factories and brands may not have. I won’t be even slightly surprised when I see these companies continuing to run their factories, but getting some of their production from China.
 
What’s An Industry To Do?
 
The only credible argument I’ve heard so far as to why some variation of the Chinese production scenario I’ve outlined above won’t happen is that our product cycle and process of distribution makes it impossible. I haven’t quite decided if that’s an actual barrier to entry or just another tactical problem to be overcome like the others I’ve described above. I hope to hell it’s a barrier. Keep changing those graphics and shapes!!
 
Know any other reasons? Let me hear from you and I’ll share them. The only thing I don’t want to hear is, “The skateboard industry is different.” It’s never been true in any industry I’ve seen. The worse thing individual companies, and the industry as a whole for that matter, can do is delude ourselves into believing that the usual competitive dynamics don’t apply to us.

 

 

Changes in the Skateboard Competitive Environment. Time to Run Your Business Differently?

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It’s interesting how a handful of events and business trends seem to be converging in skateboarding at this time. They have, I think, the potential to change the industry and how it does business. The consumers, as always, will get what they want. For some companies- usually those willing to take a risk and do something a little different- this will represent an opportunity. For others, it won’t.

 
Let’s look at these trends and speculate a little on how companies might be impacted and how they might take advantage of them.
 
The Trends
 
I don’t claim to know which of these is or will be most important so don’t conclude anything from the order in which I list them. More interesting than individual trends may be the way they interact. One plus one plus one plus one plus one may be more than five. It may also be three Or at least result in some surprises.
 
First is Chinese (or where ever is cheap) production. I wrote a whole article on that last issue, so ‘nuff said.
 
Second is the apparent slowing in the rate of growth of skateboarding. Look, some slowing was inevitable. If skateboarding kept growing at recent rates, soon everybody person on the planet would be on a skateboard and we’d be trying to sell to people (or whatever) on the third planet in the system of the star at the end of Orion’s Belt. Imagine a vert contest on a low gravity planet. “Dude, I’m going to go have lunch while we wait for him to come down.” Kind of boring.
 
Anyway, the third trend is the increasing willingness of kids to buy blanks and shop decks to save money. No surprise there. It’s not like that’s new. I don’t see it slowing down.
 
Number four on the hit parade is the decision on the part of certain brands to include new materials in their decks. It’s been tried before and hasn’t really taken hold. But what if it does?
 
Finally, like really baggy jeans and baseless snowboard bindings, the habit of changing shapes on skateboards every twenty minutes has run its course, at least for now.
 
A Lesson From Snowboarding
 
Seems like every four article or so, there’s a section with this title. Before snowboarding became run by a bunch of ski companies, back when it was as hot as skateboarding is now, I always looked forward to going to the SIA trade show in Vegas and seeing the latest “new” snowboard. One year it was the articulating snowboard. The next I was the dual camber snowboard. One especially memorable year it was the honeycomb snowboard. That’s my all time favorite because somebody flexed it and it broke in half. A gut splitter for me- not so funny to the guy trying to sell them.
 
Anyway, did any of these technologies actually work? Who the hell knows? It didn’t matter because they were never adopted by any of the leading snowboard brands. So they weren’t legitimized in the minds of snowboarders. So they died. Snowboarders knew what a snowboard was and these things weren’t it no matter how good they might or might not have been.
 
Skateboarders have always known that a skateboard is made of Canadian maple and glue. Now Tum Yeto, Santa Cruz and Mervin Manufacturing all have skateboards with new materials in them. They claim they work better and/or last longer. Great. But now skaters are being asked to accept that a skateboard isn’t just Canadian maple and glue. It can be something else as well, and this something else can result in a better skating experience.
 
What else can it be? What other materials might be included? How about a complete composite deck if (when?) somebody figures out how to do that? Might different woods be okay with Kevlar or fiberglass reinforcing the deck? Like Chinese maple maybe.
 
Plots Within Plots Within Plots
 
Now things get strategically interesting and we can look at some of the other trends we identified earlier. Let’s say growth slows enough to leave us with some excess manufacturing capacity. The usual result, if you’re making a product that isn’t really different from what everybody else makes, is price competition. So maybe brands without factories start shopping for manufacturers who can offer a little better price, or terms, or something. The factories with brands go, “Oh shit.” They want to keep their factory working, so maybe they try new materials in certain of their decks. The skaters like it. The decks do, in fact, last longer. But of course any factory can eventually learn to make a deck with these materials. As skaters, being bombarded with pictures of their favorite team riders on these decks, accept them as legitimate skateboards, more are produced. But they last longer, so total deck sales decline. And competition keeps margins from moving up. So unless skateboarding continues to grow quickly, total gross margin dollars available to the industry decline.
 
Maybe the good news is that the factories with brands are smart enough not to make blanks and shop decks. And early on, the new material decks might even sell for a premium. Blank sales decline as longer lasting decks with Kevlar or fiberglass take hold.
 
But advertising is lauding the functionality of new materials. Intentionally or not, part of the message is “the wood isn’t as important as it use to be.” Some factory without brands, or some smart person, sees an opportunity. Soon blanks and shop decks with new materials are pouring out of their factory. Or they went over to China and, with wood not quite as important it was, are bringing in Chinese maple decks with Kevlar or fiberglass or whatever. The price is low- like half the price- and they now have a way to deflect the wood argument.
 
Back when everybody was experimenting with new skateboard shapes every month, bringing decks in from China was even tougher. With that phase apparently over, another barrier to entry has fallen.
 
At the end of the day, when there is little real product differentiation, product changes are fairly easy to copy, and there are no effective barriers to entry, the consumer tends to get a better product at a lower price.
 
Good for the consumer. Not so good for the industry. I don’t expect skateboarding to be threatened with the kind of near total collapses in interest it has experienced in the past. I won’t say never, but not in the foreseeable future. It’s just become too accepted and too much a part of the mainstream for too many kids.
 
Still, in the scenario I paint above you can see the pressure on the industry that could be created. Some of that pressure is inevitable and already starting. I don’t claim to know which pressures will be greatest and how they will interact with each other. I, or you for that matter, could probably imagine half a dozen other ways things could get tougher for the industry than they are now.
 
On the other hand, we could also imagine ways things could get better. Maybe skateboarding can continue to grow. Demographics are still favorable. Maybe most kids won’t want to pay more for a deck even if it lasts longer. I have no idea how a twelve-year-old skateboarder thinks. Speaking from the perspective of having a thirteen-year-old boy, it isn’t even clear that they do think regularly and clearly. He, of course, feels the same way about me I suspect.
 
What To Do
 
If skateboarding continues to grow, and kids want wood decks with pictures of their favorite riders, enjoy the ride. It’s not that you shouldn’t try and run your business better, but cash flow covers up a variety of shortcomings.
 
If, on the other hand, you think, as I do, that some of these trends, individually or as a group, will make the skateboarding industry tougher than it is right now what should you do?
 
First, when you hear people talking about what “the industry” should do, smile politely and nod your head. Then remember that every single company out there will do what it perceives to be in its own best interest. You’re going to scurry back to your company and do that I bet. It’s this dynamic that always leads to somebody trying to do some of the things I outline above.
 
At the recent surf industry conference at Cabo San Lucas, the surf companies were worrying about skateboarding and the new chain of Hollister surf stores. At the National Ski Areas Association convention in New Orleans (tough spring I’ve had) they were worried about retention of new snow sliders. I remember when snowboarding was worried about the buy/sell cycle. In each case, the industry seemed to hope that the industry, or their association would collectively fix the problem for them.
 
In all three of those circumstances, and in skateboarding’s current circumstances, the message is the same. Business is a risk. It is a risk whether you sit on your butt and do nothing or try some innovative approaches to a changing competitive environment. If you do nothing, competitors may walk right over you. Or maybe not. If you try some innovative, new things some of them will probably fail and some will probably work. But at least you will be leading the way and making people react to you. It’s a risk either way, but my experience is that the companies with the mindset to take some risks are usually the winners when competitive circumstances change quickly.
 
Create your plan and execute it. Focus on what you can do right, not the stuff that can go wrong that you can’t control anyway.
 
Don’t worry, be happy. After all, you could in an industry that’s a whole lot less fun than this one.

 

 

We Win. Now What? Ruminations on the Future of Skateboarding

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The “AHAA!” moment at the ASR show came early for me. I’d just flown in from the SIA winter sports show in Vegas and literally walked in the door at ASR when I heard that the ubiquitous ASR Board Trac seminar had already started. I was fifteen minutes late. When I walked in, they were questioning ten “typical” teenagers about their buying habits and perceptions. I think it was five surfers and five skateboarders. Three or four were team riders. It was clear that being team riders skewed their points of view a bit. Nothing like getting free stuff to change your buying habits.

 
I listened for maybe thirty minutes. Then I had to turn to TransWorld Surf Biz Managing Editor Sean O’Brien and whisper, “Hey Sean, is this suppose to be just about skateboarding?”
 
Congratulations to Us
 
Skate was clearly the driver of the discussion. Surfing seemed largely a sport. Skating was somehow more. Skateboarding has, I guess, become something of an arbiter of style and fashion for a lot of kids.
 
That sounds kind of high and mighty. I wrote it pretty much from the gut and now that I think about it, it bothers me that I even had the thought. The consensus is that we’ve dodged the recession bullet with no more than a minor flesh wound (Assuming you believe it is a recession without a significant drop in consumer spending and that we’re in recovery mode. Can consumers start to spend more when they didn’t spend much less?).
 
We are skateboarding and we are immortal. Unless they cut off our head maybe? Or close all the skateparks in California. Check out the box on this page and do something.
 
What an enviable market position. What did we do to deserve it and how do we keep it- at least for a while?
 
Skate is Not Snow or Surf
 
Okay, you knew that. Perhaps I should be more specific. In snow, the top five to seven companies control maybe 85% of hard goods sales. Maybe more. Burton is first, followed, not necessarily in order, by K2, GenX, Rossignol and Salomon. Yes, I’m pretty damn sure GenX is either number two or number three by number of snowboards sold.
 
None of these companies, including Burton with its Gravis shoe brand, is one hundred per cent dependent on snowboarding for its revenues. None of these companies is under $100 million, and Salomon-Adidas is over $5 billion. They sell a significant amount of product to people who don’t participate in snowboarding. They want to grow, and are widening their distribution to do it. You can generally find their snowboard products in some places where you would have been surprised to find them a few years ago.
 
You need a mountain to snowboard (or at least a big hill). Buying all the gear you need to participate is pretty expensive (less than is use to be) and the expensive stuff is mostly special purpose. You don’t wear your snowboard boots to walk around when you’re not at the mountain, that is. You can’t do it all year around (unless you have a really big travel budget) and you are weather dependent.
 
For surfing you need an ocean. Or maybe, someday, a wave machine that generates high quality waves in an indoor facility. Let’s hope Surf Parks LLC pulls it off. You’re weather restricted (weather makes waves as I understand it). Buying what you need new probably will set you back six to eight hundred for a board, wet suit and bathing suit plus some accessories. Except for the bathing suit, its pretty much special purpose stuff.
 
It seems to me that the biggest surf companies are largely soft goods makers. Quiksilver had revenues of $615 million over its last four quarters. Vans did $353 million (I don’t know if I call Vans a surf company or not. I wonder if that’s a problem or an opportunity for them?) Surf soft goods brands are interested in pushing their distribution as well. Look, if you’re going to grow, you have to do it be expanding distribution. Once you get to a certain size, you just can’t get meaningful increases through the specialty distribution channels.
 
Meanwhile, over in our part of the world, we’re got a handful of large, multibrand skateboard companies with a primary focus on hard goods and skateboarding in general They sell some soft goods, sometimes under other brands, but it’s not their focus. The majority of f their revenue comes from selling skateboard hard goods to skaters. They have not, for the most part, expanded their distribution outside of specialty shops and smaller chains. They believe, and I think they are right, that it would kill their credibility with their core customers.
 
They aren’t giant companies. I don’t have any numbers but I’d be stunned if any of them topped $100 million in skate and skate related sales. I’ll be surprised if they are over $50 million and $20 to $30 million might be more typical. 
 
Though you can be weather constrained, you can pretty much skateboard anywhere. And, though decks wear out pretty quickly if you skate hard with existing skateboard technology, it’s a lot cheaper to buy what you need to skate then to surf or snowboard.
 
Skate shoe and softwoods companies, of course, are pushing madly into the broader distribution channels. Skate shoes are a limited market no matter how big skateboarding gets compared to casual shoes. There were 100 footwear companies exhibiting at ASR compared to around 70 six months ago.
 
So here we sit in skateboarding with a handful of hard goods companies that have been in skateboarding forever are largely run by skaters or former skaters focused, in their own best interest, on hard goods, riders, skateboarding’s vibe, and helping skateboarding progress. They are still their customers in many ways. They are still proselytizing missionaries for skateboarding.
 
That is pretty much a distant memory in snowboarding. Surf has the same problem though, in my judgment, not to the same extent as snow.
 
Shoe and soft goods companies get to sell to the general action sports, lifestyle market. Skateboard hard goods companies have to sell to skateboarders. I suspect it’s with some interest, if not envy, that the hard goods suppliers watch the shoe and clothing companies grow and diversify while they stay focused on a market that is nearly all young males.
 
ASR
 
We better hope the hard goods companies keep doing what they are doing. It is, I think, skateboarding’s unique competitive advantage over activities. ASR wasn’t able to give me the final show numbers before my deadline. What I felt was that traffic was down, things were generally a little quieter and the show was smaller. Company managers were talking about tighter budgets and “meeting reduced expectations.”
 
Given a recession, September 11th, overlap with other shows and a Super Bowl weekend, maybe that was inevitable. What troubled me more than that was my perception that the horde of new, little companies that usually come and go at ASR like the tide, weren’t anywhere to be seen. Okay, it’s probably a lousy time to be starting a business. But the presence of those companies is, to me, a barometer of just how exciting things are in skateboarding. When I don’t see them I worry. 
 
I worry that the hard goods companies that are the foundation of the industry will succumb to go big into clothing or shoes, or expand their distribution too much. I’m not quite sure that’s possible, given the start and the resources and the market positions that the shoe and soft goods companies now have. But it must be tempting.
 
It’s nice to be a big company I suppose, but it’s maybe even nicer to have a rock solid market niche that consistently earns money, keeps you close to your customer, and is a likely survivor in the event of a downturn. I hope the skateboard companies look at it that way. It would be good for all of us.
 
 
SIDEBAR
 
The law that releases California skateparks from liability expires December 31, 2002. Word is that it will be left to each skatepark manager to decide what to do and without this liability protection, a bunch seem to be saying they will close their parks. That would be a bad thing.
 
So, if you don’t want to risk having skateparks in California closed, YOU have to give California State Senator Bill Morrow, who spearheaded the original legislation, the leverage he needs to get the new law, SB 994, passed. You should tell him you appreciate what AB 1296 (the expiring law) has done by providing safe skateboarding venues for young and beginning skateboarders, and that you support SB 994, the new law.
 
You can do this at the following web site: http://republican.sen.ca.gov/web/38/feed.asp
 
Or you can write Senator Morrow at any or all of the three following addresses. Send a copy of your letter to each address for maximum impact.
 
2755 Jefferson St., #10                   State Capital Room 4048  
Carlsbad, CA 92008                       Sacramento, CA 95814
 
27126 Avenue Paseo Espapa #1621
San Juan Capistrano, CA 92675
 
This is important. Do it. Even if you don’t live in California but especially if you do.

 

 

Stuck In A Rut; Another Recession Article

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Look, I’m sorry about this. I’d really rather write about upbeat, happy stuff. It’s not my fault we’re in a recession, or are going to be in one, or whatever. I’m not making up these lousy economic statistics we’re seeing, you now. I don’t just sit here and pull them out of my ass, damn it. Sure, sure, everybody just goes, “Why should we read this crap when he’s never got anything good to say!?” and then I’ll probably be out of an assignment. Vuckovich will throw me out on the street, my wife will leave me when we can’t pay the mortgage, but what the hell, she’ll probably get the house anyway, the dog will piss on my leg and all because of a couple of lousy quarters of negative economic growth. I mean, so what, it’s just that Hey!! Leave me alone. Give me that back. Yeah, same to you……

Editors Note: The Editors of TransWorld Skateboarding wish to apologize for Mr. Harbaugh’s egregious behavior. He’s been restrained, and locked in a small room with case of beer. He should be himself presently.
 
Though it won’t be official until another quarter of negative economic growth is announced, it is generally conceded that we are in a recession. We would have had one even without the events of September 11th, though it seems likely that either the depth or the duration, or both, will be longer as a result of those events.
 
The genesis of this recession, in my judgment, is in the decade of growth and prosperity we have experienced since the 1990-01 economic downturn and a financial markets decline (driven largely by the bursting of the technology bubble) that is unprecedented since the Depression.
 
The 1990-91 recession lasted eight months. It was relatively short at least partly because while the United States experienced economic weakness, other parts of the world economy were stronger. In 2001, Japan is entering its fourth recession in a decade and the major countries in Europe are weak as well. It was during the 1973-75 recession that the world last experienced such a confluence of negative economic forces. That recession lasted sixteen months. Its proximate cause was the oil crisis. No similar crisis is imminent at this time.
 
Questions
 
If you’re running a business in skateboarding, you have the following issues to consider:
 
1)            Will favorable demographics and industry momentum shelter skateboarding from a general economic downturn?
2)            If there is an impact, will it be different for hard goods than for soft goods?
3)            How will brands and retailers be affected differently?
4)            Are there any opportunities here and how can you take advantage of them?
 
Below, each of these questions is considered in turn. Neither I nor anybody else “knows” the answer to any of them. Your goal is simply to consider the issues as they may impact your business and draw your own conclusions. The only way you can be “wrong” is to not consider the issues.
 
Demographics and Momentum
 
My sense is that we can make short work of this one. Not only is the primary demographic for skateboarding growing, but it’s extending itself, as both younger and older participants take up skateboarding. That the sport has gone mainstream, or legit, or whatever adjective you want to use is undeniable. That doesn’t make the industry immune to recessionary pressures, but maybe it means that the impact is in a lower growth rate, instead of a decline.
 
Hard goods Versus Soft goods
 
If you want to skateboard, you got to have a skateboard. There’s just no way around it. On the other hand, you probably don’t need another pair of skate shoes in your closet. The old pair will last another month anyway, and if you don’t have the latest style of pants, you’ll get by. Or at least your parents think you can get by. But it’s tough to ollie off a board with a paper-thin tip.
 
In the economy in general, most public companies that sell casual clothing to our demographic have warned that they may not make their projected numbers in at least the fourth quarter. Granted, skateboarding is just a small part of that much broader market. Still, everything I’ve read, and everything I learned at ASR in September, tells me that soft goods sales are going to be down in at least the near future. I don’t expect skateboarding to completely avoid that trend.
 
It’s interesting how the worm has turned. The hard goods companies use to complain about the injustice of it all. Through their teams and promotional campaigns, they created and maintained the vibe which propelled the market. But it was the apparel and shoe companies, based on their size and growth rates that benefited the most from the activities of the hard goods companies. Everybody needed shoes and clothes. Not everybody needed a skateboard.
 
Now it seems like the soft goods companies are most likely to be hurt by recession. Hard goods companies, with their solid market niches, may look on any slowdown in growth as their first opportunity in a while to take care of some neglected pieces of their business. That’s how Paul Schmidt, at PS Stix, sees it.
 
“I’m only running five 24 hour days a week now,’ he says. “We’re finally able to reorganize our production line and install some new equipment that will make us more efficient.”
 
With confidence that their higher levels of production are here to stay, it’s likely that other hard goods brands will also be willing to invest in upgrading their production facilities.
 
Then there are skate shoes. It seems like we’ve had about seventy brands of shoes for a couple of years. Every six months, at ASR, ten of them have gone away, and there are ten new ones. I suspect there will be fewer brands by the end of this recession. It’s already pretty typical to go into one of the mall “skate” shops and see a pile of skate shoes on sale. The piles I’ve seen are typically so big that they have to sit near the front door, a barrier to the customer getting to the full price merchandise.
 
I’ve never understood the financial model of the newer skate shoe brands. They have to spend a passel of marketing dollars just to have a hope of making a dent. But their lower volumes means that they aren’t typically getting pricing, terms, or attention from the factory that’s as attractive as what the larger, established brands get. Look for the total number of independent skate shoe brands to decline consistent with a recession-impacted fall off in soft goods sales.
 
Retailers and Suppliers
 
The first thing we have to recognize, especially with retailers, is that there are damn few pure skate retailers. There are lots of retailers who sell skateboard products and lots of retailers who are primarily skateboarding oriented. But for the most part, they also sell surf, or snow, or BMX, or rock climbing, or roller blading or some or all of those. So things can be great in skate, but if they are off thirty percent in the spring because of a decline in surf apparel sales, they could have a problem.
 
Retail sales increased at an average annual rate of 6.55% from 1994 through 2000. Now they’re not. The whole United States, in general, is over retailed. Though demographics may to some extent shelter action sports retailers from a general decline in retail sales, it won’t protect them completely.
 
It’s also generally acknowledged that retailers earn most of their money from apparels, shoes, and accessories. Skate hard goods are simply not high margin products. A decline in soft good sales will have a disproportional impact on gross margin dollars earned at retail and on the bottom line.
 
Suppliers, as we’ve already indicated, are likely to do fine if they are hard goods companies, and see some declines if they sell soft goods or shoes. For both retailers and suppliers, the ones with the established competitive positions and strong balance sheets will come through this in the best condition.
 
Suppliers should be paying more attention to how and to whom they extend credit. Retailers, on the other hand, can expect suppliers to encourage them to buy from them and to cut some other supplier’s order, if any cutting is being done. This may translate into opportunities for some better prices and terms for retailers.
 
Opportunities
 
I can put this real succinctly. In hard times, the strongest competitors, with the best balance sheets tend to gain share and grow stronger. It’s not that they aren’t impacted by hard times, but they have the financial ability and customer loyalty to not only get through them, but to take advantage of them. 
 
They can afford to offer better terms and prices if necessary. They don’t have to cut their advertising and promotional expenditures as much and when they do cut, it doesn’t hurt their recognition with their customers as much as it hurts a less established business.
 
A little decline in volume doesn’t put them below breakeven. They have enough leverage to be able to get their factories to share the pain. Customers are more likely to cut purchases of marginal brands. They have the financial ability to buy some of their competitors when they get into trouble.
 
If you’re not a leader in your market as either a retailer or a brand, you’d better gird up your loins. Take steps to strengthen your balance sheet by cutting expenses where possible. Do it now, not later because expense reductions are cumulative over time. Dump that old inventory and stop kidding yourself about how much it’s really worth. Be cautious in extending credit and ruthless in collecting from those who owe you.
 
Take a hard look at your advertising and promotion commitments. Don’t fall into the old action sport trap of spending marketing money because you have to build your brand’s recognition no matter what. I can pretty much guarantee that your expensively bought market position won’t be worth squat if you can’t make payroll and pay your suppliers. 
 
By the time of the 1990-91 recession, skateboarding was well into a period of decline. Largely, people say, because the demographic trends of that time had run their course; not so much because there was a recession. But out of those hard times came new brands and companies that are among the leaders in skateboarding today. Those weren’t easy times. Some companies made it and some didn’t. But looking back ten years it’s pretty clear they created some opportunities by breaking down some barriers.
 
Get out your sledgehammer, but try not to hit yourself.

 

 

Recession? You’re Kidding- Right? Please?

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

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

 

 

Tulips

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

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