“I Don’t Think We’re In Kansas Anymore, Dorothy.” Skate Retailers in the Lifestyle Market

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Let me start by telling you, in no particular order, some things you already know.

 
1)            Margins on hard goods suck, but carrying them draws customers in and legitimizes you as a skate retailer.
2)            Truth be known, hard goods from different brands are pretty much the same. You may have some brand loyalties, but you’ll buy what your customers wants. 
3)            You make most of your money in higher margin footwear, apparel and accessories.
4)            You’re a “lifestyle” business. Most of you don’t sell just to skaters, but to people who want to be part of the culture.
5)            Your hard goods go beyond skate. Maybe you also sell snowboards, maybe some other stuff.
6)            A lot of your soft goods aren’t skate specific. They come from brands that are focused on the actions sports lifestyle- not just on skateboarding.
7)            With so many brands (hard and soft goods) and so little real product differentiation, price, terms, service and support from the brand plays a larger role in your product selection.
 
First, the usual caveat. Not all of the items on the list apply equally to all shops and obviously where they do apply, they apply to different degrees.
 
Look at each item on the list again and think about how each was different a few years ago. How has your customer base changed? Margins? What was the importance of footwear compared to now?
 
They say a frog will jump out of a pot of boiling water, but will boil to death if you put him in cool water and raise the temperature gradually.   All these changes have happened gradually. Sitting here, writing this, I’m struck with just how dramatic the changes are for retailers. Looks like I’ve got something good to write about this month after all. What a relief! I was kind of worried when I started this.
 
As we’re all smarter than the average frog, we should have noticed the changing temperature and clambered out of the pot before the water temperature climbed past that of a comfortable hot tub. Still, it’s been my experience that when you’ve got a business to run, the seemingly easiest thing to do is see if you can stand a couple of more degrees.
 
Let’s look at the implications of these “things we all know” and see how running a shop may have changed as a result.
 
Margins and Profitability
 
My educated guess is that soft goods and apparel account for north of 60% of sales in many shops, and a lot more of the total gross profit. You cannot succeed financially if you try and rely on hard goods sales for your turnover. It’s not possible to sell enough to have adequate gross margin dollars to pay the bills.  
 
Points one and three from the list suggest some obvious changes that have largely already occurred in response to the financial facts of life. Carry the hard goods you have to carry, but leave the most space, and the best space, you can for the higher margin footwear and apparel. Maybe it makes sense to use hard goods in displays to establish the credibility of the store. What I’ve seen happen is that thoughtful stores tend to put the decks and other hard goods towards the back of the store, making customers move through the apparel and footwear on their way to them. I don’t know this statistically, but my expectation is that skate decks are a planned, purposeful purchase. Soft good purchases can be more spontaneous. If that’s the case, then the location of hard goods isn’t a consideration in people getting to them and buying them. Might as well use that location to encourage other purchases.
 
Customer Base
 
The message from points four and six is that your customer base is probably larger and broader, and you can appeal to a much bigger group of people. I am not suggesting you can be all things to all people. You still have to know who your customer is and is not. But the days when all your customers are core skaters are gone for many shops. And if you do it right, having new customers won’t alienate the old ones.
 
In some ways, of course, life was easier when the definition of the customer of a skate shop was most likely to be somebody who skated. Appealing to a broader customer group while maintaining the edginess and legitimacy that made you successful in the first place isn’t an easy thing to do. I’ve got two suggestions.
 
First, if there’s one piece of market research you should be doing, it’s to ask each customer (when it isn’t obvious one way or another) if they skate. If you were willing to go one step further, you could mark your copy of their receipt (when they purchase something) with the answer to the question. Based on a few simple calculations involving adding up sales and calculating gross margins, you could make a good start on learning where you’re earning your money, and how your customer base has or is changing.
 
Second, in your product selection and merchandising, move towards the mainstream cautiously. But move. That’s where skating is going and seems likely to keep going. Whether we like it or not.
 
Well, it’s always great to sit here and be able to spew forth some fatuous blather like “move towards the mainstream cautiously,” sound like I know what I’m talking about and then move on. Let me try and say a few useful things on just what that means.
 
It means that the process of selecting the brands you carry, and how deep you go with each, is more complicated. You aren’t going to carry all the shoe, apparel, deck, truck and wheel brands there are. Nobody has a store that big.   It’s complicated because there are more to choose from and you have to select brands that appeal to a broader customer base, but maintain your credentials as a skate shop.
 
It means, if you want to take advantage of the broader market, that you may need more square feet, or at least creative ways to display more product.
 
It means changing your product planning and purchasing habits. Decks, trucks, and wheels can typically be gotten pretty quickly. Skate shoes and apparel have an order/production/delivery cycle that’s a lot longer. You either have to take an inventory risk, or accept the chance that you may run out, not be able to get more, and lose sales.
 
It means recognizing, like it says in point two in the list, that there are few meaningful differences among products of equal quality- either soft or hard goods- and that the differences are mostly created by advertising and promotion (teams are just one method of promotion). This has tremendous implications for how you select and work with brands.
 
Brand Selection
 
These days, most brands produce quality products. The differences the consumer perceives are largely marketing driven. If, as I’ve suggested, your customers are more mainstream and more diverse, your product offering has to be too. But you are limited in the number of brands you can carry in each product line and in the number of sizes and styles you can carry of each brand. At the end of the day, like buying stocks in the stock market, you’re going to have made some good choices and some bad ones.
 
To carry the stock market analogy one step further, there’s really no effective way for you to evaluate all possible brand purchases and combinations of purchases for your store and to select “the best.” While you can, by careful study and based on past history, make selections that are more likely to be successful, there are no guarantees. As in the stock market, you want to purchase quality brands for your shop at good prices. Most of your portfolio, as a stock market investor or a buyer in a skate shop, should be in known, quality companies.
 
New brands, like the stocks of Internet companies, aren’t likely to make you rich any longer. You are better off with a portfolio of consistent, if not spectacular winners which, if they won’t make you rich overnight, won’t leave you in debtor’s prison either.
 
These are the brands your more mainstream customers are going to want anyway. They are the ones who can afford the ongoing advertising and promotion to differentiate themselves. As a group, they are the brands the customers usually ask for and, with a few obvious exceptions, if you didn’t or couldn’t carry one of them your shop could probably get by with another.
 
The result, as it says in the list, is that pricing, terms and service move up the list in importance as you consider which brands to carry.   
 
Next Step
 
By necessity, I’ve had to discuss these issues in general terms. To bring the discussion around to your specific situation, begin with the seven items listed at the beginning of the article. Maybe add one you think I’ve missed and throw one out if you don’t think it applies to you.
 
Next to each point, write down the situation as it existed with regards to that particular issue, say, three years ago in your shop. Where have the biggest changes happened for you? How, specifically, have you modified the way you do business in response? Where is it obvious you need to change and haven’t?
 
We all know how much retailing has changed. Take a little time and evaluate how you’ve responded to those changes.

 

 

Public Wisdom, Maybe; Comparing the 1999 and 2000 Buyers Guides

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I hold in my hand the Transworld Skateboard Buyers Guides from 1999 and 2000. Everything you could possibly want to know about decks, trucks, wheels, and bearings are in these guides.

 Well, okay, Transworld exercises some discretion in which brands make it into the guide and which don’t.   All the product from each brand isn’t necessarily included. Not everybody has actual suggested list prices so the ones included may be a little suspect. Certainly, the prices don’t bear much relationship to what things really retail for, do they?
 
Still, there are a lot of data points, and when you’ve got a lot of data points something statisticians call “regression to the mean” takes over and you find that you may be able to glean some relavent information in spite of all the inaccuracies.
 
I’ve spent a lot of time figuring out average prices and price trends and comparing them from one year to the next and listing and counting brands to see who’s there and how it’s changed from one year to the next. My fingertip is raw from punching the calculator button, and I’ve damn near gone blind staring at the guides (nobody warned me you could blind from reading skateboard buyers guides). So caveats aside, what can we learn from the two Guides about how the industry is evolving?
 
After we’ve looked at the Guide data, we’ll travel to a major skateboard internet site and see how the data checks with retail reality.
 
Decks
 
The 1999 Guide featured 411 decks from 49 brands. The 2000 edition had 402 decks from 60 brands. The increase in the number of brands has more to do with who Transworld put in the guide than with the number of brands there really are. The numbers exclude longboards.
 
The average suggested retail price for a deck declined from $54.79 to $53.35, or about 2.6%. The overall range of prices also moved down. In 1999, decks were priced from $39.95 to $76.95. In 2000, it was from $33 to $67. In 2000, everybody pretty much dropped the cents from their prices, rounding them to the nearest dollar and, incidentally, making my calculations a lot easier. Keep in mind that blanks aren’t included here.
 
MIK-
 
Here’s the distribution of decks by price for 1999 and 2000. I suggest you do a chart that shows the number of decks at each price point for each year.   You kind of need to do it, because I’m going to refer to it.
 
1999
 
Price               Number of Decks
 
34              3         
40              20
45                  20
46              90
47              14
48                  11
49                  22
50                  106
51                  4
52                  2
53                  5
54                  1
55                  35
58                  8
60              11
70              137
77                  1
 
2000
 
Price   Number of Decks
 
33          1
35              1
37                  2
40                  2
45                  7
48                  7
49                  2
50                  115
51                  3
52                  33
53                  99
54                  2
55                  38
56                  4
59                  10
60                  63
65                  3
66                  7
 
The two charts show the distribution of decks by price for the two years. Check out how the distribution has tightened up. There are fewer decks at either the lower or the higher price points. In 1999, there were 180 decks priced under $50. In 2000, the number is 22. Similarly, 1999 included 137 decks at $69.95 (I call them $70 on the chart). There aren’t any in 2000.
 
The distribution of prices has gotten a lot tighter, and the average suggested retail price moved up because of the huge decline in the number of lower priced decks. Basically, what you’re seeing is that consumers can’t afford to pay $70 for a deck (or can’t be convinced that it’s any better than a $50 deck), and nobody can make money on full graphic, branded decks that retail for under $40.
 
This tightening of the price distribution is absolutely consistent with a market where there are few real differences among products. The consumer is price resistant, and the brands all find themselves on the same cost curve. That is, it costs them all more or less the same for a deck. It’s inevitable that prices move closer to each other.
 
Wheels, Trucks and Bearings
 
There were 208 wheels in the 1999 guide from 48 brands with an average cost of $31.25 per set. The 2000 guide featured 224 wheels from 58 brands with an average cost of $30.58, down two percent. Again, be cautious in concluding anything from the number of brands.
 
Sets of wheels were priced from $24 to $43.95 in 1999 and from $20 to $40 in 2000. Prices moved down about four bucks per set, but the spread between the lowest and highest remained the same.
 
Now if I was really diligent (read that obsessive/compulsive) and had nothing else to do with my life, and loved the feeling of calculator buttons moving under my fingers, I’d go back and create the same kind of chart for wheels I did for decks. My guess is you’d see the same trend towards a tighter distribution of prices, and for the same reasons.
 
28 trucks were available from 19 brands in the 1999 guide. The average price, excluding the product for $100 a set, was $38.50 per set. They ranged from $19.60 to $100 per set, but if you take out that $100 set, the top price was $55.50 for a set. 
 
In 2000, 21 brands offered 43 trucks. The average price was $40.56, up 5.3%, excluding the $100 product. Prices ranged from $22 to $52.
 
Happily, there are fewer bearings to count and calculate. In 1999, sixteen brands offered 26 bearings. The average price was $20.79 a set and they ranged from $9.60 a set to $36.50 a set.
 
The 2000 guide featured 22 bearings from 15 brands at an average price of $19.73 (five percent lower than the previous year) excluding the $120 ceramics. Prices ranged from $10 to $37- basically the same as 1999.
 
Trends Across Products
 
The number of brands was up in all product categories except bearings, where it dropped by one. The number of product offerings was up everywhere except in decks, where it declined by two percent. Prices fell except in trucks.
 
It’s hard to interpret the increase in the number of brands. I want to emphasize again that it is probably more how Transworld put the Guides together than how the actual number of brands changed. I guess there are some new companies, and new brands also represent new offerings from existing companies trying to find a marketing advantage. It’s troubling for the industry as a whole that such a maneuver is part of the basis of competition. It just confirms the similarity of product from brand to brand.
 
Prices are tending down, at least slightly, even in what I believe is the hottest market that’s ever existed in skateboarding. In snowboarding’s go-go years, you could raise prices each year. The implications for what the market and industry may be like when (not if) growth slows aren’t very encouraging. Right now, if I were a brand that was having trouble meeting demand I wouldn’t try to meet quite all of it.
 
Yup, you heard me right. When business isn’t so good, the companies that will get through it successfully will be the ones who have nurtured their brand’s market position, built their balance sheet, and controlled expenses. The skateboard industry’s consumers tend to lose interest in any product that everybody has. What better way to support your brand then to make it just the slightest bit harder to find? I think it may be better marketing than some of the things you spend advertising and promotional dollars on.
 
Another trend, obscured by the coming and going of brands in the industry, is the dominance of perhaps the five or seven largest players.  As I watch deck prices move towards each other, with every player on basically the same cost curve, I’m certain, for better or worse, that these companies will end up with the lion’s share of the market. I’m not saying there isn’t some room for smaller players, but every industry has this trend towards consolidation.
 
Back in the Real World
 
Because of my healthy skepticism about the picture painted by the Guides, my nimble fingers have taken me to a major internet retailer of skate products. I didn’t check out every brand in every category, but I looked at a lot. Decks, including grip tape were either $44.99 or $49.99. Add some shipping costs, but may be subtract sales tax depending on where you are ordering from, and the price isn’t too far from the average price of $53.35 in the 2000 guide. Then, of course, there are the store brand decks for $29.99.
 
Almost all the trucks were either $33.98 a set for plain metal, or $37.98 for painted. The average price in the 2000 guide was $40.56. That number included both painted and plane metal trucks. Again, not so far off from this site’s prices if you take account of shipping costs.
 
Wheels were $23.96 a set “unless otherwise noted.” I saw some at $31.96 a set and there were the store brand wheels for $15.96 a set. That’s quite a different from our 2000 guide average price of $30.58.
 
To nobody’s surprise, the Guide’s suggested retail prices are higher than street prices when compared to one very comprehensive web retailer. We also confirm the tendency to move towards a simpler pricing structure, recognizing the lack of real product differentiation.   But except for wheels these retail prices are not that much higher then the Guide average prices. 
 
It looks like, at the end of the day, the lack of product differentiation is pushing product prices lower, but high demand is controlling, though not eliminating, that trend. At least for the time being.

 

 

Skateboards on the Internet; “You Can Get Anything You Want…….”

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I girded up my loins (you’d think doing that would hurt) and sat down to research this story, fully expecting to have to visit dozens of web sites and to check each of them out utilizing my infuriatingly slow web connection.

My web connection is, indeed, infuriatingly slow, but it looks like there may be less research than anticipated. You can pretty much find any deck, truck or wheel you want at prices competitive to shops. Let me give you one example- the first site I visited.
 
The Ask Jeeves search engine sent me to MySimon’s skateboard buying page when I asked where I could compare product prices. There were 38 board brands listed and north of 300 decks available on line mostly through FogDog and N.A.G. Skate House. A couple could be bought from Sports Authority. Almost all the decks were priced at $49.95.
 
There were 150 trucks from 17 different brands available at 12 different on line sellers. The overwhelmingly common prices were from $14 to $19 (per piece). A mere 410 wheels from over 30 brands could be purchased from 12 retailers. Sets of four wheels were priced typically from $25 to $29. Note the same product was sometimes available from more than one on-line retailer so 300 decks, for example, isn’t necessarily 300 different decks.
 
I checked out Fusion, Earthsports and CCS to name just a few. I looked at some shop sites, and some brand sites. For the most part, the brand sites aren’t selling directly, but my initial conclusion stood up. You can, indeed, get anything you want. Not everything every place all the time. But pretty much everything someplace most of the time.
 
What are the implications for the industry?
 
Entropy and Palm Pilots
 
The idea of entropy as used in the second law of thermodynamics says, to use an example, that if you drop a hot rock in a bucket of cool water, the temperature of the rock will drop, and that of the water will rise, until they are equal.
 
When I bought my Palm V, I went to CNet.com. It showed me the list of 20 or more places where I could buy the product. I sorted the list by price, and bought from the cheapest place (after taking shipping costs and sales tax into account).
 
All the water molecules in the bucket, being identical to each other, become the same temperature. All other things being equal, Palm Vs should all be priced the same. Modern economic theory sort of mimics the second law of thermodynamics; prices will fall until marginal revenue equals marginal cost the textbooks say.
 
Of course in business, all things are never equal for either Palm Pilots or skateboards. Even where the products are effectively identical, various market “frictions” such as distribution, production efficiencies, advertising and consumer perception create points of differentiation that can justify some price differences among essentially identical products. Happily, skateboards aren’t water molecules.
 
On the other hand, they aren’t as distinctive as Palm Pilots.
 
The temperature of the rock and water in the bucket only fall and rise to a certain point on the assumption that the heat can’t get out of the bucket. That is, it’s a closed system. That’s not true with the skateboard industry. It’s an open system where companies and product come and go. If heat can go through the side of the bucket, then the temperature can drop further. In business, the comparable result might be irrational competition, where marginal revenue is pushed below marginal cost on the assumption that the other guy will fold first.
 
Happily for skateboarding, favorable demographics and the resulting market growth seem to be putting more hot rocks in the bucket and at least keeping the temperature from falling. Business seems good right now.
 
Elvis Has Left the Building
 
Where other industries are agonizing over how their products should be distributed on the internet, skateboarding has made its decision. I can’t say that every deck, truck, wheel and bearing of every brand is available on the net, but an awful lot are. My gut is that most are. Enough so that, as an industry, we are suggesting to the consumer, at least from a distribution point of view, that there’s nothing distinctive or special about the product.
 
“Here’s a bunch of decks-they’re kind of all the same,” we proclaim by our actions. Web sites show them all in rows like soldiers standing at attention with the prices the same or close to each other. Perhaps it doesn’t matter, and this is just an extension of a skate shop with decks lining the walls. It’s also the result of a distribution system where brands not only sell direct to retailers but to middle men who distribute the product further. For better or worse, distribution is simply not controlled as well in skateboarding as in some other industries.
 
Maybe Elvis left the building long before the internet became an issue. Skate hard goods have been awfully similar for a long time in features, pricing, functionality, and durability. Many of the online sites where you can buy boards are also brick and mortar retailers.
 
And there’s some good news. In spite of broad distribution online, product isn’t finding it’s way to the big discounters. There was no significant branded product, and mostly no skateboard product at all, on internet sites for Costco, Garts, Sports Chalet, GI Joes, Sports Authority and some others I now can’t remember.
 
Issues
 
Someday, if it’s not already out there, some web search bot is going to be able to find a particular brand and model at the lowest price like I did with my Palm Pilot. As that happens, skateboards (or any other product) become even more like the water molecules in the bucket and price becomes a bigger consideration- especially since we’re presenting the product on the web as all kind of the same anyway.
 
The tool we’re left with to buck that trend is the old, reliable advertising, promotion and team budget. Old and reliable, but damned expensive. If margins drop because of over supply and the product being hard to differentiate, and what differentiation we can do requires a big marketing budget, then this becomes an industry where only bigger players survive.
 
For retailers, the question is simple- at least simple to ask. If prices are more or less equal, can a web site create a “community” on line that will motivate somebody to buy on line rather than visit a shop? A good shop is a community too. More than any web site I hope and expect. Seems like a good shop with a good web site has a lot going for it. The question, simply put, is whether a customer would rather have the instant gratification of getting the product right away as opposed to the convenience of ordering on line but waiting a few days for it to arrive. An awful lot depends on the experience the customer can expect to have at the shop. But we already knew that, whether the competition is another store or a web site. 
 
It’s hard to see any problems on the horizon when the economy and industry is booming and factories can’t make enough decks. But we’ve got an inverted interest rate curve (short term rates higher than long term rates), and four interest rate increases with more expected. Historically three increases have often preceded a stock market correction and a recession. I’m not prepared to declare that the “new economy” has relegated traditional economic relationships to the dust bin of history. Some of you “elders” who actually remember what a recession in skateboarding and in the economy in general is like might share the experience with your younger colleagues.
 
Meanwhile, Back On the Internet
 
I started out pessimistic about how the skateboard industry was utilizing the internet, but given our target customers and the fact that products were already tough to differentiate from each other, I’ve decided we’re doing a pretty good job.
 
First, leading brands are being kept out of discount chains- both on the internet and in brick and mortar. That is a huge victory. It’s probably the single biggest reason why there’s any margin left in hard goods at all and why teams and other forms of promotion work as well as they do.
 
Second, lots of shops have embraced online sales as an extension of their existing business, rather than seeing it as competition. Used correctly, it’s a way to move close out product without damaging your shop’s image, collect customer information, expand sales, build your image and maybe reach customers. My parents were the TV generation. I’m from the PC generation. Skateboarders are generally from the online generation. Embracing reality rather than fighting it usually makes a whole lot of sense.
 
Finally, brands are using their internet to support their products and the sport but not to compete with other retailers. The future there has to be online ordering and accounting and seamless information exchange with your customers. Eastern Skateboard Supply is one example of a company already doing that.
 
Skateboarding’s customer demographics diffuses some of the issues usually associated with internet sales. We’re not trying to pull our customers on line- we’re following them.

 

 

Thoughts From the Action Shoe Retailer Show; Opps- Did I Get That Wrong?

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This article sort of took shape the Monday the show ended. In the first place, I was flying back to Seattle on an Alaska Airlines MD80, which didn’t exactly put me in a positive frame of mind. Second, thanks to the ticket to the Sunday evening Gallas party Jeff Cutler gave me, I was suffering from the residual affects of too much fun.

 
There were 42 companies listed as selling footwear. I trust they weren’t all skate shoes, but a lot of them were. Not only were there more companies with skate shoes- each company was showing more colors and styles.
 
I pulled out the article I did at the end of 1994 on the imminent consolidation of the snowboard industry. I actually toyed with the idea of taking that article, changing “snowboard” to “skate shoe” wherever it appeared in the article, and having Skate Biz run that article with the changes showing just to make a point.
 
But I changed my mind, deciding there were a couple of differences worth discussing, and I’ll get to them in a bit.
 
Shoes to the Right of Me, Shoes to the Left of Me
 
With one exception, every shoe company I talked with had increased the number of shoes they were offering. The walls were covered with skate shoes. Mostly high quality skate shoes. Even the price point shoes seemed well built. They didn’t have all the colors and different layered materials of the expensive models, but I was assured they were just as solid and functional.
 
Everybody’s shoes were solid and functional. Made largely from the same materials and with similar features. If there was a color that wasn’t used in somebody’s shoe, I don’t know what it was.
 
The increase in the number of shoes per company is a response to what each company’s competitors are doing. It is not meeting any need of the consumer, unless it’s a perceived need the industry hopes to create by marketing.   
 
Though I’m not a skater anymore, I enjoy wearing skate shoes. I find them comfortable, they give good support, and they look great. But I could be talking about any brand. Because the industry has done such a good job creating a quality product, the basis of competition is starting to inevitably evolve to price and marketing.
 
Charge for the Guns!
 
The price trend I heard about was down. My belief is that this decline in prices offered to retailers wasn’t accompanied by a similar decline in manufacturing costs. I recognize that not every style and color way exhibited at the show will be produced. But more styles and colors will be produced. Manufacturing efficiencies result not just from overall volume, but also from the volume by style and color. If you want to make 10,000 pairs of shoes, you’ll get your best price if they are all exactly the same. So increasing styles and colors has some negative affect on your cost per pair.
 
But the thing that really caught my attention was the first shoe company giving 90-day terms to some of its customers.
 
Let’s say that a skate shoe company starts offering its better customers 90-day terms. Just to pick a number, let’s say it’s a larger company, and they have $10 million in annual sales done with terms of 90 days, where before that whole amount was sold COD. If they’ve got a gross margin of fifty percent, just to pick a number, that means they’ve got an extra $5 million of working capital invested in the business for 90 days. What does it cost to borrow $5 million for 90 days? You do the math using your own cost of capital.
 
Of course, it’s even a little worse than that. In the first place, we’re making the assumption that the check for each sale with 90-day terms is deposited on the 90th day and you get immediate credit. Bet some take longer to pay. In addition, the thing about giving terms is that somebody ends up not paying at all.
 
Companies give retailers terms when they feel they have to in order to compete. The trouble, of course, is that like frequent flyer programs, once one company does it, most of the rest of the companies have to do the same.  If they can afford it. Instead of being a competitive advantage, it’s just a cost. But it’s a great thing for the retailers.
 
The retailers, of course, find it harder and harder to make a rational selection among the hundreds of colors and styles. How do they select? They pick the shoes that give them the best price and terms and check at retail. Best price and terms means lower margin and higher working capital requirements for the brands. Making a shoe check at retail when it’s more or less the same as everybody else’s shoes means big marketing programs. Talk about charging for the guns.
 
Boldly They Rode, and Well
 
Big booths. Two stories. Back rooms. At the end of the show, if you put some of those booths on a lot, added plumbing (they’ve already got enough electric) and put on a roof, you’d have a fair sized house.
 
We’ve got a market that’s growing quickly. All the competitors want their piece of it. This is the time to get it, and they are pulling out all the stops to do that. The typical argument is “Market share is more important than profitability while the market is growing this fast.”
 
Guess what? I agree with that. The time to establish your position in a market is when it is growing quickly. If you’ve started recently, you better either have a big balance sheet and lots of money to lose for a while, or a clear picture of your market niche and a way to compete against the big guys.
 
The Good News
 
Okay, I’ve had my fun. I think the cautionary analogy of the Charge of the Light Brigade is worth thinking about in the skate shoe business. Will you care how glorious your charge was if you die in the process, no matter how many flags you had waving? And the chance to see a classic poem written 150 years ago printed in Skate Biz is just too good to pass up.
 
The skate shoe business is evolving to the point where it isn’t really just the skate shoe business. It’s the lifestyle casual footwear business. That opens up a big market. A really big market. I won’t give the favorable demographics speech. I’m sure we’ve all heard it too damn many times. That’s why there were 42 footwear companies at the show. But the fact is that more and more young people are going to be looking for casual, comfortable, stylish casual shoes. Everybody needs shoes. And they need them all year around. The market should be growing for a while.
 
Piece of good news number one, then, is that the market is growing, and should continue to grow. Number two is that it’s a year around business, though it has some seasonality. Year around sales means year around cash flow. Which means it’s easier to finance growth. Not easy, but easier.   
 
The financial model I’ve described in this industry- declining gross margins and higher marketing expense due to normal competitive pressures when product differentiation is difficult- usually has only one solution. That solution is to be big, or for your skate shoe line to be only one product line in a company that sells other product as well. 
 
At some volume of sales, your general and administrative expenses, and your advertising and promotion expenses, can decline as a percentage of sales even as their absolute dollar amounts go up. Obviously, companies like Adidas and Converse can afford to invest in the skate shoe business.    But there are a number of “core” skate shoe companies who already have the sales volume and/or balance sheet to compete in the market as it’s going to be and make money. There greatest challenge will be to transition to broader distribution without losing their legitimacy.
 
That there are core companies solidly positioned is good news, because I want to see the companies who understand skating continue to support and influence it. To me, that lessons the chance of another skateboarding recession. 
 
Please remember the lessons of every other industry. Growth eventually slows, and the conditions of competition change. Retailers gain power, size becomes important, the financial model becomes tougher, and entrepreneurs have to become managers.
 
The charge of the heavy brigade under General Scarlett, which preceded that of the Light Brigade, succeeded in reaching its objective at very little cost. They were prepared for their battle.           
 
The Charge of the Light Brigade
 
Half a league, half a league,
Half a league onward,
All in the Valley of Death
Rode the six hundred.
‘Forward the Light Brigade!
Charge for the guns!” he said:
Into the Valley of Death
Rode the six hundred.
 
‘Forward the Light Brigade!’
Was there a man dismayed?
Not though the soldier knew
Some one had blundered:
Their’s not to make reply,
Their’s not to reason why,
Their’s but to do and die:
Into the Valley of Death
Rode the six hundred.
 
Cannon to right of them,
Cannon to left of them,
Cannon in front of them
Volleyed and thundered.
Stormed at with shot and shell,
Boldly they rode and well,
Into the jaws of Death,
Into the mouth of Hell,
Rode the six hundred.
 
When can their glory fade?
O the wild charge they made!
All the world wondered.
Honour the charge they made!
Honour the Light Brigade,
Noble six hundred.
 
Alfred Lord Tennyson
 
The Charge of the Light Brigade occurred during the Crimean war in 1854. The brigade consisted of 673 officers and men at the start of the charge. 247 men and 497 horses were lost without achieving anything. But it was glorious while it lasted, and the survivors were decorated and promoted.

 

 

Sam And The Gradunzel-Eating Monster; It’s (hopefully) a fairy tale.

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Long, long ago in an industry far, far away (cue the heroic music), the sale of moss-covered, three-handled family gradunzels* had taken off. Now, gradunzels had been around for a long time, and they were manufactured by a dedicated group of companies, the founders and owners of which had been among the earliest users of gradunzels. They were still the product’s strongest supporters and were respected and trusted by the people who bought the product.

            These companies had worked hard to make the best-performing gradunzels they could make. They had all worked so hard, in fact, that all their gradunzels performed well, and it was not always easy to distinguish one from another—as far as how they worked. They had all been so successful in making good products that, at the end of the day, the customer selected his gradunzel based largely on loyalty to the company and people he knew who used the product. Even the prices were more or less the same.
            Oh, sometimes the colors of the three handles were changed, or a different variety of moss was allowed to grow on the gradunzel, but it still worked basically the same as all the others. Once somebody, who was not part of the group that had made gradunzels forever and ever, actually made a gradunzel with four handles. Some said it did a better job at whatever it was gradunzels did. Some said not. In any event, it didn’t look like all the other gradunzels, and soon it was gone and forgotten.
            For a long while, gradunzel users were a pretty small group, at best ignored, at worst scorned, by the rest of the people. But they didn’t care. They just went about making the best use of gradunzels they could. And if they were, from time to time, disappointed that everybody didn’t like gradunzels, they were also pleased to be part of this special and distinctive group
.
            And then a funny thing happened. One day—nobody knows exactly why—everybody wanted to buy a gradunzel. New gradunzel factories and brands sprung up all over the place. These came and went. Some succeeded, some didn’t.
            The small group of old-line gradunzel makers was overwhelmed and didn’t quite know what to think. It was true, of course, that they were selling all the gradunzels they could make and making more money than they had ever imagined. They were producing all kinds of new gradunzels in different sizes and colors and with different names, although of course they were all still just gradunzels. That was a good thing, and they were proud that after all their years in the wilderness so many other people had recognized what a wonderful invention gradunzels were. But they were also just the smallest bit concerned.
            Gradunzels had become so popular that even people who didn’t use them wanted to share in their popularity and be part of the excitement. There were all kinds of new gradunzel products: toy gradunzels, gradunzel cleaners, tools for fixing gradunzels, and clothes and shoes to wear when you were using your gradunzel, or even when you weren’t. The original gradunzel makers didn’t manufacture most of these products, but they represented a big part of the industry’s total sales. The old-line producers felt they were losing a little control of what they had created and supported, and they wondered if, in the midst of all the growth and prosperity, things would ever be the way they had been before. And sometimes they even wondered if they really, really wanted them to be.
            Undoubtedly, all this noise, growth, and excitement was what ultimately attracted the  gradunzel-eating  monster. The monster had an enormous appetite that was never really satisfied. But he had to eat so much that he couldn’t waste his time on mere appetizers. Suddenly, the gradunzel business looked like a tasty, full-course, gourmet meal. And it was making so much noise that he couldn’t help but notice.
            The monster didn’t really care what a gradunzel was or how you used it. He just needed to keep his stomach full. His stomach, it turns out, was full of production equipment, and he already had everything (well, almost everything) he needed to make gradunzels.  He wasn’t a bad monster really. He didn’t want to hurt anybody, though he knew that what he was planning might make things difficult, or at least different, for some of the smaller monsters in the food chain. Still, he hoped that the people who bought and used gradunzels might get better ones for less money and he thought that was a good thing.
            Now, because he was a very old monster and had grown big and wise over many years of gobbling things down, he had the resources to carefully study gradunzel making. So that’s what he did. He discovered he could make gradunzels as well as anybody else’s for quite a bit less money, if only because he already had almost everything else he needed. He even had a few ideas for making them better and wasn’t reluctant to try them. He had to buy a few machines and reorganize some space, but the building, the people, the computer system, and everything else he needed was already there. There was just one problem: To whom was he going to sell gradunzels?
            The monster disguised himself (not very well, actually, in a button-down and khakis, although he did manage to ditch the tie) and went out into the world of gradunzel makers and users. He didn’t understand everything he saw, but he knew he wasn’t “cool,” and somehow that mattered.
            He wondered what he could do. Then he became aware of how many brands of gradunzels there were. He knew, because he was an old and wise monster, that many of those brands—through no fault of their own—probably wouldn’t survive, or at least wouldn’t succeed at the level they hoped for. There were just too many brands and not enough competitive advantages to be had. He wondered if he could find one of those brands to work with. Then maybe he could be a little cool, or at least make gradunzels for somebody who was.
            Still, the monster wasn’t completely happy. He wanted to make a lot of gradunzels, and no brand that was going to work with him would need very many. So he called his friend Sam. Sam owned almost 3,000 stores and had bought a lot of stuff the monster had made over the years. He already sold gradunzels, but they weren’t very good, and they certainly weren’t cool—whatever that meant.
            Sam had tried to buy gradunzels from the old-line manufacturers, but they wouldn’t sell to him for three reasons. First, if they sold to him, they wouldn’t be cool anymore. Second, they couldn’t make enough gradunzels for him and still meet demand from their other customers. Third, Sam never paid anybody until the following season, and the old-line companies couldn’t afford that.
            The monster didn’t care about the first and could handle the second and third. So he said to Sam, “If I could sell you a better product for a lower price, produce as many as you need, wait to get paid, make it cool, and advertise and promote it, how many would you buy?”
            They haggled over the specifics a little. Sam looked thoughtful, then said, “Well, not too many. But if you can do all that, maybe we could handle three-quarters of a million gradunzels in the first year. We’re already selling almost that many, and we know it’s a lousy product. Would that be enough?”
            The monster smiled.
            When the monster went to talk to some of the second-tier gradunzel makers, the first thing they all told him was that everything was great. After he got to know them a little better, often over a couple pints of grog, he found that some of them were running just to stay in place, having a hard time cash-flowing their business, and needed to get a lot bigger quickly to have a financial model that really worked. But they were cool.
            Usually when he got around to asking them about selling to Sam, they’d get up to leave. But when he quickly asked them if they’d like to sell more gradunzels in two years than they could reasonably expect to sell in twenty, they sat back down again. It turns out that making money is cool, too.
            The gradunzel-eating monster returned to his lair to  plan. He didn’t know if what he was thinking would work, or if serious gradunzel users would buy from Sam. But if he could get this meal cooked, it would be big and tasty, and the ingredients wouldn’t cost much. What did he have to lose by trying?

 

 

Beset by Opportunities; How Can We Take Advantage of Them?

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There are sixty million kids people in the United States between the ages of 5 and 20. Over half of them haven’t entered adolescence yet. It’s the biggest demographic bulge since the baby boomers.

 
Every large, mainstream company in this country from Levis, to JC Penney to Fidelity Mutual Funds needs credibility and brand recognition with at least some piece of this generation. It’s not an over dramatization to say that their future depends on it.
 
They are struggling to figure out how to reach this generation. Some are doing better and some are doing worse. Some are screwing up unbelievably badly but don’t even know it. However well they are doing, they are changing skateboarding right long with other pieces of the action sports business. The resulting broader, growing market isn’t just about selling skateboards to skateboarders. It includes a growing number of customers, or potential customers, interested in the lifestyle, fashion, culture and attitude that’s being toned down and homogenized for this larger market.     
 
Is this an opportunity, an inconvenience or a big mess? Since it’s not going to go away, and many of these behemoth companies wouldn’t have a significant financial event if they suddenly controlled 100% of the skateboard market, I guess we better make it into an opportunity.
 
Marketing
 
Not running ads. Not going to trade shows. Not promoting team riders. Not sponsoring events. Those are promotional tactics. Maybe they are good ones. In the past, in most segments of action sports including skateboarding, they could pass for marketing because customer identification was simple. Anybody who bought skate product could reliably be assumed to be a skateboarder. It was an enthusiast market where your customer segmentation was done for you. You sold skateboards and skateboard products to skateboarders. There was nothing to figure out.
 
Now there’s a lot to figure out. It’s not only skateboarders buy skate shoes anymore, to use what’s probably the most obvious example. Who are your customers now if they are not all skateboarders, and why do they buy from you if it isn’t just to skateboard? Now we’re talking real marketing- something the industry has never had to do before.
 
“Figuring all that out sounds expensive, time consuming, like a pain in the butt and generally no fun,” you say. “It is,” I agree. “Well, I’m not going to bother,” you announce. “I’m going to sell what I’ve always sold to the people I’ve always sold to.”
 
No doubt that’s a viable strategy for some people. Why might it be right for fewer and fewer?
 
Competition by the Numbers
 
I guess this is either everybody’s fault or nobody’s fault, but hard goods have become a commodity. That is, they are easy to make, more or less the same, there’s too much product and manufacturing capacity, quality is generally high and uniform, and the customer knows it. Barring a major strategic breakthrough in how the industry functions or a technical breakthrough in how product is made, neither of which seems to be on the horizon, I don’t see that changing.
 
Soft goods have some of the same issues, though it seems to be easier to differentiate shoes and clothing because of distinct visual differences and new materials than it is with boards, trucks and wheels. It use to be conventional wisdom in the snowboard business that you sold boards first, and boots, bindings and soft goods would follow the boards right into the customer’s hands. When that changed- when the board became something you just needed to sell because you were in the snowboard business after all, then it was time to manage differently in the snowboard business. That’s where the skate board business is right now.
 
If you do business the same old way, you will be competing by the numbers. Here’s how the numbers can get you if you find yourself in that position. If you are perceived to be selling the same product everybody else is selling to the same people everybody is trying to sell to, then you’re competing strictly on price. Your gross margin will fall. To achieve the same level of profitability, you have to increase your unit volume. But the only way to do that in this kind of competitive situation is to reduce your price. It’s an ugly, vicious circle that ultimately forces a lot of people out of the business.
 
You may, of course, be determined to differentiate your product to avoid margin deterioration. If your product is actually not different from your competitors, the only way to differentiate is through advertising and promotion. Hype, to coin a phrase. But hype costs money. Lots of money. You may maintain your gross margin, but higher operating expenses will leave you with the same depleted bottom line, everything else being equal.
 
Sounds hopeless, but it’s far from it. Like I said in the title, we’re beset by opportunities if we just know what to do with them.
 
Marketing Again
 
Typically, competition by the numbers works only for one or two large players in each industry. So it’s a condition to be avoided- especially in an industry where there are no large players. What’s the choice?
 
Your only choice (other than to count on being lucky, which will work from time to time) is to be able to answer the following questions:
 
·         Who buys my product?
·         Why do they buy it instead of another brand?
·         What are the attributes of my product and, given those attributes, who besides my current customers might buy it?
 
What a pain in the ass. It’s such a pain, in fact, that I’ve heard executives of larger companies who have to find a way to deal with the emerging demographics say they have to earn their revenues from the baby boomers while positioning themselves with the kids.
 
It’s a great idea. But I anticipate the execution, if that’s as far as the analysis goes will leave something to be desired. If you try to appeal to everybody, you often end up appealing to nobody. It’s a seductively simple sounding solution. “There- I’ve done my market research.”
 
In skateboarding, the similar rationalization may be “My customer is the 13 to 17 year old male who hasn’t discovered girls or cars yet.”   That may be true for many companies and no doubt represents successful customer segmentation for some. But it can’t be valid for everybody and if you don’t remember why reread the Competition by the Numbers section and reflect on the overall profitability of the industry.
 
What to Do?
 
Retain a team of students from the local university MBA program to do a market research project for you. They may work nearly free, will get credit for the project, and they will be guided by a faculty member. Read some books on marketing. Get your team riders asking the people at skate parks some focused questions. Have employees canvas customers. Work with a shop to get fifteen of their customers together for pizza and ask them what they bought and why. Call up the brand managers or marketing people at Levis, Pepsi, Proctor and Gamble or another large consumer products company. Have lunch or a long phone conversation with them. You could help them figure out what’s up, and they could maybe help you structure your marketing research or even supply you with some data. I suspect you might uncover some mutually beneficial opportunities to work together. There’s a lot of that going on.
 
Once you’ve taken a shot at answering the questions posed above, be prepared to step out of your comfort zone. If selling the same stuff to the same people in the same way doesn’t represent a good business opportunity anyway, what do you have to lose?
 
Doing your marketing, and answering the questions above (or similar questions that seem more appropriate for your circumstances) will typically identify both opportunities and inconsistencies in your current market approach. Imagine being able to identify your most profitable customer groups and the marketing tactics they respond to. What’s that worth not only in incremental sales, but also in more efficient use of advertising and promotional dollars?
 
There was a time when straying outside the core specialty market threatened your credibility with that customer group. Maybe it still does, though to a lesser extent. In any event, if focusing on that core specialty market exposes you to competitive conditions where you can’t make any money, who cares?
 

Demographic changes, market homogenization caused by a fashion/lifestyle/cultural focus independent of actual participation in the sport, and the financial resources of large corporations are expanding your market. The catch is that you have to figure out what piece of that market you can compete in. Do your marketing

 

Future History; What’s the Price of Success

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Originally, it was enthusiast driven. People started companies because it was an important part of their lives and they wanted to be part of what was happening. It wasn’t just about a sport- it was an attitude and a lifestyle.

At first bigger companies in related sports weren’t interested because the market wasn’t large enough. When they got interested, they couldn’t figure it out because they just weren’t close enough to it. When the entrepreneurs who created the industry woke up in the morning and looked in the mirror, they saw their customer. No market studies, no focus groups, no statistical analysis. Clearly, obviously and directly they were their customer. If they liked it, the market liked it. They could smirk at the corporate giants in suits trying to figure out what to do, because they knew the giant just didn’t get it.
 
More and more small companies got started. The industry and the participants grew. Hype overtook reality. Product quality improved to the point where there wasn’t much difference among brands, and the consumer started to figure that out. Margins dropped even as companies spent more and more money trying to differentiate a product that wasn’t any different. Making a profit got harder.
 
With growth and acceptance, the sport became more legitimate and more accepted. Big companies decided they had to have a piece of it. Not just because of the sport, but because they wanted access to the customer group it represented and to coop the lifestyle to use in selling other products. They still didn’t really get it, but by buying a couple of successful companies, and throwing a bunch of money around, they changed the market at the same time they legitimized it. The small companies who had created the sport were outraged by what was happening to “their” sport, but outrage didn’t change any basic business principals and pretty soon most of them were out of business.
 
The sport was bigger, and here to stay at a new level. But it had paid a price.
 
I was thinking about snowboarding, not skateboarding. But the industry evolution I described could have been referring to personal computers. Or flush toilets (invented by Thomas J. Crapper- how’s that for your own piece of immortality?). Or automobiles, if we went back to the early decades of the century.   
 
In the past, an explosion of skateboarding popularity has been the prelude to a big decline. Why might that not be the case this time? What, if anything, is unusual about skateboarding that might check the kind of industry evolution I’ve described? What’s the owner of a small skate company to do?
 
What Goes Up……..Could Stay There
 
The thing I really like about the skateboarding business is that you know exactly who your customers are; males age 13-17. Who can blame them for giving up skateboarding for girls and cars when they get a little older? I seem to recall being willing to give up almost anything (my money and self respect for sure) for girls at that age.
 
That age group, according to the census data, is and will be the fastest growing group for the next several years. Check out the information in the chart. It may be that, with the target customer so clearly defined, those numbers are a great predictor of where the skateboarding market is going.
 
With K2 having purchased Planet Earth and other mainstream companies increasingly interested in the sport, it’s clear that Corporate America, for better or worse, has decided skateboarding is worth its attention. They may not understand the sport and its culture; they may not even succeed in becoming part of it. But as they stumble around and throw money at it, they’ll change it as the ski companies have changed snowboarding.  
 
The good news is you may get respect for skaters and acceptance of the sport by a more mainstream group. Hell, you may even be as lucky as snowboarders and get your very own Muppet as a mascot.
 
What’s to Stop It?
 
Typically, a period of rapid growth in an industry is followed by a period of consolidation where the number of companies declines dramatically and the growth rate falls. There’s one reason to hope that the industry might escape that pattern and a couple why, if it doesn’t escape, it might be manageable.
 
The reason you might escape it (though I doubt it) is because the industry is too small to become really interesting to big companies. If they don’t find growth opportunities, they’ll milk the culture and lifestyle in hopes of benefiting their image and other product areas, and then move on. Note that the larger companies becoming interested in skate aren’t like the ski companies; they don’t need skateboarding to survive like ski manufacturers and the resorts need snowboarding.
 
More companies (though not most by a long shot) may hope to survive a consolidation than in snowboarding. This is because of the relatively year around basis of the business, the shorter product cycles, what seem to be selling terms that favor the companies, and the speed with which what’s in and what’s out changes. In short, you don’t have to lose money six to eight months of the year and by being nimble you can compete against bigger companies.
 
But inevitably, the skate industry is already making it harder on itself as companies jockey for position in a growing industry. The proliferation of companies, the declining credibility of the pro model, and blank boards are starting to turn skateboards and their components into a commodity. Which means lower prices and margins. Which means higher breakeven points. Which mean more working capital investments.
 
All of which is fine with any corporate companies looking to stake a claim to the skate market. Because market changes that are financially devastating to a small company are pocket change to them.
 
What’s An Owner to Do?
 
All the outrage over the changes in the industry, the “prostitution” of pro models, the “selling out” that blanks are suppose to represent, the threat of Nike the industry should “stand against” all sounds ominously and sadly familiar. No matter what it does, the skate industry is not going to repeal the laws of economics and human nature. The snowboarding industry shot itself in the foot because each company pursued what it perceived to be in its own best interest. Betcha the skateboard companies do the same thing. Not because it’s good or bad. Just because they will compete to find their most viable position in a changing market.
 
While Powell has come in for some criticism because of its commitment to blanks and mini logos, I applaud their business acumen. By recognizing an emerging industry trend, and by further recognizing that it wasn’t going to go away, Powell prepared itself to benefit from it. Because they were first to move aggressively into the product category, they have positioned themselves between the blanks and the traditional full graphic boards. If they do it right, they may not have to share that niche with anybody else. I haven’t talked to anybody at Powell, and I obviously haven’t seen their financial statements. But I imagine that the cost, volume and margin numbers are pretty compelling.
 
It’s not that Powell doesn’t want to “support the industry.”   But since blanks aren’t going to go away, Powell figures they can support the industry better if they take advantage of the opportunity the evolving market presents. They sure as hell won’t support the industry if they are financially flat on their back because they stood on principal and ignored industry change. If Powell hadn’t done it, somebody else would have. 
 
Don’t forget your principals. By all means support the industry (you might start by joining IASC if you haven’t). But don’t let emotional resistance to change you don’t like prevent you from making good business decisions. In working with companies in financial distress over a period of 10 plus years, I found that they all (not some, not most- all) got into trouble because of denial and perseverance during a period of change. Skateboarding is going through some changes. You change with it.