“Jeff, This is a Hard Business!” Why Is That and What Can You Do About It?

/0 Comments/in , , , /by

That unsolicited quote is from the President of a snowboard brand that you all know and that’s been around for a while. It would generally be considered successful. I consider it successful.

It’s not the first time I’ve heard the comment. I’ve responded by agreeing and by explaining why it was true. Over the years I’ve had some suggestions as to how you could work to counter, it but I’ve never really had a strategic answer about how to deal with it.
Now, as a result of some thinking, consulting, and reading I’ve done, I’ve got some new ideas on the subject. This article does not end with a Deus Ex Machina like an ancient Greek drama that resolves everything, so don’t rush to the end to read THE SOLUTION. It’s not there. But I think I’ve maybe figured out how some of our old assumptions about snowboarding, and marketing in general are no longer valid, and how and why they have changed. Maybe when we know that, we’re a step closer to running our businesses better.
Ancient History
Somewhere around 1995 I started the process of making myself the messenger that everybody wanted to shoot by writing that there wasn’t room for 300 snowboard companies and that most of them were going to go away. I talked about what happened when a fast growing industry matures and consolidates.
Any of you who may have followed what I had to say about consolidation back then can relax. I’m not going to say it all again, though lord knows I’ve gotten a lot of mileage out of my list of changes in consolidating industries over the years.
I use to write about how you could find a competitive advantage in the snowboard industry. Maybe you could get your product faster, or cheaper, or have a better pricing structure, or make it better with more features, or have a business that was less seasonal. Then I talked about controlling distribution to have a market niche. Some of those things worked well when snowboarding was younger- for a while. A little while. A very little while.
Snowboarding, because of changes in information technology, the sheer speed of market evolution during our growth and consolidation phase, the impossibility of maintaining a real product advantage, etc. was experiencing what other industries were already experiencing.  Access to and control of information has moved down the food chain from the manufacturers, to the distributors and now, via the internet, etc. to the consumer. Nothing stays the same very long. And nothing stays exclusive. What one company has done, another can duplicate sometimes literally over night.
Though it took us all (in snowboarding and lots of other industries) a long time to figure it out, it turns out there was no longer a sustainable competitive advantage as traditionally defined resulting from anything you do operationally. The price of entry was making a good product, pricing it right, delivering it on time, supporting your dealers, having good information systems, hot team riders and, uh, well, a whole lot of other stuff.
Let’s say that again for emphasis. Doing everything right doesn’t give you a competitive advantage. It just let you play in the game. It was the entry ticket.
A few years ago I even wrote that. I said, “Hey, you got to do everything well just to be here!” I was right, but I didn’t make the leap I needed to make.
The Focus on Branding
Well, if everybody can do what you can do, and pretty much do it at least as quickly and as well, and if the consumer can compare prices and product features with hardly any work, what exactly can you do besides price it lower, give the dealers longer terms, sell it to anybody who will carry it, and spend more money on marketing? No wonder this is such a hard business.
Back in 1997 I wrote, “Realize that all you have is your brand name and do everything you can to build and protect it.” Perhaps that wasn’t quite as obvious back in1997 as it is now. But it quickly became obvious and companies did the usual things to try and build and protect their brand names to give them that alleged Holy Grail of business, the sustainable competitive advantage.
They boosted the marketing and promotional budget, hired more team riders, made films, did deals with resorts, sponsored contests, expanded product lines, put stores in stores. Fighting for market share was the mantra, and it killed a lot of brands who couldn’t afford it.
Nobody would deny that some of these companies did great marketing- and it worked. They grew and their brands became better known and established. But no amount of good marketing changed the fact that product was the same, consumers had lots of information, what one company could do another could duplicate, and the demand for growth caused sprawling distribution.
Advantage to the big diversified players with the year around business. But even they weren’t getting rich in snowboarding.
So I was right- we were all right. Your brand was all you had and you had to do the right things with it. But I still didn’t make the leap. Maybe some of you did.
What is Marketing?
Well, it sure isn’t The Four Ps anymore- product, price, place, promotion- like they taught in the 60s and 70s. Your only advantage may lie in your brand. That’s what everybody apparently thought as they spent buckets of money on marketing.
But the marketing they spent, and are still spending, all that money on was developed back when the conditions of rapid change, perfect consumer information, etc. that I describe above didn’t exist. It was done not for the benefit of the customer but for the benefit of the company to tell the consumer, what to buy, where, and why. The consumer, having many fewer choices of product and purchase location and no easily available product comparisons tended to do what they were told.
It must have been wonderful.
Now the consumer doesn’t need you, or anybody else thank you very much, to tell them what to buy, where to get it, how much it should cost and whether it’s good or bad. Just what the hell, exactly, do they need you for?
Just make it good and sell it cheap and they’ll figure out the rest. Not much of a business model from our point of view is it. Might it imply that a goodly chunk of your marketing spending, as currently configured, is wasted?
Marketing is no longer about telling your customer what they want and where they can get it. They don’t need you for that because of their ease of access to information. But you have the same access to information, and you can make your company one big marketing machine.
But it isn’t up to the marketing department. It’s the job of the whole company. Oh god, how’s that for an overused cliché? Let me be more specific.
First, marketing happens, and you are probably gathering information on your customer, every time they are in contact with you. When they call customer service. When you send them an invoice.   When you try and collect that overdue bill. When you ride up with a kid on the lift. Every point of contact creates an impression with the customer. What impression? How can you make those points of contact, to the extent they are predictable, into a positive experience that reinforces the customer’s relationship with your brand?
You can’t- unless you identify them and analyze how you can make them better in a coordinated way. The best example I can think of in winter sports is the way some resorts have evaluated, torn apart, and completely reconstructed the process of renting equipment and taking lessons to make it more pleasant for the customer. That’s what I think marketing means now. And obviously it wasn’t done by the marketing department.
Second, your customers may have all this information that makes them less dependent on you, but you know a lot more about them now as well. Who are your best customers? What are they worth to you over a period of time? Why do they identify with your brand? Easy questions for me to ask. Damn hard to answer. See, I warned you at the beginning you would not find THE SOLUTION at the end.
At least some of this information is already available in your existing data bases. But often the various systems aren’t compatible and they haven’t been structured to provide the data you need. If you think the accounting department designed it’s systems to make it easy to extract information on customer behavior, you’re dreaming. But the accounting department has a lot of contact with and information on your customers. Get your hands on it
Use your information to find out why your customers are loyal to you. Or why they aren’t. Take just a bit of the money you’re throwing at advertising and promotion and use it to extract this information where available from your existing data. I’ll bet you do a better job of spending that advertising and promotional budget when you know more about your customer.
We don’t sell products any more. We sell a customer brand experience. Certainly your traditional marketing influences that, but it doesn’t get to the heart of customer motivations. Please stop telling me how “rider influenced” your product line is unless you can prove to me that your best customers have the same motivations as your team riders.
Marketing means something different than it use to. This new marketing may be the only way to create a competitive advantage that lasts longer than twenty minutes.

 

 

Buying Smart; Selecting Among Snowboard Brands

/0 Comments/in , , /by

Ain’t business grand? You’ve got a choice of something over 100 snowboard brands to sell in your shop. ‘Course, 20 of them will be gone by the time the snow melts and next year there’ll be 35 new ones. Delivery, not to mention service, is uncertain.  Some of those new companies will be only as real as the ad they managed to scrap up enough cash to run in Transworld.

But hey, if the graphics are cool, the product is new and there aren’t many of that brand around you can probably sell some as long as the construction is solid, they are delivered on time and there’s a semblance of a marketing program.
 
Let’s assume that, like most shops, you’re going to carry some old brands and some new ones. I’ll leave it to you to figure out if the graphics and shapes are right. If I could do that with any certainty, I probably would have been in a position to buy Transworld myself instead of letting Times Mirror do it. 
 
So into your store walks the sales rep, or into the booth you walk at the trade show. What factual information can you have that would allow you to compare brands from a business perspective and keep from being completely carried away by the enthusiasm of the moment? A checklist with the following information would be useful.
 
1)            Where are the boards made?
 
Al Russell, the president of Grindrite, says there are eighty (!) factories in the U. S. alone. That includes everybody from Burton to the garage that will turn out 200 hand made boards in a season. If it’s a larger factory (Morrow, Pale, Elan, Taylor-Dykema, etc.), ask who else has their boards made there. Don’t take “I don’t know” for an answer. Somebody in the company knows. If it’s convenient, call the factory and ask for a tour. The company you’re buying from can help you get in the door. You’ll learn a lot about how snowboards are made and, at a minimum, that knowledge and the fact that you’ve been to the factory will make you a more effective sales person.
 
If it’s not convenient, go anyway. Go visit a factory in Europe, spend some days “product testing” on new terrain, and deduct the cost of the trip. I like to think this industry is getting to the point where tax deductions are becoming important. Means somebody is making some money.
 
If it’s a new brand and/or a small factory you’ve got a whole new set of issues. Can they deliver in a timely manner, will they be there for service and what will product quality be like? Lacking a track record, there’s no way to tell, so be wary. Check out the people involved. Do they actually know anything about making boards? Get a couple of samples to ride. As discussed below, make sure they have enough financial strength and savvy to be around when you need them. Consider insisting on personal guarantees from the principals.
 
2)            What’s the construction like?
 
In past issues, this scholarly and erudite publication has told you all about the various constructions and the materials used. There aren’t many basic constructions and the materials are more or less the same from board to board and factory to factory.
 
Once you’ve got all this good information from questions one and two, what are you suppose to do with it?
 
You now know brands A and B are made at the same factory (or different comparable factories) with the same materials and very similar (if not identical) construction techniques. After examining the boards, it’s clear that the visible differences are only in graphics.
 
Oh yeah- and maybe in prices. If the wholesale price sheets show major differences in what you know are boards that are basically identical except for graphics, why should you be willing to pay it?
 
Maybe the graphics are so hot that a price differential is justified. Perhaps the brand’s reputation, marketing program, quality of service, warranty policy, payment terms or some combination of these justify the higher price. If it isn’t clear that’s the case, your decision just got a whole lot easier. Alternatively, your negotiating position with the more expensive brand just got stronger. “Hey, how come I’m paying you $25 more a board when the only difference is the graphics?”
 
Could lead to some interesting conversations. Even if you’ve decided that the more expensive board really is the one you want, use your knowledge to negotiate a little better deal.
 
Consider carrying the information gathering process one step further and starting a little sooner. Meet with or call a half dozen or more other retailers. Have each retailer rate each brand they carried on a scale from one to five for timely delivery, warranty claim handling, service and other factors you consider important. Share that information among yourselves and get together to discuss it. Now the questions becomes, “Hey Joe, how come I’m paying you $25 more a board for your product when the only difference is the graphics, you were late delivering and it took two months to get warranty replacements?”
 
Alternatively, you might find out exactly why you want to pay that extra $25.
 
3)            How is the company financed? Can they provide a bank reference? What does the company sell during the off season?
 
The simple fact is that financing a fast growing, highly seasonal business is tough. It takes a lot of capital for a short period of time and coming up with it can be hard, especially if you’re a new business without a history of profitability. I’m here to tell you that just because a snowboard company has an outstanding sales organization, great graphics, a strong marketing program and a good reputation doesn’t mean it’s well financed. Size and apparent prosperity is not a guarantee of financial strength. Ask the people in Orange County, California.
 
It would be nice if your supplier would give you a financial statement, but that’s probably not going to happen (except for Ride of course). Ask for a bank reference. The banker will always be cautious about what they say but in general, the less they have to say, the more reason there may be for concern. Ask your banker to get a Dun and Bradstreet report on the supplier. Ask them for a list of credit references and check them. See if they have any cash flow during the summer, or if they just lose money for six or seven months of the year. Having some summer cash flow simplifies the problem of working capital financing significantly by reducing the peak amount required and providing some collateral for bank borrowings. I imagine that has something to do with why there are so few snowboard only shops around.
 
They say that when you go to the supermarket, it’s best to go with a list to avoid impulse purchases. I have to think that’s true in Las Vegas too. To a large extent, snowboarding is the fashion business. Hype, controversy and the other intangibles are always going to sell product. You can’t be completely rational about brand selection; your gut feel and experience does count for something. But there is some hard information out there for those of you who are willing to take the time and make the effort to collect it. It isn’t too much time or too much effort, and you can significantly improve your decision making process. Not only will it show up in your bottom line, but you can expect fewer surprises and headaches once you get into the season by finding out a little more about your suppliers now.

 

 

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

/0 Comments/in , , /by

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

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

 

 

Product Line Size; The Impact on the Way We Do Business

/0 Comments/in , , /by

It began, I suppose, a couple of months ago when somebody at Burton sent me their complete catalog, buying book, whatever you want to call it, including prices and terms. Damn near five pounds it weighs according to my handy, dandy bathroom scale including colorful blue binder. It contains all of the Burton Company’s brands and certain product for international distribution that won’t be seen in the States, so sure it’s big.

Ride’s catalog isn’t as big by weight, but it comes with two CDs full of product images and photos.
Well, you get the picture. Big product lines and lots of information to digest. I wouldn’t be surprised if there were more products to choose among than when there were 250 snowboard companies.
Big product lines aren’t new, and at least for the larger brands, no retailer buys everything the brand offers. But what struck me like a blinding bolt of the probably obvious is how much the business of snowboarding has had to change just because the product lines have become so large. Over the last eight or ten years in snowboarding we’ve studied changing competitive conditions, discussed diversification as a way of overcoming seasonality, the impact of foreign production, the role of chains, and “fixing” the buy sell cycle. I’ve been in the middle of some of those conversations.
Imagine my chagrin when I considered the possibility that a simple thing like the increased size of product lines may have been as or more important to industry evolution than the other apparently more important and more complex business factors we’ve taken so much time and energy to discuss and try to manage.
There is the chicken/egg factor to consider. I’m arguing that certain industry changes happened because of the increased size of product lines. You might also argue that product line increases were largely a response to the other changes mentioned above. I’ve previously suggested that to some extent increases in the size of product lines were a response to what competitors were doing rather than an attempt to meet identified customer needs. To the extent that is true, I am comfortable suggesting that large product lines have changed the way the industry functions.
Where are these changes? In general, the process of getting a specific order takes more preparation, a more cooperative and business oriented relationship between the company’s rep and the retailer, and more time if only because there are more factors to consider. Specifically, the role of trade shows, the selling process, and the reps function and relationship with the shop are all different. Let’s see how.
Trade Shows
How long, exactly, do you think it would take one of the major brands to present its whole product line to a retailer? Three hours? A day? After that presentation, assuming you can still hold your head up, how much do you think you’d remember? How long would it take to figure out your order and get it written? No retailer should be allowed into a product presentation meeting without first chugging two Red Bulls and presenting a notarized affidavit that they got a good night’s sleep.
For many brands it’s difficult at best (Impossible for most brands in my opinion) to show what they need to show to all the retailers they need to show it to, at Vegas alone. Mervin Sales Manager Greg Hughes says that the SIA show has become more important for them because it’s a preview show. “But we have a hard time showing all our product to all the retailers who want to see it at the show, and we’re smaller than a lot of other guys.”
If you think about the sheer time commitment, and logistics of getting an order together from a major brand it’s pretty clear why SIA adopted the “See it, try it, buy it” approach for the buy sell cycle and why Vegas is more “See it” than “Buy it.” If you do complete your buy there, it’s likely that a lot of preparation went into it before the show.
Burton National Sales Manager Clark Grundlach says Vegas is not about writing orders any more. “It’s an opportunity for dealers to review previous decisions and maybe see some late stuff. Sixty percent of our dealers will have seen the line before Vegas. We can’t show the line any other way given its size. The six weeks between Vegas and when everything has to be wrapped up just isn’t enough time.”
Clark didn’t say, but I’ll bet sixty percent of dealers means north of eighty percent of total sales.
The regional shows seem to be either more or less important, depending on who you are. For Burton, with eighteen territories and its own showrooms, the regional shows are a good place to sell accessories and to see some smaller dealers who didn’t get to Vegas. According to Mervin’s Hughes, on the other hand, “Mervin gets a lot of solid orders at the regionals. We can show our whole line there.”
Rossignol Marketing Manager Christine McConnell sees it a lot like Hughes. “They see it in Vegas, and buy it at the regional shows,” she says, but notes that around forty percent of accounts have seen at least some product before Vegas.
Selling Process
Remember the days when your whole product line (nine decks, one binding and some ts and hats) fit on a trifold? Assuming the retailer had decided to carry your brand, you could show the line and get the order in about twenty minutes. Then you both just had to pray the stuff actually showed up somewhere near when promised and that the quality wasn’t too bad. Some of you are smiling as you read that, remembering a very different snowboard industry. Some of you (your loss I’d say) don’t know what I’m talking about. God, it was more fun then.
Sales meetings tend to be in early to mid December now. Especially with soft goods, which typically have to be delivered before hard goods, an early start and on time delivery is more critical than ever. Limited showing of product lines seems to take place in December. According to Rossignol’s McConnell, smaller retailers have their hands full trying to sell everybody’s current product. “The reps have their samples in December and are ready to go, but don’t really start showing product until January. They don’t want to get in the retailer’s way.”
For chains and large accounts, where the selling and buying isn’t done by the same person, I suppose you can do a December presentation without disrupting the selling process. Still, if I were a retailer, big or small, I’d like to know what my sell through was like before I talked about new buys. And that doesn’t happen until the holidays are over, at least in hard goods.
Role of the Rep
More and more, it seems to be the rep’s role to consult with and recommend to shops what product they should carry. Armed with a lot more detailed information then they use to have on last year’s purchases, sell through and the retailer, they can and often do propose a buy for the customer that fits their size, open to buy dollars, and customers.
Mervin’s Hughes put it this way. “Good reps suggest what to buy. They know the shop, and they know what’s going to be highlighted in ads and videos, and that drives sales.”
In hard goods, I suspect retailers, especially smaller ones, are inclined to listen to a well-prepared rep. These days, all hard goods are highly functional. Brand choices are a lot fewer than they use to be, and brand switching, as a result, less common. Hell, what are you going to switch to that’s going to make any difference?
A decline in product differentiation from brand to brand means the reps can be an important competitive tool in placing product with a retailer. The quality of the business relationship between the rep and the shop buyer may have a lot to do with the brand’s success in the shop. Rossignol’s McConnell puts it succinctly: “Between the rep and buyer, they know what’s up in the shop. Their combined efforts go a long way towards insuring the right purchasing strategy.”
This relationship helps the process of getting the order together. There should be broad, early agreement on what parts of a large line are or are not appropriate for a given retailer. In some cases, the brand simply isn’t prepared to sell certain product to a retailer. The retailer’s size and open to buy for the brand may also dictate where to focus the buy in a product line they can’t possibly carry all of.
Finally, the rate of change in snowboard product simply isn’t as great as it use to be, and that takes some of the angst out of trying to pick the “right” product and reduces the difficulty of working through a huge line. Inertia can be seductive, though dangerous.
I suppose the possible downside for the brand comes at the end of the season if the rep recommended product didn’t sell through which, at the end of the day, is what it’s all about. “Hey, your rep told me to buy this stuff, which is still sitting here, and you’re pushing me to pay this bill?! Back off.” I’ll bet that conversation is the basis for a deal or two in the annual snowboard industry rite of spring- settling accounts.

 

 

China’s Fixed Exchange Rate; What It Means for Snowboarding

/0 Comments/in , , /by

My very first article for TransWorld, which became Market Watch, was on foreign exchange. I guess in some sense we’ve come full circle. But it’s never much fun ending up where you started, so I want to ask your help in keeping Market Watch valuable to you and occasionally controversial.

It use to be, when the pace of change and general dynamism of snowboarding was greater, that my problem was picking among a bunch of topics I felt should be addressed. Now, for better or worse, the industry is a little less dynamic than it use to be. What are the issues that Market Watch should be focusing on now? Is there a continuing need for the column? Leading edge topics seem fewer and farther between. Got any ideas? Want me to just shut up and go away? I don’t want to write Market Watch just because I’m in the habit of doing it. Email me at jeff@jeffharbaugh.com. Thanks.
 
Meanwhile, back on China and its exchange rate. Maybe a month ago, somebody emailed me about an article I’d written in SkateBiz on production in China. They said, “Hey, what about the fact that the Chinese currency (the Yuan) maintains a fixed exchange rate of 8.28 Yuan to the dollars?”
 
They have a point and I really wish I could find that email to thank them by name.   I also wish I’d thought of it first.
 
Fixed Exchange Rate
 
Most major currencies (the Japanese Yen, Eurodollar, British Pound to name a few) float against the dollar. That is, the amount of foreign currency you can buy for one U.S. Dollar changes daily based on productivity, interest rates, economic growth, etc. Not so with the Yuan. By buying and selling currencies on the open market, the Chinese government maintains a stable exchange rate against the U.S. Dollar. So what?
 
Estimates are that the Yuan is as much as 40% undervalued against the Dollar. So What?
 
Let’s imagine for a minute that the Chinese suddenly allowed their currency to float and that over some period of time, it revalued by 40%. That is, your crisp greenback would, at the end of that period, buy 40% less from China for the same number of dollars than it had before. Another way to look at it is that the Chinese could buy 40% more U.S. goods for the same number of Yuan. Would that be a good thing or a bad thing for the snowboard industry? Would you be surprised to learn that the answer is, “It depends?”
 
The Chinese like this arrangement. It has been critical to the growth of their economy. Their exports to the U.S. doubled between 1997 and 2002 from $67 to $125 billion. During the same time period, U. S. exports to China have grown only from $13 to $19 billion. It means that Chinese capital tends to stay in China, rather than be used to purchases various foreign products, and that additional investment flows to China.
 
The general consensus, however, seems to be that floating exchange rates promote the efficient allocation of capital. Over the long term, it makes things better for everybody.
 
But in the words of the economist John Maynard Keynes, “In the long run, we are all dead.” He has a point, and he should know ‘cause he’s dead. Most currencies are managed to some extent by open market operations, tariffs and/or quotas. The U.S., the world’s greatest proponent of free trade, is no exception, so let’s not be throwing too many stones here. Well, let’s face it; it’s not always the role of a national government to make things better for the whole world. And imagine the outcry from consumers when everything they had bought from China was suddenly 40%, or even 20%, more expensive. Politicians aren’t necessarily great at dealing with stuff like that.
 
At a time when more and more snowboard product (hard and soft goods) is coming from China, who would be the winners and losers in a revaluation of the Chinese currency? Let’s look at a couple of specific examples.
 
Winners and Losers
 
I don’t think there’s a company in the industry that doesn’t get some product or product component from China. But to me there are a couple of companies that make for an interesting comparison.
 
K2 spent a whole lot of money and put forth a lot of effort to move their snowboard production to China. I didn’t necessarily like seeing it happen, but I thought it was probably the correct business decision given that they already had an established facility there. If the Yuan was suddenly revalued by 40% (which I don’t see happening as I’ll discuss below) what would be the impact on K2’s Chinese production? Assuming they kept the same price structure, their price in the U. S. would have to go up by 40%. Actually, I guess a little more than that, since the duty would go up based on the higher import price.
 
I don’t know what they’d do- move their production back to Vashon Island maybe? Kind of doubt it. To use the international technical financial term, they’d be shafted.
 
In obvious juxtaposition (god, I love that word) to K2 is Seattle based snowboard manufacturer Mervin Manufacturing. Mervin has used every technique of technology, waste reduction, process engineering and a generally positive attitude to keep making snowboards in the U.S. “Made in the USA” has been the major focus of their advertising. Now, even they are looking at bringing in a price point, Chinese made board. They don’t much like it, but they feel like it’s a necessary competitive move.
 
A 40 percent revaluation of China’s currency maybe wouldn’t solve all their problems, but it would sure make them more competitive, at least against Chinese made snowboards. I mean, if they are making ends meet now, what could they do if other companys’ products suddenly cost them 40% more? Assuming a substantial part of that cost increase was passed on to retailers and, ultimately, to consumers, Mervin’s products would look pretty attractive.
 
Yes, I know that China isn’t the only cheap place to buy product. Yes, I know that just because your costs go up doesn’t mean, especially these days, that you can raise your prices by the full amount of the cost increase and expect consumers to swallow it. But it’s pretty clear that the undervalued Chinese currency had a lot to do with K2 moving production to China and Mervin moving to get some boards from there.
 
And the interesting thing is that everybody has always focused on low Chinese labor costs as the driver of production moving to China. What I’m saying is that it ain’t. I recently read about another company (not in the snowboard business) that said, “Hey, we can beat their labor cost advantage with technology, but we don’t have a chance against that artificially undervalued currency.” My guess is that the guys at Mervin might echo their sentiments.
 
Kind of puts a new spin on things doesn’t it?
 
Don’t Hold Your Breathe
 
Waiting for the Chinese to revalue their currency to make competition “fairer,” that is. In the first place, they’re kind of happy with the way things are. In the second place a lot of American companies love buying cheap stuff from China. A lot of consumers (including all of us I imagine) like buying cheap Chinese stuff. The issue of the value of China’s Yuan is actually getting quite a bit of press these days. The consensus is that there might be some gradual revaluation, but nothing quick and dramatic.
 
One of the reasons is that the Chinese, as they like to remind our government, is the second largest buyer of United States Treasury debt securities. With our record deficit approaching $500 billion this fiscal year, we’d kind of like them to keep buying them, so we should back off, thank you very much. To buy them, they need all the dollars they get from selling us stuff cheap and not buying much in return, which requires a week Chinese currency. So snowboards are made in China.
 
Kind of a complicated, mercantilist, financial house of cards isn’t it. Didn’t work for the Dutch or the English or, come to think of it, for the Romans. Guess I’d better move on before it starts to sound like I’m taking a political position.
 
Floating exchange rates really do help level the competitive playing field, more or less. But in snowboarding don’t hold your breath.

 

 

Wherever You Go, There You’ll Be. I Can’t Think of a Subtitle

/0 Comments/in , , /by

It’s 2002 and I think the five biggest snowboard companies, in alphabetical order, are Burton, Gen X, K2, Rossignol, and Salomon.

Gen X is owned by Huffy and Salomon is part of Adidas, so maybe I should change the alphabetical listing. But the point, and I hope this helps me think of a subtitle, is that through normal industry evolution we’ve arrived at a place where the companies that have the biggest impact on snowboarding aren’t just about snowboarding anymore. Increasingly, they have other products and product lines to consider as they build business plans and allocate resources.
Let’s look at just how wide spread this is, and then think about who it might be good and bad for in the continuing saga of snowboarding.
Who Does What?
Continuing with the alphabetical order thing, Burton is and I expect will continue to be the closest thing to a snowboard company among the five contestants. But Gravis shoes, and the delayed but imminent launch of the Korda street wear line, means that even Burton isn’t only about snowboarding anymore. Assuming you’re concerned about return on investment, and margins and growth opportunities are perceived to be better in street wear than in snowboarding, where would you choose to invest?
I can imagine the conversation, because I’ve been in it in other companies. There’s the marketing guys going, “We’re about snowboarding. No need to discuss it further.” Then growth slows and some troublesome financial guy says, “Well, okay, but there’s not much room for us to grow in snowboarding, and the margins aren’t as good as they use to be, but over in this street wear/shoe part of the world they are and we could grow and, you know, we’ve got certain financial obligations and there’s a limit to just how far we can push snowboarding distribution and we could utilize our distribution strength and leverage our overhead….”
I’ve oversimplified, and I don’t know the specifics of the process by which Burton chose to expand, but you can see the inevitable dynamic.
Burton at least started out as only, and is still mainly, a snowboard company. They’re the only one who can say that. Gen X, we know from public information, has revenues of around $150 million. Huffy, its new owner, is around $500 million including Gen X. Gen X sells, in addition to snowboards, golf, hockey and ski equipment. Not to mention scooters and whatever other sporting goods equipment they can work the distribution channels for.
In addition to Gen X’s products, Huffy sells bikes, basketball equipment, and retailer services that include in-store and in-home product assembly and repair and merchandising services. My estimate is that snowboard equipment makes up only around 10% of Huffy’s total sales.
Do you think Gen X senior management treats snowboarding as anything besides another product line that has to meet its business goals?
K2’s product line is pretty broad as well. It’s sporting goods products, of which it sold $445 million in its last complete fiscal year, includes skis, snowboards and accessories, in-line skates, fishing rods, reels and kits, active water sport outdoor products, bikes and backpacks.
Sales of other recreational products of $39.8 million in 2001 included imprinted corporate casual clothing under the Hilton brand, skate and snowboard apparel under the Planet Earth name, and Adio and Hawk skateboard shoes.  Sales of industrial products were $110.5 million in 2001 and included monofilament line, light poles and radio antennas under the Shakespeare brand.
They don’t show dollar sales by product or brand, but do you think K2 senior management treats snowboarding as anything besides another product line that has to meet its business goals?
In the year ended May 14, 2002, Rossignol had consolidated sales of 473.1 million Euros. These days, a Euro is more or less one US dollar. Of that total 50.1 million was from snowboarding, down 11.3% from the previous year. Alpine skiing, at 288 million Euros is the dominant activity. They also did 94 million Euros in golf and 25 million in textiles. Golf revenues grew 17.7% during the year and textiles 29.6%. Assuming equivalent gross margins do you think Rossignol senior management would prefer to invest in a business that’s shrinking, or one that’s growing?
You can probably see where I’m going with this, but just to make it complete, let’s finish going through the list.
Adidas-Salomon did 6.1 billion Euros in sales during its last complete fiscal year. Of that total, 79% was represented by Adidas and 9% was Taylor Made. The remaining 12% was Salomon. Of that 12%, or 730 million Euros, 8% was from snowboarding. That’s about 58 million Euros, or 1% of Adidas-Taylor-Salomon consolidated revenues.
Alpine ski products represented about 49% of Salomon’s revenues. Outdoor footwear is 14%. Skating products are 9% and cycling, 8%- the same as snowboarding.
You probably know that I have the same question here I’ve had about the other companies. As snowboarding represents less of a percentage of total revenues, and if margins and growth opportunities are perceived to be less than in other product groups, especially where it’s a very small piece of the total, what’s the incentive to invest and support it if you can’t see the best return on investment? At least, that’s the financial argument.
And if I were running any of these large, multi-product companies, I imagine I’d be making that argument too even if I didn’t completely like it.
Ying and Yang
 
Good news or bad news, or both? Certainly, you’ve got to run a business like a business. If there’s no money made, you won’t be around to fight another day. On the other hand, it’s passion and commitment that got snowboarding going and if it isn’t quite as important in keeping it going, it’s certainly critical in keeping it growing. Hopefully, there’s room for some long term perspective even when you’re worried about quarterly performance.
The winners in this corporate dilution of the snowboarding ethos are, in the first place, snowboarders. Okay, maybe there’s not quite as much hype and excitement in the air, but they can sure get a better product for less money than they use to be able to. We owe that to some of these large “corporate” snowboard companies who, in the process of competing and trying to take over the market, had to figure out how to be efficient and make product that worked. God knows it’s easier and cheaper to become a snowboarder than it use to be. You don’t even have to sneak onto the mountain any more.
Second, as I discussed in my last Market Watch, the new and existing smaller companies are winners. Almost by definition, the larger corporations abandon a chunk of the market to them. As long as they don’t harbor illusions of becoming like the big guys, and there is a significant minority of committed snowboarders who still see snowboarding as something more than a sport, there’s a market for them that the big guys mostly can’t hope to capture. And in the process, these small players might be able to keep the vibe going, to use a phrase that passed out of popular usage some time ago.
The losers? If there is one, I guess it’s kind of the snowboard industry, or maybe I mean the snowboard culture. With the diffusion of snowboarding I’ve described above, we’ve lost “good” competitors (Eureka! That the subtitle. “Where are the Good Competitors?) “Good” isn’t a moral judgment. A good competitor is a company that challenges your company not to be satisfied with the status quo while, at the same time, you are able to operate in a stable and profitable equilibrium without mutually destructive warfare. When these circumstances exist, there’s enough success and cash flow to go around so that the industry can be supported and nurtured. Okay, maybe the consumer doesn’t get the cheapest deck that can possibly be made, but snowboarding is more likely to be something people want to be part of and don’t just see as another activity.
We lose a lot of that to the extent that snowboarding becomes “just another product line.”   To those of you who are fighting that trend, thanks.

 

 

You Did What !!?? Starting a New Snowboard Brand

/0 Comments/in , , /by

Your first reaction is that they must be crazy. Starting a new brand when the snowboard market is dominated by five companies fighting to take market share from each other, pushing distribution to every corner of the retail world and, to some extent, using price as a weapon in the battle doesn’t seem to make a lot of sense. You can’t meet their prices. You can’t afford their ad budget. You can’t pay big bucks for team riders.

We all remember the uncounted brands that died when these market conditions started to emerge. What’s changed? Something? Or maybe nothing, and the people starting the brands have decided they’d rather have a good time losing their money in snowboarding instead of losing it in the stock market and not having any fun.
Like the stock market, the time to get involved is often when everybody else is fleeing into the night. It’s at least possible that the market conditions that make it look like the worst possible time to start a brand actually make it the best.
Making the Case
The argument would go something like this. There are a group of smaller (or at least non chain) snowboard retailers who are, above all, snowboard shops. They need a product that everybody else doesn’t have. There are a group of snowboarders for whom snowboarding is important. That is, it’s still part of their lifestyle, they think of themselves as snowboarders and they aren’t interested in just buying what’s on sale. Maybe that group isn’t as large as it use to be, but it’s still there and it’s still big.
To succeed as snowboard shops, those retailers need a product that everybody else doesn’t have, that has roots in snowboarding, that offers them a margin they can live with and the high probability of selling it at that margin. The customer they are looking to serve also wants something everybody else doesn’t have that confirms their deeper interest in and commitment to snowboarding. The new brands, the argument goes, provide a way for these retailers and these snowboarder to do some business together based on a common need and interest. It’s niche marketing.
The downside for these new brands is that success may mean fairly slow growth and staying pretty small (Option and Never Summer are the pioneers in recognizing and implementing this strategy over many years). In fact, if they tried to grow too fast, they’d lose the market advantage they have over the large players. They can succeed because they don’t have to compete on price and don’t have to run a huge advertising and promotion program that’s required to reach the mass market.
Hell of a theory. The counter argument is that even if everything I said above is accurate, the business may still not make financial sense. You’re may be paying more for decks and other products than larger companies. Slow growth is fine, but how long can you afford to lose money while you’re true to the market strategy. At the end of the day, can you get big enough quickly enough to provide a reasonable return on investment? Maybe even for “core” shops, the terms, prices, and support they get from the big guys is just to compelling to leave much room for new, small brands.
I guess I know which side of the theory the guys at the new brands will come down on.
Rome
Josh Reid, along with Paul Maravetz the founders of Rome Snowboards, takes a philosophical approach to building the Rome brand. No, no, no, he’s not getting marketing ideas from reading Plato’s Republic (Didn’t somebody already do that and name their brand Atlantis?). But he believes that snowboarding continues to be “rooted in the counterculture,” if not to the same extent it was ten years ago and that as a result the “philosophical aspects of the brand are more important than in other industries.”
What he means is that there are still a lot of committed snowboarder who see their choice of snowboarding as more than a sport and the equipment they purchase as more than getting the best deal on what they need to participate in that “sport.”  Those people are Rome’s target customer.
Well, so far it seems to be working. The brand came out two months before Vegas- not necessarily the best timing to attract dealers for the coming season. Still, they’ve got around two hundred dealers in North America and, both last season and this season are getting requests for more product from dealers who have been surprised by demand.
Mike Arbogast, at Mountain Riders in Stratton, says there’s lots of buzz about Rome. He doesn’t know exactly why- maybe the kids are just looking for something different. Mike would probably agree with Josh’s comment about the counterculture. According to Mike, “Every kid who comes through with a Grenade sweatshirt is looking for a Rome hat [“sex, drugs, and snowboarding”] to top it off.”
It’s telling that Mountain Riders carries only four brands total. They’ve cut back on the two large ones to make room for more Rome and Allian. They’ve dropped a third large brand this year season.
By design, Rome has chosen not to meet the requests for more product. They built to orders for this season. Dealers may be disappointed at not being able to meet demand, but hopefully they’ll console themselves with good sell through at full margin and remember to order more next preseason.
In the long term, that’s probably good marketing for Rome, but it also reflects financial realism, something was often sadly lacking in the snowboard feeding frenzy of seven or eight years ago.
Rome’s on track to be profitable in the next year or two. They could have shown a financial profit the first year but decided, correctly I think, that there were some required expenses that had to be made consistent with the brand strategy.
Allian
Allian is practically an old timer among the new post consolidation brands. Their first season was 2000-2001. “It’s run and owned by people who stand on top of 100 foot cliffs and jump off them for no good reason,” is how Sales Manager John Stanos puts it. “We’ve had enough head injuries that maybe we can see a little clearer. It’s not complicated. It’s just snowboarding.”
Allian has a target market of the kids who spend a hundred days on the mountain. They are in about a 175 shops in North America and have about 20 distributors world wide. They only make what they can sell, and they try not to spend money they don’t have. The company expects to be self sustaining financially this year.
There’s a certain relaxed attitude and flexibility that I see as contributing to their success. They see their shops, reps and riders as partners. Sure they want to grow, but they don’t want shops to take product they can’t sell. Of course the reps have a sales budget, but it’s doing what’s right for the brand that’s important. “If there are five shops in town, we should only be in one right now,” says Stanos.
Boardsports in Eugene, Oregon is an Allian dealer and Jon Faulkner is one of the owners. They started looking at new, smaller brands a couple of years because the distribution of the usual brands was getting so huge, and because they don’t carry any ski brands of snowboards. John said they liked Allian right away because, “It was new, it was local, and the boards rode great for how basic they were- the company wasn’t based on hype or design or team.
What strikes me and is that the first dealer I called described the brand to me in essentially the same way Allian Sales Manager John Stanos did. It’s not about hype and craziness like it was the first time around. It’s just about snowboarding. If Allian can maintain that connection between its brand and its dealers, it should do great.
So What Do We Got?
Rome was a bit more formal in describing its business model. Given the owner’s background, that’s not too much of a surprise. But both brands have much the same strategy and market concept.
They’re both rider driven. But that doesn’t mean just team riders like it use to mean, but serious snowboarders in general. That’s both brands’ target market. They both want to grow, but not at all costs. The brand’s positioning has to be maintained. They know the mistakes other brands have made, and are going to make building a snowboard brand a lot more fun by not making them.
They won’t spend money they don’t have, make product they can’t sell, or try to be “the next Burton.” It may be snowboarding and it should be fun, but it has to be good business. There’s a sense of realism that didn’t exist in a lot of brands that aren’t around any more.
That’s a good model for success.

 

 

Resort Retention and Occam’s Razor; Keeping it simple makes a lot of sense.

/0 Comments/in , , /by

William of Occam was a Fourteenth century logician and Franciscan friar born in the English village of Ockham and, yes, somehow I’m going to get this back to snowboarding without claiming that he invented the first one. He’s the author of what’s become known as Occam’s Razor. It states, in its original form, “Entities should not be multiplied unnecessarily.” It’s been massaged and interpreted to mean that when you have multiple possible solutions to a problem, then, all things being equal, the simplest one is usually the correct one.

All things never seem to be equal. Still, I thought about Occam’s Razor at the National Ski Areas Association in New Orleans this spring. Mike Barry, NSAA’s president, was beating the drum for the group’s growth model, and talking about the issue and importance of retention. It shouldn’t come as a surprise to anybody reading this that one of the long term problems of the
winter-sports industry is that only about one of ten people who try snowboarding, or skiing for that matter, stick with it.
As consumers, maybe we can say that’s fine with us—the fewer people on the slopes, the better we like it. Of course, we also like fast lifts, lots of choices, and great amenities. And at a cheap price, too. But those things cost money, and the only way resorts can afford them is if enough people show up to cover the costs and leave at least a little profit.
If the retention rate doesn’t improve, the rate of snowboarding growth declines, and aging baby boomers drop out of skiing, then we could see a decline in snow-sliding participation that’ll leave the winter resort business in a world of hurt. That could leave us all with a lot fewer, more expensive choices. Taking a cue from Mr. Occam, isn’t there a simple way to improve retention?
Complexity
Studies have been done. Models created. Rental programs revised. Snow-sliding lessons revamped. Instructors reeducated. The competition analyzed. Lots of money has been spent. Some of it has been our money. Well, actually maybe most of it has been our money—the winter-sports industry’s that is.
This is, I guess, all good stuff. Certainly the problem’s urgent enough to require and justify some of our attention and treasure. And I even have a sense, though I couldn’t prove it, that we might be making some progress.  Buried, or at least obscured, under all this noble activity is something we all know and accept without question. It’s that the upsurge of skiing in the 70s and snowboarding in the early 90s was driven by people who started young, got hooked, and stayed passionate about the sport. Especially in the 70s they
somehow managed to have a good time without a lot of five-star restaurants, quad lifts, on-snow condos and, from our perspective at least, good equipment.
Snowboarders, generally a younger group than skiers, are still a bit like those skiers from the 70s. They just want to be there and are willing to put up with some inconvenience if necessary to get on the mountain. No doubt that tendency will decline with age—there’s something to the phrase “youthful enthusiasm.” But it seems clear that, at its simplest, what we (you, me, and
the resorts, too) have to do is get them young and create a habit. How?
Simplicity
Sometime during my stay in New Orleans, I had occasion to hear Mike Shirley, the Chief Executive Officer of Bogus Basin, talk about his resort and to talk with him. Bogus, I learned later, is a community resort—a 501C4 corporation that doesn’t pay income taxes. There are no investors or stockholders and this, according to Shirley, lets them think long term.
I didn’t know all that in New Orleans. What had caught my attention was Shirley’s mentioning of Bogus Basin’s season pass program where any kid aged seven through eleven can get a season pass for 29 dollars.
Okay, I heard that. Then I waited for more explanation. There wasn’t any. My MBA-scarred mind, accustomed to sophisticated business models and complex financial strategies, froze. Could something this simple really be an affective approach to the problem of retention? And, equally important, how the hell was I going to write a Market Watch analyzing the idea when there wasn’t anything to analyze?
This was weighing heavily on my mind a couple of months after the convention when I finally called Shirley to try and get enough information for the article. He took pity on me and gave me something to work with. It seems that Bogus, like other resorts, used to have a complicated and arcane method of pricing lift tickets and season passes. Then in the spring of 1998, they chucked it all and went with a 198-dollar season pass and the 29-dollar pass for kids seven through eleven.
The idea of a cheap kid’s pass wasn’t new. Colorado was already giving free passes to all fifth graders. Bogus now sells around 30,000 season passes a year of which around 5,000 are the kid passes. Shirley thinks the purchase of the kid passes is often associated with the purchase of other season passes, but there’s no requirement for that.
What’s the short-term financial impact of the 29-dollar kid pass? Shirley sees it as not costing money, but of course you can’t know that unless you know what the actions of the pass purchasers (and their parents) would’ve been if they hadn’t bought the passes. What we can say is that the incremental cost to the resort of putting another butt in a lift seat is more or less nothing. To really evaluate the financial impact, we’d have to be able to answer the following questions:
  1. If these kids hadn’t bought 29-dollar passes, would they’ve bought the199-dollar pass or a bunch of lift tickets?
  1. What would their parent’s behavior have been if the 29-dollar passesweren’t available?
  1. Did they spend more days on the mountain and, as a result, spend more money on things besides lift tickets then they would’ve otherwise?
Shirley can’t offer specific answers to these questions. But he did tell me Bogus Basin is full of kids, and their visit numbers have doubled in the last five years. I don’t have any information on what the resort’s overall
financial performance is. Obviously, if they’d gone from making to losing money over the last five years, the strategy would be less attractive.  “It’s so easy to convert these kids,” Shirley says. “We’re creating a lifelong habit without them even thinking about it.”
Return On Investment
Neither Shirley nor I, unless we know the answer to the three questions above, can tell what Bogus’ cost is for this program. From a cash point of view, it’s probably close to nothing, though there may be an opportunity cost as described above. Conceivably, it’s cash positive, but we can’t really tell. I’d go one step further and point out that by simplifying its pricing structure, Bogus has actually cut some administrative expenses, and that savings has to be included in any cost calculation. I don’t know if Shirley has measured that or not.
Looking down the road, the return on investment has to be huge if only because the cost is apparently so small. We can’t conclude that Bogus has doubled its visits in five years only because of this program, but it’s hard not to believe it’s worth the cost, if there is any cost. The NSAA study emphasized how valuable, in terms of dollars spent, a snow slider who started young was compared to one who started as an adult. Bogus’ 29-dollar kid pass is consistent with that thinking.
There’s another value to creating committed snow sliders early that I don’t think I’ve ever heard anybody talk about. If resorts have customers who are going to get there no matter what, come more often, and stay longer, they are going to be cheaper to get. And easier to keep. That has a favorable impact on your cost structure from top to bottom. Think of the competitive implications. Suddenly, you’re only competing with other winter resorts—not with Disneyland, cruise lines, and Arizona golf packages. Your committed snow slider has already decided they are coming to a winter resort.
I’m not prepared to proclaim such programs as the retention solution. But it’s simple, apparently cost effective, and consistent with what we all think creates committed snow sliders. I hope more resorts consider it, or other equally simple ideas.

 

Tackling The Snowboard Industry Buy/Sell Cycle Are We Trying to Fix the Wrong Problem?

/0 Comments/in , , /by

The buy/sell cycle seems to be on everybody’s mind these days. The brands are concerned because the decline of in season orders means they have to take more inventory risk. Retailers, on the other hand, are thrilled to be able to get quality product in season at discounts, though are perhaps concerned that it’s tougher to hold their margins due to oversupply.

Everyone should be concerned; because if we follow this pattern we’ll turn into our old friend the ski industry with everybody struggling to differentiate their commodity products and nobody making much money. You should know at the outset that I’m not optimistic we can avoid falling into that same trap. There’s no reason snowboarding should be different from any other industry as it works its way through its business cycle. If we can it will be because we’re growing as an industry, are willing to ask tough, specific questions and can find some common ground between our individual competitive positions and the good of the industry.
 
The first thing we might do is to define what we mean by the buy/sell cycle. The term is thrown around pretty loosely. I’ve defined it as the process and timing of product purchases by retailers as it relates to the brands’ order and manufacturing schedule. If you don’t like my definition, please come up with one of your own. The point is that we should agree on what we’re trying to discuss and so far I don’t think we have.
 
Next, we have to make sure we’re attacking the right problem. As I’ll explain below, I believe the “problem” we have with the buy/sell cycle is really just a symptom of existing industry conditions and until those conditions change, the symptoms we call the buy/sell cycle won’t change dramatically.
 
I’ve talked about those industry conditions before and have said they are typical of any maturing industry. They include:
 
·         Overcapacity
·         Slower growth
·         Dealer margins fall, but their power increases
·         Product is viewed as a commodity
·         Competition emphasizes cost and service
·         Industry profits fall. Cash flow declines when it is needed most and capital becomes difficult to raise.
 
My guesstimate of industry board manufacturing capacity this year is three million boards. That’s not a theoretical, seven days a week, three shifts a day capacity. That’s two shifts a day, maybe five days a week. I’m not saying three million boards will be made, but that they could be. The fact that this capacity has been invested in creates a lot of pressure to put it to use. And to sell those boards to somebody. Cheap.
 
What’s being sold to retailers in the 1996-97 season? I don’t know, but I’ll put the number 1.2 million on the table. Could be higher, could be lower but whatever the number is, it’s a lot less than three million.
 
I remember waking up from my nap in an economics class when the professor said “Production increases and prices fall until marginal revenue equals marginal cost.” At the time I was pissed at him for waking me, but it seems he had a point. Each manufacturer is trying to beat out the others for market share and of course each is convinced that they are the one who will be successful. The more they invest to bring their costs down, the better price they can offer. But so can the other factory who is doing the same thing with equally blind faith that they will be the successful one.
 
Pretty soon there’s all this production capacity.   As they brought their manufacturing cost down, the price at which they could sell the board comes right down with it. Pretty soon they’ve competed their way to the point where they have to sell a lot more boards to make the same profit. And they keep cutting prices until, theoretically at least, they can sell a board for just one dollar more than it costs them to make it; just above the point where marginal revenue (what they earn from selling one more board) equals marginal cost (what it cost to make it).       
 
Each competitor has done what they perceive to be in their own best interest, and look at the fine mess they’ve gotten themselves into.
 
Basically, Pogo was right.
 
We Have Met the Enemy, and He Is Us.
 
So before we spend too much time and energy trying to fix the buy/sell cycle, let’s realize that we’re seeing in that cycle the symptoms of some more fundamental industry conditions. The buy/sell cycle problem will exist as long as over capacity exists.
 
I’ve heard basically four proposed solution to the buy/sell cycle problem. Some have been put forward seriously, and some tongue in cheek. Reviewing them offers us good perspective on how futile it can be to attack symptoms instead of the problem.
 
·         Establish a fund to purchase and close bankrupt plants.
 
The scary thing is that this may be the best solution of the four. Unfortunately, bankruptcy laws all over the world seem to start with the premise that jobs have to be saved. So factories have been like nerf balls. You can squeeze them down to nothing, but when you let them go they spring right back up.
 
·         Cooperation among brands to improve the order flow and restrict supply after the preseason.
 
Aside from being blatantly illegal, at least in this country, what I call the “You First” principal of business, where no company will do something first unless its competitor is willing to do it, makes it unlikely this can be done.
 
·         Convince the retailers to cooperate in the long term interest of the industry.
 
These get more and more unlikely as you go down the list.
 
·         Tell SIA to fix the problem.
 
They are trying with the on snow show in Salt Lake. If, as I believe, they are focusing on symptoms and not the fundamental problem, it’s not enough.
 
So far, most of this article has explained how we’re attacking the wrong problem. It has ridiculed the proposed solutions and expressed pessimism that we can do anything but suffer the fate of the ski industry. If, as a result, you’ve been persuaded to see the problem a little differently, maybe you are ready to consider a different approach.
 
First, I want to suggest that you support the show in Salt Lake. It’s not “the solution,” but it’s a start and right now it’s all we’ve got.
 
Second, nobody can measure in any meaningful way how big the problem is and how it has changed over the years. I asked maybe half a dozen snowboard companies “What percentage of your projected annual sales are booked in the preseason and how does that compare to three years ago?” Most didn’t have a specific answer or wouldn’t tell me. Some think it’s less, some more. At a middle of October in Washington State, Dave Ingemie, President of SIA, gave a presentation on sales for this season. He presented clearly the preseason bookings for skiing. When he got to snowboarding, he basically said “Sorry, we don’t have the data yet.”
 
Lacking good information and the ability to quantify the extent of the problem, it’s hard to see how we can try to manage it, or even say what it is. We’ve got to trust the company that collects data for SIA, or we’ve got to trust somebody else. It’s somewhere between sad and funny that some people are looking to SIA to take the lead but won’t help them collect the industry information they need to develop plausible options.
 
Third, companies have to look more formally at their volume versus margin assumptions. It may not be in their interest as brands to grab ever last unit of sales they can get in an endless battle for market share. If they can take that approach, then their interests and those of the industry can begin to approach each other a little.
 
It’s an up hill battle. I’m suggesting we try and do what no industry I know of has succeeded in doing. I don’t know the solution, but I am convinced that without good information we can’t hope to find one.
 
For example, saying “Let’s fix the buy/cycle” doesn’t lead us anywhere useful. But if knew what the average gross profit margins was by product for each of the last three years, at the wholesale and retail levels, and we knew what total sales by units were, then perhaps we’d begin to be able to have an intelligent conversation about how volume impacts profitability, again motivating a convergence of industry and company interests.  
 
Making broad generalizations about solutions to the wrong problem won’t get us anywhere. Carefully analysis of higher quality data may lead us to manageable opportunities to make incremental improvements that won’t seem quite so overwhelming.
 
There’s a lot at stake. I think it’s worth the effort.

 

 

Potential Impact of War and Recession on the Snow Sports Industry; Relevant Statistics and Possible Strategies

/0 Comments/in , , , /by

We were looking at a recession before the September 11 attacks on the World Trade Center and the Pentagon and the tragedy raised the possibility (certainty in the minds of many) that the recession would be longer, deeper or both then it would otherwise have been. Economic activity has already rebounded since its nadir in the days following the WTC. But what’s a “normal” recovery from such an event? Who knows.

The snow sports industry may be as impacted by a recession as other sectors of the economy. As we represent discretionary spending, we have the potential to be impacted more. Add to that the “fear of flying” hangover and we can’t help but be nervous about the coming season, especially with the possibility of further terrorist attacks. Air passenger volume was down 50% for a couple of days after flying resumed and, as of October 4th, was still off 29%, according to the International Air Travel Association (IATA).
 
On the other hand, as you’ll see below, the last recession, with its very low resort visitor days, corresponded to the worst snow year in a long time, so it’s hard to lay that awful year only at the feet of the war and recession of that time.
 
Still, my feeling is that this recession, and the caution in traveling and vacationing precipitated by September 11 and subsequent events, will be worse than in 1990-91.   Rather than just be nervous and pray for good snow we should probably “do” something. What?
 
Where Are We?
 
Before I yield to the inevitable and start quoting economic statistics, I want to introduce you to the statistical concept of regression to the mean. Discovered in 1875 by the amateur mathematician Francis Galton, it’s the single biggest reason one might be cautious about predicting a short, shallow recession.
 
To dramatically oversimplify and avoid a really boring discussion of statistics, it says, “What goes up must come down.” And the further up it goes, or the further down it goes, the more likely and the faster, it is to go the other way. We haven’t had a recession since 1990-91, and it was mild.
 
Of course a statistical mean can move, and some of these trends can be over very long periods. Still, the economic rubber band looks stretched awfully tight, and a snap back is inevitable.
 
This is supported by the fact that Japan is going into its fourth recession in a decade. Parts of Asia haven’t gotten over the impact of the currency crisis that started in 1997. Other Asian countries depend on exports to the U. S. to support their economies, and those exports are likely to decline. Much of Europe seems on the brink of recession as well.
 
During recent U. S. recessions, some other part of the world was strong and could pick up some slack. This time, the rest of the world was counting on a U.S. that is weak itself. The last time Europe, Asia and the U. S. all experienced economic weakness at the same time was during the 1973-75 recession. It lasted sixteen months.
 
Consumer spending had started to weaken before September 11. September will be the 12th month of declining industrial production. That ties a record that goes back to just after World War II. The September employment report showed a decline of 199,000 jobs during the month, the largest decline in over a decade. Very little of that reflects layoffs that occurred after the attack.
 
September retail sales, reported October 12th, showed a decline of 2.4%, the biggest drop in nine years. Economists had expected a 0.7% drop. At the same time, consumer sentiment rose to 83.4% in October from 81.8% in September, compared to expectations of a 76.0% reading in the measure of consumer confidence.     
 
The consensus is that the fourth quarter statistics will confirm that we are in a recession if the September retail sales numbers haven’t done it already.
 
Regression to the mean, indeed. Any good news?
 
Some. Housing starts haven’t plummeted and, up to now, consumer spending has held up fairly well. The Federal Reserve has cut the discount rate from six percent at the beginning of the year to two percent now. The last time it was that low was 1958. There’s some concern that the impact of interest rate cuts may not be as powerful as it once was due to the globalization of the financial markets. However, conventional wisdom is that it takes six to nine months for the impact of interest rate cuts to be felt. The first interest rate cut happened January 3rd, nine months ago. The last was October 2nd. Obviously, we haven’t felt the full impact of all the cuts yet.
 
Another thing that tends to lead an economic recovery is the stock market. We’ve all had the pleasure of experiencing the worst bear market since the depression. The week when the market opened after the WTC looked like the capitulation week that’s normally required to find a bottom. There was high point loss on big volume. The put/call ratio reached a level not seen since 1985. The number of investment advisors bearish was higher than the number bullish (they are almost always wrong at extremes). The market broke out on October 24th, and followed through on the 28th. The follow through doesn’t guarantee a rally, but one has never started without it. Since then, the market has acted the way you want it to act, shrugging off bad news, going up on higher volume and declining on lower volume. Hope I don’t sound like an idiot by the time this is published.
 
That analysis and two bucks will get you coffee at Starbuck’s (a small one). But as I sit here writing this, I’ve put my money where my mouth is.
 
SIA’s Retail Audit, conducted by Leisure Trends Group, reported early in the week of October 8th that a sample of 277 storefronts showed September ski and snowboard sales up 19%. By the end of the week, when the sample size had increased to 376, the increase was at 6.1%. That’s still a lot better than the overall national retail numbers reported for September (see above) but I guess we better not breathe a sign of relief until we see results for the full 900 store fronts survey (due in early December).   
 
Finally, increased government spending in the wake of September 11th should make the recession shorter than it would otherwise have been.
 
We’re looking at a recession. Though there are some mitigating factors, there are reasonable arguments that it may not be as mild or short as recent (if ten years ago is recent) ones have been.
 
Right today, the winter sports industry doesn’t have to worry about its length so much as it’s impact on the season that’s starting right now. What does history tell us we can expect?
 
“It’s Déjà vu All Over Again”
 
A recession, a war, and a President Bush in the White House. The parallels are almost eerie.
 
Iraq invaded Kuwait on August 2, 1990. The air war began January 17, 1991. The ground war followed on February 23rd and lasted four days until President Bush declared a cease-fire on the 27th. The first U. S. troops began to leave on March 8th. We declared victory and went home.
 
Our current conflict began September 11. I’m sure none of us knows how long it will last or what exactly success will look like, but it’s not going to be as definitive as the Gulf War. 
 
In 1990, the economy started off pretty well. Gross Domestic Product (GDP) grew at a 5.1% rate during the first quarter. That declined to 0.9% in the second quarter and fell further to a negative 0.7% in the third. Fourth quarter GDP fell at 3.2% rate.
 
For the year, we ended up with a real GDP growth rate of 1.2%. In 1991, it was a negative 0.6%. Officially, the 1990 recession started in July 1990 and ended in March, 1991- eight months later. A recession, by the way, is technically defined as a decline in GDP for two consecutive quarters.
 
From a healthy 5.6% rate of growth in 2000’s second quarter, GDP has fallen each quarter. It ended the second quarter of this year with 0.2% growth. My guess is that the number we get at the end of October for the third quarter will be negative.
 
According to the IATA, airline traffic has fallen each month this year since February compared to the same month in the previous year. When was the last time airline traffic declined? It was during the 1990-91 recession.
 
1991 is the only year from 1983 through 2000 when world airline passenger growth was negative (by 5%). Obviously, it corresponded with the recession, but it also corresponded with the Gulf War. Revenue passenger kilometers (RPKs- the total number of kilometers paying passengers paid) fell 25% during the first month of the war. They were below 1990 levels from January through September of 1991. It took a year for traffic to recover to prewar levels.
 
As we all know, the 2000-01 season was a generally good snow year, and generated 57.3 million resort visits, the highest ever. The 1990-91 season saw only 46.7 million visits, the lowest of any season since 1978-79 except for the 39.7 million in 1980-81. Visits in 1989-90 were 50.0 and in 1991-92, they were 50.8 million.
 
The USIA End of Season National Business Survey for 1990-1991 reported that the average inches of snowfall per area, based on 173 reporting resorts, was 130 inches. RRC Associates in Boulder reports that for the 2000/01 season, with 187 resorts reporting, the average number of inches per resort was 185.34 inches.
 
Over the last eight seasons, according to RRC, the average number of inches per resort was 177.6. 1990-91 was by far the worst snow year for which I have data. Which is good news, because if the snow had been great in a year when visits were 46.7 million, we would have had to lay the bad year completely at the door of war and recession. So maybe we’ll find, with good snow, that people want to go do something fun with their families and forget about war and recession.
 
We are, as usual, left praying for good snow. Even with good snow, I expect to see a negative impact from war and recession. The similarity to 1990-91 is too great to ignore. It’s my judgment that the recession will probably be steeper than that of ten years ago. In addition, the war against terrorism won’t have the clear and glorious ending the Gulf War had. It started in this country with an act that has left a long-term scar on our collective psyche and potentially on our willingness to fly and take vacations. Any further acts of terrorism will only make it worse. 
 
Do It Now Rather Than Later
 
In twenty years of working with companies in transition, the last ten in action sports, I’ve worked with quite a number of financially distressed businesses. It’s a lot of fun for me when I walk in the door and am met with, “We can’t make payroll next Tuesday. What should we do?” because when you’ve got nothing to lose, you can try or suggest anything to anybody. Still, I wouldn’t wish that set of circumstances on anybody. By the time you get to that point it’s frequently too late to solve the problem except at a tremendous personal and financial cost. 
 
Without exception, and regardless of industry, companies who are so financially distressed that their survival is uncertain got there for the same reason; denial and perseverance during a period of change.
 
Universally, the owners/managers recognized the issues before they had become issues of survival. Universally, they resisted doing anything different in response to the new circumstances. Universally, they believed that doing “more of the same,” but doing it better and harder would be an adequate response to a changing business environment. For a while, this may have worked. Typically, it at least bought them some time.
 
But the business continued to decline because they simply weren’t addressing the new business conditions. As things worsened, their options, or at least their perceived options, declined. Soon, managing cash flow was taking up all of their time. They had to do it, but it still didn’t address the basic business issues. Finally, it’s typically an outside stakeholder- the bank, a supplier, a shareholder- who forces them to deal with reality. Hopefully, it’s not too late.
 
My crystal ball is no better than yours. I don’t know what this season is going to bring.    But whether you’re a resort, a supplier or a retailer, the winter sports business isn’t an easy one if only due to seasonality. Most of you, I’m sure, have already asked the question, “What if my business is off 10%? 20%? For those of you who haven’t started that process, here, in general, is how I might go about it.
 
If you were around in 1990-91, how did you fare? If you weren’t, talk to others in similar businesses and find out how they fared. What actions did they take and when?
 
Now pull out your cash flow. Cut revenues by 10%, or by whatever number you think more relevant or likely. What happens? Is your bank line still adequate? Can you pay your suppliers on time? Can you afford any capital expenditures you had planned? Does the cash in your cash flow, flow?
 
Obviously, this is also a balance sheet issue. Even when cash flow from operations turns a little negative, some companies have the financial resources, as reflected by their balance sheet, to support spending at current levels.
 
Whatever your cash flow projections show, now is the time to take any action you decide to take. Here’s why. If, for example, you need to reduce expenditures by $36,000 over six months, just to pick a number, that’s either $6,000 a month or $36,000 in the last month. $6,000 a month may be manageable through judicious expense control. $36,000 in that final month probably (typically, I’d say) damages the operational continuity of the company.
 
So whatever actions you think you need to take, if any, to cut expenses, improve efficiency, reduce inventory, or bolster sales, start doing it now. Early action is always the key to weathering hard times if they come.
 
As a retailer, you don’t just sell winter sports products- even in winter. The highest dependence on winter sports sales comes, I think, from retailers closely associated with resorts. From that point of view, I guess you’re better equipped to weather a slow season than many suppliers and resorts who make most of their money in only one season. But retailers have some problems that suppliers and resorts, which have already undergone some consolidation, don’t have. To put it succinctly, there are too many of you. I don’t think that will be a shock to most retailers. They deal with it all the time as suppliers open up competitors just down the street.
 
For most of the 90s, high personal expenditures, low interest rates, very low inflation, huge gains in net worth and low unemployment yielded high levels of growth in retail sales, averaging 6.55% annually between 1994 and 2000. Since sometime in 2000, weakening consumer confidence, slowly increasing unemployment, declining household wealth, and high consumer debt levels have begun to take their toll.
 
In the meantime, retail competition has never been tougher. There have been growing numbers of store closing. Various kinds of direct sellers are taking more business from traditional retailers.
 
As a winter sports retailer what should you be doing? Largely, what you’re already doing as far as I can tell. Watch your inventory and expense levels carefully. Focus on knowing whom your core customer is and on attracting and keeping them. Order to maximize your discounts. Have the kind of product customers are likely to want in harder times.
 
Resorts who sold lots of cheap season passes may look like geniuses if traffic does drop significantly, though I guess maybe the people who have already made the investment will be the ones who show up anyway. The issue at many resorts, in the event of a slow winter season, is financial leverage. This is an industry where extreme seasonality requires the use of borrowed money to get through the off season- often a lot of borrowed money. You have to be able to borrow enough and, inconveniently, you have to be able to pay it back and then borrow it again for the following season. Managing that debt is already the single biggest challenge some resorts have. If revenues decline significantly, it will become an even bigger challenge.
 
Suppliers have largely already ordered and/or produced for the season. They are in the middle of shipping to retailers. Some products coming into the country have been delayed by understandably more rigorous checks by U. S. Customs. Anecdotal evidence is of some cancellations from retailers, but they don’t seem very high. If I was a supplier, I wouldn’t be counting on a lot of reorders, and I’d be damn cautious about credit this year. I’d also plan my selling efforts on the assumptions that discounts will start early if retail traffic is slow.
 
Economically, the whole country has had a bunch of good years. Now, we may be in for one that’s not so good. In good times, cash flow and growth can cover up a lot of mistakes and competitive weaknesses. In bad times, the market takes no prisoners. Whether you are a supplier, a retailer, or a resort the quality of your competition position and the strength of your balance sheet are the two things (besides snow) that will determine how you do this year.
 
That’s true in any year of course, but in a recession year, you may not get another chance. My best guess right now is that this is not going to be an easy season even with good snow. Make it as good as it can be for you by starting to deal with it right now.
 
 SIDEBAR:
 
As an industry, especially on the resort side, there’s a consensus of the need to revitalize growth by attracting young enthusiasts to the slopes and keeping them coming back. Retailers, and obviously the suppliers on the snowboard side, are already on that program or, bluntly, they wouldn’t be around. Resorts recognize the same necessity, but have the understandable need to focus on the traditional customers who are older, but have lots of disposable income and provide much of a typical resort’s cash flow. In a recession, it will be interesting to watch who shows up. Will it be the young enthusiasts, who figure out a way to find money for a list ticket and some new equipment, or the older customer, who has a high enough disposable income and net worth that a little thing like a recession doesn’t change her spending habits?
 
Speaking of the kids, the most exciting new thing in snow sliding this year may be the snowskate. It has its genesis in skateboarding, which has to be as hot right now as any action sport has ever been. Skateboarding, of course, has entered the mainstream, with skate parks popping up all over the place and being funded by local recreation departments. Now, I’m hearing the first rumblings about snow parks for use, I guess, with either snowboards or snowskates being built at places other than resorts. Especially for snowskates, you don’t need that much room, and you don’t need much vertical. Gives the resorts something to think about. What if the kids don’t have to come to participate?