Fat Lady Sings. K2 Buys Ride

/0 Comments/in , , , , /by

K2’s purchase of Ride, announced on July 22 and expected to close within 100 days, is as close as we’ll ever get to a capstone on consolidation.

We all were intellectually aware of consolidation, but this makes you aware in your gut. Burton and K2 now control what I’d estimate to be 65 percent of the U. S. snowboard hard goods market. Add Salomon and Rossignol and the number jumps to north of 75 percent. The number two, independent, snowboard only brand in North America is now Sims
Three questions:
 
·         What the deal?
·         What does it mean for the industry?
·         How is K2 going to manage it?
 
The Deal
 
The only info we’ve got on the deal comes from the press release and Ride’s 8K filing with the Securities and Exchange Commission. K2 is buying the common stock of Ride. That is, it’s buying the whole company- not the assets like in the Morrow deal and so many other snowboard deals.
 
So K2 gets all the assets and all the liabilities, known and unknown. If a two-year-old Ride binding blows up, somebody is hurt, and Ride is sued, K2 will be responsible. In an asset deal, they typically would not be- which is one reason asset deals are often popular.
 
Ride’s stock will be acquired in exchange for K2 common stock. Ride shareholders will receive K2 shares “with an approximate value of $1.00 for each share of Ride stock owned.” Given the number of Ride shares outstanding, that means a purchase price of around $14.3 million. Both boards of directors have approved the deal. One of the reasons it will take so long to close is that Ride shareholders have to approve the deal as well.
 
The deal is being structured so it’s tax free to Ride’s shareholders. Ride’s directors have already agreed to vote their shares in favor of the deal.
 
To get Ride from the July 22 agreement date to closing, K2 has agreed to extend $2 million in interim financing to Ride in exchange of a promissory note that can be converted into Ride stock. The note’s initial interest rate is eight percent. That rate increases one percent every 180 days up to a maximum of eighteen percent on the unpaid portion of the note and any accrued interest, however the notes is payable in full on November 19, 1999.
 
The note is convertible by K2 at any time into Ride’s cumulative convertible preferred stock and is automatically converted under certain circumstances if the merger agreement between K2 and Ride is terminated. K2 would get one share of the convertible preferred stock for each dollar that is still owed from the principal and unpaid interest of the note.
If somebody else buys Ride, or agrees to buy ride, before the note is repaid or converted, K2 can demand to be paid in cash for up to a year based on the price of Ride’s stock (which could go up if a better deal comes along).
 
Ride, as a public company, has an obligation to consider any better offers that come along. This note is structured not only to give Ride working capital to get it through the period until closing, but to make it less likely that any such deal will come along. If the deal with K2 closes, there’s nothing but intercompany debt that gets eliminated in consolidation and doesn’t much matter.
 
As another step in keeping Ride operational until the deal closes, the two companies have agreed that K2 will acquire Ride bindings with an approximate cost of $700,000 and assume Ride’s obligations to ship Ride customer orders of approximately $8.4 million in bindings and apparel. K2 will purchase approximately $4 million in inventory from Ride’s vendors to fill these orders.
 
What’s it all mean? The two companies are getting so far into bed with each other before the deal closes that it’s unlikely it won’t close or that another buyer will come along.  
 
The transaction will be accounted for as a purchase rather than a pooling, and now I’ve put my foot in it because I have to explain the difference.
 
First, if you buy assets, you assign values to the assets based on what they are really worth. So is you’re buying accounts receivable for $100,000, but know that only 85 percent are collectible you’d “allocate” $85,000 of the purchase price to those receivables. After you’ve allocated as much of the purchase price as you can to the assets, the rest is allocated to goodwill. Goodwill sits on your balance sheet and has to be amortized (taken as an expense some at a time) over a period of many years, but isn’t deductible for tax purposes.   In addition, no bank ever thinks good will is worth anything when considering whether or not to lend you money.
 
Allocation of purchase price in an asset deal also has a major impact on who pays what tax when the deal closes, but since this isn’t an asset deal and I hate it when readers fall asleep, we’ll skip that. You’re welcome.
 
A pooling is a straight exchange of stock where the values on the two company’s balance sheets are added up. No goodwill is created. No assets are written up or down and there’s no allocation of purchase price. The only adjustments are the netting out of any inter-company debts (amounts the two companies owe each other).
 
K2 is buying Ride’s stock with its stock, but it’s not a pooling because Ride shareholders are getting a certain value per share- not just K2 shares with a value completely dependent on the market. It’s a purchase. That’s what the Financial Accounting Standards Board says, so that’s the way it is.
 
Once K2 knows exactly how many shares it’s exchanging for Ride, and the market price of those shares at closing, it will know how many dollars it paid for Ride by multiplying the market price of each share by the number of shares they are giving Ride shareholders. The accounting interpretation of the deal is that K2 is buying Ride’s equity, a balance sheet number. At March 31, that number was 16.1 million dollars. I’m sure it’s lower now. I wouldn’t be surprised if it’s around 14.3 million dollars.
 
To the extent that the purchase price is higher or lower than Ride’s actual equity at closing, other balance sheet items will be adjusted to reflect fair market values. For example, if the purchase price is $100,000 higher than the value of Ride’s equity at closing, the value of other Ride assets will have to be increased, to a maximum of $100,00 if what they are really worth justified such an increase. To the extent that those adjustments don’t account for the difference between Ride’s equity and K2’s purchase price, goodwill is adjusted. It looks in this case like the purchase price will end up being somewhere close to Ride’s equity, so adjustments should be minor.
 
That’s enough of that. This article is in serious danger of turning into a lecture on acquisition accounting.
 
So what’s the deal worth anyway? The easy answer is that it’s worth the approximately $14.3 million in K2 stock Ride shareholders are receiving. That’s not a bad answer, but let’s go a little further, keeping in mind that there’s rarely a right answer when you value companies.
 
Ride’s March 31 balance sheet showed thirty two million dollars in assets and sixteen million dollars in liabilities. K2 gets all those as part of the purchase. The assets include $8.5 million in goodwill and $5.4 million in net plant and equipment. If I were K2 trying to figure out the value of Ride, I’d call the goodwill zero. I’d write down the plant and equipment. How much would depend on what use I was going to make of the factory. Let’s say they cut it in half, making the realizable value of the Ride assets around $20 million. The liabilities, as usual, are all real.
 
Let’s say that K2 could liquidate the assets for $20 and pay off the liabilities for $16 million. It doesn’t work that way of course, but if it did K2 would have $4 million in the bank. So they would have paid stock worth $14.3 million less $4 million in net assets, or $10.3 million basically for Ride’s trade name and order book.
 
But you can’t realize the value of that trade name and order book unless you operate the business. To do that, you have to invest a certain amount of permanent working capital. Ride didn’t have the working capital it needed. In a nutshell, that’s why it had to sell. My guesstimate, depending on the expense reductions K2 can find to reduce overall operating costs, is that K2 is going to have to invest maybe more than$10 million in Ride in additional to the $4 million in net assets that’s already in there. My guess is that Ride’s bank (owed $8.5 million at March 31) is going to want to be paid off and certain unsecured creditors who have been waiting a long time for their money will also have to be paid. 
 
K2, therefore, may look at it’s cost to buy Ride as not only the value of the equity it gave up, but as the additional capital they have to invest to normalize the balance sheet- $24 million in total or maybe higher. If Ride had been capitalized normally, that whole amount, and probably more, would have accrued to Ride’s shareholders. But K2’s offer was based on what it would cost them not only to buy but to operate Ride regardless of whether it went to the shareholders or not.
 
Good deal or bad deal? K2 got a good deal. Did Ride shareholders get screwed? Not given the alternative. My sense is that Ride’s management found the buyer to whom Ride has the most value. Furthermore, Ride’s balance sheet and recent public information suggest that cash flow issues were severe enough that scenarios where shareholders got less than one dollar per share were possible. Like a whole lot less. Like the big goose egg.
 
All of the web whiners who are bitching and moaning about this deal ought to give Ride employees credit for performing some operational miracles under impossibly difficult circumstances not of their making.
 
If you want to blame somebody, check out the nearest mirror. The person you’re looking at bought an over priced stock in an industry facing an inevitable and predictable consolidation. 
 
Industry Impact
 
Ride and Morrow are gone as independent snowboard companies. Atlantis, Division 23 and Type A are, in my judgment, unlikely to resurface as strong specialty brands. To Forum, Sims, Palmer, Never Summer, Option and maybe a couple of other brands this could be an opportunity depending on retailers’ perception of the deal. One brand I’ve talked with is already getting calls from retailers who were prepared to buy Ride but are reluctant to buy “another K2 brand.”
 
The strategic line between the niche players and the big companies are as clearly drawn as you could ever expect to see. If any single action can be said to mark the end of snowboarding’s consolidation phase, this deal is it.
 
Specialty brands can exist in their niches and maybe grow a little. But it’s financially unlikely that anybody will start another one. Those niche brands that exist don’t have the economies of scale, distribution leverage, and marketing dollars they need to chase the big players. And as independent companies, they probably never will.
 
Then there’s Burton with something like forty five percent of the U.S. market. They are left standing alone with the cache of a niche brand, but on an international scale, and the leverage of a large company. Ain’t nothing to analyze there. My guess is that they are thrilled with this deal.
 
As I indicated, some retailers may have some resistance to putting more eggs in the K2 basket. But if the consumer wants Ride boards, and K2 offers good terms, prices, service, quality and promotion, the retailers will pretty much get over it. They have before.
 
I would expect the complete programs from Morrow and Ride to improve as a result of being part of a larger, financially stable organization. And the production of boards in China is going to produce some price points that retailers aren’t going to be able to live without.
 
Sean- I don’t really want to add here what you added. I think I ask and answer the question you raise in the next section.
 
K2’s Decisions
 
What I think was the opportunistic purchase of Morrow (it was too good a deal to turn down) seems to have transformed itself into a strategy with the purchase of Ride. Of course, we don’t know exactly what that strategy is yet. K2 now has five snowboard brands, with K2, Morrow, Ride, Liquid and 5150. How do they get positioned against each other? How many of those brands can you imagine one retailer buying? If I were doing it, I’d make K2 the ski shop brand. I’d retain Brad Steward (between movies, of course) to consult on repositioning Morrow as the quirky brand it use to be. Liquid would be for the mass-market channel, and Ride for specialty shops, but with a more mainstream profile and higher volume than Morrow. I’m fresh out of market positions and have no idea what I’d do with 5150. Whatever the positioning decisions are, I’ll be interested to see if all five are retained. I wonder what Cass would pay for Liquid? I’d really like to leave this in. Let’s talk.
 
Even excluding the distribution issues, managing five brands against each other in the same organization is tough. I’m reminded that one of Bob Hall’s first pronouncements on becoming CEO of Ride was that the company had too many brands.
 
Of course, some of the brands he eliminated didn’t have enough volume to justify the required advertising and promotional expenditures, and I don’t think K2 faces that. Still, there are some obvious conflicts as K2 works to restructure its organization to manage the five brands.
 
For instance, you just know that the financial guys at K2 are sharpening their knives to slice expenses and walking around muttering stuff about synergies. And certainly K2doesn’t need two warehouses, credit departments, computer systems, purchasing departments, etc.
 
Maybe they don’t need two factories. Yet maintaining brand integrity means keeping sales and marketing separate. Will they have separate customer service departments with people dedicated to brands or will the temptation to have one group that answers the phone “snowboard customer service!” win out? Will all the invoices the retailers receive look the same except for the brand name?   How many brands will be made in the same factory? Will the T-shirts and beanies all be the same but with different logos? In a thousand ways, none of which, by itself, probably matters, the identity of the brands can be subverted in the perfectly reasonable pursuit of operational efficiencies.
 
I’m not saying it will happen, but making sure it doesn’t is a hell of a challenge. It’s not easy to be passionate about five brands at once.
 
SIDEBAR
 
Things to Watch
 
1)             Who’s going to run what brands?
2)             What will happen to Ride’s factory?
3)             What will be the fate of the Device step-in system and the lawsuit with Vans (Switch)?
4)             How will be product development be managed among the different brands?
5)             I’m sure we’ll figure out some more to add.

 

 

Hung Over, Jet Lagged, and Sleep Deprived; A View of the Industry from 37,000 Feet

/0 Comments/in , , /by

The specialty shop in Vienna was all snowboards and snowboard products. It was mostly last year’s stuff and was all on sale. Word was that financial problems were preventing them from getting new stuff.

Over at a big Intersport store, there was just as much space devoted to snowboard products and the deals were just as good. I’d estimate that roughly the same amount of space was devoted to snowboarding. Thought under construction for the upcoming season, it appeared well laid out, and the people I spoke with seemed knowledgeable.  New product was arriving, and it seemed that only Burton had any hope of holding high price points. New product board pricing for many brands was either at the high or the low end. Last year’s product is apparently taking over as the mid-price product, and there were a couple of boards of almost any brand you could imagine (Heavy Tools lives!)
 
I’m crammed in this tourist class sardine can with circulation to my butt cut off, and for reasons explained by the article title, only half my neurons are firing, but I don’t think the retail situation in the US is much different from what I observed in Vienna. And it’s consistent with what the textbooks and my own experience tell me happens in a maturing industry. Brands either become specialty players with clear market niches or they are larger volume, lower cost producers. If you get stuck in the middle, you’re, well, last year’s board in perpetuity.
 
The Good, the Bad, and the Ugly
 
Apologies to Clint Eastwood, but sometimes when an analogy fits, you just have to steal it. In no particular order we’ve got four classes of snowboard companies right now. Morrow, Ride and Sims are one class- the three companies that are arguably large enough and have enough brand recognition to survive all as specialty brands.  Burton is a class by itself. Third are the brands owned by large companies; K2, Salomon, Rossignol, Nitro and Mervin. Apologies to anybody I missed. Finally, there are the smaller brands that I won’t list. In my judgment, most of them are looking at the same fate at Lamar or Silence. They have enough brand equity to be milked, but the time when they could hope to grow and prosper independently is past. A couple have always focused on being small niche brands, and may be succeeding at that.
 
Morrow, Ride and Sims (place politically correctly in alphabetical order) have all had well publicized financial, management and brand positioning issues. During the feeding frenzy of a few years ago, they all sought to increase their market shares by rapid expansion of distribution. In the process, either by use of multiple brand names or sales through the wrong channels, they got some volume but reduced their brand strength. The impact on their brand’s market positions didn’t become apparent until growth slowed and the torture of consolidation set in. They tried to get big and they tried to be specialty brands. It turned out to be hard to do both.
 
Burton is both large enough and well enough established as a brand that it’s fairly secure as the industry leader. The word “fairly” is thrown in there in recognition of that the fact that although Burton is by far the biggest snowboard brand with the most brand equity, it’s still tiny compared to some other companies involved, or trying to be involved, in snowboarding.
 
Burton did a lot of things right, but two things stand out. First, they were well capitalized when most of their competitors were struggling to find enough dollars to print a decent catalog. Second, the expanded their franchise quickly into soft goods and are shielded, as a result, from some of the hard goods pressures even they aren’t immune to.
 
The smaller brands I didn’t list fit into one of two groups. The ones with a problem are those who use to be more visible in the market, but tried to grow and compete- to be a Morrow-Ride-Sims you could say. Now, they don’t have the money to market their brands and grow. It may be too late to succeed at that strategy anyway. At the same time, price pressures have pushed down their margins, and they have to increase volume to be profitable. They are caught between the proverbial rock and hard place.
 
A couple of smaller brands, like maybe Never Summer and Glissade, have always been focused on being smaller niche players. With a connection to a particular kind of rider or a geographic area, they never tried to be big and so don’t have to be. Consistency in your approach to the market continues to be critical for success.
  
Being a snowboard brand owned by a larger company offers both some opportunities and some challenges. On the one hand, you have the “security” of being part of a larger organization. You share overhead. You don’t need your own warehouse and computer system. You can earn lower margins and still be successful. You have access to some distribution channels that may help make it a little easier to increase sales.
 
On the other hand, you are not one hundred percent a snowboard company and are, to a greater or lesser extent, subject to the ebbs and flows of the overall company’s fortunes. Snowboard brands owned by ski companies have been directly impacted financially by the declining fortunes of the ski business. At least they are still here as snowboard brands. But they aren’t snowboard companies, and it’s likely that there will continue to be some “creative tension” between the snowboard and ski sides of the business. Skiing and snowboarding still seem to be separate changes that don’t entirely understand each other. Some things never change.
 
Which gets us, happily, to the point of the article. As an aside, I’d just like to say that it’s always gratifying to get towards the end and find myself somehow wandering towards the point I started out to make.
 
Snowboard industry evolution is not going to go the way of the ski industry. That is, I don’t expect the industry to work its way down to only half a dozen brands. Snowboarding may have become part of the winter sports business, but it still has some uniqueness to it. Unlike skiing, it’s still driven by lifestyle issues. Music, clothing, attitude are all part of snowboarding. Companies that have ignored that have gotten their asses in a sling. Witness the rise of Forum. Theoretically, it shouldn’t have been able to get started against all the large players in the industry. It is apparently adequately capitalized, is growing at a manageable rate that insures some artificial scarcity, and has a focused market strategy. Confusion, chaos and mistakes by other companies created a market niche for Ride when that brand was created a few years ago. Trying to grow too fast, in my judgment to meet the demands of wall street, cost it momentum and legitimacy in the market it had originally succeeded in.
 
Now other company’s mistakes have created an opportunity for Forum. It will be fun to watch and see if they have learned anything from history- like not to get too greedy. Brand success in snowboarding seems to require meeting the market’s expectations, but not exceeding them. You have to leave the customer just a little hungry.
 
The other reason there is room for more than a handful of companies is demographics. In spite of crossover, in spite of the increasing age of the average snowboarder, this is still a youth driven business, and the demographics suggest it will stay that way for at least the next five to seven years.
 
Retailers probably have to not get too comfortable with the brands they are carrying. What’s hot and what’s not will keep changing. Brands have to keep focused on snowboarding no matter who owns them. People who write columns for trade magazines will have lots to write about.
 
Over the last couple of years, the term “core” is perceived to have lost some of the passion, importance and legitimacy that was once associated with it. But the sport still has its roots there. And it looks like it will for the foreseeable future. Successful companies will have to sell beyond that core, but always have a focus there. That’s our biggest challenge and the reason snowboarding won’t become the ski business.

 

 

Life in the Real World; Hoisted by My Own Petard

/0 Comments/in , , /by

I’ve had the luxury, over the last couple of years, to be able to dispense advice and commentary from the relative safety of an observer’s perch. Suddenly and, amazingly, of my own choosing, I’ve given up a perfectly comfortable life style to reenter the snowboard management fray. I must be out of my mind.

I’ve done this at a time when the snowboard industry consolidation, if measured by the number of companies, is probably entering its final year. But we’ve become part of the winter sports industry. That industry is going through some hard times, and the continued scurry to embrace snowboarding as its savior is perpetuating some tough and irrational competitive conditions that aren’t going away quickly.
 
When I last sat in the management chair, in the early 90s, industry conditions were, well, just a bit different. Remember when we could sell everything we could get made, there weren’t enough factories to go around, and raising prices ten percent each season was a no brainer? Ah, those were the days.
 
Since that move from management to consulting, I’ve dispensed a bunch of advice in this space. I trust it was at least worth what you paid for it. Four ideas have stuck with me.
 
·       Protect Your Brand Name
·       Know Your Numbers
·       Find a Niche
·       Don’t Kid Yourself
 
How has the relevance of these ideas changed as the industry has involved? Maybe more interestingly, am I taking my own advice? Let’s see.
 
Protect Your Brand Name; It’s All You’ve Got
 
I’m there. I get an “A.” Maximizing sales isn’t the goal. Increasing sales at a respectable rate, selling out every year and earning a profit is. Growing too quickly can mean lower margins and higher short term working capital requirements. Who needs that? The best advertising and promotion that can be done is the kind where the retailers says, “Say, I sold it all at full margin, and when I called to order more, they were all out!” Next ordering season the poor sales rep, with any luck at all, will find himself faced with having to control the increases requested by the shops to make sure they sell out again. And you didn’t spend a single marketing dollar to get that.
 
Then there’s the issue of gray market sales. Avoid them, I’ve said. It’s not that simple. Your distribution can get better year by year, but it will never be pristine. The impact on sales if you arbitrarily cut off all the sales that might be gray market could be too severe. Every snowboard brand has some gray market sales. Everybody. And I think most of us know where they are. When the boards are going to somewhere Hitler and Stalin fought a tank battle, it’s pretty clear they aren’t staying there.
 
Four or five years ago, brand name hardly seemed to be an issue. If it was a snowboard, it sold. With hindsight, it looks obvious that those who succeeded managed to grow while controlling their distribution and bringing some brand equity to their name. It was a fine line to walk. One the one hand, you had to get out of the awkward “tweens,” that level of sales between, say, five and fifteen million dollars where you needed to act like a larger company, but couldn’t afford to. On the other hand, if you tried to push sales too hard, your credibility as a brand suffered. To put it succinctly, you had to perform and grow according to the market’s expectations, but no faster. Too slow or too fast and you were toast.
 
So building your brand was just as important, and difficult, as it is now. It just didn’t seem quite so urgent.   
 
Know Your Numbers; Cash Flow is Everything
 
Opps- so far, I’m only a Cplus to B minus on this one. I’ve got the numbers thanks to some good systems and people. In fact, even as I write this they’re sitting on the desk next to me waiting to be studied, analyzed and dissected (“Crunch me, crunch me!” I hear them whispering). But I’m finding that management issues during the first month or so have left me with precious little time to spend the consecutive hours required to really get into them. I can wing it pretty well because I already know the financial model of a snowboard company, but that’s no excuse.
 
They are also not “my” numbers yet. They’re somebody else’s. Cash flow, I’ve said, is a living, breathing thing. By creating your own model, working with it and thereby internalizing it, you develop certain instincts for how the money moves through a business. In a highly seasonal business like snowboarding, there’s probably nothing more important than the dance of the cash flow. I’m prepared to give myself something of a break on this issue, because I haven’t really been at it long enough to have the necessary gut instinct for this particular company’s cash flow.
 
At a time when everybody is struggling to make a profit, and so few are succeeding, knowing and managing by your numbers should be at the top of everybody’s management priorities. It always should have been there. Five years ago, however, flush with high margins, soaring sales, Japanese prepayments and COD terms to retailers, knowing and working with your numbers didn’t seem quite so compelling. In truth, it wasn’t. You didn’t have to invest as much money, and you got it back sooner. Boy I miss the good old days, where various management miscues could be hidden behind ravenous product demand.
 
 Find a Niche; Know Your Customers and How You Compete
 
I can console myself on this one by remembering that when I gave the advice, I acknowledged that it was not a trivial thing to do. In fact, I said it was time consuming, detail oriented, hard work to really figure out who your customer is. I know the market niche and the basis of the company’s competitive advantage. But as far as what kind of consumers are actually buying the stuff, I haven’t even gotten around to asking the question. Let’s give me an incomplete.
 
And let’s acknowledge that it will always be an incomplete. The process will always be never ending, unless the market stops changing.
 
A niche, it turns out, is a necessary survival mechanism. The hundreds of companies who didn’t have one, or the basis for creating it, aren’t with us any more. Creating a niche is a long term process, and it was five or more years ago, when it didn’t seem to matter, that you had to have begun the process if you wanted a niche you could defend in current business conditions. Some companies found theirs, then lost it in the struggle between growth and credibility I described above. Some stumbled on it, and kept it in spite of themselves.
 
Don’t Kid Yourself; Make the Hard Decisions
 
The rumors are always worse than the truth. Ignoring it won’t make it go away. Change is easier when you make it before you have no choice. Bullshit is inevitably dysfunctional to an organization. Etcetera.
 
We kidded ourselves as an industry for a long time. Sure there was going to be a consolidation, but it would be somebody else who would be the consolidatee. We were brainwashed by the wonder years. No hard decisions required. We couldn’t bring ourselves to believe that snowboarding was just another industry, as susceptible to competitive trends as any other.
 
Guilty. Along with most of you. In my first snowboard management incarnation I was a believer. Even though I knew better from my experience in other industries. The excitement was contagious, the opportunity apparently endless. The bullshit smelled great.
 
Never again. I’ll have fun, but I won’t lose my perspective and objectivity. May I suggest that you shouldn’t either?
 
Well, I guess these four ideas have held up pretty well. They weren’t any more or less valid five or seven years ago then they are now. The irony is that in the past they were easier to ignore, but paying attention to them then might have made consolidation a little more manageable for some companies. Like compounding interest, little changes can have a big impact given the advantage of time.

 

 

News from the North; Lessons for the Snowboard Industry from Canadian Resorts

/0 Comments/in , , /by

Last April, I headed to Tremblant for the Canadian Ski Council’s annual symposium on the state of the Canadian resort industry. Naturally, my naïve anticipation of great snowboarding had nothing to do with my decision to go.

Groomed hardpack with mud and rocks sticking through on narrow runs wasn’t what I’d expected. Thanks El Nino. At least it motivated me to go to most of the seminars and presentations. Nor did I miss a single dinner or cocktail party. I’ll be there again next year even if the snow conditions are lousy.
 
One of the presentations I attended was by a gentleman named Richard Basford of Integrated Marketing Strategies. He’d conducted for the Canadian Ski Council their annual Skier/Snowboarder survey and was presenting the preliminary results. Here’s some selected survey results that really jumped out at me.
 
First, Richard said that about 20 percent of the Canadian resorts’ winter visitors were snowboarders. No big surprise there. Then he announced that out of 4,293 responses, only 7 percent considered themselves beginners as skiers (three times skiing or less) and 9 percent considered themselves novices. That’s a total of 16% of the survey that’s just starting to ski. 
 
Now, the numbers for snowboarding were, respectively, 36 percent and 17 percent, for a total of 53 percent who are starting to snowboard.
 
Only fifteen percent of skiers have been skiing for two years or less. The number is 69 percent for snowboarders!
 
Go back and read that again, please. It’s okay- I can wait.
 
By the way, I’m pretty certain that a similar situation exists in the United States. Jim Springs of Leisure Trends presented some numbers at the SIA show in Las Vegas this year that supports that conclusion.
 
I looked around the room at the group of Canadian resort managers and owners who were attending the presentation. They were all sitting there calmly. Nobody asked a question, fainted, said “Oh dear!” or anything. I wondered if they were all hopelessly hung over from the previous evening’s business meetings. Some of them were definitely moving, so they weren’t all dead.
 
If you put a frog in cold water and raise the temperature slowly they say he’ll boil calmly to death rather than jump out. That same type of behavior-denial and perseverance during a period of change- seems to be going on in the winter sports industry right now.
 
For me, that stark, black and white survey was kind of an epiphany.
 
If the number of people starting to ski is relatively low, the drop out rate among beginners is high,and the number of existing skiers is declining due to aging, how many skiers will there be in ten years? In twenty? On the other hand, the percentage of snowboarders new to the sport is high. I’ll bet that the drop out rate is lower than skiing. I’m confident we aren’t starting to retire from snowboarding because of age. Snowboarding is growing, though not as fast as it use to.
 
But snowboarding is only twenty percent of the total. For every twenty snowboarders, there are still eighty skiers. It’s not clear to me that the industry can rely on the growth of snowboarding to make up for the decline in skiing, assuming current trends continue.
 
Somewhere in the bowels of some ski manufacturer or resort group the trends I’ve alluded to have been more thoroughly quantified and analyzed. In a more formal and systematic way, they have reached the same conclusions I’ve reached. That’s why there’s a proposal for the resorts and manufacturers to fund a three-year, $57 million promotional campaign. That’s why summer activities, tubing and mini skis are being embraced and promoted. That’s why individual resorts are upgrading facilities and creating more terrain even as, overall, their financial condition is not improving.
 
What are the implications for the snowboard industry? Two main ones, I think.
 
First, while much of the expected consolidation, measured by number of brands, may be behind us, competitive conditions are still very difficult. The brands may be gone, but most of the production capacity, with its need to keep producing something, still exists. If ski companies can’t make money selling skis (one projection is for pre season ski orders for 1998-99 to be down ten percent or more) they are going to continue to flock to the growing sport of snowboarding.
 
The evolution of the snowboard industry from its entrepreneurial roots as a distinct sport and market to a part of the winter sports industry is already being confirmed by the market segmentation that is occurring. There’s no longer a bias against snowboards made by ski companies and, with the exception of Burton, the success of every independent snow board company seems to be an uphill battle. More and more boards are sold by large companies to which snowboarding is just one of a number of product lines.
 
This industry evolution is consistent with most business theories that suggest you must either compete on price, as a volume producer, or by defining a market niche that will allow you to sustain your competitive position even though you’re more expensive. But the explosion of quality product at lower and lower prices has made it tough to be a traditional niche player. If everybody’s product quality and pricing is basically pretty comparable, that leaves marketing as the primary way to differentiate your brand. 
 
The second implication for the snowboard industry is that what the resorts are doing matters. We’re past the point where just the fact that they let us on the lift is enough.
 
Resort shops are charging manufacturers for space and displays like grocery stores charging for shelf space. Exclusive deals are being made to supply rental fleets- witness Rossignol and Intrawest. Joint promotional efforts are becoming more frequent. It seems like “resort marketing” should start to be a standard category in every snowboard company budget.
 
The Canadian Ski Council survey provided some additional statistics. They may be important as snowboard brands consider their marketing position given the increasing importance of resorts in building a brand. Sixty percent of resort visitors won’t be staying over night. Half expect to board/ski for only one day on a given trip. Seventy six percent live two or less hours from the mountains they visited.
 
Perhaps this says something about the location of the shops snowboard companies should focus on. Maybe there are products that can be developed just for the day boarder. Maybe we should be providing benches and lockers, or at least having banners, in the day lodges.
 
I’m beginning to believe that snowboard brands should be interested in building relationships with some local resorts and sharing information with them for the benefit both of the company and the resort. I’d try and use the resort’s perspective, and information they would hopefully share on the composition of their visitors, to help me differentiate my brand.
 
We’ve all talked about our period of consolidation ending. If that is measured by stabilization in the number of snowboard brands, we can expect to be there in less than a year. But the end of the brand consolidation should not be assumed to imply a return to a more rational competitive environment.
 
The snowboard industry is not the distinct industry it use to be. It’s part of the winter sports industry and subject more than ever to the trials and tribulations of the ski companies and resorts.
 

We can learn a lot by looking at who’s visiting resorts and what they are doing while they are there. Maybe we can even help the resorts deal with some of their own competitive issues

 

Just Who Are We Anyway? Perceptions of Market and Industry Evolution

/0 Comments/in , , , /by

One day, a few years ago, we looked up and had become “the snowboard industry.” Growth, friends, good margins, optimism, an endearing naivete about the future and a quotient of bullshit was all part of what made it fun. The boundaries were clear. We were on the right side of that boundary and knew what was up. If you were on the other side, you didn’t. It was simple. We sold snowboards to snowboarders.

But fast growth and high margins can create an illusionary sense of control and invincibility. When these went away, the boundaries collapsed along with an awful lot of brands. Now it seems like the snowboard industry, for practical purposes, has become a piece of the winter sports industry. The retailers, the resorts, the ski companies, and everybody who is interested in hitching their star to the alternative sports market all have or want a piece of snowboarding- or at least of what snowboarding represents. Take Mountain Dew as an example. It doesn’t want to sell snowboard products, but it wants to be legitimized in the eyes of the consumer the snowboard market represents.
The reason that’s so important to Mountain Dew and others is because the Echo Boom Generation- loosely defined as the thirteen to twenty-five year olds- is projected to grow at a compound rate approaching fifteen percent between 1995 and 2005. There are a lot of them, and they have money to spend.
It’s no longer simple, and it’s not just about selling snowboards to snowboarders. At its 1998 annual shareholders’ meeting,  Ride Sports (note the previously announced new company name) CEO Bob Hall talked about the company’s mission as “creatively marketing high quality, technologically innovative contemporary sports products and extending those brands into apparel.”   Burton has started a shoe business. Morrow owned West Beach has a summer clothing line.
These companies are not just selling a product. They’re building brand equity with the goal of servicing the broader needs and interests of their target market. If the brand is legitimate in the eyes of that target market, they can sell an awful lot besides snowboards. And they can sell it at good margins.
In the past, I’ve called this market evolution “homogenization.”   That continues to be a good term. But it might be construed as implying a high level of “sameness” to a much larger action-sports market. In fact, what you’ve got is an increasing overlap among what use to be smaller, distinct segments: snowboarding, skateboarding, wakeboarding, etc. The boundaries have gotten fuzzy, as lifestyle and attitude become more important to a larger market.
What does this means for companies, resorts and retailers? They share some of the same strategic business issues, and are increasingly dependent on each other. Maybe they were always dependent, but they are recognizing the dependence and, in fact, seeing it as an opportunity.
Companies
Transworld Snowboarding Buyers’ Guide includes around seventy-five board brands.  I counted only around fifty exhibiting at Vegas. Once there were over 300.  The number will decline further. Most of the “How are you guys doing” calls I make seem to end up discussing layoffs and budget cuts. Orders are up for the coming season, but up twenty percent when you were down fifty percent the year before doesn’t cut it. Breakeven points are up. Everybody seems to be talking to everybody else about merging or being acquired. Making it as a snowboard-product-only company is tough.
Ski companies, in a declining market, aren’t making money on skis. Rossignol effectively recognized that when it tripled the company’s snowboard marketing budget last season. Salomon makes most of its money on golf.
Successful business strategies for these companies probably involve a year round business and less seasonality, multiple product lines, higher volume, better expense control and the creation of brand equity.
Resorts and Ski Areas
During the ‘85/86 season, there were 52 million visits to U.S. ski areas. In ‘96-97, the number was 52.5 million. If essentially none of those ‘85-86 visits were by snowboarders, and eighteen percent were by snowboarders in ‘96-97, then the number of skiers has declined by eighteen percent. Over that same period the number of North America ski areas has declined by 22 percent.
The 1996-97 Economic Analysis of United States Ski Areas, prepared by the National Ski Areas Association, noted the following trends during that season:
·         Increases in capacity and infrastructure improvement.
·         No change in total revenue per skier/boarder visit.
·         Declines in the net working capital and current ratio measures.
·         A 2.3 percent decline in operating profits and a 9.8 percent decline in pretax income.
Obviously, some of these numbers are open to interpretation, and results vary by region and resort size. But if participation is even (and may decline when snowboarding growth slows), balance sheets are in some sense weaker and profitability is declining, what is the justification for capacity and infrastructure improvements?
Sounds a little like the frantic competition for market share in the snowboard industry that led to product oversupply and a decline in the number of brands from over 300 to 50 and still falling. What’s a ski area to do?
Successful business strategies for resorts and ski areas probably involve a year round business and less seasonality, multiple product lines (golfing, real estate, tubing, etc), higher volume, better expense control and the creation of brand equity.
In fact, that’s what’s happening. Vail, American Ski Company, Intrawest and Booth Creek are purchasing other resorts. They are trying to remake resorts as year round destinations, create purchasing synergies, sell real estate, reduce seasonality and create brand equity they can cross market among their resort locations. Together, these four companies probably account for 35 percent of North American skier/boarder days.
Retailers
The National Sporting Goods Association recently released its Cost of Doing Business Survey for Retail Sporting Goods Stores. The survey is done every other year. It reported the following changes in financial results for full-line and specialty sport shops between 1995 and 1997.
                                                                        Full-Line Stores             Specialty Sport Shops
                                                                        1997     1995                 1997     1995
Return on Total Assets                                      9.4%     8.6%                 5.3%     9.8%
Return on Net Worth                                          23.3%   15.6%               16.6%   23.9%
Net Operating Profit                                          4.8%     5.0%                 4.1%     4.5%
Gross Margin on Merchandise Sales                  35.9%   34.7%               36.4%   36.5%
The full-line stores’ financial performance seems to have improved, even though their net operating profit declined by four percent. Specialty sports shops saw their performance decline, with operating profit down almost 9 percent.
The United States simply has more retail space than it needs in almost every product category. This is reflected in sporting goods stores in the low net operating profit percentages shown above. Remember that operating profit is before interest expense and taxes, so bottom line returns are even worse. When there is too much of something, the laws of supply and demand kick in and it gets hard to make money. It’s true in snowboard brands and ski resorts as well as sporting goods stores.
My belief is that specialty sport shops are also experiencing the market changes described earlier in this article. They can’t, for example, just sell snowboards to snowboarders any more. They have to cross-market different products to the alternative sports lifestyle market.
Successful business strategies for specialty sport shops probably involve a year round business and less seasonality, multiple product lines, higher volume, better expense control and the creation of brand equity.
A Community of Interest
I’ve used that last sentence three times now to describe what I see as the business imperatives of the ski and snowboard companies, resorts and ski areas and winter sports retailers. They are all operating in oversupplied markets and trying to focus on the same basic consumer group. I expect this emerging common focus to cause them to increasingly coordinate their efforts and evolve new relationships.
For example, we’re already seeing buying groups have more leverage with brands. The large resort groups are beginning to own their own retail space. The resorts are also working directly with the brands to supply their own product needs. Witness Intrawest putting its rental equipment needs out to bid and going with Rossignol. Brands are working with resorts to promote not only their products, but the sports themselves. Salomon made a major effort to work with resorts in promoting mini skis this past season.
What we’ve got going on is a huge change in the market, how it is perceived, and how it’s sold to. Put a dozen small circles of different sizes on a piece of paper, with none of them touching the others. Put one big circle around all of those smaller ones signifying the relative isolation of those related, but distinct markets. Those were the markets we focused on a couple of years ago. Now take those same circles, grow them, and have them intersect with each other in various ways. They don’t all touch each other, but are all connected if only through a common connection with another. And the connections change spontaneously. Finally, make the boundary of the big circle into a dotted line, signifying that it has become porous.
This is our new market. It’s bigger, but tougher to target. There’s greater interdependence. It’s not just composed of enthusiasts. Competitive pressures don’t come only from companies who make the same product you do. Single product/market companies are becoming increasingly rare.
Where do you fit in the new market?

 

 

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

/0 Comments/in , , , /by

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

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

 

 

Snowboard Industry Evolution; Is It the Survival of the Fattest?

/0 Comments/in , , /by

The snowboard industry is changing so quickly that I find myself looking back at articles that haven’t been published yet and wondering if I’ll agree with what I wrote by the time it’s in print. When Adidas buys Salomon, Quicksilver buys Mervin, Elan talks about putting its own name on a board, and Nike makes a deal for hard goods with DNR, last month’s immortal truth can become this month’s fatuous blather faster than you can say “Isn’t Animal cute!”

Valid business principals don’t change. But the arena in which you have to apply those principals is changing rapidly with growth, new players, and the challenges of consolidation. In a strategic sense, what are these changes, why are they happening and what are your choices in dealing with them?
The first time Elan, to pick a convenient example, put their name on a snowboard and it didn’t sell well we all smiled and said, “They don’t get it.”   And they didn’t. It wasn’t just about sliding down the mountain, but about lifestyle and attitude as well. You could make a good product but if you weren’t connected to the culture it wasn’t going to sell.
That at least hasn’t changed. It’s still about lifestyle marketing and we can hang our hats on it. But as the sport has grown and its energy become diffused, the lifestyle it represents is being interpreted and caricatured into a mass-market phenomenon. Witness Fila’s two page outerwear ad in the November, 1997 issue of Freeze with the punch line “BE CORE in two inch letters.
Nike, Solomon, Fila, etc. are going to show us what lifestyle marketing is all about by going after and attempting to tie together the pieces of that market in a way few companies in the snowboard industry can match. The ski business has finally remembered its roots, and is trying to regain some its previous energy and focus by reintroducing the youth market to skiing, recreating their own core market.
The big players aren’t going to dominate the core snowboard market (The core market consists of enthusiasts for whom participation in the activity of snowboarding is an integral and validating part of their lifestyle and self image.). But it won’t matter. They will try, and to some extent succeed in redefining and expanding “core.” Fila wants you to believe that if you “Buy Fila Skiwear” you’ll “BE CORE.”
 Nike’s sales alone, remember, are something more than 10 times those of the entire snowboard industry at wholesale. The traditional industry’s combined marketing and promotional budget could probably be doubled if we just had the cash from the experiments and false starts Nike probably made and is making in figuring out what to do with, to, and about snowboarding.
The second strategic change, then, is that we’ve got the attention of the big boys. The “they don’t get it” barrier to entry is diminishing because the market has gotten so much bigger. It’s now on the radar screen and worth a few missteps to decipher. And if they can’t decipher it, no problem; they’ll change it.
The third strategic change is that the borders of what is the snowboard business and what is not are getting less distinctive. As ski companies start marketing to the youth market, big companies try to grab a piece of and redefine the snowboarding vibe, and resorts have accepted (become dependent on?) snowboarding, the business we’re in and the customer we’re after is less clear than it use to be. Whether that’s good or bad depends on what you do with it.
Get yourself a little perspective. The March-April 1997 issue of The Harvard Business Review has an article by George S. Day called “Strategies for Surviving a Shakeout.”   I spoke with Professor Day, who has basically never heard of snowboarding. But if you changed a few words, his article could be about our industry cycle (damn-why didn’t I think of that sooner). I described our industry’s circumstances and the only thing that surprised him was the speed with which the consolidation was occurring. Somehow it wasn’t very comforting to learn that we were exceptional only in that way.
The good news is that though the sport will inevitably get homogenized, it will also grow and be legitimized to a whole new group of participants. The uncertainty is in how existing companies will participate in that growth. The newcomers to snowboarding won’t be completely successful in the traditional core market. Nobody can please all of the people all of the time, and it is exactly these inevitable inefficiencies in larger companies that result in the market niches where smaller players can thrive.
As the large players change the market, who are the new snowboarders going to be? To what extent will they care about the values of the core market? Can the core market grow and still be a core market? If it doesn’t grow, what are the growth prospects for existing companies who have positioned their brands to appeal to that market?
Traditional business strategy suggests that snowboard companies have two choices. They either can get big, or they can attempt to dominate a niche. Dominating a niche implies reduced growth prospects. Getting big in the snowboard industry, where big implies an ability to compete with the very large players, is probably unrealistic for many snowboard companies. The solution, if you’re unwilling to accept a niche position, even a profitable one, is growing in product areas related to snowboarding. I am anticipating, as a result, that snowboard companies will focus on making acquisitions in related action sports industries or will end up as subsidiaries or divisions of larger companies. There will, of course, be the exceptions that are satisfied with and can defend a profitable niche.
But how many niches are there? The one everybody has seemed to focus on are “high end boards to specialty shops.”   Others may be in leading edge technology and in image (Mervin?).
Don’t despair; there’s room for more than one company in a niche. But there’s not room for 300 and that’s one fundamental reason so many companies have fallen by the wayside. The competition to claim a piece of the most obvious and attractive market niches has been, and continues to be, intense.
I’m afraid that snowboarding is a bit of a flea on an elephant. The elephant is going to go where it wants and the flea can only ride along, get a tasty meal, and try not to be in the wrong place when the elephant roles in the dust. But fleas always get enough to eat, breed like crazy, are notoriously tough to kill, and can be really annoying to their host. In fact, the reason the elephant roles in the dust is to try and get rid of them.
But he never does.

 

 

Winter Resorts and Snowboarding; Why Does It Seem Like an Arranged Marriage?

/0 Comments/in , , /by

The Medici family of Italy rose to commercial prominence during the renaissance at least partly because of their ability to make or receive payments in widely dispersed geographic locations. Lacking a wire transfer system, they arranged marriages between family members and other prominent merchants in commercial centers that gave them the ability to move money or goods through somebody they could trust. There was no love lost, but the commercial opportunities were too good to pass up.

 Sound a little like winter resorts and snowboarding?   The antagonism of past years has largely evaporated. We don’t have complete enthusiasm, but it seems like we’ve at least worked our way past grudging acceptance. We’re certainly a long way from understanding. If we weren’t, we wouldn’t have had Animal foisted on us as a mascot.
 
At the National Ski Areas Association (NSAA) last May, the moderator asked the panel of four CEOs of major resorts, “What about snowboarding?” There was a pause before Adam Aron, CEO of Vail and, interestingly enough, a newcomer to the winter sports business said something like, “It’s here, it’s not going away, that’s it.”   There was another pause before the conversations moved on, with what I thought was palpable relief, to another subject. 
 
Is this any way to treat the sport that represents 17% of lift tickets, is growing rapidly, and, frankly, has saved your posterior quarter while skiing has stagnated?
 
Maybe. There’s a couple of things that may explain this can’t live with us, can’t live without us attitude and behavior.
 
Legitimate Lifestyle Differences
 
The NSAA meeting was my first exposure to a ski industry gathering. Those of you in snowboarding who have never been to one should try it. It really brings home the differences between the two sports. It was more subdued than a snowboard gathering, dress was more conservative (tuckers in button down shirts) and the average age, higher. The number of relationships that went back thirty plus years seemed astounding. The meeting was about business and, for better or worse, the passion and concern for the sport that has been so common in snowboarding was less obvious. A number of ski industry veterans commented on that fact with concern.
 
I had a good time and don’t make the above comments as a criticism, but as a statement of obvious differences. Skiing use to be a lifestyle but now it’s a sport. Snowboarding is still closely associated with participant lifestyle choices in music, clothing, culture, and other sports.  Skiing and snowboarding are of different generations, with different participant concerns and focuses at their different stages of life. It’s not good or bad. It just is.
 
These generational differences go a long way towards explaining why the resorts want the snowboarders’ money, but would just as soon we all took up skiing. We share sliding down a hill, and not much else. Really catering to snowboarding requires that the skiing establishment develop a commitment to lifestyle activities they aren’t attracted to and don’t understand.
 
Remember, this isn’t about finger pointing or right/wrong. We’ve just got groups of people with different life experiences who are at different stages of their life.
 
Financial Realities
 
If you take the time to read through the stock offering prospectuses of Vail Resorts and Intrawest Corporation from earlier this year, you’ll quickly realize that there’s a lot more to their business visions than selling lift tickets. It’s not enough, and it’s not accurate, to say simply that they are in the skiing business, or even the resort management business. It’s closer to the mark to say they are in the business of maximizing asset utilization, but I think a better way to put it is that they are in the theme park business.
 
Yup- just like Disneyland.
 
Walt Disney and successors have spent and are spending hundreds of millions of dollars on castles, monorails, fancy roller coasters, hotels and retail space. Their ongoing maintenance and operating expenses are big numbers. Even if they shut the parks down, interest expense and depreciation by itself would be a huge financial burden.
 
Disney’s revenue in the year ended September 30, 1996 was 18.7 billion dollars. Depreciation expense by itself was 3.94 billion. They had long term debt of over $12 billion on which they have to pay interest. Not all of that is associated with the theme parks, but you get the picture.
 
So how are they going to cover all those expenses and make a buck? By keeping those assets busy. They don’t want you to come for a day and go on a few rides. They want you to come for a least a week, stay in their hotels, eat their food, shop in their stores, play a round on their golf course and ride all the park attractions. And it would be nice if you got there via an airline they have a deal with. Keep those assets busy and hear the cash register go ca-ching!
 
Now, check out this nice juicy quote from Vail’s prospectus.
 
While lift ticket sales….have grown each year over the past ten years, revenues from other sources have grown at a much faster rate and, as a result, have increased as a percentage of Resort Revenue from 36% in fiscal 1985 to 51% in fiscal 1996.
 
The Company’s focus on developing a comprehensive destination resort experience has also allowed it to attract a diverse quest population with an attractive demographic and economic profile, including a significant number of affluent and family-oriented destination guests, who tend to generate higher and more diversified revenues per guest than day skiers from local population centers. While the Company’s Resort Revenue per skier day is currently among the highest in the industry, management believes that the Company currently captures less than 20% of the total vacation expenditures of an average destination guest at its resorts. Vail Resorts’ business strategy is not only to increase skier days and guest visits but also to increase Resort Revenue per skier day by capturing a higher percentage of the total spending by its year round destination and day guests, by continuing to expand the range and enhance the quality of activities and services offered by the Company.
 
Intrawest says much the same thing.
 
Intrawest’s operating strategy is to link the staged modernization and expansion of mountain facilities at its resorts with the controlled development of four-season resort villages focused on high occupancy accommodations.
 
I think it’s a hell of a good strategy, and if I were CEO of a large mountain (not winter!) resort, I’d do the same thing.
 
I wouldn’t do it because I didn’t like snowboarders. I wouldn’t do it because I didn’t want them on my mountain. I wouldn’t do it because I didn’t like/understand/participate in their activities and life style. I’d do it because it made business sense and my first responsibility was to my shareholders or myself as the owner. I’d believe that right now I can attract more destination guests and make more money on a golf course than a skate board park, because the people who golf have more money than the people who skate. That’s just the way it is.
 
But it won’t always be. And so the mountain resort community has to deal with a bit of a conundrum that I think explains their sometimes schizophrenic approach to snowboarding. The larger resort’s strategies seem to require them to focus on the current generation of skiers. Given that this group is constant to shrinking in numbers, skier days can only be increased by taking market share from other mountains. This explains some of the consolidation pressure in winter resorts, but it also represents a marketing opportunity for some smaller mountains (Hey-I think I feel another article coming on!).
 
But those skiers are going to get old and, someday, stop skiing. So are current snowboarders, but not so soon. How do resorts that have to rely on the current skiing generation to achieve their strategic and financial goals keep a growing and important minority of their customers happy?
 
Do they need to do very much at all? Will snowboarders turn into their parents, have similar disposable incomes, and want the same facilities and amenities their parents wanted by the time they are the destination decision makers? Don’t laugh; it’s been known to happen. I wonder if Nike will come out with an adult diaper someday (Just do it?).
 
Maybe snowboarding and snowsboarders need to take the time to understand the ski industry that we wish they would take to understand us. Betcha there’s some business opportunities there somewhere.

 

 

Now What Do We Do? Living With the Industry’s Success

/0 Comments/in , , , /by

I guess you can start by congratulating yourself. Though the snowboarding industry is still relatively small ($800 million at wholesale?) it’s continuing to grow at a rate most industries can only dream of and is clearly here to stay. You’ve been a part of that.

 
But now, you are face to face with the results of your own success. The consolidation we knew would eventually come is here. Three years ago, it was an intellectual concern for the future. Last year we could see it happening, but were hopeful it would be gradual and, therefore, manageable. This year, in the wake of the trade show season, it’s a lot like a cow pie dropping on an ant hill; sudden, stinky and overwhelming.
 
I couldn’t back this up statistically, but my travels and conversations tell me that a lot of companies lost money last year and are poorly positioned to carry themselves through another season. I’d guesstimate that retailers typically committed no more than half of their open to buy for the season and are expecting to rely on closeout product available during the season. Brands, including a couple of the larger ones, have been disappointed by their preseason orders. I view being positioned to do as much business in units as you did last year as a big success.   I suspect that quite a few smaller brands (hard and soft goods) are past disappointed and approaching scared.
 
There are a lot of deals being discussed among companies. Buyers want to give themselves the critical mass and product mix they think they need to be a successful industry player. They also see it as a time to pick up good brands cheap. Most sellers are making deals out of necessity. Ride has never made a secret of the fact that selected strategic acquisitions were part of its plan. The Silence board brand was acquired by Straight Line Manufacturing. I think you can count on some more announcements over the next couple of months. 
 
Everybody that’s having a tough time isn’t going out of business. But some are. I’ve talked to too many companies who’s strategy for surviving the consolidation is to “hunker down until it’s over.” The problem with that particular strategy is that they’ll have to hunker down a hell of a long time; by definition a consolidation isn’t over until smaller players without clearly defined market niches are gone.
 
It’s also not appropriate to assume that “getting through” one more year will be enough. Over capacity, which I see as the primary cause of the consolidation, isn’t going to go away that quickly. As soon as I get my crystal ball working again, I’ll let you know exactly how long it will take.
 
Well, I hope you enjoyed that little dose of doom and despair. Now let’s talk about what you can do about it.
 
The funny thing is that when times get hard and things get chaotic, there are always opportunities if you can just raise yourself out of the paralysis and myopia that is always the result of short term pressures. I’ve seen it time after time with companies in difficult transitions and been the victim of it myself. The effort, time and focus that it takes just to manage from day to day when money is tight takes most of your energy. You are so busy hiking through the forest that you never find the perspective to climb one of the trees and see if you’re going the right way, or are even in the right forest.
 
The good news is that the tougher things get, the less you have to lose my trying. You’re probably better off dying in a fall from the top of a tree than starving to death hiking through the wrong forest.
 
We all come to business with a clear sense of what “makes sense.” Forget it. Pull out all the apparently crazy ideas you’ve rejected out of hand and look them over. Put a sock in the mouth of the little voice in your head that says “We can’t do that.”
 
It’s time for absolute openness and absolute honesty with the people you work with. Listen, have respect for everybody’s crazy ideas and don’t reject anything out of hand. Stop worrying about people finding out things ain’t great right now. They already know it. Chances are they will respect you for your honesty and for dealing with it. Get the all the big uglies on the table so you can deal with them. The companies I have least confidence in are the ones who tell me everything is going great (“Oh yeah, we’re booking lots of orders!”) when I know they aren’t.
 
·         Cut that expense you didn’t think you could do without. What have you got to lose?
 
·         Ask that supplier for better terms and lower prices. All they can say is no.
 
·         Get rid of that old inventory at whatever price. Take the income statement hit and generate some cash. It’s not going to be worth more later.
 
·         Renegotiate your lease. Tell your landlord you need the rent to come down by 15% if he wants to have a viable tenant. Get him to give half of your security deposit back. 
 
·         Let people go if you have to, even if they are relatives and friends of long standing. How else are you going to preserve the company and jobs of the remaining employees (including yours).
 
·         Cut everybody’s salary 10%. And never pay payroll if you can’t pay the associated payroll taxes. Those taxes are a personal obligation.
 
·         Tell your creditors you can’t pay them now. Explain what happened and what steps you are taking to change things. Be honest with them. Keep them informed. Ask them for a discount and make a deal.
 
·         Get rid of the 800 number. Call the phone company and tell them you want a better rate per minute. You’ll probably get one. I did.
 
·         Stop making nice to people who owe you money and haven’t paid.
 
·         Raise your prices. Now. If you can’t survive with in your current financial circumstances anyway, what do you have to lose?
 
If you’re shocked by that last one, good. I want you to be. Maybe it’s not the right step for you. But there are a dozen other equally crazy sounding ones that are. All you have to do is think of them.
 
All these tactical steps will help as long as they are part of a feasible, overall plan. Don’t tell me it’s impossible. I’ve implemented all the steps above at one company or another. Remember that the power of enhancing revenue or reducing costs is in how quickly you do it. $2,000 a month becomes $24,000 over the period of a year.
 
So much for tactics. Unless you’ve got a workable strategy none of the above matters. Fundamentally, there has to be a reason why you are going to be able to successfully compete. If you can’t specifically define who your customers are and why they will buy your product instead of a competitor’s, you don’t pass go and you don’t collect $200 dollars. If you can’t differentiate your product and your company, you have a limited chance of being a survivor.
 
Ask 200 customers why they bought your product or why they came into your store. Listen to them carefully. Tabulate the responses and looks for trends and consistencies. Visit 20 other stores who are your customers or competitors. Have a check list of things you want to ask or note. What are they doing better or worse than you? How are they displaying your product?
 
Developing an effective strategy doesn’t result from taking everybody to a nice hotel for three days of meetings. It comes from a tedious process of collecting and studying meaningful information. Strategic planning is the process of looking at the same information your competitor can get from a different perspective and making better decisions as a result.
 
So you think you have identified a competitive advantage and have a strategy to carry out. Is it worth the effort?
 
Envision your store or company as you want it to be three years from now. What will it’s sales be? What will its customers think about it? How hard will you be working and what you will be earning? How much risk will you be taking? Ask the questions that are relevant to your circumstances.
 
Now look where you are right now. What resources will you need to get where you want to be? What are the risks? This is part of a much more detailed process but, in general, does it look like what you have to go through to get where you want to be is worth the time, risk and effort? Can you get the resources you need? If not, why are you considering doing it?
 
Nimble, aggressive companies that can identify opportunities, have a competitive advantage they understand, and have made an explicit decision about what they want to achieve and how they are going to get there will be the survivors. Don’t starve marching around the wrong forest. Climb the tallest tree and see which way to go even if you risk being killed in a fall.

 

 

Orders; I Got to Get Some Orders! The View From Las Vegas

/0 Comments/in , , , /by

Many snowboard companies came to Las Vegas this year knowing in their heads it could be tough to get orders, but hoping in their hearts that oversupply in all product areas wouldn’t stifle retailers’ demand for new, branded product. There are prominent exceptions, but a month after the show, it looks like some heads were right and some hearts broken. Companies at all levels of the sport have experienced disappointing preseason orders and face the hard decision of whether to order on faith or reduce their projections for the year.

Anybody who had hoped that the worst of the consolidation was behind the industry unfortunately knows better now. Even as retail sales climb and snowboarding becomes more mainstream and better established, some industry participants seem to be facing hard times.
 
The Numbers
 
SIA’s numbers on the show for 1997 and the three preceding years appear to validate industry conditions and suggest why some companies have been disappointed by their preseason order numbers. The total number of show exhibitors grew from 705 in 1994 to 897 in 1996. In 1997, the number declined a little more than eight percent to 823.
 
Total show square footage grew almost twenty-one percent from 427,000 in 1994 to 515,960 in 1996. In 1997, total square feet fell to a little over 504,000. That decline was reflected by the fact that no companies were exhibiting in the upstairs meeting rooms like they had the previous year.
 
The total number of buyers attending the show and shops represented also dropped. After growing thirty-one percent between 1994 and 1996, from 2,854 to 3,738, the number of shops attending dropped by over seventeen percent to 3,101. The number of buyers grew twenty percent during the same three year period from 7,761 to 9,333. It fell five percent in 1997 to 8,867.
 
My conjecture is that the decline in the number of shops and buyers attending the show is to some extent a function of an increase in orders being written at regional shows. As a result, I don’t see it as being a significant negative for the industry.
 
The Feeling
 
Comparing the mood at Vegas this year to last year was initially difficult. In past years, the peaks of excitement in the snowboard area were balanced by the valleys of the ski side. This year, with both major ski and snowboard players in the main hall, the energy level seemed more even, the peaks and valleys having leveled off somewhat.
 
Perhaps this was the result of the show reorganization. More likely, it followed from the larger booth and more business-like atmosphere, a continuation of trends from last year. The product, not the booth, was definitely the focal point. Ride and Sims must have been thrilled by that, since it appeared that the same designer using the same materials had created both their booths.
 
There were more people with ties than purple hair. Nobody was thrown out for having drugs in their booth and I heard fewer stories (only one) of product theft. There didn’t seem to be a keg in a booth anywhere. It’s possible I just wasn’t in the right place at the right time, but I’m usually pretty good at sniffing them out.   
 
My other observation about booths is that many companies were using the same booth materials they used the previous year, though the materials were assembled in a different way. I took that as one confirmation that maturing industry conditions are leading companies to be a little more careful how they spend money.
 
The booths of the leading snowboard companies seemed busy most of the time. Salomon and Bonfire shared a booth, with the boards along the back and the clothing on both sides. To keep things from getting too businesslike, Mervyn Manufacturing featured big white boards on which they listed and ranked the leading marketing gimmicks as reported by people walking the show. These included three dimensional top sheets and a bunch of others I can’t remember. Mervyn also had some women (I think they were women) walking around dressed as nuns.
 
It occurred to me that the best marketing gimmick at the show was Mervyn making fun of everybody else’s marketing gimmicks as a way of attracting attention to their booth. Thank God we’ve got Mervyn to keep us from taking ourselves too seriously.
 
The Other Hall
 
Back across the lobby, in what use to be the snowboard ghetto, it was, well, kind of a ghetto. Though traffic picked up as the week progressed, there were few larger companies to serve as a draw for the smaller players there. West Beach was the largest snowboard related company in that hall, and they seemed to be having a good show. The moral of the story may be that if you have good product, programs, financing, management, industry history and your reps do their jobs, show location may not be as big an issue for you.
 
In the corner of the hall, as far from the main entrance as you can get, was the Reef Brazil booth. I have absolutely no recollection what the booth looked like. I don’t even remember what products they were selling. But(t) till the day I die I will carry with me the memory of the Reef Brazil models standing there and signing posters. My own theory is that SIA intentionally put the Reef booth in that location to draw traffic into and through that hall in response to some of the complaints from companies who didn’t get into the other hall. I think it worked and I hope Reef took the same approach at ISPO.
 
New Brands and Manufacturers
 
I swear I didn’t expect to have to write this section. I thought the recent performance of snowboard company stocks, the publicity about over supply, and the declining prices for hard goods would cause people to be cautious about entering the industry now. Compared to previous years I suppose they were cautious. But there were fifteen or so new brands I hadn’t seen before. Even more interesting was the amount of additional manufacturing capacity associated with these brands.
 
Wolverine Snowboards is apparently owned by a Michigan auto parts manufacturer and expects to do OEM business. I don’t know for whom. Kuusport Mfg. Ltd. has a great looking accessory line but has decided to start making snowboards. They took out a full page color ad in Transworld Snowboard Business advertising what appeared to be good quality boards for between $105 and, I think, $130 dollars. Good luck to them.
 
After a few days of going from booth to booth to booth and being told by everybody that business was great and they were writing lots of orders, I had begun to feel like Diogenese searching for an honest man. At one of the new brands, I finally found one.
 
This booth was manned by an industry veteran who was old enough to have had his rose colored glasses shattered. After a few minutes of conversation, I cautiously approached the subject of his ability to compete and ask him, in the nicest possible way, why his current employer had leaped into snowboarding now and how they expected to succeed. He looked me right in the eye and, with hardly a moment’s hesitation said, “We can afford to lose a lot of money.”
 
It was one of those moments of clarity that happens all too infrequently in business. I don’t know where this guy is now. I have no reason to think he’ll see this article. But if he should, I want him to know that if I was starting a new snowboard company, I’d hire him in a minute.
 
Trends
 
Boards really do seem lighter this year. Significantly; not just by an ounce or two. It’s been suggested to me that this trend will finally run its course when durability declines and there isn’t enough weight to provide adequate dampening. Like pants can get too baggy, boards can get too light.
 
Quicksilver introduced its step in, joining the apparent rush towards that technology. But the waters were muddied a bit by improvements to traditional soft bindings that improved their ease of use and, in some cases, claimed to make them nearly as convenient as a true step in. All I really care about is that somebody makes a step in boot bigger than a (US size) 13 so I can actually try one of them.
 
Maybe a dozen companies showed some form of a three dimensional top sheet. Some claimed various performance benefits, but I see it mostly as a decorative way to reduce weight. Morrow first used this technology in a limited way maybe three years ago. It’s not new, but it’s sure gotten more popular.
 
This year’s Vegas show and the period immediately following it basically validated the changes many of us have seen coming in the industry. I won’t characterize them as good or bad, but as inevitable. Hype and image aren’t enough anymore.