How a Brand Makes Money In the Snowboard Business

/0 Comments/in , , , /by

Don’t get too comfortable. This is a short article that won’t take long to read. It’s a direct result of that moment in Vegas when I finally decided I wasn’t dreaming and that there actually were a bunch of new snowboard brands and new factory capacity. What makes it even worse is that some of these companies appear to be backed by financially solid parent companies, and can afford to lose money for a really, really long time.

I had thought maybe we were making some progress in getting through the consolidation, but now it looks like we’ve got some new fodder for the irresistible business cycle and we can all be miserable a little longer.
 
To make money, do these things:
 
·         Realize that all you have is your brand name and do everything you can to build and protect it. If you don’t have a recognized one, you probably can’t expect to make any sort of reasonable return by starting to build it now.
 
·         Base your product orders on your preseason.  Don’t kid yourself about reorders. Business people I respect are ordering no more than 10% above their preseason bookings, and some are 5% below. If you have to count on reorders to break even, you might want to ask yourself if your company has a future in snowboarding.
 
·         Be clean at the end of the year. You’re better off agonizing over sales you lost than inventory you have left. Leave your retailers sold through at full margins and anxious to increase their orders next year. You aren’t giving up sales; you are just delaying them a year.
 
·         Don’t chase market share right now. I’m beginning to think market share is a code word for losing money.
 
·         Respect the fact that closed out, brand name product may be among your toughest competitors this year.
 
·         Sharpen your pencil when formulating your advertising and promotional budgets. If you’re ordering product based only on what’s already booked and you aren’t fighting for an increase in market share, aren’t there some things you can do without?
 
That’s it.
 

 

 

US Market Conditions and the Globalization of Snowboarding

/0 Comments/in , , /by

Last year when somebody said to me “Write about US market conditions” it was easy. You could think of the US, Japan and Europe as distinct markets and approach the trends in each accordingly. But overcapacity and the slowing of growth have made that harder, and the interdependence of the three markets has become much more obvious.

Let’s at least start in the US at the Transworld industry conference in Vail. We’ll see that the issues on everybody’s mind reflected what’s happening in the US market, but that those conditions are at least partly the result of developments in the rest of the world.          
 
The 7th Annual Transworld Snowboarding Industry Conference in Vail, Colorado December 11th to 14th reflected US industry and market conditions perfectly. The familiar companies were all represented. But the number of total participants dropped to around 500 from closer to 600 last year with some smaller companies apparently not surviving. The new CEO’s of Morrow, Ride and Sims (David Calapp, Bob Hall, and Jim Weber) attended their first industry conference, highlighting a trend towards increasing professionalization of management.
 
There were attendees from a handful of record companies, some ski resorts and a couple of winter sports trade associations. They were all there to learn about snowboarding and, hopefully to help snowboarding with its inevitable move into the mainstream.
 
Presentations and seminars were better attended and the attitude was more businesslike than last year. I’m sure this had something to do with the fact that Transworld decided this year not to have open bars in the back of the rooms where the presentations were taking place. But it also reflected an emerging realization that industry over supply and some slowing of growth were making this a tougher market for everybody and creating survival issues for some.
 
Europe was represented by Harry Gunz from Rad Air and Charly Messmer from Generics and Blax. Salomon Snowboards had five representatives in addition to a contingent of four from Bonfire. Charly got some publicity for Generics and Blax the hard way, by hitting a rock in deep powder on day three. His board stopped, but he didn’t and the result was one broken ankle and one chipped one. No, of course you weren’t out of bounds Charly.
 
When last seen he was lying in bed smiling and seemingly unconcerned about the whole thing. I don’t think the pain medication had worn off. Anyway, it’s the time of year when he should be working, not riding.
 
The conditions in Japan were lurking in the back of everybody’s mind. Oversupply there (an estimated 300 to 350 thousand boards) has made it impossible to look at the three major geographical markets independently of each other. Many US companies had relied on cash deposit from Japan and/or site letters of credit to fund their production. It was clear those days are over for most companies. US retailer orders have to be expected to decline to the extent they represented gray market product shipped to Japan. Airwalk, Sims and probably others I don’t know about have seen some of their product show up in the retail warehouse giant Price/Costco and are moving aggressively to plug the leaks that allowed it to get there in the first place.
 
Good early season snow conditions in most of the US and mid November opening dates at many resorts are no doubt benefiting sales. My perception is that Burton and Mervyn Manufacturing (Gnu/Lib Tech) are overall the best positioned brands. Morrow, Ride and Sims are all dealing with the results of oversupply to the Japanese market and with management and organizational changes.
 
David Calapp joined Morrow as Chief Executive Officer only in August of this year and Dennis Shelton resigned shortly thereafter. David is experienced in sporting goods, but not in snowboarding. The brand is strong in the US but faces challenges in Europe and Japan. The recent announcement (during the Vail conference) that the company would not achieve its earnings projections for the year caused the stock to fall 27% in one day. Morrow’s response was to announce a buyback of 5% of its stock on the open market. 
 
Jim Weber, at Sims, has been in his new position almost a year. Like Calapp, he came to the job with sporting goods, but not snowboarding experience. His first major challenge was to prepare Sims to delivery a quality product on time. He believes the company is prepared to accomplish that. The second was to gain control of the brand. The lawsuit against DNR is being settled in Sims’ favor, with the company now controlling its distribution worldwide.
 
Bob Hall joined Ride as Chief Executive in August, 1996 with a strong background in winter sports including skiing and consumer goods. His immediate challenges were to rebuild the management team and restructure a company that suffered from very rapid growth and losses of key management people in many areas. The restructuring he accomplished quickly. Rebuilding of the management team is an ongoing process.
 
The major asset of most companies in the snowboarding business is their brand name. Many people, including myself, are of the opinion that a correct business strategy in the current environment is to protect that brand name through better control of distribution even though some sales volume will be sacrificed. Hopefully, the company will be compensated by higher gross margins on a product that is harder to find. As public companies, Ride and Morrow will have a harder time than other companies pursuing this strategy with shareholders looking for growth.
 
But don’t despair if you are a shareholder. The issue of which companies will be among the leading brands in the US is largely decided. They may fight for position against each other, but they will be here. It’s the smaller companies who have been dependent on Japan, who’s product lines are incomplete, and that are under financed that may have survival issues to deal with.
 
Ski Industry America’s retail audit numbers for the period from August through October 1996 seem to confirm these conclusions. They report that specialty store snowboard sales were up only 12% during the period by volume. In dollars, the increase was only 1%, indicating that average retail price of a board is continuing to drop. That average price was $294.00 during this period. 
 
What we see in these statistics seems to be confirmed by my discussions with retailers. Boards are harder and harder to sell at full margin. There is too much supply out there, and a more knowledgeable consumer has figured out that there isn’t that much difference among the major brands. I’ve heard of brands selling boards in quantity to close them out at $85 a board or even a little less. The result is that price has become a key factor in selling boards in the US.
 
As I’ve indicated, it’s become increasingly difficult to separate conditions in one market from those in another. That’s made very clear by an excellent report prepared by Robert C. Marvin and C. Heath Glennon of The Seidler Companies in Los Angeles. It’s called The Snowboard Industry 1996/97. You can call for your own copy at (213)-624-4232. Since I couldn’t say it any better than they do, let me quote them at some length.
 
“We estimate that the number of snowboards shipped (excluding OEM boards) to retailers by the five major manufacturers will increase about 26% from 1995/96 to 1996/97 and that the top five will account for about 45% of total boards shipped worldwide as compared to 35% in 1995/96. This should mean trouble for many of the other 200+ snowboard companies.”
 
“Unfortunately, it does not appear that the excess inventory problem will end with the 1996/97 season. We believe snowboard production for the 1996/97 season will again approach 1.9 million units. Add the 425,000 units of 1995/96 inventory that are still around and there will be about 2.3 million snowboards available for sale in 1996/97. Even if demand grows 25% to 1.5 million units, there will be 800,000 units left over in March of 1997.”
 
The report goes on to produce a similar analysis of boots and bindings, and concludes that there are excess inventory problems in both these categories and that “…snowboard boot inventories at retail were an even bigger problem than board and binding inventories.”
 
My own analysis suggests that board production this year probably exceeded 1.9 million and that production capacity may be close to 3.0 million boards.
 
This article started in Vail, Colorado but ends with a focus on snowboarding as a maturing, global business.  The markets can’t be viewed in isolation of each other any more. They never could, I suppose, but the illusion that they were separate was fostered, to some extent, by a demand that exceeded supply. Obviously, that period is over. Welcome to the world snowboard market. 

 

 

Hard Choice Time; Strategies for Success in the Snowboard Industry

/0 Comments/in , , /by

It all kind of came together for me at the industry conference at Banff, though I couldn’t say if it was on the lift, in the spa or at the bar. Probably at the bar. The time is over when a small or medium sized independent player in this industry can just focus on getting from one year to the next. If all you think about are tactics and operations, chances are that one year soon, you won’t make it even as the industry as a whole continues to prosper.

 Your choices are pretty clear cut. There are four. They are discussed below. The goal of this article is to motivate you to dispassionately evaluate your business and the market, and then actively pursue one of the four. To do that, we’ll consider the impact of some recent industry transactions and identify the problems that most smaller companies say they have in common.   To begin, we’ll get past some of the hype and excitement of snowboarding and look at it as another industry starting to enter its maturing phase.
 
In 1980, a Harvard professor named Mike Porter wrote a book called Competitive Strategy. The whole volume is worth your consideration, but Chapter 11, “The Transition to Industry Maturity” is especially relevant at this time in the industry’s evolution. I think we can safely assume that Dr. Porter was not a snowboard pioneer, but his discussion of what happens in a consolidating industry (any consolidating industry) will look ominously familiar to anybody who thinks about what snowboarding is going through.
 
Step One in our analysis, then, is to agree that as much as we may love it, and as exciting as it may be, the evolution of this industry won’t ultimately be different from that of any other industry. At this point in time, the only difference I perceive is that it is happening faster than it does in most industries. I believe that’s because there are really no significant barriers to entry, but the fact that you have to commit to the next season before the last one ends makes it hard to get out.
 
No entrepreneur succeeds without an almost heroic belief in themselves and their business; if they didn’t have it, they would never take the risk.   It can be difficult to have an objective perspective on industry trends and the potential of their company. The euphoria engendered by rapid growth, the hype of any fashion related business, and the fact that companies try to make themselves look bigger than they really are (except Burton and Gnu/Libtech, who seem to want to look smaller) can make it tough to be dispassionate.
 
Get dispassionate. Talk to business people outside of snowboarding. Set some measurable goals. Figure out what success means (hopefully more than bare survival). Formally decide if the risks are worth the potential returns, financial and other.
 
Step Two is to look at some recent industry transactions to figure out why, in general terms, they happened and what their impact on the industry may be.
 
Let’s see, Morrow went public, Salomon bought Bonfire, Ride bought Thermal, Hooger is buying American Snowboard Manufacturing, Madison Sport bought Purged/Mantle and Variflex bought Plunkett Snowboards, Inc. What’s going on?
 
Companies are building their balance sheets, vertically integrating their businesses, associating themselves with stronger partners, developing year round cash flow, and generally positioning themselves to survive and compete with lower margins on higher volume. 
 
Are we shocked by all this activity? No, because under Step One we agreed that the same trends that occur in any other maturing industry will also occur in snowboarding.
 
Let’s look specifically at the Variflex deal. Variflex produces protective equipment and in-line skates that it sells directly to large retailers.  In May 1995, it acquired Plunkett Snowboards, Inc. to produce its Static brand of snowboards. Variflex’s goal at the time was to produce a board that retailed in the $300 price range but was comparable in features and quality to the most expensive brands.
 
Because Variflex sells directly to retailers, from a financial perspective this goal won’t be difficult to achieve. Based on my discussions with a number of board manufacturers, I’d estimate that the cost to produce a high quality board in volume is probably under $90.00. Let’s say it is $100 and the board is sold to a retailer for $140 to give Variflex a 40 percent margin over cost. The retailer wants to make their traditional 40 margin too, so the consumer pays $233.
 
Hey, what happened to the $300 retail price? Remember this is a bit of a moving target, and K2 already has the Dart out for a suggested retail of $270. K2 and Variflex are both selling direct, as is Elan with the Nale brand. Eliminating the profit for that extra middleman frees up a lot of margin.
 
Happily, there’s more than financial calculations at work here. Even in skiing, brand names and marketing keep retail prices higher than they need to be from a financial perspective. Nobody is going to scurry to give up margin before they have to. But I do see the day where a high quality wood core board will retail not too far north of $200. With boots and bindings, there appears to be more of an opportunity to keep margins up through technological innovation, assuming you can afford the cost of developing those innovations. 
 
Step Three is to identify problems most companies have in common. One’s obviously price pressure. It’s more or less important depending on your market segment and size, but it exists for everybody.
 
A second is inability to differentiate a brand. Most smaller companies are unable to spend enough to make an impression in the market. Even when they do spend it, it gets lost among the hundred of brands trying to do the same things, driving operating margins down even further.
 
A third issue is the working capital requirements of a highly seasonal, fast growing business. Success probably requires you grow at least as fast as the market. Seasonality, and the increasing tendency of retail accounts to require longer terms, means you have to tie more and more capital up in the business for longer and longer periods. Many company’s’ track records and profit potential don’t justify either a loan from a bank or an investment. Lacking a rich uncle or a trust fund, it’s going to be tough to come up with the money. 
 
Fourth is dependence on the Japanese market. A few months ago, several sources estimated that there would be 800,00 boards brought into Japan this year. Interestingly, I’ve also heard 400,000 and 1.2 million. Maybe 800,000 is a reasonable number.
 
I don’t know what reality is in the Japanese market. But I am certain that the days of 50 percent cash deposits and 50 percent site letters of credit are going to vanish. Companies creating brands that are sold only in the that market should not expect those brands to survive. How will they replace that cash flow?
 
In summary, then, margins are declining while required marketing costs increase. The financing
necessary to grow quickly enough so that volume offsets reduced margins is, at best, difficult to find. Cash constraints will be accentuated by changes in the Japanese market.
 
Step Four is to look at possible strategies given the conditions and market evolution described above. There are four of them.
 
The first is to find enough capital to reach a volume world wide, as a manufacturer or a wholesaler, that makes you a “player.” That is, that puts you in a position to compete at least partly on price and to be profitable under the circumstances described above. As a stand alone snowboard industry company, if you aren’t close to being there now, you probably won’t be able to get there. The reason is that you won’t be able to show the return on investment required to attract the funding.
 
The second, in theory, is to find a market niche where you can differentiate yourself so that brand loyalty offsets sensitivity to price and, to some extent, insulates you from the emerging competitive conditions. I say “in theory” because the only company I believe has really accomplished that is Mervin Manufacturing, and they’ve done it by having a consistent focus over a period of years. Nitro, with what I’ll call their high tech, retro-ski approach to advertising this year, may be trying to establish a niche for themselves and I think they’ve got a good chance to do it. Not a jumping rider in sight on some of their ads. For a long time, they tried to disguise the fact that they were a European owned company. Now it looks like they are using that “liability” as a strength.
 
AK Bommer Boards in Valdez, Alaska is another good example of a niche strategy. They make individual custom snowboards. “Big Boards for Burly Riders with Big Feet” it says on the business card. As a guy with a size 13 attached to my leg, I called for information. Probably won’t ever be a big company, but at $500 a board, their margins should be okay and their break-even point low.
 
They have the additional advantage of knowing exactly who their market is; “Big Boards for Burly Riders with Big Feet.” Think of the power of that phrase. With those eight words they know exactly who their competitors and customers are and what their position in the market is. Consider the efficiencies it gives them if only because they don’t waste advertising and promotion dollars.          
 
The problem is that there are too many companies and not enough niches, and no niche completely insulates you from price pressure. Sales dollars required to break even are rising, and I expect they will continue to do so.
 
The third strategy is to become a product line of a larger company with year round cash flow. You share overhead, facilities, possibly distribution channels and reduce your break-even point. Year around cash flow eliminates or at least reduces the annual crisis of working capital common to one season businesses.
 
A corollary to this strategy is to find someone better capitalized than you are to distribute your brand. You continue to control product development, and maybe advertising and promotion, and earn a royalty on sales. It’s probably a lower return strategy, but it’s lower risk as well.
 
The fourth strategy, which is inevitably the least popular, is to pack up and go home. If you go through the kind of analysis suggested above and can’t find a way to implement one of the three strategies I’ve identified, maybe the chances of success don’t justify the risk and effort anymore.
 
There’s actually one more strategy, if you want to call it that. It’s what I characterize as the “more of the same” approach. This will prove to be the most popular approach and some companies taking it will succeed. A lot won’t. There’s not much to this; just keep doing whatever you’ve been doing before and hope it works. Every company has a strategy- even if it’s a bad one and they didn’t actively chose it.
 
I know how hard it is to find time to deal concretely and dispassionately with issues of strategy when you’re trying to run a company. But the surest path to failure is to be caught in between strategies, unable to compete on price and not having established a defensible market niche. If you are caught there you aren’t going to enjoy it, and you aren’t going to survive.
 
SIDEBAR:
 
Trends In Any Maturing Industry
Shamelessly plagiarized in a good cause from Competitive Strategy by Michael E. Porter
·         Firms sell to experienced, repeat buyers who shift their focus from the decision to buy to choosing among brands.
·         Industry profits fall. Smaller firms are most affected. Cash flow declines when it is most needed, and capital becomes increasingly difficult to raise.
·         Danger of over capacity accentuates the tendency towards price competition.
·         Company attitudes must be disassociated from the euphoria of the past.
·         New products and applications become harder to develop.
·         Dealer margins fall, but their power increases as more brands compete for shelf space.
·         Slowing growth means more competition for market share. Frequently that competition can border on irrational.

Competition may emphasize cost and service

 

Big Air; Initial Public Offerings in the US

/0 Comments/in , /by

Open on the table next to me I have the preliminary and actual prospectus for, respectively, Morrow and Ride Snowboards initial public offerings. As of December 13th, 1995, my broker assures me, Morrow is not public yet.  Ride’s prospectus is dated May 6, 1994 and those of you who bought their stock at the time of the offering are patting yourselves on the back. Those of you who didn’t, aren’t.

Ride’s prospectus estimates expenses of the offering at $361,500. Morrow’s estimate is $900,000. They pay these expenses for the privilege of filing quarterly and annual statements with the Security and Exchange Commission (SEC), dealing with shareholders, revealing information they’d rather keep confidential, paying for audited financial statements and legal fees and holding annual meetings.
I can tell you from experience that to prepare their company to do all this, they went through a process which, besides being expensive, distracted senior management from running the business, was stressful and involved a high level of uncertainty. Why would they do it?
For the money, dude. But it’s not quite that simple. Basically, there are five financial benefits to going public.
First, the company receives cash from the sale of shares. In the case of Ride, the net proceeds were $4,138,500. Morrow hopes to raise something like $19,000,000. The company has great flexibility in how it uses the money. The Use of Proceeds section of the Ride prospectus says they expect to use $175,000 for office and warehouse equipment and the remainder for “working capital and general corporate purposes.” As non specific as that is, they then go on to reserve the right to use it differently “…if market conditions or unexpected changes in operating conditions or results occur.”
Basically, they can use it for any reasonable business purpose.
Second, it’s typical that the value of a public company is higher than a private company. As recently as April of 1995, Morrow sold convertible debentures with a conversion price of $3.67 per share. Remember they are hoping to go public at “between $11.00 and $13.00 per share.” If the offering price was $12.00, the company’s apparent valuation would have increased over 225% since April. Going public creates wealth.
Third, the company gains liquidity, and this in part explains the higher valuation. Shares in the company can now be bought or sold easily and efficiently.  The price is determined daily by the actions of (hopefully) objective third parties.
Fourth, the owners reduce their risk and can diversify their portfolios. Also, they make a lot of money. Morrow expects to sell 1,600,000 shares to the public but current shareholders will sell an additional 530,000 shares personally. The net proceeds from sale of those shares (around $6 million) will go directly to those individuals.
Finally, the company creates an asset that doesn’t show up on its balance sheet; the ability to sell stock. There are restrictions to how much you can sell, when, and at what price.  Some restrictions are legal one, and some the result of how the financial markets view the sale of new shares. But in general the public company has easier access to capital.
In August of this year, Ride did a secondary stock offering. The company sold an additional 1,165,400 shares and existing shareholders (directors and officers of the company) sold 834,600 shares they held at a price of $17.00 a share, succinctly demonstrating the value to the owners of a public offering and a successful company’s ability to raise cash after it is public.
The process of doing a public offering starts when a company goes into registration, submitting a registration statement and a draft of the prospectus (known as a “red herring”) to the SEC. Depending on how recently the company has done an offering, and how well known the company may be, the SEC may decide to have no review, limited review, or full review. A review will typically take about a month. It results in the company receiving comments from the SEC that require changes and/or additions to the registration statement and prospectus.
If there is no review, or when it is complete, the road show can begin. The road show is a series of meetings and presentations with interested investors and institutions in different cities. These meetings allow the company and its investment bankers to create interest in the offering and to evaluate how it should be priced.
Following the road show, the stock is priced in one or more meetings between the company and its investment bankers. The price depends on a variety of factors including market conditions and the reception during the road show. Once the deal is priced, the prospectus can be printed with complete information and become effective. The prospectus and stock are distributed to interested institutions for sale to investors and the stock begins to trade.
The draft I have of Morrow’s prospectus runs to 66 pages. Ride’s was 48. Both have sections entitled “Additional Information” which makes the reader aware that the prospectus does not contain all the information in the Registration Statement filed with the SEC. It notes that “Statements contained in this Prospectus as to the contents of any contract or other document are not necessarily complete…” and informs the reader that they can get copies of these documents (which, including exhibits, can run to hundreds of additional pages) from the SEC.
The form and content of a prospectus is clearly defined by the SEC. It is a carefully choreographed document that results from a certain level of creative tension between the company executives, the lawyers and the investment bankers. They all share the goal of getting the company public. The executives and investment bankers want the prospectus to be as positive a document as possible to improve the prospects of selling the shares at the best price. The lawyers are more cautious. Their job is to make sure that all the relevant information is disclosed completely and accurately, whether it is negative or positive. Lawsuits by investors claiming inadequate or inaccurate disclosure in the prospectus are not unusual.
My favorite example of how language gets crafted is in the Morrow prospectus when they talk about manufacturing risks. When discussing the company’s ability to get the materials it requires for manufacturing, they say “In addition, the Company has experienced limited delays in the delivery of certain raw materials due to delay in payment for such materials.” Those of us who are less eloquent than attorneys might have said “Their suppliers wouldn’t ship any more until they paid for what they’d already received.”
Obviously Morrow is far from the only snowboard company to have a tight cash flow, and one purpose of the offering is to prevent that from happening again, but you can see how it can pay to read some of the fine print carefully.
The Table of Contents to Ride’s prospectus dated May 6, 1994 is reproduced in the box below. Morrow’s is the same except for a few words and the order of presentation. We’ll talk briefly about some of the sections.
Table of Contents                                  Page
Prospectus Summary                            3
Risk Factors                                         6
Use of Proceeds                                   12
Dividend Policy                                     12
Dilution                                                 13
Capitalization                                        14
Selected Financial Data                         15
Management’s Discussion and Analysis
  of Financial Condition and Results of
  Operations                                          16
Business                                               18
Management                                         22
Executive Compensation                       24
Principal Shareholders                           27
Certain Transactions                              28
Description of Securities                       31
Underwriting                                          33
Shares Eligible for Future Sale               36
Legal Matters                                        36
Experts                                                 36
Additional Information                           37
Index to Financial Statements                F-1
The prospectus begin with a summary and moves on to “Risk Factors.” Morrow and Ride take six pages to talk about what could go wrong; foreign exchange, seasonality, ability to sustain growth, weather, dependence on key individuals, product liability. The list goes on. It gives the potential investor insight into the business risks, but is also important in protecting the company from lawsuits for inadequate disclosure.
“Selected Financial Data” is summarized historical income statement and balance sheet data. I always ignore this and proceed directly to the detailed, audited financial statements. The “Management Discussion” puts into words the financial relationships you’ll note yourself in reviewing the financial statements and explains the conditions that led to those results. The “Business” section talks about the industry, the company’s strategy, and its basis for competing.
Now it starts to get really interesting. “Management” describes the age, position and background of the company’s executives and directors. “Executive Compensation” tells you who is paid how much in salary, bonus and “other.” “Principal Shareholders” lets you know who owns how many shares, and what percent they own before and after the offering.
Now comes my favorite section: “Certain Transactions.”   This is where you can hope to  learn how the company really got financed before its public offering. You learn about stock issued for services, loans from family members of officers, private placements to officers and directors and their families and other interesting transactions. I always smile when I read about them, but it’s partly in admiration for people who figured out how to get the job done.
“Shares Eligible For Future Sale” gives you some idea what the “float” (number of shares actively available to trade) will be. Morrow’s prospectus indicates that after completion of the offering, but assuming no exercise of outstanding options or warrants, there will be 5,061,045 shares of common stock outstanding, but that only 2,130,000 will be eligible for sale to the public without restriction. The others are restricted either for legal reasons or be agreement with the investment bankers doing the public offering. They will become eligible to be sold as described in this section of the prospectus. As and if they appear on the market, the supply of Morrow common stock will increase. All other things being equal, increased supply reduces demand and, therefore, price.
Now you know a little about what it means to go public in the US and what’s to be found in a prospectus. Only the substantial financial rewards to the company and the shareholders can justify the expenses, distractions and continuing obligations the process inflicts.

 

 

Where Have All the Snowboards Gone? The Apparent Imbalance Between Production and Sales

/0 Comments/in , , /by

I seem to remember from my first economics class that if supply goes way up and demand doesn’t keep pace, prices can be, well, negatively impacted. When I look back at the 1994-95 season, I am disturbed because it appears that there were more boards produced than were sold to retailers; maybe a lot more.

Below, I try and estimate just how many more. With so little hard information out there, that’s a tough thing to do with any confidence. But because the answers will affect how we run our businesses and how successful we are, it’s worth the effort.
 
My information is based on what I’ve read, some third hand conversations, rumors, insights gained working with snowboard companies, and some educated guessing. My numbers are not precise, and I’d like nothing better than for somebody to prove me wrong. 
 
If I were to guess how many boards were sold to retailers during the 1994-1995 season in the United States, I might estimate 225,000. Conventional wisdom says that the U.S. is one third of the total market. If that’s accurate, there were approximately 675,000 boards sold to retailers world wide.
 
My instinct is that the number is over 800,000. Using that number for discussion purposes, let’s talk about how many boards were produced.
 
I’m pretty confident that Pale and Elan together produced over 400,000 boards. Let’s say that Burton, Morrow, K2, Lamar, Gnu/Libtech and Rossignol together made 450,000 in factories they own or control for their own brands or others.
 
That’s a total of 850,000, which would be consistent with my estimated sales number if I wasn’t ignoring Atomic, Spaulding, Blizzard, Carnival, Thermal, Surf Politix, ASM, Niedecker, Volkl, Dynastar and a host of others that make their own and/or other brands.
 
At a minimum, I think production for the 1994-95 season was 1,100,000 snowboards. One knowledgeable source said the number was closer to 1,500,000. That means there would be between 300,000 and 700,000 unsold boards out there, not counting what retailers still have.
 
That raises some interesting questions. Like, for example, where are all these boards?
 
Maybe a distributor has them all in a warehouse somewhere, waiting for a good time to unload them.
 
Japan. They got to be in Japan. That’s actually the opinion of some people, and if you accept the conventional wisdom that there’s enough pairs of skis in Japanese warehouses to satisfy the market in 1995-96 if not a single additional pair was imported, it at least seems plausible. Certainly the Japanese have the balance sheets to support holding that much inventory.
 
Maybe it doesn’t matter where they are if they exist. At some point in time, they will appear on the market. Are your brands so well positioned that customers will still pay full price rather than buy a new, one year old board with essentially the same construction for a huge discount?
 
Think on it. What do you need to do differently as the market changes?

 

 

Show Trends and the Business of Snowboarding; “It’s Deja Vu All Over Again!”

/0 Comments/in , , , /by

In 1903, 57 companies were started to make cars. 32 left the business. I recently heard it on National Public Radio, so it must be true. Snowboarding, of course, is going to be different.

In your dreams.
 
They say that when you die, your finger nails and hair keep growing for about three weeks. In Las Vegas I saw some companies who’s personal grooming was clearly not part of a fashion statement they were making (except for Gnu/Libtech of course). They sat in their booths waiting for wide eyed buyers desperate for any kind of snowboard or snowboard product to place orders regardless of price, quality, or line completeness.
 
Four, maybe three years ago, it might have worked. It did work. This year jaded buyers overwhelmed by the number of snowboard brands and companies scurried back to the familiar brands they knew they could count on for delivery, quality, terms, warranty, service and, by the way, sell through.
 
It’s 1903 all over again.
 
I asked the same set of questions to perhaps 25 hard and soft good companies. I focused on relative newcomers. The conversations typically went something like this.
 
“If you’re successful, what will your company look like in three years?”
Long pause and a smile followed by some variation on “We’ll be a lot bigger and making money.”
 
“So you’re not making any money yet? Are you paying yourselves salaries?
Longer pause and less of a smile followed by some variation on “Well, you know how it is.”
 
“How much working capital do you need to achieve your sales goals this year?”
“We’re not exactly sure yet.”
 
“Where are you going to get it?”
“We’re talking to a lot of people.”
 
“Who are your competitors and how are you differentiating yourself from them?
Inevitable answer: “We’re closer to the market and really know what’s up.”
 
“Are you really prepared to risk loosing everything you have?”
At this point they were often looking around hoping somebody else would come into the booth for them to talk to. If there was ever a messenger who needed shooting, it was me. I could see it was time to finish up, so I’d summarize by saying, “Let me see if I understand this. You aren’t really sure what your goals are, have no source of capital, no clear competitive strategy, could make more money working at McDonalds, and are risking everything you have. Why are you doing this?”
 
Finally a question they could answer. Their face lights up. “We love snowboarding!”
 
Obviously, most companies didn’t fit this extreme profile, but some came close. Almost everybody had at least one of the issues I referred to above and, to everybody’s surprise I’m sure, the most common was lack of financing.
 
There are quite a few companies with well known brand names that are much smaller than everybody thinks. They are well managed and established in their market niches. They know what they need to do, but don’t have the bucks to do it. The sad thing is that in this competitive environment, where just surviving requires an aggressive marketing posture, investors will not be able to find the returns they require and capital may not be available.
 
It’s hard to make good business decisions when you are driven by a capital shortage. More than one company had an opportunity to sell a lot of product to a chain. They need the sales volume and cash flow, but can’t risk devaluing the brand and alienating their specialty customers. If the capital requirement is critical enough, they may be forced to make a bad marketing decision for short term survival.
 
The kind of irrational competition described above is one indication of the consolidating snowboard market. Other indications I saw at the shows include:
 
1)         People trying to create market niches as a way of differentiating their product by a) having separate lines for specialty and chain stores, b) doing graphics specific to a particular region of the country and c) trying to make minor design or construction changes seem significant.
 
2)         The product is becoming more important than the booth and its presentation. As what it takes to succeed in this business hits home, price, quality, service and delivery are competing with glitz and hype in the selling equation.
 
3)         The first rumbling of price declines were seen, but not as much as I had expected. I attribute that to a shortage of quality, volume manufacturing and fiberglass in the U.S., a week dollar, the presence of a lot of smaller brands that can’t afford to sell at lower prices, and the fact that a lot of the big players aren’t really selling direct yet. If you want a peek at the future, look at the pricing on Nale’s boards (Is that Elan spelled backwards!? Gee, I wish I’d thought of that.) One new brand having its boards made at Elan bemoaned the fact that Nale was selling boards to stores for less than he was buying from Elan. How could he compete?
 
Answer: he can’t, unless he’s very well capitalized and has a well thought out marketing strategy.
 
I guess it’s just this simple. The snowboarding business is changing in predictable ways. Whether you are a retailer, distributor or manufacturer the way you do business is going to change as well. Success means being out ahead of the curve and using these changes to develop a competitive advantage. Living in the past means being buried there. “More of the same” won’t work anymore.

 

 

Who Are Your Customers? And Why Are They Buying From You?

/0 Comments/in , , , /by

As a snowboard retailer, you have a position in your market. You own it, and it’s yours to loose. The best way to loose it is to forget who your customers are and what they want.

The other day I was in one of these warehouse stores. There was a snowboard with bindings for, I think, $299.00. The board had a full metal edge, the inserts and finish looked fine and the bindings, while nothing to write home about, seemed perfectly functional. The description said it had a full wood core, and most of the other statements about it could have been out of an ad for a leading brand. The brand? At about the point where the number of brands passed 150 the part of my brain that could remember them all atrophied.
 
It’s enough to strike terror into the heart of a shop owner. If you end up competing on price…. Well, you can’t. 
 
But there’s hope. Recently, a competing publication (I don’t think they’ll let me say Transworld Snowboard Business here) did a survey of 100 snowboard shops. It indicated that brand name and the sales person were the two most important factors determining a purchase. On a local level, how can you get that kind of information; the kind you can act on?
 
Rush to your local library or town hall, or log onto the Internet. Dig up the census data for your county or SMSA (standard metropolitan statistical area). What are the incomes levels? Average age? Population density? Where are most of the people you believe are your likely customers?
 
Are they your customers? Ask questions of every customer that comes in your store whether they buy or not. Get their address, school they attend if appropriate, where they work, what mountains they ride, whatever will help you figure out what they want. This doesn’t mean locking them in a room until they fill in a three page questionnaire. It can be part of an informal conversation between the sales person and customer. The trick is getting it consistently written down immediately after the conversation.
 
One side benefit is that showing that kind of personal interest in a potential customer may actually increase your chance to make a sale. Listen to your customer. Easier said than done.
 
Get a map of the area and tape it to the wall. Put a pin in to show the home and/or job and/or school of each person. Is there a pattern to where your customers are coming from? Is it what you thought it was? Does this tell you anything about how to reach them and where you should be advertising?
 
Pay for gas, food and list tickets for a couple of shop employees on the condition that they come back with information on 50 snowboarders. What kind of riding do they do, how often, where did they buy their gear, and why? Offer to share your data with the mountain if they’ll do the same with you.
 
It isn’t enough to collect this information on slips of paper or three by five cards, read through it, think to yourself, “Isn’t that interesting” and then forget it. Organize it to see the patterns. On a computer, or on some big pieces of paper taped to a wall. The more data you collect and the more ways you look at it, the more you learn. The magic of being this rigorous is that some of your cherished and unquestioned assumptions about who your customers are and why they buy will turn out to be a bunch of fatuous blather (i.e., wrong).
 
Assuming that you go through the procedure I’ve described (or a similar one you believe is more appropriate to your market) what’s in it for you? Now you have some harder data on what kind of people are buying from you, what they are buying and why. Tape some more big pieces of paper on the wall with information about your inventory at different times of the year. Given the kind of people buying from you and their reason for buying at your store, should your product mix be different? Are you carrying too much of some items and not enough of another?
 
How many dollars is it worth to you to have the right inventory at the right time and have as little as possible left over at the end of the year?
 
If you are a little better able to anticipate your customers’ needs, what kind of return and add on sales does that generate? The process is cumulative and never ending. The better you do, the better you do.
 
Scurry to the book store and buy a paperback called Customers For Life, by Carl Sewell. Mr. Sewell is the most successful luxury car dealer in the country. The book is about how he gets and keeps his customers. Before you laugh about using the ideas of a car dealer in a shop that sells snowboards, you might take a look at the consolidation going on in that industry. Price competition is intense, the number of dealers has declined rapidly, the survivors are tending to be much larger, and the customers aren’t as willing to be convinced that there’s a significant difference between brands . Recognize any trends you’re worried about?
 
Your shop is unique. My questions and sources of information may not be the right ones for you, but the concept is right; whether you’re selling cars or snowboards. There’s no more important information than who are your customers and why are they buying from you. In the snowboard industry’s competitive environment, you have to take the time to find out. 

 

 

The Joys of Consolidation; Managing the Transition from Growth to Maturity

/0 Comments/in , , /by

It happened to skate boards and surf boards. Now, it’s the snowboarding industry’s turn.

The transition from a fast growing, hot trend to a mature industry is about more than consolidation to fewer players. It means lower margins, slower growth for many companies and aggressive competition increasingly based on price and service, not to mention savvier consumers who may care less about image and more about price. This transition will happen quicker than in most industries due to a lack of entry barriers (low capital costs, no patented technology) and be accentuated by the financial burden imposed by extreme seasonality.
 
But change produces opportunities whether you’re a retailer or distributor if you have perspective to recognize them and willingness to do things differently. Some companies will refuse to recognize the new circumstances and insist on business as usual. Acting irrationally, they will fight for sales as a temporary survival mechanism — even at the expense of future fiscal viability.
 
Realize you may not be able to count on the fast growth and high gross profit margins the industry has historically enjoyed. Your break-even point will be higher, a larger investment will be required, and payback will be further down the road. Check out Ride’s public offering prospectus and read the six pages of single spaced, small type “risk factors.” And that’s for a company that just completed a year with nearly $6 million in sales and over $400,000 in net income.
 
No matter what end of the business you are in, take a hard, realistic look at your numbers. As your margin goes down, your break-even goes up. Don’t kid yourself into thinking you’re immune from these trends. Where are you going to get the additional working capital? Can you compete? I don’t know who they are, but there are some companies who should be getting out of the business. Actually, they will be getting out. The issue is whether they walk or are carried feet first.
 
Think you can outlive the competition? Here’s a partial survivor’s checklist.
 
If you’re a distributor:
 
·         Sharpen your pencil and look closely at the gross margin of each product. There’s been a tendency to look at the overall margin and let the higher margin products carry the lower ones. Obviously, there are some good marketing reasons to do that, but the competitive environment that is emerging may not allow it. Do you really need all those T-shirt colors and designs?
 
·         If you do find yourself with too much product, write it down and move it fast. There’s never a good time in a seasonal business to get stuck with close-out merchandise but tying up working capital in bad inventory is an even worse idea than usual when an industry is maturing. The longer you kid yourself about what it’s worth, the less you’ll get for it.
 
·         When you do your financial planning, allow three percent of cost of goods sold for uncontrollable things to go wrong. Last season, I cleverly chose to ship a container of boards by train across the country rather than by ocean carrier through the Panama Canal. The goal was to save a week to ten days in shipping time. Great analysis, good plan. Then the freight company called to announce that the container was “lost” in the midwest due to the floods. Three weeks later, it showed up.
 
·         If your product is priced in currencies other than the dollar, hedge. You’re trying to make money in snowboarding, not currency speculation.
 
As a retailer:
 
·         Buy from companies you can count on. Competition is going to be based more on price and service. Deal with companies who provide them. That will often mean larger, better established companies who own the manufacturing plant or have a long term relationship with the manufacturer. A small company with presses in a garage can supply a small number of boards either because their costs are low or because they don’t really know their costs. With growth, it will run into the same cost curve as every other manufacturer, but be on the wrong end of it. Either they will raise their prices or go out of business, leaving you with an interesting warranty problem.
 
·         Give some thought to the relationship your supplier has with the manufacturer. If a manufacturer is making 1,000 boards for one customer and 10,000 for another, which one do you think is going to get the best prices, service and attention? Who is he going to keep happy when something goes wrong?
 
·         Retailers can expect margin pressure as more product is available, the consumer gets smarter, and chains push prices down. The good news is that leverage with suppliers should increase. Use your leverage to build cooperative, rather than confrontational, relationships. If you’re getting your budgeted margin from a supplier, don’t push for an extra point just because some other company offers it. You’ll get it back in service and responsiveness.
 
·         Retailers shouldn’t have a hard time getting product this year, though not always from the company you want. But even with free freight, great terms and a big discount, don’t buy it if you aren’t sure you can sell it.
 
Going into a business because you are excited about it is a good idea. Going into it without adequate capital and with unrealistic expectation of risk and return can get you unexcited real quickly. Fast growth and high margins cover up a variety of business sins. Nobody likes to change, and doing “more of the same” is the usual response. If you expect to be one of the survivors, focus on costs, build your balance sheet, make a profit even at the expense of growth, and actively select a strategy that fits your market position and financial capabilities. Lots of companies, new and established, are going to make it in this industry. But counting on selling more at higher margins may no longer be a viable strategy.