New Stuff to Do More; New Strategies are Critical as the Snowboard Industry Evolution Continues

/0 Comments/in , , /by

I remember when this was a simple business. Or at least I thought it was a simple business. You had a pro team, ran some ads, built relationships with core shops, sold C.O.D. or on 30-day terms, and were thrilled if you could get enough product to fill orders.

With supply shortages, the fact that quality wasn’t always very good was less crucial. Margins were better anyway.
 
Your team is still valuable, but successful team riders have to do more than rip up the hill. Apparently, they also have to look good in their underwear. Riders have agents now, for god’s sake.
 
Your choice of where to run ads has expanded dramatically. We used to laugh at people who ran an ad anywhere but the usual places. Now we wonder if we’re missing an opportunity.
 
Thirty-day terms are pleasant memories and selling some product at a decent margin is tougher than climbing out of a tree well after a ten-day dump. You can’t just focus on ‘core shops any more. Hell, it’s getting hard to even find one if you define it the way we used to.
 
Not only does a snowboard company have to do the same old things better, but my contention is that it has to do a whole bunch of new things as well.
 
Endless Product Lines
 
 SKUs are getting out of control. Product lines have gotten enormous- largely as a competitive response to what other companies are doing. I’m not against responding to your competition, but recognize that such a response is strictly defensive in nature. Rather than differentiating you, it makes you look like you’re simply copying your competitor. 
 
This is yet another example of our talking and listening to ourselves, rather than focusing on the customer. It also costs money. Making and managing more SKUs is expensive. In some cases, it may even drive up costs of other products by shortening production runs.
 
The situation requires a little zero-based product planning. Don’t start by looking at your competitor’s product lines. Begin by looking at what your customers are buying and what you think the market trends are. Design your product line in response. Figure out all the hard costs of an extra product- molds, samples, employee time, short production runs, etc.
 
Now, what are the specific benefits of another length of one style of board or an extra color in a jacket? Will you actually increase sales or will you just cannibalize another part of your line? Are you making it even more difficult for the store to carry and merchandise your products? Will your reps really understand the whole line and will they be able to make a cogent and complete presentation to the poor retailer before that retailer keels over in confusion and exhaustion?
 
The hard costs are real. The soft benefits are tougher to quantify.
 
Public Relations and Co-Branding In Advertising
 
Snowboarding has been turned into the poster child of the cool, young generation every advertiser wants to reach. Snowboards and snowboard products are turning up everywhere. Are any of them your products? If not, you’re missing an opportunity.
 
Does a particular board’s base graphic turn up on a resort’s promotional brochure by accident? Did K2 team members just happen to be standing around in their Jockey underwear, boards in hand, when a photographer happened by, took a picture, and sold it to Jockey?
 
Most of this exposure is not accidental: taking advantage of all these opportunities is a full-time job for somebody. And the work that’s done now probably won’t have an impact until next year due to the lead times involved. So get started sooner rather than later. Prepare and distribute a press kit. Include photos anyone can use. Make contacts with companies that are interested in your customers and make it easy for them to get the images or the product they need. 
 
One note of caution: it’s easy to believe that free or inexpensive exposure is good, no matter where it occurs or in what association. Not true. Make sure the opportunity is appropriate to your brand and its market position. To use an extreme example, how many snowboard brands rushed out to have snowboarding’s furry Olympic mascot Animal seen on their boards?
 
Resorts Are Our Friends
 
I think we’re to the point where the director of resort relations is probably a full-time position for a snowboard company.
 
Ignoring rental possibilities for a minute (because they’re a whole separate issue), there are an almost endless number of things you can do to help resorts focus on snowboarding and the kids they want to attract and retain.
 
Are you maintaining a database of key resort employees and contacting them from time to time? Do you have a program to flow a little product to the right people?
 
Are you having a couple of team members spend a day at the resort and then sending an unsolicited letter to the appropriate resort executive telling them what a good time they had and maybe suggesting a few things they could do to improve the snowboarding experience?
 
Have you sat down and thought specifically about how the needs of resort shops are different from city shows and, besides giving different terms, how you can meet them?
 
I don’t think I’m even scratching the surface here. I’ll bet your new director of resort relations, a snowboarder who’s spent some years in resort management, would have a whole lot of ideas.
 
Rentals
 
The trouble with rentals is we don’t know why we’re doing them. Are they a loss leader that gets people on our product and ultimately selecting our brand when they buy? That is, are they justifiably part of marketing and promotion budgets? Or are rentals supposed to be moneymakers?
 
As long as I’m restructuring the sales and marketing organizations of snowboard companies, may I suggest a sales manager of rentals?
 
I know rentals are growing dramatically. I suspect they’re no longer just for people trying snowboarding for the first time. They have become a convenience, like takeout food. Done well, as it increasingly is, the equipment is always new and tuned and the boots are dry. All you have to do is show up.
 
Why buy if you’re a typical participant who’s only on the slopes for a few days each year?
 
I think the rental trend is going to catch us by surprise, at least partly because we in the industry spend too much time talking to each other instead of to our customers. This is an interesting problem. We sell rentals cheap, or offer ridiculous terms, or agree to take the product back next year. We do it because we believe that ultimately it helps sales. But by providing cheap, new product each year to rental shops we make it increasingly easy and economical for participants to rent. Aren’t we helping the rental shops to build their businesses and killing ourselves? Yet another example of irrational competition in a maturing market.
 
I wonder if any snowboard company really makes money in rentals. By embracing snowboarding, the resorts have given themselves tremendous leverage over the industry. I suspect your new sales manager of rentals and director of resort relations will be working closely together.
 
Wherever You Go, There You’ll Be
 
In a maturing industry, you either find a defendable niche, or become a low-cost producer. Considering the trends discussed above, it’s obvious this is true for snowboarding.
 
Margins have declined, but the cost of doing business has increased. There are too many things you have to do to succeed. Which means your break-even point has gone through the stratosphere. And the working capital investment required in this highly seasonal business has grown even more.
 
My perception is the entire business model is changing. Snowboard companies have to do things they haven’t done before. There is a new group of stakeholders who aren’t just the people who snowboard. The snowboard industry has lost a lot of the control it had over snowboarding. Getting that control back, if it’s possible, requires new organization and a new way of thinking.

 

 

The Basis of Competition; How Do We Sell More Stuff?

/0 Comments/in , , /by

It’s funny how the fundamentals of business never change. Three years ago at the Surf Industry Conference in Cabo, I facilitated a panel of people from the skateboard industry because skate was going off and the surf guys thought skate was going to have them for lunch or something. Then skate sales plummeted though, happily, they are recovering now.

Many of us were around when snowboarding was going to take over the world. It didn’t.  And last week at the first ever and hopefully annual Snowboard Industry Conference at Laax, there was a great gnashing of teeth and ringing of hands over the fact that snowboarding didn’t seem to be growing and might even be declining.
Business cycles are immutable and inevitable. That’s especially true because of the way companies in an industry choose to compete with each other. They bring those cycles on themselves. This article will look at how we bring this death spiral of competition on ourselves, how we compete, and finally suggest a general approach (there’s no room to outline it in detail) that describes how an individual company might change that and sell more stuff.
This article had its genesis on the last evening of the Snowboard conference, when Tim Petrick of K2 was kind enough to buy a couple of bottles of just excellent red wine.  We were talking about the snowboard market’s perceived stagnation. In a BGO (blinding glimpse of the obvious) I spewed out something like “We got to do some things differently!”
Well, everybody was kind enough not to say, “What the **** does that mean?” Still, it seemed they were waiting patiently (and reasonably) for me to explain what I meant and perhaps even to say something useful. I tried. I really did. But my thoughts were unformed. An attempt to expand on the idea just sort of died and the conversation moved on.
Still, the initial impulse was right. We do need to do some things differently so that our sales and margins can increase.
The Death Spiral of Competition
We’ve done it to ourselves you know. Declining prices, over distribution, some say stagnant participation, high marketing expenses, and the commoditization of the product. Inevitably there’s some search for blame. But at the end of the day we can all point the finger at each other and we’d be right. Every company does what it perceives to be in its own best interest. Of course. Me too.
 We all do things to try and grow the market, but at the end of the day we find ourselves battling each other for scraps from the other company’s table in a market that isn’t growing that much. And even if we succeed what have we accomplished? Probably just pushed prices down further or increased marketing expense. We’re left with the same circumstances and maybe we’ve made it even a little tougher to succeed. There’s no “sustainable competitive advantage” from anything we do. All we can think to do to grow is expand distribution, open retail stores, diversify or acquire somebody (often just a form of diversification).
It’s no wonder that maybe a little of the optimism has gone out of snowboarding. This is a hard business we keep making harder by our competitive actions.
How We Compete
Here are the things we all do to one extent or another: They aren’t listed in any particular order.
·         Sponsor contests and events
·         Teams
·         Advertising
·         Give away product
·         Prices, terms and conditions
·         Strategic alliances
·         Graphics
·         Product features
·         Distribution
·         Trade shows
·         Films
Are any of us really doing any of these things much, much better than our competitors? I’d say no, though some have the resources to do more, which doesn’t necessarily mean better.
And those larger companies seem to be applying more and more of those resources to diversifying or expanding into the larger fashion/lifestyle business.
Our competitive environment is largely a zero sum game. What one gets, the other loses.
When we’re not busy diversifying to reduce our dependence on this hard industry, we’re focused like a laser on what the other companies are doing. To some extent we go to trade shows because they go and make sure our displays are comparable. We price according to their pricing. We run similar ads in the same magazines. We benchmark our product lines against theirs.
We’ve expanded distribution so much that we’re putting the specialty shops, which we all seem to believe are a bedrock of snowboarding, at risk. We’re eating our young. Is this any way to run an industry? You bet it’s not.
 Has anybody noticed that my entire diatribe here hasn’t even mentioned the snowboarder? Kind of odd isn’t it?
The Consumer
You remember them. The person who actually buys the product and, hopefully slides down the mountain? The one without whom we would all have to get real jobs? How can I possibly have written two thirds of an article on how we compete and not have even mentioned them? Doesn’t that bother anybody? It sure bothers me.
The goal here, as I understand it in my simple way, is to create more snowboarders who snowboard more often so that we can sell more stuff (thanks Tim). Sorry to be quite so mercantilist about it, but that’s what we all want to do I think. Otherwise we’ll be working in industries that have their trade shows and conferences in Kansas City. I’m quite sure I like Laax better.
I’m not quite sure I think going to trade shows where we all talk to each other helps us sell more. I get concerned when companies say they only sell product their team riders approve, because I don’t think team riders, or riders of that caliber, make up a very large percentage of the customers to whom we want to sell more. I know that making stuff cheaper in China because everybody else is and so we have to do it (which is true) doesn’t help us sell more. I hate it when we make it cheap and convenient for people to rent equipment, make no money on it, and excuse that by calling it marketing. And end up selling less.
How Do We Sell More?
 
The first thing I’d ask you to do is stop focusing quite so much on your competitors. They aren’t the ones you need to impress. I know that sounds risky. But on the other hand, what’s more risky than trying to compete in an industry that, if you believe the people at the conference, is stagnant to declining and where the process of competing is apparently making things worse, if you think my analysis has any validity.
Second, I want you to figure out who your consumer is and why they buy your product. You already know that? Great. But if you were to explain it to me and it involved reps opinions, anecdotal evidence, and a discussion of the kinds of stores where your product is sold, I might think you didn’t really know, or at least that you weren’t really sure.
Third, look very, very closely at how you compete. Start by creating a list of the ways the industry competes. Include on the list things that you do that others don’t, if any. Which of these are more or less important? How does the way your company competes in these areas differ, if at all, from your competitors?
This is not quite so obvious at it seems.   You would put team riders on the list I’m sure. But sponsoring team riders is something you do- not how you use them to compete. “Why are they important?” I might ask. “They influence kids purchase decisions,” you declare. “Prove it,” I say. “How exactly do they do that?”
“Everybody knows” can not be part of an acceptable answer.
The slicing and dicing would continue. Do they just influence kids? What do you mean by “kid” anyway? What are the things they do that create this influence? What makes them successful at it? How do you measure that? How many riders do you need?
As you can see, the list of how you compete evolves pretty dramatically over the process and become more focused. Some things will come and some go. General competitive ideas will be broken down into a number of more specific ones.
And so would your sense of what was actually important. And what was not. When you were finished, and if you did it right, your spending would have become much more efficient.
That is a good thing, and it might even help you sell more stuff, but it doesn’t get your out of your competitive space and mindset.
The process of evaluating your competitive strategy in detail and of being forced to question sacred assumptions generally leads to new ways to compete. It also tends to eliminate unproductive ones and put more focus on those that really work. It changes your company’s strategic profile.
There was package delivery before Fed Ex. There was ocean shipping before somebody thought of containers. There were winter sports before somebody decided one plank might be more fun than two.
Overnight package delivery, containers, and snowboarding kind of seem like common sense now, don’t they? But they didn’t to industries that were focused more on their competitors than their customers and potential customers.
Want to sell more? Take a hard look at your customers, what they want, and why they buy from you. Just for the moment, forget your competitors. If the process leads to a new market space your issues with competitors will take care of itself.

 

 

Small Brands Are Cool! How Can They Stay That Way?

/0 Comments/in , , /by

Actually, the question is not how small brands can stay cool. It’s how they can stay at all. As in stay here- alive, in existence, solvent. Not toast.

I have been so encouraged by the number of small brands I’ve seen in snowboarding recently. I love them. There was a bunch at the SIA show in Vegas. There were some of the same ones at ISPO and some different ones that I’d never heard of. At ISPO there were some small brands with skis and snowboards with the same branding and graphics.
 
There were even a couple of new kinds of snowboards. I have to admit that I don’t think they have a chance in hell, but it was great to see somebody trying and may they prove me wrong.
 
If snowboarding is going to be something besides a sport, which is good for business, then we need the enthusiasm and excitement that these small brands represent. But, I wouldn’t want all this enthusiasm and excitement to overwhelm good business practice.
 
That’s the other thing I’m seeing that I like. When you talk to the people running these brands, they refer to balance sheets and cash flow without being prompted and without their eyes turning brown from trying to bullshit you into thinking they know why that’s important.
 
Josh Reid, one of the founders of Rome Snowboards, demonstrated the benefit of a solid financial approach when he told me, ” Our close attention to our budget and balance sheet allowed us to come out with our binding a year early than we expected to.” 
 
So some of these smaller brands, partly because of a businesslike approach to financing, have a real chance to succeed. Here are some things they might want to consider doing to improve their chances and a few ideas about why that’s important to us. I can’t believe I missed the strippers in the Atomic Booth.
 
Normal Business Stuff
 
Just a reminder- building a quality product with great detail and finish, pricing it right, delivery it right, servicing accounts right, and supporting it with appropriate advertising and promotional programs gets you nothing more than the right to try. Market positioning and branding is what will make you successful. Along with having enough working capital to get through the year.
 
Adopt a Shop
 
If I were a small brand, I’d identify one, or maybe a handful, of really successful retail shops and I’d adopt them. By which I mean it would be just my first goal to have my product in those shops. Then I’d be all over them weekly or daily to figure out how my product was doing and why. I’d work like hell to learn from that shop or few shops. I’d watch their sales people sell my product. I’d try to talk to the customers who bought my stuff. I’d talk to the retailers about what they bought and why. I wouldn’t leave it only to my rep- I’d do it as the owner of the brand. I’d take these bits of information and develop a short manual about why the brand was successful in the shop, identifying anything that was unique about that shop’s situation. 
 
Then I’d take whatever I learned and develop it as training and selling tool for my sales force, doing my best to create a shop development approach that in some ways was the “signature” of the brand’s approach to working with shops. In the meantime, I’d probably try to convince the shop owner that he should be an investor in my brand.
 
I’ve heard too many retailers complain about this brand or that brand, their reps, and a general lack of attention once the products in the door. Here’s a chance to distinguish yourself in a way that maybe larger brands can’t and to learn a few things in the process.
 
The Buying Cycle
 
 Not the trade show buying cycle we all agonized about some years ago. The consumer buying cycle for snowboard goods. I’ve heard that skiers buy equipment something like every six years. Maybe it’s less or more. But whatever it is, I think (or maybe I hope) that snowboarders buy stuff more often. Or at least they use to. My guess is that they are moving towards the ski model. Products are all of solid quality right now. They just don’t wear out as quickly. Expansion of distribution, price declines and general product availability means there’s not quite the same urge or need among many snowboarders to get the newest thing.
 
If the number of snowboarders doubles, but they only buy half as often where are we as an industry? Do the math.
 
I see this as a big problem that nobody is really talking about. From a strict financial point of view the skateboard guys have it right. Make sure the product wears out pretty quickly and that it’s cool to break it. Of course, it’s also a lot cheaper to replace, so we can’t quite follow that model.
 
Small brands obviously can’t change this trend, but they have a role to play in resisting it by being cool and not quite so easy to get. It is, obviously, also a way in which they can differentiate themselves- at least for a while. So, small brands help themselves and the industry by restricting their distribution. It needs to be the big brands- who have encouraged retailers to buy with pricing and volume discounts and terms- whose product is left to be discounted after the holiday season. The small brands’ retailers need to more or less sell through at full margin if the small brand is going to differentiate itself and succeed. Further, the shops that carry the small brands need to be a destination for customers who want to buy that brand. What’s the value of the brand to the shop if the customer has to come to their shop to get the brand because it’s the only place in town that carries it and the shop has the chance to sell them some other stuff as well?
 
Obviously, the small brand and the shop have common cause here and it is a source of advantage for small brands. At least for a while.
 
Expectation Management
 
There’s never enough marketing dollars and there are always too many ways to spend what you have. If a new brand does everything right, and it grows in the correct way, it will create expectations on the parts of its customers, its retailers, its employees, its investors. But do too little, and you disappoint. Do too much, and you go broke. How to manage that? Well, my experience is it’s more an art than a science. But you can start by spending some time- actually a lot of time if you do it right- on developing a quality brand positioning statement for your brand. If you do it right, it will be a filter through which all your opportunities are passed, and you won’t waste time trying to figure out which one is right or money on the wrong ones.
 
Like Nikita’s “For Girls Who Ride.” Best one I’ve ever heard. I wish somebody would send me their brand positioning statements so I could plug them. I keep using the Nikita example and I’m giving them entirely too much free publicity.
 
Growth Problems
 
Someday, if you succeed, you won’t be a little brand any more. You will lose some of the possible competitive advantages I’ve described above. As every company wants to grow, those of you who prosper are likely to face this to some extent. So there you are- too big to be small and too small to be big. What are you going to do?
 
Interestingly enough, the answer is almost completely financially driven. I don’t care about marketing, I don’t care about distribution and pricing, I don’t care how cool you are. None of that will drive your strategic business decisions when you get to that point of being somewhere between big and small.
 
What you’re going to find is the extreme seasonality of the snowboarding business means that the risk return ratio is out of line if you are just in snowboarding. Most of you already know that because while you probably love snowboarding, you aren’t naïve kids who only want to be in the business because it is cool.
 
Working capital comes from either debt or equity. Okay, from retained earnings too, but that’s just another form of equity. In snowboarding it doesn’t make financial sense to finance with equity, because you don’t need it year around. But lacking all that equity and the strong balance it give you, debt that isn’t prohibitively costly can be damn difficult to find.
 
So you’re going to try and find a way to become, or become part of, a company with year around cash flow. Because for most companies, it’s the only solution that effectively balanced risk with return and makes working capital requirements manageable.
 
I would dearly love to get an email from some new small brand telling me I’m crazy and explaining what their financial plan is and how it will work differently. Because it would be great if that plan were out there. In the meantime, all you small brands keep up the good work but remember the wonderful problem of too much growth that you’re going to have when you succeed.

 

 

Company Stores and Retail Consolidation; What’s a Core Store to Do?

/0 Comments/in , , /by

At the Surf Industry Conference last May, I was the last one to ask a question of a panel of very successful specialty retailers. I acknowledged that I was sure they would all continue to be successful, though I doubted they were representative of most retailers out there. And then I asked them, “So what happens in let’s say five years when there are, just to pick a number, 5,000 company owned specialty stores in the United States?”

The panel grew quiet. The microphone was removed from my hand. One panel member finally volunteered the idea that in the normal course of business, some retailers come and some go. The meeting was adjourned.
You know, I have got to stop doing that. Asking people tough questions about real business issues with political overtones in a public forum is simply no way to build a consulting practice. Still, even if I have to say so myself, it’s a hell of a good question and worth exploring further.
Lest anybody be unclear, the question is not if there are going to be more company owned stores or if chains that target the same customers as the core stores will open more stores. There will be and they will. The question is how the role of core stores changes, if it does, and how they respond.
Why is This Happening?
Oh, the usual reason. To grow and make more money. Ho hum. For some reason (and this is worth another article), companies that don’t grow seem to have a hard time surviving in the action sports business. And, come to think of it, that’s true in any business. To grow, you can grow the market, take share from competitors, buy companies, start new brands, or go into new (but usually related) businesses like retail. Those are the only choices I know of.
Leading companies in snow and surf have learned that it’s hard to increase your market share past a certain point. You can get your share of any market growth, but not increase your share. Once you get to a certain point, there seems to be a backlash from your competitors, the retailers and, most importantly, the consumers, that keeps your market share from increasing.
Markets don’t keep growing fast enough to satisfy growth requirements. Acquisitions that make sense, especially if you aren’t a publicly traded company with well valued stock to buy them with, aren’t always easy to come by. New brands take investment, some time to succeed and, at the end of day, are often just another form of trying to take share from competitors- unless you’ve spotted a new market. But meaningful new markets don’t come along every day.
So if you’re a brand, you think about opening retail stores as a new, but related, business which you can maybe grow faster than your existing business. And you notice that while your cost structure is neither better nor worse than any other retailer, your profit structure is a hell of a lot better than core retailers selling your brand. This is simply because you are selling, to a greater or lesser extent, product you, as the brand owner, were already having made.  And you are selling it to your retail outlet at your cost. It’s for this reason that retail chains not owned by brands push their own brands- the gross margin is a lot higher.
It’s also why I expect to see more consolidation of retail stores. Higher margins through private label require a certain volume of business, and unit costs do come down with size as your ability to negotiate with brands increases.
Industry Dynamics
It’s funny, because no matter whom you ask in this business, distribution is an acknowledged issue. At some point, distribution becomes too broad. “It’s not good for the industry,” most will admit, “If you can find everything everywhere.” And margins- look, for sure margins have been under pressure and they need to be higher. Just ask, oh, anybody. Core retailers are for sure important to the industry, and we obviously need new brands to lead the way. “Everybody” thinks so.
But at the end of the day, every manager of every business is going to do what they perceive to be in the best interest of their company. You will. So will I. Every damn day.
We’re going to look for ways to grow and to increase our margins.   We’ll expand our distribution because there just isn’t enough growth in core shops for larger brands. We’ll get stuff made wherever it’s cheaper because all this “me too” product means that differentiation is tough and price is an important way of competing. We’ll open more stores. And as we do this stuff, we are legitimately and seriously and really going to be   worried about the core retailers.  Brands will do some things to help them. But we’re still going to do what we perceive we have to do given a tough, competitive environment.
I’m not saying this is a good thing, though maybe it has benefits for the consumer. I’m not saying I want it to happen. I’m just saying I’ve watched enough business cycles (in action sports and other industries) to be pretty certain this one won’t be any different. Don’t just shoot the messenger- think about the issues and how your business can benefit.
Position of Core Retailers
 
In its fiscal year ended January 31, 2004, Pacific Sunwear reported a gross margin of 35%. It stated that 32% of its business in the same year was private label. I couldn’t find anywhere what the gross margin on its private label business was. But even with 32% of its business being higher margin private label, its overall gross margin was only 35%.
Quiksilver, obviously a supplier to lots of retailers, in its year ended October 31, 2003, reported a gross margin of 44.4%. Now, there are some retail sales from some of its own stores in there, and probably some other sources of revenues from things besides its core business of making stuff and selling it to other retailers. But let’s just focus on that 44% number and recognize that most of it comes from Quik’s core business.
Retailers look at Quik’s 44% margin and ask themselves, “How can I get some of that?” The answer is private label.   Private label really is not a viable idea to a small, single store, retailer. Okay, you can do some t-shirts, stickers, and decks. But the bigger you are, and the more stores you have, the more valuable it can be to you- not just in terms of the additional gross margin, but in terms of brand recognition.
But remember that we’ve got an awful lot of companies selling an awful lot of product, through an awful lot of retail outlets that’s awfully similar to everybody else’s product. So price matters. And a retail chain (I’m not going to pick on Pac Sun anymore. I admire the hell out of what they’ve accomplished) is probably going to pass some of that extra gross margin they get from being larger and having private label to their customers for competitive and growth reasons.
If you’re a core retailer, and your competition is a big chain, you have a problem. You can not sell the same brands they sell, at the prices they sell, with your comparatively tiny annual turnover and have a financial model that makes sense.  We all know that’s accurate because we’ve seen so many small stores go out of business and so few open.
So if you are a core store, you better make sure you’re positioned so that you’re not competing directly with the chains. Because you can’t.
Well right, Jeff thanks a lot for that useless bolt of wisdom. How do we do that?
First, the days of just opening the store with a few bucks in the bank and your credit card are gone. If you really have a need to get rid of your money, have a big party and please invite me. Invite me? Screw that, just send me the money. You’ll save yourself a whole lot of effort and anxiety.
Second, you need a plan that gets you to a larger turnover quickly. You need the capital to fund that. You’ll need that plan and the capital just to convince the brands you want to carry to sell to you.
Third, from the day you open, you need a quality information system and the ability to use it. There’s not the room for mistakes like there use to be. Focus not just on gross margin, but on total margin dollars. If you don’t know why that is, don’t even think about getting into this business.
Fourth, you need at least a couple of committed and experience management people who can do this right. No learning as you go like you use to be able to do. And they need to like sleeping in the shop.
Fifth, however much capital your plan shows you need, you need more. The only thing we know about your plan is that it’s wrong. Either you will grow faster than projected, or slower. In either case, you’ll need more money. If you don’t understand that, don’t open a shop.
Sixth, you need the right location and strengthening community involvement from day one. If you come from the community and already have recognition in it, so much the better.
All the successful core shops I’ve ever seen that have been around a while have all these things, but they got started when it was easier by orders of magnitude.
So having said all these discouraging things, I’m urging with you to go out and open shops. But I’m urging you to do it right to maximize your chances of success. Shops have an important role to play in identifying trends, making it about the lifestyle and not just the sport, and taking a chance on new brands. They keep the industry from just becoming part of “sporting goods.”
My concern is that chains of smaller stores that look and act somewhat like core shops are going to replace the real thing.   And as a business guy, I’ll congratulate those chains on their success even as I recognize that their actions and motivations aren’t exactly what the industry needs to stay fresh.

 

 

One Possible Future; An Industry Model for Skateboarding

/0 Comments/in , , , /by

Last month, I wrote about surviving a downturn, suggesting that this wasn’t just a downturn but a fundamental change in industry structure, requiring a change in the way successful companies competed. This month, I’d like to be more specific about how I see the industry evolving.

It’s perhaps a bit pompous to do this, because my crystal ball is no better than yours. But my recent study of China’s fixed exchange rate and the September 21 cover of the New York Times Magazine made me decide to give it a shot.
 
Perhaps that needs some explaining.
 
Chinese Exchange Rates
 
I took a whole column in SnowBiz to write what I’m summarizing here. It should be out by the time you see this, so for more detail refer there. Basically, China keeps its exchange rate fixed at 8.3 Yuan to the US dollar. Most currencies are managed from time to time and to some extent, but the major ones change against each other daily based on interest rates, trade, general economic conditions and other factors. The Chinese government makes sure its exchange rate doesn’t change.
 
The result is that the Yuan is between 10 and 40 percent undervalued against the dollar. That is, stuff we buy from China is between 10 and 40 percent cheaper than it should be. Great for consumers and companies that import from China. Not so good for U.S. manufacturers and people who want to sell to China.
 
And there’s not much you, as a US manufacturer can do, given the artificial undervaluation of the currency. It may be, as some have claimed, that you can beat low labor costs with technology. But add the artificial exchange rate advantage and you’re screwed.
 
It’s unlikely that the undervaluation of the Chinese currency will go away in the short term. Among other reasons, we need them to invest a chunk of their trade surplus with us in U. S. Treasury securities so we can finance our budget deficit.
 
We all know that more and more skate hard goods (not to mention soft goods) are being made in China. Lacking some kind of meaningful technological change in skateboards, expect that to continue and grow. If the quality of Chinese made skate hard goods is still an issue, and I’m not sure it is, it won’t be for long.
 
So the stuff gets made a lot cheaper, and the quality is fine. Lacking product differentiation, those lower prices eventually, through normal competitive dynamics, get passed along to consumers. Good for the consumers, and perhaps for the general growth of skate. Bad for manufacturers and retailers.
 
Because even if sales of hard goods grow (unless they grow an awful lot) and even if percentage margins remain the same, the total number of margin dollars realized from hard goods sales declines.
 
Margins dollars are the dollars available to pay for team, marketing, rent and telephone, salaries and bunches of other stuff excluding product. Whatever left is profit, more or less.
 
I am not suggesting that there will be no skaters left willing to pay higher prices for branded decks, but I expect the number of such skaters to decline as percentage of the total. And, at the end of the day, there’s no reason higher end branded decks can’t and won’t succumb to the same competitive pressures as any other deck.
 
So if you’re a seller of skate hard goods, manufacturer or retailer, your financial model may change. In hard goods, you’ll have to sell more to make the same money.
 
Boy, I’m just full of good news today, aren’t I?
 
The Kid on the Cover
 
I think he was four. He was a skateboarder and he was on the cover of last Sunday’s New York Times Magazine. The story was about how really young kids are becoming sponsored and managed.
 
Seeing him there didn’t tell us anything we didn’t already know about the mainstreaming of skateboarding, but it sort of galvanized me into saying the following:
 
The skate market will increasingly be driven by the apparel (including footwear) brands. They can sell product to anybody who thinks that skateboarding is cool. Hard goods brands can only sell to people who skate. The apparel market, which I suppose includes everybody who needs shirts, pants, and shoes and is over four and under 50, is simply a couple of orders of magnitude bigger than the hard goods market. And, for successful companies, margins are and will be better in apparel than in hard goods.
 
They will influence skateboarding, to put it bluntly, because they will be bigger and have a lot more money than most hard goods companies. Hard goods skate companies already know everything I’ve said here. They have the following choices:
 
1)            They can try and use the strength and remaining cash flow of their established brands to transition into soft goods and, ultimately, make those soft goods the bigger part of their business. You saw that process already going on with some brands at ASR. Soft goods are tougher to do well than hard goods, and skate brands that take this approach will (for the most part) be competing with companies that are larger and better financed than they are. They will also have to decide whom they are trying to sell to- the core skaters who buy their branded product, or the larger mainstream market. Obviously, it starts with the core and has the possibility of being extended from there. The art is in figuring out how to expand distribution without damaging the brand’s credibility.
 
2)            They can sell their companies. But if they wanted to do that, they should have done it two years ago at the peak of the frenzy. Element is the only brand I recall that really did that. Companies selling now won’t get near the prices they would have gotten. Still, it may turn out to be the only financial choice for some and certain brands may have more value as part of a larger organization than as stand alone companies.
 
3)            They can remain as independent “core” skate companies. Whether there is a financial model that can support that strategy is unclear to me.
 
If you want some confirmation that this kind of industry evolution is a reasonable possibility, look no further than the surf industry. It’s dominated by a handful of soft goods companies. Mainstream sales, for both brands and retailers, are where the sales volume and profit is. Many to most industry customers don’t surf. Hard goods are having problems with cheap product from China, and nobody seems to make any money on them. Hard goods have hardly been discussed at the last two surf industry conferences.
 
Under the scenario I’ve suggested here what, exactly, is skateboarding? Fairly clearly, it’s not the kind of urban, underground, at the fringe activity it use to be. Time was when it was in the interest of the major hard goods brands to position it like that and hell, that’s how it was anyway. But if the picture of industry evolution I’ve painted here is valid, that no longer makes sense at least in terms of the business strategy. Because, as I’ve tried to explain above, the sales, growth and margins are in the other, much, much larger part of the market- the mainstream, if you will.
 
You can be a successful, profitable $20 million company with a significant marketing and advertising program if your margins are 45%. If those margins fall to 25%, I’m not so sure that works. Okay, I’m pretty sure it doesn’t actually.
 
More and more of my articles could be written for any of Skate, Snow or Surf Biz. There’s a lesson there somewhere about how the industry is evolving. In line with that, I want to suggest that skate retailers who haven’t seen it get hold of the September 2003 issue of TransWorld Surf Business and read the “When It’s Time to Change” article on the cover. It’s an interview with K-Five Boarding House owner Jurgen Schultz. He’s much smarter than I am because he started reacting, as a retailer, to the changes I’ve described here a couple of years ago. He took some risks to do it, but he saw doing nothing as a worse risk.
 
That’s a good way to think in this market.

 

 

Strategic Planning; Questioning Our Most Cherished Assumptions

/0 Comments/in , /by

This article sort of popped full formed into my brain at the TransWorld Snowboard Industry Conference at Whistler in April. It happened in an elevator. A kid carrying a skateboard got in (Shows you what kind of lousy winter it was in Whistler). As the door closed, I asked him how often he replaced his deck. He said, “I’ve been skateboarding eight years and this is my fourth deck.”

 Let’s hope he’s not our average customer.  I don’t believe he is. Still, how do we really, really, know and prove, for sure, that he isn’t? What percentage of our market does he represent? Hopefully, he replaces his shoes and clothing more often than his deck. Should we be marketing to him differently? Is he really what we mean by a “skateboarder?” Does he care about all the marketing we do?
 
No doubt somebody is reading this and saying, “Well, the answers to those questions are obvious!” Maybe. But I’m reminded of H. M. Warner at Warner Brothers in 1927 saying, “Who the hell wants to hear actors talk?” Or Digital Equipment President Ken Olson, in 1977, saying, “There is no reason anyone would want a computer in their home.” Or the Yale professor who wrote, “The concept is interesting and well-formed, but in order to earn better than a ‘C,’ the idea must be feasible” while critiquing Fred Smith’s plan for an overnight delivery service (Fred went on to found Federal Express, which is showing signs of being feasible).
 
I’m sure all these guys thought what they were saying was “obvious.” 
 
Strategic planning, I’ve learned, is the process of using the same information your competitors have to make better decisions than they make. You do it, in my experience, by questioning cherished assumptions, rigorously collecting good information, and looking at that information from a different perspective. 
 
In a difficult market, the industry’s general response seems to have been to cut expenses, including marketing, and discount to get orders and keep volume up to the extent possible. I’m all for good expense management- in any market conditions- and wrote about it here some issues ago. Still, we’ve lived by marketing, and I wonder if we can’t hurt ourselves by not marketing lacking any real product differentiation among brands.
 
But marketing what to which customers? When everybody was fat and happy and selling everything they could make, we had the luxury of not worrying about that. Now, companies who prosper are going to take some risks and do some things differently. What things? Depends on the company, but let’s look at some “Cherished Assumptions” and see if we can get a glimmer. 
 
“Core Shops Are the Foundation of the Industry!”
 
 Hold the hate email please. I recognize the importance of shops and I’m not saying that statement is inaccurate, but I’ve got a couple of questions.
 
What, exactly and specifically, is a core shop? What are its attributes? It probably doesn’t sell skateboarding only, so can it be both a core skate and, say a surf or snow shop at the same time and still be “core?” Is core then not a function of what a shop sells? As the industry has involved, have others “foundations” emerged? Like televised skateboarding, the skatepark movement, the contest circuit? What’s their relative importance to individual companies? How has it changed? How is this different for apparel and shoe companies compared to hard goods companies?
 
“Riders Are the Key Influencers of Skaters.”
 
If so, why are there so many blanks and shop decks sold? It appears that price is also a key influencer. Obviously, riders don’t influence all, or even most, skaters to buy a certain brand of deck, though hopefully their prominence promotes skating in a general sense. From a company’s perspective, then, how has the relative influence of pro riders changed? How strong is the association between the brand and the rider? How strong is the tendency of kids who like a rider to buy his pro deck and how has it evolved? Or do they just buy a blank and slap a sticker on it? Interesting questions to ponder when considering issues of budget and marketing.
 
"Chain Stores Suck"
 
Well, I doubt the shoe and apparel companies would put it quite that distinctly. Chains- not all chains, but chains- move a lot of product for them and make them a lot of money. There also seems to be a certain level of conventional wisdom that says chains, by selling cheap completes, are important in getting new skaters involved in the sport. That would be interesting to research.
 
At the end of the day, though, chains are neither good nor bad- they just are. And they are more all the time. My opinion is that the Zumiez and Pac Suns of the world are going to make it increasingly tough on core shops. I hope to be wrong. No company can grow very big without an increasing percentage of its sales being to chains. That’s not an opinion, and it shouldn’t be controversial. It’s just mathematics. In a market with little or no product differentiation, where price matters, volume becomes an important survival strategy. So companies- including hard goods- need strategies for working with certain chains if they want to prosper and maybe just if they want to be around given the evolving financial equation.
 
Of course, it may be a viable strategy for some companies to not work with big chains, and to constrain their growth. But the companies that do that won’t ever be big. By way of definition, I don’t believe there are any “big” companies in skating. My information is that the shoe companies are the largest, but I still see them as pretty small. And note that getting to even that size required sales to chains. 
 
“A Skateboard is 7 or 9 Ply Laminated Canadian Maple- Period.”
 
What a remarkably conservative industry we are, and isn’t it funny to hear that? Granted, laminated hard rock maple has worked great. But it’s also true that the industry has encouraged the idea that anything not made of Canadian maple couldn’t be a skateboard, wouldn’t function right and, worst of all, might get you laughed at. For a long time, all that was true. But industry growth and visibility, coupled with advances in composite materials, engineered resins and manufacturing techniques, along with the acceptability of blanks, suggest that this may change. If it does, I hope the charge to adopt new technology is lead by the current industry leaders.
 
Lots of questions. No solid answers, though we’ve all got lots and lots of opinions. But opinions, even tried and true and generally accepted opinions, can’t be the basis for a business plan when the industry is changing. And I’m pretty certain that doing “more of the same” isn’t going to work for at least some companies. I’ve always thought that doing the same old things when the market was changing was riskier than trying something new that might not work out. The companies that feel that way, and that go through the process of questioning their assumptions, will most likely emerge as the leaders.

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

/0 Comments/in , , /by

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

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

 

 

Three Business Models That Might Work; Ideas From Vegas

/0 Comments/in , , , /by

You might have thought I could have gotten around to this before now, but there were no more SnowBiz issues after Vegas, and I kind of forgot about this for a while. Sorry.

As we’ve watched snowboarding evolve, we’ve noticed how closely products of different brands resemble each other. Differentiation is based largely on marketing and making a buck requires a strong brand, adequate financing, and solid operations.
 
Well okay, that’s basically what happens in any industry as it matures and no, I’m not going to make that speech again. Seems a waste of time at this point.
 
But, the bottom line is that companies that make money tend to have what’s called a “sustainable competitive advantage.” Sustaining it is typically a lot of work. Just because you have it doesn’t mean you keep it. At Vegas, I saw three brands (I’m not suggesting there aren’t others) that I thought had a potential competitive advantage. Whether it’s sustainable or not isn’t clear. That depends not only on what they do, but also on what their competition does.
 
I thought we might learn something by looking at them.
 
Head Snowboards
 
Two years ago, Head had the beginnings of a snowboard program. This year at Vegas, they had a complete snowboard program with a product line that looked as good and as complete as some better-known brands.
 
My more recent information is that their bookings have increased substantially for the coming season, but at the time I asked them, in my usual subtle way, “So are you telling me that the best you can do is to be as good as everybody else? Doesn’t sound like the basis for a competitive advantage.”
 
They smiled and showed me their rental product with a setup time of 59 seconds. Boot sizes are color coordinated with board widths. There’s an embedded microchip for inventory control and to get people in and out fast. The boards are delivered with premounted rental discs. The step-in bindings can be adjusted in two steps for stance and angle without any tools, as can the straps for boot size.
 
Okay, I liked that. Seemed like it would make life easier for everybody. Renters move through lines quicker and get a better setup. Instructors can change things for students on the fly. The resorts save a few bucks by improved efficiency and hopefully lose fewer newbies as they go through the hazing that has too often been lessons.
 
So where should Head allocate their resources? To selling a snowboard line that, at best, will be perceived as being as good as everybody else’s to specialty retailers or pushing their rental system, with some clearly identifiable advantages, to the rental shops at the resorts? Who knows, maybe they’ll both depending on the resources available. Well, you know what I told them.
 
It isn’t of course that easy. Company size, terms, price, relationships and momentum all make a difference. The best technology doesn’t always win. Ask Apple Computers.
 
Nikita
 
“Street clothing for girls who ride.”
 
Let’s just wallow in that tag line of theirs for a minute. Six words don’t create a competitive advantage, but my guess is that some thought went into creating it. When you read it, don’t you know exactly whom their customers are? Certainly the people at Nikita know.
 
At the same time, their potential customers know if Nikita is a brand they should be interested in. Are you a girl and do you ride? If so, how can you not check out Nikita?
 
They also have what’s called “first mover” advantage. That is, Nikita is the first company that I know of that has moved exclusively into this space. First movers often have lower cost of establishing and maintaining a brand name in their chosen category and they may build a reputation that later entrants will have a harder time overcoming. The company also may enjoy temporary early profits from its position and define the competitive rules in their niche.
 
Think of Clive and Nixon. They were early movers who defined their market niches. Sure, they already had competitors. As a result of their success, they attracted more. But they are more closely identified with their target niches than most other companies that sell similar products.
 
Clive and Nixon also share with Nikita the fact that they don’t just sell to snowboarders. Their businesses are less seasonal than they would be as snowboard only businesses and the target market, much larger.
 
Nikita’s positioning statement, and the focus it represents, also gives them some advantages in efficiency and resource allocation. In the fashion business, which we are all in to some extent, you sit at your desk and are bombarded by advertising, promotion, and product opportunities and ideas. Wouldn’t it be great if you spend no more than a micro second thinking most of them? The people at Nikita can do that I think. If it isn’t interesting to girls who ride, then they don’t have to think about it. And they don’t have to spend (or misspend?) money on it.
 
The downside, I guess, is that when you position your company so specifically, you give up some potential areas of growth. In my experience, that downside is largely illusionary. Nikita certainly has plenty of room to grow. Well-defined market niches aren’t necessarily small.
 
Volant
 
Yeah, I know it’s a ski, but look around the snowboard industry and you can’t take too much umbrage at that. The point is that the transition of Volant from an independent company making its own skis to a brand owned by GenX changes the whole dynamics of the brand. My expectation is that GenX will make money on the brand where Volant couldn’t make money as a stand-alone company. Let’s talk about why and the source of Volant’s new competitive advantage.
 
You remember the Volant story. They made steel skis at their own factory in Colorado. They had some ongoing production problems, expensive labor, and difficulty getting to the volume they needed if they were going to have their own factory. In an attempt to solve these problems, they tried an ill-fated internet venture that really pissed off retailers. That seems to have been the last nail in the coffin.
 
But Volant, with the only steel ski, had a ski that was really different from all its competitors and, according to Volant anyway, worked better.
 
Certainly GenX knew that, but they also had a different business model in mind.
 
They bought the production equipment for not so much money and moved it to a factory in Europe where they were already having some of their various brands made. In one easy step, they set up that manufacturer to make the Volant ski. They hired just a couple of key people from Volant, and moved them to the GenX headquarters where they could share facilities and expenses.
 
Since the factory was already making various other skis, the cost for each pair of Volant’s, I assume, went down. GenX didn’t have to worry about running a factory. Back at their headquarters, their overhead could be spread even more efficiently over more sales. The number of pair they had to sell to break even dropped.
 
True, they still have to run a marketing campaign, and I’m assuming you’ll see some Volant ads. But I wouldn’t be surprised if the most critical part of the marketing campaign was the part where the sales manager tells the retailers, “Yes, we’re going to deliver on time, the prices will be better, the ski is really different and works, and those guys who tried to hang you out to dry by selling on the internet are gone and we won’t do that.”
 
Sounds like really effective marketing to me. Winning retailers back will be a challenge, but with the lower breakeven point, I’ll bet they can work it out.
 
It’s not like having multiple brands, sharing overhead, and having somebody else make your product is a new idea, but it’s interesting to watch it be put into affect. It’s pretty much the GenX business model.
 
There you have three businesses with three different sources of potential competitive advantage. Head gets its from product improvements. Nikita’s comes from the market niche they have targeted and their early movement into it. Volant’s is the result of GenX’s usual operational efficiencies.
 
Which is best? None. But you’ve got to have some competitive advantage or another. 

 

 

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

/0 Comments/in , , /by

 Okay, let’s review the rules.

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

 

 

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

/0 Comments/in , , , /by

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

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