“Hey! How Come You’re Still Around?” Conversations With Survivors

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It’s old news, of course, that we’ve gotten to the point in this industry where probably north of eighty-five percent of the snowboards sold come from a handful of brands, mostly made by ski companies with the usual exception. And if that concentration is not how we’d like it to be, it’s how it almost always is. Don’t worry; I’m not going to give you the lecture on consolidation again- it’s too late to help anyway.

 But there are a number of small brands still out there when hundreds of others aren’t. How have they done it? Have they found the proverbial “defendable market niche?” Or did they just luck out and find an investor with too much money and not enough common sense? Or maybe, at different times, both.
 
So I’m going to call some of them up and ask something tactful like, “How come you’re still in business?” If they don’t hang up on me, maybe we’ll all learn something.
 
My Guess?
 
Okay, not completely a guess, as I’ve talked to most of these people before over the years and have watched them build their brands and companies. We’re going to find a high level of continuity in management, and a lot of support from shareholders. These are brands that have been around a while.
 
None of them ever thought they were going to be “the next Burton.” They were balance sheet aware, and never tried to grow faster than their financing allowed. They’ve generally figured out how to make money, and are bemused and perplexed when they hear about brands doing 30,000 snowboards and losing money. Advertising, promotion and team riders? It’s a good thing- as long as you can actually afford it. Having happy retailers who sell through at full margin, call for more product, and then can’t get it seems to be their approach to marketing. Oh, and, for some reason, they seem to only want to sell to people who can pay them on time.
 
They have generally discovered a market niche, and it’s typically high end. In one case, they’ve discovered that they aren’t only a snowboard company. Here they are in alphabetical order.
 
Glissade
 
“We’ve been making snowboards for seventeen years,” says Glissade founder and president Greg Pronko. “I think we might be the sixth oldest snowboard brand in the world.”
 
But Glissade no longer sees itself as strictly a snowboard brand competing only against other snowboard brands. They produce a relatively small volume of a few thousand very high-end boards, and don’t want too much volume. What they’ve learned to love is working with materials and figuring out how to use new ones. They have evolved to the point where they earn revenues from materials research and development, and rapid prototyping for other companies in snowboarding and other industries.
 
In spite of these other activities, the Glissade brand is the founder’s true love. But the love that goes into these custom, low-volume boards has a price. One of their decks will set you back a bit north of $500 at select retailers. For a little more, they’ll be happy to make you a custom board. Or you might call them and see if you can get on the list to get one of only twenty-five 195s they make each year.
 
So what have we got? Year around cash flow, a redefinition of their market niche that allows them to compete, no warranty problems, and a product that doesn’t require a big advertising and marketing campaign to check at retail. Oh- and good margins for Glissade and the retailer. 
 
Heelside
 
Heelside started as a boot company before expanding into bindings and, more recently, boards. They are heading into their seventh season. President Jim Ferguson emphasizes the continuity in investors and employees they’ve enjoyed since the company was founded. “Consistency of ownership and management has been key for us,” he says.
 
They have also enjoyed a few other advantages. Jim’s background in making boots went a long way towards getting Heelside started without some of the startup and growing pains that other companies have typically experienced. When they did decide to make boards (interestingly enough, at just about the peak of the consolidation), they purchased high quality equipment for not much money from a factory going out of business and hired the manufacturing team to make Heelside’s boards. Good for cash flow, and good for avoiding mistakes in learning the manufacturing process.
 
Growth is a good thing, but “The numbers have to make sense,” says Jim. “We’ve always lived within our means,” he emphasizes. “We do as much marketing as we can, but keep a close eye on the bottom line.”
 
Evidently Heelside isn’t sure how much being cool will help if you can’t pay your bills.
 
Of the up to 15,000 boards they expect to sell this year (depending on the snow) most will be sold in North America. One thing Heelside has in common with many of the other brands being discussed here is no dependence on the Japanese market for financing. I’m sure we all remember when Japanese prepayment for boards dried up, and one hundred plus brands vanished in short order.
 
Never Summer
 
They were profitable when they were only making 7,000 boards. That was the plan. Now, they’re making more, but maybe not as many as you might expect from a brand that’s been consistently pursuing its plan for ten years. They’re still making money. “Clean distribution, limited supply, unmatched customer service and exclusive territories for retailers,” is the foundation of their market position, explains co-founder Tracey Canaday.
 
The average wholesale price is higher than most brands, but Never Summer uses a layered, precured, pretensioned fiberglass that, according to Tracey, costs about three times as much as the glass in a traditionally made board. They also make their sidewalls out of sintered ptex. The result, according to Tracey, is a construction that makes the board more durable and responsive and gives the retailer something to sell.
 
Never Summer, located in Colorado, doesn’t sell a single snowboard in Japan. Zero, zip, nada, the big goose egg. So clearly when the Japanese market crashed, it didn’t hurt them much. Might even have helped their competitive position. Would they sell some boards there? Sure, but they haven’t been approached by the right potential partner and don’t want to be distracted from their retailer focus.
 
There’s little discounting at retail, and typically few Never Summers left over at the end of the year. Scarcity does much of the marketing for them. Want to buy a Never Summer? Better go find one now (October 3) and expect to pay full retail.
 
There are only four or five managers at the company, and two of them are owners. They are careful where they spend their dollars. For example, all new accounts are COD, no matter who they are. “This is our retirement,” says Tracey.
 
I’d be careful too.
 
Option
 
“We’re modest in our goals and live within our means,” says Option President Geoff Power. “We have really good people who don’t have stars in their eyes.”
 
Option was started in August of 1992. Geoff gives a lot of credit to the company’s investors, who have always taken the long term view, don’t need a return to live on, and have been willing to help the company over some rough spots or to take advantage of opportunities. One of those opportunities was the acquisition of the snowboard apparel company NFA at a time when lots of apparel companies were available for purchase. NFA has been able to grow and transition nicely in the direction of the street ware/lifestyle market. 
 
There was never a big dependence on Japan, so when that market cratered, it didn’t have as much impact on Option as on its competitors.
 
Option has done many of the same things as the other smaller, successful, brands mentioned in this article. They are careful with distribution. Their product cost is above the average but also, according to Option, better made. Customer service is critical. They like to be paid by the people they sell to, and control their marketing expenses consistent with their overall financial plan and capabilities.
 
It seems to be working.
 
Silence
 
One of these days, I have to remember to ask BK Norman, the lead dog at Silence, what BK stands for. Silence is nine years old. Their story is a bit different from the other brands mentioned above, but BK has been there for the whole ride. Continuity seems to be important.
 
When Silence was started, it had the good fortune to be owned by a guy who, in terms of his understanding of the snowboard business, had more money than sense. He had a whole lot of money. Like a real lot. He spent it on Silence. After all, snowboarding was hot. So they could build up the brand in a few years, go public and all retire rich. Seems like I’ve heard that story somewhere else before.
 
Never mind. Anyway, BK kept going “Uhhhhh, I’m not quite sure we can sell as many boards as you want,” but who was he to turn down all this marketing money? It’s just too much to ask a snowboard guy to do. The marketing money got spent. As BK had foretold, not as many boards as the inflated corporate plan required were sold. It was a financial mess, but the literally millions of dollars spent on advertising and promotion created brand awareness.
 
Silence has changed hands twice. The first time, it was sold to A Sports which also bought Avalanche. Now, a new investment group has picked up both Silence and Avalanche, and is working closely with BK, Dale Rehberg and Maureen ter Horst to run the brands the right way. “I always managed to find a new investor before things really cratered,” was the way BK put it. “A lot of money was wasted on huge corporate business plans that never came true. Now, we are concentrating on building our business on a grass roots level working closely with our retailers all over the world.
 
So now, well financed and with a realistic business plan, BK uses the brand awareness created in Silence’s early “drunken sailor” spending period to make some money.
 
The Japanese distribution has been kept intact over nine years. The distributor didn’t go bankrupt and the market was never over supplied. BK has stayed focused on building and selling snowboards. Most of the business is to specialty shops, but that is changing gradually. Because of the wider awareness the brand has and the presence of Avalanche, he can expand his distribution a bit more than some other smaller brands without damage. “We’ll keep Silence true to its history as a specialty shop brand and expand the distribution for Avalanche,” he says.
 
I Think I See a Pattern
 
These brands have quite a bit in common. Continuity in management would seem to be high on the list. Financial acumen with a balance sheet focus is up there too. Growth was kept consistent with their financial capabilities, and an awareness of whom their customers were. They focused on the bottom line, not the top. They tend to have their own factories. They spend a lot of time thinking about their distribution.
 
Anything there that should surprise us? Nah. Any small company that successfully competes against much larger brands has to have an answer to all those issues.

 

 

Sell!? Maybe It’s Time to Think About It

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Here we all are, back from ASR and boy are we excited. More brands, more excitement, hype, orders, deals, three page ads in Skate Biz. People can’t get enough of skateboarding There’s nowhere for business to go but up, and it’s got to be even better next year.

 
Unless, of course, it’s not.
 
As a business owner, you have (or you ought to have) some goals that go beyond running your business every day. They may include spending more time with your family, buying an island in the Caribbean, working less hours, diversifying your financial position, or just getting off the damn personal guarantee for the bank loan. Clearly, these aren’t all financial goals, but they have a big financial component to them. Someday, it’s going to be time to sell your business, though it may not be now. If you were to decide that this was the time, when, why and how do you do it?
 
It was August 1996 when I wrote a column for Snowboarding Business on selling your company. Given how long it takes to sell a company, and the timing of the snowboard industry consolidation, I was probably about a year late writing it. As I write this article, I have a high level of confidence that nobody (but me) has an issue of SnowBiz from August 1996 lying around, so I figure I can plagiarize the hell out of that article.
 
A Cautionary Tale of Success
 
Doug Griffith left K2 in the early 90s to start American Snowboard Manufacturing (ASC). Len Hall joined him a little later. ASC grew and prospered. Scott came and offered to buy the company. For a bunch of money. They were going to make snowboards and be cool and would need their own factory.
 
But Doug and Len hesitated. “If it’s worth this much money now,” they thought, “How much more will it be worth after another year of growth?”
 
Doug and Len had been around a while and knew something about business cycles. They knew enough to realize that their crystal ball was just the slightest bit cloudy. One of them, and I don’t know which one, had the acumen and perspective to step away from the euphoria of running a profitable, exciting, fast growing business and say, “Well, the truth is I’m not exactly certain how long this ride is going to last.”
 
They sold.   They took the money and ran. Skedaddled. Laughed all the way to the bank. Now, I’m sure they had a little seller’s remorse initially as they worried about how much money they might have left on the negotiating table. But their remorse no doubt went away as the snowboard industry went into the depths of consolidation hell. Scott stopped producing boards for the US. They sold the factory to A Sport. I have no idea if it’s still operating.
 
Their timing of the sale was prescient. If they could buy and sell stocks like that, they’d own the world. If they hadn’t sold when they did, they would probably have had some hard times before they sold the place for not much, or just had to close it down. There are a lot of people who are (or were) in the snowboard business who weren’t as insightful/lucky as Doug and Len. They either got a lot less money (or just got debt assumed) or they went out of business with nothing to show for a lot of hard work, except maybe some creditors chasing them around.
 
I’m not claiming that skateboarding is like snowboarding and is going to go through the same cycle. Nor am I saying that everybody who owns a skateboard, or skateboard related business, should try and sell now. What am I saying?
 
  • Business cycles happen.   Someday, skateboarding won’t be as hot as it is now and your company, even if it’s exactly the same, will be harder to sell and worth less.
  • Getting a business ready to sell, and selling it, takes time. Want to have a deal done in a year and get the best deal you can? Start now. Anybody can sell a good company fast if they are willing to sell it cheap.
  • Figure out what you want to do and what you are trying to accomplish. Then decide if and when you should explore selling. It’s true that you can just wait for a buyer to show up. But you won’t be in control of the process and probably won’t get the best deal.
  • Business is a risk. Money in your pocket today is worth more than money in your pocket tomorrow. That’s why we have interest rates, a measure of time and risk. Given that time and risk, and the difference between what you can sell for today compared to tomorrow, it might not make sense to wait. Especially if you expect valuations to decline. That is, a company might be worth more today than tomorrow even if tomorrow’s company was bigger and more profitable.
  • Supply and demand matters. If times should get hard, there will be lots of sellers and fewer buyers. If you sell, you want to do it when you’re the only one for sale.
 
If you’re going to sell your business, let’s make sure you do it right and for the right reasons. You can maximize your chances of success, and minimize wasted time, by focusing on what I call the five “Gets.” Get real, get a goal, get ready, get agreement, get help. 
 
Get Real
 
It’s as predictable as the sun coming up in the morning. The owner believes in his business so much that his perception of what it is worth to a buyer is, in my experience, almost always out of line. A sophisticated buyer won’t ignore your projections, but he will discount them. He will recognize the growth potential of your business, but balance that with a realistic assessment of the competition. He will want to know very specifically why you have been or will be successful. He will base his offer to you on the potential return he objectively thinks he can earn compared with other investment opportunities he has. He will value your business in ways that are standard for valuing companies in this or similar industries.
 
He will recognize that your growth depends on increasing working capital investment in the business and that he, not you, is the one who is going to have to take that risk. He will admit that there are some synergies in combining the two companies, but will believe (probably correctly) that his organization will be more responsible for achieving them than yours. Accordingly, he will be reluctant to pay you for them. He will understand that the business is dependent on you and perhaps a few key managers, and will be concerned with your motivation once the deal is closed. So if you expect to receive the value you perceive in your business you should expect to do it in an earn out.
 
He will look closely at your historical financial statements. They will frequently be the single most important (though not the only) factor in determining the price he is willing to offer and no amount of explaining, rationalizing, projecting or shucking and jiving will change that.
 
So, to begin, make a realistic estimate of the value of your company. There are many ways to value a company. None of them give a right or wrong answer. But when you are done you will have a reasonable range of value for your company. You may also want to value it under different scenarios. For example, your company may be worth more as part of a larger organization because your sales will no longer have to support, on a stand-alone basis, all the overhead expense you currently have.   Value it, in other words, as the potential buyer would to get insight into his thought process.
 
This knowledge is a powerful negotiating tool. Make sure you have it.
 
Get A Goal
 
What do you want to accomplish by selling (besides get money)? What do you want to sell; assets or equity? How do you want to get paid? Will you take stock? Cash at closing only? Is an earn out acceptable? What will be your role be in the business after the deal closes? For how long? How hard do you want to work following the sale? What is the minimum price you will accept? 
 
There is no way to know if an offer is a good one or a bad one unless you know what you are trying to accomplish by selling the business. You always want the other side to put the first offer on the table, but you never want them to be able to control the negotiating process because you haven’t thought long and hard about what a good offer looks like.
 
The converse is that you must also know when to walk away. If you are desperate for a deal, you’ll get a bad one.
 
Get Ready
 
From the time the first contact with a serious purchaser begin, it you can generally expect it to take six months or longer to close a deal. But preparations may begin literally years earlier, when the owner concludes that her best long-term strategy is a sale of the business.
 
Try and increase awareness of your company among potential buyers. You can do this, for example, by being active in the appropriate professional associations. Get articles about your company published in trade journals.
 
Have systems that prepare consistent, accurate financial statements and information that can be easily verified or audited. It’s a critical element in determining a purchase price and an important indication that you are a competent business person the buyer can rely on to operate the acquired business.
 
Clean up your balance sheet. Get rid of old inventory and write off uncollectable receivables. It’s never a good idea to fool yourself about the value of assets, and you won’t fool a potential buyer. But by not making these adjustments you may find your own competence and credibility questioned during the acquisition process. “What other surprises are hidden here?” wonders the potential buyer.
 
Have a current business plan that validates your strategy. Make sure the warehouse is brightly lit and painted. If there’s any tax issues, litigation or disputes with employees out there, settle them.
 
You can’t put your best foot forward if it’s stuck in the mud.
 
Get Agreement
 
This may seem a little obvious, but it’s a good idea if all the shareholders agree with the decision to sell the business and have a common understanding of what constitutes an acceptable deal. Legally, it’s possible to sell a business with the approval of less than 100% of the ownership. But in a private company, with only a few shareholders, it can be difficult. A buyer may be concerned about litigation by a minority shareholder. If a dissenting shareholder is expected to continue to work for the acquired company, an uncomfortable operating situation can result.
 
While you can’t please all of the people all of the time, it’s usually a good idea to try and get acceptance (enthusiasm would be nice) from other key stakeholders. These may include customers, suppliers and key employees. They will all be asking “How is this going to affect my relationship with this company?” and you need to have an honest and accurate answer.
 
Get Help
 
Sale of a company demands an accelerating time commitment from the owner. My experience is that as the deal gains momentum, you can either manage your business or work on the deal. There’s often not enough hours in the day to do both well.
 
Let’s look at a typical scenario. You’re selling the business you built. It’s your baby. You’re proud of it, and are far from objective. To make it more interesting, you’re entering into a process with which you have little or no experience. And this deal is potentially the most important and lucrative transaction you have ever entered into.
 
Let’s say that on the other side of the table is the representative of a larger company. He’s been through this before and knows what to expect. At the end of the day, whether or not there’s a deal, he gets paid the same and goes on to work on the next deal. He’s completely dispassionate and may not have any stake in the outcome.
 
Somewhere in the course of the negotiations he looks at you and says, “I assume you’re willing to warrant that there are no outstanding disputes with any federal, state or local tax authorities except as disclosed in appendix A of the agreement?”
 
Now, a good response, assuming it’s true, is something like “I’m willing to warrant it to the best of my knowledge,” but if you’ve never done this before, you might not know that. Happily, you’ve got an attorney sitting by your side to handle those kinds of issues.
 
But if he’s the attorney who drafted your will, helps you collect from delinquent creditors, or kept you out of jail after the IRS audit, he may be waiting for you to speak up. Your attorney must be experienced in representing sellers of business.
 
Right now, there are some skateboard industry companies that are a lot more valuable today than they will be in a year or two. I don’t know who they are, or whether their decline in value will be due to industry changes, competitive pressures, or operational mistakes. But right now, I’m not aware of a single successful skateboard, or skateboard related, company that is for sale. One that was might command a lot of attention and an attractive price. I’m not saying, “sell” but I do suggest you think about it. If you decide this is the right time, make sure you do it right. You may only get one chance.

 

 

I Think I See a Plan. News From the Ski Industry Summit

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Okay, what was I doing at the Ski Industry Summit (formerly known as Ski Week) and why am I writing about it for Snow Biz?

Anybody got a problem with some early season turns in Vail when there’s hardly anybody here? Didn’t think so. Also, there was an open bar each night.
 
But aside from the obvious hedonistic reasons to show, the winter resort business has to do some things differently. Baby boomers are showing up less as they get older, and kids and younger people, overall, are either doing something besides coming to winter resorts or trying it, not liking it, and not coming back. The retention rates for beginners basically suck. If as an industry (and I mean the winter sports industry, not just the winter resort industry) nothing happens and demographic trends and retention/conversion rates continue on their present source, the National Ski Areas Association (NSAA) projects that total visits to resorts will drop 27.2% from 52.2 million to 38 million in 15 years. 
 
Forget the ski versus snowboarding, them versus us, “they don’t get it” stuff. If present trends continue, there will be fewer resorts around, less money to spend on half pipes, terrain parks, new lifts, and developing new runs. Snowboard hard goods and apparel sales will drop. So it’s not just their problem. We are part of the winter sports business and snowboarding’s success is related to the resorts’ success. As far as I know, nobody has figured out a way to snowboard without a mountain.
 
The Ski Industry Summit got three hundred people together to talk about this issue from December 3rd through 6th. This is hardly a new issue, but there was a sense of urgency and an attempt to focus on specifics that was positive, refreshing and to some extent overdue. People were interested in specifics.
 
In the same study that suggested what might happen if we do nothing, NSAA showed that if the industry can increase the number of beginners by 6% each year (subject to some statistical limits that keep growth rates from getting ridiculous) and boost the conversion rate of those beginners by 1% a year, we can have 69 million visitor days annually by 2015.
 
There was general agreement on the need for action, at least among the attendees. Obviously, this kind of conference is self-selecting for people who already recognize that need. And there also seemed to be a consensus that concentrating on getting more people on the slopes and working to make them stay was an appropriate focus.
 
Formally and informally, people had different ideas about exactly what should be done by whom and what the opportunities and obstacles to success might be. There wasn’t an overall program presented. Still, from the studies I’ve seen from SIA and NSAA, the comments made at the conference, and my own experience working with companies that had to change, there was an implicit program that came out of the discussion. Recognizing that I don’t know much about running a mountain resort, here’s what I think I heard the elements of such a program might be.
 
Every Mountain is Different
 
There are 300 or so people out there who use to own snowboard brands who would have killed for the competitive differences that exist among winter resorts. Each is unique, and can utilize its uniqueness in attracting and retaining customers. But how is it unique? Step one is to find out. I don’t mean from anecdotal evidence, informal surveys, or perceptions from 15 years ago. An ongoing program of carefully structured, unbiased, thoughtful market research is required.   I know it costs money, is a pain in the ass, and leaves you with more questions than you had when you started. But you still have to have that the information.
 
Marketing Schizophrenia
 
Male or female? Skier or snowboarder or neither? Day tripper or destination visitor? Young or older? Rich, or not so rich? Real estate buyer? As an industry, it seems hard for the resorts to know where to focus its marketing efforts, although, of course, individual resorts may and often do have a clearer focus. But it’s never as easy in the skateboard business, where north of 90% of the customers are male and between the ages of eight and seventeen. What can resorts do to get that kind of focus?
 
Teaching and Retention: The Customer Experience
 
My perception, reinforced at the summit, is that the winter resort industry generally agrees that the battle has to be won by getting beginners to the slopes and motivating them to come back and by attracting back lapsed participants. There’s no need to market to core participants. They show up no matter what.   What has to happen so that the others show up?
 
They have to have a good experience. Short lines. Rental boots that fit. No confusion about where to go. Warm and dry. Access to bathrooms. Minimal caught edges during lessons. There are, no doubt, 100 others I haven’t mentioned or don’t know about. What’s the magic of this? Rich or not so rich, male or female, skier or snowboarder, young or old, the visitor to a winter resort wants this kind of good experience. They want to have fun. There shouldn’t be a penalty that can border on a fraternity hazing to become or remain a snow slider.
 
Magically, this is a big step in managing the winter resort’s Marketing Schizophrenia. The confusion caused by the apparently irresolvable market segmentation problems and the conflicting demands of each segment is suddenly dramatically diminished. It may not be as conceptually simple as being in the skateboard business, but suddenly a resort can say, “All our customers want this!”
 
Ultimately, customers always get what they want- from somebody. How shall we give it to them?
 
Management Commitment
 
It starts at the top, and there’s never been a truer cliché. Well, maybe one. I’ll get to it in a minute. If you run or own a winter resort (or any other business for that matter) and you think that your future success, and maybe your survival, depends on doing some things differently, you better be leading the charge. If you don’t- if you aren’t involved and seen to be committed every day- the organization won’t change. The customers will get what they want somewhere else.
 
Andy Clurman, President of The Skiing Company, suggested that each resort should appoint a Director of Learning and Retention, or some such title. Great idea. I’d add that the new Director should report directly to the General Manager or President of the resort and have instant access to them.
 
Nuts and Bolts
 
ASC reported at the Summit that the conversion rate for beginners who participated in their new Learn To Ski program was 30%. That program emerged from a complete reevaluation and restructuring of every detail of their teaching program and from measuring the results. It had nothing to do with running ads or showing people jumping off cliffs or selling the latest and coolest technology. It required changing the compensation structure. It meant a two-day seminar where instructors were turned, initially kicking and screaming it sounds like, into sales people. It meant new facilities and processes. No detail of the teaching and conversion process was left unexamined.
 
Opportunities- Not Problems
 
ASC Chairman Les Otten, addressing the Summit, said, “We don’t have a problem- we have an opportunity.” That’s the even truer cliché I mentioned earlier.
 
I think perhaps part of the audience did take it as a bit of a cliché. I didn’t get a chance to ask Mr. Otten, but here’s what I think he meant.
 
When a company needs to change, it resists. Of all the company’s I’ve worked with, I can’t think of one where that wasn’t the case. Inevitably, in addressing the issue, they try to do what’s worked in the past to fix the problem. “More of the same,” no matter how rigorously applied, doesn’t usually work. It also grinds you down. Pretty soon, if all you do is deal with problems you can’t solve, life sucks. It’s depressing, demoralizing, and no fun. There’s no way to succeed. And the worse it gets, the harder it gets to change. You trap yourself in an endless downward spiral.
 
Unless you’ve got an opportunity. In which case, you can create a positive environment, move forward, have fun, give credit, do good things and celebrate a little bit. And by the way you may have accidentally taken a step towards solving that problem that just wouldn’t go away. Pretty soon, you don’t have to “step outside of your box” to use another cliché. You’ve created a new, bigger and more comfortable box to be in.
 
Mr. Otten and the ASC management team saw an opportunity. It just so happens that it helps solve a problem.
 
Finance and Factories
 
General Motors hates it when the production line slows down or stops. They don’t want to repaint fenders. They can’t stand sending back parts. It drives them nuts when a poorly trained employee connects a wire wrong. They moan with every warranty claim.
 
Because every one of these things costs them money.
 
People aren’t cars. Still, the process by which a resort moves a beginner, or any customer for that matter, through the process of getting to the resort, getting equipment, learning, getting on the hill, and committing to come back is a bit of a production line. And people yell louder then cars on an assembly line when you connect their wires wrong. Every customer who’s boots don’t fit, who can’t find where the lesson starts on time, who gets wet and cold in the middle of the lesson, costs you money due to the disruption of the process. Not to mention potentially a future customer.
 
I love it when the marketing and the financial strategy seem to dovetail. I’ve discovered that usually an indication that a strategy makes sense. The operationally oriented approach that the Summit suggested is required to attract and retain snow sliders seems to make financial sense. Not only because of the medium and longer-term impact on visitor days, but because it requires an efficient (i.e., customer friendly) operation that saves you money right now. I also wonder how it might impact your spending on advertising and promotion over the longer run. I note from SIA data that 87% of visitors to winter resorts have internet access. If you’ve better identified your customer, have made it easier for them to come and have fun and have their email address, perhaps some of your other marketing expenses can be reassessed.
 
I don’t want to underestimate the financial implications of some of the ideas presented at the Summit. It costs money to undertake some of these initiatives and cash flow is a hard thing in all parts of the winter sports industry. Still, I can probably guarantee that resorts that don’t start now will have a harder time starting later.
 
What can retailers and suppliers do? You share some responsibility for making sure people know how much fun we have on the mountain. If you can equip them right, and the resorts can make sure they have a positive experience, maybe we will be looking at 69 million visitors in 15 years.

 

 

Benefiting from Recent Industry Initiatives; It’s Up to Each of You

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By now, you should all have seen SIA’s study “Growing the Snow Sports Industry” and NSAA’s growth model for the resort business. They don’t claim that any industry initiative by a trade association is the salvation of the winter sports industry’s issues of participation and profitability. They say, if not exactly this way, “It’s up to each of you.”

From the 20,000 foot level, where the oxygen is thin, here’s what they said, how you can use their work, (whether you’re a brand, a retailer, or a resort) and why it’s such a hard thing to do well.
Industry Initiatives
SIA commissioned Growing the Snow Sports Industry: Marketing Analysis and Strategy for Breaking Down the Barriers. NSAA created a growth model for the snow resort industry based at least in part the conclusions of the SIA study, which you should also make sure you see.
SIA and NSAA did not position their studies as “industry initiatives.” They didn’t make any claims that their programs offered industry wide solutions. They acknowledged that previous industry initiatives hadn’t worked, or hadn’t had the funding and support to be implemented consistently over a long enough time frame.
They said, and this is the most important thing they said, here are some facts and ideas-It’s all up to you. We can’t fix the industry’s problems, but we hope we can give you some guidance and support as you do it.   They are exactly right.
I think that industry initiatives only work, or appear to work, when you don’t need them. When there is lots of growth, lots of money and less competitive pressure, everything seems to be working. In fact what’s going on is that consumer demand and cash flow can cover up a lot of shortcomings in a company’s strategic position.    When that changes, focus often becomes internal and understandably a bit more selfish. Support for industry initiatives, both in terms of time and money, is harder to come by.
In any event, in a consolidating or mature industry there is no rising tide to lift all boats. It’s up to each company to find their market position and respond to the particular needs of their carefully identified customers. The individual companies in addressing their particular circumstances can almost certainly put the resources that might be committed to an industry initiative to better use. That’s just business- in any industry.
What They Said
NSAA proposed focusing on two things; getting a 6% annual increase in beginners and increasing the conversion rate of beginners from 15 to 25 percent with the goal of increasing skier [their word] visits from 52 million to 67.2 million by in 2015. In their words, “The success of this formula for growth…lies not in any national campaign, but rather in the dedicated efforts of individual area operators consistently implementing achievable trial and conversion goals that make sense for their resorts.”
They go on to say that, “…this was developed with input parameters that reflect the national environment. At the regional level and at the level of the individual resort, the underlying dynamics of the Model change and, therefore, the specific goals also change…The great strength of NSAA’s approach toward growing the industry over the next 15 years is that it encourages individual self-gain and entrepreneurial spirit to achieve collective benefits” (Quoted from the September 2000 issue of SAM magazine, page 10. NSAA’s Model for Growth: What It Is, and What It Is Not. By Nolan Rosall, RRC Associates and Michael Berry, President, National Ski Areas Association).
Good strategy is the process of defining where you are, envisioning where you want to be and when, and filling in the time in between with appropriate tactics.   That’s what NSAA is suggesting to each of its individual members.
The SIA study recommends that each member company take steps appropriate to its specific circumstances and opportunities. Like NSAA, the SIA study is meant to support its members, not kick off any national campaign.
It starts by stating that “We must:”
  • Develop a unified understanding of the marketing problems and opportunities
  • Identify the market segments that hold the greatest “acceleration potential”
  • Focus our marketing resources on those productive audience segments
  • Apply those resources in an integrated, efficient manner
All true. For any business in any industry any time and I wouldn’t expect anybody to be even slightly surprised by that. The devil, as usual, is in the details.
They went on to “explode the industry myths that bind us to the obsolete remedies of the past.” Simplified, the five myths are:
  • That participants aspire to be “extreme.” They don’t. They are in it for the wholesome, lifestyle activities.
  • That the dominant barrier to increased participation is increased cost. It’s more complex than that and involves time, quality of experience and proficiency.
  • That we have a big opportunity with underserved populations who have never been on the hill. Maybe not. They have to be lured to the slopes, sold on winter vacations and cold weather activities, and convinced to adopt an activity their peers don’t participate in.
  • There’s a single advertising message that will work for the whole industry. There isn’t. The consumer base is too diverse.
  • That awareness of various “make it easier” technologies like shaped skis and of the technology’s benefits are high. Nope. Most are unaware of its existence or benefits.
After that we’ve got six key findings.
  • There is a strong relationship between proficiency, enthusiasm, participation and sales.
  • The industry is bleeding new triers and participants of low proficiency.
  • The biggest opportunity is in reactivating lapsed participants and upgrading light and moderate users.
  • New technology can produce marketing leverage.
  • Children can be a barrier or a motivator to increased participation.
  • Introducing consumers to skiing/boarding young and keeping their loyalty can have an exponential impact on revenue.
Based on this, they suggested a “new” approach to the market that included:
·         Looking at snow market as the sum of many segments- not as a mass market.
·         Communicating the brand snow sports in terms relevant to each of these customer segments.
·         Allocating marketing resources based on the potential value of each segment.
They go on to suggest more specific strategies and tactics for retailers, suppliers and resorts.
I’m sure most of us recognize that this “new” approach is old. It represents a pretty traditional market strategy that is new to winter sports only because it was, historically, unnecessary for success or, more recently, resisted. Why is that?
Déjà vu All Over Again
It doesn’t matter what industry we talk about. In periods of difficult transitions, all companies tend to react the same way. Specifically,
·         They do what they perceive to be in their own (short term?) best interest. They don’t ask, “How can we help the industry?” when they are dealing with gut renching issues of change and survival.
·         They resist change and tend to do “more of the same.” Change is uncomfortable and most of us dislike stepping out of our comfort zones.
·         They have a hard time just recognizing the new environment they are operating in and frequently don’t until they are slapped upside the head.
·         They focus on tactics that are responsive to short term pressures rather than identifying and reacting to critical strategic issues.
·         Typically, an outside change agent (the bank, big customers, a consultant or new CEO) is required to motivate the change process.
Before I’d ever heard of a snowboard, I’d worked with companies in banking, pharmaceuticals, light manufacturing and retail where this was the case. I can assure you it’s true in snowboarding and in all of winter sports as well.
Many of the people making skis and running resorts have been doing what they do for a long time. There’s a tremendous amount of inertia and continuity in the industry. With such long histories, established relationships, and common perceptions firmly entrenched in a comfort zone, it can be difficult to make the kinds of changes the industry required.
Those of us who got into action sports through snowboarding have the same issues, though perhaps not to such an extreme if only because we haven’t been involved as long. Like skiing in another era, snowboarding could rely in its early years on the enthusiasm of its youthful participants to overcome issues of expense, poor facilities, lousy equipment and inconvenience. If, as an industry, we didn’t handle our consolidation as well as we might have, we can plead that it happened too quickly to react to, and we’d be partly right.
Now, we’re getting older (which is fine given the alternative). Larger corporations, most of who are also in the ski business, dominate snowboarding. The snowboard, ski and resort industries increasingly have common issues, interests, and relationships.
What You Can Do
One of those common interests is making money, which has been a hard thing to do for a lot of organizations. I know we’re also interested in the lifestyle, and the product, and the experience, and supporting the sport, but if there isn’t enough money made, we won’t be here to do that. Everybody reading this knows somebody who’s committed to snowboarding, use to be in the business, and isn’t anymore as a result of financial issues.
SIA and NSAA have now provided their members with a justification and a framework, rigorously validated through actual data, for changing the way they do business in response to new competitive conditions. But they can’t (and have learned they can only get in trouble if they try to) do it for you.
That’s all they can do. A basic blue print is in your hands.   Adapt it for your organization and go and do it. You can’t “fix” the industry anymore than SIA and NSAA can. But you can sure take a shot at fixing your piece of it. Bottom line? Marketing, and customer identification and segmentation, not discounted season passes, longer terms for retailers, and discounting at retail that starts in November are the answer if we have the patience and longer-term perspective to do it consistently. Step out of your comfort zone.

 

 

Building a Business; Issues for Would be Skate Entrepreneurs

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When a market gets hot, people start companies.   Where the capital costs and entry barriers are low, they start more rather than less. When there’s enthusiasm for the industry and the lifestyle, they often start them for all the wrong reasons, and without adequate or any business planning. It looks like easy money, but it usually isn’t. 

 
Well, God bless naïve, enthusiastic entrepreneurs because if everybody understood the risks and stresses of starting new businesses, none would ever be started. I don’t want to discourage anybody from starting their business, but I’d like them to know what they are getting into, what’s going to happen if they have some early success, and why it’s too late to begin when the market is already hot. The genius of the entrepreneur is in starting his or her business before everybody else sees the opportunity.
 
Just for fun, let’s say you want to start an independent street shoe company. Now? Today? Okay, okay, stop laughing. Pretend it’s two years ago.
 
In the Beginning
 
You’re a sponsored skater with a good reputation, and a following among local retailers. You don’t like the shoes available to you. Conversations with retailers you know make it “obvious” they’d be receptive to some new colors and designs. Response to your color sketches and description is positive. “Cool! We’ll buy them for sure,” they say almost without exception.
 
“Kaching!!!” you think. Easy money, here I come. Not that anybody gets into the business for the money of course…….
 
Let’s make this simple. Magically, you’re through the product development cycle and are ready for production. You did all the work yourself.   A friend introduces you to a manufacturer who loves you and your shoes so much he agrees to produce a thousand pairs with no up front money and to give you 60 days after delivery to pay. Orders from some retailers materialize, though not from everybody who said they would buy and not always as large as you’d like. You successfully grovel, taking the “I’m just a poor skate entrepreneur” approach to your new customers, and they reluctantly agree to pay you cash on delivery.
 
Your shoes arrive on time (right). All the people who said they’d buy your shoes buy them (sure they do). They all pay you cash as promised (uh-huh). You put the money in the bank and earn interest until you have to pay the factory that made the shoes for you. The shoes all sell through great (of course). Reorders flow in like water over Niagara Falls during the rainy season. What a terrific business this is. Here’s what your income statement for this little business looks like after the first 1,000 pair.
 
Net Sales                                                          $25,000            
Cost of Goods                                                  $15,000
Gross Profit                                                      $10,000 (40 percent)
 
Operating Expenses                                          $2.000
 
Pretax Income                                                   $8,000
 
Remember that everything went perfectly. Also, you worked for yourself for free and did everything yourself. Your operating expense was almost all for travel and communications. At the end of the day, you’ve got yourself a nice little 32 percent profit margin. Isn’t that wonderful!
 
Having run a distributor that was selling imported product, I am here to tell you that everything working right is a full-on, drug induced, hit your head while skating without a helmet, hallucination.
 
But it’s a great hallucination to have, so let’s assume it continues except for a couple of little things. You’re so hot that your next order is for 10,000 pairs.
 
The Next Step Up
 
Your supplier still likes you but, hey, this is business. With an order that size, he wants a letter of credit or a deposit up front, and you’ll have to pay him the balance when he ships the shoes. Remember, though, that this is a hallucination, so he gives you a break and says you just need to pay him when the shoes ship.
 
Your retailers still like you but, hey, this is business (you’re starting to hear that a lot as your company grows). They want 45 -day terms just like they say they get from the other companies. The 10,000 pair cost you $150,000 including freight and duty.  Your supplier says, “I’m ready to ship, send the money.”
 
Details like this can really put a damper on perfectly good hallucination. The bank won’t lend you any money, your credit card limit isn’t quite that big and none of those lottery tickets you’ve bought have been winners. You need $150,000 or you’re out of business. Let’s assume somebody comes along and lends you the money for only an exorbitant interest rate and doesn’t want 50% of the equity in your company to do it. Remember, this is a pleasant hallucination.
 
The shoes are delivered to you and, in turn, to your customers. You’ve sold the shoes, you’ve got the same 40 percent gross profit that you had when you sold 1,000 pair, but this time it’s 40 percent of $250,000 or $100,000.
 
Inconvenient Realities
 
The expense side looks a little different though. You had to get some help warehousing and delivering the product. Retailers want some service so you need some phone lines and somebody to answer them. Some promotional product has to go out the door for free. The guy you borrowed the $150,000 from wants interest. You’re still making money at the bottom line, but that 32 pretax margin has evaporated. Maybe if you’re lucky it’s still as high as 15 percent but heading south fast as you become an established company.
 
Oh, and by the way, you’ve got no cash. You retailers aren’t paying you for 45 days and, strangely enough, not all the cash shows up exactly on the 45th day. But the people you’re hiring to man the phones and deliver the product don’t seem to want to wait 45 days to get paid. It’s the lament of the entrepreneur to their accountant- if I’m making so much money, how come I can’t pay my bills!?!?!?!
 
Now, awaking from our dreamlike state, we find that the supplier wants a letter of credit before he’ll produce any more, and the order isn’t really big enough to get his attention anyway. Retailers are asking about your team and your promotion budget. Some shoes sell and some don’t. Certain retailers you really want to be in want a credit for the ones that haven’t moved. There’s so much to do that you need to hire more people to help you. The government wants you to fill out a bunch of paperwork, and they want their piece too. You’ve got every cent you can find invested in the business and it’s barely enough-for the moment.
 
Congratulations- you’re no longer an entrepreneur, you’ve a manager. Overall, your income has increased. But your net margin on each pair of shoes sold has declined as the cost of running the business gets bigger.
 
You didn’t do anything wrong. This is all normal stuff. Every time volume increases and margins decline, more working capital has to be invested in the business. Working capital is nothing but the money you have to spend to pay bills, get product made and market your brand while you wait for retailers to pay you. Almost every successful, growing business I’ve ever seen has working capital crunches as a normal part of growth.
 
Managing by the Numbers
 
What can you do to avoid this financial hang grenade?   Nothing. It comes with being in business. But you can try and minimize its impact by a little planning. Do it on a computer or with a piece of paper. Here’s a format I’ve used with some success in a variety of businesses. Don’t get fixated by the categories I’ve used. Change them to work for your business.
 
                                                            Jan.      Feb.     March. Etc.
 
Beginning Cash Balance
Sources of Cash
            Cash Sales
            Collection of Receivables
            Borrowings
            Other
Total Sources of Cash
 
Total Cash Available
 
Uses of Cash
            Product Purchases
            Payroll
            Rent
            Utilities
            Advertising
            Phone/Fax
            Etc.
Total Uses of Cash
 
Ending Cash Balance
 
The beginning cash balance is probably whatever is in your checking account. The ending cash balance each month becomes the beginning cash balance for the next period. Depending on how quickly your situation is changing, your estimate of expenses can usually be based on your historical experience. But remember that just because you get your phone bill in July doesn’t mean you pay it that month. Typical many of your operating expenses will be paid in the month following receipts, and your cash flow has to take this into account.
 
Don’t get too caught up in the process of creating a perfect model. Get it done and work with it. Modify it as you learn more. Look at your projections versus what actually happens. Creating the model isn’t really where you get the benefit. Using it and watching the variables change with each other is.  It’s a lot like learning a language. You only get better with practice and as soon as you stop speaking it, you start to lose it.
 
Rules to Live by
 
Rule one, then, is don’t try to grow your business faster than you can finance it.
 
Rule two for the budding skate entrepreneur is to know the difference between starting a company and running one. Get the help you need.
 
Rule three is that it’s easy to sell when you’re new and small, and harder as you grow. Know how you’re going to compete.
 
Follow these three rules and maybe the glamour of having your own company won’t wear off so quickly.

 

 

Future History; What’s the Price of Success

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

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

 

 

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

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

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

 

 

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

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

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

 

 

Hard Choice Time; Strategies for Success in the Snowboard Industry

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

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

Competition may emphasize cost and service