What I Learned at ASR: Products, Movies, Cooperation, Culture and Hype

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I spent three days walking and talking. I suffered through the usual distraction and traffic jam at the Reef booth (why is it that no matter which way you try and go, you end up there?). In no particular order, I noted the following things:

 
  • No major new products
  • Snowboarders trying to do skate tricks in the new movies
  • A focus on culture that goes beyond individual sports
  • The industry’s continued inability to cooperate in its own best interest
  • Some hype from companies that look big but probably aren’t.
  • Shoes- lots of shoes.
  • My favorite company name
 
Is there some common theme here? I hope so, or this is going to turn out to be a really lousy article.
 
New Products
 
There was the Expedition Insert, the new Powell rubber washer, (Help Mik!- What’s that thing called?) and a few incremental improvements or at least points of hoped for product differentiation like there are every show. Brands should strive to create these points every chance they get, but they won’t provide a significant strategic advantage.
 
Aircraft had its aluminum skateboard that now really looks like a skateboard and has replaceable wooden tips. How will it be accepted? I don’t know, but I do know that its success is likely to depend only partly on its functionality and durability.
 
Look, I’ve heard it works fine (makes a cool sound I’m told) and is durable. But skaters are at heart, a conservative crowd. Trying something new brings with it certain social risks. I seem to vaguely remember being willing to do almost anything to prevent any such risks when I was a teenager.
 
Aircraft’s success will depend on their ability to make the product cool. If the right opinion leaders give it the thumbs up, others will adopt it. If not, no amount of technical superiority will make it take off. I almost think I’d rather start a new skateboard brand with a traditionally constructed board and the right team and marketing budget than with a product that’s too different from what’s already out there. 
 
I’m reminded of Forum Snowboards in their first year. The boards had the reputation of breaking but the kids didn’t care because the team was so cool. I’ve characterized Forum as a skateboard brand that happens to sell snowboards because of how they have positioned themselves in the market. Hopefully, Forum takes that as a compliment.
 
Skate Tricks on Snow
 
A few years ago, jibbing was hot in snowboarding. Then it kind of went away. Last season, it was back and at the premieres of the snowboard movies at ASR, I saw not only more jibbing, but also kids trying to do skate tricks on snowboards without their feet in the bindings. It would be easier if there weren’t bindings in the way.
 
Focus on Culture
 
This kind of crossover seems consistent with a market that’s become, and is becoming, much broader. And much more confusing. People (a lot of people) who don’t participate in the sports belong, or think they belong, or want to belong, to the culture. In shoes and apparel, I wonder what percentage of purchasers are regular skateboarders? Not a majority I’ll bet. Hey, I love my skate shoes and their teched out look, but while I’m still willing to take a tumble on snow, I’m too old to fall on concrete.
 
I’ve had occasion, recently, to read the public Security and Exchange filings of Vans, Pacific Sunwear, and Quiksilver. When they talk about why they are successful, and about risks associated with their businesses, they talk about understanding the lifestyle, spotting the trends, and being part of the culture. These are three companies that are successful by most measures. Their success is almost completely outside of hard goods, though of course they support the sports.
 
No hard goods company has the chance to grow as fast as these companies have grown, and to the size they have grown. The hard goods market just isn’t big enough to allow it.
 
Industry (Non) Cooperation
 
But hard goods are the engine that drives the growth of the culture and sales of apparel and shoes. They are what drives Mountain Dew and the U. S. Marines, etc., to pay lots of money to promote their products at the X-Games. Everybody needs apparel and shoes. Not everybody needs a skateboard. Apparel and shoes typically offer higher gross margins along the whole food chain.
 
Various mainstream soft goods companies have figured this out. They are thrilled to allow the core hard goods skate companies (and some soft goods companies) to support the sport and the riders while they try and reap the benefit.
 
We, as an industry, feel just the smallest bit used. That’s only because we are. I trust none of us are surprised.
 
We think that our support of the sport and longevity in the industry entitles us to a piece of action. Entitles is a pretty lofty word- and it gets us nothing. Anybody who thinks that ESPN is going to just hand the industry a piece of their action or promote IASC (International Association of Skateboard Companies) at the risk of pissing off an advertiser who’s paying them some millions of dollars is unrealistic.
 
Getting that piece of the action requires, as strange as it sounds, that we work with the big organizations that we are concerned will destroy our sport. Because they aren’t going to go away.
 
In the first place, the industry has to speak with a somewhat unified voice. I don’t know if that’s possible. It doesn’t seem to have been so far.
 
The rest of the process is conceptually simple and basically the same that lots of groups have used to create influence/leverage with organizations they want to influence.
 
First, reach an internal consensus as to what we want the target of our efforts to do. Second, present these requests/suggestions/demands in a way that tells the target why we want these things to happen, what, exactly has to be done, what the benefits to the target organization are and how we can help them. Finally, let them know the cost of not seeing things at least partly our way. Do all this in such a way that the “person of influence” we are working with at the target organization looks like a hero to their boss. Make that target organization dependent on our input and support to accomplish their goals. 
 
I left myself an out by saying this was “conceptually simple.” It’s a lot of work under conditions of uncertainty. The end result will never be exactly what we want. But I’m certain that unfocused complaints about tactical issues won’t win us the respect of the people we want to influence.
 
Hype and Glory
 
I remember the year at the snowboard show when Morrow had a helicopter on its second story, and the average size of a snowboard booth was just south of a football field. Okay, maybe a tennis court. Advertising and promotion expenses as a percent of revenue were completely out of control. Companies who were smaller than they wanted anybody to know struggled to get enough market share to be players.
 
I saw a bit of that at ASR.
 
Shoes
 
I especially saw it in the shoe and apparel companies. When somebody tells you that their revenues are growing hundreds and hundreds of percent over last year and refuses to tell you what percentage of revenues their advertising and promotional expenditures represent, you know they are smaller than they want you to know. Why?
 
The smaller you are, the easier it is to get big percentage revenue increases. If you’ve only sold one $10 dollar t-shirt, selling two the next year doubles your revenue. Big deal. If on the other hand you sold $100 million in t-shirts, or whatever, and double it the next year to $200 million, for the same percentage increase as from one to two t-shirts, it’s a huge accomplishment. Percentage sales increases decline precipitously with revenue growth.
 
Spending a bunch of money and incurring big losses to get market share isn’t necessarily a bad idea- you just have to have the balance sheet to finance it and a strategy to eventually become profitable. In other words, it can’t just be a fear driven, defensive response to your competitors.
 
Favorite Company Name
 
And the winner is……Red Ink. I started laughing so hard when I saw the name that I don’t remember what they do- some kind of apparel I think. My money is on those guys to be survivors, because I have a hunch they understand how their financial model has to work.
 
Which brings me back to shoes. There were a lot of beautiful shoes. New materials, cool features, broader selections, more colors. And prices that I thought were generally tending lower. Great for the consumer. Not necessarily so good for the company that has to support a big advertising and promotional program with a lower gross margin. Unless of course their volume is growing quickly. In which case maybe that volume gets some of the margin dollars, if not percentage points, back. So better pump up the marketing budget and get that volume up.
 
Which is of course what all your competitors are thinking and doing. You know, maybe if the booth was the size of a football field…….
 
And in Conclusion
 
Oh god, I promised to tie this all together somehow. The skateboard industry, as traditionally defined, is in danger of being the engine that fuels somebody else’s growth with no benefit to itself. I suppose that’s the common message from all the vignettes above. In our little corner of the world, competitive pressures are reducing margins, product is over supplied, and advertising and promotion is the only way to differentiate brands.
 
Skateboarding and the skate culture may be a huge commercial success. But many core focused companies may not share that success. We’re competing with each other instead of focusing on the real threat.

 

 

I Feel a Whole Lot More Like I Do Now Than I Did a Little While Ago; My Take on ASR

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I’m not entirely sure what the title of this article means, but I’m pretty certain it applies to the skateboard industry. Conditioned as I am by the snowboard industry consolidation, I went to ASR expecting to observe a similar process. Subjectively, it seemed like the show wasn’t quite so crowded, and things were more business like, but there weren’t dozens of companies missing and multiple unused booths. And there were some small companies saying and doing the kind of things that made me think they might be around a while.

 
Don’t get too excited. Not for a moment am I going to suggest that skateboarding is in any way immune to typical business cycles. But there may be some forces at work that will allow the process of industry maturation be a little less painful, or at least draw out the agony over a longer period of time. I’m not sure if that’s good or bad.
 
So here’s the plan. Let’s decide what we mean by “the skateboarding industry,” review how consolidating industries change, look at a couple of industry trends that may make it easier to deal with, and then, to conclude with a happy feeling, look at some of the positive things I think I spotted at ASR.
 
Who Are We?
 
This use to be easy to answer. A company in the skateboard industry was any brand or retailer that sold skateboards and/or any other hard goods. Probably they also sold some soft goods but, at least in the case of the brands, those tended to be promotional and if they happened to make money on them, great. Now you’ve got skate shoe companies and skate clothing companies and shoes and clothing are an important component of any retailer’s sales. Are they still skate companies?
 
When you sold a skateboard, you could reliably assume it was to somebody who was going to actually go skateboarding. That’s not so clear when you sell a pair of skate shoes or some skate clothing. I’m going to guess that an increasing percentage of non-hard goods sales are going to people who don’t skateboard. Are companies who don’t sell hard goods and who sell a bunch of product to non-skaters industry companies?
 
Have a great time arguing over that. Since I seem to have a 5,000-word story I have to write in 1,500 words, I’d better move on. The point I’d like to make is that the industry has evolved so that, for better or worse, it’s no longer just defined by people skate, but by people interested in the image, attitude and lifestyle of skating. And by companies with a lot of money who are having a hard time understanding the sport. I’ll get back to this when I talk about industry trends.
 
Trends in Consolidating Industries
 
I’ve said this all before. Just check out the sidebar to refresh your memories, think about it for a minute or two, and we can move on.
 
SIDEBAR
 
Changes in Consolidating Industries
 
·         More competition for market share. Competitors become more aggressive because they realize their survival is at stake.
·         New products and applications become harder to develop.
·         Dealer margins fall, but dealer power increases.
·         Industry profits fall during the transition period. Cash flow declines when it is needed most. Raising capital becomes very difficult.
·         There is the danger of over capacity and turning the product into a commodity (Repeat after me- “Blanks are sure swell!”).
·         A new basis of competition is required for successful companies, but past industry euphoria makes changing difficult.
·         There’s a bunch of irrational competitive behavior. “It won’t happen to me” is an idea frequently expressed by companies waiting for their competitors to falter.
 
Industry Trends and Circumstances
 
Not all the changes in consolidating industries happen at the same time to all companies. Nor do they all occur with equal strength. In skateboarding, there are a number of reasons consolidation doesn’t seem to be occurring in a textbook way.
 
The industry is not extremely seasonal.   Retailers aren’t being offered 120-day terms by manufacturers. There are no long lead times on making and delivering product.   Inventory turns, let’s say, four to six times a year (my guess). Manufacturing technology is simple enough, or well enough established at least, that no huge investments are required and yield is high.
 
All those things mean that the working capital investment required in skateboarding is comparatively easier to manage than in some other industries. So the financial pressures on marginal players is less. It also means that it’s easier to get in, and to get out, of this industry. Due to extreme seasonality and the timing of the product cycle, there was never a good time for a company to exit snowboarding.
 
I’m not suggesting that things are easy financially. Low hard goods margins, blank decks, and difficulty differentiating one company’s product from another’s means you have to spend more on advertising ad promotion exactly when margins are declining. That creates a bias in favor of larger companies that move more volume because it gives them more gross margin dollars to work with.
 
But maybe financial pressures will be increasing. I talked to one large company that sells skate shoes (among other things) at the show that mentioned how they were starting to offer 60 day terms to select retail accounts. And so it begins.
 
There is no leading, clearly dominant company in the industry. My guess is that the single largest hard goods company sells no more than $15 million annually in decks, wheels, and trucks. In snowboarding, Burton, with a market share in excess of 50% a few years ago, had the market leverage to set the bar for successful competitors. An awful lot couldn’t get over it. Nobody can set that bar in skateboarding at this time. It’s interesting to note that some of the larger shoe and soft goods companies appear to be at least double the size of the hard goods leaders based on revenue.
 
Skateboarding is operating in a roaring economy, with income and spending growing, interest rates low, lots of wealth created in the stock market and jobs for anybody who wants one. Now add to that 60 million young people between five and twenty born between 1979 and 1994. Levi’s, Converse and Nike aren’t cool any more. But their long-term success requires that they make an impression on this group, whose spending habits aren’t formed yet and the largest chunk of who are still ten years or so away from adolescence. So they are interested in skateboarding and other activities that are part of this group’s culture. Not because they want t sell skateboards- they could take the whole skateboard hard goods business and it wouldn’t have a material impact on their bottom lines- but because they want their involvement with the sport/lifestyle/attitude to give them credibility with this group.
 
The (Probably) Good News
 
So we’ve got a strong economy, favorable demographics for the next ten years or so, and big money interested in the sport.   For the reasons I mentioned above, the financial environment could be a lot more difficult than it is right now. That’s especially true if you define the skateboarding industry to include clothing and shoes- which, to answer the question I raised earlier, I think you have to do.
 
Some smaller companies seem to be making some good decisions. At ASR I heard people talk about cutting teams to get costs in line with measurable financial benefits. There were comments like, “I’m not going to run an advertising campaign that drives me into the hole financially.” People were acknowledging the similarity of products from company to company and being thoughtful about how to differentiate themselves from their competitors.
 
I suppose you’re only surprised by such common sense ideas and comments if you were around at the peak of the snowboard feeding frenzy, when it was grow at any cost, take market share, find money for just one more ad. The perception was that if you didn’t “establish your position” you were dead meat. That was true. But the cost of establishing your position was as likely to kill you as not establishing it. Turned out it didn’t matter how you died- only that you were dead.
 
Pay attention to the trends in consolidating industries, but recognize that the rapid growth, maturity, and consolidation cycle is more typical of emerging industries. Skateboarding has been around a while. Hard goods, clothing and shoes are all part of skateboarding, but each seems to be at a different point in the cycle. I’d look at them separately. The lack of a dominant company in the industry and the fact that the business isn’t extremely seasonal suggests that more players can survive.
 
In the past, the attention of large companies caused a severe decline in skateboarding. Given the demographics we’ve got, and assuming that skateboarding doesn’t become “uncool” who’s to say that the industry can’t continue to grow at a rate that lets it at least keep its existing percentage share of adolescent males? That doesn’t mean a hundred new hard goods companies. That could only happen if some product innovation lifted margins on hard goods to the point where new, smaller players could compete. I don’t see that happening and expect the lion’s share of any growth in skateboarding to accrue, at least in hard goods, to the existing, larger, companies.
 
Interesting stuff. Let’s talk about it at the Industry Conference in April.

 

 

Reality Bites; The View from ASR

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There was a keg at the IASC hospitality suite at ASR the first evening of the show, and I was drinking a beer with Miki Vuckovich of Transworld Skate and Jim Fitzpatrick of IASC. Into this fairly typical trade show experience walks the comedian Gallagher with his entourage of one. He sits down with his own beer and ten minutes later we’re talking about his new line of educational toys for children based on sub atomic particles and meant to teach them about nuclear physics, or something.

 
I thought the toy line was a good idea, but there was a certain sense of unreality to the encounter and discussion I guess because of the venue and circumstances. And I guess that’s how I’m going to segue into making that chance meeting relevant to ASR and the skate industry; good ideas with a sense of unreality.
 
What They Said
 
Almost every skate company owner/manager I talked with at the show had basically the same things to say. They were concerned with the state of the industry and overall competitive conditions. Specifically,
 
1.     Growth seems to be slowing and profits are harder to come by.
 
2.     Deck margins especially are declining due to blanks and oversupply.
 
3.     There are too many companies with no business reason to exist.
 
4.     There are too many wood shops with too much capacity.
 
5.     The companies that are investing in team and marketing and benefiting the industry are giving a free ride to the companies that don’t.
 
6.     The top five to ten companies in the industry ought to cooperate to stabilize and rationalize the industry, but probably won’t.
 
7.     Differentiating your brand is getting harder. You are faced with the need to spend more marketing dollars exactly when it’s toughest to afford.
 
What’s Been Said Before
 
What they said was pretty much the same thing that’s been said in every industry that has experienced fast growth followed by a period of maturing and slower growth. For example, Harvard Professor Michael Porter in his 1980 book Competitive Strategy said it.
 
Professor Porter who, I am quite sure, hasn’t spend much time skate boarding, took a whole chapter to talk about the transition from fast growth to industry maturity. He noted the following tendencies, and that they are more or less the same in every maturing industry.
 
Slowing growth, he said, means more competition for market share. Because fast growth is no longer supplying opportunities for growth, the focus becomes on attacking the market shares of others. Competitors can become more aggressive, because they realize their survival is at stake. There are lots of misperceptions and irrational retaliations for the perceived and real attacks of others.
 
New products and applications become harder to develop. Don’t look now, but basically a skateboard is a skateboard. My money is on the companies who are continually finding small ways to differentiate their products.
 
International competition increases, according to Dr. Porter. I recently talked with a French snowboard factory that’s started taking shop orders for decks. Easy business he says. He can make money doing as few as fifty decks for a shop.
 
Dealer margins, according to Dr. Porter, will fall. But at the same time their power increases. Kind of makes sense when there are more companies, more products, and less perceived difference among product. Companies looking for a survival strategy will offer retailers lower prices, discounts, maybe some increased dating on orders to try and generate cash flow. Great for the consumer. Not so good for brands and retailers trying to sell a specialty product at higher margins.
 
Industry profits will fall during the transition period, and the fall can be temporary or permanent. Cash flow declines when it is needed most due to lower margins and greater expense incurred in trying to provide better customer service and differentiate “me too” products. Raising capital becomes very difficult. Companies with the smallest market shares are the most affected.
 
There is a danger of over capacity as more and more manufacturers rush in to meet the seemingly endlessly growing demand for this hot product. Over capacity accentuates a tendency towards price warfare. The result I’ve seen with the snowboard is that it became something of a commodity. And there’s a lot more technology and actual product differentiation in a snowboard than in a skateboard.
 
At the end of all this, the whole basis of competition in the industry has changed permanently. The euphoria that can characterize a company’s management style during the fast growth period has to change. Doing more of the same won’t work anymore. When you could grow quickly, raise prices and have high margins you could get away with anything. Hey, cash flow can hide a lot of mistakes.
 
I don’t want to belabor the point, but you might also pick up a copy of the March-April 1997 issue of the Harvard Business Review and read Professor George S. Day’s article called “Strategies for Surviving a Shakeout.”
 
Now I know it sort of stretches the bounds of reality to talk about the Harvard Business Review and the skateboarding industry in the same breath. I talked with professor Day and I think I can assure you he’s never been arrested for skating the railings at city hall. I also know he’s not Richard Novak or George Powell writing under an assumed name.
 
So how come he’s managed to write an article all about the evolution of the skateboarding industry (even though he never uses the word)?
 
What Needs to be Said
 
There’s one, minor, inconvenient, sort of annoying, little fact that has to be faced. Please pay attention. That fact is that skateboarding is no different from any other industry in how it will go through its growth cycle. The companies in the industry will respond to changes in the competitive environment just like companies in any other industry.
 
Every company in the industry will do what it perceives to be in its own best interest. Each will create a projected scenario explaining how it will be a successful survivor while its competitors succumb to changing competitive pressures. Failing companies will resist closing their doors even when every objective analysis of their risk and potential return indicates that they should. Ultimately, only companies with a clear competitive advantage under the new market conditions will survive.
 
Each will truly want to support the industry, but won’t be able to agree with other companies exactly what that means. As a result the “you first” principal will tend to prevail and each will wait for somebody else to step up to the plate as the leader. That is probably inevitable in an industry where there is no clearly dominant company.
 
What Should You Do?
 
My suggestion is that you start by accepting two facts:
 
1.     The basis for competition has changed and is changing in predictable ways. The “good old days,” if they ever existed, aren’t coming back.
 
2.     Fact one is really important.
 
If you accept this, then it’s time to start recreating your business to succeed in the new competitive reality.
 
Begin by not chasing market share. Not that market share is a bad thing, but blindly chasing it in a competitive frenzy often leads to a financial disaster. Remember that any company can get one hundred percent market share- all they need to do is give away the product. Unless, of course, somebody else does the same thing, in which case I suppose you’d have to pay the customer to take your product. But hey, you’d have a big market share!
 
Which is a somewhat sarcastic way of saying that your competitive strategy has to be tied to your financial capabilities. Try this. Realistically, what can you expect your gross profit margin to be? What are your general and administrative expenses for the year? What do you need to spend on sales and marketing to have a chance at a viable marketing position? What other money do you have to spend on interest, taxes, commissions, etc? Now add twenty percent to your total estimated expenses for stuff you couldn’t have imagined would happen in your wildest dreams.
 
Given your gross profit margin and these expenses, how much do you have to sell to earn a reasonable profit? Figure it out right now, on the nearest available piece of paper. It shouldn’t take more than twenty minutes. Given the risk you are taking and how hard you’re going to have to work is your business a good deal? Can you sell that much? To give you some perspective, recognize that if you’re earning five percent before taxes, you could be doing just as well in thirty year U. S. Treasury bonds with basically no risk. And no effort on your part.
 
So make some hard decisions. Some business decisions. Don’t let the hype of a trade show substitute for sound business judgment.

 

 

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

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

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

 

 

SIA 1996; It’s Just Business

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Business. It was all business.

 
Well, maybe not quite all. The ladies and gentlemen at Mervin Manufacturing were dressed in all white outfits (they claimed not to be angels) and Mike Olsen was shooting money out of a cannon at irregular intervals.   But the snowboard side of this year’s SIA show in Las Vegas showed that the industry is maturing. There were the usual crowds and noise and excitement. But there was also, especially among the larger companies coming to dominate the industry, a more subdued sense of purpose and focus.
 
They weren’t there to have fun; they were in Vegas to do business. 
 
You felt it as soon as you saw the booths. Many were the size of my house, except my house doesn’t have a second story . Now I know why Morrow did a public offering. To pay for their booth.
 
Larger, sleeker, cleaner, sophisticated, with more controlled access and private rooms for meetings and order writing. Less beer being consumed during show hours. No companies thrown out for use of controlled substances. To put it succinctly, snowboard industry leaders had booths that looked, well, like ski company booths; except they were busy.
 
This was the year where it seemed that the ten or so companies that control 70 plus percent of the US snowboard business heaved a collective sigh of relief. They knew snowboarding was here to stay. They knew they were going to have a prominent part in it. They realized that the small, undercapitalized companies not being run like businesses would disappear or, at worst, be like fleas on a dog; occasional and momentary distractions.
 
Their focus was on taking market share before the competitive situation solidified and establishing their positions against the other large players.
 
Their tools were complete product lines, payment terms, discounts, pricing, reliable delivery and customer service coupled with marketing and promotional programs only they could afford. Retailers, nervous after late deliveries, poor and/or late snow in much of the US, and left over inventory didn’t have to have their arms twisted-much. Their interests, and those of the Burton/Sims/Ride/Morrow/Mervin snowboard juggernaut generally coincided.
 
Now under these circumstances, you might expect that the size of the show would have stabilized or (be still my heart) even declined a little. Nope. Booths spilled out into the lobby and took over the meeting rooms on the second floor. I don’t know how much of the growth was the result of companies taking more square meters, but I’d estimate there were a couple of dozen new snowboard companies. Or at least people with boards in booths hoping to become companies. The directory lists about 300 snowboard brands in total.
 
My conversations with them tended to be the same as with other new companies last year. They had limited capital and product lines, no competitive strategy, and couldn’t explain how they were going to differentiate themselves. If I hear “We’re closer to the market than our competition” one more time, I’ll shoot myself (I shouldn’t say that. I’ll be dead at the next trade show.). I didn’t have the perception that these companies were writing any significant orders, though of course you can’t expect anybody at the show to say “We’re doomed” when you ask them how it’s going.
 
There didn’t seem to be much change in board design or construction. What I did notice was the size of the line of some of the players. Between the Ride, Mercury, Liquid and 5150 brands, Ride, if I counted right, had 84 boards. Let’s see a sales rep put all those in his van. Graphics were simpler and colors varied but muted. Yellow seemed popular. As companies go mainstream, the goal of graphics seems to be not offending anybody.
 
Traditional bindings offered incremental improvements. The hot product had to be the step in bindings. In addition to K2’s Clicker, Switch and Device, Wave Rave, Blax and Marker/DNR had models to sell. Burton didn’t have one, but was taking orders anyway. That’s market power.
 
Over 300 companies were listed in the show directory as offering snowboarding apparel. The statistics I’ve seen indicate that Burton and Columbia by themselves account for 50 percent of sales in the US, making it pretty clear that many of these companies have their work cut out for them if they are going to succeed.
 
One thing I didn’t see at the show was the usual number of representatives from Japanese companies frantically looking for new snowboard product lines. This seems consistent with current conventional wisdom about oversupply and general competitive conditions in Japan. As discussed below, it has critical implications for the viability of a large number of US snowboard hard and soft good companies.
 
Essentially, what happened was that companies were pushed down the feeding chain. Larger companies tried to require bigger commitments from retailers, pushing out second tier brands. These brands sold to stores they had not previously done business with to try and maintain their volume. The smaller companies were pushed out of these stores, sometimes leaving them with no place to go.   
 
What was seen at the show has been confirmed in the six weeks or so since it ended. I’ve had calls from perhaps half a dozen smaller apparel companies who did not write the anticipated orders at the shows, and who’s Japanese orders have been significantly reduced or are not yet received. At least one larger apparel company has picked up an additional distributor in Japan because of the reduction in orders from its existing distributor. Where orders have been placed, there’s increasing reluctance to provide the historically favorable financing terms of 50% down and 50% sight letter of credit.
 
In the US hard goods reps for other than the major companies are having a hard time getting orders, and personal relationships appear to be the key factor in determining their success. 
 
Retailers are cautious in their ordering. Often they are already committed to the major suppliers. In addition, some have more stock than anticipated left from last year.
 
A new factor seems to be retailers perception of product availability. Historically, companies produced only what they could sell in the preseason, and retailers were confronted with an inability to get reorders. Late season availability was not a problem last year. Late deliveries and poor snow conditions in much of the country meant retailers were getting called by snowboard companies with product to sell at attractive prices. Combined with the increased availability of quality domestic manufacturing, retailers seem comfortable in holding back some of their open to buy for later in the year.
 
An industry consolidation does not start with a bang at a particular moment in time. However, the SIA show this year made is absolutely clear that the long awaited consolidation isn’t just starting. It’s in full swing.

 

 

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

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

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