China, Small Brands, Inventory; Visions from Vegas

Still, I’d rather people were realistic about doing good business instead of being naively optimistic like they use to be. It’s good for the businesses and good for snowboarding.

 

I want to illustrate that with short discussions of three things I noticed in Vegas. Each could probably be a whole column. And may turn out to be, come think of it.

 

 

Not new of course. And I took a whole column to talk about it some issues ago. But what struck me is what a non issue Chinese production is now. Hopefully the extra margin gets allocated in such a way as to both give brands better profitability they can use in supporting the sport and consumers a better deal.

 

But what’s new about China is the impact of the strengthening of the Euro against the Dollar. Stuff was already cheap in China when a Dollar bought one Euro. Now it takes a buck and a quarter to purchase a Euro. All other things being equal, a snowboard made in a factory in the European Common Market is now 25% more expensive than it was some months ago. The Chinese snowboard has stayed the same price, because the Chinese currency is pegged to the dollar.

 

In the course of my wandering at the show, I found myself talking with a representative of one of those European snowboard factories I had known for some years.  In my usual subtle way, I asked him if he had opened a Chinese factory yet. He smiled, but I didn’t think it was completely genuine, if you know what I mean.

 

Being completely incapable of taking a hint, I commented, “Well, maybe when the Euro hits 1.5 to the Dollar.” I got another one of those smiles and the subject changed. What has me worried is that, as an industry, competitive pressure to make and sell less expensive product means we’ll end up with less margin dollars in total to play with even if our gross margin percentages stay the same or even improve.

 

More about that later. Though it’s not obvious, these three Vegas issues of China, small brands and inventory are all related and by the end of this I hope to show how.

 

 

There were a bunch, and they seemed to be doing great! What a relief. Snowboarding took off because it was fun and because it gave kids something to belong to that was different and unique. Skiing, when it consolidated, was reduced to basically nothing but large company brands with the result we are all familiar with. Snowboarding consolidated, and it was fashionable to talk about how it was becoming “just like skiing.”

 

Apparently, it’s not. Somehow, through the consolidation, a number of smaller, snowboard only brands managed to hang in there. And now more are popping up. Not just appearing and then disappearing, but hanging in there.

 

You might have expected that the sheer size and marketing power of the big brands would have left damn little room for the smaller players. To some extent that happened. But interestingly enough, the sheer size, and the push for growth through broadened distribution by the big guys, didn’t kill the small brands. It validated them.

 

I’m not quite certain why that is, but I’ll speculate a bit.

 

First, though some have been better and some worse, the major brands have pushed hard to find all the distribution they could. I’m not saying that as a criticism, but as a statement of fact. Maybe it was the inevitable competitive response- you know, get the market share before they do coupled with a grow or die mentality. Had that growth been a little more selective, perhaps the opportunity for small brands would have been less because the major brands would have been less like commodities available everywhere.

 

Second, the sheer size of the leading brands makes it hard for them to be quite as in touch or quite as “cool” or quite as at the edge than a smaller brand. You lose an edge when you get to be a certain size. You just do. I heard the story at the show about the small brand that had run an ad explaining how to change the picture on a lift ticket, or forge it, or something. Apparently some of the resorts aren’t too pleased with this for some reason.

 

No large brand, with its rental relationships with resorts, is likely to do that. And I have to confess that while I laughed, I’m don’t like encouraging that kind of behavior. But remember ten plus years ago when the goal was just to find a way onto the hill even if you had to duct tape your binding together, even if the choice was between a lift ticket and food and even if the resort didn’t want you and your snowboard there?

 

Perhaps I wax a bit too nostalgic, but this brand with its lift ticket scam reached back and touched that a bit, not to mention appealing to basic greed.

 

We need the enthusiasm- the “I don’t give a damn I just want to snowboard” feeling- if we want to continue to grow the sport. The success of smaller brands is a barometer of how effectively we are doing that.

 

For that to happen- for the small brands to grow and succeed- they need to make a few bucks. They need not to just to grow in units, but to earn gross margin dollars. That implies a certain cost and pricing structure that may not be compatible with too much inexpensive Chinese product (no matter what its quality) and resulting price competition among leading brands. As they are discovering in the skateboard business right now, if there’s enough price difference and the quality is the same, a lot of kids will forego the hot brand for the feel of cash in their pockets.

 

Which brings us to-

 

 

As a finance guy by training, this was the most glorious thing I heard at the show. Retailers were telling me how they were calling up brands to buy some closeouts (an old and honorable tradition) and couldn’t find much. Could it be that the brands were finally coming around to my way of thinking? That it’s better to agonize about not having product to sell than about having it. Hope so.

 

I’ve been making that argument for years because I believe that the best advertising you can do in a one season business like snowboarding is to say, ‘Sorry! Sold out!” No close outs, no old inventory, no retailers pissed because the stuff they paid so much for is now on sale at Chain Store X for less than their cost, bigger preseason orders next year, lower advertising costs, and higher margins for everybody.

 

A little scarcity lets us sell value- not just snowboards. Value goes for a higher price.

 

You can begin to see how these three issues come together based on self interest which, to nobody’s surprise, is the best way to engender cooperation among a group of stakeholders with competing interests.

 

Growing snowboarding requires successful smaller brands and specialty retailers. You can’t just market your way into growth forever. At some point, no matter how good the marketing is, it becomes ubiquitous and mainstream if only due to sheer volume. The excitement and sense of belonging to something declines. Smaller brands and specialty retailers can keep some of that going.

 

But to stay in business and do what we all seem to think they need to do smaller brands and specialty retailers need margin dollars, because by definition they aren’t going to make it on volume.

 

Margin dollars come from some combination of higher prices and lower costs. The lower costs, like with product from China, can’t be all pushed down to the consumer by competitive pressures. The higher prices come from some discretion in distribution and the right kind of promotion.

 

I’m probably being wildly optimistic here, but what I’m painting is a scenario where some improved control of inventory and distribution by brands, the success of small brands, and judicious use and pass through of the extra margin from foreign production works for brands and retailers in not only keeping snowboarding special and growing the sport, but in financial performance as well.

 

Not too bad.