Consolidation, War, and a Lousy Economy;Skateboarding Will Be Fine, Thank You Very Much

 

Any one of the four would have been a pain in the ass for business. All four simultaneously is downright inconvenient. Let’s put this in a little perspective and try and separate the good from the bad and the ugly, to coin a phrase.

 

 

Everything I’ve read, and everybody I’ve talked to who remembers it, tells me that skateboarding declined by something like 90% in and around 1990. It declined dramatically- some have said nearly vanished- and I guess at its nadir, only like one skate park was operating in the country.

 

That scenario will never be completely out of the thoughts of people who experienced it, but it’s unlikely that it will be repeated. There are too many skaters, too many skate parks, too much exposure, and too much involvement and dependence on the part of too many organizations for that to happen again.

 

My guesstimate, based on being in a few stores and talking to some people, is that hard goods sales are down north of 30% compared to a year ago. They may not be through dropping yet. I don’t know if traffic is down, but parents, I suspect, are less likely to fork over the dough their little munchkins, who don’t have their own money, need to buy a new deck.

 

I haven’t been able to get a solid fix on whether shoe sales are soft or not. I wouldn’t be surprised if market softness in shoes manifested itself as lower price points rather than the big volume decline that seems apparent in hard goods. You need shoes no matter what, and shoe margins are better than deck margins to start out with.

 

With those general comments as background, let’s talk about three specific issues that may give us some incite into where skateboarding is going; the number of brands, the role of distribution, China and how skate compares to other action sports. I guess that’s four. Oh well.

 

 

One thing about this market that’s neither good, bad nor ugly but just downright strange is that I haven’t seen brands going out of business. Typically, when times get tough, especially in an industry that’s grown quickly, some brands just don’t make it. I’ve heard of a couple of companies that are for sale, and I know of a brand or two that’s having a hard time, but they gone away. I wasn’t expecting mass extinction, but I thought we’d see some serious consolidation by now. 

 

I feel strongly both ways about this. On the one hand, companies that manage to hang on for a while by the skin of their teeth when they have no viable way to compete make it harder for stronger companies to prosper (though retailers may get some really good deals!). On the other hand, small companies, scrapping to build a market position and less conservative than their larger, more stable brethren can be a fountain of new ideas. That’s always a good thing.

 

Why haven’t we seen more consolidation? I have the following speculations. First, I’ve been surprised by just how well most companies have reacted to a slowdown in business. I perceive a faster than normal movement towards control of expenses and inventories.    That can prolong survival, though it doesn’t solve the basic problem of brands that don’t have a defendable market position. Second, a number of brands/companies that have appeared in recent years are backed by companies that can afford to lose a whole lot of money for so called “strategic” or “positioning” reasons. This seems particularly true in shoes and apparel. In hard goods, I don’t think we have as many small companies as we use to have. Some consolidation has already happened there.

 

I do ultimately expect to see fewer brands, especially in shoes and hard goods. How that shakes out will depend in no small way on distribution, so let’s move onto that.

 

 

The major hard goods brands are dependent on the specialty shops and distributors for much of their sales. Specialty shops are hit by both economic softness and the decline in skateboarding sales. The successful footwear and apparel companies have diversified and expanded their distribution. The hard goods brands have generally been unable to do that. People need shoes and clothes all the time, though they may require that the stuff cost less. People don’t necessarily need a skateboard.  If they do, it’s as likely as not to be a blank or a shop deck. 

 

The hard goods industry is reaping what it has sown, by selling basically the same products for years with all the differentiation being based on marketing. Inevitably consumers got smarter and price got to matter. When skating isn’t quite as cool at it was and the economy sucks, price matters a lot. Not that I wouldn’t have done the same thing if I’d been running a skate hard goods company, but the result was predictable, and I think I’ve discussed it in this column before.

 

Meanwhile, the shoe and apparel companies, operating in a much larger market, get larger. Their sales are less dependent on the popularity of skate, or at least they are all trying to make them less dependent. When the downturn comes, they are selling products everybody needs, they are not just selling to the skate market, there’s less seasonality, and their size gives them some financial flexibility smaller companies don’t have. What I mean is that even if they should earn less money because their gross margins fall, they still earn enough gross margin dollars so that they don’t have to gut their marketing and product development efforts. Smaller companies may not have that option.

 

So distribution matters in who prospers or even survives in a consolidation. Having a bigger potential customer base and more possible outlets for your products helps. More on this when the section on other action sports below.

 

 

This, strangely enough, comes under the heading of “good.” In the past I’ve said that cheap Chinese decks could take over the skateboard market like in so many other wood products, if the market was big enough to make it worth while. Now it appears, until the market recovers and growth resumes, that it won’t be worth while. The Chinese can continue to have the cheap complete market in the chains as they always have, but I’m no longer as concerned that they will get a significant position in the higher end branded market.

 

I know the apparent price difference has made it compelling to try and get decks from China. But nobody had suggested to me with any conviction (except the Chinese) that the quality problem is resolved. I also believe, and have argued in this space before, that the apparent gross margin improvement is an illusion for the industry as a whole over the medium to long term. If the quality problem was resolved, and one brand started bringing in Chinese decks, other brands would tend to do the same. Natural competitive pressures would inevitably lead to somebody discounting to retailers, who would inevitably figure out what was going on and would demand some of that margin for themselves. At the end of the day, unless a whole lot more decks were sold, the overall industry might find itself with fewer total margin dollars to play with. Of course, the consumer would be happy.

 

But why bother even discussing this. If the quality’s no good you’ll kill your brand with serious skaters and if it is, you’ll just end up in the same boat as all the other brands again, though some with their own manufacturing plants might be hurting. So why bother. I mean nobody could really think this would work in the core market, could they?

 

 

In surfing, the subject of the actual surf boards didn’t even come up at last year’s surf industry conference. Sales in surf equal soft goods. I’m told that making money with surf boards is damn difficult due to competitive pressures, lack of product differentiation, and low volume. The soft goods brands in surf are selling their life style across a wide and widening variety of retail distribution. There aren’t and will never be as many surfers as there are people who like the idea of surfing and the surf style. That’s where the money is.  

 

In snowboarding, decks are very competitive for the same reasons. In binding, and even more in boots, there’s been continuing, meaningful, product improvement that which has at least created a basis for competition that’s other than just price and marketing. But generally product in all hard goods categories is damn good. It’s durable, functional and isn’t replaced as often as it used to be. As in surfing, soft goods and the expansion of brands into the lifestyle market are seen as an important source of profit and growth. Not perhaps as much as in surfing because a significant percentage of snowboarding soft goods are basically for snowboarding in the same way that a wet suit is only functional when you’re actually surfing.

 

In surfing, the soft goods brands dominate the market. In snow, the leading hard goods companies also have significant apparel lines that are both for snowboarding and have lifestyle components.

 

In skate, the important hard goods companies are much smaller than the leading companies in either surf or snow. They don’t have the same possibilities of expanding their distribution and, mostly, they aren’t doing a lot of soft goods business. You shouldn’t hold your breath waiting to see one of the leading hard goods companies grow to $300 million in revenue.

 

Yet these are the companies and brands that set the tone for skateboarding, because that is what they are about and focused on. In the past, when skateboarding was much smaller and not nearly as mainstream, companies and brands just vanished in a down market and mostly nobody noticed. What’s different this time is that these brands have value and are on more people’s radar screen.

 

But that doesn’t change the financial equation- at some point a decline in sales, inability to expand distribution, and a need to maintain expensive marketing/team programs with inadequate gross margins means a company is losing money.

 

So skateboarding will be fine, but I expect to see some companies acquired. As divisions of larger organizations with certain shared functions, these companies make financial sense. On a stand alone basis, some of them may not if current circumstances last very long. Let’s hope any acquirers treat what they buy with respect- if they don’t, I’ll be a lot less sanguine about the prospects for skateboarding.