Let’s Review; Lessons for Being in the Winter Sports Business
Well, here we are in the middle of a new snow season. Among the things people are probably thinking about are:
“It can’t be any worse than it was last season.” That seems statistically likely to be correct.
“What am I going to do with last year’s product?” Probably something brands and retailers are both still thinking about that.
“I am never, never, ever going to order (or produce) more than I’m absolutely certain I can sell.” I do hope you stick to it.
“Wow! Am I glad I wasn’t over inventoried when last season started.”
And, if you’re a smaller, single season company, there’s the ever popular, “I hate having to finance this business and I’m really, really tired of personal guarantees.”
With those in mind, I thought it might be useful to review the things you have to do to be successful in a one season business. Most of these ideas I’ve written about before, but I don’t think I’ve ever pulled them all together in one place.
Be Cognizant of What Is and Is Not Controllable
Business is good when it snows and bad when it doesn’t- and there’s nothing we can do about that. That means you’ve got to assume and prepare for an average season at best (though you might need to think about what you mean by “average” in a lousy economy with global warming).
You Have to Make Money
I know this sounds kind of obvious, but if you can’t make money, don’t be in the business. We’re all aware of retailers who have pulled out of snowboarding after doing that analysis. Though I don’t like to see that, I say good for them for facing the reality. I guess the good news is that it helps those who remain in the business by reducing distribution a bit.
Unfortunately, the analysis is not as cut and dried as I just made it sound. You mean make money every year? How do you allocate your overhead to winter sports if that isn’t all you do? Is it cash flow positive even if it isn’t bottom line profitable (I doubt it)? Will it cost me customers who buy other stuff? Can I make it profitable by carrying different brands or inventory mix? Etcetera.
Don’t Be a One Season Business
I suppose the only snow only retailers left are shops associated with resorts, and they close in the summer. Except that winter resorts have figured out that not being a one season business is a good thing. Water slides, zip lines, mountain biking trails, golf, and other activities are allowing them to generate at least a bit of cash flow in the summer. What significant snowboard brand hasn’t, or isn’t trying to create year around revenue or isn’t owned by a larger company that has that year around cash flow?
You’d be stunned at what getting just 10% of your total revenue in the off season does for the ability of your finance person’s ability to sleep at night by improving the cash flow.
Basically, there’s no good way to finance a one season business except to make it less seasonal. You can do it with equity, but you really don’t need to tie up all that money all year and your return on equity will probably suck. You can do it with debt and pay it down in the off season but lenders, especially now, want to see a strong balance sheet (implying lots of equity) before they will lend you the money. It’s a bit of a conundrum.
I’ve been responsible for the financial management of a couple of snowboard companies and the only solution I see is increasing off season revenue.
Inventory Management
I would always prefer to bemoan a sale I didn’t make than inventory I had to liquidate. It was years ago I suggested that a focus on the gross margin dollars you generated rather than the gross margin percentage was a good idea, and it’s only gotten more important as the economy has become and remained soft. Sales growth is harder to come by, but maybe you can improve your bottom line anyway by growing your gross profit.
In a more formal sense, this method of looking at your inventory is referred to as gross margin return on inventory investment. To over simplify, it makes you confront the fact that you’d rather sell an item with a 35% gross margin that sells for $175.00 than three items with a 50% gross margin that sell for $12.00.
That’s worth thinking about in any business, but especially in the seasonal snow business. To put it as directly as I can, if you’re stuck with much inventory at the end of the snow season, the chances of your making an overall profit in snow that season are slim to none.
And there are other advantages to managing inventory a bit more tightly and in a more sophisticated manner, as if making more money shouldn’t be enough to convince you. You tie up less working capital. You create a perception of value through scarcity. I think “Sorry it’s all sold!” does more to create value in the eyes of the consumer than all the advertising in the world. What exactly is wrong with selling a bit less, but paying the bank less interest, generating more gross margin dollars, and perhaps being able to spend a few less bucks on advertising and promotion?
I thought this was going to be a way longer article. I know, I know. Conceptually simple sounding, but not all that easy to do. But much of what I’m describing just represents good business practices that these days you can’t ignore.
Great Article Jeff, as the owner of a small brand these are words to live by. Keep this stuff coming.
Thanks,
//Daniel
Thanks Daniel,
I am pretty sure I didn’t say anything that surprised you.
J.