Volcom’s Quarterly Conference Call: It Didn’t Sound 29% Bad to Me

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         I’m just back from two years In Ireland, where I made a futile attempt to have one pint in every pub in Dublin. I’ve missed a bit, but I did hear about Volcom’s quarterly conference call last Friday, the 29.4% decline in its stock that followed, the industry discussion that has ensued about the reduction in Volcom’s projected third quarter sales at PacSun, and the apparent concern over the ability of industry companies to sell their denim and other brands if PacSun was to change its branding strategy. 
         So I listened to the conference call. All one hour, 32 minutes, and 19 seconds of it. Moan. Volcom beat estimates for its second quarter, held to its guidance for the year, and announced what I took to be some very positive developments in new products, distribution and retail.
         But Volcom reduced guidance for the third quarter from 45 to 38 or 39 cents and said it expected sales to PacSun, its biggest customer representing 29 percent of last year’s revenues, to decline in the third quarter.
         When asked for some specifics about why this was happening (some “color” as the analysts call it) management just repeated the same non-specific answer about how they had a great relationship with PacSun, considered them an important customer, looked forward to a continued good working relationship with them and were all over it.
         I didn’t think much of it at first, but by the fourth time they gave that answer and no details I was wondering if there was something more to this. (Apparently, judging from the stock’s performance, so does the stock market.) Is there? I have no idea. But I might have approached the issue a bit differently.
         Before I tell you how, go check out a daily stock market chart for Volcom and some of the other publicly companies in our industry. Notice that many of the prices aren’t exactly up. They are kind of unup. Well, actually they are down and it’s hard to put a positive spin on that.
         Is it industry related? Maybe. But the whole stock market has been in a downtrend since early April. Investors Business Daily regularly points out that three out of four stocks follow the market direction. So anybody who might be concerned that any of Volcom’s comments (or lack of comments) with regards to PacSun caused a decline in industry stocks needs to look at the longer-term trend and general market conditions as well.
         If you’re a public company and the analysts think you didn’t quite provide a good answer to a question they think is important, and you reduce your guidance for the coming quarter, your stock goes down. But not, one would think, by 29 percent when you have some good news as well. If I were Volcom, I might have suggested that questions about PacSun’s brand strategy be directed to PacSun.  I might have suggested that if PacSun was going to focus on brands like Levi (and its own brands for that matter—not news) that over time Volcom’s sales to PacSun might, in fact, become less important given Volcom’s distribution strategy, which they characterized (correctly, I think) as cautious. And I would have focused on all the other positive initiatives Volcom highlighted and how they might, over time, reduce the company’s dependence on PacSun.
         If you’re a public company, then you are to some extent a prisoner of the quarterly filing cycle. That’s life. But it seemed to me that a reduction of Volcom sales (at least as a percentage of total sales) to PacSun could be seen as strategically positive if PacSun is changing its brand strategy in a way that’s not consistent with Volcom’s market positioning.
         And (of course) if it’s not too big a reduction. No matter what your strategy is, it’s damn hard to get profit growth without an overall growth in sales.
         Somehow, all the good things Volcom had to say were overshadowed by the implications of the third-quarter decline in sales to PacSun and the possibility that there was more to it than Volcom explained. I just wonder if the question couldn’t have been answered so that the decline in the stock wasn’t so dramatic.
         Unless of course, there was more to it than Volcom explained.

 

What’s Happening to Core Retailers? Things We Won’t Argue About- and What They Mean

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Not long ago, I finally came up with a definition of core retailer that I liked. I was really proud of it because it had taken me about 13 years to settle on one I thought was accurate and useful.

Now, not all that long after I accomplished that feat, I’m not sure it really matters. I’ve begun to be concerned that the traditional concept of core stores is of diminishing importance (or at least they are being treated like they are of diminishing importance), and changing that is what this article is about.
 
I’d been thinking about this for a while.   But there were three pieces of information that finally made me decide to tackle it even though I knew it might not be too popular a point of view. In my endearing naiveté, I think that what’s important is that you consider the business issue being raised regardless of whether you believe I’m right or wrong. 
 
The Three Pieces of Info
 
Anyway, the first piece of information was the announcement that VF Corporation, the owner of the Nautica, Lee, Jans Sport, Vans, Wrangler, Reef brands, and a whole lot of others for that matter, was planning to go from 600 to 1,200 retail stores over five years. I didn’t even know they had 600 retail stores.
 
The second was a Business Week online article that talked about brands opening their own stores as a “survival strategy” response to big department store chains having fewer store fronts due to consolidation and chains getting better and better at designing and selling their own higher margin private label brands.
 
These two pieces of information made me realize how wrong I’d been two years ago when I asked a panel of specialty retailers at the Surf Industry Conference what they were going to do when there were 5,000 company stores in the U.S. I should have said 10,000.
 
The third was reading through the prospectus for Zumiez’s very successful initial public stock offering and noting that the company’s gross margin for its last complete fiscal year was 32.8 percent. Pac Sun’s, by way of comparison, was 36.4 percent. Both are doing a fabulous job and they do it with a gross margin that would put a traditional specialty retailer out of business in about 20 minutes. Don’t like Zumiez or Pac Sun for whatever archaic, incestuous action sports reason? Get over it. Their many customers like them and that’s what matters.
 
The Things We Won’t Argue About
 
So small core shops can not sell the same product as specialty chains at anywhere near the same gross margin and expect to survive. That’s the first thing in this article that I don’t think anybody can argue with.
 
Just for clarification, when I say “small core shop,” I don’t mean the guy with five store fronts or with one store doing $6 million annually. It’s not like it’s a walk in the park, but they can do well or even prosper. The second thing we can agree on is that there are fewer of these small core shops than there use to be. A lot fewer I think. I wish I had numbers on that. And no, I don’t know how many store fronts you have to have before you become a chain.
 
The third thing I don’t think anybody will argue with is that fewer brands are accounting for a larger percentage of total sales. Next is that these brands all want to grow. How’s that for a blinding glimpse of the obvious? And I don’t think I’ll get much disagreement if I suggest they are very interested in the broader lifestyle market as the major source of that growth- because after a certain size, that’s the place much of it has to come from.
 
The Brands’ Perspective
 
Given these “things we won’t argue about,” what might the motivations of larger brands be. How might the specialty stores fit into their plans?
 
The law of large numbers tells us that it gets tougher and tougher to get big percentage growth as your base starting number gets bigger and bigger. What that means is that even if a larger brand gets good increases from core retailers, it just won’t move the revenue or profit numbers as much as it use to. If you just talk about the small core retailers, it moves those number even less- perhaps not enough to really matter? I suppose, though you may be getting tired of my saying this, that that’s another thing we won’t argue about.
 
From a strict financial point of view, then, I can imagine that the larger a brand gets, the less it is focused on the core shops- especially the smaller ones. Most brands believe, I think, that core shops still have an important role to play in developing new brands, identifying industry trends, creating excitement, building the foundations of the sport, and defining the lifestyle. They want them to succeed. 
 
But there’s all this qualitative stuff and then there’s the sales manager sitting there with a budgeted sales increase she really needs to make. And the larger the company, the bigger the number in dollars. Where’s it easier to find those additional sales dollars? From a bunch of small shops or from one chain of 50, or 500, stores?
 
The sales and marketing people recognize the importance of the qualitative factors in establishing their competitive position and keeping on top of the market. Maybe the brands with their own stores think they can get some of the same kind of input through those stores that they can get through core shops. I don’t happen to think that’s true.
 
If I were a larger brand, I’d select, let’s say, 50 shops in Europe that are established, well run, influential, and on top of their market and its trends. We’d all probably pretty much pick the same shops for that select list.  Maybe it’s shorter than fifty. The greater your presence in those shops the better. I’d make sure my brand was well represented in those shops even to the extent of making some deals I would not necessarily make with a shop that’s not on my list. I’d utilize my relationships with those shops to gather much of my core market and retail trends information.
 
If your brand’s sales increases are less likely to come from smaller core shops, your customer base is increasingly broader than those that they appeal to, you believe you can get the marketing and trend information you need from a smaller, select group of shops and the dangers of broader distribution have declined dramatically, where would you focus your time and effort? I know where I’d focus mine.
 
The Good News
 
Maybe I should have started with this section so small shop owners weren’t rushing to their doctors for lithium prescriptions for depression by the time they got here. 
 
There’s no advice leading to a miracle fix here. Hard goods are tough, shop owners need to run their shops like businesses, margin and competitive pressure is real, and your revenue level needs to be higher than it use to be for you to have a viable financial model.
 
But I want you, on the other hand, to consider the size of the potential market out there and all the people who want cool shoes and clothing but aren’t ever going to buy a skate board. My god, it’s huge. If it wasn’t, frankly, you wouldn’t have these problems- or these opportunities.
 
Do what I do from time to time- wander into a shop in a chain you think is doing a good job. Not for a five minute walk through. Talk to the sales people. Engage the manager in a discussion about how they do things and why. Look at their layouts and their use of wall space. Watch who their customers are. Make some notes about their pricing. Rigorously compare what you carry with what they carry. I do this to gain information (not often enough) without saying I’m writing an article or making an appointment or anything. I just engage whoever’s around in a conversation about the store and the industry.
 
Who on your list of the absolutely best shops is in your area? Go visit them and do the same as with the stores above. How come the biggest brands are so focused on those stores? It goes beyond sales volume I think you will find. Ask the owners, who will probably be willing to talk to you if you call them in advance and if you aren’t too direct a competitor, how come they are so successful.
 
Look, you do have a certain level of legitimacy that the chains don’t have and there’s a huge potential market out there. You can go after your piece of it without losing your vibe, or coolness, or whatever the word is to explain your distinctiveness. In fact, you have too. It may look risky, but consider the alternative. Do what you have to do to be one of the stores that major brands feel they just have to be in.

 

 

Margins- Percentages and Dollars; Where to Focus?

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I always looked first at gross margin percentages when I was running a business. Before revenue, before anything. Because those percentages were what determined how many dollars I had to pay all the salaries and operating expenses. Higher had to be better. It just had to be.

 
Except that I was never dealing with major price differences in nearly identical products when I did my analysis. And I think maybe that changes the calculation for skate hard goods. Let’s see.
 
One Shop’s Numbers
 
I called a shop. It’s not just a skate shop- it does snow too. I talked to one of the guys who runs it and he gave me some rough numbers off the top of his head (You know who you are- thanks!).
 
They sell two to three hundred branded decks a year. They charge $50 to $55 for each one (more than some shops I think) with grip tape. Those decks each cost them a bit north of $30 each, he estimated. Let’s say $32.00.
 
They also sell around 500 blanks a year. Those sell for $30.00 each with grip tape, and cost them around $16.00.
 
If they sell branded decks for $53.00 each, and sell 250 of them, then their annual revenue from those decks, according to my antique but trusty Hewlett Packard HP22 financial calculator is $13,250. Their gross margin percentage is 40. Their total margin dollars earned on each branded deck is $21. The total margin dollars earned after they sell all 250 is $5,250.00. The total cost is $8,000.
 
Now let’s take a look at those 500 blank decks in the same way.
 
The first uncomfortable but unavoidable fact, of course, is that the shop is selling twice the number of blank decks as branded.   Two-thirds of this shop’s skate deck buyers think that a branded deck is not worth $23.00 more than a blank. Or they think it’s worth it, but can’t afford it.
 
Companies who are cutting their prices on branded product better hope it’s the later, and they better hope their brands are “cool” and they better hope they can earn at least the same number of margin dollars to afford the programs that keep or make a brand cool.
 
I’ll leave it to all your arbiters of coolness and fashion to figure out which brands are cool. Hell, I buy most of my jeans at Costco. I’m so uncool I’m even willing to admit it.
 
But I digress. That’s too kind a term, actually. I’m wandering around in the wilderness here, and better get back to the 500 blank decks the shop is selling.
 
So anyway, they’re selling these 500 blank decks at $30.00 a pop and getting revenue of $15,000 annually. That’s more than from the branded decks. The gross margin percentage is 47 percent. Total gross margin dollars earned is $7,000. Total cost of these inventory decks is $8,000- the same as for the branded decks.
 
I swear to god that I didn’t figure out these percentages and stuff in advance to make a point. I did it as I wrote it, unclear what I was going to come up with and what it would suggest. Much as I hate struggling to create a table, I think this is worth while one. I’ll leave it to the poor layout people at TransWorld to make it legible.
 
 
 
Branded
Blanks
Number Sold
250
500
Selling Price
$53
$30
Cost
$32
$16
Total Revenue
$13,250
$15,000
Total Cost
$8,000
$8,000
Gross Margin Percentage
40%
47%
Total Margin Dollars
$5,250
$7,000
  
 
A Little Analysis
 
There are a couple of caveats to this. First, I didn’t specifically include the grip tape. As both branded and blanks include it, I don’t think it changes the analysis. Second, different stores have different costs, selling prices, and mixes of branded and blank decks. Change those things and you obviously are looking at different results. Which means, as will be clear when I discuss the implications of this below, that every shop should be using this table to take a look at their own numbers. Not just for decks, but for every product where there is a non-branded alternative.
 
At the risk of inflicting a blinding glimpse of the obvious on you, I’m going to point out some things that the table already makes very clear.
 
The total investment for the shop over a year of $8,000 is the same for both branded and blank decks. I’m pretty confident that having to handle twice as many blank as opposed to branded decks doesn’t increase the cost of selling the product. If you invest $8,000 in branded decks, you earn $5,250 in gross margin dollars. Invest the same $8,000 in blanks and you earn $7,000. From a strict financial point of view, which would you rather do? Which is the best use of your $8,000?
 
If it didn’t affect how their customer viewed the shop, if they didn’t recognize that what the brands do is critical to the popularity and growth of skating, if branded product wasn’t important in getting customers into the shop and if those customers didn’t buy stuff besides skate decks, then this shop would rather sell blanks than branded decks. The return on investment is just better. Thirty three percent better.
 
Those are a lot of ifs. Important ifs. In spite of what the raw, maybe oversimplified numbers show, there is no way, not even in a strictly financial sense, that shops can not be committed to carrying branded product. Without it, they just aren’t skate shops.
 
But that doesn’t mean you can ignore this analysis.
 
What’s To Do?
 
For this shop, at least, these are not big revenue numbers. But each shop has to do this analysis and, as I said above, not just for decks. There is no retailer out there who does not want to sell more of whatever makes them more money. At least, I hope there isn’t and if there is, they won’t be around long.
 
Financial considerations never exist in a vacuum. After you do this analysis for your shop you have to ask:
 
  • Does the customer who buys a blank buy as much other stuff as often as the customer who buys the branded deck?
  • Does the customer buying the blank replace their deck more often and, therefore come in the store more often?
 
If the answer to those two questions is clearly “no,” then what the retailer wants to do becomes quite clear. Looking at decks in isolation, you may earn more selling blanks compared to branded decks overall. But you earn more margin dollars selling each branded deck than on each blank ($22 compared to $14 in this case). And the customer who buys the branded deck spends more money on other stuff and comes at least as often as the customer who buys the blank if, in fact, the answer to these questions is no. You certainly don’t get rid of blanks, but under these circumstances you recognize the value, in a broader sense, of the customer who is committed to a brand or brands.
 
What is that value? I don’t know! Figure it out. Ask your sales people. Look at your sales journals and see what went out the door with the branded, as opposed to the blank deck. Surely your point of sale system allows you to track customers by phone number or something. This is an important thing to quantify. It is a strategic issue especially if you are concerned that hard goods prices may move down. 
 
If the answer to those two questions looks like it might be “yes,” then the role of branded product changes. You don’t have to try and carry as many graphics from as many brands as you can plaster the walls with. It’s not that you don’t want to carry and sell branded decks, but some part of that space may be better used to sell other products.
 
The shop referenced in this article sells twice the number of blank as branded decks. So the return on investment calculations, focusing on just the decks in isolation, favors the blanks. In a shop where the numbers were more equal, that would change. The gross margin percentage on the blanks would still be higher, but the total margin dollars earned would favor the branded product.
 
So what we have here is a situation where gross margin dollars may be more important than gross margin percentage.  I thought we might get to this point.  But then again, depending on product volume and customer buying behavior, it might not be.
 
Do the little table above for your shop wherever you have a branded and a blank product. Figure out the typical buying behavior for customers of branded versus blank product. You will make some better decisions that will make your shop more money.

 

 

Action Sports; Are We Still in That Business?

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Seems a silly question I suppose. Action sports are what we do. It’s what we’ve always done. It’s what we love. Our trade shows are more fun than anybody else’s. We get to take vacations and call them business expenses or, even better, product testing. Uh, not that I’ve ever done that, Mr. Tax Man, sir. But I’ve heard about it.

I’m not quite sure that’s the business we’re in any more. Or, to put it more precisely, I’m thinking that action sports is only part of our business. A smaller part for many of us. Maybe I’m just playing with words. “What’s in a name?” somebody once asked. Maybe a lot if that name determines how you think about who your competitors and customers are, how you need to do business, and the market where you position your product. Put like that, it’s a survival issue.
If you’re going to make money in this industry, you need to recognize how it has evolved and run your business accordingly. By reviewing that evolution, and talking about how you might redefine the business you’re in, I’m hoping some things you should be thinking about doing differently will become obvious. Or, at the very least, you can start to move in the direction of identifying those issues and opportunities.
Can It Be This Simple?
I thought this would be a nice easy article to write. Just sort of review some industry evolution. You know- how we use to sell mostly to participants and tended to be focused on a single sport, but now we’re selling across the sports, increasingly to non participants who just want to look good and maybe feel some connection to the lifestyle and account for the majority to most of our sales and even more of our profits. Then pronounce we’re in the fashion industry and be done.
Wouldn’t it have been great? “Wham! Bam! Thank you ma’am!” [good luck translators] and Boardsport Source would send me a check, and I could move onto my next project. But then I realized two things. First, that Boardsport Source pays by the word.  This was looking like a damn short article, and that wouldn’t do.
Second, and arguably more importantly, pronouncing that we are in the fashion business wasn’t much help to anybody. It was kind of like saying the goal of a business was making money. True, you need to do it, but it doesn’t say a thing about how to go about it.
So it appears I’m stuck at my computer a bit longer.
Still, my blazingly short description of our evolution as an industry- from participant to non participant as main customers and towards the fashion business- is generally accurate, though not adequate as I explain below.
Fashion Business- What’s That?
Are you thinking, “We all know what the fashion business is, so there’s no need to discuss it?” Well, you’re smarter than I am because I’ve decided I don’t quite know what it means, at least not in a useful way. Have you ever noticed that when the consensus is that “everybody knows,” you’ve probably got something worth digging into?
Here’s what I think characterizes the fashion business:
  • All product differentiation is created by advertising and promotion (branding) and design.
  • No functional product difference remains exclusive for long.
  • The fashion business is huge. The action sports business is tiny.
  • The fashion industry encourages product replacement. If we all wore our shoes and apparel as long as we reasonably could, the fashion industry would be a hell of a lot smaller than it is.
  • In a product we are encouraged to replace from season to season, function can become less important than form.
  • The customer base is no longer easily identified or segmented. Marketing (the process of figuring out who your customer is and why they buy from you) is critical. And challenging.
  • Your relationship with core participants is different. You want to sell to them, but they may be more important to you for the legitimacy and brand power they can give you with all the non participants who represent your biggest opportunity for growth.
If you think about these points, you may come to some of the same conclusions I came too. The one that sticks out like a day glow, skin tight orange/lime green ski suit on the slopes (Those aren’t fashionable again yet are they?) is that it is absolutely futile to say, “We’re in the fashion business,” because that business is too vast and varied and massive to tell you anything useful.
Which bring us to marketing.
Marketing- No Way to Avoid It.
 
Remember that we all use to be our customers. Market segmentation? If they boarded, they were a potential customer. If they didn’t they weren’t. Marketing done. It was easy, accurate and damn near perfect. It was seductive because it didn’t require any effort and didn’t generate any uncertainty.
Like an archeologist digging down through the layers of a civilization, we can find the remains of those days in some companies, where the people who manage the still critical advertising and promotions function continue to be called The Marketing Department. I have no idea why. If you accept my definition of marketing above, they don’t do any marketing. But somehow the name hangs on.
“What’s in a name?” I asked at the beginning of this article. Maybe a lot if you think you’re doing marketing, but what you’re really doing is running ads, supporting riders, and sponsoring contests. Lacking effective marketing, you have no way to judge if you’re running the right ads, supporting the right riders, and sponsoring the right contests.
If you agree with me that you’re now in the fashion business to some extent, your first job is to find out just what part you are in. You have to do some real marketing. You have to find out who your customers and potential customers are and why they buy from you.
Competitor Identification
As soon as you recognize you aren’t just in the action sports industry, but in some (clearly identified) segment of the fashion business as well, then the lists of companies you are competing against changes. Those non board sport participating customers that you are selling to are comparing your product to those of brands that have nothing to do with action sports.   Why might they buy your product? Why will a particular non skating customer buy Brand X of skate shoe rather than a Nike if they are just looking for a comfortable, casual shoe?
Obviously, if this wasn’t an issue skate shoe companies wouldn’t be making casual shoes less closely tied to actual skating.
So, you may have some different competitors. I wonder if those advertisements and promotions being churned out by your non marketing department are as relevant as they once were? You might wonder too. Are you spending all that money in the right place?
Then There’s the Customer
Just who is your customer? For most brands and retailers it’s not just core skaters, or surfers, or snowboarders anymore. It hasn’t been for quite a while. I think we’d all agree on that. If you want to grow your business to a serious size, there just aren’t enough of them around.
Look at your distribution and how it’s changed. There are a lot of clues about your customers there. Go ask your fifty largest customers to describe the person who buys your product. Don’t accept a vague answer. Work to collect some of that data if you don’t already have it.
Consider what you might learn. When you sell to a core participant, your customer tends to be  knowledgeable, function oriented, possibly less price sensitive, and knows about the competitor’s product. When you are selling to somebody who’s a lifestyle customers they are, well, not necessarily like that. They perceive themselves to have choice of brands beyond what the core customer may consider.
This has huge implications for how you advertise and promote your brand. Just as one example, the core customer may recognize and identify with specific sponsored riders and how they perform. The broader market “fashion” customer is less likely to recognize the rider or the trick, but may be attracted to their perception of that rider’s lifestyle and the places they go.
If that’s true should your ads be less technical? Does it change your choice of sponsored riders and how you compensate and present them? Etc.
For most brands and retailers, it’s no longer accurate to say only that, “We’re in the action sports business.” There’s an important and growing (maybe dominating) fashion component to your business, but describing your company as being, “In the fashion business” is too broad a statement to be useful, even though it’s true.
Chuck out the old habits. Recognize that your market is changing, and you have to do some work to figure out how and what that means. It’s no longer handed to you on a silver platter. And if you’re calling your Advertising and Promotions Department “Marketing,” will you please change that? You’re driving me crazy.

 

 

The Impact of Consolidation; Wasn’t That Over Years Ago?

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Yes. And no. The snowboard industry consolidation that started around 1995 or 96 could probably have better been called extermination. Literally hundreds of brands went away either because their founders got tired of losing money or because the Japanese stopped paying cash in advance for snowboards. Though there were exceptions, these brands didn’t get subsumed under the multi-brand umbrella of a large corporation. They just ceased to exist.

A Business Week article in September talked about the fact that prices on recent acquisitions of apparel makers have been at cash flow multiples 20% higher than what companies were purchased for just a few years ago. Some of the recent, richest deals have closed at multiples of cash flow that are twice what public apparel makers trade for. A graph in the article shows the value of mergers and acquisitions in the apparel sector were around US$ 6.5 billion in 2000 and are projected to be nearly US$ 40 billion in 2005.
 
Quiksilver has announced that it’s earning for the year ending October 31, 2006 are expected to be US$ 0.87 to US$ 0.88 cents a share. Analysts had been expecting US$ 0.98 per share. Earnings are expected to be US$ 0.86 to US$ 0.87 for the year ended October 31, 2005.    They said the integration of Rossignol, acquired in March, the strengthening of the dollar and higher interest expense were responsible for their projection of essentially no earnings per share growth in the coming year.
 
These two things got me thinking. Sometimes that leads to an article.
 
The 90s snowboard consolidation was largely confined to the small world of the snowboard industry itself. And as I said above, consolidation maybe wasn’t the right word for it. This consolidation is different. It’s not confined to snowboarding, or even to what we have called action sports. It’s taking place in the context of the much, much larger lifestyle/fashion/apparel (pick your favorite term) market. It’s big companies buying companies that we in action sports use to think of as big, but that are turning out to be small compared to the companies buying them and the markets the acquirers are in. Hurley bought by Nike, Quik bought DC and Rossignol, VF Corporation bought Vans, Addidas bought Salomon (and has now sold it to The Amer Group). I’ve forgotten all the brands K2 has bought. I don’t mean to suggest this is new, but I expect it to continue. It has ramification for brands and retailers.
 
Let’s see what they might be.
 
Stuck in the Middle
 
The conventional wisdom is that you either need to be a niche brand, or a big company with a low cost structure. If you’re stuck in the middle, you’re screwed. We could talk, I think, about how that may have changed or be changing due to the role of brands, how marketing has evolved, and the internet and the leveling of the information playing field, but that’s a topic for another day. For the moment, let’s go with the conventional wisdom.
 
We continue, thank god, to see the regular emergence of new action sports brands. Some of them get some traction in the market. We all know why. Committed snowboarders, for example, who think of snowboarding not just as a sport but a lifestyle are interested in buying brands different from the ones anybody could buy pretty much everywhere. I’d argue that this group of committed snowboarders, as a percentage of total snowboarders has shrunk, but it’s still a basis for a new brand to get a toehold.
 
I look at these companies as niche brands who, due to their small size, flexibility, limited availability, coolness factor, and cost structure control, have a way to compete. Remember when one of these brands ran the ad telling kids how to fake lift tickets or something like that? Boy were the resorts pissed off and you couldn’t hardly blame them. But it generated a lot of talk. Can you imagine a large snowboard brand with close ties to resorts using that kind of marketing?
 
At the other extreme are the big players. But if I try and list the big snowboard only companies (or the big surf only companies, or the big skate only companies) I end up with a damn short list. Not even Burton, even with the leading position in the snowboard market, is a snowboarding only company any more. Quik’s’ certainly not just surf with acquisition of Rossignol.
 
The big players are increasingly multisport, year around businesses with a significant and growing presence in the apparel/lifestyle market. K2 Corporation, Amer Sports, VF, Nike, Quiksilver come to mind. There are others you might name. I think the companies stuck in the middle are those with revenue of, oh, let’s say under $1 billion who don’t have defendable and competitive lifestyle/fashion/apparel brands.
 
Got your attention with that number did I? Good. That was the idea. Want to say $800 million? Okay with me. But whatever the number it’s at least one order of magnitude bigger than what we usually think about when we say “big” action sports companies.
 
The idea I want you to come away with is that many of the companies with the potential to be “stuck in the middle” are now much larger and the revenue range of such companies much wider. In this much larger market, you can be stuck in the middle at $25 million. Or at $400 million.
 
Remember action sports- especially in hard goods- is an industry where you have to do everything right just to be in the game. And, in contrast to how it use to be, doing everything right doesn’t give you a long term competitive advantage (I’m not sure there are any of those anymore unless they are related to brand)- it just gives you a chance to compete and make it to another season.
 
A further factor in catching companies in the middle is the squeeze on hard goods prices and margins that has resulted from wide distribution, lack of product differentiation, and the availability of cheaper, quality, manufacturing. Downward pressure on prices can mean less margin dollars even if the margin percentage remains the same. Nobody is immune to this.
 
So What?
 
Because of the encroachment on action sports of the lifestyle/fashion industry, and the fact that there seems to be more money to be made in soft rather than hard goods, companies in the middle face a tough competitive challenge. Much (most?) of their growth potential is in selling soft goods to the lifestyle market. But their competitors in that much larger market have resources and advantages that the pure action sports companies can’t even come close to matching. What can they do?
 
Well, they can sell. For many, that will be by far the best financial decision they can make. So we will see this continuing wave of consolidation. As usual, there will be those companies who will have been mismanaged and need to find a deal. But even solid companies, looking at their market position and circumstances, will rationally decide it’s time to sell.
 
They’ve grown steadily, are profitable, and respected in the core market. They are a trend leader with a serious cool factor. The next step in growth requires them to begin to expand their distribution into the broader market. Potentially, they may begin to erode their image. They will begin to run right into the much larger competitors who have them out resourced by ten to one. Even if they are successful, they may not have the working capital they need to follow through.
 
Typically it’s right at this point where the company’s value will never be higher. The Business Week article suggests that might be right now. It’s not easy to recognize, and there are damn few successful entrepreneurs who don’t think next year will be better than this year. But making a deal right then, with your market aura in tact and your financial statements pristine and before you start to run head long into the 500 pound gorillas who will be your competitors is where the deal needs to be made. And that’s why I think we’re going to see more deals.
 
But who to buy? If, as I’ve suggested, the core market of actual participants who define themselves and their lifestyle by their participation is shrinking then the niche brands, while they may be successful, don’t have the room to grow they use to. So why would they be attractive to a larger company if they can’t contribute substantially to growth and profitability? They probably aren’t. So the number of attractive acquisition candidates shrinks, and the price, as seen above, gets bid up.
 
And the Retailers?
 
Four things. First, we seem to have been through, and maybe we are still going through, the extermination phase with retailers. I have no numbers, but I think we all share the perception that a lot of individual retailers have gone away and comparatively few have opened.
 
Second, I expect the “stuck in the middle” analysis above for brands to apply to retailers as well. We’re already seeing some consolidation and I’d expect more. As I’ve written, the only financially attractive exit strategy for a core shop run by the founder/owner seems to be to open enough additional stores to create a size, management structure, and ”proof of concept” that makes the mini-chain attractive to buyers. This is consistent with the discussion above of why a brand would sell.
 
Third, I can imagine that purchasing inventory is going to get interesting for shops as the companies they buy from have more and more things to sell them. Remember that the days of the single sport/activity shop are long gone. I wonder if K2 will want you to buy both your snowboards and your football equipment from them. Okay, granted I don’t know of a snowboard shop that sells football equipment in the summer, (and I don’t know if K2 sells it) but there must be one. What kind of incentives might they offer you to consolidate your buying for various activities with them? Hmm. Maybe I should ask them.
 
Fourth, are you sure you’re still an action sports retailer? I mean, a lot of you are selling an awful lot of soft goods that aren’t really sports functional to people who don’t participate. Maybe, for some retailers at least, it’s time for you to reconsider how to redefine yourself to take better advantage of the whole lifestyle/fashion/nonparticipant thing. Could be there are some opportunities you’ve been scared to look at that make sense? 

 

 

Doing Marketing; What, How and Why?

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At the Skateboard Industry Conference earlier this year and in these hallowed pages, I’ve argued:

 
1.     That advertising and promotional tactics like running ads and hiring teams pass for marketing in this industry but aren’t.
2.     That marketing (maybe better called market research) is the process of finding out who your customer is and why they buy your product.
3.     That few people in skateboarding (or in action sports) do marketing well if at all.
4.     That favorable demographics and large company interest in the skate vibe are creating opportunities that we aren’t taking advantage of.
5.     That good marketing will make you more efficient in the use of your advertising and promotional dollars, a good thing at a time when this is a tough business financially.
 
Marketing costs a little money, takes some time, and will leave you with as many new questions as answers if you do it right. It isn’t a one shot deal. Its value increases as you continue it over time and, indeed, as you institutionalize it within your organization. How might you do some marketing in your organization? Here’s one general approach. Not by far the only one. Not necessarily the best or the right one for your organization, but one I think you can implement and get some value out of.   
 
The Right Questions
 
It’s easy to come up with a list of questions that, on the surface, seem relevant. General questions like “Who’s my customer?” You could create a list of good, general questions like that in about twenty minutes and walk away thinking, “Yes sir, there’s not much to this marketing stuff.”
 
Instead, begin with the goal in mind. Let’s say the goal, as mentioned above, is to make more efficient use of advertising and promotional dollars. Ask questions that help you do that. Go through each of your advertising and promotion expenditures and develop specific questions- questions that will help you know where to spend your money and what you’re getting for it.
 
One such question might be, “Do people buy our boards because of the team?” Well, duh, yes of course they do. Or at least that’s always been your assumption. Ever tested it? In several industries I’ve been amazed at the number of once true assumptions that have been institutionalized in industry lore even when they were no longer valid.
 
Among winter resorts, for example, the current assumption seems to be “If we build it, they will come.” My guess is that snowboarders would come regardless of whether or not the resorts build new trails, facilities and lifts and the number of skiers will continue to decline in spite of all the capital investment.
 
I’m not suggesting teams aren’t important to skateboarding, but if I had to prove it in a rigorous way, I couldn’t. Not unless I’d done some marketing. Use marketing to test your traditional assumptions. If you find something has changed, it’s a potentially huge opportunity.
 
Based on a specific statement of what you are trying to accomplish, get more specific in the questions you ask. “Do people buy our boards because of the team?” is too general. No answer you’re likely to get will help you do anything better or differently unless, I guess, everybody says no.
 
Maybe “Whom do you know that rides for Brand X?” would generate some useful information if your goal is to focus your team spending on the riders who create the most brand visibility. If nobody knows a rider you’re spending serious bucks on, or if lots of people know somebody who only gets product, you’ve got a chance to spend your money more efficiently, or maybe just to spend less. Or to spend more but feel good about it.
 
Marketing’s biggest challenge is in asking the right questions based on specific goals.
 
Gathering the Data
 
I’m a big believer in quality and consistency over quantity. I’d rather have 200 thoughtfully and consistently completed surveys than 2,000 incomplete warranty cards where there was no contact between the customer and the company. Send team riders or employees to skate parks on weekends. Make a deal with some of your retailers to approach customers in their store in exchange for sharing some of the data with them. Let the retailers add a few questions they’d like answered. Give every consumer who works with the interview to complete a questionnaire a T-shirt and turn the collection of market data into a promotion.
 
Do some training before you send people armed with good intentions and clipboards out to talk to customers. Make sure they understand why you’re asking the question, what you expect to learn, and what the benefit of having the data is. Get them to practice a little with other employees or friends so that their lack of experience doesn’t skew the data collection.
 
Exercise some common sense. It might not work to ask team riders to collect data about team performance. A rider isn’t going to be anxious to report that nobody ever heard of him. Consider the possibility that young males might consider this as an opportunity to do something besides collect market data and return surveys predominantly from the best looking girls at the skate park that day.
 
The data doesn’t all have to be collected in one massive effort. A couple of people in a couple of shops for a couple of hours a couple of times a months will build you a big data base faster than you think.
 
The experience the data collectors have can be as important as the information they come back with. They’ve just spent some serious face time with customers or potential customers. Sit down with them right after the session. What did they feel/see/think? What interesting comments did they hear that didn’t make it into the survey? What questions appeared to have been a complete waste of time? Did they hear gripes? New product ideas?
 
Most people from companies don’t spend enough time with the customer. Take advantage of people who are. In fact, spread the wealth- get as many employees as possible to take a turn gathering market data.
 
Your data collection is going to be biased in some way no matter how hard you work to collect it in a consistent and dispassionate way. The way the interviewers dress, the locations you select, the time of day, the different ways interviewers approach the customer and a bunch of others we can’t even conceive of will all affect the quality of the data. You strive to minimize these influences in the way you develop the survey, train the interviewers and select the locations. At the end of the day, with enough good interviews completed, you recognize, or at least hope, that the biases will have been statistically reduced to background noise. That brings us to what to do with the data.
 
Analysis
 
If you’ve gone through the process correctly, data analysis should be almost an anti-climax. From the process of designing the survey, you know specifically what you are trying to find out and what kind of decisions you hope to make from the data you collect. You know before collecting the first piece of data exactly what the analysis process is going to be. It will have become clear in the hard work you did establishing goals and developing the right questions.
 
Responses will be counted, and percentages calculated. Maybe you will have asked the same questions in a couple of different ways and will want to compare the responses. But when the simple counting and calculating is done, there are a couple of statistical techniques that will help you get the most out of the data.
 
Not all the questions you ask will require this kind of analysis. But when appropriate, the concepts of “mean “ and “standard deviation” are powerful tools that are not tough to use once you understand them.
 
A standard distribution is represented by a bell curve. Bells can be taller or flatter depending on how the data points are distributed. The vertical line that divides the bell exactly in half represents the mean on the curve. The mean is the point where half the data values are greater and half are smaller. Simple so far.
 
The standard deviation is a statistic that tells you how tightly all the data points are clustered around the mean . When the points are pretty tightly bunched together and the bell-shaped curve is steep, the standard deviation is small. When the bell curve is relatively flat, you know you have a relatively large standard deviation. One standard deviation away from the mean in either direction on the horizontal axis accounts for somewhere around 68 percent of the data points in this group. Two standard deviations away is roughly 95 percent. Three accounts for about 99 percent of all the data points.
 
So who cares? Just for fun, say you ask 200 customers how old they are. Their mean age is calculated as 14 with a standard deviation of one year. So you know that 68 percent (one standard deviation away from the mean in either direction on the horizontal axis) of your customers are between 13 and 15. 95 percent 12 and 16.    You can see how this might help you focus your marketing efforts.
 
Mean and standard deviation are calculations that lots of cheap calculators can do. Excel will do it for you on your computer. So, as I started out by saying, you can do this yourself. On the other hand, time is money, and there lots of companies around that specialize in designing surveys, collecting data and interpreting the results.
 
Any masochists out there who actually want the formula for calculating a standard deviation should let me know and I’ll be pleased to provide it. 
 
Even if you get some professional help and trade some money for time and efficiency in the process, your customer and industry knowledge will still be required to make sure the right questions get asked of the right people.
 
Somebody once said that half of your advertising and promotion budget is wasted- you just don’t know which half. Marketing can help you figure that out. Just to pick a number, if you spend $20,000 to do a survey that helps you save only $5,000 a year, a return on investment of 25 percent, isn’t that a great deal? My guess is that you’ll do better between more efficient spending and better customer focusing. Do the marketing yourself or get help. But please do it.

 

 

Conversations with a Skate Retailer; A (Pretty Much) True Story

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Some month ago, I got a call from an actual skate retailer. “It said at the end of the article that you work with companies in transition,” he asked almost as a question. “It’s true,” I told him.

 
“Okay,” he said. “Help me with mine.”
 
The story unfolded like this. He’d been in business for a bunch of years, and loved the business. He was doing about $500,000 a year but increasingly it was a struggle to make ends meet. He seemed to be feeling a little run down and beat up from the constant pressure of making ends meet financially and working long hours without enough help. Anybody out there sympathize with him?
 
Breaking the primary rule of having a consulting business, I started asking questions to try and figure out his situation and help him before he’d agreed to pay me anything. Oh well, so I’m a pushover. He seemed like a nice guy.
 
The conversation revealed that his product mix was about 60 percent decks, trucks and wheels and 40 percent apparel and shoes. Margins were “good” on the apparel and shoes and “not so good” and declining on hard goods. He couldn’t be much more specific than that, and didn’t even want to hazard a guess about which brands gave him the best margins and what they were. Nor was he real clear with me on which products and brands were turning how quickly.
 
The finance guy in me perked right up. I started ranting and raving about his need for point of purchase registers, new computers and advanced accounting software, and revising his chart of accounts forgetting for a minute that this was a $500,000 retail store, not a chain or huge stores. The long pause on the other end of the phone line brought me back to earth. It was clear that a big investment in equipment and hiring a financial controller wasn’t going to happen.
 
“Let’s try it another way,” I suggested. “Ignoring the small stuff and what you don’t sell much of, so you know what you sell everyday by category and brand?”
 
“Sure,” he said.
 
“And you know what it costs you, right?”
 
“Of course I do,” he said a little frostily, beginning to think I was suggesting he was an idiot.
 
Then I asked, “And you can come up with a pencil and paper, can’t you.”
 
Before he could tell me to go directly to hell and hang up, I said, “Well, then you can figure this thing out!” He was still unsure what to make of me, but at least he was still listening.
 
Every Sunday evening, I told him, he should get his sales records, dealer invoices, the pencil paper, maybe a calculator and a cold beer and sit down at a table. “Get the beer first,” I corrected myself, “And don’t put the beer on the pad of paper. It’ll make a big wet circle.”
 
List your dollar sales by category and brand.
 
Get your costs for those sales from your supplier invoices. Pretty soon, you’ve got a neat, one or two or maybe three page document that shows you your sales and gross profits by brand and product category. Do what works for you. Might look something like this.
 
Week Ending:
 
 
 
 
 
 
COST OF
GROSS MARGIN
 
SALES
GOODS
Dollars
percent
 
 
 
 
 
Decks
 
 
 
 
 Brand one
 
 
 
 
 Etc.
 
 
 
 
Total Decks
 
 
 
 
 
 
 
 
 
Wheels
 
 
 
 
 Brand one
 
 
 
 
 Etc.
 
 
 
 
Total Wheels
 
 
 
 
 
 
 
 
 
Shoes
 
 
 
 
 Brand one
 
 
 
 
 Etc.
 
 
 
 
Total Wheels
 
 
 
 
 
 
 
 
 
Apparel
 
 
 
 
 Brand one
 
 
 
 
 Etc.
 
 
 
 
Total Apparel
 
 
 
 
 
 
 
 
 
Total Sales
 
 
 
 
 
 
 
 
 
 
Small business owners have a lot of this information in their head. But usually not all of it, not accurately, and not in a way where they can see the relationships. As your business gets bigger, keeping it all straight in your head gets, first, more difficult then impossible.   But with a weekly chart like this one, you can see which brands are moving, how your margins are, and how sales of one brand compares to another.
 
Consider the decisions you can make after you’ve been doing this for maybe a couple of months and have accumulated some data. Where are you actually making your money? Should you be carrying more of that product or brand? What is it time to discount and get rid of? What are the financial results of changing your product mix and increasing your gross margin by a couple of points?
 
If you want to get a little fancier, include columns for cumulative sales and margins from the first week you start doing this. There will be nothing to it if you’re doing it on a computer and using a spreadsheet. One last iteration might be to show the total inventory you’ve got in each brand and category. Obviously, sales have some relationship to what you’ve got in stock, and you wouldn’t want to condemn a brand for poor sales when you’re low on inventory.
 
Such an analysis isn’t just financial in nature, but is the starting point for evaluating some important operating issues. In the case of this particular retailer, we pretty quickly got around to asking how and if he could change his sales percentages from sixty percent hard goods and forty percent soft goods to the other way around. We knew, though we couldn’t be specific during the conversation, that the change would have a major impact on his financial situation.
 
I asked him some questions about his store layout and merchandising. It seemed like it had been a while since he’d changed some of his fixtures. His lighting, he acknowledged, might not be quite up to par or focused on the products he was most interested in moving. It sounded like some reorganization of his selling space was overdue and that product access could be improved. I don’t know a hell of a lot about merchandising and layout, but people who do know have told me that changes in these areas almost always result in sales increases and need to be done on a regular basis.
 
I wasn’t telling him to throw out all his fixtures and displays, trash his lighting, and redecorate his whole store. It wasn’t in the budget. But maybe some of those fixtures could be spray painted and put in a different place. Maybe the light bulbs could be changed to a higher wattage. Perhaps a coat of paint on one wall would help highlight some of his higher margin, but slower moving product. Couldn’t he use some of what he’d learn in the simple financial analysis described above to make some inexpensive but effective merchandising and marketing changes in places where they would do the most good? I mean, just changing things in your store from time to time is a good idea, but tying those changes to specific opportunities for financial improvement makes it an even better idea. 
 
The point, I guess, is that financial analysis doesn’t exist in isolation from other aspects of your business. The analysis isn’t difficult if you have some simple systems and doesn’t require a complex knowledge of accounting. It shouldn’t be looked at as forensic. That is, it’s not just something you have to do at the end of each month, quarter and/or year to satisfy your banker or the tax guy.
 
Besides, standard financial statements by themselves will not give you all the information we discussed above. But you need it to make day to day management decisions.
 
So improvise a little.  Get out the beer, pencil and paper and calculator. You live or die by your gross margin. Use the information about it that’s at your finger tips to make better business decisions that are responsive to the changing skate market.

 

 

New Stuff to Do More; New Strategies are Critical as the Snowboard Industry Evolution Continues

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I remember when this was a simple business. Or at least I thought it was a simple business. You had a pro team, ran some ads, built relationships with core shops, sold C.O.D. or on 30-day terms, and were thrilled if you could get enough product to fill orders.

With supply shortages, the fact that quality wasn’t always very good was less crucial. Margins were better anyway.
 
Your team is still valuable, but successful team riders have to do more than rip up the hill. Apparently, they also have to look good in their underwear. Riders have agents now, for god’s sake.
 
Your choice of where to run ads has expanded dramatically. We used to laugh at people who ran an ad anywhere but the usual places. Now we wonder if we’re missing an opportunity.
 
Thirty-day terms are pleasant memories and selling some product at a decent margin is tougher than climbing out of a tree well after a ten-day dump. You can’t just focus on ‘core shops any more. Hell, it’s getting hard to even find one if you define it the way we used to.
 
Not only does a snowboard company have to do the same old things better, but my contention is that it has to do a whole bunch of new things as well.
 
Endless Product Lines
 
 SKUs are getting out of control. Product lines have gotten enormous- largely as a competitive response to what other companies are doing. I’m not against responding to your competition, but recognize that such a response is strictly defensive in nature. Rather than differentiating you, it makes you look like you’re simply copying your competitor. 
 
This is yet another example of our talking and listening to ourselves, rather than focusing on the customer. It also costs money. Making and managing more SKUs is expensive. In some cases, it may even drive up costs of other products by shortening production runs.
 
The situation requires a little zero-based product planning. Don’t start by looking at your competitor’s product lines. Begin by looking at what your customers are buying and what you think the market trends are. Design your product line in response. Figure out all the hard costs of an extra product- molds, samples, employee time, short production runs, etc.
 
Now, what are the specific benefits of another length of one style of board or an extra color in a jacket? Will you actually increase sales or will you just cannibalize another part of your line? Are you making it even more difficult for the store to carry and merchandise your products? Will your reps really understand the whole line and will they be able to make a cogent and complete presentation to the poor retailer before that retailer keels over in confusion and exhaustion?
 
The hard costs are real. The soft benefits are tougher to quantify.
 
Public Relations and Co-Branding In Advertising
 
Snowboarding has been turned into the poster child of the cool, young generation every advertiser wants to reach. Snowboards and snowboard products are turning up everywhere. Are any of them your products? If not, you’re missing an opportunity.
 
Does a particular board’s base graphic turn up on a resort’s promotional brochure by accident? Did K2 team members just happen to be standing around in their Jockey underwear, boards in hand, when a photographer happened by, took a picture, and sold it to Jockey?
 
Most of this exposure is not accidental: taking advantage of all these opportunities is a full-time job for somebody. And the work that’s done now probably won’t have an impact until next year due to the lead times involved. So get started sooner rather than later. Prepare and distribute a press kit. Include photos anyone can use. Make contacts with companies that are interested in your customers and make it easy for them to get the images or the product they need. 
 
One note of caution: it’s easy to believe that free or inexpensive exposure is good, no matter where it occurs or in what association. Not true. Make sure the opportunity is appropriate to your brand and its market position. To use an extreme example, how many snowboard brands rushed out to have snowboarding’s furry Olympic mascot Animal seen on their boards?
 
Resorts Are Our Friends
 
I think we’re to the point where the director of resort relations is probably a full-time position for a snowboard company.
 
Ignoring rental possibilities for a minute (because they’re a whole separate issue), there are an almost endless number of things you can do to help resorts focus on snowboarding and the kids they want to attract and retain.
 
Are you maintaining a database of key resort employees and contacting them from time to time? Do you have a program to flow a little product to the right people?
 
Are you having a couple of team members spend a day at the resort and then sending an unsolicited letter to the appropriate resort executive telling them what a good time they had and maybe suggesting a few things they could do to improve the snowboarding experience?
 
Have you sat down and thought specifically about how the needs of resort shops are different from city shows and, besides giving different terms, how you can meet them?
 
I don’t think I’m even scratching the surface here. I’ll bet your new director of resort relations, a snowboarder who’s spent some years in resort management, would have a whole lot of ideas.
 
Rentals
 
The trouble with rentals is we don’t know why we’re doing them. Are they a loss leader that gets people on our product and ultimately selecting our brand when they buy? That is, are they justifiably part of marketing and promotion budgets? Or are rentals supposed to be moneymakers?
 
As long as I’m restructuring the sales and marketing organizations of snowboard companies, may I suggest a sales manager of rentals?
 
I know rentals are growing dramatically. I suspect they’re no longer just for people trying snowboarding for the first time. They have become a convenience, like takeout food. Done well, as it increasingly is, the equipment is always new and tuned and the boots are dry. All you have to do is show up.
 
Why buy if you’re a typical participant who’s only on the slopes for a few days each year?
 
I think the rental trend is going to catch us by surprise, at least partly because we in the industry spend too much time talking to each other instead of to our customers. This is an interesting problem. We sell rentals cheap, or offer ridiculous terms, or agree to take the product back next year. We do it because we believe that ultimately it helps sales. But by providing cheap, new product each year to rental shops we make it increasingly easy and economical for participants to rent. Aren’t we helping the rental shops to build their businesses and killing ourselves? Yet another example of irrational competition in a maturing market.
 
I wonder if any snowboard company really makes money in rentals. By embracing snowboarding, the resorts have given themselves tremendous leverage over the industry. I suspect your new sales manager of rentals and director of resort relations will be working closely together.
 
Wherever You Go, There You’ll Be
 
In a maturing industry, you either find a defendable niche, or become a low-cost producer. Considering the trends discussed above, it’s obvious this is true for snowboarding.
 
Margins have declined, but the cost of doing business has increased. There are too many things you have to do to succeed. Which means your break-even point has gone through the stratosphere. And the working capital investment required in this highly seasonal business has grown even more.
 
My perception is the entire business model is changing. Snowboard companies have to do things they haven’t done before. There is a new group of stakeholders who aren’t just the people who snowboard. The snowboard industry has lost a lot of the control it had over snowboarding. Getting that control back, if it’s possible, requires new organization and a new way of thinking.

 

 

The Dilemma of Being “Core;” Identifying and Managing the Conflict.

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A few years ago I wrote a column called “Are there Any Core Snowboard Shops Left?” It generated a good discussion, though I got burned at the stake by quite a few people. Happily, I was wearing my asbestos underwear.

The question, however, is still valid because of some of the problems core shops are having and how important they are to the industry. I want to talk today about why the snowboard business for a core shop is either easier or harder than other action sports businesses and why it may be a tougher business proposition to be “core” in snow than in other businesses.
I also think, much to my amazement, that I’ve come up with a working definition of what a core shop is and I’ll present that to you later. Only took me fourteen years.
Having a definition is important if we want to say anything meaningful about what core shops do, why it is meaningful, and how they might do it better. Like the resorts and the suppliers, they have a role to play in resisting the snowboarding business degenerating into a more and more price driven game and in continually finding new participants. In the long term all three groups have the same interests. In the shorter term, these issues are most important to the shops.
Easier and Harder
Extreme seasonality defines snowboard retailing. You get just one chance. So, if you’re a flinty eyed business person, you order cautiously, thinking that you’d rather be pissed that you didn’t order enough than if you had to pay for it and carry it over until next season. You buy mostly mainstream stuff that you think is likely to sell best, and your selection is heavily influenced by prices, terms, discounts, and other similar goodies. If it doesn’t snow, or doesn’t sell, you discount it ruthlessly and early. It’s got to be gone by the end of the season. Once the season is over, say the early part of February, that snowboard stuff disappears and the floor space is largely filled with whatever season is next.
That was easy, and as low a risk as you could make it. But it was hardly core. We’ll get to the official definition. Among other things being core requires that you carry enough stock in enough brands to really serve serious snowboarders even if they aren’t most of your customers and that you take some chances on brands that maybe aren’t mainstream or haven’t been around long. probably means some other things that increase risk and cost. Like having employees with enthusiasm for snowboarding and its lifestyle. And supporting the local community.
At the end of the season, even a good season, at least some of that snowboard stuff probably still sits there, gobbling up floor space and working capital. It generates some occasional sales, though not near what you could get with different product. But you’re core so you do it and it costs you money. That’s harder.
I’ve illustrated two extremes. The magic of successful retailing, of course, is finding the sweet spot in between those extremes that works for the customers and doesn’t blow your bank account.
Still it’s obvious that being a core retailer in snow is a lot harder than in a retail business where participation doesn’t stop dead for eight months of the year even if it slows down. Like skate or surf. But it’s not only harder because of the seasonality. People who don’t skate or surf still buy skate or surf brands to wear. Certainly some of that goes on in snow, but I suspect that most snow soft goods (or at least a higher percentage than in surf or skate) are sold to people who want to use them snowboarding. That makes for a much smaller possible market.
Which, we can probably all agree, is why shops don’t just do snowboarding anymore. There’s no business model that makes sense. Looking at a single season, it probably doesn’t make financial sense to try to be “core” in snow. It just costs too damn much.
The Definition
A core retailer is one that has a primary focus on customers who are drawn to the lifestyle and keyed intothe trends associated with the activity they participate in. This focus is shared by the shop owners and employees. Many of its customers tend to purchase more often and be less price sensitive than others. Though it is not necessarily true that core retailers are small in size, it is reasonable to say that being a core shop becomes more difficult as your size and number of storefronts increases.
What I’ve suggested above is that, due to being a one season business, and for other reasons, there are some risks and costs to being a core snowboard shop that don’t exist in the same way or to the extent they exist for skate or surf. That’s bad because we need the core shops, we all say. Just to refresh our memories, we say that because they are the first ones to spot trends, have a role in incubating brands, and in creating and maintaining a bedrock of excitement that supports the industry through good times and bad.
Where Do Enthusiasts Come From?
From the womb I suppose. Which is my way of saying that these lifestyle participants we, as business people, depend on tend to be younger. And as they get older, they begin to develop other priorities. What was a passion and a lifestyle becomes a sport. It competes with other uses of time and money and may no longer be the thing they find a way to do no matter what. We can market our asses off, but we’re seriously drinking the kool aid if we believe that any amount of clever marketing will change this inevitable evolution as people get older.
So that’s going to happen? We will lose participants, or at least frequency of participation and people will be less inclined to buy new stuff more often.    And they will have less propensity to buy soft goods if they are participating less. As I said above, I think surf and skate sell more broadly defined soft goods to more former or non participants than snow does. Participation is more important to snow than to skate or surf. Look at the percentage of total surf revenues represented by surf boards.
Well, okay, if snowboarders are inconveniently going to get old in spite of all our outstanding advertising and promotion, where are the new participants we need going to come from?
Like I said, from the womb. Well, this is hardly a surprise. SIA spent a whole lot of money having studies done that, in part, showed the importance of getting participants started young. Resorts and brands both have their parts to play in keeping new, young participants coming into and staying in snowboarding. But so do the core retailers. What should they do?
Action Items
First, it would be good if you stayed in business. That, by itself, would help a lot and is by no means an easy thing to do.
Second, stop agonizing over broader distribution and company stores. It’s here to stay and it’s unlikely you can do much about it, except of course take it into account as you consider how you run your store.
Third, get bigger. The numbers show that smaller shops have higher leverage (risk) and lower returns on net worth.
Fourth, even if your roots are in snowboarding, and you see yourself as a core snow shop, don’t use that as a reason to exclude other products that make sense. Try to limit your financial dependency on snow. You can be a “core” snow shop even when a lot of your total sales are from other products.
Fifth, have a cash flow that makes sense and build it with special consideration for your (I think) less predictable snowboard business. And in that cash flow, plan to pay your suppliers on time. I don’t know why, but they seem to like that. It’s also a big step in accomplishing point number one.
Sixth, though your roots may be in snow, I think retail business conditions require that you think of yourself as an action sports shop. It’s the financial model that works. Treasure the crossover customer.
Seventh, build relationships with winter resorts that help get new participants to the slopes. That’s worth another article. I can tell you from sending a few emails that some of the best stores are already all over that.
What writing this article has made me realize is that there is, in some sense, a conflict between being, thinking, and acting as a core snowboard shop and having a solid business model. Maybe that’s too strong, and I know there are some notable exceptions. Still if success requires, and I think it does, that you are active in areas besides snowboarding, can it be dangerous to think of yourself as a snowboard shop even if that is your focus? To put it in fancy business school-like strategic planning terms, if your mission statement isn’t aligned with your business model, you’re screwed.
Sorry, not allowed. We can’t have the core snowboard shops screwed if they are going to fulfill their role in developing new participants. Think about this possible conflict—we really need core snow shops, but being too core in snow alone may hurt a shop’s chances to grow, succeed, and influence new participants. Where’s the balance for your shop?

 

 

Hard Truths about the Action Sports Business; Use Them to Make Lemonade from Lemons

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As I said in the last issue of Boardsport Source, the way companies choose to compete in the action sports industry and, I suppose, in most industries, is largely responsible for the maturing and consolidation of fast growth industries. Ask the skate and snow people. People way smarter than I have acknowledged that surf’s time will come.

It wouldn’t hurt to read that last article before this one.  So if you’re one of the few people who doesn’t seal their copy of this mag in an air tight case of bullet proof glass filled with argon gas to prevent the paper from deteriorating, let me know and I’ll email it to you.
 
I have the privilege of looking at things at my leisure from the 10,000 foot level without the distraction of having to make a budget, ship a product, or figure out which brands to go how deep on. I guess what I want to tell you is just how much this industry has changed. Perhaps that seems obvious, though if we take it as a given it’s amazing how little we seem to try to manage our businesses differently to compensate. What can we do, anyway? Let’s think about some old habits we should consider breaking.
 
Hardgoods
 
Congratulations. Surfboards, skateboards, and snowboards are all well made, quality products that the consumer can rely on.   The brands have done an outstanding job of designing, sourcing, and manufacturing. So much so that the prices keep going down. In the industry’s incestuous world, we bemoan this, point fingers in various directions (usually not in the mirror, which is where we ought to be pointing at least some of the time), and discuss endlessly what we can do to increase margins to what we “need.”
 
Maybe, instead of wringing our hands over lower prices and margins, we should all be congratulating ourselves for making it easier and cheaper for the consumer to skateboard, snowboard, or surf. I’m not suggesting that cost is the only, or even the most important, determinant of participation. But as long as we, as an industry, seem determined to drive down costs and prices, don’t you think we should celebrate that service we’ve performed for our customers and figure out how to turn it into a good thing rather than complaining endlessly about something that doesn’t seem like it’s going to change?
 
Why haven’t I heard of a surf retailer giving a free surfboard ($95 ex-factory out of China) to a customer who buys a wet suit, baggies, wax, sun glasses and a surf trip from the retailer? “But we’re not a travel agent!” bemoans the retailer. Well, maybe you better consider becoming one. That’s how scuba diving retailers, in the US at least, make a lot of their money. Is there any reason a snow retailer couldn’t do more or less the same thing? Maybe skate retailers should be selling a deck at cost to a kid who buys wheels, trucks, grip tape and a pair of shoes at regular prices.
 
Brands, resorts (or skatepark owners) and retailers should be sitting and talking about how you can help the consumer rather than about who’s fault it is that it’s harder to make money. Ignoring the Japanese snowboard phenomenon of the early to mid 90s, consumers don’t want a surfboard, skateboard, or snowboard for its intrinsic value or artistic design- they want to skate, snow, or surf.
 
Rather than bitching about what’s happened in hard goods, why don’t you embrace it (since you’re stuck with it!) and do something positive with it? Don’t sell skateboards, surfboards, and snowboards. Sell skateboarding, surfing, and snowboarding. That’s what your consumer is interested in. 
 
And those margins you “need?” Zumiez, the very successful US action sports retailer with around 130 stores just launched its stock in an initial public offering and so far, the stock has performed pretty well. Zumiez gross margin in its last complete year was 31%. I guess that’s all they “need.” I know- they’ve got all those stores, and they’re a mall shop, and they get better prices from suppliers, and we’re way cooler than they are, and, and, and, and….. Guess what? It appears that quite a few of the industry’s consumers don’t care about that. They think Zumiez does a great job. So do I. If you’re interested, here’s a link to their public offering prospectus. http://www.sec.gov/Archives/edgar/data/1318008/000104746905013143/a2153924zs-1a.htm
 
Distribution
 
I don’t have the words to describe how tired I am of hearing people argue over whose “fault” our distribution problems are. Whenever you get a group of brands and retailers together, the issue is bound to come up. But no new information is ever exchanged, and nobody has any useful suggestions. Why don’t we just get over it?  Whether you’re a retailer or a brand, assume that most product, hard good or soft good, is going to be available all over the place. It mostly already is. Am I overstating that maybe a little? Maybe. But we can all agree that every brand of any size is available in many different size and quality retailers in many locations.
 
Retailers have three choices. First, if your margins are going to drop, then you have to sell more to make the same level of gross profit. Maybe you’re a brilliant retailer and can do it by increasing sales per square meter in your existing space. More likely, you’ll have to increase your floor space or open new locations or add products. Or all of those. That, of course, requires you to increase the working capital investment in the business.
 
Choice two is to carry more new, lesser known brands. Risky? Yes, but no more risky than doing nothing as your margin drops and your operating expenses stay the same or rise. Besides it fits right in with choice three, which is to do what smaller retailers are suppose to do to compete- differentiate themselves by brands carried, customer service, and expertise. At the end of the day, the best specialty retailers can sell whatever quality brands they choose to carry, because the credibility of the retailers is so high that it rubs off on whatever brands the shop has. The ability to give credibility to any brand it carries may be the best definition of the specialty retailer I’ve ever heard.
 
Actually, I suppose these three things aren’t really choices, but tactics that should be pursued simultaneously.
 
If I were a brand, I think I’d sharpen by pencil and ask what would happen to my gross margin, marketing expenses, and bottom line if I were to get a bit more cautious on my distribution and was satisfied with lower top line growth. The UK brand Animal is taking something like this approach. By being cautious about their distribution, they keep retailers happy by promoting sell through at higher margins. That exclusivity increases demand and next year’s preseason orders. It also means they can be more judicious in their marketing expenses because limited availability drives demand better than a whole bunch of paid ads. The bottom line is, well, a bigger bottom line than if they focused exclusively on driving sales.
 
Marketing
 
I keep turning back to the two page Globe ad in this mag’s spring issue. It’s an artistic rendition of a single wave breaking in a big ocean. There’s nothing else in the picture. Not a product or a team rider in sight. Nobody doing a trick that 99% of the people looking at the ad can’t do. It reminded me of what I really value about surfing- the peace of just being out there even if the surf sucked. Anyway, there was always the hope that the occasional, elusive good wave that comes through even when the surf was bad would be the next one.
 
Was it a good ad or a bad ad? I loved it, but that’s up to you to decide. At least it was different and I noticed it. And of course this was a trade, rather than a consumer, publication. Obviously if you can make your ads different so that they get noticed in a positive way that’s good. If in fact more of the consumers who buy your product are non participants interested in the lifestyle rather than the technical specifics of the newest trick maybe more of these ads are particularly appropriate.
 
The caveat is it depends where you are advertising. In core consumer publications, read mostly by core participants, (I think- that’s an interesting question! Who does read them?) I suppose tricks and pros will also be the staple of advertising, though it tends to leave everybody’s ads looking the same. But if you’re reaching to the mainstream and becoming more and more part of the fashion industry, your advertising placement may change, or at least expand, and a different kind of ad become appropriate.
 
Don’t find yourself directing too much of your advertising to the industry. Deliver an image and a message that your consumers- not your retailers or your competitors- think is cool.
 
In this article, I’m asking you to do three things. First, focus like a laser on your consumer and what they want. Don’t confuse your team riders, the industry, or the retailers for the people who buy your stuff. They overlap for sure, but they are increasingly not the same for most companies. I can guarantee you that the companies that do that will be the most successful.
 
Second, rather than bemoaning the trends in hardgoods and distribution laid out above, recognize that they are normal industry evolution stuff and figure out how to operate your business given that they are here to stay.
 
Third, do some things differently keeping the focus on the consumer in mind. Yes, they feel risky but I hope I’ve made it clear that not trying some new business approaches is even riskier. If you agree that the industry has changed, how can you possibly make the argument that you should be using the same old tactics to build your business?