The Enthusiast Cycle; Lessons From the Scuba Diving Industry

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Yes, the scuba diving industry. Maybe nine months ago Fran Richards, former VP at TransWorld and somebody whom I consider one of the best intuitive marketing guys in action sports, called me up and said, “Hey Jeff, I’ve given your name to the guys at the Dive Equipment Manufacturers Association!”

“Uhhhhh, thanks Fran, that’s great, I guess…..WHY?!”
 
Anyway, to make a long story short, some months later I found myself facilitating a conference for that industry. It seemed that the sport was perceived as too expensive, the instructors were not very sales oriented, the baby boomer customers were dropping out, the equipment was all good and not differentiable (and a lot made in China by one manufacturer who may enter the market with its own brand), nobody had the time to participate, it was becoming even more a destination sport, there were too many small retailers who had no idea what they were doing, the industry had no idea how to attract kids and as a result of all this, the market was shrinking or at best not growing.
 
Anybody who is or has been in the winter sports business, as a resort, retailer, or manufacturer probably feels for the dive guys by now. At one time or another we’ve had or have all those problems. Like the dive industry, we’re still working through some of them. The good news is that we’re further along the “figuring it out” curve than they are.
 
Anyway, having noted once again that industries tend to be more similar than different in spite of the protestations to the contrary by the participants in each industry, I found that working in a new industry gave me better perspective on this one (In some ways, diving ought to be an action sport, but it’s just too damn peaceful).
 
The Enthusiast Cycle
 
As I listened to the dive retailers and manufacturers talk, I found myself thinking about the ski resort business in the 60s and 70s. People came and skied in droves in spite of comparatively poor base facilities, equipment, lifts and various other inconveniences. I won’t say that none of that mattered, but it certainly didn’t keep people from showing up and participating.
 
The resorts got just the slightest bit complacent. When skier days started to decline, the resorts didn’t know what to do, but while they were thinking about it, the snowboarders appeared to the resort’s ever lasting relief.
 
And the snowboarders didn’t care about poor base facilities, equipment, lifts and various other inconveniences. Hell, they even found ways around the people trying to kick them off the mountain.
 
The skiers in the 60s and 70s and the snowboarders into the 90s weren’t just participating in a sport. Many of them defined themselves as snowboarders and skiers. It was their lifestyle.
 
As people trying to make a few bucks (or Euros- whatever. Look, I’m in the middle of moving to Dublin and have no idea what currency to think in. I suppose it doesn’t matter as long as I can buy beer with it) in the action sports business, that’s exactly where we want (need) people to be. We want them to feel that participating in the sport is validating their lifestyle and self image. Then, to put it a bit indelicately, they buy more and put up with more.
 
Why do they do that? I think it’s because they are young, something is new, and maybe perceived as a bit exclusive. But whatever it is, they don’t stay young, it doesn’t stay new and we bust our butts trying to make sure it doesn’t stay exclusive lest too many of us go out of business.
 
So somehow, at some point in the enthusiast cycle, it becomes just a sport to more people. You can participate in a whole lot of sports and activities. You can’t have a whole lot of lifestyles- maybe you can only have one. As you get older, your lifestyle can revolve a bit more around kids, career and mortgage payments and less around snowboarding, or skating, or surfing. Not for everybody, I know, but I’d say that’s true for most.
 
SIA’s web site shows this succinctly in a couple of graphs in one of their reports. They show snowboard and skier participation by age. Guess what it shows? Snowboarders are younger, skiers are older, skiing participation is going down, snowboard participation is going up. What a shock.
 
Skateboarding has been through this a couple of times and may just be starting to come out of its latest down cycle. At the recent Surf Summit, in May, Quiksilver CEO Bob McKnight warned that surf’s present good times wouldn’t last forever.
 
These cycles happen and will continue to happen. When surf/skate/snow/diving become “only” a sport they become vulnerable to new competitive pressures. It is no longer the same priority at the top of the participant’s list. Maybe we can influence these cycles (and I’m not sure of that) but we can’t change them. What should we do?
 
The Ski Resort Response
 
To their credit winter resorts started to figure it out and snowboarding bought them some time to do it.   They trained instructors in selling and conversion. They collaborated with manufacturers in making equipment that was easy to learn on. They put up signs so you could find the bathroom. They offered cheap lessons and incentives to come back. They tried to make sure that people didn’t show up for their first lesson in jeans and freeze to death. Some resorts have restructured their rental process from the ground up to make it more customer friendly. High speed lifts, better base facilities, the list is endless.
 
It cost a lot of money. My perception is that it’s working to some extent, though the jury is still out on whether it will work in a way that makes financial sense. But at the end of the day, what the U. S. resort industry says is:
 
“While these tangible issues are encouraging, conversion (“software issues”) has emerged as the predominant roadblock in the industry’s ultimate goal of growing the sport by 10 percent.”
 
The intangible “psychology of conversion” and the “golden hour” between trial and conversion must be more effectively addressed.”
 
In other words, all the tangible improvement and enhancements in processes and facilities are necessary but probably not enough. Somehow, they need people to “feel the love” and make snow- or skate, or surf, or diving- something that defines, to some extent who they are. They don’t need somebody who participates in snowboarding, though they’ll take them. They need people who think of themselves as snowboarders.
 
The Marketing Delusion
 
We all believe, or perhaps hope, that the rather significant sums we spend on advertising, teams, trade shows, promotional product, events- the list can seem endless- contribute to creating people who don’t just participate but associate themselves with the lifestyle images we try to create. We know to some extent it works and if I knew what “to some extent” meant exactly you’d all be paying me a fortune to tell you.
 
My belief is that it works better when the target audience is younger and the product is fresher. That’s why the skate companies, with an overwhelmingly adolescent male audience, have tended to introduce new brands on a regular basis.
 
I’m suggesting two things. First, and most importantly, we’re at the mercy of what I’ve described as the enthusiast cycle- not in control of it. We can’t stop people from getting older and, as a result, changing their priorities.
 
Second, and here’s a BGO (Blinding Glimpse of the Obvious) for you, we damn well better know as precisely as we can who our customers before we spend those buckets of money on marketing.
 
It’s not just about whether a customer is “young” or “old.” We should be concerned with their changing motivations as they age. Resorts have been trying to sell condos to baby boomers as they sell terrain parks to teenagers. Some have succeeded, but lord that’s a hell of a schizophrenic marketing message to manage.
 
Recognize that you can’t do anything about the enthusiast cycle. It’s as inevitable as death and taxes. Don’t believe that the same marketing will work as the customers’ priorities change and they age. Start by checking out the demographic statistics in your market. The U.S. Census bureau has great stuff on line that tells you how many people are what ages and where are they.
I don’t know if all the EU countries have the same thing. 
 
To oversimplify a bit, are you going to try and hold on to the same customers as they age, or are you prepared to drop them and go after the new crop? Or both?
I know it’s not that linear, but your answer will determine where, how, and how much you spend on marketing.
 
Don’t fool yourself into believing you can overcome the enthusiast cycle with marketing. Acknowledge it and build it into your business strategy. If you approach it that way it’s an opportunity, not a problem.

 

 

Buying Smart; Selecting Among Snowboard Brands

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Ain’t business grand? You’ve got a choice of something over 100 snowboard brands to sell in your shop. ‘Course, 20 of them will be gone by the time the snow melts and next year there’ll be 35 new ones. Delivery, not to mention service, is uncertain.  Some of those new companies will be only as real as the ad they managed to scrap up enough cash to run in Transworld.

But hey, if the graphics are cool, the product is new and there aren’t many of that brand around you can probably sell some as long as the construction is solid, they are delivered on time and there’s a semblance of a marketing program.
 
Let’s assume that, like most shops, you’re going to carry some old brands and some new ones. I’ll leave it to you to figure out if the graphics and shapes are right. If I could do that with any certainty, I probably would have been in a position to buy Transworld myself instead of letting Times Mirror do it. 
 
So into your store walks the sales rep, or into the booth you walk at the trade show. What factual information can you have that would allow you to compare brands from a business perspective and keep from being completely carried away by the enthusiasm of the moment? A checklist with the following information would be useful.
 
1)            Where are the boards made?
 
Al Russell, the president of Grindrite, says there are eighty (!) factories in the U. S. alone. That includes everybody from Burton to the garage that will turn out 200 hand made boards in a season. If it’s a larger factory (Morrow, Pale, Elan, Taylor-Dykema, etc.), ask who else has their boards made there. Don’t take “I don’t know” for an answer. Somebody in the company knows. If it’s convenient, call the factory and ask for a tour. The company you’re buying from can help you get in the door. You’ll learn a lot about how snowboards are made and, at a minimum, that knowledge and the fact that you’ve been to the factory will make you a more effective sales person.
 
If it’s not convenient, go anyway. Go visit a factory in Europe, spend some days “product testing” on new terrain, and deduct the cost of the trip. I like to think this industry is getting to the point where tax deductions are becoming important. Means somebody is making some money.
 
If it’s a new brand and/or a small factory you’ve got a whole new set of issues. Can they deliver in a timely manner, will they be there for service and what will product quality be like? Lacking a track record, there’s no way to tell, so be wary. Check out the people involved. Do they actually know anything about making boards? Get a couple of samples to ride. As discussed below, make sure they have enough financial strength and savvy to be around when you need them. Consider insisting on personal guarantees from the principals.
 
2)            What’s the construction like?
 
In past issues, this scholarly and erudite publication has told you all about the various constructions and the materials used. There aren’t many basic constructions and the materials are more or less the same from board to board and factory to factory.
 
Once you’ve got all this good information from questions one and two, what are you suppose to do with it?
 
You now know brands A and B are made at the same factory (or different comparable factories) with the same materials and very similar (if not identical) construction techniques. After examining the boards, it’s clear that the visible differences are only in graphics.
 
Oh yeah- and maybe in prices. If the wholesale price sheets show major differences in what you know are boards that are basically identical except for graphics, why should you be willing to pay it?
 
Maybe the graphics are so hot that a price differential is justified. Perhaps the brand’s reputation, marketing program, quality of service, warranty policy, payment terms or some combination of these justify the higher price. If it isn’t clear that’s the case, your decision just got a whole lot easier. Alternatively, your negotiating position with the more expensive brand just got stronger. “Hey, how come I’m paying you $25 more a board when the only difference is the graphics?”
 
Could lead to some interesting conversations. Even if you’ve decided that the more expensive board really is the one you want, use your knowledge to negotiate a little better deal.
 
Consider carrying the information gathering process one step further and starting a little sooner. Meet with or call a half dozen or more other retailers. Have each retailer rate each brand they carried on a scale from one to five for timely delivery, warranty claim handling, service and other factors you consider important. Share that information among yourselves and get together to discuss it. Now the questions becomes, “Hey Joe, how come I’m paying you $25 more a board for your product when the only difference is the graphics, you were late delivering and it took two months to get warranty replacements?”
 
Alternatively, you might find out exactly why you want to pay that extra $25.
 
3)            How is the company financed? Can they provide a bank reference? What does the company sell during the off season?
 
The simple fact is that financing a fast growing, highly seasonal business is tough. It takes a lot of capital for a short period of time and coming up with it can be hard, especially if you’re a new business without a history of profitability. I’m here to tell you that just because a snowboard company has an outstanding sales organization, great graphics, a strong marketing program and a good reputation doesn’t mean it’s well financed. Size and apparent prosperity is not a guarantee of financial strength. Ask the people in Orange County, California.
 
It would be nice if your supplier would give you a financial statement, but that’s probably not going to happen (except for Ride of course). Ask for a bank reference. The banker will always be cautious about what they say but in general, the less they have to say, the more reason there may be for concern. Ask your banker to get a Dun and Bradstreet report on the supplier. Ask them for a list of credit references and check them. See if they have any cash flow during the summer, or if they just lose money for six or seven months of the year. Having some summer cash flow simplifies the problem of working capital financing significantly by reducing the peak amount required and providing some collateral for bank borrowings. I imagine that has something to do with why there are so few snowboard only shops around.
 
They say that when you go to the supermarket, it’s best to go with a list to avoid impulse purchases. I have to think that’s true in Las Vegas too. To a large extent, snowboarding is the fashion business. Hype, controversy and the other intangibles are always going to sell product. You can’t be completely rational about brand selection; your gut feel and experience does count for something. But there is some hard information out there for those of you who are willing to take the time and make the effort to collect it. It isn’t too much time or too much effort, and you can significantly improve your decision making process. Not only will it show up in your bottom line, but you can expect fewer surprises and headaches once you get into the season by finding out a little more about your suppliers now.

 

 

Business By The Numbers; Simple Questions a Shop Owner Can Ask Regularly to Stay in Control

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If your typical day is a series of disruptions and interruptions like that of many small business owners, then you may find yourself having difficulty controlling your business and knowing with certainty where you stand on a day to day basis. All businesses face challenges. Those challenges are most easily met if focused on early. What starts out as a minor inconvenience can become a survival issue if not identified and managed in a timely way.

But the disruptions and interruptions aren’t going to go away. So any system for anticipating problems and controlling your business has to be simple to develop, simple to use, and take not much time. It has to be your servant; not make you a slave to data collection. Here are some ideas on developing one that’s right for your business.
 
The first thing you need is a budget. To some people, this means a complex financial model on a computer projecting a balance sheet, income statement and cash flow. If that’s what you’ve got, great. But in the interest of keeping this simple, let’s assume you at least have a sharp pencil and some accounting paper with columns.
 
Write the 12 months of the year across the tops of the columns. Let’s start with the current month. Down the left side of the paper, enter the following row captions; sales, cost of goods sold, and gross profit.
 
Continue with the following expense categories; advertising, promotion, salaries and taxes, rent, telephone, utilities, maybe interest expense, and supplies. Finish up with pretax income for the month.
 
Now say, “I’m the only one who really understands my business” and change the categories to reflect the specifics of your shop. Maybe it would be helpful to split up sales among product type (boards, boots, bindings to use one example that comes to mind). Could be that the costs of keeping the doors open every month always total nearly the same and you’re comfortable with just one total number for these costs. Whatever works for you.
Now fill it in. Congratulations! You’ve got a budget If it took you more than an hour or two to do this in rough form, then you may have identified the first minor inconvenience that could become a survival issue; poor financial data.
Get yourself a manila folder, label it “My Control System,” and put the budget in it. You’re half way there. Now all you’ve got to do is ask a few simple questions on a regular basis and record the answers. The questions I recommend are:
 
1)    How much did we sell today? Get another piece of accounting paper, write the month on top, and the days from 1 to 31 along the left margin. Have two columns headed “Today’s Sales” and “Cumulative Sales.”   Fill in the two columns at the end of each day and put it in the folder.
2)    How much did we sell this week? Add a column to the daily sales sheet and put a weekly column every seven days. If you think it would be valuable, add another sheet of paper and look at sales by major product group weekly. At the very least, do that monthly.
3)    What’s the gross profit? Look at it weekly and at the end of the month in total dollars and record the information on another sheet of accounting paper. If you know your starting inventory, what you have received, what it cost and what you’ve sold, this is a simple calculation.
4)    How much inventory do I have? Record it weekly and at month end on another piece of accounting paper you slip into your folder. If you answered question three above, you’ve already got the answer to this one so the only additional work is writing the numbers down. A refinement you may want to consider is looking at your inventory by major product groups.
 
Now we’re getting somewhere. We have a simple budget, are tracking sales, gross profit and inventory levels. We can start to make some decisions. Trends can be spotted early and adjustments made with minimal pain. The magic of this is that the more you do it, the better those decisions will become.
 
Are inventory levels too high or too low given your sales levels? What should you try and see if you can get more of, and what should go on sale or be displayed differently? Your gross profit is higher than expected. Is sales of one brand with a particularly good margin outpacing other brands? Is this a chance to dump some stuff that’s not moving and still maintain your profitability?
Obviously, all these factors work together in a very dynamic way. With the kind of system I am describing here, you’ve got them all in front of you in a very simple format. Patterns will emerge and trends be more obvious. You don’t have to be a master of accounting to do this.
 
In fact, remember that this isn’t accounting at all; it’s management. You do not need precise numbers. I am not suggesting a physical inventory every week. Don’t count your nuts and bolts. Focus on the products that make up most of your sales.
 
Let’s move on to the expense side.
5)    What are my fixed monthly expenses? There’s a bundle of monthly operating expenses including things like rent, telephone and insurance that should stay pretty constant from month to month. Look at them monthly and don’t expect much variation. If you see it, ask why.
6)    What am I spending on salaries (including taxes and benefits)? Salaries should be reviewed weekly and at the end of the month. Weekly because they are a big expense item and can be managed relatively easily in response to changes in sales. Add another piece of accounting paper to your folder that by now has all of, oh, maybe five pieces of paper in it.
7)    What are my advertising and promotional expenses? Record them weekly or monthly depending on what right for your business. Use the same sheet of paper you use for salaries. Let’s keep this folder thin. In fact, put all your expenses on one piece of paper.
8)    How’s my cash flow? That’s probably another article, though by asking the seven questions I’ve listed above, you’re well on your way to predicting your cash flow. As a retailer, paid at the time of sale, you don’t have the collection of receivables to worry about. Your cash flow typically differs from your income statement in four basic ways. First, some taxes may be paid quarterly, though you expense them for income statement purposes monthly, as incurred.
 
Second, you’ve got terms from some of your suppliers. You recognize cost of goods sold for income statement purposes when the product is sold, but may not be paying for the product until some months later.
 
Third, you’re probably paying for fixtures and leasehold improvements at the time you receive them, but depreciate them over some period of time on your financial statements.
 
Finally, if you’ve got a line of credit from a bank, your borrowings and repayments are not reflected in your budget, though your interest expense is.
 
Shouldn’t be very hard to adjust your income statement budget for these differences and have a cash flow.
 
At the end of the month, look at your budget compared to actual and see how you did. Since you’ve been following things daily and weekly anyway, there shouldn’t be anything unexpected. As a modification, consider adding a column after each month of the original budget for inserting the actual numbers at the end of the month.
 
So here’s a tool for you to consider using. If you’ve already got a good accounting system, this can help you focus on what’s important. If you don’t, this will give you the minimum you need to control your business and anticipate problems and opportunities. This generic system should, of course, be adapted to the particulars of your business. The exact form it takes isn’t as important as using it regularly; every day, week and month. Invest a little time now and you will have more time later, and better control of your business.

 

 

China, Small Brands, Inventory; Visions from Vegas

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Purposeful. In a word, that’s how I’d describe the show. There was the quiet hum of business being done and if the aisles weren’t as full as I’ve seen them in the past, and the noise level was somewhat subdued, it was because the booths were full of people focused on doing business. Sure, I miss the good old days a little, I guess. It really was fun to hear what brand got thrown out of the show for which infraction.

Still, I’d rather people were realistic about doing good business instead of being naively optimistic like they use to be. It’s good for the businesses and good for snowboarding.
 
I want to illustrate that with short discussions of three things I noticed in Vegas. Each could probably be a whole column. And may turn out to be, come think of it.
 
China
 
Not new of course. And I took a whole column to talk about it some issues ago. But what struck me is what a non issue Chinese production is now. Hopefully the extra margin gets allocated in such a way as to both give brands better profitability they can use in supporting the sport and consumers a better deal.
 
But what’s new about China is the impact of the strengthening of the Euro against the Dollar. Stuff was already cheap in China when a Dollar bought one Euro. Now it takes a buck and a quarter to purchase a Euro. All other things being equal, a snowboard made in a factory in the European Common Market is now 25% more expensive than it was some months ago. The Chinese snowboard has stayed the same price, because the Chinese currency is pegged to the dollar.
 
In the course of my wandering at the show, I found myself talking with a representative of one of those European snowboard factories I had known for some years.  In my usual subtle way, I asked him if he had opened a Chinese factory yet. He smiled, but I didn’t think it was completely genuine, if you know what I mean.
 
Being completely incapable of taking a hint, I commented, “Well, maybe when the Euro hits 1.5 to the Dollar.” I got another one of those smiles and the subject changed. What has me worried is that, as an industry, competitive pressure to make and sell less expensive product means we’ll end up with less margin dollars in total to play with even if our gross margin percentages stay the same or even improve.
 
More about that later. Though it’s not obvious, these three Vegas issues of China, small brands and inventory are all related and by the end of this I hope to show how.
 
Small Brands
 
There were a bunch, and they seemed to be doing great! What a relief. Snowboarding took off because it was fun and because it gave kids something to belong to that was different and unique. Skiing, when it consolidated, was reduced to basically nothing but large company brands with the result we are all familiar with. Snowboarding consolidated, and it was fashionable to talk about how it was becoming “just like skiing.”
 
Apparently, it’s not. Somehow, through the consolidation, a number of smaller, snowboard only brands managed to hang in there. And now more are popping up. Not just appearing and then disappearing, but hanging in there.
 
You might have expected that the sheer size and marketing power of the big brands would have left damn little room for the smaller players. To some extent that happened. But interestingly enough, the sheer size, and the push for growth through broadened distribution by the big guys, didn’t kill the small brands. It validated them.
 
I’m not quite certain why that is, but I’ll speculate a bit.
 
First, though some have been better and some worse, the major brands have pushed hard to find all the distribution they could. I’m not saying that as a criticism, but as a statement of fact. Maybe it was the inevitable competitive response- you know, get the market share before they do coupled with a grow or die mentality. Had that growth been a little more selective, perhaps the opportunity for small brands would have been less because the major brands would have been less like commodities available everywhere.
 
Second, the sheer size of the leading brands makes it hard for them to be quite as in touch or quite as “cool” or quite as at the edge than a smaller brand. You lose an edge when you get to be a certain size. You just do. I heard the story at the show about the small brand that had run an ad explaining how to change the picture on a lift ticket, or forge it, or something. Apparently some of the resorts aren’t too pleased with this for some reason.
 
No large brand, with its rental relationships with resorts, is likely to do that. And I have to confess that while I laughed, I’m don’t like encouraging that kind of behavior. But remember ten plus years ago when the goal was just to find a way onto the hill even if you had to duct tape your binding together, even if the choice was between a lift ticket and food and even if the resort didn’t want you and your snowboard there?
 
Perhaps I wax a bit too nostalgic, but this brand with its lift ticket scam reached back and touched that a bit, not to mention appealing to basic greed.
 
We need the enthusiasm- the “I don’t give a damn I just want to snowboard” feeling- if we want to continue to grow the sport. The success of smaller brands is a barometer of how effectively we are doing that.
 
For that to happen- for the small brands to grow and succeed- they need to make a few bucks. They need not to just to grow in units, but to earn gross margin dollars. That implies a certain cost and pricing structure that may not be compatible with too much inexpensive Chinese product (no matter what its quality) and resulting price competition among leading brands. As they are discovering in the skateboard business right now, if there’s enough price difference and the quality is the same, a lot of kids will forego the hot brand for the feel of cash in their pockets.
 
Which brings us to-
 
Inventory
 
As a finance guy by training, this was the most glorious thing I heard at the show. Retailers were telling me how they were calling up brands to buy some closeouts (an old and honorable tradition) and couldn’t find much. Could it be that the brands were finally coming around to my way of thinking? That it’s better to agonize about not having product to sell than about having it. Hope so.
 
I’ve been making that argument for years because I believe that the best advertising you can do in a one season business like snowboarding is to say, ‘Sorry! Sold out!” No close outs, no old inventory, no retailers pissed because the stuff they paid so much for is now on sale at Chain Store X for less than their cost, bigger preseason orders next year, lower advertising costs, and higher margins for everybody.
 
A little scarcity lets us sell value- not just snowboards. Value goes for a higher price.
 
You can begin to see how these three issues come together based on self interest which, to nobody’s surprise, is the best way to engender cooperation among a group of stakeholders with competing interests.
 
Growing snowboarding requires successful smaller brands and specialty retailers. You can’t just market your way into growth forever. At some point, no matter how good the marketing is, it becomes ubiquitous and mainstream if only due to sheer volume. The excitement and sense of belonging to something declines. Smaller brands and specialty retailers can keep some of that going.
 
But to stay in business and do what we all seem to think they need to do smaller brands and specialty retailers need margin dollars, because by definition they aren’t going to make it on volume.
 
Margin dollars come from some combination of higher prices and lower costs. The lower costs, like with product from China, can’t be all pushed down to the consumer by competitive pressures. The higher prices come from some discretion in distribution and the right kind of promotion.
 
I’m probably being wildly optimistic here, but what I’m painting is a scenario where some improved control of inventory and distribution by brands, the success of small brands, and judicious use and pass through of the extra margin from foreign production works for brands and retailers in not only keeping snowboarding special and growing the sport, but in financial performance as well.
 
Not too bad.

 

 

By the Numbers; The Impact of Price and Margin Changes

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Two issues ago, I suggested one possible future for the skateboard industry that I really don’t want to see happen, but which we all have to consider. Last issue, I suggested some questions you needed to ask to figure out the financial impact on your company.

 
This issue, let’s drill down one more level and look at some general numbers and see how a company might actually be affected and why. Note that these numbers aren’t real numbers from a real company. But we all know enough about what it costs to make a skateboard and what they sell for to put together some rough numbers for a mythical company we’ll call “The Company.”
 
Three Years Ago
 
About three years ago, The Company was loving life. It had an income statement that looked something like this.
 
Net Sales                                              $20,000,000                  100.00%
Cost of Goods Sold                              $11,333,340                   56.67%
Gross Margin                                        $ 8,666,660                   43.33%
 
Operating Expenses
 
Advertising, Promotion, Team                $ 2,000,000                    10.00%
Overhead                                              $ 2,000,000                    10.00%
 
Total Operating Expenses                      $4,000,000                     20.00%
 
Pretax Profit                                         $ 4,666,661                    23.33%
 
Yikes! The Company has an impossibly good business. The pretax margin is twenty three percent. Here are the rather gross assumptions I made to put this together.
 
The Company sells nothing but branded decks at $30.00 each- sort of a blended rate between direct to retail and distributor pricing. So they are selling 666,666.67 decks. I have no idea who the fool who buys the last two thirds of a deck is. Hope he got a discount.
 
The decks, back then, cost them $17.00 dollars to have made or to buy. I’m assuming this is a distributor. Obviously, if it’s a manufacturer, margins get even higher, but there are manufacturing expenses to be added to cost. In real life, they wouldn’t just be selling branded decks. There’d be other hard and soft goods and probably various brands.
 
One Year Ago
 
Gee, what a fun couple of years it’s been. For The Company’s last complete year, sales were off thirty percent, declining to $14 million. Luckily, this was a hot brand and selling price and margins held. Assuming they kept their operating expenses constant, The Company’s pretax profit fell to $2.8 million as shown below.
 
 
Net Sales                                              $14,000,000                  100.00%
Cost of Goods Sold                              $ 7,933,333                   56.67%
Gross Margin                                        $ 6,066,667                   43.33%
 
Operating Expenses
 
Advertising, Promotion, Team                $ 1,400,000                    10.00%
Overhead                                              $ 2,000,000                    14.29%
 
Total Operating Expenses                      $3,400,000                     24.29%
 
Pretax Profit                                         $ 2,666,667                     19.05%         
 
Hey, that’s not so bad! You’ve still got a pretax margin of nineteen percent, down from twenty three. You can live with that. Your overhead doesn’t really go down much, but you kept your marketing expense at ten percent of sales by reducing your trade show presence, advertising a bit less, and cutting a few riders you considered marginal. And you’re just a bit stingier with that promotional product. No free t-shirts for Jeff this year. Damn.
 
But lurking in the lichens is the fact that your product is the same as everybody else’s, and keeping your gross margins depends on keeping the hype going, no matter what your sales are. Cutting those marketing expenses can be good financial sense in the short run, but be tough on the brand in the longer term. Still, you got to do what you got to do. Or you could maintain the marketing expense level at $2 million. You’d still have a pretax profit margin of a little over $2 million. Pretty nice.
 
Unless of course, The Company was a $10 million company three years ago, with an income statement that, today, with sales down thirty percent, looks like this:
 
Net Sales                                              $7,000,000                    100.00%
Cost of Goods Sold                              $3,966,667                     56.70%
Gross Margin                                        $3,033,333                     43.30%
 
Operating Expenses
 
Advertising, Promotion, Team                $   700,000                     10.00%
Overhead                                              $1,000,000                     14.29%
 
Total Operating Expenses                      $1,700,000                     24.29%
 
Pretax Profit                                         $ 1,333,333                    24.29%
 
Wow, that’s still pretty damn good! It’s amazing what a cash machine a high margin branded product can be. You can see why everybody wanted to get into this business. These kinds of pretax margins don’t come along that often.
 
Still, note how the total margin dollars available are dropping. It may be that at $7 million in revenue, The Company really needs to spend more than ten percent of sales on its marketing.
 
Retailers reading this should think about the gross margin dollars issue carefully. As much as I’m a fan of high margin percentages, you also need to think about the total margin dollars you generate. Do the numbers yourself, but you can sell fewer $50 decks with a lower gross margin percentage and still make more margin dollars than you make selling more higher margin percentage $30 decks. I think that’s probably worth a whole column next issue.
 
I confess to indulging in a little bit of gloriously naïve optimism in my discussion of The Company. A real company’s gross margin isn’t going to be lower than what you see here after you factor in discounts, freight, returns, etc. And I’ve conveniently not included any rider royalties. I also don’t think you can automatically reduce your marketing expense in this business to conform to a percentage of sales as those sales drop. So if the $7 million company shown above has only a 40% gross margin, for example, and has to hold its marketing expenses at a million dollars even with falling sales, the pretax profit is suddenly down to $500,000.
 
 
Next Year
 
Sales have stabilized and even started to recover a little. The Company wipes its brow in relief realizing that volume isn’t going to drop another 30 percent. But your average selling price has dropped as a result of cheaper product being available from overseas, the actions of some of your competitors, and some retailers and customers welcoming cheaper product. The good news, kind of, is that you also have the ability to buy some of this cheaper product yourself and, continuing to assume that The Company is just a distributor, it’s been able to get its domestic manufacturers to lower their price a bit.
 
If The Company is a domestic manufacturer, it has a different set of problems. Its volume is probably down, and its OEM customers have been squeezing it for better pricing. Lower volume may mean that the all-in cost for each deck is actually up, while customers have the leverage to get you to take less for each one. That sucks.
 
In addition, the price difference between branded and blank decks has become even more compelling, and some percentage of skaters finds the price difference too compelling to resist.
 
But as we see in the numbers, selling that high margin branded product is what makes this business financially attractive, and people are going to be fighting to keep their share of that. That probably translates into higher marketing expenses, assuming you have the money to do it.
 
Let’s run some of these issues through The Company’s grossly simplified income statement, starting with The Company doing the $14 million sales have declined to.
 
Except of course that $14 million isn’t $14 million any more. The Company is doing the same number of decks, but the average selling price has dropped to, let’s say, $25. You’re now doing roughly $11.7 million in business   but you’ve squeezed your suppliers some and your cost per deck is down to $13.
 
You squeeze your overhead for all it’s worth, but you’re doing the same number of decks so there’s not much to cut there. We’ll leave the marketing budget the same. As I said before, it might be that it should actually go up. 
 
Net Sales                                              $11,700,000                  100.00%
Cost of Goods Sold                              $ 6,067,000                   51.85%
Gross Margin                                        $ 5,633,000                   48.15%
 
Operating Expenses
 
Advertising, Promotion, Team                $ 2,000,000                    17.09%
Overhead                                              $ 2,000,000                    17.09%
 
Total Operating Expenses                      $4,000,000                     34.18%
 
Pretax Profit                                         $ 1,633,000                     13.96%
 
 
What we started with as a $20 million company is now doing less than $11.7 million, but it’s still okay, but only under my admittedly naïve, optimistic scenario. Look at the percentages as well as the numbers. What would happen if The Company was an $11.7 million business when this all started three or more years ago? Not a pretty picture.
 
The big unknowns, of course, are what skaters will actually be willing to pay for decks and what companies will actually buy decks for and from where. It’s possible that a brand’s selling price could have to go down further. But it’s also that their cost can be much lower as well. The issue for skating is how we make sure there will be enough gross margins dollars left when this all works its way through the system to allow the brands to continue the marketing programs that are critical to skating.

 

 

Watching the Big Box Selling Process; Thoughts for the Specialty Retailer

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Store One

 
I would guess the girl was 14. She was at this big box sporting goods store with her parents picking out a board, boots and bindings. She didn’t say much and was following her parent’s lead. Their credit card I suppose.
 
It isn’t easy, you know, to hang around through the whole sales process- close enough to hear what’s being said but far enough way so that the sales person doesn’t call security.
 
In this particular case, security should have been called. Not for me but to hold the sales person until the police could show up to arrest her for impersonating somebody who knew something about snowboarding.
 
I didn’t hear any discussion about whether the girl had snowboarded before. I don’t think she had. The first criteria for selecting the board was length, determined by the girl’s height. Her weight was never asked. There was no discussion of flex or where she might be riding and how she was going to learn.
 
The second criteria was color. Blue seemed to be the mother’s preference, so blue snowboards was what the sales person showed them. She seemed to be able to distinguish blue from other colors, so at least she wasn’t color blind.
 
It was at this point I started to get a little antsy. My growing disquiet didn’t decline at all when they started talking about bindings. The mother took the lead on this. Arguably, she was the most knowledgeable one in the group- including the sales person. At least Mom knew what she wanted and why.
 
And the major criteria for selecting a binding was? You guessed it. It had to coordinate with the board. So without a word, the sales person started showing them bindings that looked good with the blue board.
 
Well, that was easy. The parents looked relieved. This was obviously going very well. Their daughter just stood there.
 
Next, the sales person asked, “Are you going to mount these yourself?” Suddenly, the father looked troubled. It was clear where even semi-mechanical duties lay in this family. After an uncomfortable pause, the sales person came to the rescue, if you insist on calling it that, by saying, “We can mount them for you for $10.00. Looking relieved, the father readily agreed.
 
“Which foot do you want forward?” asked the sales person. “Can’t you ride either way?” queried the mom.  “Yes, but most people have a preference,” was the reply.
 
There was an uncomfortable silence. Showing her great knowledge, the sales person said, “Well, most people ride with their left forward, so how about we mount them that way?” That was agreed to, and represented the end of the mounting discussion. No talk of angles or stance width. Granted, the girl probably didn’t know what angle or width she wanted, but the concept that it could make a different might have been mentioned.
 
Now, onto boots. Though I’ve never sold a snowboard in my life to a consumer, I would have started with boots, but what do I know.
 
However, I would not have started with these boots, by which I mean any of the boots in the whole store. Everybody reading this knows the kind of boots I mean. No support, a lousy lining, cheap construction.
 
This is the end of my story. I don’t know what happened with the boots, or if the sale was consummated. Though I’d seen it before, I never react very well in these circumstances. My frustration and stress level goes so far through the roof that I either have to get out of the store, or rush over to the family and beg them to let me help. That’s what I should have done.
 
There were good Oxygen boards there from last season that would have worked. They even had some blue in them. There were some perfectly serviceable bindings, but they didn’t go with blue. Oh well. Boot wise, I would have told them to flee into the night. I don’t think that would have gone over very well with store personnel.
 
I should have jumped into the middle of it. I should have fed them information until I was thrown out of the store. But I chickened out. And though she’ll never see it, I want to apologize to that poor girl who is going to have something less than an ideal experience when she goes to learn to snowboard and to her family, who think they got a good deal but really got something else.
 
Store Two
 
In a second chain retailer, arguably a step up from the first, the couple told the sales kid (who had told me he was a snowboarder) they were looking for a board, boot and binding for their 14 year old daughter who had been snowboarding a couple of years. Something not too expensive. The sales kid’s immediate response was, “Well, these are the setups we have on sale.”
He cued off the “not too expensive,” perhaps assuming if they were in his store, price must be the most important thing. That’s why you’d come into his store, right? Much of the rest of the conversation was in generalities and was driven by the customer. The sales kid responded in generalities to customer assertions like, “We want something that’s kind of medium quality.” “How about this one?” he’d ask, reaching out to pick up a binding.
I left before the conversation ended. The kid was sort of starting to wonder why I was hanging around and watching out of the corner of my eye. I don’t know if he sold anything or not. If he did, I have no reason to believe it was a good fit for their daughter.
 
What I Learned
 
Let’s do a little customer segmentation work here. Look at the admittedly oversimplified grid below.
 
                                                            NOT
KNOWLEDGEABLE           KNOWLEDGEABLE
 
 
PRICE SENSITIVE
 
PRICE INSENSITIVE
 
                                                                                                                                  
 
 
Just to save me some typing, let’s call these “ideal type” customers NKPS, KPS, KNPI, and KPI. NKPS, for example, refers to customers who fit in the box with Not Knowledgeable on top and Price Sensitive on the left.
 
Obviously, most customers don’t fit perfectly in one of these boxes. They are not, for example, knowledgeable or stupid. There are a variety of levels of knowledge and of price sensitivity. Nobody is completely price insensitive. But they give us a way to think about the customer base.
 
The KPIs are the ones that specialty shops tend to own. They will find you, appreciate your product knowledge and know they could buy cheaper somewhere else but not really care. God bless ‘em, I wish there were more.
 
The biggest challenge for the specialty retailer is the NKPS customer. The customers I’ve described above are examples of them. In the first place, they are the least likely to show up in your shop. If they do show up, they are the hardest to convince to buy because they start off knowing the least and have a predilection to spend less anyway. You can spend a lot of time educating them only to have them buy somewhere cheaper.
 
You have the same problem with the KPS types, but at least you can hope to spend less time educating them before they buy somewhere cheap.
 
The NKPI customers are the ones where you can best spend your time and hope to make your knowledge a real competitive advantage.
 
What I suggest is that your sales staff be armed with questions to determine how each customer could generally be characterized. If you’ve done your sales training, they already have most of those questions- they just need to think about the answers in terms of this classification.
 
In the first place, it would be interesting to see how many of your customers fell, more or less, into which category. I also suspect you could provide information, guidance, and help in product selection to the customer more efficiently based on how they were categorized.
 
I think what I might have just said is that you can do a better job of creating value for the customer. It is a matter of faith that the specialty shop competes by “creating value.” What I think that means is providing the most useful information in the most efficient and understandable way. I’m suggesting that this classification of customers might help you do that.
 
I’ve also visited a number of specialty shops and I think I spotted a couple of things that the successful shop does way better than the chain- and a couple they have to do as well. More on them next article.

 

 

Chop Chop, Fizz Fizz, Oh What a Morass It Is!

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Apologies to the Alka Seltzer people for bastardizing one of their old advertising slogans. It just sort of sprang into my head the moment I saw Dwindle’s announcement on their Chop Chop Wood Shop. I assume it occurred to somebody that the name might be offensive to the Chinese, but this is probably just some form of obscure skateboard humor. Hope it turns out to be good business.

Last issue, I offered up my opinion on how the industry might evolve. That was written before Dwindle’s announcement. Dwindle may have validated the scenario I laid out, so you might want to go back and read it if you haven’t already.
Let’s not waste time being pissed at Dwindle, and let’s not be surprised by their actions either. It’s not like they are the only skate company making or planning to make product in China- they’re just the only one that’s made a big formal announcement. They should get credit for standing up and saying it. This is just kind of standard industry evolution stuff.
But that’s not to say it isn’t important. The announcement marks a symbolic divide between how the industry use to be and how it’s going to be. That sure sounds pompous, but I really, really, really, believe it.
If it’s that important, what are you going to do about it?
Break Out the Spreadsheets!
At the end of the day, how this affects your business is going to have a large financial component, whether you’re a retailer or a brand or a manufacturer. With your computer on and your budget (you do have one, right?) on the screen, decide the following things:
  • To what extent will it be possible for an established brand to maintain higher prices in the face of Dwindle’s price cuts without giving away much or most of their volume?
  • How much of these price cuts is going to filter down to the consumer? That is, do you think retailers will hold prices, or pass the lower prices on to the skater?
  • What will be the impact on sales and margin of hard goods prices besides decks?
  • What’s going to happen to the pricing and sales of blanks?
  • To the extent that retailers choose to pass on their savings to skaters, what will happen the number of decks sold? Will it go up enough to compensate for making fewer margin dollars on each deck?
  • Is there going to be any kind of backlash against decks made in China? If so, how long do you think it will last?
  • What’s going to happen to distributors? If price cuts get passed through to consumers, will there be enough margin dollars to go around?
  • What’s going to happen to brand value? That is, how will lower prices impact the consumers’ impression of a brand and its desirability to them?
Say, these are all cheery questions, aren’t they!
Make your best guess and plug the resulting numbers into your budget. What does your new financial model look like? Are you making money? If not, what are you going to start doing differently?
For Retailers
Interestingly enough, retailers may be less impacted than anybody. Most retailers have already gotten use to the idea that hard goods aren’t necessarily the biggest profit maker in the store. They have allocated more and more space to shoes, apparel and accessories because they know that’s where they make their money. Many to most are selling blanks and shop decks. Largely, they are not just skate shops either. Obviously, the more skate focused you are, the bigger the potential impact. Tactically, the most important thing retailers may have to worry about is how the profitability of their blanks and shop deck sales could be affected.
Strategically, it’s a different thing. A few years ago, Burton Snowboards expanded its distribution dramatically. Pretty soon Burton, like most of the other major brands, was available in most distribution channels from specialty shops to big chains like Garts. I thought the message this distribution by the major snowboard brands sent to the consumer was, “It’s just a snowboard. No reason not to buy it where it’s cheapest.” If Burton wasn’t special in snowboarding, then nothing was.
That was the moment when the “race to the bottom” began in snowboards in earnest, though price competition was already pronounced before then. I hope skate hard goods aren’t doing the same thing.
For the retailers, the future can probably be seen in a Zumiezs or BC store, both of which I’ve visited in the last few days. They carry skate and snow hard goods, but I wouldn’t call either one a skate or snow shop. They are either lifestyle or action sports stores, or some other name I haven’t thought of. The hard goods are there, but they are casually displayed and don’t take up all that much room. I’m sure it’s not that they don’t want to sell them, but hard goods do appear to be a badge of credibility among the racks, stacks, and piles of shoes and apparel.
They have a year around business model that doesn’t just cater to skaters and snowboarders, but to the much broader market interested in the fashions associated with the lifestyles. If, as I think, we’re sending the message that “It’s just a skateboard” like it’s been sent in snowboarding, this is where I expect skate retailing to head. I’d note that this has happened in snow in spite of big team programs, promotions, and advertising campaigns by the major snow brands.
For Brands
Tactically, of course, brands without their own factories now have some ability to get lower prices either by getting their own product from China or using the threat of doing it to get better prices from their domestic suppliers. They won’t get as good a deal locally as they can get from China no matter how well they negotiate.
The strategic financial question is the more interesting one.
When Chinese production (not just from Dwindle) works its way through the system, will a brand be selling more or less decks at higher or lower margin? I’m not concerned about the gross margin percentage as much as about the total number of gross margin dollars available. Given the total gross margin dollars the brand has available, will they be able to support their team and marketing programs (the only real source of brand differentiation) at the level they have supported it at in the past and still make money? If marketing programs suffer for financial reasons, it gets even harder to support the argument that there’s any reason to buy a skateboard based on anything but price.
For Manufacturers
In the late 80s and early 90s, there was no snowboard manufacturing capacity available. Factory after factory opened in the US. Then the big Austrian ski factories and, later, the Chinese, stepped in. Most of the US factories disappeared. Mervin Manufacturing, the producer of the Gnu and LibTech brands, survived the transition by being bought by Quiksilver. Now, even they are starting to make some low end product in China.
Due partly to a managed foreign exchange rate that keeps the Chinese currency ten to forty percent undervalued against the dollar, the Chinese have eaten the lunch of various wood products manufacturers in the United States. I hope it’s different with skateboard manufacturers.
If it is, it will probably have to involve consolidation and a highly efficient, large player. Maybe something along the Mervin model will happen, though it’s unclear to me why anybody would buy a skateboard manufacturing facility right now.
Speaking of the Mervin model of course, they also make their E-Maple skateboards with the plastihide tops that are suppose to last longer and offer more pop. Technology has been the traditional defense against low cost manufacturers. We could sure use some more right about now.
Don’t Panic, At Least Not Too Much
No doubt everybody, including me, would feel a whole lot better if I’d painted a rosier picture. Unfortunately, I have the really bad habit of saying what I actually think. Maybe I have exaggerated the potential changes just a little to encourage everybody to take a hard look at their business model and plan for how they are going to react as things unfold. Bottom line is that the Dwindle announcement and associated price cuts shouldn’t be that big a stunner because anybody who hasn’t been playing at being an ostrich knew this was coming from somewhere, though of course we hoped it wouldn’t happen. Industries change. You change with it.

 

 

Snowboard Company Business Models and Core Retailer Problems; A Basic Incompatibility?

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“They may put me out of business and they can’t even put a wax on a board!” said the snowboard retailer about the Zumiez down the street.

I talked to him enough to know that he wasn’t kidding and he wasn’t being sarcastic and he wasn’t just trying to make a point. After a bunch of years as a successful, core, snowboard retailer, he may find himself history. Gone, done, toast, road kill, finished.
 
And he’s not doing anything fundamentally wrong that I could pick up on.
 
The brands will all tell us, have told us, that the core specialty retailers are critical to their businesses and to the future of snowboarding. And they know that, as a group, those retailers are having problems. Granted, they are trying to give some focus and support to those retailers. But it’s my point of view, given the market characteristics we are faced with in snowboarding, that it is difficult for the major brands’ given their inevitable, justifiable, and reasonable competitive actions and strategies to support the core retailers in the way they need to even though some of their tactics do provide such support.  
 
Well, here I go making myself popular again.    I really need to get over this personality quirk that seems to require that I say what I actually think.
 
Industry Conditions
 
As an industry, we aren’t growing so fast any more. Generally, everybody makes good product in hard and soft goods. Quality snowboard product has become ubiquitous. That is, it can all be bought at lots and lots of places. People don’t buy new stuff as often as they use to. There’s no reason to unless you just have to have the latest and greatest. Price is more important in the purchase decision.
 
Mostly, you already know all that. You also know that, in general, the major brands want to grow. Some apparently at any cost. Some are a bit more cautious, or maybe I mean a bit more realistic.
 
K2 Sports Division President Robert Marcovitch puts it like this. “Sure we want to grow, but we are also focused on our gross margin. We want to make money- not just sell.”
 
Salomon National Sales Manager Greg Keeling pointed to the brand’s long standing and consistent strategic focus on technology. “Salomon has always been about the technology,” he said. “That means our average customer is maybe a little older than that of other brands.”
 
It may also means that maybe they lose a few sales to people not quite so interested in the technology, but Greg believes it means they gain in loyalty and maybe in margin as well.
 
That’s a lot the same as what K2’s Marcovitch is saying. Growth, yes- but not at any cost.
 
But still growth for all the top five companies. Four out of the five are public, which creates pressures of its own. The fifth, Burton, isn’t, but seems at least as committed to growing revenue as the others.
 
With the market conditions outlined in the first paragraph of this section, however, growth can be hard to come by. Your product isn’t really better than your competitors. You’re running out of new retailers. The existing ones can only take more in total to the extent snowboarding is growing.
 
So you try to find new places to sell- online, retail stores, retailers you wouldn’t have given a second thought to a few years ago, better deals. You fight to take shelf space from your competitors. They fight back. But lacking real product differences the consumer believes in, those fights can get ugly, though great for the consumer.
 
This is hardly a new story. We’ve watched it evolve over years now. The point is that a requirement for growth, lacking a real competitive advantage, turns into “beggar thy neighbor” tactics that kind of overwhelm any real strategy you might be trying to execute.
 
Meanwhile, Back at the Specialty Retailer
 
It is obvious, I think, that no specialty retailer can have any meaningful influence over the situation I’ve described above. Yet the whole specialty retailer business model requires exactly the things that the competition for revenue growth makes difficult to achieve.
 
First, they need higher margins. But they often, and maybe always, get higher product prices than the chains get. They don’t buy as much and they don’t have the same leverage. So to get those higher margins, they have to price higher. But it’s hard to make higher prices stick when all the product is so good and so much the same and the consumer knows it. It doesn’t help that the same stuff is available in nineteen places within a radius of two miles. Okay, I might be exaggerating there- let’s say three miles.
 
It follows that the second thing they need is more controlled distribution. Higher prices come from scarcity and differentiation. But controlled distribution implies less growth. There doesn’t seem to be much willingness to give up sales for the benefit of smaller core retailers who would rather sell what they have at full margin in season than buy more and have to put it on sale after Christmas.
 
So you can see the contradiction between what the brands are driven to do and what the specialty retailers need.
 
The Brand Financial Model
 
Are there any circumstances under which that contradiction might at least be diminished? Maybe. From the comments above, you can see that K2 and Salomon are not just interested in growth at any cost. Though I haven’t seen their numbers, I suspect their thinking goes something like this.
 
They have a certain percentage of snowboard industry sales. At this point, their market share is unlikely to change much. That doesn’t mean they can’t grow sales as a company. They may start new brands or acquire companies. And they’ll get their share of any market growth that does occur. Maybe a stream of new products with incremental improvements will give them a short-term opportunity. Certainly, they will take advantage of any opportunity that comes their way.   But fundamentally, they won’t change their market share- at least not profitably.
 
Sure, they can undercut their competitor’s prices and spend big bucks on marketing. But that won’t make money. So instead, what if they kind of acquiesced to their existing market share in snowboarding? They stop selling to some accounts that they hadn’t really wanted to sell in the first place. They cut back a bit on advertising and promotion. They work to make the product just a little harder to find. They don’t produce quite as much. They don’t try to pressure the retailers- all the retailers- just to buy more. The focus becomes helping the retailer sell through at full margin.
 
The benefits to the brand may include:
 
  • Fewer collection issues
  • Lower financing costs
  • Less close out and returns to manage
  • Lower marketing costs
  • Retailers who are more successful with the brand
  • Consumer willingness to pay a little more for something that’s not quite so common
  • Improvement in consumer perception of the brand
 
Where the rubber meets the road, as usual, is at the issue of profit. If you lose some sales, but have lower costs and maybe a better margin and market perception, will you make the same profit, or more or less? I’m not sure. I’ll leave it to the brands to crunch their own numbers and tell me. Note how this approach begins to align the interests of the brands and specialty retailers.
 
Of course, it’s hard for one brand, with the possible exception of Burton, to take this approach if others aren’t. Still, competition for market share based on price and big marketing budgets is nothing but a rush to the bottom of the pricing structure- for both the brands and the retailers.
 
A Suggestion
 
The section above presents one approach to aligning the interests of the brands and retailers. I’d like to suggest one specific thing the brands might do. And again, whether this can work depends on your specific numbers. Give the specialty retailers the same pricing as the big chains. Not the same pricing structure- the same actual prices. What I’m saying is consider giving them the same prices for lower volume.
 
Well, now I’ve put my foot right in it. I know- you’d be giving up too many margin dollars. The chains would demand even lower pricing based on their volume. We can’t do it, it won’t work, you’re crazy, blah, blah, blah.
 
Maybe. But I know we all say the core retailers are critical. I know we all recognize they are in trouble. I suspect that total sales to core retailers as a percent of total sales is not that large for the major brands. It wouldn’t hurt to figure out what it would cost and discuss the impact with retailers would it?
 
Look, I’m open to anybody else’s crazy ideas as well. How about a if the brands run retail 101 classes for retailers or maybe help them finance and install good accounting systems?
 
What I’m suggesting major brands do is look at their snowboard businesses as cash cows- not growth engines. If we do that the interests of the retailers and brands can be aligned to everybody’s interest.

 

 

Now What? The Established Shop Owner’s Dilemma

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You started it because it was going to be fun. You were younger- a lot younger. And perhaps just a bit naïve and optimistic. You didn’t know what it was about margins that made everybody think they were gross, but what the hell. If you could hang with your friends, do what you loved and have a few beers at trade shows, starting a retail shop obviously made sense.

A bazillion years later, your stop is still here and successful. You’ve gotten some of the things you wanted out of it. Along the way, you’ve become something of a businessperson. You’ve got good systems and know your numbers, are involved in your community, know your customers and why they buy from you, have managed to have some competent and semi-stable employees, and are actively involved every day in running the shop.
 
As is typical of most small businesses, you and the shop have become synonymous and therein lies the rub. Somehow, working six or seven 12 hour days doesn’t seem quite as attractive as it use to. There’s children, a spouse who for some unknown reason wants to spend time with you, some actual interests outside of action sports and, frankly, you just don’t have the stamina you use to have.
 
What use to be the thing that kept you going has the potential to become something of an albatross if it hasn’t started to already. What can you do? What are the choices, and how are some people in this situation thinking they might manage it?
 
I talked to some shop owners who, if they aren’t all in this situation already, are sure starting to think about it. I expect to quote some people, but I’m not going to identify them. Some of the things they said, that I want you to hear, are just a bit too personal for attribution. 
 
Choices
 
Most of your assets, a lot of your time, and a piece of your self-image are tied up in the shop. Someday, maybe now sooner than later, you are going to want or have to sell it, or at least make a management transition happen. You have basically four choices. Sell it all. Sell part. Don’t sell but get some management help. Or close it.
 
Selling it is easy to say, and seems an obvious choice. But you’re likely to run up against some significant roadblocks. 
 
 
Having partners who share the shop’s equity with you can be it’s own interesting challenge. What happens when you and your partner (s?) don’t agree about something important?
 
Just bringing in management and continuing to own it 100 percent kind of makes sense, but how comfortable will you be with somebody else making decisions with what’s still your money?
 
Closing the shop solves the issues of partners and management, but why would you shut down a perfectly good shop?
 
As we look at each of these, remember that these kinds of decisions lifestyle as well as business decisions, and must be viewed from both perspectives.
 
Sell!
 
“For the 150 to 200 thousand dollars I could get, I can work really hard and maybe make that much in two years.”
 
The statistics suggest that you haven’t necessarily gotten rich owning a specialty shop. I forgot which retailer it was who told me, “Hey I paid the bills and snowboarded a hundred days this season, so I guess it was a great year!”
 
The sad truth is that from a strict financial point of view, a specialty shop isn’t usually worth that many dollars. “I tried to sell a shop I owned years ago, but all they offered was half the fixture value,” was one comment I got.
 
Much of its value to the owner is in the flexibility and lifestyle it offers. Financial buyers won’t focus on that. They will see how hard the owner works and how relatively little they pay themselves. They will recognize how critical the owner is to the business and know it’s at best difficult to replace them. It’s likely they will conclude that while some modest growth is possible, it’s not likely the business will double in the next few years.
 
To the extent you have more than one shop, this changes a little. Multiple shops suggests some growth potential and indicates you have made some progress developing management that might fill the hole left by the departure of the owner.
 
One owner has a plan to expand the number of shops and put management in place with the goal of having the option to sell for a reasonable price some day in the future. “That’s it,” he says, “That, or I work until I’m seventy.”
 
Partner Up
 
Yeah, but with who? And just what does it mean to have a partner?
 
“As far as I can tell, I’m kind of stuck here,” the owner said. “I took five weeks off and things got kind of sloppy.”
 
Did they really get sloppy, whatever that means, or were things just not being done the way the owner wanted? Could he stand it if somebody was making decisions differently from how he had always made them? Where and how do you find somebody you trust?
 
If you are truly sharing the equity in the business in a meaningful sense, then this is somebody whose judgment you are comfortable with. That means two things- they have been in action sports business for a while and you have known them long enough (measured in years) so that you have a high level of confidence in them. Even then, once you are both owners of the business, the relationship will change. Now, it’s their money too.
 
Sharing the company’s equity with a partner requires a lawyer. Sorry, no choice. You need a buy/sell agreement and a dispute resolution procedure not to mention the paper work by which the actual equity sharing occurs. And how, exactly, is that going to happen? Is your new partner going to pay you cash? Do they have any? Are you willing to take a note collateralized by the equity, which of course may not be worth shit if they screw up? How are you going to work together? Who’s responsible for what?
 
It’s not to say that it’s impossible, but equity sharing agreements can be damn tough and this is probably my last choice for an owner unless it’s part of a longer-term exit strategy where the new partner eventually becomes the one hundred percent owner.   
 
Management Help
 
How many hours a day do you work? I asked. “Fuck!!!” was the beginning of the answer. When the smoke cleared, he allowed as how he’d like to get down to twelve. A second owner estimated 200 to 250 hours a month. A third just moaned. A fourth, when asked how you got off this treadmill, said, “You don’t.”
 
Not surprisingly, all four of these owners are focusing on developing competent management for their businesses. One already has two good people he thinks/hopes might be buyers of the store in the future. Right now, he’s just glad there are there to take some of the load off his shoulder.
 
A second is “Waiting for somebody to step up to take over more responsibility.” He’s willing to give up some equity or more money when he sees that happen.
 
The person on the treadmill said he’s “delegating stuff that doesn’t matter as much” and “Not trying to do everything anymore.”
 
It’s my opinion that there’s nothing you can do that’s more important than develop some management. In the short term, it can take some of the load off of you. In the longer term, it may be the single most important thing you can do (besides make sure the business makes money) that will position the business to be sold someday- either to those managers or an outsider.
 
Close It Down
 
Somehow it isn’t very psychologically satisfying to talk about closing down a perfectly good shop. Yet, if there are no buyers at a reasonable price, for the reasons described above, it might be the most financially sensible solution. Are you better off selling for “half the value of the fixtures” or liquidating the inventory through a big sale and then selling the fixtures? Who knows, but it’s worth thinking about
 
Not Just for Old Owners
 
Or maybe, rather than having to contemplate closing down some day, you should start to think now about what you’re going to do with your shop. How are you going to make sure you have some options in the future when you need them?
 
We learned at least two things above. First, the single most important thing you can do to give yourself options and flexibility is to develop management. Second, we learned that it takes time- years in fact.
 
So even those of you who aren’t old enough to be worried about an end game for your business should start thinking about it now. If you’re lucky, some day you’ll get old enough for it to be an issue. And in the meantime it will make running your business a lot more fun, unless you just love spending every waking hour in your shop.

 

 

One Possible Future; An Industry Model for Skateboarding

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Last month, I wrote about surviving a downturn, suggesting that this wasn’t just a downturn but a fundamental change in industry structure, requiring a change in the way successful companies competed. This month, I’d like to be more specific about how I see the industry evolving.

It’s perhaps a bit pompous to do this, because my crystal ball is no better than yours. But my recent study of China’s fixed exchange rate and the September 21 cover of the New York Times Magazine made me decide to give it a shot.
 
Perhaps that needs some explaining.
 
Chinese Exchange Rates
 
I took a whole column in SnowBiz to write what I’m summarizing here. It should be out by the time you see this, so for more detail refer there. Basically, China keeps its exchange rate fixed at 8.3 Yuan to the US dollar. Most currencies are managed from time to time and to some extent, but the major ones change against each other daily based on interest rates, trade, general economic conditions and other factors. The Chinese government makes sure its exchange rate doesn’t change.
 
The result is that the Yuan is between 10 and 40 percent undervalued against the dollar. That is, stuff we buy from China is between 10 and 40 percent cheaper than it should be. Great for consumers and companies that import from China. Not so good for U.S. manufacturers and people who want to sell to China.
 
And there’s not much you, as a US manufacturer can do, given the artificial undervaluation of the currency. It may be, as some have claimed, that you can beat low labor costs with technology. But add the artificial exchange rate advantage and you’re screwed.
 
It’s unlikely that the undervaluation of the Chinese currency will go away in the short term. Among other reasons, we need them to invest a chunk of their trade surplus with us in U. S. Treasury securities so we can finance our budget deficit.
 
We all know that more and more skate hard goods (not to mention soft goods) are being made in China. Lacking some kind of meaningful technological change in skateboards, expect that to continue and grow. If the quality of Chinese made skate hard goods is still an issue, and I’m not sure it is, it won’t be for long.
 
So the stuff gets made a lot cheaper, and the quality is fine. Lacking product differentiation, those lower prices eventually, through normal competitive dynamics, get passed along to consumers. Good for the consumers, and perhaps for the general growth of skate. Bad for manufacturers and retailers.
 
Because even if sales of hard goods grow (unless they grow an awful lot) and even if percentage margins remain the same, the total number of margin dollars realized from hard goods sales declines.
 
Margins dollars are the dollars available to pay for team, marketing, rent and telephone, salaries and bunches of other stuff excluding product. Whatever left is profit, more or less.
 
I am not suggesting that there will be no skaters left willing to pay higher prices for branded decks, but I expect the number of such skaters to decline as percentage of the total. And, at the end of the day, there’s no reason higher end branded decks can’t and won’t succumb to the same competitive pressures as any other deck.
 
So if you’re a seller of skate hard goods, manufacturer or retailer, your financial model may change. In hard goods, you’ll have to sell more to make the same money.
 
Boy, I’m just full of good news today, aren’t I?
 
The Kid on the Cover
 
I think he was four. He was a skateboarder and he was on the cover of last Sunday’s New York Times Magazine. The story was about how really young kids are becoming sponsored and managed.
 
Seeing him there didn’t tell us anything we didn’t already know about the mainstreaming of skateboarding, but it sort of galvanized me into saying the following:
 
The skate market will increasingly be driven by the apparel (including footwear) brands. They can sell product to anybody who thinks that skateboarding is cool. Hard goods brands can only sell to people who skate. The apparel market, which I suppose includes everybody who needs shirts, pants, and shoes and is over four and under 50, is simply a couple of orders of magnitude bigger than the hard goods market. And, for successful companies, margins are and will be better in apparel than in hard goods.
 
They will influence skateboarding, to put it bluntly, because they will be bigger and have a lot more money than most hard goods companies. Hard goods skate companies already know everything I’ve said here. They have the following choices:
 
1)            They can try and use the strength and remaining cash flow of their established brands to transition into soft goods and, ultimately, make those soft goods the bigger part of their business. You saw that process already going on with some brands at ASR. Soft goods are tougher to do well than hard goods, and skate brands that take this approach will (for the most part) be competing with companies that are larger and better financed than they are. They will also have to decide whom they are trying to sell to- the core skaters who buy their branded product, or the larger mainstream market. Obviously, it starts with the core and has the possibility of being extended from there. The art is in figuring out how to expand distribution without damaging the brand’s credibility.
 
2)            They can sell their companies. But if they wanted to do that, they should have done it two years ago at the peak of the frenzy. Element is the only brand I recall that really did that. Companies selling now won’t get near the prices they would have gotten. Still, it may turn out to be the only financial choice for some and certain brands may have more value as part of a larger organization than as stand alone companies.
 
3)            They can remain as independent “core” skate companies. Whether there is a financial model that can support that strategy is unclear to me.
 
If you want some confirmation that this kind of industry evolution is a reasonable possibility, look no further than the surf industry. It’s dominated by a handful of soft goods companies. Mainstream sales, for both brands and retailers, are where the sales volume and profit is. Many to most industry customers don’t surf. Hard goods are having problems with cheap product from China, and nobody seems to make any money on them. Hard goods have hardly been discussed at the last two surf industry conferences.
 
Under the scenario I’ve suggested here what, exactly, is skateboarding? Fairly clearly, it’s not the kind of urban, underground, at the fringe activity it use to be. Time was when it was in the interest of the major hard goods brands to position it like that and hell, that’s how it was anyway. But if the picture of industry evolution I’ve painted here is valid, that no longer makes sense at least in terms of the business strategy. Because, as I’ve tried to explain above, the sales, growth and margins are in the other, much, much larger part of the market- the mainstream, if you will.
 
You can be a successful, profitable $20 million company with a significant marketing and advertising program if your margins are 45%. If those margins fall to 25%, I’m not so sure that works. Okay, I’m pretty sure it doesn’t actually.
 
More and more of my articles could be written for any of Skate, Snow or Surf Biz. There’s a lesson there somewhere about how the industry is evolving. In line with that, I want to suggest that skate retailers who haven’t seen it get hold of the September 2003 issue of TransWorld Surf Business and read the “When It’s Time to Change” article on the cover. It’s an interview with K-Five Boarding House owner Jurgen Schultz. He’s much smarter than I am because he started reacting, as a retailer, to the changes I’ve described here a couple of years ago. He took some risks to do it, but he saw doing nothing as a worse risk.
 
That’s a good way to think in this market.