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Requiem for the ASR Show. Now What?

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At the moment you hear about it, it’s kind of a surprise. But when the initial shock passes, it’s not. I thought The Editors over at Boardistan put it best. Back in 2009, referring to ASR, they said;

“We have to wonder what happens to the entire trade show business model when they have to pay retailers to attend. Lord knows retailers need to be treated well these days, but it still seems to bring us back to the question that’s been plaguing the boardsports business for several years: are trade shows even relevant anymore?”

I couldn’t have put it any better. Or at least not so succinctly. In fact, I didn’t put it succinctly. In the summer of 2009, I wrote a long article about trade shows in general for Transworld Business. Much of what I said then is still relevant. On the assumption that you don’t want to hear me re-pontificate it all, I’ll just include the link here. If you don’t read the serious part of the article and haven’t seen it, you might just to go to the section “In the Beginning,” where I wax biblical. There’s always room for a little humor. It’s one of my favorite things I’ve ever written.
 
What Went Wrong for ASR?
 
As I’ve heard it, the straw that broke the camel’s back was the decision of a number of large brands not to participate in the show. But the poor camel had been under stress for quite a while and the recession, exacerbating a number of existing trends, accelerated the process.  What are these trends?
 
  • Fewer retailers. And the ones that were showing up brought fewer people.
  • Brands showing product and getting orders outside of the trade show environment.
  • The internet and everything you can do on it
  • The union/convention center cost structure.
  • Industry consolidation. Big companies don’t have as much need of trade shows. See the second point above.
  • Recognition that competing against your competitors at trade shows with your show presentation is silly.
  • Slower industry growth.
  • More trade shows while demand was falling. Crossroads. Agenda.
  • Declining clarity as to just what the action sports market is. Did starting Class help ASR, or did it cause confusion as to just what the show was about and who should attend?
 
And then there’s that old bugaboo called momentum. As I’ve said, companies, trade show or otherwise, get in trouble due to denial and perseverance in a period of change.
 
In hindsight it’s easy to see what ASR should have done; Blown up the existing format and started over with another ASR show that recognized changing conditions. Specifically, that the show was essentially a regional show for smaller and new brands. And if that sounds a bit like Agenda well, okay. Maybe they should have just bought Agenda.
 
I hasten to admit that’s all easier to say than to do. It’s that momentum thing. I’m pretty certain ASR boss Andy Tompkins was quite aware of all the factors I listed above. I know he was. He lived with them every day. Yet it’s hard to imagine him (or anybody in his position) going to his boss, and his boss’s boss a couple of years ago and saying, “This isn’t working. We need to blow it up and start with a new focus and a smaller show.” Or maybe he did and got overruled by some people further up in the organization who aren’t quite in touch with our market. Big organizations often don’t make difficult, unpleasant changes until forced to.
 
With that short forensic analysis of what happened behind us what happens now?
 
Everybody’s talking
 
Just from the flurry of public discussion after the announcement, we can assume that IASC is talking to Agenda is talking to SIMA is talking to BRA is talking to Crossroads is talking to Surf Expo is talking to IASC. And if there was some talking going on at Outdoor Retailer and SIA I wouldn’t be surprised.
 
It’s public knowledge that certain of these organizations have (had?) deals with ASR that provided them with a certain amount of funding. Nobody much likes it when revenue goes away. I know I don’t. Those who lost income will want to replace it. Where? How? From whom? That will be a lot of the focus right now.
 
Concrete Wave is sponsoring a show by an organization called  Homegrown called the Midwest Skateboard Industry Summit next May.  As they are selling booth space for $200, I guess it also has elements of a trade show.  I suspect there will be more announcements from various players. 
 
There was an immediate reaction from various sources that Agenda had “won” and ASR “lost.” I didn’t see it that way. I don’t expect Agenda to take over the ASR space. I just don’t think the ASR format and structure for a trade show is valid any longer for the reasons I list above. I’ve also written (see the above link to my earlier trade show article) that anybody who tried might find themselves with the same issues that lead ASR to close.
 
Aaron and Seth at Agenda have themselves a small, solid, regional show. Can they grow it? I expect them can. They have. How much? And in which market? Is Agenda fashion or action sports? I’d be really careful saying “both.” ASR, with Class, tried to be both. When they opened Class, it was a symptom of the problems- not part of a solution.
 
The action sports industry is going back to what it used to be; a fairly small industry and its customers consisting of participants in the sports and the immediate circle of people who may not be participants but are committed to the lifestyle and truly interested in the sports. The rest is fashion; a style sold to customers who’ve seen surfing only on TV and have never been near a skate park. Bigger public companies looking to grow are after that market. They have to be to find growth. They may have their roots in action sports, but it’s getting harder, if you just look at their customer base, to call them action sports companies.
 
That has a huge impact on what our trade shows should or shouldn’t be. It’s incumbent on anybody running a trade show to figure out who their market is. Trouble is, I’m not sure either “fashion” or “action sports” really describes it. Youth culture might be closer.
As all this talking among the various industry organizations goes on, I hope it’s not just about replacing ASR. Let’s assume there were no trade shows. What would we want ours to look like?
 
First, it should look however the retailers want it to look. And as I indicated above, it would initially be regional and would be for new and small brands. Maybe it gets combined with the industry boot camp or other conferences. Perhaps it’s not only brands with booths, but venture capitalists, attorneys, bankers, accountants and other organizations that can help new brands and are interested in them as customers.
 
There should be a web site associated with the show that doesn’t just promote the show, but encourages interactions among the participants. Would it be closed to retailers for a day just so the focus could be on how these companies could run their businesses better? I’d like to see us try and charge non-endemic companies a big price to show up and be educated about the industry. I hope whoever runs this new show has authority to decide which companies can exhibit regardless of who belongs to what group.
 
If we’re going to break some new ground, let’s do it quickly. I find myself sitting here wondering if I should go to Agenda, Surf Expo, or Outdoor Retailer instead. Obviously, some companies are going to be looking for a replacement venue.
 
Fundamentally, however, we have to start by asking if we need another trade show. Maybe there will be surfboards at Outdoor Retailer, skateboards at Agenda and brands that tend towards fashion at Magic and some fashion shows I don’t even know about. Remember that skate had more or less pulled out of ASR, so it’s hard to argue that skate and surf have to be together, though one trade show makes it a whole lot easier for retailers.
 
Whatever happens, I hope the discussion among all the people who are talking is more around what the industry needs or doesn’t need rather than the requirements of the organizations they represent.
 
This is great opportunity to do the trade show we want if we’re really sure we want it.

ASR and Crossroads Make a Deal; What a Surprise!

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This is good news because it makes things easier for the retailers, which I may have said a time or two is what trade shows need to be about. Crossroads needed retailers, which ASR can help supply, and Jamie Thomas doesn’t want to have to manage the logistics that will be required if Crossroads grows. ASR needs the skateboard industry. I don’t think Andy Tompkins wants ASR to be thought of as “a surf show” when apparel, style, and fashion are so much a part of where the whole action sports industry is going (has gone?). Hmmm. By that logic, Surf Expo should consider changing its name. And ASR would like to bring back the additional exhibitors and revenue that the skate industry represents.

This is being billed as an experiment over the next two ASRs. I’m guessing, especially when the economy improves, that it will be extended and the relationship will become closer. At some point, I expect to see the skate companies back in the convention center if the economics can be made to work.
It’s kind of an open secret that there have been some disagreements between the skate industry and ASR about how the show could best serve the skate industry. When times were good, those disagreements were easy to paper over. But then things got tough and, to some extent, the Crossroads show was the response. I’m glad to see them working out their differences in the interest of the industry and the retailers.

Hype, Technology And Trade Shows; Not Enough of Some, too Much of the Other.

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Slowing growth, or a decline in year over year sales if that’s what your company is experiencing, was inevitable in skateboarding. Sure, we would rather it didn’t happen. But since we all knew it was going to happen, it might as well be sooner rather than later so it’s less painful.

What I didn’t see in San Diego, happily, was what I saw at the Vegas snowboard industry show in 1995. Or was it 1996? Whatever. Vegas that year was the biggest snowboard party I’ve ever seen with lots of hype and lots of new brands. And then the snowboard consolidation wiped out most of those brands.

Skateboarding doesn’t seem to be doing that to itself. The number of brands isn’t expanding dramatically. We’re resisting, so far, “net never” dating, and there isn’t a Japan around that’s going to yank the financing many companies need to survive as there was in snowboarding.
 
Still, this setback has wonderfully focused the mind on some significant business issues. Here are some of the ones mine is focused on.
 
Hype
We need less hype. Between network television, Investor’s Business Daily, The Wall Street Journal, The New York Times, and more bad ads featuring skateboarding than I can even begin to count, it’s just too much. Maybe what I mean is we need the right kind of hype. At least part of skateboarding’s success has been its ability to be underground, a little dark and urban, and maybe somewhat unintelligible in its humor and attitude toward non-participants. That kind of hype—the kind that makes people curious about skateboarding is a good thing.
 
I’ll go a step further. The kind of hype we want encourages people to skate or learn to skate better—not just to buy a T-shirt. I recognize that we can’t do much about the people who just want to create an association between their brand and skating for the sake of selling a product and don’t really give a damn about skateboarding. I hope the skate-industry companies will look at all their advertisements and promotions through that filter—does it encourage people to skate? I think that for the most part they do.
 
Two people I respect have pointed out that the slowing of skateboard growth may be related to demographics. As they put it, we’ve got a lot of sixteen-year-old boys who are discovering girls and cars to the detriment of skating. We’ve also got a lot of seven, eight, and nine year olds who are discovering skating, but their disposable income is limited and their purchases largely controlled by their parents, who tend to favor spending less rather than more and buying pricepoint decks. The suggestion is that our slowdown/decline may be caused by the loss of older kids before the younger ones, although they are coming up, are ready to replace them. In this scenario, everything will be fine in a couple of years.
 
I haven’t checked out the census data recently, but if the numbers bear it out, I can see some validity to this scenario. The caveat, and this is where we get back to hype, is that it won’t matter how many kids there are if too many of them think skateboarding is lame because of how ubiquitous it’s become.
 
Technology
Meanwhile, cheap decks from China are happening. I’ve written enough about that and the potential (probable?) impact in previous articles. What’s the typical strategic response in any industry to lower-cost foreign competition? Technology and product improvement that can’t be matched, at least not immediately.
 
Of course, the skateboard industry has spent some years now explaining that a seven-ply Canadian maple deck is what a skateboard is, and nothing else is a skateboard. Nevertheless, if you’re a factory making skateboards and you want to compete with Chinese labor costs, you’d better figure out a better skateboard technology that gives you a competitive advantage.
 
Over at PS Stix, to nobody’s surprise, Paul Schmidt has taken a shot at that. His Featherlight technology results in a skateboard he describes as lighter and stronger. It contains a layer of new material that results in a stronger, more consistent pop back when you flex it. The new material doesn’t go all the way to the tips, and the deck will still wear out.
 
The good news is it looks just like a traditional skateboard. The bad news is that it looks just like a traditional skateboard. How do you sell something nobody can see when they inspect the product?
 
PS Stix’s answer is to have a display for the retailer that shows the cross sections of the deck. An awful lot of people tried this in snowboarding to differentiate their constructions, and it never seemed to work. Maybe the differences weren’t significant enough and maybe there were too many of them. Probably both. PS Stix seems to have first-mover advantage on this, and there won’t, at least at first, be 100 guys using cross sections to explain why their construction is better and their decks perform better.
 
PS Stix’s Featherlight deck will sell for about ten percent more than a traditional deck. That’s what you expect from a product with a competitive advantage. If it catches on and the volume justifies the effort, eventually the low-cost producers will figure out how to make it for less. Then PS Stix and the other manufacturers will have to move on to another new technology. Sounds to me like it could be good for the consumer. Oh yeah, I guess that’s what competitive pressure is supposed to accomplish.
 
How do we get notoriously conservative skateboarders to accept these new technologies as they come along? We’ve created the form of rock star known as the teamrider. We’re more or less convinced that what they ride influences what other kids buy. It’s pretty clear, then, that we have to get our teamriders to ride decks with the new technologies.
 
That shouldn’t be so hard. The company says, “Hey, you need to ride this new technology from now on and love it.” The rider says, “I don’t want to!” The company says, “Do you want to get a check every month?” The rider says, “Yes!” The company says, “Given the number of blanks being sold and the margin pressure we’ll be under if this new technology doesn’t work out, you won’t get that check unless you ride and love this new technology.” The rider suddenly feels love for the new deck welling up in his heart. People with agents should be able to see the business necessity.
 
Trade Show
Over at the International Coup D’Etat Skateboarding Exposition, sponsored by Alien Workshop and Foundation Skateboards and supported by others who showed some product and paid for some of the festivities, companies had a good time and got some business done. Tum Yeto’s Tod Swank says he spent less cash than he would have spent exhibiting at ASR and was able to make, because of the involvement of his and other companies, a contribution of at least 10,000 dollars to the Children’s Museum where the event was held. Nice.
 
Powell, Nixon, and Gravis were upstairs in rooms at the convention center. Bet they saved a few bucks with no loss of business. I thought the atmosphere up there was more conducive to doing business than it was on the floor of the show.
 
Meanwhile, various companies were spending well over 100,000 dollars to attend ASR, not counting lost business and management time. Under current business conditions, I think they have to look themselves in the mirror and ask, “If I didn’t come to the show or cut my presence way back, would I actually lose much business?” They might consider spending some or all of the money they spend at ASR on other ways of meeting their customers’ needs. If you haven’t seen it, you might check out my article (“Trade Shows Again”) in the July 2002 issue of TransWorld SNOWboarding Business. It suggests an alternative trade-show strategy used by some snowboard companies that might be appropriate for some skate companies. (If you e-mail me, I can send you a copy.)
 
Then there was the “secret” meeting called by ASR to address issues that the skate companies have with ASR. I’m told about 25 skate-company heads were invited. I didn’t go. Couldn’t find the secret room. Don’t even know the secret handshake.
 
The skate companies are unhappy because of the cost of ASR and the pressure from ASR to participate in other kinds of advertising and promotion as part of the perceived price for getting the booth you want in the location you want regardless of how long you’ve been coming to the show. They also don’t feel it’s right that ASR pays SIMA a bunch of money to support the show but don’t pay a dollar to skateboarding now that skate is arguably more important to the show than surf.
 
I guess there was also some frustration expressed with the fact that there’s no beer allowed in the booth. You know, that one bothers me, too—especially after waiting in a long line to pay four dollars for a small beer when I could have gotten a big one for free somewhere.
 
I think these concerns are justified, although I’m not so worried about the beer as the other issues. It’s getting harder and harder to justify the expense of the shows. I imagine ASR recognizes these issues as being legitimate. But they can justifiably ask, “Who, exactly, should we negotiate with?” There’s no skateboarding equivalent of SIMA, and unless IASC gets more industry support and Jim Fitzpatrick is ready to quit his day job, we can’t really point there.
 
There’s an old Chinese curse that says, “May you live in interesting times.” For a lot of reasons, including those discussed above, this would be a good time for the skateboard industry to cooperate in ways it never has before. The industry’s history is such that I won’t hold my breath. Still, imagine if we could.

 

 

Another ASR. Anything to Learn

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Lousy time for a deadline. What am I going to say about ASR that seems relevant when what’s left of the World Trade Center towers is still burning? The most talked about issue at ASR seemed to be conjecture about what was holding up the girls’ low riser pants, and it suddenly doesn’t seem so compelling.

 
I love this business, and am grateful to be in it because it’s fun and I like the people involved in it. But at the end of the day, we’re about marketing and brand building. We succeed if we create demand for and perceived differences among products that aren’t very different from each. It all sounds pretty trivial after the descriptions of people jumping out of the World Trade Center.
 
Sorry if I’m feeling a little morose today. I imagine some of you might be feeling the same. I’m going to go hug my wife and kids, then its time to focus on some business stuff.
 
Advertising Trends
 
Speaking of marketing and brand building, it’s getting kind of hard to spot an ad that focuses on product features. They all show teams and tricks. Sometimes, it takes a second to figure out which company the ad is for. One hard goods company told me they could double their sales if they could get a couple of more leading team riders.
 
Talk about shooting ourselves in the foot. We’re working as hard as we can to demonstrate to our customers that most of our products are functionally the same. We call it differentiating ourselves from our competitors. How do you do that on a brand versus brand basis? By spending more on team, advertising and promotion. When can you afford to do that? Only if your volume and/or your prices go up. Who wins this game? Companies who are either larger, have strong balance sheets, or both. How many can win? Don’t know. But I know it’s more if the market is growing, and fewer if it’s not.
 
Maybe this accounts for the feeling I got that there was a lot of energy at ASR, but it was at a pretty even level through the skate portion. Exciting, but the same everywhere. I don’t like sameness. It’s not a good foundation on which to keep growing an industry.
 
It Is the Economy
 
Quiksilver isn’t a skate company, though I suspect a lot of people who skate buy some of their stuff from time to time. Thursday, the first day of the show, they guided earnings expectations for their fourth quarter down for two reasons. First, they said that their domestic men’s inventories are much too high and will have to be closed out at distressed prices. Second, they said reorders are coming in more slowly than plan and are being negotiated at lower prices.
 
Part of me feels like I should be able to just stop this section right now and move on, but allow me to belabor the point. In my conversations with people at the show, I frequently heard about softness at retail. This generally focused on soft goods. Hard goods seem to be holding up so far, as did skate shoes, at least for the credible skate brands.
 
My interpretation? If you’re a skater, and you want to keep skateboarding, when the tip of your board has worn down to the point where it’s paper thin, you finally have to get a new board. No choice. If the bearings fall out, you have to replace them. No choice.
 
Do you need a new pair of pants or shirt to keep skating? Nope. You’ve got a choice.
 
With shoes, my hypothesis is that the skate shoe brands with the most credibility with skaters are taking business from all the wannabee brands. So it may be that shoe sales can soften without the major brands really noticing. If they will be cautious about raising prices, this can be a hell of an opportunity for those major skate shoe brands.
 
The ASR show guide has seventy companies listed under footwear. That number is, as I recall, the same or a little higher than the previous show. Not all of those offer skate shoes, of course. But if I’m right about the more credible skate brands taking share from the others, and the economy is soft, then you might expect to see the beginnings of a consolidation in skate shoes we’ve all been expecting. Why might it not happen? Because some of the brands that are in the skate shoe business, but not as credible as the leading brands, have lots of money and big balance sheets. They could make a “strategic” decision to stay in the business and lose money for a while. It happens. Then the number of brands doesn’t decline so dramatically, but everybody’s profitability can be hit because price becomes more of a competitive factor and more has to be spent on marketing.
 
The successful, branded skateboard companies have watched the shoe and soft goods’ companies grow like mad at least partly on the backs of the hard goods brands’ support of skateboarding. Sometimes it looks like the hard goods brands have missed out. I bet they’ve all wondered from time to time if they should be making shoes and soft goods. If the economy turns, they will look prescient, because their market position, focused on the core of people who really skate, is likely to hold up better than the much broader market the soft goods aim at.    
 
Check out again the section above on Advertising Trends and what happens when the basis of competition is advertising, team, and promotion. If you’re a retailer, you might go back a couple of issues and read what I suggested you do if we are, in fact, heading into a recession. Maybe our favorable demographics insulate us from economic cycles? Or may the force be with us. Whatever works.
 
Chinese Skateboards
 
The Chinese make lots of stuff that was once made here, and they can make a skateboard. They are making them now.
 
To pick some rough numbers, let’s say there’s maybe $4.00 of wood and $1.00 of glue in a deck. There’s also labor, freight in, waste, the cost of operating a factory, administrative overhead, maybe royalties to team members. Eight dollars? Ten dollars in total? A little more? That’s before graphics and any dying of plies before you make the deck. Total cost depends on your overhead, your cost accounting, and your volume.
 
I hold in my hand an actually quote from a Chinese factory to supply seven ply Canadian maple blank decks at a little under $8.00 depending on dimensions. That’s before shipping and before the four percent duty U. S. Customs tells me would apply. It’s also for a natural colored board. This communication names a couple of brands that are making them there now. 
 
So you can buy decks from China, and probably land them for less than you can make them here. It seems to work for Variflex, who buys god knows how many completes from China and sells them in various discount chain sporting goods stores. 
 
But Variflex isn’t concerned with pro models, doesn’t have to change their graphics as often, and doesn’t, I suspect, handles quite the numbers of brands and models. Make them cheap, make a lot, and ship them out.
 
However, if you were convinced the quality was what you required, and I see no reason why it can’t be, what’s to stop a brand from bringing in blanks and screening them as and when required? You can maintain your flexibility and get a price that is lower. How much would depend on the specifics of your operation.     
 
New Products?
 
Not too much, as usual. I saw a couple of variations of the long boards with single center wheels on the front and rear that are suppose to emulate surfing or snowboarding I guess. Looks like it might be fun.
 
I heard about something coming out called Sticky. Apparently there are magnets in the shoes and metal plates on the deck so the deck doesn’t always have to be gripped during tricks. It’s not just an idea. It’s been extensively tested and, I’m told, been given thumbs up by skaters who have tried it. Guess it could open up some new possibilities. Wonder what the added weight is?
 
There use to always be “new” snowboards at the snowboard show. Trouble was, the snowboard had already been invented and none of these “new” things, good ideas or not, could ever break through what the established concept of a snowboard was. All these guys might have the same problem. You can have a great technology, but it comes down to marketing. If the riders don’t accept, it’s a bad idea.
 
Dark Horse showed me the rocket bolts and V-Beam axle, which seemed to make sense. But how do you sell technology in a market driven by team and promotion?
 
I’m sure there was some other stuff I missed. Wish I could have gotten into all the booths to see it.
 
Are we headed for economic hard times? If we are, the next ASR could be a bit different. It couldn’t hurt for you to think about what you’d do if we were before we get there. If they happen, they will be hardest on those who haven’t prepared in advance. 

 

 

Tulips

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I walked out of ASR feeling positive about skateboarding and its market and will discuss why below. Still, when things look too good to be true, it’s been my experience that they usually are and I’m as susceptible to the hype as the next person. Let’s start, then, with this cautionary tale from Edward Chancellor book “Devil Take the Hindmost- A History of Financial Speculation.” 

 
Tulip Mania
 
“Conditions in the Dutch Republic in the 1630s were propitious for an outburst of speculative euphoria. It was a period of rising commercial optimism, owing partly to the final extinction of the Spanish military threat and partly to the booming Dutch textile trade, which profited from the turmoil in Central Europe at the beginning of the Thirty Years’ War. The Amsterdam bourse [stock market] had moved into a new building in 1631. The East India Company was profitably developing its settlement in Batavia and its shares rose faster than at any time during the century. House prices were also climbing sharply, producing a boom in the construction of suburban mansions. The Dutch Republic lost some of its Calvinist austerity as its people, who enjoyed the highest incomes in Europe, became a nation of consumers. In the tulip, they found an object which enabled them to mix their love of display with the avid pursuit of wealth.”
 
Tulip bulbs were classified according to the flower colors. They were given military titles that reflected their position in the bulb hierarchy. Unknown at the time, tulip colors and patterns are affected by a virus that attacks the bulb. You never knew what pattern or colors might result. This led itself to a speculation that was essentially gambling. 
 
In late 1636 and early 1637, at the height of the market, no actual deliveries of tulip bulbs took place. A tulip futures market known at the windhandel (the wind trade- say no more) appeared. At the peak, the combination of the windhandel and paper credit “created a perfect symmetry of insubstantiality: Most transactions were for tulip bulbs that could never be delivered because they didn’t exist and were paid for with credit notes that could never be honored because the money wasn’t there.”
 
Average annual wages in Holland were from 200 to 400 guilders. A small town house cost 300 guilders. Bulbs at the top of the tulip hierarchy sold for thousands of guilders. There were examples of prices for a pound of bulbs going from the equivalent of one month’s pay to five year’s in a week.
 
On February 3, 1637, the market crashed. There were no more buyers, and existing contracts were rejected. Perhaps it had something to do with the fact that spring was coming, and most of the bulbs promised for delivery didn’t exist. The litigation dragged on until the following year, when it was decreed by the government that contracts could be settled for 3.5% of their value.
 
We Are Not in the Tulip Business- Not Exactly
 
I’m not claiming that tulips are like skateboards and skate shoes. People are delivering real products in return for real money. Obviously, there are more differences among skate decks and shoes than just color, though I can’t think of many right off the top of my head. Oh yeah- who the team riders are. See, there’s a difference.
 
Nobody will ever pay a year’s wages for a pair of skate shoes, though it seemed like some prices were tending to go up at the show in spite of the fact that sixty companies were offering footwear (not all skate shoes) up from forty-two at the last show. Eighty-two companies were selling what was classified as “Skateboard Hard goods.”
 
And nobody is going to sell to somebody for future delivery that they think can’t pay, though the use of terms to retailers appears to be growing.
 
This seemed like the busiest ASR I’ve been to in years, and the most business like. Lots of order writing going on. People with things to do- not just hanging around. It was, in a word, purposeful.
 
That’s one of the things that makes me optimistic. I remember the 1995-96 Snow Industries America Trade shows in Las Vegas, where snowboarding ruled and would never die. But that show had the feeling of people energized by hope and expecting to find the deal that would save them. Snowboarding’s imminent consolidation was a big shared secret, and nobody wanted to tell Emperor Snowboard to go and get some clothes on.
 
This ASR was about doing business, not looking for a deal to save your butt. Most of the time when the people in booths told me the show was going great, I believed them. This was a show where just moving through the aisles was a challenge if you were in a hurry.
 
Where at the last ASR, all the shoe brand offerings looked the same, this time I saw some visual differences among brands that offered the possibility of their establishing distinct personalities- call it different signature looks. Easy to copy, of course.
 
This isn’t to say that there isn’t going to be a period of consolidation in the skateboard industry at some point in time. There are too many companies selling trying to sell “me too” products. If you don’t have an established brand name or a product that can be seriously differentiated, this is the wrong time to offer a new brand in the skateboard industry.
 
But here we are with a seriously strong economy, very favorable demographics, woodshops unable to meet demand, skate parks popping up like mushrooms, skate styles influencing shoes and clothing in a way that has expanded the market to a whole lot of non skating people, and skateboarding being exposed to and accepted by a much larger group of people than ever before. What can go wrong?
 
Sector Rotation
 
In the stock market, they call it sector rotation. The industry groups that lead the market change. Not too long ago, it was the internet stocks.   A year or so ago, the health maintenance organization stocks were dead last. Now they are among the leading sectors. The issue is never if a sector is going to crash, or leap to the top. It’s when- and how long it stays down- or up.
 
Action sports is powerful right now for a variety of reasons we all know. It’s a strong market and seems likely to stay that way. But what sectors will lead it?
 
Inline skates had their day. So did snowboarding. So did surf. So did ski. Now it’s skate. For how long? Normally, I’d say until all the companies are making quality, nearly identical products and the basis of competition has been reduced to price and marketing, the consumer figures that out and the hype gets massive. But we’re already there. And it’s possible that by next ASR I’ll be hoping nobody remembers that I wrote an article suggesting that skateboarding might have some legs.
 
Skateboarding has broken out. It’s becoming legitimate without losing too much of its edge. Compared to most other sports (with apologies to those who object to that word) it’s cheap and convenient to participate in. The related shoes and clothing can be and are worn by nonparticipants unlike, for example, snowboard boots. The hard goods companies continue to support, promote, and maintain the core of skateboarding even though this may prevent them from participating in the growth of the larger market.
 
Somehow, skateboarding has made a meta-change. It has repositioned itself and become legitimate to a much larger market without letting itself be changed too much. I wish we could claim it had been an active act on the part of the industry; a strategy we chose to implement.
 
But it wasn’t. We were lucky, or maybe deserving after a long period in the wilderness. If any single event was indicative of this change (I hesitate to say responsible for, though I’m tempted) it was the changing of the liability laws that unleashed the skateboard park building boom. So if you aren’t a member of IASC, join now if only to say thanks to Jim.
 
Strategies
 
Retailers have already figured it out. Their hearts may be in skate, but when it’s some other action sport the customer is asking for, they will be offering the goods related to that sport. Much of their sales are higher margin shoes and apparel to non-participants. The clothing manufacturers, by and large, aren’t tied to a single activity/sport. Their customers are the action sports crowd- participants or not- who are tied into the lifestyle, music and attitude. The shoe brands are actively expanding their product lines to include footwear in addition to core skate shoes.
 
The skate hard goods brands have a tougher road to follow. Their focus is on the core of skateboarding, and that focus has a lot of responsibility for skateboarding’s continued strength. Yet even in this record year, I suspect (can’t prove it) that a large hard goods manufacturer is doing, say, $25 million in sales. Compare that to the sales and growth of clothing companies. Even the leading skate shoe companies are several times that size.
 
To really take advantage of market conditions, skate hard goods brands need to figure out how to move beyond their traditional market. But it may be that their movement beyond the core hard goods market if it occurs, will signal a market top in skateboarding. That’s a bit of a conundrum.
 
Schizophrenia
 
Is skateboarding going to crash or continue? Obviously, I feel strongly both ways. I think we’ve got a bit of a run ahead of us, but being bigger and having an established brand is going to be critical for success. Right now, fast growth and cash flow can paper over a whole host of competitive shortcomings. And no industry is immune from business cycles.

 

 

Thoughts From the Action Shoe Retailer Show; Opps- Did I Get That Wrong?

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This article sort of took shape the Monday the show ended. In the first place, I was flying back to Seattle on an Alaska Airlines MD80, which didn’t exactly put me in a positive frame of mind. Second, thanks to the ticket to the Sunday evening Gallas party Jeff Cutler gave me, I was suffering from the residual affects of too much fun.

 
There were 42 companies listed as selling footwear. I trust they weren’t all skate shoes, but a lot of them were. Not only were there more companies with skate shoes- each company was showing more colors and styles.
 
I pulled out the article I did at the end of 1994 on the imminent consolidation of the snowboard industry. I actually toyed with the idea of taking that article, changing “snowboard” to “skate shoe” wherever it appeared in the article, and having Skate Biz run that article with the changes showing just to make a point.
 
But I changed my mind, deciding there were a couple of differences worth discussing, and I’ll get to them in a bit.
 
Shoes to the Right of Me, Shoes to the Left of Me
 
With one exception, every shoe company I talked with had increased the number of shoes they were offering. The walls were covered with skate shoes. Mostly high quality skate shoes. Even the price point shoes seemed well built. They didn’t have all the colors and different layered materials of the expensive models, but I was assured they were just as solid and functional.
 
Everybody’s shoes were solid and functional. Made largely from the same materials and with similar features. If there was a color that wasn’t used in somebody’s shoe, I don’t know what it was.
 
The increase in the number of shoes per company is a response to what each company’s competitors are doing. It is not meeting any need of the consumer, unless it’s a perceived need the industry hopes to create by marketing.   
 
Though I’m not a skater anymore, I enjoy wearing skate shoes. I find them comfortable, they give good support, and they look great. But I could be talking about any brand. Because the industry has done such a good job creating a quality product, the basis of competition is starting to inevitably evolve to price and marketing.
 
Charge for the Guns!
 
The price trend I heard about was down. My belief is that this decline in prices offered to retailers wasn’t accompanied by a similar decline in manufacturing costs. I recognize that not every style and color way exhibited at the show will be produced. But more styles and colors will be produced. Manufacturing efficiencies result not just from overall volume, but also from the volume by style and color. If you want to make 10,000 pairs of shoes, you’ll get your best price if they are all exactly the same. So increasing styles and colors has some negative affect on your cost per pair.
 
But the thing that really caught my attention was the first shoe company giving 90-day terms to some of its customers.
 
Let’s say that a skate shoe company starts offering its better customers 90-day terms. Just to pick a number, let’s say it’s a larger company, and they have $10 million in annual sales done with terms of 90 days, where before that whole amount was sold COD. If they’ve got a gross margin of fifty percent, just to pick a number, that means they’ve got an extra $5 million of working capital invested in the business for 90 days. What does it cost to borrow $5 million for 90 days? You do the math using your own cost of capital.
 
Of course, it’s even a little worse than that. In the first place, we’re making the assumption that the check for each sale with 90-day terms is deposited on the 90th day and you get immediate credit. Bet some take longer to pay. In addition, the thing about giving terms is that somebody ends up not paying at all.
 
Companies give retailers terms when they feel they have to in order to compete. The trouble, of course, is that like frequent flyer programs, once one company does it, most of the rest of the companies have to do the same.  If they can afford it. Instead of being a competitive advantage, it’s just a cost. But it’s a great thing for the retailers.
 
The retailers, of course, find it harder and harder to make a rational selection among the hundreds of colors and styles. How do they select? They pick the shoes that give them the best price and terms and check at retail. Best price and terms means lower margin and higher working capital requirements for the brands. Making a shoe check at retail when it’s more or less the same as everybody else’s shoes means big marketing programs. Talk about charging for the guns.
 
Boldly They Rode, and Well
 
Big booths. Two stories. Back rooms. At the end of the show, if you put some of those booths on a lot, added plumbing (they’ve already got enough electric) and put on a roof, you’d have a fair sized house.
 
We’ve got a market that’s growing quickly. All the competitors want their piece of it. This is the time to get it, and they are pulling out all the stops to do that. The typical argument is “Market share is more important than profitability while the market is growing this fast.”
 
Guess what? I agree with that. The time to establish your position in a market is when it is growing quickly. If you’ve started recently, you better either have a big balance sheet and lots of money to lose for a while, or a clear picture of your market niche and a way to compete against the big guys.
 
The Good News
 
Okay, I’ve had my fun. I think the cautionary analogy of the Charge of the Light Brigade is worth thinking about in the skate shoe business. Will you care how glorious your charge was if you die in the process, no matter how many flags you had waving? And the chance to see a classic poem written 150 years ago printed in Skate Biz is just too good to pass up.
 
The skate shoe business is evolving to the point where it isn’t really just the skate shoe business. It’s the lifestyle casual footwear business. That opens up a big market. A really big market. I won’t give the favorable demographics speech. I’m sure we’ve all heard it too damn many times. That’s why there were 42 footwear companies at the show. But the fact is that more and more young people are going to be looking for casual, comfortable, stylish casual shoes. Everybody needs shoes. And they need them all year around. The market should be growing for a while.
 
Piece of good news number one, then, is that the market is growing, and should continue to grow. Number two is that it’s a year around business, though it has some seasonality. Year around sales means year around cash flow. Which means it’s easier to finance growth. Not easy, but easier.   
 
The financial model I’ve described in this industry- declining gross margins and higher marketing expense due to normal competitive pressures when product differentiation is difficult- usually has only one solution. That solution is to be big, or for your skate shoe line to be only one product line in a company that sells other product as well. 
 
At some volume of sales, your general and administrative expenses, and your advertising and promotion expenses, can decline as a percentage of sales even as their absolute dollar amounts go up. Obviously, companies like Adidas and Converse can afford to invest in the skate shoe business.    But there are a number of “core” skate shoe companies who already have the sales volume and/or balance sheet to compete in the market as it’s going to be and make money. There greatest challenge will be to transition to broader distribution without losing their legitimacy.
 
That there are core companies solidly positioned is good news, because I want to see the companies who understand skating continue to support and influence it. To me, that lessons the chance of another skateboarding recession. 
 
Please remember the lessons of every other industry. Growth eventually slows, and the conditions of competition change. Retailers gain power, size becomes important, the financial model becomes tougher, and entrepreneurs have to become managers.
 
The charge of the heavy brigade under General Scarlett, which preceded that of the Light Brigade, succeeded in reaching its objective at very little cost. They were prepared for their battle.           
 
The Charge of the Light Brigade
 
Half a league, half a league,
Half a league onward,
All in the Valley of Death
Rode the six hundred.
‘Forward the Light Brigade!
Charge for the guns!” he said:
Into the Valley of Death
Rode the six hundred.
 
‘Forward the Light Brigade!’
Was there a man dismayed?
Not though the soldier knew
Some one had blundered:
Their’s not to make reply,
Their’s not to reason why,
Their’s but to do and die:
Into the Valley of Death
Rode the six hundred.
 
Cannon to right of them,
Cannon to left of them,
Cannon in front of them
Volleyed and thundered.
Stormed at with shot and shell,
Boldly they rode and well,
Into the jaws of Death,
Into the mouth of Hell,
Rode the six hundred.
 
When can their glory fade?
O the wild charge they made!
All the world wondered.
Honour the charge they made!
Honour the Light Brigade,
Noble six hundred.
 
Alfred Lord Tennyson
 
The Charge of the Light Brigade occurred during the Crimean war in 1854. The brigade consisted of 673 officers and men at the start of the charge. 247 men and 497 horses were lost without achieving anything. But it was glorious while it lasted, and the survivors were decorated and promoted.

 

 

What I Learned at ASR: Products, Movies, Cooperation, Culture and Hype

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I spent three days walking and talking. I suffered through the usual distraction and traffic jam at the Reef booth (why is it that no matter which way you try and go, you end up there?). In no particular order, I noted the following things:

 
  • No major new products
  • Snowboarders trying to do skate tricks in the new movies
  • A focus on culture that goes beyond individual sports
  • The industry’s continued inability to cooperate in its own best interest
  • Some hype from companies that look big but probably aren’t.
  • Shoes- lots of shoes.
  • My favorite company name
 
Is there some common theme here? I hope so, or this is going to turn out to be a really lousy article.
 
New Products
 
There was the Expedition Insert, the new Powell rubber washer, (Help Mik!- What’s that thing called?) and a few incremental improvements or at least points of hoped for product differentiation like there are every show. Brands should strive to create these points every chance they get, but they won’t provide a significant strategic advantage.
 
Aircraft had its aluminum skateboard that now really looks like a skateboard and has replaceable wooden tips. How will it be accepted? I don’t know, but I do know that its success is likely to depend only partly on its functionality and durability.
 
Look, I’ve heard it works fine (makes a cool sound I’m told) and is durable. But skaters are at heart, a conservative crowd. Trying something new brings with it certain social risks. I seem to vaguely remember being willing to do almost anything to prevent any such risks when I was a teenager.
 
Aircraft’s success will depend on their ability to make the product cool. If the right opinion leaders give it the thumbs up, others will adopt it. If not, no amount of technical superiority will make it take off. I almost think I’d rather start a new skateboard brand with a traditionally constructed board and the right team and marketing budget than with a product that’s too different from what’s already out there. 
 
I’m reminded of Forum Snowboards in their first year. The boards had the reputation of breaking but the kids didn’t care because the team was so cool. I’ve characterized Forum as a skateboard brand that happens to sell snowboards because of how they have positioned themselves in the market. Hopefully, Forum takes that as a compliment.
 
Skate Tricks on Snow
 
A few years ago, jibbing was hot in snowboarding. Then it kind of went away. Last season, it was back and at the premieres of the snowboard movies at ASR, I saw not only more jibbing, but also kids trying to do skate tricks on snowboards without their feet in the bindings. It would be easier if there weren’t bindings in the way.
 
Focus on Culture
 
This kind of crossover seems consistent with a market that’s become, and is becoming, much broader. And much more confusing. People (a lot of people) who don’t participate in the sports belong, or think they belong, or want to belong, to the culture. In shoes and apparel, I wonder what percentage of purchasers are regular skateboarders? Not a majority I’ll bet. Hey, I love my skate shoes and their teched out look, but while I’m still willing to take a tumble on snow, I’m too old to fall on concrete.
 
I’ve had occasion, recently, to read the public Security and Exchange filings of Vans, Pacific Sunwear, and Quiksilver. When they talk about why they are successful, and about risks associated with their businesses, they talk about understanding the lifestyle, spotting the trends, and being part of the culture. These are three companies that are successful by most measures. Their success is almost completely outside of hard goods, though of course they support the sports.
 
No hard goods company has the chance to grow as fast as these companies have grown, and to the size they have grown. The hard goods market just isn’t big enough to allow it.
 
Industry (Non) Cooperation
 
But hard goods are the engine that drives the growth of the culture and sales of apparel and shoes. They are what drives Mountain Dew and the U. S. Marines, etc., to pay lots of money to promote their products at the X-Games. Everybody needs apparel and shoes. Not everybody needs a skateboard. Apparel and shoes typically offer higher gross margins along the whole food chain.
 
Various mainstream soft goods companies have figured this out. They are thrilled to allow the core hard goods skate companies (and some soft goods companies) to support the sport and the riders while they try and reap the benefit.
 
We, as an industry, feel just the smallest bit used. That’s only because we are. I trust none of us are surprised.
 
We think that our support of the sport and longevity in the industry entitles us to a piece of action. Entitles is a pretty lofty word- and it gets us nothing. Anybody who thinks that ESPN is going to just hand the industry a piece of their action or promote IASC (International Association of Skateboard Companies) at the risk of pissing off an advertiser who’s paying them some millions of dollars is unrealistic.
 
Getting that piece of the action requires, as strange as it sounds, that we work with the big organizations that we are concerned will destroy our sport. Because they aren’t going to go away.
 
In the first place, the industry has to speak with a somewhat unified voice. I don’t know if that’s possible. It doesn’t seem to have been so far.
 
The rest of the process is conceptually simple and basically the same that lots of groups have used to create influence/leverage with organizations they want to influence.
 
First, reach an internal consensus as to what we want the target of our efforts to do. Second, present these requests/suggestions/demands in a way that tells the target why we want these things to happen, what, exactly has to be done, what the benefits to the target organization are and how we can help them. Finally, let them know the cost of not seeing things at least partly our way. Do all this in such a way that the “person of influence” we are working with at the target organization looks like a hero to their boss. Make that target organization dependent on our input and support to accomplish their goals. 
 
I left myself an out by saying this was “conceptually simple.” It’s a lot of work under conditions of uncertainty. The end result will never be exactly what we want. But I’m certain that unfocused complaints about tactical issues won’t win us the respect of the people we want to influence.
 
Hype and Glory
 
I remember the year at the snowboard show when Morrow had a helicopter on its second story, and the average size of a snowboard booth was just south of a football field. Okay, maybe a tennis court. Advertising and promotion expenses as a percent of revenue were completely out of control. Companies who were smaller than they wanted anybody to know struggled to get enough market share to be players.
 
I saw a bit of that at ASR.
 
Shoes
 
I especially saw it in the shoe and apparel companies. When somebody tells you that their revenues are growing hundreds and hundreds of percent over last year and refuses to tell you what percentage of revenues their advertising and promotional expenditures represent, you know they are smaller than they want you to know. Why?
 
The smaller you are, the easier it is to get big percentage revenue increases. If you’ve only sold one $10 dollar t-shirt, selling two the next year doubles your revenue. Big deal. If on the other hand you sold $100 million in t-shirts, or whatever, and double it the next year to $200 million, for the same percentage increase as from one to two t-shirts, it’s a huge accomplishment. Percentage sales increases decline precipitously with revenue growth.
 
Spending a bunch of money and incurring big losses to get market share isn’t necessarily a bad idea- you just have to have the balance sheet to finance it and a strategy to eventually become profitable. In other words, it can’t just be a fear driven, defensive response to your competitors.
 
Favorite Company Name
 
And the winner is……Red Ink. I started laughing so hard when I saw the name that I don’t remember what they do- some kind of apparel I think. My money is on those guys to be survivors, because I have a hunch they understand how their financial model has to work.
 
Which brings me back to shoes. There were a lot of beautiful shoes. New materials, cool features, broader selections, more colors. And prices that I thought were generally tending lower. Great for the consumer. Not necessarily so good for the company that has to support a big advertising and promotional program with a lower gross margin. Unless of course their volume is growing quickly. In which case maybe that volume gets some of the margin dollars, if not percentage points, back. So better pump up the marketing budget and get that volume up.
 
Which is of course what all your competitors are thinking and doing. You know, maybe if the booth was the size of a football field…….
 
And in Conclusion
 
Oh god, I promised to tie this all together somehow. The skateboard industry, as traditionally defined, is in danger of being the engine that fuels somebody else’s growth with no benefit to itself. I suppose that’s the common message from all the vignettes above. In our little corner of the world, competitive pressures are reducing margins, product is over supplied, and advertising and promotion is the only way to differentiate brands.
 
Skateboarding and the skate culture may be a huge commercial success. But many core focused companies may not share that success. We’re competing with each other instead of focusing on the real threat.

 

 

I Feel a Whole Lot More Like I Do Now Than I Did a Little While Ago; My Take on ASR

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I’m not entirely sure what the title of this article means, but I’m pretty certain it applies to the skateboard industry. Conditioned as I am by the snowboard industry consolidation, I went to ASR expecting to observe a similar process. Subjectively, it seemed like the show wasn’t quite so crowded, and things were more business like, but there weren’t dozens of companies missing and multiple unused booths. And there were some small companies saying and doing the kind of things that made me think they might be around a while.

 
Don’t get too excited. Not for a moment am I going to suggest that skateboarding is in any way immune to typical business cycles. But there may be some forces at work that will allow the process of industry maturation be a little less painful, or at least draw out the agony over a longer period of time. I’m not sure if that’s good or bad.
 
So here’s the plan. Let’s decide what we mean by “the skateboarding industry,” review how consolidating industries change, look at a couple of industry trends that may make it easier to deal with, and then, to conclude with a happy feeling, look at some of the positive things I think I spotted at ASR.
 
Who Are We?
 
This use to be easy to answer. A company in the skateboard industry was any brand or retailer that sold skateboards and/or any other hard goods. Probably they also sold some soft goods but, at least in the case of the brands, those tended to be promotional and if they happened to make money on them, great. Now you’ve got skate shoe companies and skate clothing companies and shoes and clothing are an important component of any retailer’s sales. Are they still skate companies?
 
When you sold a skateboard, you could reliably assume it was to somebody who was going to actually go skateboarding. That’s not so clear when you sell a pair of skate shoes or some skate clothing. I’m going to guess that an increasing percentage of non-hard goods sales are going to people who don’t skateboard. Are companies who don’t sell hard goods and who sell a bunch of product to non-skaters industry companies?
 
Have a great time arguing over that. Since I seem to have a 5,000-word story I have to write in 1,500 words, I’d better move on. The point I’d like to make is that the industry has evolved so that, for better or worse, it’s no longer just defined by people skate, but by people interested in the image, attitude and lifestyle of skating. And by companies with a lot of money who are having a hard time understanding the sport. I’ll get back to this when I talk about industry trends.
 
Trends in Consolidating Industries
 
I’ve said this all before. Just check out the sidebar to refresh your memories, think about it for a minute or two, and we can move on.
 
SIDEBAR
 
Changes in Consolidating Industries
 
·         More competition for market share. Competitors become more aggressive because they realize their survival is at stake.
·         New products and applications become harder to develop.
·         Dealer margins fall, but dealer power increases.
·         Industry profits fall during the transition period. Cash flow declines when it is needed most. Raising capital becomes very difficult.
·         There is the danger of over capacity and turning the product into a commodity (Repeat after me- “Blanks are sure swell!”).
·         A new basis of competition is required for successful companies, but past industry euphoria makes changing difficult.
·         There’s a bunch of irrational competitive behavior. “It won’t happen to me” is an idea frequently expressed by companies waiting for their competitors to falter.
 
Industry Trends and Circumstances
 
Not all the changes in consolidating industries happen at the same time to all companies. Nor do they all occur with equal strength. In skateboarding, there are a number of reasons consolidation doesn’t seem to be occurring in a textbook way.
 
The industry is not extremely seasonal.   Retailers aren’t being offered 120-day terms by manufacturers. There are no long lead times on making and delivering product.   Inventory turns, let’s say, four to six times a year (my guess). Manufacturing technology is simple enough, or well enough established at least, that no huge investments are required and yield is high.
 
All those things mean that the working capital investment required in skateboarding is comparatively easier to manage than in some other industries. So the financial pressures on marginal players is less. It also means that it’s easier to get in, and to get out, of this industry. Due to extreme seasonality and the timing of the product cycle, there was never a good time for a company to exit snowboarding.
 
I’m not suggesting that things are easy financially. Low hard goods margins, blank decks, and difficulty differentiating one company’s product from another’s means you have to spend more on advertising ad promotion exactly when margins are declining. That creates a bias in favor of larger companies that move more volume because it gives them more gross margin dollars to work with.
 
But maybe financial pressures will be increasing. I talked to one large company that sells skate shoes (among other things) at the show that mentioned how they were starting to offer 60 day terms to select retail accounts. And so it begins.
 
There is no leading, clearly dominant company in the industry. My guess is that the single largest hard goods company sells no more than $15 million annually in decks, wheels, and trucks. In snowboarding, Burton, with a market share in excess of 50% a few years ago, had the market leverage to set the bar for successful competitors. An awful lot couldn’t get over it. Nobody can set that bar in skateboarding at this time. It’s interesting to note that some of the larger shoe and soft goods companies appear to be at least double the size of the hard goods leaders based on revenue.
 
Skateboarding is operating in a roaring economy, with income and spending growing, interest rates low, lots of wealth created in the stock market and jobs for anybody who wants one. Now add to that 60 million young people between five and twenty born between 1979 and 1994. Levi’s, Converse and Nike aren’t cool any more. But their long-term success requires that they make an impression on this group, whose spending habits aren’t formed yet and the largest chunk of who are still ten years or so away from adolescence. So they are interested in skateboarding and other activities that are part of this group’s culture. Not because they want t sell skateboards- they could take the whole skateboard hard goods business and it wouldn’t have a material impact on their bottom lines- but because they want their involvement with the sport/lifestyle/attitude to give them credibility with this group.
 
The (Probably) Good News
 
So we’ve got a strong economy, favorable demographics for the next ten years or so, and big money interested in the sport.   For the reasons I mentioned above, the financial environment could be a lot more difficult than it is right now. That’s especially true if you define the skateboarding industry to include clothing and shoes- which, to answer the question I raised earlier, I think you have to do.
 
Some smaller companies seem to be making some good decisions. At ASR I heard people talk about cutting teams to get costs in line with measurable financial benefits. There were comments like, “I’m not going to run an advertising campaign that drives me into the hole financially.” People were acknowledging the similarity of products from company to company and being thoughtful about how to differentiate themselves from their competitors.
 
I suppose you’re only surprised by such common sense ideas and comments if you were around at the peak of the snowboard feeding frenzy, when it was grow at any cost, take market share, find money for just one more ad. The perception was that if you didn’t “establish your position” you were dead meat. That was true. But the cost of establishing your position was as likely to kill you as not establishing it. Turned out it didn’t matter how you died- only that you were dead.
 
Pay attention to the trends in consolidating industries, but recognize that the rapid growth, maturity, and consolidation cycle is more typical of emerging industries. Skateboarding has been around a while. Hard goods, clothing and shoes are all part of skateboarding, but each seems to be at a different point in the cycle. I’d look at them separately. The lack of a dominant company in the industry and the fact that the business isn’t extremely seasonal suggests that more players can survive.
 
In the past, the attention of large companies caused a severe decline in skateboarding. Given the demographics we’ve got, and assuming that skateboarding doesn’t become “uncool” who’s to say that the industry can’t continue to grow at a rate that lets it at least keep its existing percentage share of adolescent males? That doesn’t mean a hundred new hard goods companies. That could only happen if some product innovation lifted margins on hard goods to the point where new, smaller players could compete. I don’t see that happening and expect the lion’s share of any growth in skateboarding to accrue, at least in hard goods, to the existing, larger, companies.
 
Interesting stuff. Let’s talk about it at the Industry Conference in April.

 

 

Reality Bites; The View from ASR

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There was a keg at the IASC hospitality suite at ASR the first evening of the show, and I was drinking a beer with Miki Vuckovich of Transworld Skate and Jim Fitzpatrick of IASC. Into this fairly typical trade show experience walks the comedian Gallagher with his entourage of one. He sits down with his own beer and ten minutes later we’re talking about his new line of educational toys for children based on sub atomic particles and meant to teach them about nuclear physics, or something.

 
I thought the toy line was a good idea, but there was a certain sense of unreality to the encounter and discussion I guess because of the venue and circumstances. And I guess that’s how I’m going to segue into making that chance meeting relevant to ASR and the skate industry; good ideas with a sense of unreality.
 
What They Said
 
Almost every skate company owner/manager I talked with at the show had basically the same things to say. They were concerned with the state of the industry and overall competitive conditions. Specifically,
 
1.     Growth seems to be slowing and profits are harder to come by.
 
2.     Deck margins especially are declining due to blanks and oversupply.
 
3.     There are too many companies with no business reason to exist.
 
4.     There are too many wood shops with too much capacity.
 
5.     The companies that are investing in team and marketing and benefiting the industry are giving a free ride to the companies that don’t.
 
6.     The top five to ten companies in the industry ought to cooperate to stabilize and rationalize the industry, but probably won’t.
 
7.     Differentiating your brand is getting harder. You are faced with the need to spend more marketing dollars exactly when it’s toughest to afford.
 
What’s Been Said Before
 
What they said was pretty much the same thing that’s been said in every industry that has experienced fast growth followed by a period of maturing and slower growth. For example, Harvard Professor Michael Porter in his 1980 book Competitive Strategy said it.
 
Professor Porter who, I am quite sure, hasn’t spend much time skate boarding, took a whole chapter to talk about the transition from fast growth to industry maturity. He noted the following tendencies, and that they are more or less the same in every maturing industry.
 
Slowing growth, he said, means more competition for market share. Because fast growth is no longer supplying opportunities for growth, the focus becomes on attacking the market shares of others. Competitors can become more aggressive, because they realize their survival is at stake. There are lots of misperceptions and irrational retaliations for the perceived and real attacks of others.
 
New products and applications become harder to develop. Don’t look now, but basically a skateboard is a skateboard. My money is on the companies who are continually finding small ways to differentiate their products.
 
International competition increases, according to Dr. Porter. I recently talked with a French snowboard factory that’s started taking shop orders for decks. Easy business he says. He can make money doing as few as fifty decks for a shop.
 
Dealer margins, according to Dr. Porter, will fall. But at the same time their power increases. Kind of makes sense when there are more companies, more products, and less perceived difference among product. Companies looking for a survival strategy will offer retailers lower prices, discounts, maybe some increased dating on orders to try and generate cash flow. Great for the consumer. Not so good for brands and retailers trying to sell a specialty product at higher margins.
 
Industry profits will fall during the transition period, and the fall can be temporary or permanent. Cash flow declines when it is needed most due to lower margins and greater expense incurred in trying to provide better customer service and differentiate “me too” products. Raising capital becomes very difficult. Companies with the smallest market shares are the most affected.
 
There is a danger of over capacity as more and more manufacturers rush in to meet the seemingly endlessly growing demand for this hot product. Over capacity accentuates a tendency towards price warfare. The result I’ve seen with the snowboard is that it became something of a commodity. And there’s a lot more technology and actual product differentiation in a snowboard than in a skateboard.
 
At the end of all this, the whole basis of competition in the industry has changed permanently. The euphoria that can characterize a company’s management style during the fast growth period has to change. Doing more of the same won’t work anymore. When you could grow quickly, raise prices and have high margins you could get away with anything. Hey, cash flow can hide a lot of mistakes.
 
I don’t want to belabor the point, but you might also pick up a copy of the March-April 1997 issue of the Harvard Business Review and read Professor George S. Day’s article called “Strategies for Surviving a Shakeout.”
 
Now I know it sort of stretches the bounds of reality to talk about the Harvard Business Review and the skateboarding industry in the same breath. I talked with professor Day and I think I can assure you he’s never been arrested for skating the railings at city hall. I also know he’s not Richard Novak or George Powell writing under an assumed name.
 
So how come he’s managed to write an article all about the evolution of the skateboarding industry (even though he never uses the word)?
 
What Needs to be Said
 
There’s one, minor, inconvenient, sort of annoying, little fact that has to be faced. Please pay attention. That fact is that skateboarding is no different from any other industry in how it will go through its growth cycle. The companies in the industry will respond to changes in the competitive environment just like companies in any other industry.
 
Every company in the industry will do what it perceives to be in its own best interest. Each will create a projected scenario explaining how it will be a successful survivor while its competitors succumb to changing competitive pressures. Failing companies will resist closing their doors even when every objective analysis of their risk and potential return indicates that they should. Ultimately, only companies with a clear competitive advantage under the new market conditions will survive.
 
Each will truly want to support the industry, but won’t be able to agree with other companies exactly what that means. As a result the “you first” principal will tend to prevail and each will wait for somebody else to step up to the plate as the leader. That is probably inevitable in an industry where there is no clearly dominant company.
 
What Should You Do?
 
My suggestion is that you start by accepting two facts:
 
1.     The basis for competition has changed and is changing in predictable ways. The “good old days,” if they ever existed, aren’t coming back.
 
2.     Fact one is really important.
 
If you accept this, then it’s time to start recreating your business to succeed in the new competitive reality.
 
Begin by not chasing market share. Not that market share is a bad thing, but blindly chasing it in a competitive frenzy often leads to a financial disaster. Remember that any company can get one hundred percent market share- all they need to do is give away the product. Unless, of course, somebody else does the same thing, in which case I suppose you’d have to pay the customer to take your product. But hey, you’d have a big market share!
 
Which is a somewhat sarcastic way of saying that your competitive strategy has to be tied to your financial capabilities. Try this. Realistically, what can you expect your gross profit margin to be? What are your general and administrative expenses for the year? What do you need to spend on sales and marketing to have a chance at a viable marketing position? What other money do you have to spend on interest, taxes, commissions, etc? Now add twenty percent to your total estimated expenses for stuff you couldn’t have imagined would happen in your wildest dreams.
 
Given your gross profit margin and these expenses, how much do you have to sell to earn a reasonable profit? Figure it out right now, on the nearest available piece of paper. It shouldn’t take more than twenty minutes. Given the risk you are taking and how hard you’re going to have to work is your business a good deal? Can you sell that much? To give you some perspective, recognize that if you’re earning five percent before taxes, you could be doing just as well in thirty year U. S. Treasury bonds with basically no risk. And no effort on your part.
 
So make some hard decisions. Some business decisions. Don’t let the hype of a trade show substitute for sound business judgment.