The Dilemma of Growth in Action Sports
Help me out here. Name me one company that (1) has its roots in action sports, (2) has grown to have revenues greater than, say, $200 million, (3) has gone public, (4) hasn’t been acquired and, (5) is continuing to grow and prosper. In retail, I’d name Zumiez though I imagine some people won’t like that. A nonretail brand? I can’t think of one. Can you?
The genesis of this article is some recent thinking I’ve done after reviewing industry company annual reports. I’ve noted that the requirements of being a strong brand and meeting Wall Street expectations may be at cross-purposes. I have also watched companies struggle the further they get away from action sports and the more they find they have to focus on youth culture and fashion in broader distribution.
Why is that? The economy has something to do with it. But more fundamental are the characteristics of the “real” action sports industry and the dramatically different competitive conditions you discover when you step outside it.
What Is the Action Sports Industry?
To start with, it’s really small. Its customers include the people who participate in the sports and perhaps the first level of nonparticipants who follow the sports and are into the lifestyle. That’s it. Everything else is hype and glory. During “The Best Economy Ever,” anybody who could make or sell a hard good or figure out how to spell “EXTREME!!” was thought to be in action sports. The industry looked way bigger than it was as cash flow covered up evolving structural weaknesses.
Now, in “The Worst Economy Ever,” those structural weaknesses (over distribution, lack of product differentiation, weak balance sheets; I could go on) have been exposed and the action sports industry, bloodied but unbowed (well, maybe a little bowed), has returned to its roots as a community of like-minded enthusiasts that is too small for big companies to really care about unless they can co-opt the action sports ideal to reach the broader market.
I’m not saying this is good—more that it’s a survival mechanism for small action sports retailers and brands that are really in the market as I’ve defined it. And I’m certainly not suggesting nothing has changed and that we’re back where we started. Far from it. There’s the internet and consumer empowerment, the fact that there’s so much quality product everywhere, big companies trying to co-opt and extend the action sports ideal, a declining sense of exclusivity, and yes, the economy.
But if this is where we are, and if you accept my industry definition, what are the implications for growing in the space? Let’s start by looking at how brands used to grow and how they grow now before answering that.
The Process of Growth- Then
It was about patience. Somebody would start a brand or open a store because they wanted to work with their friends, have a job in something that meant something to them, or be able to get in extra days on the hill (little did they know). You’d hand out some stickers, print up some t-shirts, and visit local retailers with your first batch of products which your friends were already using. The process was a bit more casual than it is today and, initially at least, there didn’t seem to be a sense of urgency. Indeed, you couldn’t be in a hurry because the independent specialty shops were pretty much your only choice for retail distribution. There was enough margin to go around and you could rely on distribution being controlled—probably more than you wanted.
Not only did you have to be patient, but humble. You built relationships and waited for the intimate action sports community to look for your product. Spending a bunch of money (which you probably didn’t have anyway) on marketing to try and push your brand was counterproductive. Your brand became credible through supporting the industry and the retailers.
You knew you were succeeding once the marketing guy was trying to hold the finance guy hostage for more budget because the perception of the brand exceeded its actual size and financial resources. You knew you’d arrived when the first retailer asked you for terms.
What’s implicit in this process is the passage of time. I’ve arbitrarily suggested that it used to take five years to really establish your brand with the core action sports consumer. They and the retailers just needed that long to get used to who you were and what the brand stood for. It was hard to circumvent the need to be around a while no matter how good a brand builder you were.
In that time, you became established in the action sports market as I’ve defined it. You’d grown within the specialty retailer community. Next, to provide opportunities for your employees and, truth be known, because you wouldn’t mind making some more money, you looked for opportunities outside that niche.
And it was a niche. You’d work hard to be credible and establish your brand in it. Now you were going to ……”Sell Out!” Remember the outrage of core customers when brands took the first tentative step towards broader distribution?
But it was more like a leap over a chasm. Some of the changes in retail and consumer behavior that are unfolding now weren’t even on the horizon. Expansion of distribution by definition meant going from the “cool” niche market you’d created to the clearly “uncool“ outer circle. There was little of the tiered distribution we have now. Either you were core, or you weren’t. The dichotomy created barriers- both ways.
The Process of Growth- Now
With the coming of the recession forcing an accelerated reaction to trends already in play, the action sports market has devolved back towards what it used to be. In some ways—the number of independent specialty retailers comes to mind—it’s smaller. Meanwhile, the steps to broader distribution are more obvious—less chasm leaping is required–and probably more necessary.
Bluntly, the business model is tougher. Consumers have less money to spend and are more discriminating in where and how they spend it. Sales growth is harder to come by. Product that is truly distinctive is rare. Distribution is wide open and the action sports culture has been melded into and suborned by the youth culture/fashion market.
You no longer have five years to build brand recognition and acceptance. Interestingly, I don’t think you need it. As soon as you start to get some traction and sales growth, you’ll find that some multi-store retailer or another is interested in giving your brand a try. That’s hard to resist given general market conditions. The retailer will tell you they are going to help you develop your brand. The blowback that used to accompany growing distribution too much and too quickly doesn’t exist. It’s so completely expected that everybody seems to take it for granted, or at least be resigned to it.
But you haven’t spent five years establishing your brand identity. Your customers aren’t all the same customers you would have been selling to had you launched in the past and they aren’t as committed to your brand. The further you get from core distribution, the truer that is. They may know your brand, but they don’t know your story. You are trying to sell to customers (because you’re being “helped” by the retailer) who don’t know the difference between your logoed plaid shirt and the same product at JCP with their store brand logo. The problem, as we all know, is that there may not be much difference.
You didn’t mean to be, or at least you probably didn’t want to be, but somehow you’ve found yourself in the much broader fashion market. You have become dependent on the good will of the large retailers. We all know how long that lasts if you don’t sell well at good margins (of course that’s true, though I like to think not as true, in core retailers as well). Even if you’re doing $100 million in revenue, the competition is ten, twenty, thirty, forty, or fifty times bigger than you. Or more. They have resources you can’t think about competing with. The things that gave your brand strength in the action sports market aren’t as important in the broader fashion market.
The Usual Result
You know, succeeding and being acquired is a good thing. So is sticking to the market niche you know and maybe growing less but having a successful, profitable business. What’s bad is not understanding the impact of growth and the competitive environment it’s going to put you in when you take the step into the broader fashion market. What’s bad is not recognizing the pressures and requirements of being a public company. The requirements of being public can conflict with building and sustaining a brand.
The good news is that consumers are willing to trust new brands faster these days, sometimes at the expense of heritage brands. That’s one reason you can grow faster. No need for five years of building credibility.
Your brand positioning decision is now much more complicated than core or noncore. There’s a whole range of customers and distribution channels to pick from and it takes some hard, thoughtful work to figure out where you belong. Accepting the invitation of the first big retailer that wants to carry you is not the way to approach it. Remember, all those retailers are busy building themselves as brands and carrying lots of proprietary product. I’d approach retailers I think might be appropriate for my brand based on my customer analysis. Yes, I know that you can’t always been that “pure” in who you decide to sell to. I also know I have the privilege of way over simplifying the decision process, but just think about the concept.
Finally, I’m implying that if you’ve done your homework, you could find yourself turning down some business you might otherwise have accepted. Hard to do, I know. Maybe that’s where the business model I’ve been pushing, where gross margin dollars and operational efficiency have a focus equal to sales growth, comes in. You can’t think of marketing and brand positioning as distinctive from operations and inventory management any more.
You don’t want the usual result. To avoid it, start by recognizing what that usual result has been way too often in our industry and how the environment has changed.
Nicely done Jeff…I think you have nailed it.
This should be printed out in placed in EVERY action sport office in the country…
You know, succeeding and being acquired is a good thing. So is sticking to the market niche you know and maybe growing less but having a successful, profitable business.
What’s bad is not understanding the impact of growth and the competitive environment it’s going to put you in when you take the step into the broader fashion market.
AKA…You can’t be a little bit PREGNANT….
Hi Michael,
If pregnant is going public, I agree with you. What you can do it is evaluate each new customer carefully, and make sure they fit you and your market, or recognize the gradual change in your market you will be undertaking as you move into new customers and distribution. Seems pretty obvious to me, but it didn’t for a long time. I think this was always a good approach, but didn’t seem as urgent during “the best economy ever.”
Thanks for the comment,
J.
I’m confused why you use “going public” as one of your benchmarks for success in the Action Sports industry? The pressure from Wall Street for growth at all costs has been at the root cause for decisions made that were/are detrimental to the long term health of the Brand.
I agree with Michael that you can’t be a little pregnant, but it’s nice when you can consummate in private and not in the public eye!!!
Hi Bill,
I don’t think I do use going public as a benchmark of success, though obviously it may be success to the owners in a financial sense at least. What I’ve argued is that companies in this industry that go public don’t seem to succeed. Read the question I ask in the first paragraph again.
Thanks for the comment,
J.
Jeff- what is you change your thesis a bit to “(1) has its roots in action sports, (2) has grown to have revenues greater than, say, $200 million, (3) has NOT gone public, (4) hasn’t been acquired and, (5) is continuing to grow and prosper.
There are now some good examples of brands who have “succeeded” in this with the main reason being “not” going public. The public markets are just not made for action sports unless action sports is only a part of your business like VF
Hi Jeff,
You might be making a good point, but the trouble is that we’ve only got data on public companies. Have you got any examples in mind?
Thanks,
J.
Well stated…..
Jeff,
Nice history lesson. While this ought to be obvious, it’s great that you synopsized it for those that started on the upswing or forgot.
TWBiz is full of good stuff this issue, your article included. From all of it I take these truths to be self evident.
1. The market for “boardsports” product has adjusted to reasonable levels.
2. Live within your means. Being a youth culture brand is not a turn and burn business.
3. You are responsible for your brands growth, not retailers.
4. Retail has changed. It is no longer limited to brick n mortar. It exists as much on everyone’s phone/pad/computer as at geographic locations.
5. Unless you’re selling beer, chips and lottery tickets, the best retailers are destinations that offer more than inventory and attitude.
So,
Technologies are changing the way we live. Learn to use them to your benefit. The “good old days” are over, the “good new days” are today. Don’t be a Luddite.
Glenn
Hi Glenn,
Thanks. Liked your article too. Luddite bad. Technology- inevitable. For many companies, there is now more money to be made at the bottom line by controlling distribution (which does not mean don’t grow) than by trying to expand sales madly.
See you in a couple of days.
J.
Nice Jeff! Since all public companies want some type of growth, does it make sense to explore growing demographics that have not been the usual active sports industry market but have been showing up in droves in the the active sports industry activities but in my opinion have not been marketed too. Thoughts?
Hi Artie,
Well, you see, that’s the problem. The answer is “Ultimately, you have to do that if you’re going to grow.” But unless you’re very, very careful how you do it, as I’ve been writing, you’re going to find yourself competing with mega companies in the broader fashion industry. Those mega companies have you way out gunned in resources of all kinds, and the broader fashion market is full of customers who may know your brand’s name, but won’t know your story. So they are hard to get and keep as customers. That means that each decision you make about distribution is more important and harder to make. We are way, way, past the good old days of core or not core.
Thanks for the comment.
J.
Hi Jeff
I enjoyed your article.
Would this be the right platform to ask for your thoughts about Patagonia’s a) brand positioning to core and aspirational customers, b) business model as a B Corporation and c) vision for growth (or at least survival to be around in 100 years)?
It seems to me that they may exemplify what you are saying about thriving in a relatively small marketplace (vs fashion) by taking a holistic view of your business by keeping everything in sync – branding, marketing, operations, inventory, retail channels, company stores & ecommerce.
I attended a conference at Ft Mason, S.F. 1992 where then CEO Kristine (McDivitt) Tompkins explained that Patagonia’s growth track at the time was not sustainable and for the good of the company (brand, owners & employees) they were making a very deliberate decision to stay private, limit SKUs and distribution channels to carefully manage growth. While they may have missed the ride up and down, they seem to be successful on their chosen path.
Thanks again,
Jim
Hi Jim,
Have to say that I don’t have the information I need to really give you a good answer, and getting the information is a matter of at least some hours of analysis, so I’ll have to beg off from a detailed answer. But certainly my perception of Patagonia is that they are an example of the business model I’m suggesting. You seem to know more about Patagonia than I do. Do they have aspirational customers?
Thanks for the comment,
J.
Hi Jeff
No, I have no special insight to the firm. They are a brand/business I’ve followed for a long time and my perception is their business model should/could be relevant to the business model topic of this post.
Perhaps I misuse the term aspirational customer. Customers don’t aspire to purchase their product, but they do aspire to participate in the outdoor adventures where their products are in use. Even their board shorts have focused on technical innovation for well over a decade, promising a better surfing experience whether at a local beach break or an exotic tropical reef.
Thanks for writing this stuff,
JP
JP,
There are of course levels of aspirational customers. While such terms may suffice for broad, industry conversations, each company has to look at its customers and distribution strategy as an individual company. There are lots of shades of grey these days and not so much black and white. I think some of these broad terms we use sometimes turn out to be excuses for companies not to do the kind of homework they should be doing.
Thanks for the comment.
J.
Jeff, well done yet again and thanks for your time and insight. Your first question, as I have said before fits the brand FOX head, minus the “gone public” they are still very much privately held and meet all the criteria you mention.
Thanks CMG,
You aren’t the first one to point out Fox to me. I’d argue is that part of the reason they continue to be so successful is precisely because they aren’t public and don’t have to deal with the growth pressures of a public company.
J.
Hi Jeff
Great article. You’ve managed to muddle through the confusion and clearly show how and why so many of the “action sports” big boy brands are failing.
As far as “core” and “not core” no longer existing, I believe in some markets certain “core” shops that have maintained a reputation for being enthusiastic about sticking to their values, can still be looked upon as trusted “leaders.” Many of our retail customers seem to “know our story” and come to us to buy because of that. They know we dump brands quickly who over distribute, and they’re willing to buy the less well-known companies. We’re very lucky to have their trust and support. Maybe our story is a very isolated case, but we’ve been successful for a long time supporting “core” brands and avoiding the “sell-outs.”
Also, you mentioned: “We all know how long that lasts if you don’t sell well at good margins (of course that’s true, though I like to think not as true, in core retailers as well). ”
We’ve heard from more than one brand how they appreciate us for being loyal to them even when they’re not having a good year. Unfortunately, this probably isn’t the case with most retailers. But, in an ideal world, it would be. And, this kind of philosophy has worked for us.
Thanks for your many insightful articles. I always look forward to the next.
Tim McKevlin
McKevlin’s Surf Shop
Hi Tim,
I’m not saying there is no “core” and “not core.” But there used to be a clear border between them, and it was pretty easy to determine where that border was. No longer. “Core” is still a viable strategy for some shops and brands as long as they recognize what that means and how it might limit growth. Nothing wrong with that as long as it’s a conscious decision. It sounds like you work to make the brands you carry credible instead of the other way around. I’ve always said that’s what the best shops do, though of course that can’t happen in isolation to what the brand does itself. You’ve also indicated a willingness to dump brands, which I think is key to a quality shop. The big risk is not dumping those brands that need to be dumped. I agree with you that rushing into that is a bad idea. Besides over distributing, what other factors do you consider in replacing a brand?
Thanks for the comment,
J.
I agree figuring out what is core or not has become a lot more difficult. I think some companies have gotten better at figuring out how to “look” core. Sometimes we get fooled and have to find out later. I’ve been fooled before. Even ordered merchandise, and before it arrived I knew I was going to send it to the Clearance Rack!
As for other factors for replacing a brand: Our first priority is always quality. If it doesn’t do what it’s supposed to do well, then we shouldn’t carry it. I’ve seen brands start good then get sloppy. Sometimes they lose their focus like a surf brand deciding they also want to appeal to motorcross! There have also been brands who suddenly kick you in the groin by discounting everything online. There are so many reasons these days . . ., I’m just thankful that there always seems to be some new brand on the horizon interested in being respected and appreciated more than selling out.
Hi Tim,
I think brand extensions are particularly dangerous and yes, there are always new brands that at least know they have to start by being respected and appreciated. That’s always been the cycle.
Thanks,
J.
Jeff and Tim,
The lines of core not core aren’t that cut n dry. I’d like to add a couple layers/definitions that shouldn’t be ignored.
1. The marketing pyramid for our industry has 5 general layers between which there is obviously some gray area.
The top is Hero. Athletes and celebrities who don’t “buy” anything but are looked up to as lifestyle and brand ambassadors.
2. Next are those you would be referencing as “Core”. I call them “participants”. This includes everyone from local hero to regular hack. They buy and wear out the equipment needed to perform whatever activity we’re talking about. They understand most of the brands and have favorites and some they just don’t identify with for one reason or another.
3. Below that is the first layer you’re missing. These are the “Aspirationals”. They actually bought equipment or maybe rented it. The fact is, they’ve actually tried the sport and would like to continue. These know the brands for both hard and soft goods and are generally loyal to the idea of legit brands. Most importantly, they not only fly the flag but claim to be participants.
4. Second missing tier is “Lifestylers”. They may have never tried our sports or might have tried one (Snowboarded but never skated or surfed) and now identify with the lifestyle. They know some of the brands but have a little trouble figuring out why some people look down on them for wearing Hollister. Either way, they want the look.
5. Last, on the bottom of the pyramid is your “Non core” / “Fashion” customer. They don’t care about authenticity. They move around with fashion whims and probably own a surf branded T they bought at Costco or a Tommy Hilfiger “Surf themed” T or shorts.
As an industry, it’s important to include the lifestylers and aspirationals in our marketing and sales efforts. We have the opportunity to connect with them and educate them. Their potential lies in our ability to connect them to the tribe. We’ll lose some to Hollister but fewer to Tommy if we’re helping them understand the distinction.
As for the “mainstream”. Forget them. If they buy something from us, great. I wouldn’t waste time worrying about them or spending marketing dollars to convert them.
There’s a big difference between fashion trying to co-op our style and how we differentiate from them. It’s much easier for us to tell a believable story than it is for them.
Our customer is the one that walks by the Hilfiger “Surf” window next door to Sun Diego and laughs. The customer that see’s the same TH display and thinks “cool, I’ve been waiting for Hilfiger to make boardshorts” was never our customer.
Glenn
Glenn,
I’ve said that the distinction between “core” and “not core” is a lot more complicated than it used to be. And as long as you’ve done such a good job breaking down the market for us, let’s take the next step every company has to take. Or at least should be taking. Given that breakdown, how do you decide which customers you have, which customers you want, and which you can go after without putting yourself in a difficult competitive situation? And then, how do you decide which distribution, on a customer by customer basis, works for you? I like your five layers, but wouldn’t necessarily accept them as gospel. There’s value in each company breaking down their own customer base in whatever way gives them the best information and thought process.
I agree it’s a bad idea to waste time on the mainstream. But public companies find that they don’t have any choice, and it gets them in trouble. At the end of the day, that’s why I think being public just hasn’t worked in our industry.
Thanks. See you Thursday I imagine where the conversation can continue.
J.
Jeff,
I look forward to continuing the conversation over a glass of wine.
Glenn