There Is No Action Sports Industry. Or Maybe It’s the Same as its Always Been
Sometimes I just can’t help myself. Many years ago, I wrote an article called “Are There Any Core Shops Left?” My good friend and editor at the time Sean O’Brien thought enough of it to put it on the Transworld web site for discussion. Without telling me. In hindsight, his instincts were good, but I was the slightest bit confused when I started seeing posts and getting emails that either told me how smart I was or hung me in effigy.
I think I might be about to do it again. What I want to tell you is that many of you who think you’re in the action sports business are wrong. And if you don’t act accordingly, things could become difficult. More difficult. I want our old economy back!
This has been in my head for a while in unformed ways. The launch of Nike’s Chosen campaign, their investment conference yesterday, an email I got from somebody who’s had a lot of success in our industry, and my evaluation of some of the recent industry deals including Volcom and Sanuk has caused neurons to fire and thoughts to coalesce. So let’s look at just what this industry is and has become, what I think are the major, long term, strategic trends, and the implications for how this industry, whatever it is, will change.
What Is the Action Sports Industry?
I’ve expressed an opinion about this before, but want to do it a bit more forcefully. The action sports industry is a small industry composed of businesses that sells products to participants in a number of individual sports and to the first level of non-participants that closely associate with the lifestyle and athletes. If that isn’t who most of your customers are, then you’re in the youth culture or fashion or some term I haven’t thought of business.
That doesn’t mean that your roots can’t be in action sports, and I’m not trying to imply any kind of criticism of a company that’s graduated out of action sports (we are way, way past any concerns about “selling out”. That almost sounds laughable now). But if you think you’re selling to action sports customers, as I’ve defined them and you’re not, you’ve got a challenge because you’re probably trying to punch outside of your weight class.
Why did we ever believe action sports was a bigger industry than it is? That’s easy; it’s due to 20 or 25 years of THE BEST ECONOMY EVER. With rising incomes and asset values, easy credit, and low inflation you can, as the saying goes, sell snow to the Eskimo. So any shop that sold hard goods could be known as a core store. But it wasn’t.
As I suggested in the title, then, the real action sports industry is a lot like it’s always been. We just thought it was different. What made it change?
Trends We Should Pay Attention To
How do you know when a successful brand has graduated out of the action sports market? That’s easy- they get acquired. Somewhere around $40 million in revenues, to pick a number, they start to get big enough to be attractive to a strategic buyer that makes it worthwhile to sell. Hopefully, they also get smart enough to know that they don’t really have the resources, expertise, or competitive advantage to step outside the action sports market they came from without help. Expect more CONSOLIDATION as the trends I’m discussing here play out.
Volcom pretty much said in their filings that industry conditions and difficulty growing meant it was time to sell while they could get a good price. Look at the deal Sanuk got. Notice that PPR’s CEO specifically said in an interview they didn’t pursue Quiksilver because they didn’t see the growth potential. Buyers want growth potential. Successful sellers know they have it, but that they can’t do it themselves.
And that means, if you try and grow out of the real action sports space, you’re going to face some big honking competitors. Bigger all the time. Nike’s almost its own trend. I’ll get to them. Think about Burton in the snowboard space a few years ago. Why did Burton own the hard goods market?
First, great product. I’ve never heard anybody say different. Second, financial strength. That strength meant the best athletes and the biggest advertising and promotion program. So consumers wanted the product and it checked at retail at good margins as long as the distribution was well managed.
In its snowboard niche, Burton was like Nike in the athletic footwear market; unless they screwed up everybody was fighting over second place. But Burton has a problem Nike doesn’t have. Nike’s concern, they say, is about picking the best of their growth opportunities. Burton, as best as I can figure it out, hasn’t been able to grow much outside of its core snowboarding franchise. Even if it were for sale, Burton would not be attractive to a strategic buyer lacking that growth opportunity.
The lesson? Either plan to stay in the core action sports market, or be prepared to sell when you threaten to break out of it.
Let’s talk about NIKE, THE ONE COMPANY TREND. At the start of this article were a couple of links to Nike that may interest you. Here’s another one to a press release on a conference they held last year. It’s worth a read. I actually have the transcript of that conference, though I can’t find it on line any more. It’s 75 pages long but worth reading. If you’re really interested, let me know and I’ll send you a copy.
Nike is $20 billion in revenue. As you’ve no doubt read, they are now taking the Nike brand directly into surf, skate and snow. They think they’ve now got the credibility to do that, having been somewhat cautious in their approach for a couple of years.
I have to say their timing surprised me a bit. For years, Nike flopped around the action sports space screwing up their attempts to get in it. Then they got a little realistic and decided to exercise some patience. They hired a few of the right people and used their unmatched product capabilities and financial strength to edge their way in cautiously. I thought they were doing fine. But it feels like they might have run out of patience sooner than they should have.
It will be interesting to see if the Chosen campaign is seen as authentic or arrogant.
In its investment conference, Nike talked about its ability to market and merchandise a product or brand down to the city level. They pointed to their focus on customizing product for individual consumers (try it on line!). They discussed the process where an innovation from one product makes its way to other products and brands. They were very thoughtful about the integration of brick and mortar and digital and expect growth there. The analysis they’ve done about what kind of stores to put where is intriguing. And they had a good discussion of their integrated systems for managing costs and inventory, which I love.
Of course, it’s their investment conference, so you’d hardly expect them to highlight where things hadn’t worked out so well. Still, it was impressive. There was a clear analytic framework that I think gives them unusual flexibility for a company their size.
And that brings me to the email I received from the gentlemen with a lot of success in our industry who said, in part, “Based on how they [Nike] have single handedly destroyed the competitive brand environment in sports like Football, Tennis and Golf does this mean that Action Sports brands have to work on the basis that they will be relegated to being a fringe player in a culture and sport they created?”
Well, maybe. But let’s not over dramatize this. There’s nothing we can do about how Nike (or any of the other large companies) runs their business except, in this case, maybe learn some lessons from them based on the things they do well. I might have said this a time or two, but don’t worry too much about what the competition is doing- just run your own business well. If you adopt just a bit of Nike’s thoughtful, analytical approach to your market, you’ll be doing a good thing.
One thing you might think about is whether Nike is trying to ‘take over” the action sports market or just use legitimacy in that market to be credible with customers outside of what I’ve defined as action sports customers. See, this is why explaining what action sports is and being aware of how it’s changed is so important.
One way you need to do that is to FOCUS ON THE ECONOMY. I know it’s hard when you have to run your business on a day to day basis, but look beyond, the day, week, month, quarter and even the year. Recognize that, historically, the “good old days” were an aberration we’re not returning to in the foreseeable future. Want to know why? Go read this book so I don’t have to make a long speech. It’s a pretty easy read. The bottom line is that this is a financially caused, global recession and they last a long, long time. Always have. You must build your business around that assumption. Most of you, I hope, already have.
One of the economic things you’ve got to think about is inflation. You are going to see some product cost increases, and it’s not clear how much you will be able to pass through to your customers. Factor that into your financial model.
Next, we can’t forget VERTICAL RETAILING, which I expect will continue to grow and even accelerate. Vertical retailing is a financial and merchandising strategy that is viable partly due to changes in consumer perceptions and habits and because we’re selling a lot of product to a different consumer. You don’t have to be “core” anymore to be cool and most of our customers aren’t action sports consumers as I’ve defined them.
Where does this leave the “core” retailer? Well, kind of where they’ve always been if they are really core retailers; servicing the group of customers I’ve described above for whom community and expertise are the most important factors. That was never a huge market.
Specialty shops and small chains that really weren’t core retailers have mostly gone away. Even some really good retailers who have been around for many years are struggling. Partly that’s because we’re no longer in the best economy ever. But it’s also because they are dependent on customers outside the traditional action sports niche as I described it and don’t have an adequate advantage with those customers over the vertical retailers and large chains for the reasons we’re discussing here.
Some years ago, I created a list of things I thought core retailers had to do well to succeed. The list included good systems and financial data, close connection with the community, a reasonable internet presence, quality, trained employees to whom you could offer a career path, revenues in excess of $1 million and a willingness to take some risks in the product you carried as a point of differentiation.
It’s not a bad list, but when I wrote it I thought a specialty retailer who did all that would just kill it. Now it’s kind of a minimum bar to succeed. And doing all that isn’t enough if you’re trying to compete with the big, vertical brands for the non-action sports customer.
Price has become more of an issue than it ever was and (forgive this gross generalization) there is no financial model that makes sense for a specialty retailer that carries the same brands as the chains and vertical retailers and serves the same customers. This is going to be especially true as product costs rise.
Related to vertical retailing is distribution, or rather NOT DISTRIBUTING. Here’s a link to an article I wrote after SIA posted its sales report in March. Basically, SIA members reported higher margins and better sell through with lower sales. They sold less but earned more and created perceived value through scarcity. I’ve been beating the drum for focusing on gross margin dollars rather than sales or gross margin percent for years. It took the worst recession since the Great Depression to scare them into controlling inventories. I really hope they don’t screw it up next year.
Around 2000 when I took my first close look at THE INTERNET and its impact on the industry, I thought it was just another distribution channel. Maybe that was an adequate answer then, but it’s way more now.
It’s your most important point for customer contact and information. It’s a tool for managing and controlling inventory. There is no successful brick and mortar retail without a closely integrated internet presence. I could create a much longer list, but just imagine running your business without the internet and we’ll leave it at that. It’s no longer a choice and I guess it really hasn’t been for a long time.
So What?
Determining whether you are “action sports” or “not action sports” is obviously not as clear cut as I’ve made it sound. Most retailers and brands fit somewhere along a continuum. Yet determining who your customers are is critical (duh) and maybe the distinction I’ve made is a good way to start thinking about it. For most of you, it’s not the same customer you used to have.
For better or worse, big companies have learned to buy brands in our industry and support them without killing what made them special. Consumers won’t know that Volcom is owned by PPR. More importantly, if they did, they probably wouldn’t care anymore.
The buyers of industry brands can’t justify their purchase prices unless those brands grow at a pace that means they take market share. So you, as an independent brand or retailer, are competing with businesses that were successful in their own right but are now backed by various 900 pound gorillas committed to growing them. Sophisticated, well managed gorillas at that.
Don’t despair. Just recognize the market you’re in and who you’re competing against. Then plan accordingly. Like the old saying goes, “Call on God, but row away from the rocks.”
Solid stuff as usual Jeff. I think you’re spot on. Thanks, also, for the shout out.
Thanks Sean. You going to Josh’s last day party at Transworld?
J.
I’d love to see a few more posts on the topics you point to in this article. There’s room for discussion on the size and number of players in the “new” (old) action sports industry, the impact of the internet, and vertical retailing. Keep up the good work Jeff!
Hi Rob,
Yeah, me too. “What industry are we?” seems like a simple question, but it’s not and it’s awfully important.
Thanks,
J.
Good piece Jeff. Again, you strike fear into people’s minds in such a nice way.
; )
Michael,
Yeah, I do that once in a while. I don’t want to scare people, but they don’t do themselves any good by not facing up to the trends.
Thanks for the comment.
J.
Another great article Jeff. Thanks.
Thanks Charlie.
J.
Sure Jeff. Taking some salt for the wound too. You know me. But we’re not talking about that yet, right?
Another well thought out and relative piece. I like how they are easy to read Jeff, its an unusual and highly effective way to communicate i find.
Your comment that core shops should possess ” a willingness to take some risks in the product you carried as a point of differentiation” is so true, yet their standard answer from a core store is “people come in here to buy what they already know about”. Its head in the sand stuff, i can buy it online way cheaper if i want what i already know.
You should enquire about the Australian market at the end of our coming season now with our dollar being so strong. I really dont see how any shops can sell a product at a price even close to what i can buy it in America and have it posted here now for, yet they will sell the same products in preference to new exclusive emerging brands. Your USD dollar now creates a global online opportunity that is largely untapped in my view..i know people here are buying so many things from America online as its now so much cheaper. For 10% i wouldnt bother, for 30% i will is the rationale.
Hi Bill,
It is, indeed, a global market now. Wonder if this is a problem for a company like Billabong, or an opportunity. Probably both. Given the strong Aussie dollar, might be an interesting time for them to look at further acquisitions of U.S. brands.
Taking brand risk is important for core stores, but it’s not a panacea. I’ve also said in the past that the store should be giving credibility to the brands it carries, not the other way around. At the end of the day, the market has become tough enough that you can do everything right, and it may still not work out. That’s why even some high quallity, well managed shops are struggling.
Jeff,
As usual a great article on the harsh reality we are all going through. I personally feel that everyone from companies to retailers are looking at one another like deer in headlights all searching for answers and acting off the competition actions, instead of formulating there own unique vision and following through. I can’t tell you how many times in the last 5 years I have heard well XYZ company did this so we need too or are going too! Instead of being leaders, a majority of this industry turned into a heard of sheep being lead to the slaughter! Of course there are some exceptions, but in reality consumers can only buy so much, if there is too much product being produced, too many choice, too many retailers, too many deals / pricing wars, the basic economics of supply and demand are disrupted and you better change your plan.
Second, our whole financial system has been based off of trust which is obviously broken, Ponzie schemes, bad loans, and a lack of character and responsibility for debt has forced our hands and decisions. The new banking world does not allow for long term plans, the Banks, stockholders and investors just wants results today, what happened to building something?
I just think we all need too and are taking a step backward, decide what side of the fence you want to be on and move forward from there, its just going to be a long, grinding road for a while. No easy way out of this one!
Hi Matt,
You know, we all got use to good times and aren’t quite clear what to do now that things are gone the other way. I’ve written for years that nobody in our industry (including me) has any experience managing in an economy like this one. It is, I suppose, harsh because consumers buying less and having less confidence means there will be fewer brands and retailers around. On the other hand, it’s not personal- it’s just the business cycle. You have to manage within it- not worry about it. As far as companies focusing too much on what competitors rather than customers are doing, yup it’s a problem. Not a new one. I wrote back in the 90s about snowboard brands expanding their hard goods SKUs as a reaction to competitors rather then to meet consumer needs. If it was a mistake during the boom, it’s a bigger one now.
Thanks for commenting,
J.
Interesting article Jeff. At the end of the day the consumers is the King in the debate and as much as Nike want to get in, it’s out of their control in some ways. I feel that it might take half a generation for them to get the new consumers to the industry onto their program. That’s a long time for sure but the current consumers won’t, in my opinion, go over to their side in droves. Trying to come in to the industry from a pure marketing stand point isn’t really coming into the industry is it? Maybe it is, maybe the consumers are lemming that just do as they are subliminally told to.
Might be interesting to do an article on a player like Billabong, for instance, who is in the industry now and has the potential to completely f*#k the whole thing up.
Hi Kel,
As I said in the article, I think Nike might have gotten a bit impatient a bit too soon. And you are of course right that the consumer always gets what they want. It will be interesting to see how Nike does (always is!) It is certainly true that you can’t just buy your way into this industry, or at least used to be you couldn’t. I wonder though with “the industry” being a vastly different critter from what it use to be, if that hasn’t changed. Maybe, when so many consumers aren’t close to the sports and lifestyle any more, you can indeed use marketing to buy your way in. Hollister anyone?
I’d be interested to hear more of your thoughts on Billabong.
J.
Jeff,
Another great article.
Two comments.
1. You are on the dime buddy. We have to really understand and get used to how big (or small) our market is and be happy with it. It used to be that we were generally happy with a small healthy business that kept shoes on our kids and left us time to skate and surf. Yes, there are some success stories like Wooly but most brands have never come close and we should realize that.
2. Now that I’ve done more business outside the US, I’ve discovered that retail prices in the US are artificially low and we consume ridiculous amounts of “stuff” rather than buying quality and hanging on to it. We’d better get used to paying a little more and not having this months hot thing.
This goes to your statements on the economy, “Recognize that, historically, the “good old days” were an aberration we’re not returning to in the foreseeable future.”
With that said, we’re in for a long slow climb and arrogance will get you nowhere.
G
Thanks Glenn. I’m afraid our desire for instant gratification makes us consume junk and too much debt leaves you buying as cheaply as you can even when it makes no longer term sense.
J.