Just Who Are We Anyway?: Perceptions of market and industry evolution

One day, a few years ago, we looked up and had become “the snowboard industry.” Growth, friends, good margins, optimism, an endearing naiveté about the future, and a quotient of bullshit was all part of what made it fun. The boundaries were clear. We were on the right side of those boundaries and knew what was up. If you were on the other side, you didn’t. It was simple. We sold snowboards to snowboarders.

But fast growth and high margins can create an illusionary sense of control and invincibility. But when the boom slowed, the boundaries collapsed along with an awful lot of brands. Now it seems like the snowboard industry, for practical purposes, has become part of the winter-sports industry. The retailers, the resorts, the ski companies, and everybody who is interested in hitching their star to the alternative-sports market all have or want a piece of snowboarding-or at least of what snowboarding represents. Take Mountain Dew as an example: the company doesn’t want to sell snowboard products, but to be legitimized in the eyes of the consumer the snowboard market represents.

The reason that’s so important to Mountain Dew and others is because the Echo Boom Generation-loosely defined as the thirteen to 25-year olds-is projected to grow at a compound rate approaching fifteen percent between 1995 and 2005. There are a lot of them, and they have money to spend.

It’s no longer simple, and it’s not just about selling snowboards to snowboarders. At its 1998 annual shareholders’ meeting, Ride Sports (note the previously announced new company name) CEO Bob Hall talked about the company’s mission as “creatively marketing high-quality, technologically innovative, contemporary sports products and extending those brands into apparel.” Burton has started a shoe business. Morrow-owned Westbeach has a summer-clothing line. These companies are not just selling a product. They’re building brand equity with the goal of servicing the broader needs and interests of their target market. If the brand is legitimate in the eyes of that target market, they can sell an awful lot besides snowboards. And they can sell it at good margins.

In the past, I’ve called this market evolution “homogenization.” That continues to be a good term. But it might be construed as implying a high level of “sameness” to a much larger action-sports market. In fact, what you’ve got is an increasing overlap among what used to be smaller, distinct segments: snowboarding, skateboarding, wakeboarding, etc. The boundaries have gotten fuzzy, as lifestyle and attitude become more important to a larger market.

What does this mean for companies, resorts, and retailers? They share some of the same strategic business issues, and are increasingly dependent on each other. Maybe they were always dependent, but they are recognizing the dependence and, in fact, seeing it as an opportunity.

Companies

TransWorld SNOWboarding‘s Buyers’ Guide includes approximately 75 board brands. I counted merely 50 exhibiting in Las Vegas. Once there were more than 300. The number will decline further. Most of the “How are you guys doing?” calls I make seem to end up discussing layoffs and budget cuts. Orders are up for the coming season, but up twenty percent when you were down 50 percent the year before doesn’t cut it. Break-even points are up. Everybody seems to be talking to everybody else about merging or being acquired. Making it as a snowboard-product-only company is tough.

Ski companies, in a declining market, aren’t making money on skis. Rossignol effectively recognized that and it tripled the company’s snowboard marketing budget last season. Salomon makes most of its money on golf.

Successful business strategies for these companies probably involve a year-round business and less seasonality, multiple product lines, higher volume, better expense control, and the creation of brand equity.

Resorts and Ski Areas

During the ’85/86 season, there we 52-million visits to United States ski areas. In ’96/97, the number was 52.5-million. If essentially none of those ’85/86 visits were by snowboarders, and eighteen percent were by snowboarders in ’96/97, then the number of skiers has declined by eighteen percent. Over that same period the number of ski areas in North America has declined by 22 percent.

The 1996/97 Economic Analysis of U.S. Ski Areas, prepared by the National Ski Areas Association, noted the following trends during that season:

Increases in capacity and infrastructure improvement.

No change in total revenue per skier/boarder visit.

Declines in the net working capital and current ratio measures.

A 2.3-percent decline in operating profits and a 9.8-percent decline in

pre-tax income.

Obviously, some of these numbers are open to interpretation, and results vary by region and resort size. But if participation is even (and may decline when snowboarding growth slows), balance sheets are in some sense weaker and profitability is declining, what is the justification for capacity and infrastructure improvements?

Sounds a little like the frantic competition for marketshare in the snowboard industry that led to product oversupply and a decline in the number of brands from over 300 to 50 and still falling. What’s a ski area to do?

Successful business strategies for resorts and ski areas probably involve a year-round business and less seasonality, multiple product lines (golfing, real estate, tubing, etc.), higher volume, better expense control, and the creation of brand equity.

In fact, that’s what’s happening. Vail, American Ski Company, Intrawest, and Booth Creek are purchasing other resorts. They are trying to remake resorts as year-round destinations, create purchasing synergies, sell real estate, reduce seasonality, and create brand equity they can cross-market among their resort locations. Together, these four companies probably account for 35 percent of North American skier/boarder days.

Retailers

The National Sporting Goods Association recently released its Cost of Doing Business Survey for Retail Sporting Goods Stores. The survey is done every other year. It reported the following changes in financial results for full-line stores and specialty-sport shops between 1995 and 1997.

Full-Line StoresSpecialty Sport Shops

1995199719951997

Return on Total Assets 8.6%9.4%9.8%5.3%

Return on Net Worth15.6% 23.3% 23.9%16.6%

Net Operating Profit5.0%4.8%4.5%4.1%

Gross Margin on Merchandise Sales34.7%35.9%36.5%36.4%

The full-line stores’ financial performance seems to have improved, even though their net operating profit declined by four percent. Specialty-sports shops saw their performance decline, with operating profit down almost nine percent.

The United States simply has more retail space than it needs in almost every product category. This is reflected in sporting-goods stores in the low net operating profit percentages shown above. Remember that operating profit is before interest expense and taxes, so bottom-line returns are even worse. When there is too much of something, the laws of supply and demand kick in and it gets hard to make money. It’s true in snowboard brands and ski resorts as well as sporting-goods stores.

My belief is that specialty-sport shops are also experiencing the market changes described earlier in this article. They can’t, for example, just sell snowboards to snowboarders any more. They have to cross-market different products to the alternative-sports lifestyle market.

Successful business strategies for specialty-sport shops probably involve a year-round business and less seasonality, multiple product lines, higher volume, better expense control, and the creation of brand equity.

A Community Of Interest

I’ve used that last sentence three times now to describe what I see as the business imperatives of the ski and snowboard companies, resorts and ski areas, and winter-sports retailers. They are all operating in oversupplied markets and trying to focus on the same basic consumer group. I expect this emerging common focus to cause them to increasingly coordinate their efforts and evolve new relationships.

For example, we’re already seeing that buying groups have more leverage with brands. The large resort groups are beginning to own their own retail space. The resorts are also working directly with the brands to supply their own product needs. Witness Intrawest putting its rental equipment needs out to bid and going with Rossignol. Brands are working with resorts to promote not only their products, but the sports themselves. Salomon made a major effort to work with resorts in promoting mini skis this past season.

What we’ve got going on is a huge change in the market, how it’s perceived, and how it’s sold to. Put a dozen small circles of different sizes on a piece of paper, with none of them touching the others. Put one big circle around all of those smaller ones signifying the relative isolation of those related, but distinct markets. Those were the markets we focused on a couple of years ago. Now take those same circles, grow them, and have them intersect with each other in various ways. They don’t all touch each other, but are all connected if only through a common connection with another. And the connections change spontaneously. Finally, make the boundary of the big circle into a dotted line, signifying that it has become porous.

This is our new market. It’s bigger, but tougher to target. There’s greater interdependence. It’s not just composed of enthusiasts. Competitive pressures don’t come only from companies who make the same product you do. Single product/market companies are becoming increasingly rare.

Where do you fit in the new market?

————————————

Reach Jeff Harbaugh in Seattle at: (206) 232-3138. He’d like to hear how your company is adjusting to the new market.

snowboard companies, resorts and ski areas, and winter-sports retailers. They are all operating in oversupplied markets and trying to focus on the same basic consumer group. I expect this emerging common focus to cause them to increasingly coordinate their efforts and evolve new relationships.

For example, we’re already seeing that buying groups have more leverage with brands. The large resort groups are beginning to own their own retail space. The resorts are also working directly with the brands to supply their own product needs. Witness Intrawest putting its rental equipment needs out to bid and going with Rossignol. Brands are working with resorts to promote not only their products, but the sports themselves. Salomon made a major effort to work with resorts in promoting mini skis this past season.

What we’ve got going on is a huge change in the market, how it’s perceived, and how it’s sold to. Put a dozen small circles of different sizes on a piece of paper, with none of them touching the others. Put one big circle around all of those smaller ones signifying the relative isolation of those related, but distinct markets. Those were the markets we focused on a couple of years ago. Now take those same circles, grow them, and have them intersect with each other in various ways. They don’t all touch each other, but are all connected if only through a common connection with another. And the connections change spontaneously. Finally, make the boundary of the big circle into a dotted line, signifying that it has become porous.

This is our new market. It’s bigger, but tougher to target. There’s greater interdependence. It’s not just composed of enthusiasts. Competitive pressures don’t come only from companies who make the same product you do. Single product/market companies are becoming increasingly rare.

Where do you fit in the new market?

————————————

Reach Jeff Harbaugh in Seattle at: (206) 232-3138. He’d like to hear how your company is adjusting to the new market.