Hard Choice Time; Strategies for Success in the Snowboard Industry

It all kind of came together for me at the industry conference at Banff, though I couldn’t say if it was on the lift, in the spa or at the bar. Probably at the bar. The time is over when a small or medium sized independent player in this industry can just focus on getting from one year to the next. If all you think about are tactics and operations, chances are that one year soon, you won’t make it even as the industry as a whole continues to prosper.

 Your choices are pretty clear cut. There are four. They are discussed below. The goal of this article is to motivate you to dispassionately evaluate your business and the market, and then actively pursue one of the four. To do that, we’ll consider the impact of some recent industry transactions and identify the problems that most smaller companies say they have in common.   To begin, we’ll get past some of the hype and excitement of snowboarding and look at it as another industry starting to enter its maturing phase.
In 1980, a Harvard professor named Mike Porter wrote a book called Competitive Strategy. The whole volume is worth your consideration, but Chapter 11, “The Transition to Industry Maturity” is especially relevant at this time in the industry’s evolution. I think we can safely assume that Dr. Porter was not a snowboard pioneer, but his discussion of what happens in a consolidating industry (any consolidating industry) will look ominously familiar to anybody who thinks about what snowboarding is going through.
Step One in our analysis, then, is to agree that as much as we may love it, and as exciting as it may be, the evolution of this industry won’t ultimately be different from that of any other industry. At this point in time, the only difference I perceive is that it is happening faster than it does in most industries. I believe that’s because there are really no significant barriers to entry, but the fact that you have to commit to the next season before the last one ends makes it hard to get out.
No entrepreneur succeeds without an almost heroic belief in themselves and their business; if they didn’t have it, they would never take the risk.   It can be difficult to have an objective perspective on industry trends and the potential of their company. The euphoria engendered by rapid growth, the hype of any fashion related business, and the fact that companies try to make themselves look bigger than they really are (except Burton and Gnu/Libtech, who seem to want to look smaller) can make it tough to be dispassionate.
Get dispassionate. Talk to business people outside of snowboarding. Set some measurable goals. Figure out what success means (hopefully more than bare survival). Formally decide if the risks are worth the potential returns, financial and other.
Step Two is to look at some recent industry transactions to figure out why, in general terms, they happened and what their impact on the industry may be.
Let’s see, Morrow went public, Salomon bought Bonfire, Ride bought Thermal, Hooger is buying American Snowboard Manufacturing, Madison Sport bought Purged/Mantle and Variflex bought Plunkett Snowboards, Inc. What’s going on?
Companies are building their balance sheets, vertically integrating their businesses, associating themselves with stronger partners, developing year round cash flow, and generally positioning themselves to survive and compete with lower margins on higher volume. 
Are we shocked by all this activity? No, because under Step One we agreed that the same trends that occur in any other maturing industry will also occur in snowboarding.
Let’s look specifically at the Variflex deal. Variflex produces protective equipment and in-line skates that it sells directly to large retailers.  In May 1995, it acquired Plunkett Snowboards, Inc. to produce its Static brand of snowboards. Variflex’s goal at the time was to produce a board that retailed in the $300 price range but was comparable in features and quality to the most expensive brands.
Because Variflex sells directly to retailers, from a financial perspective this goal won’t be difficult to achieve. Based on my discussions with a number of board manufacturers, I’d estimate that the cost to produce a high quality board in volume is probably under $90.00. Let’s say it is $100 and the board is sold to a retailer for $140 to give Variflex a 40 percent margin over cost. The retailer wants to make their traditional 40 margin too, so the consumer pays $233.
Hey, what happened to the $300 retail price? Remember this is a bit of a moving target, and K2 already has the Dart out for a suggested retail of $270. K2 and Variflex are both selling direct, as is Elan with the Nale brand. Eliminating the profit for that extra middleman frees up a lot of margin.
Happily, there’s more than financial calculations at work here. Even in skiing, brand names and marketing keep retail prices higher than they need to be from a financial perspective. Nobody is going to scurry to give up margin before they have to. But I do see the day where a high quality wood core board will retail not too far north of $200. With boots and bindings, there appears to be more of an opportunity to keep margins up through technological innovation, assuming you can afford the cost of developing those innovations. 
Step Three is to identify problems most companies have in common. One’s obviously price pressure. It’s more or less important depending on your market segment and size, but it exists for everybody.
A second is inability to differentiate a brand. Most smaller companies are unable to spend enough to make an impression in the market. Even when they do spend it, it gets lost among the hundred of brands trying to do the same things, driving operating margins down even further.
A third issue is the working capital requirements of a highly seasonal, fast growing business. Success probably requires you grow at least as fast as the market. Seasonality, and the increasing tendency of retail accounts to require longer terms, means you have to tie more and more capital up in the business for longer and longer periods. Many company’s’ track records and profit potential don’t justify either a loan from a bank or an investment. Lacking a rich uncle or a trust fund, it’s going to be tough to come up with the money. 
Fourth is dependence on the Japanese market. A few months ago, several sources estimated that there would be 800,00 boards brought into Japan this year. Interestingly, I’ve also heard 400,000 and 1.2 million. Maybe 800,000 is a reasonable number.
I don’t know what reality is in the Japanese market. But I am certain that the days of 50 percent cash deposits and 50 percent site letters of credit are going to vanish. Companies creating brands that are sold only in the that market should not expect those brands to survive. How will they replace that cash flow?
In summary, then, margins are declining while required marketing costs increase. The financing
necessary to grow quickly enough so that volume offsets reduced margins is, at best, difficult to find. Cash constraints will be accentuated by changes in the Japanese market.
Step Four is to look at possible strategies given the conditions and market evolution described above. There are four of them.
The first is to find enough capital to reach a volume world wide, as a manufacturer or a wholesaler, that makes you a “player.” That is, that puts you in a position to compete at least partly on price and to be profitable under the circumstances described above. As a stand alone snowboard industry company, if you aren’t close to being there now, you probably won’t be able to get there. The reason is that you won’t be able to show the return on investment required to attract the funding.
The second, in theory, is to find a market niche where you can differentiate yourself so that brand loyalty offsets sensitivity to price and, to some extent, insulates you from the emerging competitive conditions. I say “in theory” because the only company I believe has really accomplished that is Mervin Manufacturing, and they’ve done it by having a consistent focus over a period of years. Nitro, with what I’ll call their high tech, retro-ski approach to advertising this year, may be trying to establish a niche for themselves and I think they’ve got a good chance to do it. Not a jumping rider in sight on some of their ads. For a long time, they tried to disguise the fact that they were a European owned company. Now it looks like they are using that “liability” as a strength.
AK Bommer Boards in Valdez, Alaska is another good example of a niche strategy. They make individual custom snowboards. “Big Boards for Burly Riders with Big Feet” it says on the business card. As a guy with a size 13 attached to my leg, I called for information. Probably won’t ever be a big company, but at $500 a board, their margins should be okay and their break-even point low.
They have the additional advantage of knowing exactly who their market is; “Big Boards for Burly Riders with Big Feet.” Think of the power of that phrase. With those eight words they know exactly who their competitors and customers are and what their position in the market is. Consider the efficiencies it gives them if only because they don’t waste advertising and promotion dollars.          
The problem is that there are too many companies and not enough niches, and no niche completely insulates you from price pressure. Sales dollars required to break even are rising, and I expect they will continue to do so.
The third strategy is to become a product line of a larger company with year round cash flow. You share overhead, facilities, possibly distribution channels and reduce your break-even point. Year around cash flow eliminates or at least reduces the annual crisis of working capital common to one season businesses.
A corollary to this strategy is to find someone better capitalized than you are to distribute your brand. You continue to control product development, and maybe advertising and promotion, and earn a royalty on sales. It’s probably a lower return strategy, but it’s lower risk as well.
The fourth strategy, which is inevitably the least popular, is to pack up and go home. If you go through the kind of analysis suggested above and can’t find a way to implement one of the three strategies I’ve identified, maybe the chances of success don’t justify the risk and effort anymore.
There’s actually one more strategy, if you want to call it that. It’s what I characterize as the “more of the same” approach. This will prove to be the most popular approach and some companies taking it will succeed. A lot won’t. There’s not much to this; just keep doing whatever you’ve been doing before and hope it works. Every company has a strategy- even if it’s a bad one and they didn’t actively chose it.
I know how hard it is to find time to deal concretely and dispassionately with issues of strategy when you’re trying to run a company. But the surest path to failure is to be caught in between strategies, unable to compete on price and not having established a defensible market niche. If you are caught there you aren’t going to enjoy it, and you aren’t going to survive.
Trends In Any Maturing Industry
Shamelessly plagiarized in a good cause from Competitive Strategy by Michael E. Porter
·         Firms sell to experienced, repeat buyers who shift their focus from the decision to buy to choosing among brands.
·         Industry profits fall. Smaller firms are most affected. Cash flow declines when it is most needed, and capital becomes increasingly difficult to raise.
·         Danger of over capacity accentuates the tendency towards price competition.
·         Company attitudes must be disassociated from the euphoria of the past.
·         New products and applications become harder to develop.
·         Dealer margins fall, but their power increases as more brands compete for shelf space.
·         Slowing growth means more competition for market share. Frequently that competition can border on irrational.

Competition may emphasize cost and service