MARKET WATCH: A Strategic Focal Point in Billabong’s Change in Guidance?
Jeff Harbaugh
- December 10 2008
- 954 views
- 28 comments
As you know and have been told about 17 times, Billabong has cut its forecast. Here’s the link to the call with investment bankers if you want to read the whole thing. For those of you who don’t want to read all 22 pages, here’s a great article that summarizes it.
So having short cut the process of analyzing the transcript from the call, let’s get to the heart of the matter. Talking about their response to the economic environment, Chairman and CEO Derek O’Neill says,
“Promotional activity may support short term targets but we feel it can also lead to longer term expectations from customers and pressure brand equity. We don’t plan to participate in any race to the bottom in regards to pricing. We’ve built our brand equity over many years and we’re determined to protect it. We have a compelling brand portfolio and retail offer and we continue to manage these in the interests of the long term health of the business.”
For solid brands with strong balance sheets, it’s hard to argue with that very strategic decision. But just because it may be the right decision doesn’t mean it’s easy or cost free.
Every brand is deciding (or needs to be deciding) how to manage this issue right now. And they’ll be reviewing it as conditions change. I don’t have any specific knowledge into how Billabong reached the decision reflected in the quote above, but I can tell you some of the considerations that go into it for all brands.
None of us have to think very long to realize that brand equity is the most important thing we’ve got going for us. In this industry, without it, you are not going to be successful at the high end retail level. End of discussion.
But now it’s time to get tactical. Holding your pricing compared to your competition is going to cost you some sales. How much depends on your brand strength and positioning, and a host of other factors. Like the terms you offer, whether or not (or maybe how much) you’ve cut back on your inventory purchases, if you maintain all your advertising and promotional programs and how bad the recession is.
So you pull up your trusty spread sheet and revise your projection. It shows you have fewer gross profit dollars than you thought you were going to have (I guess I’m assuming your sales aren’t rising right now) and, depending on how you’re managing your expenses, your net income is probably down. If, like Billabong, you’ve made the strategic decision to preserve brand equity above all else, your chances to cut expenses may not as great as that of some other brands, because it’s those expenses that create and maintain the brand’s equity.
Now you have to figure out how long current economic conditions are going to last. Billabong says, and I think correctly, that not fighting the price wars and maintaining brand equity through the recession will leave them well positioned when things finally turn around. Their thinking is that other brands will have either have gone away or will have lost credibility. Here’s what Derek O’Neill says:
“The discounting that’s going on, I would argue, in the long term, is unsustainable. So I would have to think that environment is going to change at some point, or to be honest the market share opportunities for us are going to become even bigger because there may not be some of our competitors around.”
“The fact is that we think it’s an uneven playing surface while the discounting goes on, we’re just not going to participate and we’ll have to tough it out. But I don’t see it as being sustainable in the long term and therefore I expect that market opportunities, market share opportunities will begin their upward trend again at some point, not too distant future.”
They have no doubt had long discussions about what “sustainable” and “unsustainable” mean and just how far away the “not too distant future” is.
I agree the discounting is unsustainable, but let me tell you how that plays itself out in my experience.
Companies having hard times keep discounting. They push sales, make deals, cut costs and prices, and keep trying to survive. Until absolutely forced to, they don’t sit down and say, “The risk doesn’t justify the potential reward here. We should shut down.” They fight, often beyond rationality, to survive. If they eventually fail, they are either acquired (in which case the brand doesn’t go away) or they liquidate, putting whatever merchandise they have left on sale at lower and lower prices.
This process can go on longer than you’d expect. Talking about current economic conditions and the possible impact on their receivables, Derek says,”… these are somewhat extraordinary circumstances. I think that we’ve got the management team in place to manage around the current situation, but frankly no we’ve never seen somewhat of a slowdown at a global level like this. We’re not that old.”
I’m not sure many of us are. So extrapolating to the future from our experience with the past may not work.
Reading suggestion: The Black Swan; The Impact of the Highly Improbable, by Nassim Nicholas Taleb.
Jeff Harbaugh is a consultant for the action sports industry and works with companies to identify and focus on critical business issues and opportunities fundamental to the bottom line. For more information, visit www.jeffharbaugh.com.
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December 10th, 2008 at 12:04 pm
the sky really is falling. it really bad out there.
December 10th, 2008 at 12:40 pm
Joe,
Help everybody who reads some of this stuff I write out. Don’t just bemoan the circumstances. Tell us what you’re doing differently to manage things. We can all use a few new ideas.
thanks,
J.
December 10th, 2008 at 2:08 pm
This is a bigger problem then just the economy… When you walk into Jack’s or HSS the first thing that comes to mind is everything looks like the same brand with different artwork. We as a subculture have watered down our industry so bad that there is no more value to our small industry. Money has been such a light for each brand path to success… now these brands are about to take there lickings.
The brands who have decided to stay private and have great relationships with the banks that are supplying credit are the one’s that are going to survive in this time. Being a public company isn’t always that bad it’s just when you run into a situation like this and there are dozens of other brands that offer your same service and can’t show a difference between brands. Such as Nike = Sport, Louis Vuitton = Luxury, Burton = Snowboarding… it’s not quite the same for others… Quiksilver, Billabong and Volcom are all just trading dollars lifestyle for lifestyle.
What to do now? It’s bigger then all of us… I’m not saying you should throw in the towel, but I think it’s more like the towel is about to be handed out in the next 1-2 weeks.
One thing we can all agree on is that there is big change about to happen in the surf industry. The chemistry of this culture will change… and typically change is good.
I hate to see people/families lose jobs in order to progress because of others mistakes.
December 10th, 2008 at 2:31 pm
As you say, being public can be, and is, both good and bad. The watering down, I’m afraid, is inevitable with growth after a certain point. But public, or private, if you don’t the balance sheet and liquidity to make it through a tough spot, you’ve got a problem. I agree with you that great cash flow has covered up a lot of issues for years. It’s always been that way.
You don’t happen to work for Quik do you?
thanks for the comment.
J.
December 10th, 2008 at 6:11 pm
No, I don’t work for Quiksilver or any other brands in the ASR business.
Myself with others have been intrigued to see massive brands like O.P. and Quiksilver grow over the years as well make conquer their challenges or in some cases lose everything.
Billabong is right in there with these brands as well by acquiring Dakine recently, Nixon, Element and Von Zipper. All these brands are expensive brands to keep running with possibly a very low ROI, so it will be interesting to see how they maneuver over the next few years as well. Dakine is probably the healthiest of the four brands they acquired and has the most potential, but the challenges they’ll have are most likely their low margins with bags and accessories business model with high freight cost. I’m sure they are lucky to break even on the board bags but at the end of the day it’s probably a loss, but a gain through marketing and brand exposure.
Sadly for Quiksilver they should be weathering through all this steadily with a long term savings plan in mind. But because of the Rossignol acquisition it really appears to be detrimental to the brand and Corporation. When you look at Quik vs. Billabong, Quik’s portfolio actually should be a better ROI similar to Volcom. Let’s hope for the best…
You were asking what can some of these brands do… A good place to start is saving which I know it take someone like myself to say that. This “crisis” isn’t just about the Senior Managers, Directors or managers but it’s also the normal everyday employees. Think about cutting back in so many ways or even going to the extreme of asking employees to take a cut in wage. As well with CEO’s not taking a salary or bonus. It takes everyone to be involved as well meet with everyone… some of the best ideas are always left unheard because of ignorance.
If there is one thing I can share with you is the EGO’s most Senior Manager’s I’ve met over the years seem to carry. Ignorance + EGO is a big reason why we are all in this position.
Break down all the walls and start listening…
How do you see the CEO’s and Senior Managers reacting right now? Are they reacting/defensive, being offensive or lost? How do they prevent this to happen in the future? How do these brands create more of a value for this industry rather treating it like a flea market?
December 11th, 2008 at 12:16 am
New Ideas…..step down from the soapbox please. Us folks that DO work in the “ASR Business,” as you put it, understand what is going on out there and are working VERY hard in our respective teams not only for our jobs but to put out quality product that doesnt make the industry look like a “flea market” as you so professionally put it. I’d love to explain to you why that might appear to be, but I’m sure youre already off-line and racing to over to the nearest Tommy Bahama and Hollister retailers to find some new gear for your company’s christmas party.
December 11th, 2008 at 7:19 am
So intrigued that you missed Sector 9 and Xcel. Two companies picked up by Billabong that are performing way above average. What a chimp–how’s that for professional. A little bit of knowledge is a dangerous thing, so you almost done with biz 101, bet you can’t wait to get home and see your H.S. sweetheart again.
December 11th, 2008 at 7:55 am
it’s pretty true- some stores have so much gear piled up it does look like a flea market..
December 11th, 2008 at 8:16 am
HB,
I didn’t miss Billabong’s acquisitions. I’ve actually written here about the Sector 9 and Dakine deals and said I thought they were great acquisitions. As to how the Sector 9 and Xcel are performing, I imagine well, but I have no specific information about that as Billabong doesn’t break out their numbers. So if you’ve got specific information, and since you have the advantage of being able to stay anonymous, please share.
I am always happy when somebody disagrees with me here. As I’ve said, I never claim to be right all the time- I just hope to create some discussion around issues. Could you be a little more specific as to your disagreement about what I wrote?
Thanks for the comment.
J.
December 11th, 2008 at 8:27 am
Come on Anonymous, let’s try and keep this keep this discussion above the sarcasm level. Just because you don’t agree with New Ideas doesn’t make them either wrong or stupid.
J.
December 11th, 2008 at 9:05 am
New Ideas,
In general, I think managers/CEOs are coming to terms with the fact that this recession is going to be worse than anything they’ve ever had to work through. Kind of like Derek O’Neill said in the conference call.
What I’ve normally seen doing turnaround work is that there’s a certain level of denial and hope that keeps people from reacting as strongly as they should as early as they should. We’ve had some of that too, but we’re no different from any other industry in that regard.
The great divide is between well positioned companies like Billabong and companies that are not in such good shape. Billabong can say, “We’re going to work to preserve our brand equity and market positioning and have the balance sheet to do it.” It may not be much fun and cost them some money, but it’s not a survival issue.
In companies that aren’t so well positioned and don’t have strong balance sheets (having lived on reliably growing cash flow during the boom times, as you pointed out), their survival may be at stake. The worse the circumstances, the more stressful and personal it becomes. People are threatened with losing their jobs and their assets. They look like they “failed” even if they did most things right. They feel, often correctly, that they’ve lost control. In the worse cases, a logical businesslike approach is often out the window.
As Billabong said in the conference call, one of the “benefits” of the recession, at least to them, is that some competitors may go away. Unfortunately, (at least from the industry’s point of view)as I described in the article, they don’t go away quickly or cleanly. Their unwinding can throw a lot of merchandise on the market at very low prices.
How to keep it from happening in the future? From an overall industry point of view, you don’t. Business cycles happen. Having gone pretty much up from 1982 to 2000, why are we surprised that the down part of this cycle isn’t short and easy? Regression to the mean happens.
Individual companies can’t do much about business cycles, but they can position themselves to survive and take advantage of downturns. Have strong brand positioning and a strong balance sheet. I’ve said that so many times even I’m tired of hearing it.
The last thing a company can do, and the hardest, is somehow be enough in touch with reality to react earlier than their competitors. Easy to say, hard to do.
December 11th, 2008 at 10:32 am
It’s also really easy to write 3 lines of “Facts”. Try writing a whole article before you start calling guys “Chimps”. Also, if you actually read more then one article you would see that Jeff has commented on these acquisitions before.
Regarding the article it’s really good to hear that Billabong are committed to keeping their prices but when you are seeing Billy pump out specials soon after Indent arrives it is a little questionable. If all the brands can dry up a lot of the specials we might keep this “premium” industry. Good chats though, all very interesting.
December 11th, 2008 at 10:39 am
Jeff, first of all I would just like to say how lucky we are to have someone like yourself, giving us your insight, and keeping us all up to date with everything that’s going on in our industry and others. Many of us have worked really hard to get to where we’re at in the Surf industry, and have over-come many obsticles. I really thought I had seen it all: Oil spills off the HB pier, Summers without any sunshine on the coast, The horrible happenings of 9/11.. This is without a doubt is a new type of “troubled water’s” that we’re all going through today. What I really hate about what we’re going through is all the “finger pointers” out there.. Some people just like to blame other people for all their misgivings. Let’s face it, none of us knew all the shit we’re going through today was going to be this tough. Many of us will get through it, some of us won’t. The only advice that I have to give to everyone is try to keep things in the proper perspectives as well as you can. Don’t burn the bridges of relationships that you’ve built throughout the years.
Do everything you can do to make it through these times, and be ready for the ride we will all take when the “Smoke Clears” My Dad used to tell me; “Son, when you’re facing difficult times, don’t worry about thing’s you don’t have control over. Do the best job you know how, dig in, and know, really know, that no one could have done it better, and, what ever happens, will happen. Then, at the end of it all, no matter the outcome, you can rest assured, you did your very best, and at night, when you go to sleep, you will rest peacefully to enable youself to deal with the challenges of the new day.”
December 11th, 2008 at 11:05 am
Dakine has a low ROI…are you nuts!
December 11th, 2008 at 11:08 am
Also how would their aquasition and sell off of rossignol hurt the quik brand, yes the bottom line but not the brand the average joe has no clue about this stuff.
December 11th, 2008 at 11:16 am
Hmmm,
I agree that the average Quik customers mostly have no idea what’s going on at the corporate level. The way it hurts Quik isn’t at the brand level, but at the financial level. What we know from the public information is that they’ve got some liquidity issues. Maybe we’ll get some insight into this when we see their next quarterly result any day, but that has the potential to hurt their ability to support their brands. If that should happen, it would certainly have the potential to hurt the brand.
December 11th, 2008 at 11:20 am
Duke,
Thanks. Your dad is a smart man.
I learn a lot doing this, but I do have to keep it from turning into a full time job.
J.
December 11th, 2008 at 5:23 pm
No mention of the fact that they only just started shipping their November orders for Australia last week. this is peak season and they cant supply their retail clients with product… but their own retail stores are full of new high summer deliveries. No thanks for helping out your long term loyal supporters!!
As for seeing a positive in having less brands in the market, how does this help the independent retailer? we need the small brands to be strong and keep billabong honest.
December 11th, 2008 at 5:52 pm
Jeff,
I agree, I’m glad you are bringing these topics to the surface and thank you for answer all our questions. I also want to clear up a couple comments earlier that in no way do I consider myself and expert in this field or do I want to mislead you that I’m trying to give that perception. I like others who have bought stocks in Billabong, Volcom and Quiksilver are interested in how these brands expect to recover.
Yes, I did say I don’t work in the ASR industry, but I have grown up skateboarding and surfing my whole life. Thank God to skateboarding I’m able to do what I do today!
As for the Ausie retailer, I’m sorry you are experience these set backs. Same with the manufactures retailers are going to have come up with their own game plan as well.
Jeff, have you heard anything how retailers are doing on the West vs. East coast? How should they be planning to place their buys at the upcoming trade shows? Is there anything they should be expecting with the credit crunch?
Thanks again, Jeff.
December 11th, 2008 at 6:37 pm
Aussie retailer,
Great info. Thanks. I think you’re right that having less brands is not a positive for specialty retailers if it’s the small brands that go away. But Billabong says they see it as a positive for them, and I can understand their point of view.
We can say that it can be good or bad for specialty retailers depending on which brands with which kinds of distribution go away.
J.
December 11th, 2008 at 7:13 pm
New Ideas,
Sorry, I don’t have a comparison between east and west coasts. How retailers should be planning their buys differs from retailer to retailer. I’m going to guess they will be cautious (wow, I bet you hadn’t heard that anywhere else)and that there will be a lot of serious negotiations between brands and retailers. They really need to work together these days. If I were a retailer, I’d be focusing on smaller brands and brands that are doing their best to hold their pricing.
Banks and other financing sources are still scared to lend. A recent treasury auction ended up with some people parking money in short securities for an interest rate of zero. Yes- zip, zilch, nada. They are willing to give up interest income for safety. The TED spread (The price difference between three-month futures contracts for U.S. Treasuries and three-month contracts for Eurodollars having identical expiration) has come down, but is still very high historically. There is just a lot of fear out there still.
My expectation is that the credit crisis will go away slowly, but do not expect it to be like the good old days again. At least not for a long, long, long time.
J.
December 11th, 2008 at 9:03 pm
One thing that I think should be a concern to all, but which I have not seen discussed - is the amount of product that is being put into the discount channel. If you have been to Marshalls, Costco, or TJ Max recently you may have noticed that they have become the dumping ground for our industry. Marshalls has entire sections dedicated to action sports products often running the exact same goods as you would find down the street at Jacks or Surfride but for a significantly decreased price. While Billabong says, “it?s an uneven playing surface while the discounting goes on, we?re just not going to participate and we?ll have to tough it out,” it seems that there is a lot of Billabong and Element product in Marshalls.
How are “core” retailers - the real high margin customers of the brands - supposed to compete and survive when the brands are undermining them with this channel? It seems that mass dumping into the discount channel leads to commodization of their products and ultimately becomes pretty much a price game. While this might not be an issue in “normal” times when people want to shop at a “cool” store, I would think that as the customer’s wallet tightens, the brands - including Billabong - would want their long term core customers to benefit from the kinds of deep markdowns given to discounters rather than increase pressure on the full-price channel.
How can Billabong say they are protecting their brands by maintaining while they clear huge chunks of inventory into the discount channel at the same time?
December 12th, 2008 at 5:44 am
TJX- While I don’t disagree with you, what are these companies to do with all the excess inventory? The specialty shops are not buying it. I think companies could keep their inventories tighter in the hopes of not having to ” dump ” old inventory, but then again if they don’t order enuff they end up pissing off the specialty retailors by not being able to deliver everything, or spotty deliveries.
December 12th, 2008 at 7:58 am
TJX,
Sounds like it would be interesting to visit a Marshall’s, which I’ll do.
Every brand has stuff that didn’t work out and has to be moved. Or stuff that found its way into channels they didn’t mean to be in. The issue, of course, is how much, and we have to be cautious saying there’s “huge chunks” of inventory being dumped and in using similar adjectives because who knows what that means. I’m not saying you’re wrong but I try to be careful reaching broad conclusions based on anecdotal evidence.
Certainly it’s true that distribution has expanded (and not just because of current economic conditions) in ways we would have preferred it didn’t. Commodization is one result- in any industry. I completely agree that more consumers are price sensitive right now and are more likely to buy in those channels.
Unfortunately, the answer to the question of how core retailers are suppose to compete and survive is that many of them have not. This is not a new phenomenon either. The good news is that for those who are left, there are opportunities when there are no longer six specialty stores within a mile carrying the same product. There will always be a place for specialty stores. The market will tell us how many and which ones we need. Just like for brands. Sorry if that sounds a little harsh, but that’s how it is.
Opps, I forgot to log in before I wrote this. Thanks for the comment TJX
J.
December 12th, 2008 at 8:05 am
dwood,
That’s exactly the dilemma. First, you have to be far seeing enough to know this is coming and reduce your buying. Second, you have to not care that your competitors are not doing that and will replace you in stores to the extent they have product and you don’t. I have to confess I was never quite as good as that as I would have liked to have been when I was running companies. It’s an endless juggling act
J.
December 12th, 2008 at 8:23 am
In alot of cases the manufacturers place factorie orders based off focasted sales which is like shooting in the dark, this is done before orders are even in from dealers is some cases. ALmost impossible to hit right on, the manufacturer wants to order enuff to fulfill all orders and have enuff for re orders, or orders that didn’t come in when they were supposed to. What ends up happening is excess inventory that they eventually need to dump somewhere, unfortanately it ends up in that channel-TJX etc. Yes this pisses off the specialty dealer and makes things a price game. Mr retailer, if you were in the manufacturers shoes with all that excess inventory that you needed to get rid of, that you are not buying, what would you do?
December 12th, 2008 at 9:07 am
Ya but when you are Billabong, they can unload overstock at the drop of a hat, it not so much shooting in the dark. They can have sample sales and people will line up for hours in freezing cold to get stuff. It is way easier from them to unload overstock, then if you are a small unknown brand. But then you run into the brand equity issue. Also you can help but be a little bit suspicious about their own store being full stocked and their core retailers being shipped late right before X-mas and a retail slump, they have to get number into their stores and if it is at the expense of the core retailer so be it, they care more about the ROI on the retail expansion. At any rate I hope they (stores) are gona hit them with the discounts.