MARKET WATCH: Some Industry Strategic Considerations
Jeff Harbaugh
- January 12 2009
- 1,177 views
- 25 comments
Reading and analyzing Quik’s 10K helped clarify some issues for me about industry strategy and the economy. I want to use some of their positioning statements to talk about how we compete in the much larger market we are, or want to be, a part of. When I say “much larger market” I mean the fashion driven market and the customers and potential customers who don’t skate, surf, or snowboard.
Recently, I’ve written about Urban Outfitters and Hot Topic success in their most current quarters. Their strategy, simply stated, is to figure out what trends their target customers are interested in and give them products that meet the needs implied by those trends. Buckle seems to be doing the same thing, but I haven’t written about that yet.
Quiksilver and the whole action sports industry (if that’s what we should still be calling ourselves) takes a different approach. To quote Quik’s 10K (and it could be other companies as well):
“We believe that surfing, skateboarding, snowboarding and other outdoor sports influence the apparel choices made by consumers as these activities are communicated to a global audience by television, the internet, movies and magazines. People are attracted to the venues in which these sports are performed and the values they represent, including individual expression, adventure and creativity. “
They go on later in the report:
“We believe our most valuable input comes from our own managers, employees, sponsored athletes and independent sales representatives who are actively involved in surfing, skateboarding, snowboarding and other sports in our core market.”
“Over time, our brands have become closely identified not only with the underlying sports they represent, but also with the way of life that is associated with those who are active in such sports.”
Quiksilver, like most companies in this industry and in juxtaposition to Urban Outfitters, Hot Topic and Buckle, wants to convince consumers that what it’s involved in is cool and that they should want to be associated with it.
Fair enough. Nothing wrong with that as a strategy and obviously it’s worked for a while. Why might companies in the industry need to reconsider that strategy?
Two reasons. First, the larger you get, and the larger you want to get, the more difficult it becomes to implement that strategy. Almost by definition, your new customers are further and further from the core of what you do and what you have based your appeal on. Your message is less compelling as your distribution broadens and your product and brand becomes a bit ubiquitous. And you’re dealing with customers, and potential customers, with competing core interests that may be as or more compelling to them than yours is.
The second reason is the economy. We had 20 plus or so years of unprecedented good times. Lots of cash flow, lots of growth, lots of disposable income. We got use to it. We based our strategies on it. We thought we were great managers at least partly because people had lots of money to spend. Now we’re in the middle of what looks like it’s going to turn out to be the worst recession since World War II. None of us have ever managed through anything like it. At some point it’s going to end and we will start growing again. But it won’t be like it was before- at least not for a long, long, long, long, time.
Consumers are going to save more and spend less. Credit will be tighter. Home equity won’t be available for spending. Retail space is going to contract. If you believe, as I do, that economic conditions will be fundamentally different for an extended period of time (not necessarily bad the whole time- just not unbelievably good), isn’t it time to reevaluate your fundamental business assumptions?
I reviewed Quik’s 10K filings back to 1995 and found that the basis of their strategy hasn’t really changed. Their explanation of it has become more thoughtful and sophisticated but at its core, it hasn’t changed.
Well, why should it? It was successful until the Rossignol deal.
Let me try and be succinct (Not always my strong point). Even when the recession ends, you are not going to be managing in the same environment you were managing in before it started. Now is the time to be thinking about what that means.
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.
Photo: Jenah Crump, Creative Commons
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January 12th, 2009 at 6:36 am
Hi Jeff
I agree with you , some one asked me the other day any advice
for business save 3 months salary and don’t spend money tell you really need it ,
as for Quicksilver we buy from them and I do like them but they just need to make something that is really good i.e. a hard good for us to sell(great wetsuit)
people learn the most from the biggest mistakes they make
thanks for the info
January 12th, 2009 at 8:06 am
Lance,
Good advice. Three months is a minimum. I’m sure Quik would love to help you out with a really great, fundamentally different, product. Hard to do in this industry however, as anything new is copied by everybody else pretty quickly. I imagine they might point to the snowboards being made at Mervin as such a product, but of course that’s not branded Quik.
Thanks for the comment.
J.
January 12th, 2009 at 8:29 am
Hey Jeff,
I’ve been hearing rumors for months now about Quiksilver being $1.5b dollars in debt. Is this true? If so, how does this effect the future of their business? Typically if someone is in debt with this amount… How long can they keep running their business?
Are they running on fumes at this point?
Thanks for your insight…
January 12th, 2009 at 8:33 am
“The second reason is the economy. We had 20 plus or so years of unprecedented good times. Lots of cash flow, lots of growth, lots of disposable income.”
I think everyone should be taking a good look into what was going on during that late 80’s / early 90’s transition.
January 12th, 2009 at 9:10 am
Since1936,
I published something last week on Quik’s October 31 quarter and total year. If you go to the top of this page and look to the right, you’ll see a link to it. It probably goes as far towards answering your question as I can go.
Their total lines of credit and long term debt were about $1 billion at October 31. No idea what it is today. That number by itself is neither good or bad and doesn’t tell us anything by itself. It’s public information that the company’s leverage is a concern and that they are working to address it. I discuss that in my other article.
Debt, the cost of debt, and the willingness of lenders to continue to lend certainly effects Quik’s ability to operate normally and to be in business. But most companies have debt and, in general, using debt wisely can be a smart business practice.
There’s value in Quik and its brands and it will be around. But I expect to see some kind of liquidity event, though I don’t know what form it will take or when it will occur. That’s not me looking into my crystal ball. That’s essentially what they say they are working on in their 10K.
Hope that’s helpful. Thanks for the comment.
J.
January 12th, 2009 at 9:16 am
Reality Czech,
I’m guessing you’re talking about the collapse of the skate market that occurred around then and making the point that it wasn’t exactly “unprecedented good times.” You’re right to bring it up. I thought about that when I wrote this article. I decided that even though it was a huge event for everybody in skate, it was pretty insignificant for the overall economy so I didn’t mention it.
Thanks for the comment.
J.
January 12th, 2009 at 11:07 am
Hey Jeff, great article, research and facts are everything when making decisions. To use your word …why so “succinct” ? More insight regarding this transition period would be great.
Can the team at Transworld provide more space to keep us up to date re your thoughts and scenarios over the next few months? All the extra review and comments are welcome at this time in our industry. Great work, will check your website.
January 12th, 2009 at 11:23 am
Hey Jeff,
I normally read these type of message boards as they help to give me insights in broadening my perspective and strategic thinking in this very fun but challenging business. I have worked on the manufacturing side and have owned a retail store for the past few years. While I am relatively new at retailing I have worked diligently to learn as much, as quickly as I can. We are about to open our second store in S.D. County as crazy as that sounds! I believe this year is a year of positioning and planting some great seeds. I believe “010″ is going to rebound and we want to be positioned strategically.
Quik is a great company and I, among many others, are pulling for them and all the great people there. And don’t even get me started on Bob, look up “good guys” in wikipedia and his face should be plastered all over the page. No matter what, at the end of the day, that’s who he will be.
However, the main reason for this post, was to let you know that I believe that you are an amazing analyst. Your insight and analysis is genius and you explain your high level thoughts in a way that I can understand. I have learned so much from you, so thank you.
Just my thought on the success of stores like Buckle. They took a business model and leveraged the fact that kids are very fashion forward and fashion sophisticated now. A lot of these “kid consumers” would like nothing better than to walk into a high end boutique or a Fred Segal like store and buy fashion. The issue obviously is that not all their parents are willing to drop 1500 each time they want a few school clothes. So, the alternative is go to a store like Buckle. They give you a boutiquey feel at a much better price, relatively speaking. And then there are still some great recognizable brands that they can relate to. We held a round table and stood out on the street and ask the kids where and why they wanted to shop. They liked Buckle because they can get their staple brands and then find a very cool fashion brand that’s new to them but sets them apart from the mainstream stuff.
Sorry for the long reply, just felt compelled to take a few moments to express my gratitude.
I would also like to encourage everyone to keep looking forward and this too shall pass.
All the Best!
January 12th, 2009 at 1:38 pm
Hi Jeff,
One question: you write that Quik’s stragegy “was successful until the Rossignol deal.” Am I correct to imply from this that you think the Rossignol deal somehow evidences a failure of Quik’s longheld (and otherwise successful) strategy? I follow you insofar as that the economic meltdown makes now a good time to rethink strategy. But the Rossignol deal (at least the acquisition) wasn’t a product of the meltdown. Do you really think it was a strategic mistake or that it shows Quik’s strategy was coming apart prior to the isht hitting the fan in the markets? Obviously, the Rossignol deal didn’t work out, so it was a mistake for some reason. But, to use a metaphor, just becaue a train comes off the tracks doesn’t mean it was heading in the wrong direction in the first place, right? I’d be curious to know your thoughts about that deal, especially with respect to whether it meshed with Quik’s past (and still current) strategy.
Thanks,
Morgan
January 12th, 2009 at 1:56 pm
Student of Business,
Thanks for saying nice things. All I try to do is make people think about business issues and maybe say some stuff that others are sometimes reluctant to say even though it needs saying. The way I learn from this is when people tell me I’m wrong, and a good discussions follows so please remember to disagree with me when you think it appropriate.
I haven’t been in a Buckles, but what you’re saying makes sense to me based on what I’ve read.
J.
January 12th, 2009 at 2:02 pm
Crocodile,
I’m still kind of thinking about this transition. I’ve known for years (like we all have) that we’re becoming (or already are) the fashion business to a large extent. But it was really writing in this space that gave me the “AHAA!” moment when I began to question if the traditional action sports company strategy would continue to be as appropriate as it has been. The idea is very much a work in progesss, and I haven’t thought through the implications yet. What do you guys think?
Email Transworld and tell them what you’d like me to be doing more of. Can you be a little more specific?
thanks,
J.
January 12th, 2009 at 2:29 pm
Morgan,
Great question. I probably wasn’t as clear as I needed to be. As you read in the article, I’m starting to wonder if there might be some limitations to how far a company can push the traditional action sports positioning of being “core” and based in participation in the activity as it grows. Not just for Quik, but for any industry company that’s used that positioning.
I don’t believe that Quik’s strategy has failed- it just might be more difficult to implement successfully. I believe (nobody in a position of authority at Quik has ever told me this) that part of the reason for the Rossignol deal was because it gave Quik a lot of growth, and potential for more they thought, quickly. As a public company that was in some ways beginning to reach the limits of its distribution, I can see why they would have thought that way and why it might be attractive.
So I’d say two things. First, the purchase of Rossignol doesn’t evidence a failure of Quik’s strategy. But it certainly suggests that they were aware that their traditional strategy was no longer going to give them the growth they wanted. And you could reasonably ask if Rossignol fit into their traditional strategy. I’d say it didn’t and frankly I never saw the potential that Quik management apparently saw. But like an awful lot of people, I had tremendous respect for what they’d accomplished and just said, “Well, those are real smart guys and they must know something I don’t.”
My second point is that even if the acquisition wasn’t in some sense a strategic mistake, it was certainly damaging to the company financially and, I imagine, in terms of management focus. They lost a bunch of money, damaged their balance sheet, and had to focus an awful lot of time and effort first trying to integrate it and then selling it.
Does that answer the question? Follow up if it doesn’t.
Thanks,
J.
January 12th, 2009 at 2:52 pm
All acquisition decisions are part of management strategy, therefore you would have to say their strategy was flawed in this particular case, when they decided to buy Rossignol.
The decision was based on a long held desire by the founders and key associates. I think they tried to blame that Bernard guy and he no longer is at Quik, but really the founders of Quiksilver loved Rossignol from day one and were stoked to buy the company with borrowed funds, also (as you say) to acquire something with great top-line sales to add to the books, plus they believed and genuinely had passion for the brand. Look at the Quiksilver logo … clearly you will see the classic SNOW CAPPED peak.
A bummer it ended up being a fundamental detour from the business they were famously great at, surf apparel for the masses.
January 12th, 2009 at 3:12 pm
I believe the Rossignol deal was not a “company / group” decision. There is a reason why Mr. Mariette is no longer with the company. I know this statement lacks any real analytical value, but sometimes people make poor decisions, simple as that. I had the pleasure of meeting Mr. Mariette several times, and while I found him to be a very intelligent and insightful man, I also found him to be very aggressive. I believe there was a bit of national pride associated with the Rossignol deal. I know most of the worker bees at Quiksilver were not onboard with this decision when it happened. The point being I don’t think this was ever a true strategy for the brand. It was more of an “opportunity”. Quiksilver was riding an incredible wave of success and the opportunity came up. It was then justified as an opportunity for growth in the outdoor arena. Those of us who keep a finger on the pulse of this industry saw this as a huge mistake. Bob was out to lunch during those years. With him back at the helm I suspect Quiksilver will get back to doing what they do best and get rid of all the excess baggage i.e. Kummunity Project, workout gear, footwear (at least a big part of it)…weren’t they trying to do energy drinks also?? Wouldn’t be surprised if they sold DC as well!
January 12th, 2009 at 4:04 pm
Crocodile,
Obviously the way it worked out, it was flawed, but hindsight is always 20/20. As to who made what decisions and what their personal motivations were, it sounds like you have more info than I do. I love to speculate on those kinds of organizational psychology issues and would be happy to do so if we meet up at a show. But in a public forum like this one, I am really cautious about creating the perception that a speculation is the truth in spite of all the fun we having doing that in this industry.
January 12th, 2009 at 4:14 pm
Isaac,
Good analysis. See my response to the comment right above yours.
Also, and this applies to any company, if an “opportunity” doesn’t fit the company’s strategy, then you wonder if it really is an opportunity.
Thanks,
J.
January 12th, 2009 at 5:24 pm
Jeff-
Love your column. You are the man! Question- I am hearing tidbits that it may take a long time before we are out of the woods. With a 2nd wave of foreclosures looming and the risk of hyperinflation, how do we really know if the economy is going to turn around like our media says it will in late 09 early 2010? Are they blowing smoke up our asses? Can you recommend some good unbiased pubs-domestic or international that can give it to us straight? What’s your opinion on what I am hearing?
January 12th, 2009 at 5:26 pm
Jeff,
Agree, Thanks for the advice.
January 12th, 2009 at 5:30 pm
Issac,
Great comments about Mr. Mariette! Most of us don’t see the brand platform that Mariette created in Europe before his visit to NA. But some people have compared Quiksilver Europe to a flea market. With that in some people’s eye’s he was considered a genius because of the financial growth but not for the brand growth.
After 9/11 there was a lot of shake up that happened internally at Quiksilver. NA was pushed to join the band wagon to have everything GLOBAL, some people call this McDonaldlizing the company. Shortly after Bernard joined NA and started making moves and hired people from outside the Quik umbrella (nothing against these people but I don’t think they understood Quik expect for a flowered shirt. most of these people came from guess, gap and other major outside the asr umbrella brands).
Like anyone, Bernard made some critical mistakes, everyone has to understand that these mistakes Bob had no control of…Bernard was the man at the time. It was basically a domino effect and Rossi was the last of the domino’s… It’s a F&$**G ski company. Anyone who has had the pleasure to read the Quiksilver book or meet anyone who has been with the brand for 10years or more knows that skiing isn’t Quiksilver. They already owned one of the best snowboard manufactures so it just didn’t make any sense.
If anyone is able to lead them out of this mess, Bob is the guy to lead the team.
January 12th, 2009 at 10:18 pm
Jeff, How long will underperforming stocks such as Orange 21 and Source Interlink be able to remain trading below $1 per share before they lose the IPO status?
January 13th, 2009 at 9:28 am
Sky,
I don’t know and neither does anybody else. Including or especially the media. My OPINION, and that’s all it is and it’s worth what you’re paying for it, is that early 2010 is the soonest we can expect a turnaround, whatever that means. Let’s define what we mean by turnaround. That’s when we get our first quarter of positive GDP growth.
I have no idea exactly what quarter that will be (but it will happen). What I suggest you focus on is that when the turnaround does come, that doesn’t mean we go right back to 4 or 5% GDP growth. Plan for slower, more normal, growth than what we had before this recession starts.
As far as what to read the answer is everything you can get your hands on but not just the usual public media. Check out all the internet sites that focus on the economy and the stock market and start reading some of those opinions. You’ll find some that aren’t widely known or distributed among the general public that are good. Some you have to pay for, some you don’t.
Hope that’s helpful.
J.
January 13th, 2009 at 9:30 am
markfitzy,
IPO means initial public offering as far as I know. I think what you mean is how long before they get delisted. I wrote about this maybe two months ago, and it’s still on the Transworld site somewhere. I think if you click on the market watch icon on the front page (which is much too far down the page if you ask me!) you should be able to find it. I think it will answer your questions. If not, let me know.
thanks,
J.
January 13th, 2009 at 8:00 pm
I love that people are actually thinking about their purchases and weighing their wants vs. their needs for a change… refreshing and I believe it signals the end of the baby-boomer inspired shopping-as-a-hobby way of life… but something has to change to make retail seriously sustainable. Buying and selling the way we are used to can continue as it is for only so long before the strain on the environment becomes a reality… There are lots of cool initiatives going on in the action sports industry, which is a great sign since there is always a trickle up to other parts of society from us, but a real mindshift is needed and I think our industry has the vision that is needed for it.
January 14th, 2009 at 7:36 am
buddy,
Something is changing- stores are closing in droves (not only in our industry) I saw the number of 140,000 store front closings last year. I haven’t seen a projection for this year. This is just a guess on my part, but you may also find that you have fewer choices in specific types of goods when you shop as retailers control inventory a bit more tightly. Not that we’ll suffer that much if we only have 30 tshirts to pick from instead of 75.
I think you’re right that the baby boomer shopping spree is over- at least for a long time. And I hadn’t thought about the fact that it’s all good for the environment, though I guess it is.
good comment!
thanks,
J.
January 14th, 2009 at 7:13 pm
Interesting article on NYT.com today re: luxury goods and the debate in France over their place…
http://www.nytimes.com/2009/01/15/fashion/15paris.html?_r=1&hp