Chop Chop, Fizz, Fizz-Oh, what a morass it is!

Apologies to the Alka-Seltzer people for bastardizing one of their old advertising slogans. It just sort of sprang into my head the moment I saw Dwindle’s announcement on their Chop Chop Wood Shop. I assume it occurred to somebody that the name might be offensive to the Chinese, but this is probably just some form of obscure skateboard humor. Hope it turns out to be good business.

Last issue, I offered up my opinion on how the industry might evolve. That was written before Dwindle’s announcement. Dwindle may have validated the scenario I laid out, so you might want to go back and read it if you haven’t already.

Let’s not waste time being pissed at Dwindle, and let’s not be surprised by their actions either. It’s not like they’re the only skate company making or planning to make product in China-they’re just the only one that’s made a big formal announcement. They should get credit for standing up and saying it. This is just kind of standard industry evolution stuff.

But that’s not to say it isn’t important. The announcement marks a symbolic divide between how the industry used to be and how it’s going to be. That sure sounds pompous, but I really, really, really believe it. If it’s true, you need to ask yourself what you’re going to do about it.

Break Out The Spreadsheets!

At the end of the day, how this affects your business is going to have a large financial component, whether you’re a retailer, brand, or manufacturer. With your computer on and your budget (you do have one, right?) on the screen, decide the following things:

* To what extent will it become possible for an established brand to maintain higher prices in the face of Dwindle’s price cuts without giving away much or most of their volume?

* How much of these price cuts is going to filter down to the consumer? That is, do you think retailers will hold prices or pass the lower prices on to the skater?

* What will be the impact on sales and hardgoods price margins besides on decks?

* What’s going to happen to the pricing and sales of blanks?

* To the extent that retailers choose to pass on their savings to skaters, what will happen to the number of decks sold? Will it go up enough to compensate for making fewer margin dollars on each deck?

* Is there going to be any kind of backlash against decks made in China? If so, how long do you think it will last?

* What’s going to happen to distributors? If price cuts get passed through to consumers, will there be enough margin dollars to go around?

* What’s going to happen to brand value? That is, how will lower prices impact the consumers’ impression of a brand and its desirability to them?

Say, these are all cheery questions, aren’t they!

Make your best guess and plug the resulting numbers into your budget. What does your new financial model look like? Are you making money? If not, what are you going to start doing differently?

For Retailers

Interestingly enough, retailers may be less impacted than anybody. Most retailers have already gotten used to the idea that hardgoods aren’t necessarily the biggest profit-makers in the store. They have allocated more and more space to shoes, apparel, and accessories, because they know that’s where they make their money. The majority are selling blanks and shop decks. Largely, they’re not just skate shops either. Obviously, the more skate-focused you are, the bigger the potential impact. Tactically, the most important thing retailers may have to worry about is how the profitability of their blanks and shop-deck sales could be affected.

Strategically, it’s a different thing. A few years ago, Burton Snowboards expanded its distribution dramatically. Pretty soon Burton, like most of the other major brands, was available in most distribution channels, from specialty shops to big chains like Garts. I thought the message sent to the consumer was, “It’s just a snowboard. No reason not to buy it where it’s cheapest.” If Burton wasn’t special in snowboding, then nothing was.

That was the moment when the “race to the bottom” began in snowboards in earnest, although price competition was already pronounced before then. I hope skate hardgoods aren’t doing the same thing.

For the retailers, the future can probably be seen in a Zumiez or BC store, both of which I’ve visited in the last few days. They carry skate and snow hardgoods, but I wouldn’t call either one a skate or snow shop. They are either lifestyle or action-sports stores, or some other name I haven’t thought of. The hardgoods are there, but they are casually displayed and don’t take up all that much room. I’m sure it’s not that they don’t want to sell them, but hardgoods do appear to be a badge of credibility among the racks, stacks, and piles of shoes and apparel.

They have a year-round business model that doesn’t just cater to skaters and snowboarders, but to the much broader market interested in the fashions associated with the lifestyles. If, as I think, we’re sending the message that “It’s just a skateboard” like it’s been sent in snowboarding, this is where I expect skate-retailing to head. I’d note that this has happened in snow in spite of big team programs, promotions, and advertising campaigns by the major snow brands.

For Brands

Tactically, of course, brands without their own factories now have some ability to get lower prices either by getting their own product from China or using the threat of doing it to get better prices from their domestic suppliers. They won’t get as good a deal locally as they can get from China no matter how well they negotiate.

The strategic financial question is the more interesting one:

When Chinese production (not just from Dwindle) works its way through the system, will a brand be selling more or fewer decks at higher or lower margin? I’m not concerned about the gross margin percentage as much as the total number of gross margin dollars available. Given the total gross margin dollars the brand has available, will they be able to support their team and marketing programs (the only real source of brand differentiation) at the level they have supported it at in the past and still make money? If marketing programs suffer for financial reasons, it gets even harder to support the argument that there’s any reason to buy a skateboard based on anything but price.

For Manufacturers

In the late 80s and early 90s, there was no snowboard manufacturing capacity available. Factory after factory opened in the U.S. Then the big Austrian ski factories and, later, the Chinese, stepped in. Most of the U.S. factories disappeared. Mervin Manufacturing, the producer of the Gnu and LibTech brands, survived the transition by being bought by Quiksilver. Now, even they are starting to make some low-end product in China.

Due partly to a managed foreign exchange rate that keeps the Chinese currency ten to 40 percent undervalued against the dollar, the Chinese have eaten the lunch of various wood-products manufacturers in the United States. I hope it’s different with skateboard manufacturers.

If it is, it will probably have to involve consolidation and a highly efficient, large player. Maybe something along the Mervin model will happen, though it’s unclear to me why anybody would buy a skateboard-manufacturing facility right now.

Speaking of the Mervin model of course, they also make their E-Maple skateboards with the Plastihide tops that are supposed to last longer and offer more pop. Technology has been the traditional defense against low-cost manufacturers. We could sure use some more right about now.

Don’t Panic, At Least Not Too Much

No doubt everybody, including me, would feel a whole lot better if I’d painted a rosier picture. Unfortunately, I have the really bad habit of saying what I actually think. Maybe I’ve exaggerated the potential changes just a little to encourage everybody to take a hard look at their business model and plan for how they’re going to react as things unfold. Bottom line is that the Dwindle announcement and associated price cuts shouldn’t be that big of a stunner, because anybody who hasn’t been playing ostrich knew this was coming from somewhere, although of course we hoped it wouldn’t happen. Industries change. You change with them.

Jeff Harbaugh is president of Jeff Harbaugh & Associates, an action- sports consulting firm that helps companies manage transition. Reach him at (206) 232-3138 or at jharbaugh@msn.com. things unfold. Bottom line is that the Dwindle announcement and associated price cuts shouldn’t be that big of a stunner, because anybody who hasn’t been playing ostrich knew this was coming from somewhere, although of course we hoped it wouldn’t happen. Industries change. You change with them.

Jeff Harbaugh is president of Jeff Harbaugh & Associates, an action- sports consulting firm that helps companies manage transition. Reach him at (206) 232-3138 or at jharbaugh@msn.com.