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]> Known for its extreme, "need for speed" activities, the action sports licensing industry nevertheless is a slow-growth, long-term market that o
April 6, 2018
Known for its extreme, "need for speed" activities, the action sports licensing industry nevertheless is a slow-growth, long-term market that often is misunderstood by skittish manufacturers and retailers. The cost of entry is high, and consolidation continues from both a manufacturer and retailer perspective. Department stores represent a large growth opportunity, but they often don't regard the action sports industry as a specialty segment of their business, so many manufacturers are establishing their own retail stores. That said, the market does have tremendous potential, notching $12 billion in sales with 22-plus million participants, according to SGMA. License! recently hosted its first action sports roundtable, bringing together executives from apparel licensor OP, skateboard technology company Performance SK8, and action sports consulting firm Global Wave Ventures to discuss market changes, distribution channels, challenges, and retail strategies.
License!: How has the action sports business changed in the last five years?
DAVE SEEHAFER: Action sports now include not only surf, skate, and snowboard but motocross, kiteboard, wakeboard, BMX, and more. There is lots of crossover participant-wise. The action sports industry at retail and wholesale has been on a positive growth cycle for the last three-plus years with a boom in the beginner/ entry-level market, women and juniors' market, and returning/older (ages 35-plus) market. The target customer is 12 to 24 years old, 70-plus percent male, with a growing percentage of men and women ages 35-plus. The industry has become more "businesslike," profitable, and accepted by the traditional business world. Quiksilver is the industry's first billion-dollar action sports brand, and there have been quite a few acquisitions/purchases, including Quiksilver/DC, VF/Vans, K2 purchases, Warnaco/OP, and Billabong/Honolua/Beach Access. Brands now are starting their own retail stores (Quiksilver, Billabong, RipCurl, Volcom, and O'Neill, for example), which is influencing and restructuring distribution and specialty retail focus. Specialty retailers remain the top distribution chain for action sports, but retailers are adjusting to the needs of manufacturers to grow beyond the specialty level.
BECKET COLON: When we first approached the skateboarding market leaders five years ago, Performance SK8 was a small start-up with a functional prototype of a skateboard deck construction called the Performance Tip Skateboard and a strategy to combat the sales of mini-logo and non-branded skateboard decks. Five years later, the majority of skateboard decks sold are non-branded, and the major skateboard deck hard goods companies are fighting for 30 percent market share. As a result, they're not selling much apparel either, so times will be tough for skateboard brands unless they can differentiate. Surf apparel and skate shoe companies are after the same soft goods dollars.
ANDREW LELCHUK: When OP first started out in 1972, we were in core surf shops, which was the nature of the business at the time, then became mainstream in the late 1980s as "surf" went mainstream. Subsequently, our business moved into the mid-tier. Over the last seven or eight years, we've focused on being in the better department stores and specialty stores and reinvigorating our business. We accomplished that, but as competition came in and there was consolidation in retail, our business began to settle once again in the mid-tier. Now we're reinventing ourselves again, focusing on the better channels (department, specialty, and sporting goods stores) and extracting ourselves from the mid-tier.
L!: Where does licensing fit in the action sports industry?
SEEHAFER: For many action sports manufacturers and retailers, licensing is a frightening word. Many companies haven't tapped into the potential of licensing because they don't understand it or they have an unclear opinion of the concept.
COLON: Our focus is OEM production, so we make product for people who have their own channels of distribution. We still believe you need to give a kid a reason to buy a branded deck. The Performance Tip skateboard offers skate marketing brands sustainable differentiation and skate retailers a much more profitable product. Replacement parts (the tips) are high-margin products and need to be replaced regularly. Replacement tip sales lead to more frequent visits to the shop, creating additional sales opportunities. The Performance Tip will remain a product and brand for core retailers. Mass-market versions of Performance Tip decks will be branded under a different name. These tips are not interchangeable with the high-end tips.
L!: How has the shrinking retail environment affected the action sports business?
SEEHAFER: The large brands/ manufacturers are diversifying and getting more of the open-to-buy budget from the specialty retailers. It makes these retailers somewhat dependent on that entity, and at the same time their margins may be squeezed. As long as specialty retailers differentiate and specialize themselves from other levels of distribution by customer service, product knowledge, and selection, there will always be a need for them. Specialty retailers really need to stay focused, experiment with new brands and products, and nurture their relationships with their customers. E-commerce also has become a potentially viable profit center for both manufacturers and retailers.
LELCHUK: It would be interesting to look at where Quiksilver's growth is coming outside of acquisitions. I would bet most of its growth is coming from its retail stores, not from doing more business in existing channels of distribution. It will get some growth out of Pac-Sun's growth, but I don't see it getting more real estate at Nordstrom or Federated or Dillard's. That's why many of these companies have aggressive company-owned retail plans.
COLON: Many of the larger retailers just focus on the major brands, and that creates an entry barrier for the small brands. It's the small brands that revive and reinvigorate our sport. Skate-boarders are fickle. They don't want to be wearing what everyone else is wearing. They start a trend and then everyone catches onto it. When that happens, they move onto the next big thing. Larger retailers now focus on the sale of their own private-label skateboard decks. Private-label/OEM decks offer much higher margins and are a great marketing tool.
LELCHUK: While we're focused on better channels of distribution, it's a bit of an oxymoron because when you look at department stores—which represent a large growth opportunity —for the most part, they're not specifically disposed to the action sports industry as a specialty segment of their business. While Federated and May Company's divisions have had success with core action sports, most department stores have not. That's why we distinguish ourselves as a "California lifestyle" company as opposed to an action sports company. The California lifestyle is made up of action sports, whether it's surf, skate, or snow, but there also are other things such as music, entertainment, and motorsports that go into it. Macy's West has been successful in getting action sports business as has Bloomingdale's. Part of that has to do with who the customer base is and the fact of the "aging consumer." Even though our target consumer is ages 12 to 22, I saw a survey that said the largest part of the action sports demographic is in the 25- to 35-year-old range, and those consumers often have more expendable income.
L!: Is retail exclusivity a major force in the action sports industry?
LELCHUK: I don't think exclusivity really affects this business. It may happen just out of necessity when your brand launches, that you end up in one place, but I don't think it's done intentionally.
SEEHAFER: Exclusivity has become less of an issue over the years at the specialty level. Distribution by most brands is very diverse. If retailers were more willing to make more of a commitment to a brand or product category, manufacturers might consider more exclusivity. However, this is not the trend overall. There is a great deal of "sameness" at retail. Retailers have become less adventurous and more conservative regarding new brands and products, sticking solely to the top four to six brands with solid sell-through.
L!: What is your opinion of shop-in-shop environments vs. product representation in multiple departments?
SEEHAFER: Shop-in-shops are something of a mixed blessing for manufacturers. They want better representation of their products and brand image overall. Consumers want better selection. The problem is that satisfying those needs takes up a lot of retail space. This doesn't leave enough space to bring in new products and new brands. Such shops have become increasingly expensive for manufacturers. This trend is squeezing the small and mid-size brands as retail space becomes more of a premium. For retailers, one solution is to move into a place with more space. If you have a store on the beach though, you're not going to move two blocks inland for more space—location is still an important key to success.
LELCHUK: As much as you would love to put all your merchandise together, you're hampered by the realities of retail. When consumers come in to shop for a watch or a belt or a wallet, they're going to go to that department, not the young men's department. People still shop by classification. It's the reality of making it easy for consumers to find your products and letting them know what those products are all about.
L!: What would you like to see change in the business of action sports licensing?
LELCHUK: Entertainment licensing has done a great disservice to the rest of the business. The expectation now is that the licensor also is going to be responsible for selling in the property or brand. But in our world, that doesn't happen. Instead, the licensor relies solely on its licensees to run that business. They're the experts in product development, managing their inventory, selling in, and maintaining relationships with retailers. But when I talk to licensees now, they want me to guarantee I can get their product into the retailer. That's based on their experience with the entertainment giants, which are marketing companies, while we're focused on the lifestyle and the product that's appropriate for that lifestyle. How do you fix this problem? There is no complete answer. But part of the solution is the hybrid model we've adopted. The licensor manages the core part of the business and licenses out ancillary products. That's why Quiksilver only licenses out two categories: sunglasses and watches. You have to take control of your core business.
SEEHAFER: For licensing to succeed in the action sports industry, there must be a heavy focus on the educational aspect. Potential licensors looking to tap into the action sports market need to understand the unique qualities and intricacies of the market—relationships take time to develop, millions are not made overnight, brand image and consumer attitudes are important. This is a slow-growth, long-term market with a high cost of entry and resources. The steps and processes to successful licensing need to be marketed and communicated throughout the action sports industry.
COLON: As some of the larger, more mainstream brands reinvent themselves and take a piece of the action sports pie, action sports participants who maybe didn't get in at the start of the business will buy into it.
LELCHUK: Consolidation will continue both from a retail and manufacturer perspective. That will shrink opportunities and lead to more private-label and retail-owned brands. But while the retailers understand the youth lifestyle and that action sports is important to their customer, they still have to figure out how to reach out to those customers and translate that into a meaningful business.
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