Our industry is on the cusp of major change. Many of the biggest brands are under new ownership and have converted to licensing models. A crop of new brands like mine are itching to earn more real estate in stores.
But to move forward, everyone, brands and retailers alike, needs to stop the race to the bottom that comes from overproducing in a quest to chase unrealistic sales goals, granting retail floor space based on discounts and end-of-season returns that end up at discount chains, and producing dumbed-down product instead of focusing on innovation and a premium offering.
How did we get here from the utopia days of the ‘90s and early 2000s when legacy surf brands were hitting their stride and creating new and innovative products? When demand outweighed supply, surfing was the coolest sport out there, and retailers were thriving? Everyone was making money, putting things on sale wasn’t even a thought, margins and profits were healthy, and the tradeshows were a positive vibe party scene that were the stuff of legends.
DTC Channel Margins and Clearance Outlets
I think one of the major issues that caused this race to the bottom happened in 2004 when Google AdWords was introduced and the internet shopping era exploded. Legacy surf brands and others started to get a taste of a sweet new DTC margin drug. They learned that for every $1 they spent in online advertising they could get $5-$10 in Return on Ad Spend (ROAS). Not surprisingly, this made the C-suite salivate over potential short-term returns and they began to order and produce way more product than they needed to feed that beast.
One might think that would create too much inventory, but where there is inventory, there is also a clearance outlet waiting to scavenge any leftover stock for pennies on the dollar. With the huge increased margins from the DTC sales, the minimal margins of the clearance channel wouldn’t even matter.
While that is a very good financial plan for private equity investors, it’s a horrible business model for long-term sustainability as you’re just flooding the market and devaluing your brand.
Long-Term Impact
What no one was considering at the time was the long-term impact this would have on the industry as a whole. I can identify two catalysts here:
- This flood of product into the DTC and clearance channels wasn’t just hitting the target demographic, it was reaching a mass market well outside the endemic surfer and coastal tourism consumer. It was hitting middle America and millions of people that didn’t surf but wanted to look like they did and liked the fashion style. While getting the product out to more people doesn’t seem like a bad thing, what it was doing, in my opinion, was slowly draining the “cool” factor from those larger brands.
- Behind the scenes, this excessive production practice began training retailers into a different buying strategy. When historically they had to place pre-orders for next year’s goods or they wouldn’t receive any products, now they could wait until the season came and the legacy surf brands were holding plenty of stock that they could order for “at-once” delivery. Retailers started getting used to this and began to take pre-booking less seriously.
Product on Wheels
While those big brands loved the increased revenue from the wider distribution, they didn’t want to lose their space in core stores. So they started dealing some of that sweet DTC margin drug they got hooked on over to the retailers, and the retailers understandably got hooked as well.
The brands also began placing product “on wheels” and accepting huge returns after the season ended, as well as big discounts of their orders in general in return for prime locations inside stores and big sections – essentially buying their space on the floor of the best retailers in the nation.
On the surface this seems like a win-win, right? The brands get to sell way more product at better margin while keeping their branding in the faces of the core market specialty dealers and target demo.
The retailers get to greatly expand their margins while also limiting the risk associated with their buys because the brands would just take back or credit them for what didn’t sell.
Of course what the brands took back they dumped in clearance channels, flooding the market more, and continuing to devalue the brands and the industry.
The Solution
Brand Responsibility
Brands must order tighter to what is booked by the retailers and have a digital “buy” for their websites that is realistic and at full margin without taking discounting into account. This is a hard pill to swallow – especially for private equity backed or publicly traded brands – because it means less forced growth and more reliance on natural growth as dictated by the market and consumer demand. It requires brands to make great products and tell great stories. This is the more difficult path and takes hard work, time, and patience. It’s a sacrifice in short-term gains to protect long-term sustainability.
Retailer Responsibility
Factories want orders placed by the brands earlier than ever – this is beyond the control of the brands. This sucks for retailers, but the next group of brands in line to be the anchors in your stores want to be part of the solution and not continue this downward spiral in the industry. And we actually do need pre-book orders in on time to properly project our production orders; it truly matters and is the only way to buck the trend of too much inventory.
Retailers also must get off the margin drug supplied by some big brands cold turkey and realize they are shooting themselves in the foot by encouraging this behavior. This practice helps your margin in the short-term but is slowly suffocating you in the long-term as you train your customer to expect those cheap prices.
Look, I’m not claiming to be perfect at Jetty – far from it. If you’re looking for hypocrisy in what I’m saying versus business decisions we’ve made in the past, you’ll find it. We had a small taste of the DTC margin drug, we’ve run our sales, we’ve had our glut of inventory, we’ve done those same clearance dumps that I’m chastising.
Thankfully we are small and nimble enough to have identified our problem, gone to rehab, and detoxed our way back to a healthy margin business.
We want our industry to last, because it’s special. It includes people like LG Shaw, an owner of key core account WRV in Virginia Beach, who just ran for city council with two months’ runway and almost won, and the Farias crew of Farias Surf & Sport in New Jersey who just sent a truckload of clothing and jackets to people in North Carolina who had their homes and lives destroyed by Hurricanes Helene and Milton.
That stuff matters, it always has and it always will. Maybe not to the Wall Street boardroom, but it does to the small-town communities that keep our specialty stores humming. And it should also matter to our industry.
We as an industry have a lot to be excited about – there are more people surfing than ever before, and the surf park/wave pool era is upon us. It’s our responsibility to usher in this next era with mindfulness so the soul of the industry can live on through the changes.
It’s a team effort. Every one of us has played a role in creating this problem. Now it’s on us to be self-aware and do what we can to be part of the solution.
Cory Higgins is the chief commercial officer and co-founder of Jetty.
