MOSS ADAMS CAPITAL: Apparel and foowear market monitor highlights notable deals, stock prices and results.
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"One of the biggest issues between specialty surf/skate/snowboard shop owners and manufacturers is when the manufacturers open their own stores, especially when they open them near established accounts. From the specialty retailer perspective it is hard to be happy about this for many reasons.
"First of all, no retailer wants more competition in their local area. There are only so many customers to go around and increased competition from anyone, especially a manufacturer, only makes it harder to run a profitable business.
"But it really goes deeper than that. Often the first reaction a specialty retailer has to hearing one of their vendors is opening a store nearby is a sense of betrayal. The deal has always been that the manufacturer makes cool products and the specialty retailer sells it. It was a time honored understanding between retailers and manufacturers in our industry for decades. Many retailers feel that they have pioneered their areas and have supported and helped the manufacturers grow and it can very much feel like a slap in the face to have a manufacturer change that deal.
"It really can feel like the "reward" a good specialty retailer gets for doing a solid job of spreading the stoke of the surf culture and the manufacturers' products is to have that same manufacturer move in on their turf. Obviously the manufacturers know how much product the retailers are selling and then can use that to their advantage.
"Another issue is that it is an uneven playing field. The profit margins for specialty retailers are fairly thin, but the manufacturer has a much higher margin when they sell direct to the consumer. For example, if the retailer pays $10 for a t-shirt and sells it for $20, the manufacturer is paying much less to put that same garment into their own store, yet they are selling it for the same price.
"Also, specialty stores generally carry hardgoods, such as surfboards, skateboards and surfboards, which have historically very low margins, while manufacturer's stores usually just carry softgoods with higher margins. If manufacturers do open stores that sell hardgoods and softgoods, then they are simply another direct competitor, which is hardly the basis for a good partnership. And it is an uneven playing field because the manufacturers that open retail stores can afford for their stores to be unprofitable for a while, while a specialty retailer cannot operate their business this way at all.
"Besides the direct competition and margins issues, probably the biggest reason specialty retailers don't like to have the manufacturers open their own stores is that it ruins what is special about their products. Specialty stores need products and brands that are unique and not available everywhere. It is one of the things that make our stores special. Retailers love finding and developing brands. Nourishing and growing relationships with our vendors and the consumers is an important part of specialty retailers place in the culture of the sports we sell. When the manufacturer starts selling the product themselves, it just isn't as "cool" or unique as it used to be. Suddenly everyone is wearing it. And at the end of the day, specialty stores aren't going to survive selling the same products as everyone else. More than that, specialty retailers don't want to sell "The Gap" or "Levi's," we want to sell the coolest, cutting edge products on the market.
"Manufacturers open their own stores for various reasons; specialty shops can't carry enough of their products, they want to showcase their brand for tourists, they feel their own stores help build the brand nationally or internationally, which in turn will ultimately help the specialty retailer or simply because if can be very profitable. But those are reasons that really only help the manufacturer grow. I have never talked to another specialty retailer who feels that manufacturer's stores have helped grow their business.
"Lastly, the relationship the specialty retailer has with a manufacturer is a partnership. That relationship should involve good communication and trust. With good communication and trust both the retailer and the manufacturer can build a brand together. They can do events together; promote the brand together and help each other through the ups and downs of business. When the manufacturer becomes a competitor it changes all of that and it can be hard to know why a specialty retailer should look to continue growing with that brand.
"If and how retailers and manufacturers continue their partnership when the manufacturer opens a store nearby comes down to their historical communication and trust. Different manufacturers communicate (or don't) in very different ways and with varying degrees of success. Manufacturers that do communicate well and earn the trust of the retailer will navigate these waters better, but the retailers will never like it. And I fear that ultimately the relationship will be unlikely to grow into the future."