The Industry’s Great Surfstitch Conundrum

The news of Surfstitch calling in the administrators, while wasn’t surprising to many, certainly rattled the cage of the broader industry a couple of weeks ago. The news seemed to pose more questions than it answered and certainly brought the conversation of ‘responsible online retailing’ squarely back on the table for many bricks and mortar retailers.

The reality is Surfstitch will rise from the ashes in some form or the other – either under new ownership or potentially refinanced with some private equity partners. News came out yesterday that the online retailer had received a draft proposal for a restructure in which shares in the collapsed retailer could be re-listed on the Australian Securities Exchange (ASX). John Park from FTI Consulting said this would be the desired outcome for the business, and that he expected there would be a few more proposals being put forward.

This could mean some salvation for Surfstitch shareholders, whose shares collapsed from just over $2 last year to under 7c in recent months before it was placed into voluntary administration. However it does beg the question; is a publicly list business in our ‘cottage’ industry sustainable when it needs to continue to release and defend trading results to the market every 6 months? Rebuilding businesses need longer runways to claw back to profitability; do listed companies have that luxury?

In an article written by Seth Godin, he refers to a polemic written by Milton Friedman almost 50 years ago. To quote from Mr Godin’s words of wisdom;

The simple message of the simple article was: “there is one and only one social responsibility of business – to use its resources and engage in activities designed to increase its profits”.

Friedman does add a parenthetical, “so long as it stays within the rules of the game, which is to say, engages in open and free competition without deception or fraud,” but it’s clear that his emphasis is on the first part.

Businesses, he argues, should show no corporate responsibility, do nothing to further the goals of an ethical society, do nothing to improve the lives of customers, employees or bystanders—unless these actions coincidentally maximize profits.

Seth then offers up his own definition of how business should look today.

A business is a construct, an association of human beings combining capital and labor to make something. That business has precisely the same social responsibilities as the people that it consists of. The responsibility to play fairly, to see the long-term impacts of its actions and to create value for all those it engages with.”

So when it does rise from the ashes, what will the Surfstitch 2.0 business look like?

To set the scene; we assume that roughly 40% of Surfstitch’s sales are attributed to promotional activity, which has marginalised many independent retailers who say they (Surfstitch) have commoditised ‘Surf’ and the value proposition they have worked so hard to build up with the brands they partner with.

Brands who supply Surfstitch are seeing a big customer put a hold on current orders and are looking at what impact the loss of sales to one of their biggest retailers might mean to the business. What will they comp off next season? How will they fill the hole? How can they work with Surfstitch to manage their brand responsibly, bag the sales and still be able to look their independent retailers in the eye when walking in their bricks and mortar doors?

Then, if we take Seth Godin’s point of view into account – There is a new focus on sustainability and responsibility in business. And do consumers know, or even care?

With so many questions, (I told you there were more than answers in this one) we thought we’d solicit some response from the industry – both from the brands and from the retailer’s side of the fence.

We were curious; what was their view on the Surfstitch situation? Once they come out of administration, what will or should Surfstitch 2.0 look like? Should brands just satisfy online retail demand? And what collectively, were we thinking as an industry going forward.

The response was interesting. Retailers came out quickly with their points of view, opinion and comments – while the major brands generally declined to comment, or just never replied to the e-mails.

So was the silence from brands deafening? Quite possibly, and maybe it speaks to the shrinking (speaking broadly) cottage industry we play in and how desperate they are to keep sales on the books. Not wanting to upset the apple cart perhaps? Remain neutral, sit on the fence, keep noses clean or maybe it’s as simple as not wanting to comment on other peoples business.

We wont speculate any further, rather we’ll give you the responses of those who were happy to air their views, grievances and advice on where all this should end up.

Enjoy.

Mark Rusher starts the conversation off and responds in his own personal capacity.

I see tremendous opportunity in online for Surf.

Here’s how and why:

1) Category Specialists – online retailers who provide a strong specialty aspect through stocking large ranges of specific categories, who hero the most innovative and category forward product, and who can support with technical knowledge and offer a great experience through content.  Service is king in this environment.

2) Multi Brand/Multi Category  – There is definitely a need for a multi brand/multi category online retailer in Surf – The Consumer demands it .  The Industry needs it to be the best expression of Surf it can be. It’s has the opportunity to be the biggest door on the busiest street.  Its role should be to take the great product and brand stories from the brands, polish it and hold up to the consumer.

3) Value – This opportunity will continue to exist online and in Bricks and Mortar as long as Brands continue to push at a marketplace and not have inventory inline with marketplace demand.

“More focus by Brands on being consumer right with product through consumer right pricing and attention to the quality and craft of a garment will also help avoid the glut of product the Surf Industry currently faces.

“The industry has great brands with great stories to tell and that’s what future-proofs the industry. I hope the industry gets back to story telling and that distinct look of Surf and separate from the homogenised blend I see it has currently with fast fashion”.

“In closing I would say this; Markdown is a healthy and necessary part of the retail cycle if used correctly. It all comes down to the frequency of the conversation with the consumer. If the overall conversation you are having with the consumer is more value then premium – You should expect your consumer to be a value consumer and the premium consumer will simply move on”.

Can Surfstitch 2.0 work? The following is the response from an industry Brand (non apparel) that preferred to remain anonymous.

“It is a simple equation; can they create an offer that customers want? Break it down to the basics of Product, Price, Place and Promotion.

Product – They can get the product, most of the brands support them. We don’t because we have been concerned about them going under and we don’t want to take the risk. Most other brands support them. I think the key for them is to edit an offer to their customer.

“Their current product strategy is to sell everything to everyone. It is pretty difficult to say what Surfstitch stands for, it doesn’t even stand for surf anymore, and they are selling so many different non-surf brands.

First step needs to be for them to understand who their customer is, what they want and then edit a range for that customer. Customers need a reason to visit, I got to Surfstitch for ………. fill in the dots and you have a good starting point”.

“My view is they (customers) currently go there to find out what bargain they can get, I suspect the majority of sales are at a discount. It cannot work if the majority of their sales have to be discounted. Discounts online are so brand damaging. We hate discounting and support our retailers heavily to compete on product, not price. When discounting happens on line EVERYONE sees it. Simply put, they need a proper merchandising strategy and they need to be able to access all the brands they desire (that their customers desire) and they need to be able to get exclusive product. I also believe they need to find an offline clearance channel”.

Price – Covered heavily above, everyone knows Surfstitch for discounting, and the offer isn’t strong enough if you can’t sell at full price. Get the right product and it sells at full price. Discounting is a very slippery slide.

Place – Clearly they are Internet based, not a lot of discussion can go into this. I can’t see them going down a physical retailing path.

Promotion – It is really easy to pay Google, Facebook to deliver traffic to your website but you need to understand what are profitable transactions and what are unprofitable. I don’t think they have spent enough time on this, without a shadow of a doubt they are transacting a large number of loss making transactions. They need to find cheaper ways to generate traffic to their website.

“The 4 P’s are inextricably linked, if you have exclusive desirable product people will come to your website for free, if you are launching new cool products every few days people will come back to see what you are offering, if you have amazing content (arguably the content strategy) people will come to the website. They need to find better ways to promote the business and generate traffic”.

Google and Facebook have become the Westfield, they will squeeze very last cent out of you. Westfield can do it because they deliver the traffic; Google and Facebook deliver the traffic for online retailers.

“Can it be rebuilt? Only if it fundamentally changes, they have proven their current model is not profitable”.

“I believe an online business can succeed. But it has to get back to the basics of retailing, understanding their customer and what they want to buy”.

“Overall, a lot of brands are struggling to get good channels to market and are struggling to show all their range to their customers. This is because Billabong (SDS) and Rip Curl (Ozmosis) control the major channels. Both groups are so aligned product wise to their parent it makes it hard for brands to get good representation in the retail channel. I think this is a big part of the reason that Quicksilver has gone into Myer; they can’t get enough doors any other way”.

“It requires a complete change of strategy. Whilst they are changing their strategy revenue will decline, it becomes hard for businesses to hold the line during that process. Product is the absolute key element of it”.

“Interestingly, it is hard to find an online retailer in Australia that does well. Kogan appears to be doing it. Lots don’t. People talk about how well The Iconic does but inferring their performance from Global Fashion Group accounts, they are not performing any better than Surfstitch; they are just doing it out of the public eye. Their results are here:  http://global-fashion-group.com/investor-relations.html?slide=1

Australian Retail Association Hall of Fame recipient, Anthony Wilson (Saltwater Wine and Stormriders) kicks off the retailer’s response.

“The brands have got to control the space, it’s got to be about the brand story. I still firmly believe the model for surf has got to be full price/premium online and clearance offline.  While some brands have protected themselves to a degree from the unrelenting promotional activity, others haven’t. The simple fact remains that our broader genre has been commoditized and the brands in their greed, or need for sales growth, or both are complicit”.

“All this bullsh*t about Cyber Monday, Black Friday etc. just train our consumers to wait for the sales. Damn, last week there was even “After Pay Day”!? WTF is that all about? Throw in a 15% discount for Uni students with Uni Days, spend $100 and get a $40 gift card and the new expectation is that recommended retail is price gouging. We wonder why we can’t clear end of season anymore”?

“I think there is opportunity right now to reset. I also think the brands have got to look at the marketplace holistically. There isn’t an Australian state called ‘online’ where all these customers are going to magically appear. Every online consumer that is searching for the cheapest Brand ‘X’ T-Shirt is a commoditized consumer, full stop end of sentence.

“The brands need to make some conscious decisions about their approach to supplying the market and also about independent retail. We keep hearing about how important independent retail is – but how many have been compromised by online? How many have closed”?

“We are at the fork in the road and it’s not just us.  In his introduction to Doug Fleeners latest book “Reengineering Retail” Joseph Pine (Co founder Strategic Horizons LLC) explains:

“There are two great forces impacting the economic landscape. 

The first is the commoditization of goods and services, for people increasingly want to buy them at the greatest possible convenience and the lowest possible price. The rise of the Internet as a platform for purchasing exacerbates this force. People can instantly compare prices from one vendor to another, which tends to push them down to the lowest possible price.

The second great force is the shift into the Experience Economy. Goods and services are no longer enough; people increasingly desire experiences – memorable events that engage each individual in an inherently personal way.

And naturally these forces intertwine. Consumers want goods and services to be commoditized so they can spend their hard-earned money, and their harder-earned time, on the experiences they value so much more highly.”

So what do we want to be? An experience? Or a commodity?

Andrew Lindsay of Coopers Surf.

“The amount of damage Surfstitch has done to our brands and industry as a whole has been extreme in the way it has educated a large number of our consumers not to pay full price or get some sort of deal. Brands have always banged on about how they are all about being premium and want to minimise discounting but they were happy to support the Surfstitch beast and let it do the damage it has done.

All the brands could see the damage happening but very few had the balls to do something about it.

“Kudos to those that did”.

“I believe it (Surfstitch 2.0) either needs to be done by the brands themselves or someone that actually cares about the longevity of our industry and wants to keep our brands premium.

“I’m not so sure a premium version is profitable for an independent company but what we do know is a discounting model is not! Hopefully the brands have learnt from what has happened and stump up with whoever it may be going forward and get some control measures in place and ensure they abide by them. If the brands let a version of what we have already seen happen again then there is going to be a lot of brands and retailers disappear.”

Glenn Callegari of Hillzeez Retail Group weigh’s in:

“Surfstitch 2.0 really needs to back seasonal alignment and echo the message from brands leading the space. There is a great opportunity here to reset, to send a premium message to the existing audience. Qualify the size of authentic demand, because the size of the market can’t be measured whilst being on a 12 month promotional loop tape.

“I don’t think it can work unless it’s a drop ship model – brands need to hold the inventory to hold control. I doubt the size of the on-price market is big enough to yield a return for any investor, which is why I think it gets back to brands controlling the space”.

“If Surfstitch 2.0 migrates from being a pipeline business on the Internet, to a true platform, perhaps it can be the solution for premium brands to have reach to consumers in a premium content rich space. There is lots of literature on this, for another day…

https://hbr.org/2016/04/pipelines-platforms-and-the-new-rules-of-strategy

“The damage of Surfstitch to this point in time goes beyond the investors who lost out.  It has hit everyone’s net worth, marginalising everyone collectively over time.  The “network effects” of Surfstitch did not create value (the more people used it, the more it bled).

It was impatiently grown using price.

“Now we have an unhealthy marketplace, symptomatic of unsustainable wholesale supporting unsustainable retail. There is many a discussion going on about what ‘good’ looks like. Brands have to walk the talk.  Rightsizing means less top line sales for many of them.  They can’t get past that. Brands are stuffing the Surfstitch warehouse right up to the death knell.  One major is offering a price structure to support a 2 for $50 die cut tee offering as a segmented solution to our damaged industry value proposition”.

“We need to reverse commoditisation and get back to pull demand.  Restore the conversation to be about the product, not the price.  If you want to identify yourself with surf lifestyle culture, you have to pay $44.99 for a T-Shirt.  Or go to Kmart. A price point we were asking over 20 years ago, pre GST in the 90’s, should not be deemed “expensive” in 2017. No more erosion! It’s not sustainable”.

“Retailers also have to walk the talk.  This is not about welcoming the prodigal brand back with open arms.  Brands have to communicate what they stand for on Surfstitch 2.0.  If they don’t stand for something, they stand for nothing and a retailer’s sales floor should reflect this”.

“Regarding Surfstitch’s financial performance, I always told people to stay focused on the “statutory” cash flow reported, not “pro-forma” profit and loss.  The former was fact – the latter was fiction. Net operating cash flows suggested very poor GP, very high discounting. Perhaps that is what every industry participant needs to do.  Keep focus on facts”.

 

 

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3 Comments

  • Anonymous

    September 7, 2017

    Great article, interesting insight.

  • Danny

    September 7, 2017

    Very interesting read, thanks guys!

  • Clayton

    September 9, 2017

    Great article. This problem echoes through all other branded markets who have partnered with online platforms and not put control measures in place. It’s just a race to the bottom.