Inside Player: Bryan Friedman’s View Of The Surf Market

Someone, someday, should sit down and chart out the surf industry’s family tree and how the roots from the Bay Of Plenty have spread across the org charts of our most successful companies. Back when “surf industry” was more non sequitur than investment opportunity, Gotcha’s Michael Tomson and Joel Cooper slowly brought over the cream of the Durban, South Africa surf scene to help them run their then-growing company.

One of the first hitters they tapped was Bryan Friedman, a Bay Of Plenty surfer who happened to be a lawyer. It was 1979, and Gotcha was a 2.5-million dollar company with plenty of growth opportunities but not a lot of cash.

“When I arrived here {in 1979}, Gotcha was on the brink of running out of cash for all the usual reasons,” says Friedman. He became the brand’s general counsel and helped achieve the breakneck growth of the brand over the next decade.

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He also set up his own law practice shortly thereafter, a firm that has grown into a fourteen-lawyer success story. Friedman, Peterson, Stroffe, & Gerard PC is a business law firm that helps Billabong, Ezekiel, Surf Diva, and many others navigate the tricky legal waters of the apparel and surf industries. Partner Robert Gerard is an advisory member of the ASP board of directors — on the day of our visit he was fresh off the plane from Tavarua.

The offices, which wear the sheen of success, include dozens of vintage surf photos on the walls. “Over the years there isn’t a brand in Orange County that we haven’t worked for or against on something,” laughs Friedman.

His practice includes formalizing, implementing, and evaluating domestic and international licensing and trademark programs; advising and assisting start-ups; registering and enforcing trademarks and copyrights; negotiating and documenting finance and factor arrangements; and negotiating and documenting strategic business alliances such as joint ventures, licenses, production and distribution agreements. In other words, if a big deal has happened in the surf industry, it’s a safe bet that the fingerprints of Friedman or his firm will be found somewhere on the documents.

TransWorld SURF Business sat down with Friedman to get his personal take on where the surf industry is headed and how it’s changed.

What’s been the biggest change you’ve seen in the surf industry?

Bryan Friedman: The biggest change I’ve seen in the twenty years I’ve been doing this is that the surf industry has grown up.

In the early days, even as sophisticated as Op was, it wouldn’t have compared to the real apparel companies from the East Coast. That was an opportunity for everyone. You could play at a level where you wouldn’t get buried by Levi’s or one of those huge apparel guys. Everyone was playing at the same speed.

Nowadays, with the evolution of the industry, the bigger brands are as sophisticated as anybody. Quiksilver and Billabong are publicly traded. Hurley is part of the Nike family. The list goes on. All that lifted the bar, and you have to play at that high level if you want to be competitive.

What’s the health of the surf industry’s distribution channels?
It’s the same story as with the brands: the strong have gotten stronger and the weak have gotten weaker. But there’s still room for smaller stores where you can smell the wax and know the guy behind the counter.

What we miss out on when we get into our paranoia about the Hollister issue is the recognition that for every real surfer there are ten wannabes. What happens east of the freeway may have some relevance to them, but really it’s what we do on the ocean that drives the lifestyle forward.

The local surf shop is always going to be an important place for our market. It’s always going to be the place where surfers hang out and get their gear. A real surfer is not going to buy his board at Costco, but I also don’t have a problem with having boards at Costco. That 0-dollar board might let some grommet convince his mother to buy him his first board. It may be a board that he wouldn’t have gotten if it were 500 bucks at the surf stores. What’s wrong with that?

So the hand-wringing about Hollister is a little misplaced?
The kids are more sophisticated than that. Surf branding is almost like gang membership. You aren’t going to see kids getting behind Hollister. I haven’t seen it at any of the schools near the ocean. You aren’t going to see it in Laguna or San Clemente — not unless they want to get run out of school.

Will there be more or fewer specialty mom-and-pop stores in five years as there is now?
I would say pretty much the same. We’ve lost quite a few in the recent years. But again, these stores are places where real surfers buy their boards and as such are the cornerstone of the market. Your shaper is your shaper. You can buy boards in a Billabong or a Boardriders store, but it’s not the same customer as the guy who has a relationship with his shaper. The customers are different and there’s room for both, so I don’t see a major drop in the number of mom-and-pop surf shops.

Have the barriers to entry for new brands ever been higher than they are now?
No. The times have definitely changed. Back in the heyday, there was a very clear pecking order. If Op shipped 80 percent of its orders, the other twenty percent percolated down to the next level. So if you {were a smaller brand who} had product in your warehouse through the summer, you could rely on the reorders from the fallout. If you ran out, those missed orders would percolate down to the even smaller companies. That allowed the little people to live off the crumbs of the bigger guys. It was strictly because of the big guy’s inability to execute everything that was on the table.

That doesn’t exist anymore. Now the biggest stores play the big guys against each other, and if they can’t get it from Billabong, they’ll go to Quiksilver, and if they can’t get it from Quiksilver, they’ll get it from Hurley. Plus there aren’t many crumbs. The brands have got their act together.

In the next five to ten years, do you expect any brands to fade or new brands to emerge among the top tier?
I don’t think so. Right now the top brands have been the brands who have survived some serious purges. In 1989, when surf was so hot, Gotcha and Quiksilver were both 100-million-plus companies, and Maui & Sons was a 30-million-plus brand. Op was doing 350-million a year. Everyone was just going gung ho. But in the space of the next two years, the whole industry was devastated. We lost something like 400-million dollars in gross sales, and the casualty list was long.

Nowadays the biggest companies have strong foundations. The bigger companies have gone multi-brand to some extent. All of them are also trying to maintain their integrity and roots. They’ve done that very well. Quiksilver has been a big factor in the U.S. for many years — much longer than we foresaw the life span of a brand would be. They’ve done it very well.

The change is that you now have all these companies spinning out more and more product to fewer and fewer doors. You’ve had the consolidations with the PacSuns and the fact that you don’t want to go too deep with the department stores. Couple that with the fact that many surf shops aren’t credit-worthy and it becomes a huge problem.

The combination of all those factors makes it very difficult to be a small brand. I think there’s still room for small brands, but they’ve got to understand and maintain their identity. They can’t compete with the budgets that are available to the big guys.

But then again, my client base is very supportive of these smaller brands. They aren’t looking to squash them. The big guys don’t want to absolutely dominate. There’s a lot of sharing of information and advice to help people along the way. There’s a recognition that there’s no point to being a four-brand industry.

Will the bulk of new brands be independently financed or will they be part of a larger company?
The problem that the smaller brands are having right now — which didn’t exist during the embryo stage of the industry — is that there’s no institutional financing. The banks and the factors, for the most part, aren’t interested in financing these start-ups.

Why not?
I guess it’s because of their vulnerability, how many of them fail, and how {un}sophisticated a lot of them are.

Part of how you get a loan is you have to be able to package yourself in a way that the banks recognize. Unfortunately for the little brands, the amount of professional help they need from lawyers and accountants is inverse to what they have available to spend — so it’s a problem.

But even with all the help in the world, it’s tough to find cash. In the olden days, we used to go to Manufacturers Bank and they understood the cycles and seasons, the fickleness of fashion, and they would back somebody if it looked like they had their act together.

When you’re looking at the top-tier institutions, the guys who give you the straight deals and the best rates, they’re not looking at anybody who doesn’t have a net worth of less than a million bucks and generating volume where they’re going to earn points. Their attitude is, “We don’t make enough money to risk losing any money. We’d just as rather go for bigger numbers.”

I don’t think we’ll see the likes of Op, Billabong, or Quiksilver again, where a brand grows from the beach into a multimillion-dollar publicly traded company on their own resources.

Is the lack of proper financing the biggest problem young brands face?
The biggest problem is a lack of sophistication and a naiveté about what it takes. It’s kind of like if you were going to drive to New York from here. You could probably get there by heading east and by asking for directions, but it would be easier if you had a map — especially if you had a limited amount of gas and time. But a lot of them just embark on the trip and say, “Hey, we’ll figure it out.” And when they hit the mountains they don’t see any way over and they perish. In some ways it’s very predictable.

What other mistakes do most newer brands make?
From growth comes a need for more working capital. If you grow, you need more money, and if you don’t make money you need more money. So whatever happens you need something in your reserve tank.

Companies don’t understand that you can’t go from one-million to two-million dollars on the same 100-thousand you started with. That’s even more important when you make these quantum leaps. You may get from one-million to three-million dollars with kind of the same resources, but you’re not going to get from three to ten without a radical injection of cash. At that level there’s a whole infrastructure that’s necessary to service that growth, and more companies fail by success than fail by failure. They can’t finance where they’re heading, and they get to a point of financial constipation where everything locks up. They can’t go forward to produce the order that would make the cash that would release the flow.

Younger companies need a certain amount of sophistication. You can’t afford to have lawyers and accountants make every move for you. You need business advisors who can give you guidelines to follow, but then you have to follow those five steps and then come back and say, “Okay, now what?”

What’s the most exciting, biggest opportunity facing the market, and what would you say is our biggest challenge?
The thing that concerns me is the lack of fresh blood coming through. When you are at the Surf Summit or any of these places, you see the same faces over and over again. I don’t see the typical cluster of rookies coming up in the market. That’s a big problem.

What’s the solution?
There e’s no point to being a four-brand industry.

Will the bulk of new brands be independently financed or will they be part of a larger company?
The problem that the smaller brands are having right now — which didn’t exist during the embryo stage of the industry — is that there’s no institutional financing. The banks and the factors, for the most part, aren’t interested in financing these start-ups.

Why not?
I guess it’s because of their vulnerability, how many of them fail, and how {un}sophisticated a lot of them are.

Part of how you get a loan is you have to be able to package yourself in a way that the banks recognize. Unfortunately for the little brands, the amount of professional help they need from lawyers and accountants is inverse to what they have available to spend — so it’s a problem.

But even with all the help in the world, it’s tough to find cash. In the olden days, we used to go to Manufacturers Bank and they understood the cycles and seasons, the fickleness of fashion, and they would back somebody if it looked like they had their act together.

When you’re looking at the top-tier institutions, the guys who give you the straight deals and the best rates, they’re not looking at anybody who doesn’t have a net worth of less than a million bucks and generating volume where they’re going to earn points. Their attitude is, “We don’t make enough money to risk losing any money. We’d just as rather go for bigger numbers.”

I don’t think we’ll see the likes of Op, Billabong, or Quiksilver again, where a brand grows from the beach into a multimillion-dollar publicly traded company on their own resources.

Is the lack of proper financing the biggest problem young brands face?
The biggest problem is a lack of sophistication and a naiveté about what it takes. It’s kind of like if you were going to drive to New York from here. You could probably get there by heading east and by asking for directions, but it would be easier if you had a map — especially if you had a limited amount of gas and time. But a lot of them just embark on the trip and say, “Hey, we’ll figure it out.” And when they hit the mountains they don’t see any way over and they perish. In some ways it’s very predictable.

What other mistakes do most newer brands make?
From growth comes a need for more working capital. If you grow, you need more money, and if you don’t make money you need more money. So whatever happens you need something in your reserve tank.

Companies don’t understand that you can’t go from one-million to two-million dollars on the same 100-thousand you started with. That’s even more important when you make these quantum leaps. You may get from one-million to three-million dollars with kind of the same resources, but you’re not going to get from three to ten without a radical injection of cash. At that level there’s a whole infrastructure that’s necessary to service that growth, and more companies fail by success than fail by failure. They can’t finance where they’re heading, and they get to a point of financial constipation where everything locks up. They can’t go forward to produce the order that would make the cash that would release the flow.

Younger companies need a certain amount of sophistication. You can’t afford to have lawyers and accountants make every move for you. You need business advisors who can give you guidelines to follow, but then you have to follow those five steps and then come back and say, “Okay, now what?”

What’s the most exciting, biggest opportunity facing the market, and what would you say is our biggest challenge?
The thing that concerns me is the lack of fresh blood coming through. When you are at the Surf Summit or any of these places, you see the same faces over and over again. I don’t see the typical cluster of rookies coming up in the market. That’s a big problem.

What’s the solution?
There are no easy solutions. The bigger brands are mentoring and are somehow trying to help out as for as they can. It seems to me that SIMA could play a bigger role. You can’t rely on Quiksilver and Billabong to educate everybody. It has to be an industry thing, and what other institution do we have besides SIMA to do that?

What has you most excited about the surf market?
The industry is great because we’re not selling products, we’re selling a lifestyle. That’s why people want to be involved. That’s why Blue Crush and the women’s market are so strong. We won’t survive unless we have a product that stands on its own, but the biggest thing we have going for us is that we have a lifestyle that marketing people from any other industry would love to have.
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For more information on Friedman, Peterson, Stroffe, & Gerard PC, log on to: fpsglawyers.comere are no easy solutions. The bigger brands are mentoring and are somehow trying to help out as for as they can. It seems to me that SIMA could play a bigger role. You can’t rely on Quiksilver and Billabong to educate everybody. It has to be an industry thing, and what other institution do we have besides SIMA to do that?

What has you most excited about the surf market?
The industry is great because we’re not selling products, we’re selling a lifestyle. That’s why people want to be involved. That’s why Blue Crush and the women’s market are so strong. We won’t survive unless we have a product that stands on its own, but the biggest thing we have going for us is that we have a lifestyle that marketing people from any other industry would love to have.
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For more information on Friedman, Peterson, Stroffe, & Gerard PC, log on to: fpsglawyers.com