Oakley Isn’t Content To Be Part Of The Apparel Market, It Wants To Lead It

Oakley comfortably straddles a spectrum of worlds. It was recently named one of Fortune magazine’s top luxury brands, yet it still has a devoted following among ‘core surf-shop owners. Its roster of athletes are involved in just about any sport you can think of, yet Oakley still seems firmly rooted in the action-sports market. Since it launched in 1975 as a motorcycle-grip company, Oakley has remained one of the action-sports industry’s most visible success stories. And after the company went public in 1994, the pace of that growth was there for all to see. Since 1998, revenues have grown by 106 percent, from 232-million to more than 477-million dollars this past year. The company is on track to top half a billion in sales in 2003.

And yet this also appears to be a time of change for the iconic eyewear brand as it moves more aggressively into the apparel market. While brand extensions are nothing new (the company launched a line of footwear and a line of watches in 2000), the Spring 2002 line of apparel ruffled the feathers of several surf brands. Companies that one worked in partnership with Oakley now view it as a growing threat to their business — as well they should.

When TransWorld SURF Business sat down to talk with Oakley President Colin Baden, it became clear that Oakley management is not content to merely take part in the apparel market, it wants to lead it to new heights. The expectations are that the bulk of future growth will not come from more sunglass styles, but from growing the company’s apparel and footwear market share. So what’s the plan, and how will Oakley continue to appeal to both the specialty and mainstream markets? Here’s the view from the Oakley corporate bunker.

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How’s the sunglass market right now?

Colin Baden: As you know from our last press release, we think the downturn in the economy has affected our performance. We’re a premium-priced brand and our customers are predominantly male. My sense is that the weakness in that specific demographic is hurting a lot of companies right now — in a lot of the {public-company} announcements profits got a hair cut.

Are you also seeing softness in footwear and apparel sales?

Our new categories are so small that a downturn {in those categories} doesn’t really impact our business the way a downturn in eyewear does. If our eyewear is off in the single digits to low double-digits, that has a far greater impact on our earnings and profits than any other of the new categories that we’re in.

The new categories are tracking to the numbers we had anticipated. It’s really the change in eyewear that led to what we brought out in the press.

What’s the prognosis?

I’d like to think that when times are tough, it’s opportunity time for us. When times are tough, retailers look for ways to fix it. They’re going to do that through new categories, carrying different brands, and trying different things.

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From our perspective, the fact that we’re in these new categories during a time when business is tough is an advantage. That’s also true for our eyewear business. If retailers are having a hard time making it with certain categories, they’re going to predominantly rely on us. They’re familiar with our product, and as long as we keep delivering new and innovative creative messages to the marketplace, I don’t see why we won’t come out of this in a stronger place than we were heading into it.

Which subgenre of the overall action-sports market is most important to Oakley? Is it surfing, snowboarding, or skating?

There’s really no distinction. We think we can be relevant to all those categories — and more. I would point to the fact, however, that for the longest time we avoided doing boardshorts because it said we’re a surf brand. The reason for that was sports-marketing driven. We have a lot of key eyewear athletes who promote other apparel cpanies with big dollars involved in those contracts. So before we did boardshorts, Scott {Farnsworth, apparel brand manager} had to position ourselves with some key athletes with head-to-toe contracts. Once we had that, we had to be lined up with ads, collateral, and this guy {Apparel Designer Lawrance Quigley} all at the same time.

It was a great lesson. We got behind it, said, “Let’s do it!” and it worked. This line has been a success. It’s also been a touchstone to pissing off every other surf company out there.

When contract time comes around, will Taj Borrow and Mark Occhilupo continue to be Oakley guys?

I’ll not comment in detail. One, because it’s not my area and, two, because strategically it’s not a good thing to do. However, my perception of Occy’s relationship with us is that it’s a lifetime relationship that’s beyond the contracts. Billabong has been the most vehement about our entry into the category because they have the most erosion to loose initially. But that’s just it. It is the way it is. Beyond that, I can’t really comment.

Has the economy affected your pricing strategy?

In both footwear and apparel, we’ve historically been a high-priced brand. If you look at our distribution, it’s pretty broad. We’re in the coolest niche golf shop to mom-and-pop surf shops to Sunglass Hut. In our idyllic world, we’d love to make a product, have it work in every one of those distribution channels, and price it at 400 dollars. Well, the 400-dollar-check-writing customer ain’t walking in to that small mom-and-pop surf shop, so we’ve had to make sure we’re relevant to all our accounts.

But having said that, the fact remains that we’re a group of very brand-protective, image-conscious maniacs. So once we enter the marketplace and compete in a place where we can bring something meaningful to that retailer’s business, once the stuff starts checking and people know we’re on the playing field, then it’s time to start marching — just like we’ve done in every other category. It’s time to start making boardshorts that don’t have any seams, have really intricate molded pieces, and may cost 140 dollars. Then people are saying, “Yeah, that stuff’s working. I’ll take it!”

It’s worked every time for us in the past, but where we once had years to get that formula right, as a public company we have to hit the mark right out of the gate. That’s a different dynamic than we’ve historically had to deal with. So right out of the gate {with apparel}, we went to where we want to be in terms of premium price and features, and it hasn’t worked all the time. I’m pretty confident, though, that we now have all the pieces in place.

Apparel has lower gross margins than eyewear and competition for floor space is fierce. So what made it so attractive to Oakley?

Well, it’s harder to make a buck, but there are a lot more bucks to be made. Just compare the size of the apparel market to eyewear. It’s huge! If we can take a piece of that, just one percent of that apparel market, Oakley would see enormous growth. The trick is, don’t do too many of these {brand extensions} at one time or I’ll die {laughs}.

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Plus, we think we can advance the market. When we got into the {motorcycle} grip business, the most expensive grip was 99 cents. And Jim {Jannard, Oakley founder} entered it at $3.98. And then we worked our way up until we exited that market with grips at almost thirteen dollars. So I don’t mind getting into the apparel business as long as that formula of higher perceived value is pursued at all costs. When we got into the apparel we knew we were going to competitive and premium-priced, but we also want to move the {higher perceived value} needle to a place that’s better for us.

Which distribution channels offer you the best growth prospects when it comes to apparel?

It’s really across the board. A lot of little niche players only tell a piece of the Oakley story. Growth will result not only from being better designed, better accepted, better priced, and better produced, it will also come from adding more concept shops where retailers can tell the whole Oakley story in one place, including footwear, watches, eyewear, and clothing.

We’ll also see growth in the larger accounts. If you think about department stores, everyone in the action-sports market we’re competing with sells to department stores — every real player at least. Take a look at the Quiksilvers, Hurleys, and Billabongs of the world. I bet department stores are the biggest part of their business. Federated, for example, is one of the biggest conglomerates out there. They have 320 stores, but only 80 of them make 70 percent of their sales. So we are going to be in, at most, 40 of their doors, and it will be among those 80 stores, and that’s it.

Then we have O Stores. Here’s a place where people actually believe in what we do so much that we’re selling them a ton of different stuff. In fact, in O Stores our eyewear is less than 50 percent of sales revenue.

There are now nine O Stores and by the end of the year there will be twelve. They do more than 400 dollars in sales a square foot. I would like to see any other new fledgling brand in retail do 400 fricking dollars a square foot. So they’re cash cows and something that we’re quickly moving forward with.

The growth of company stores has been a big topic in the surf industry. Some retailers say they’re angry that the brands they helped build are now competitors. What’s your take?

Boy, if we had retail partners that would put concept stores in, opening our own stores would’ve never been a consideration. But nobody is saying, “I want your shoes, I want your clothes! I want to carry a good representation, and it’s going to rock!” Nobody is doing that.

Are their complaints loud enough that it’s a concern?

When we first announced that we were launching our own stores, yes. But now that we’ve done it, and people still enjoy success with our brand, it’s not a problem. Probably the biggest opposition to it is from the sales reps. That’s a real issue and we have to deal with it.

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It’s interesting. I was with a sales guy in an East Coast surf account and we walked in the door and there’s the DC Shoes rep crying to the owner about why he was getting thrown out of the shop. The owner said, “Well, you’re selling Tilly’s and I just can’t have that going on. It’s not good for my business.” And the rep points at our Oakley shoes, and says, “Well, those motherfuckers are in Foot Locker. That’s the dirtiest distribution there is!” And the guy says, “They’re selling to a different customer than you are, and I need those customers in here.”

Has becoming an apparel brand changed the way you and your staff view both the Oakley brand and also your vendors?

Being a company that’s based on sculpture and launching an apparel line was, is, and will continue to be the hardest segue for the creative group. How are we going to express ourselves in fabric? Well, it’s through graphics. It’s through dizzywhackers that you put on the piece. It’s through trims. It’s through technical language. It’s through jackets that inflate. It’s through these kinds of new expressions.

The years that we’ve been in apparel have been spent figuring out what that expression is and getting the resources in house to really drive it home. We were just a bunch of elite designers working on little eyewear jewels. What we have now is a comprehensive view of the apparel market and how to support it.

Did launching the apparel line change your relationship with your retailers?

I would say that our retail partners at the time we entered apparel had so much success with our brand, they thought, “Why wouldn’t this work? Why would this not make sense?” What we created in those initial points in our e Oakley story. Growth will result not only from being better designed, better accepted, better priced, and better produced, it will also come from adding more concept shops where retailers can tell the whole Oakley story in one place, including footwear, watches, eyewear, and clothing.

We’ll also see growth in the larger accounts. If you think about department stores, everyone in the action-sports market we’re competing with sells to department stores — every real player at least. Take a look at the Quiksilvers, Hurleys, and Billabongs of the world. I bet department stores are the biggest part of their business. Federated, for example, is one of the biggest conglomerates out there. They have 320 stores, but only 80 of them make 70 percent of their sales. So we are going to be in, at most, 40 of their doors, and it will be among those 80 stores, and that’s it.

Then we have O Stores. Here’s a place where people actually believe in what we do so much that we’re selling them a ton of different stuff. In fact, in O Stores our eyewear is less than 50 percent of sales revenue.

There are now nine O Stores and by the end of the year there will be twelve. They do more than 400 dollars in sales a square foot. I would like to see any other new fledgling brand in retail do 400 fricking dollars a square foot. So they’re cash cows and something that we’re quickly moving forward with.

The growth of company stores has been a big topic in the surf industry. Some retailers say they’re angry that the brands they helped build are now competitors. What’s your take?

Boy, if we had retail partners that would put concept stores in, opening our own stores would’ve never been a consideration. But nobody is saying, “I want your shoes, I want your clothes! I want to carry a good representation, and it’s going to rock!” Nobody is doing that.

Are their complaints loud enough that it’s a concern?

When we first announced that we were launching our own stores, yes. But now that we’ve done it, and people still enjoy success with our brand, it’s not a problem. Probably the biggest opposition to it is from the sales reps. That’s a real issue and we have to deal with it.

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It’s interesting. I was with a sales guy in an East Coast surf account and we walked in the door and there’s the DC Shoes rep crying to the owner about why he was getting thrown out of the shop. The owner said, “Well, you’re selling Tilly’s and I just can’t have that going on. It’s not good for my business.” And the rep points at our Oakley shoes, and says, “Well, those motherfuckers are in Foot Locker. That’s the dirtiest distribution there is!” And the guy says, “They’re selling to a different customer than you are, and I need those customers in here.”

Has becoming an apparel brand changed the way you and your staff view both the Oakley brand and also your vendors?

Being a company that’s based on sculpture and launching an apparel line was, is, and will continue to be the hardest segue for the creative group. How are we going to express ourselves in fabric? Well, it’s through graphics. It’s through dizzywhackers that you put on the piece. It’s through trims. It’s through technical language. It’s through jackets that inflate. It’s through these kinds of new expressions.

The years that we’ve been in apparel have been spent figuring out what that expression is and getting the resources in house to really drive it home. We were just a bunch of elite designers working on little eyewear jewels. What we have now is a comprehensive view of the apparel market and how to support it.

Did launching the apparel line change your relationship with your retailers?

I would say that our retail partners at the time we entered apparel had so much success with our brand, they thought, “Why wouldn’t this work? Why would this not make sense?” What we created in those initial points in our infancy was really less about distribution, the type of consumer we’re talking to, pricepoints, or where we were building the stuff, and more about making really elite, technical product.

Marching forward, the parts of that first experiment that worked will continue — especially the technical story — but the specificness of who we’re addressing, the pricepoints, and the overall design message have begun to grow and diversify from what we initially offered.

Where along the development curve is your apparel program? When will you be satisfied or comfortable with where you are?

When I start seeing us march up the pricepoints, I’ll be comfortable. Until we reach that point and have demand that we have trouble filling, I won’t be comfortable. I would say, however, that we now have a number of accounts that are happy to be apparel partners with us. When we started that wasn’t the case.

There was some low-key scuttlebutt a while back that Oakley was considering sponsoring an event on the WCT tour? Any truth to that talk?

I don’t know. That’s a question for Scott {Bowers, director of sports marketing}, but it’s not on my radar.

The new product categories are about 30 percent of your overall business. What percentage of sales will they reach and how long will that take?

I expect them to far and away exceed eyewear, and it will happen when it happens.

Do you feel pressure to make it happen sooner rather than later?

Absolutely. The importance is that as a brand, we can’t crank out twenty more sunglasses next year. We could, but it would be totally meaningless. That’s not going to grow our business. Look at Nike. In the last six years they grew their business by four-billion dollars, but they grew their income — their profit — by only 40-million dollars. Think about how much stuff that is — and I mean stuff — that doesn’t mean shit to anybody that’s getting cranked out to make that extra 40-million dollars.

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I have a really strong incentive to have fun and make cool shit to make these new categories successful — and by successful I mean to be larger than our eyewear business — so that we’re not relying on 300 new sunglass models each year, which is what Luxottica does.

How are your apparel and footwear margins?

We’re right now above industry par. Nike’s at 41 percent and we’re higher than that. I won’t tell how much higher, but Oakley’s margins are higher and they’re going to get even better.

How?

By improving efficiencies and the pricing we’re getting in production. And the more effective our design team becomes, and the more effective each piece is in the marketplace, the better our margins will become. We also expect to improve apparel margins by introducing new technologies to the marketplace so that the average pricepoint increases.

But from the outside looking in, it looks like apparel is eroding the overall Oakley margin, right?

Yeah, I hear that every time we’re on a conference call with investors: “Why did your margins go down?!” That’s because we’re selling a shit-pop more of apparel and footwear. Get over it!

What distribution lesson, if any, did you learn in the wake of the whole Sunglass Hut debacle?

Well, don’t put all your eggs in one basket. That was probably one the biggest things that drove our diversification was this customer that was a huge part of our business telling us, “Oops, we made a mistake.” What? Oh, that’s neat!

We just don’t want to be put in that situation again. They are still good customers, but we’ve got to get out from underneath them.

Did you open up your distribution during those couple of months when you weren’t in Sunglass Hut?

We had partnerships and channels where we were just doing category-specific business that opened other categories. For example, we launched eyewear in Foot Lock