Swell and Laguna Surf & Sport Merge Companies

At first blush, it appears to be another “dogs-and-cats-living-together” story like Surfer buying Surfing. But the rumors are true: Laguna Surf & Sport and Swell, Inc. have joined forces in a merger that was completed Monday, October 28, and the two parties say they’re excited by the new possibilities.

Laguna Surf & Sport Owner Eric “E.J.” John was a well-known critic of Swell as few years ago, but the merger highlights just how much has changed at the Swell brand and within the surf industry.

On the day the merger was complete, TransWorld SURF Business talked to E.J. and Swell President Nicholas Nathanson about the deal and what it means to the two companies moving forward.

So tell me what’s happened.

Eric John: Well, we’ve been talking on and off for about a year now and when we dug into the negotiations we discovered it was in our best interests to merge our companies. So Laguna Surf & Sport and Swell officially are merged.

So who got what? Did Swell buy Laguna Surf & Sport?

John: That’s the first way people are going to want to conceptualize it, but that’s not the case at all. It’s a merger of the two companies, and I went from being the 100-percent owner of Laguna Surf & Sport to being a part owner of Swell Commerce. I’m going to be doing a little bit of work here {at Swell} as vice president of retail. We’re going to expand in the next year and open about three more stores.

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The names of the stores we have now down in Laguna Beach and Aliso Viejo aren’t changing. They’re still going to be LS&S and Laguna Surf & Sport. The stores that we’re going to open may or may not be LS&S stores. For sure one of them is going to be a Swell store, but the other two we’re not sure about. This just provides another outlet for another thriving business here at Swell: catalog, internet, and now a retail business.

Nicholas, what does having Laguna Surf & Sport give you that you don’t have right now?

Nicolas Nathanson: The goal of becoming a multi-channel retailer is important because it lets you serve the customer in whatever channel they want to be best served. Just like if folks are comfortable buying over the phone, we want to let them buy over the phone. If they’re comfortable buying online, then we want to let them buy online.

I think that the Laguna stores represent what we are in the mail order and online space. We view it as a launching pad for a larger retail presence.

What affect will this deal have on getting brands involved with Swell that might not be involved right now?

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Nathanson: I think it’s definitely an important piece of the puzzle. On the skate side, we really haven’t had any difficulties in working with any vendor that we want to. In surf, I think that because the mail-order channel is a lot newer to the vendors as a distribution medium, that it’s been a lot more difficult. For a lot of those guys it just gives them a level of comfort that we have our feet on the ground someplace in Laguna in such a core presence. It’s definitely an important factor.

I think there are synergies from an inventory perspective as well. Sometimes you have a style that may be a great style but for whatever reason it isn’t merchandised well in the catalog or it just doesn’t sell well through mail order, but it could sell great in the store. So those are probably the two biggest reasons.

What brands would you expect that Swell would now be carrying via mail order that it hasn’t carried in the past.

John: Well, there are now two catalogs, Monsterskate and Swell. And they currently sell Volcom in Monsterskate. They rock with it and they have a completely happy relationship with one another. In the Swell holiday catalog, they’re breaking Hurley and DVS.

So are there any brands that Laguna Surf & Sport has relationships with that will be new to Sll?

John: I think that there will be. What we’re going to do here is create complete continuity between the stores, catalogs, and online business. One of the things that impressed me most when I first met these guys and got to know them was their obsession with wanting to serve the customer. From the way they package the box, to how quickly they ship it out, to just all these other things. They’re jumping through hoops like crazy to buff out the customer. As a long-time retailer I have a lot of respect for that. Now through these channels people can buy something in the catalog and bring it back to the store and return it if it didn’t work out right. So we want complete continuity to the nth degree.

E.J., in the past you’ve been pretty critical of Swell and the whole Swell model. What’s changed for you that would make you want to partner up with it?

John: First of all, that was a few years ago when I was pretty critical of it. There’s been a significant shakeout since then and, in my opinion, the companies who have lasted are the ones with the utmost commitment to serving the customer and to their mission.

To be perfectly honest, in the past I’ve always been against any type of stand-alone catalog or internet operation because it didn’t mean much to me. It didn’t have a feel. It seemed like it was kind of generic and sterile. But in the last year I’ve changed my view. Take for example a surfing magazine. Looking at a surfing magazine isn’t the same as going surfing. It doesn’t smell like wax — it’s just a lot of ink on paper, but it does have a certain vibe to it. I think that’s what they’ve developed at Swell and Monsterskate too. Most people who criticize it these days haven’t seen it.

Obviously creating a strategic partnership gives me the opportunity to grow and get involved with a bunch of guys that have the same level of passion for serving the customer that I do. It also creates opportunities for my employees — guys like Watto and Steve and Jack and anybody else who are now filling up a small nest. Usually when one of our birds gets too big we have to kick them out of the nest. Now all of the sudden we have a bigger nest, so we don’t necessarily have to graduate people to other companies. We have lots of opportunities within this system.

Will the balance sheet of both companies be combined?

Nathanson: Yes

How will that help both businesses?

Nathanson: Retail does bring, I won’t say less seasonality, but a little less spikiness in the revenue stream because catalog drops tend to create a lot of demand within an eight-week period of the catalog mailing. But I think they are fairly similar businesses from a seasonality standpoint. We have a strong fourth quarter and Laguna Surf & Sport has a strong fourth quarter. It steadies things out a tiny bit, but I think any different revenue stream you add evens things out a bit.

Can you see any situation coming down the road where the two Laguna Surf & Sport locations would be changing their name to Swell? It seems like building one brand would be easier than building two.

John: You don’t walk away from something that’s so valuable and means so much and something that I have so much personal equity in. It’s not going to happen. Ever. We’ve talked about it and no one here {at Swell} has ever suggested it or that might have killed the negotiations. These guys around here are pretty astute and they appreciate what we’ve got and they want to be part of it. And we want to be part of what they’re doing.

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Nathanson: It’s really about serving the customer in the way they want to be served. There is no real value proposition in changing the name — it just doesn’t make any sense. E.J. has done an amazing job of building up loyalty to a brand in his community and there isn’t any benefit to changing that. If this were a store in Nebraska, it might be a little bit different.

There still seems to be some confusion out there as to whether Swell is owned by Primedia. Can you clear that up once and for all?

Nathanson: Primedia has basically no interest in Swell. They do have a minute interest — something like one-tenth of one percent. They own shares through an ads-for-equity deal that we did more than two years ago. When Swell and Surfline split into two entities — or really just prior to that — Swell entered into an agreement with Primedia so that Primedia could, in exchange for Swell hosting Surfing magazine’s web site, Primedia would cover some of our editorial costs. But there’s never been any type of ownership by Primedia of Swell.

John: You know, this time of year in a slow retail environment, people like to talk because they have nothing better to do. This is obviously going to be spread by some people — probably by those retailers who have a pretty good Internet business or catalog business. But I don’t know how anybody is going to stand against this. It’s a done deal.

So are you disclosing the terms of the deal?

John: No, but I can say it’s no sweetheart deal. I want to communicate that as effectively as I can. I’m not getting a whole bunch of money for this or anything like that. What I’m doing is partnering up and together we’re going to build a pretty big deal. We’ll have this conversation again in three years and see what we’ve got here.

So what’s the roll out plan? Can you see the Laguna Surf & Sport chain growing or having a Laguna Surf & Sport Web presence now?

John: I don’t know. We’re going to evaluate it on a case-by-case basis. In the past I’ve been limited with the Laguna Surf & Sport name because you couldn’t put a Laguna Surf & Sport store in Dana Point, because it’s Laguna Beach. There’s that territorial aspect to surfing and surfing stores. That way we went to the acronym when we started moving to different cities. We started using the LS&S. So going forward we’re all help and access resources in each other’s little realm and help build the business. As far as what it’s going to do to the LS&S empire or the Laguna Surf & Sport empire, or the Swell empire, I don’t know. But it’s all one deal now. As long as the whole organism grows and is successful, that’s all I care about at this point.

And how about for Swell? You’ve already said you expect that there would be one Swell branded store front. Do you have hopes that there will be a chain of them?

Nathanson: That’s going to be kind of E.J.’s ball of wax. He’s really going to help shape our retail strategy. I think we’re talking about adding essentially three more stores next year, and that’s still a little bit up in the air. I think that’s going to be dictated by where we feel its appropriate to have a Laguna Surf & Sport store or where we feel it’s appropriate to have a Swell or Monsterskate store. Our retail strategy is going to be restricted to Southern California in the near term. Any successful retailer needs to prove a platform in one region before they take it anywhere else.

So it sounds like you’re going to be keep E.J. busy.

Nathanson:That’s an important point. We didn’t want to get involved in a relationship where we weren’t going to get a lot of the knowledge that E.J.’s built up over 30 years of retailing. We did not have that internally as an organization, so that’s something we really need on an ongoing basis. So E.J. is going to be involved.

John: I’m not that old. I want to build. It’s not like my career goals are dead. They’re alive. Believe it or not I’m excited and fascinated by the online and catalog business.

Nicolas: Yeah, we expect E.J. will bring some value to the catalog business as well. I think we’ve done a very good job getting smart about our circulation management and even doing a good job proa, it might be a little bit different.

There still seems to be some confusion out there as to whether Swell is owned by Primedia. Can you clear that up once and for all?

Nathanson: Primedia has basically no interest in Swell. They do have a minute interest — something like one-tenth of one percent. They own shares through an ads-for-equity deal that we did more than two years ago. When Swell and Surfline split into two entities — or really just prior to that — Swell entered into an agreement with Primedia so that Primedia could, in exchange for Swell hosting Surfing magazine’s web site, Primedia would cover some of our editorial costs. But there’s never been any type of ownership by Primedia of Swell.

John: You know, this time of year in a slow retail environment, people like to talk because they have nothing better to do. This is obviously going to be spread by some people — probably by those retailers who have a pretty good Internet business or catalog business. But I don’t know how anybody is going to stand against this. It’s a done deal.

So are you disclosing the terms of the deal?

John: No, but I can say it’s no sweetheart deal. I want to communicate that as effectively as I can. I’m not getting a whole bunch of money for this or anything like that. What I’m doing is partnering up and together we’re going to build a pretty big deal. We’ll have this conversation again in three years and see what we’ve got here.

So what’s the roll out plan? Can you see the Laguna Surf & Sport chain growing or having a Laguna Surf & Sport Web presence now?

John: I don’t know. We’re going to evaluate it on a case-by-case basis. In the past I’ve been limited with the Laguna Surf & Sport name because you couldn’t put a Laguna Surf & Sport store in Dana Point, because it’s Laguna Beach. There’s that territorial aspect to surfing and surfing stores. That way we went to the acronym when we started moving to different cities. We started using the LS&S. So going forward we’re all help and access resources in each other’s little realm and help build the business. As far as what it’s going to do to the LS&S empire or the Laguna Surf & Sport empire, or the Swell empire, I don’t know. But it’s all one deal now. As long as the whole organism grows and is successful, that’s all I care about at this point.

And how about for Swell? You’ve already said you expect that there would be one Swell branded store front. Do you have hopes that there will be a chain of them?

Nathanson: That’s going to be kind of E.J.’s ball of wax. He’s really going to help shape our retail strategy. I think we’re talking about adding essentially three more stores next year, and that’s still a little bit up in the air. I think that’s going to be dictated by where we feel its appropriate to have a Laguna Surf & Sport store or where we feel it’s appropriate to have a Swell or Monsterskate store. Our retail strategy is going to be restricted to Southern California in the near term. Any successful retailer needs to prove a platform in one region before they take it anywhere else.

So it sounds like you’re going to be keep E.J. busy.

Nathanson:That’s an important point. We didn’t want to get involved in a relationship where we weren’t going to get a lot of the knowledge that E.J.’s built up over 30 years of retailing. We did not have that internally as an organization, so that’s something we really need on an ongoing basis. So E.J. is going to be involved.

John: I’m not that old. I want to build. It’s not like my career goals are dead. They’re alive. Believe it or not I’m excited and fascinated by the online and catalog business.

Nicolas: Yeah, we expect E.J. will bring some value to the catalog business as well. I think we’ve done a very good job getting smart about our circulation management and even doing a good job producing the catalog and merchandising well, but I think that E.J. can bring even more of a sense of vibe to the catalog that will make it even better. producing the catalog and merchandising well, but I think that E.J. can bring even more of a sense of vibe to the catalog that will make it even better.