Dwindle Distribution

Don’t let the name fool you.

Dwindle Distribution is the relatively new name for a company that has a long and somewhat convoluted history. In 1988 Steve Rocco thumbed his nose at the skateboard establishment to found what soon became the fledgling World Industries. Despite staggering odds, the company grew in the new and somewhat depressed business climate of the early 90s and managed to launch more brands, including Blind and several others that came, went, and had some success in their time.

In 1998 Rocco and his partner, CEO Frank Messmann, sold a minority interest in the World Industries Distribution business to investment firm Swander Pace Capital, whose involvement, we were assured, was minimal. The distribution business adopted the misnomer Dwindle, and Merge, Inc. was formed to oversee the newly purchased Dub and Droors apparel brands. Last year World Industries, Inc. was spun off to stand on its own, while the A-Team, Axion, Blind, City Stars, Darkstar, Deca, and Speed Demons brands remained under Dwindle, and to keep a handle on all of this, Kubic Marketing was formed to act as the conglomerate’s holding company.

In the year since Kubic formed, an equally confusing series of moves transpired to arrive at the current situation. Dwindle is shuffling a couple brands as it adapts to the changing skateboard market, World and Merge are up and running independently, CCS was stealthily purchased and then sold before most of us knew any better, and many more surprises lurk just beneath the surface, waiting for their cue.

Nominally in charge of all this, Kubic Marketing presides over one of the most diverse and successful collections of brands ever to be associated, even if that association is loose at best.

In the current swell of skateboard commerce, SKATE Biz sat with Dwindle’s management triad of CEO Messmann, Vice President Rodney Mullen, and General Manager Rob Valerio to gain some perspective on the ever-evolving manufacturer/distributor and its associate operations, and to find out what the skateboard marketplace looks like through their eyes.

Was World Industries separated from Dwindle in order to develop broader distribution?

Messmann:

Not necessarily broader, in terms of distribution. There is a little bit of broadening, just by virtue of the fact that World caters to a younger audience, and a portion of that younger audience doesn’t have access to specialty stores the same way that a more ‘core skater has. So to even catch that consumer you need to go slightly broader. But you’re really just talking about Pacific Sunwear and that level where parents of the eight, nine, or ten year old are also likely to shop. The majority of the revenues domestically are still gonna come from the ‘core skate shops.

Another way it’s expanding is how aggressively it licenses its name out to things that you wouldn’t consider licensing Deca to. We’re doing a paper-products program with X-Concepts, which is the company that does Tech Decks fingerboards. So there’ll be school binders, erasers, and pencils—stationery, basically. We put its World’s logo and its brand on more products than we would at Dwindle.

Would you say the skaters at Dwindle are more involved in making critical decisions here than they would be at World?

Messmann:

Yes. There’s way more, first of all. The amount of pro skaters associated with Dwindle is five times that of World. It’s much more integrated here at Dwindle, even through cross ownerships and percentage royalties paid to a pro rider based on a certain brand’s sales. We have a number of riders who are involved that way.

Is that the deal Chet Thomas has with Darkstar?

Messmann:

Chet Thomas actually sold us Darkstar, but not for dollars—for equity; he is a shareholder of Kubic, really. We did that not because of the value of Darkstar, though it is valuable, but even more to just associate Chet with our company as he continues to grow and eventually won’t have a pro skate career. We’d love to have him be an integral part of Dwindle.

We’re all basically skaters at the management level, or were skaters. At a certain point you lose touch with the market that you knew five, ten, or fifteen years earlier. The more skaters we can get to be involved, the better chances we have of staying on top of our game. The best way to do that is to develop an equity program rather than just paying them a flat salary.

When World Industries was formed in the late 80s it seemed to be managed spontaneously—it was kind of off-the-cuff and reactionary, and that seemed to be partially responsible for its initial success. In a short period of time it got really organized, focused, and became this marketing machine. The company today and the way it started—both of which were successful—are almost the antithesis of one another.

Rob Valerio:

I think the consumer has changed dramatically from the early 90s into 2000. From the retailer point of view, they would now rather deal with a company that’s more organized than less organized.

Messmann: There’s been a maturing of all the companies—not just our company, but all companies. And not just at the manufacturing level, but also at the retail level. A lot of the shops, the ‘core start-up shops that were successful with the way World and Steve Rocco did business in the early 90s, they’ve been around for ten years now. They’ve also organized their shops in a much more planned way than was the case before.

So there’s just been a general maturing of the industry, period. But I think we’re still trying to mix the two a little bit. Clearly, if you’re selling 50,000 T-shirts a month, you can’t just on a whim say, “All right guys, next month it’s white only,” like Steve Rocco used to.

I think the way we do try to mix it a little bit is by having a lot more brands; individual brands can try things, and if it doesn’t work, we can just stop and do something else. It’s more like planned chaos, if you will.

It seems the company has really been able to assess the market and respond to it well. When the market demanded crazy spontaneity, that’s what you did. When the shops started maturing and started selling volumes that required on-time deliveries, the company changed, became more organized, and was able to make those deliveries. In the last five years, you’ve gone through some different brands—some that lasted a short period of time, and some that were mainstays. Traditionally you’ve had a range of brands that cater to different aspects of the market, and you’ve recently made some changes to your lineup once again, replacing A-Team with Enjoi.

Mullen:

A-Team happened so fast that I think a lot of the ideas didn’t solidify in terms of the marketing and image. It was like, “Hey, we’re all good skaters, we’re all good friends, let’s start this.” We didn’t think so much about where it was going in terms of marketing. It never really took.

Chet said Darkstar was his baby, so he wanted to go with that. Gershon Mosley skates a lot with the Blind guys, and Marc Johnson and I started thinking that it would be so fun to start fresh. He and I think along the same lines, and he had so many good ideas he’d been telling me about, so we decided to do a company that really has a lot of our own feeling of why we skate—enjoy.

I assume the graphics and imagery will be a little less hard-edged, and a little more curved and bubbly.

Mullen:

I’ve seen some of the early stuff that Marc’s come up with, and it really isn’t too sophisticated or refined—it’s the furthest thing from it, but it’s fun.

Messmann: The business angle to that is that Rob Valerio and I were looking at the history of A-Team sales in fall of last year. We were looking at the amount of money we had to spend. These are top riders, so they also get top dollar, and we advertised it pretty heavily. So the marketing dollars we put in versus what we got out of
it clearly showed a mismatch somewhere. It sold well, but needed to show more of a growth curve than it did in order to justify the money that we were putting into it.

So there was a shift in the market, you made a decision, and implemented it. It seems like A-Team existed, served its purpose, things evolved, and this is how it’s changing.

Messmann:

If you can establish a successful brand name and keep growing it, that’s the best of both worlds, of course. But Dwindle is a brand-management company. Some brands turn out to have lives, for a number of different reasons, that keep it going for a long time—Blind is an example. It had ups and downs, but it’s always come back, and everyone’s always agreed that it’s a great brand. And I don’t think anyone would dispute that World Industries is a great brand, either. In the ‘core audience, there may be more people who have the negative connotations to World just because of the characters, or whatever, but everybody’s still gonna agree that it’s a brand that’s there to stay. And some of the other brands are still too young to make that judgment call—they haven’t gone through the ups and downs of skateboarding yet.

Valerio: We have four new brands this year.

Messmann: I can’t think of too many brands out there that have really gone up and reached sort of a high point, then a significant lowering of sales, and then came back up. There are probably less than four brands or so in the industry that have done that. World and Blind are two of them: when World was high in the early 90s, and then when I came to the company six years ago, it World was the smallest brand we had here. It became the biggest brand four years later, and Blind sort of followed a couple years later.

Outside of our companies, Birdhouse has done it. They had a high point, then a significant low point a few years ago. Clearly they’re on the run today. Alien is making a comeback, but there are only a few brands that have done that.

I think it’s really healthy to see, because before that the general consensus was you get one chance, and that’s it. Now I think there are enough brands to show that’s not necessarily true.

It probably comes down to the fact that there are new generations of skaters every couple of years.

Valerio:

What’s interesting, though, is that in the past year or so the stronger brands have been taking a much larger share of the market where there used to be very low barriers to entry, so there’d be a lot of little brands coming in. And we don’t see that right now. We actually see the larger brands, like ours, really represented in all the good skate shops across the country.

It’s interesting that we now have sort of a Big Ten today, much like you had the Big Five manufacturers dominating the market in the late 80s.

Valerio:

Now you have five distribution houses that might have many brands.

The industry is certainly much more diverse than it was a decade ago. But with this tendency toward a more consolidated market, do you think that jeopardizes the industry? Or do you think that’s actually a strength?

Messmann:

It depends. We’re trying to become a bigger company and maintain creative flow by having smaller brands that are headed by fresh, young individuals who have that vision: Chet Thomas on Darkstar, Marc Johnson on Enjoi, Rodney Mullen on Tensor. We do try to mitigate that fear of not having enough creativity because it’s more consolidated. I think that’s a constant struggle.

The goal of any company, I would say, is to be profitable and grow its business—stay true to whatever you believe in, but still the goal is grow the business. Look at retailers. All the shops that were around five or ten years ago—a lot of them now have two, three, four, five storefronts. And that’s the way they’re growing. A lot of the stores that were considered very ‘core are still ‘core, but they might have five storefronts and centralized buying.

It seems one way World Industries and Dwindle grew is not just by releasing parallel brands, but also by going into clothing, shoes, and other product categories.

Messmann:

What we try to do today in terms of businesses that are part of Kubic, and what we would want to make part of Kubic in the future, is to diversify and not become completely reliant on skateboard hardgoods, even though that’s where we come from. We would like to diversify with product categories and brands that are complementary, that we could support and be proud of having as part of our company.

Merge clearly falls in there. We had our growing pains figuring out how to do clothing, and we’ve come around finally, and it’s looking good for Merge in the coming year. And there will be other brands out there that we can do something similar with. I can’t say what in particular right now.

CCS was a whole different thing. It’s been our biggest customer for years, domestically. It’s been many of our competitors’ biggest customer for years. We bought CCS because we saw tremendous value in it and everything that was going on, including the Internet. It was never the intent to make CCS a vehicle to sell our products, de-emphasize everyone else’s products, and piss off retailers. It was more that there was an opportunity to buy CCS as a subsidiary of Kubic with no integration, really.

It was just an investment—almost like buying a security, if you will. If you get something at a good deal, you’ll probably do it. That’s why we kept it very low-key, because we didn’t want to upset our competitors and our retailers for no reason. But CCS’ actions over the period of Kubic’s ownership showed that there was nothing to fear, and they didn’t emphasize our products any stronger than before.

Now it’s common knowledge that Alloy, the New York-based Internet and catalog company, bought CCS. We made a profit on it, CCS is still our biggest customer, and we have the same relationship with them from a supplier-customer perspective. We’ve Kubic become financially stronger as a company and are able to continue to support the growth of our brands without having to be as dependent on the banks as we were before.

So all of your efforts, historically, in diversifying into other types of product categories and other types of ventures have been to create a more stable and diverse portfolio?

Rodney Mullen:

Steve Rocco and I, from the very beginning, had a lot of sleepless nights. What happens if this rider who’s running this brand gets in a fight with his girlfriend, and his whole world looks bleak? He calls you and goes, “You know what? Come to think of it, I’m unhappy about this, this, and that.” It’s a terrifying way to live. It was shock treatment all the time because there’s no real reasoning in it, sometimes. So we’ve spent a lot of time in agony thinking that everything we’d worked for could be jeopardized in an instant.

After getting sent through it a couple times, we realized it was going to be a goal of ours to diversify, so if one aspect of our business sinks or has a problem, it will never again bring down the whole place. When you’ve worked with something for so long, and you’re faced with the prospect that one problem could bring down everything, it’s hell. So that was a goal, that was something we learned early on—to diversify.

When I talk to Marc Johnson, for instance, I say, “Hey, we want to do a company with you, and build a future for you.” Marc’s gonna be a dad, so here I am promising this guy a future here at Dwindle. Well, what if an aspect of our business goes down and brings his down, too? What kind of promise is that? And does that make me a liar in the end? It’s gnarly to live with, and that’s something we learned early on—that we have to diversify. Never again will we pay that price of risking everything.

Messmann: Bigger companies always talk about how they have obligations to a lot of shareholders. They’ve got the owners, employees, customers, and vendors depending on
them. It starts becoming more clear what that really means as you get to be a bigger company. And it becomes a bigger responsibility. We have about 300 employees. That’s a lot of people who make their living from our companies.

We are also starting to grant stock options to not just the top managers, but key employees and riders throughout the companies. And that’s a promise of a future upside, a future growth in value. So you have a big responsibility to ensure the viability of the company.

I guess it’s also complicated when you have investors who don’t come from skateboarding and who simply expect certain incremental growth.

Messmann:

That’s true. I think that’s one of the biggest costs of bringing in someone from outside who doesn’t necessarily understand the business, but they do understand that they want to put in a chunk of money, and X amount of years later they want to get a chunk plus Y back. And that’s why you have to choose those people very carefully when you do that.

It’s not just a question of the dollars, it’s really about how are they going to be to work with? How easy is it to convince them that it’s okay to lose money this quarter because we are going to be fine five quarters from now? You really need to consider that pretty thoroughly before you do it. I’m saying this because we did it, and there may be a lot of other companies out there that, as skateboarding gets more mainstream, will get similar opportunities.

To grow it seems like you really need that kind of infusion, the capital to make those jumps.

Valerio:

It’s just a matter of getting more sophisticated financially.

Messmann: There are companies that grow organically, but the owners take a higher level of risk. When he founded the company, Steve Rocco had personal guarantees that kept increasing as the company grew every year.

The Internet is changing not just business, but the way we live our lives. Just in skateboarding, a lot of companies seem to be developing Web sites to make an impression initially, but eventually it seems like some element of e-commerce will be inevitable.

Messmann:

In my opinion, it’s not the time for manufacturers to jump in there in a big way and leapfrog their customers. If it was, we’d have taken CCS and integrated it as our selling tool, and we would have taken a bigger step than anyone else could’ve. We didn’t want to do that. I don’t think it’s the right time, and I think it’s probably blown up a little bit because of the blurring of the distribution lines.

When the dust settles, the retailers are still the best at doing retail. What you see online is a new generation of retailers, and even if half of the dotcoms disappear because they run out of funding, some will remain. That’s a new form of retailer, and they’re gonna buy products from us, and they’re gonna sell to consumers, just like brick-and-mortar retailers do.

There’s not going to be a huge portion of sales in the next five years that are gonna be sold directly from a manufacturer to the consumer in our industry. If it goes over ten percent, I would be very surprised.

Valerio: Certain product categories do not sell well on the Internet. Shoes do not sell on the Internet, while something like a T-shirt or a deck might sell fine because the consumer knows what they’re going to get.

Messmann: But they’re going to be sold by a consolidator, which is someone like CCS or another operation.

Valerio: And they give you all the options, where you don’t get as many options at your local skate shop. For something like shoes, where the fit is very important, the brick-and-mortar retailer is the best person to do that. They are the local experts at that.

Our dotcom experience here is in providing information—we have informational Web sites about all our companies. We want to make them interactive and interesting for people to look at and go through. It’s a place for us to give very detailed information that we can’t give in a one-page magazine ad.

Messmann: And get very detailed information back about the tastes—likes, dislikes, and so on—of our customers, as opposed to just listening to the retailers.

We can use e-commerce to better our business not so much by going direct with anything, but B2B business-to-business. That’s a much bigger opportunity, clearly. We are implementing new ERP—enterprise resource planning—software that will allow us to involve our field reps, customers, and international distributors in a way we think will increase our business, decrease the costs of doing business, and increase the visibility of the customer. Over the next two years we think it’s gonna have a huge impact.

Historically, the skateboard industry has gone through cycles of relative prosperity and recession about every ten years. The last recession was ten years ago, and we seem to have either prolonged this period of prosperity, or else we’ve broken the cycle. Are we benefiting temporarily from the twenty-million-strong Generation Y, or has skateboarding just mainstreamed to the point where we’re now as stable as anything?

Messmann:

The fact is nobody knows. Every industry is cyclical, and skateboarding’s going to be cyclical in the future. The question is whether the industry is flat. When you talk about the industry having a downside every ten years, you assume that it goes up and down to the same levels. And clearly that’s not the case.

I think everybody’s gonna agree there’s a general upward trend in the size of the skateboard market now. I’m personally convinced that it’s less cyclical than in the past. That’s not to say that the twenty- to 30-percent growth rate we’re experiencing this year could easily go down to a 30-percent negative a couple years out. I don’t see it happening in the next eighteen months, but I don’t see it going down to 1996 levels again, which was a lot higher than what the bottom was before, in 1991 or ’92.

Valerio: Even the cycle from January to December, the month-by-month sales, has flattened out significantly over the past couple of years. It’s more consistent.

Mullen: It may very well be cyclical, but the parameters are changing—they’re nonlinear. So you end up with these curves that are accentuated—longer cycles between them, and amplitude that’s just growing overall.

And in English?

Mullen:

The economy is smoothing out.