It’s never a great idea to start with a cliche;, but here it goes: I’ve got some good news and some bad news.
The bad news is the world economy is in a serious jam. Japanese banks are in the middle of a “monolithic, titanic f***-up” (as John Hildeburn of Hasco so aptly puts it) that makes the United States savings-and-loan crisis of the 80s seem puny in comparison. They’re sitting on a stratosphere-scratching mountain of bad debt-estimates range from 600-billion dollars to more than double that. The result? The entire Japanese economy has spiraled into its most severe recession in 50 years.
But it gets worse.
Weakness in the Japanese economy has hamstrung the teetering economies of neighboring countries; the Asian Tigers seem more like paper tigers each week.
Elsewhere, Russia’s unpaid populace is becoming increasingly grumpy in the wake of a devalued ruble. Brazil is slip-sliding along the brink of a financial meltdown that could take most of Latin America with it. Spasms are rocking the world’s free-market economies, and even Tom Brokaw looks grim, so we’re hosed for sure, right?
Of course, this is a gross oversimplification, which brings us to our good news: None of us works for De Beers.
If we did work for that giant diamond supplier, we’d see our global sales down by more than a billion dollars this year, and we’d be able to pin the blame directly on the shaky world economy. We’d be closely monitoring developments and gnashing our teeth each time more scary world economic news came pouring over the transom.
But since we work in the snowboarding industry, the effect the global economy has on our business isn’t quite so straightforward-or desperate.
After all, many of the financial woes are coming from countries on the periphery of the snowboarding world. “The financial crisis in Indonesia really doesn’t matter much to us,” says K2 Vice President Brent Turner, “because frankly we don’t sell much product there and we don’t have a factory there.
“Because of the global economy, what happens in one country definitely affects other countries-at least on some level,” continues Turner. “But severe economic problems in developing countries don’t affect the snowboarding business that much.”
Don’t Forget Japan
But the Land of the Riding Sun isn’t a developing country-it’s the de facto one-third of the world snowboarding pie, even as its market has gone through the business equivalent of shock therapy.
“That market is probably flat or down ten percent compared to a few years ago,” says Airwalk Category Manager Cec Annett, “but that’s a combination of the recession in Japan and the boom-and-bust nature of the snowboarding industry there. It’s been a double whammy.”
Others say the consolidation has obscured the impact of the economic recession. Viewed on the macro level, most Japanese citizens are holding on to their money. “There’s so much financial uncertainty in Japan that overall consumer spending is down,” says Turner, who notes that many of the 747s once full of Japanese tourists heading for Hawaii are now mostly empty.
But once again, the snowboarding industry is slightly insulated from these scenarios. “When the Japanese economy was good,” says Dave Schmidt, vice president and director of global sales for Burton, “the snowboard market became oversaturated and blew up, then flattened for some or dropped like a rock for others. All this happened before the economy went bad. Now the snowboarding business has actually stabilized, even though you’d expect it to be all doom and gloom.
“It comes down to the fact that in Japan the snowboarding demographic is tighter than anywhere else,” continues Schmidt, “and those seventeen- to 25-year-old kids are the least impacted by a recession. They’re going to continue to spend money on products like snowboards.”
Turner echoes the sentiment of Schmidt by saying: “In general, the typical snowboard consumer in Japan is in that wonderful period between high school and when they have to go out and get a real job. Many of them are parent-supported, so there’s been a pinch, but their spending is still mostly discretionary.”
The Yen Rollercoaster
But while the consumer market seems to be holding its own (judging by anecdotal evidence), retailers, distributors, and manufacturers have been more affected by the crunch-especially when it comes to exchange rates.
“The currency fluctuations have certainly affected Japanese distributors and retailers when it comes to pricing,” says Annett, “and when the yen was weak, it hurt. Most companies were trying to be compassionate, but at the same time, we needed to make our margins. A weak yen helped their domestic brands more than anything-but they really didn’t need any help.”
Scott Sorenson, minister of propaganda at Dragon Optical, says exchange rates put many U.S. brands in a bind. “When the Yen was weak, a few distributors and retailers wanted to raise prices to cover their currency losses. But raising prices in the middle of a recession isn’t the way to grow business.”
Fortunately for retailers and distributors in Europe and Japan, in October the U.S. dollar plunged against most currencies. In Japan, it was the largest three-day swing in 27 years, as the yen/dollar exchange rate fell from 135 to 117-an almost overnight drop of nine percent.
Turner says this was actually good for business, as U.S. goods become less expensive in Japan and savings were passed along to consumers. “We’re definitely going to try to be competitive in Japan,” says Turner, referring to the dollar’s dive.
“As a snowboard company, we try to stay focused on snowboards,” says Schmidt, “not the currency market. So we don’t have a lot of expertise on this subject. We do try to protect ourselves by buying currency futures and options. However, no company or person could have predicted the extreme volatility of the past several months. You hope you play your cards right, and any impact is for the positive, but it’s so far out of control you mainly try to minimize your risk.”
Running The Numbers.
Changes in the currency markets don’t just effect retailers. Manufacturers doing any sort of international business can be ruined if they ignore exchange rates.
Let’s say an imaginary brand-Team Bro/Brah-placed a November order for 50,000 boards in its European OEM factory. Imagine each board costs 200 deutschmarks (DM) to build. So, based on November 1997 exchange rates (1.725 DM per dollar), 50,000 boards would cost around 5.8-million dollars.
So, Bro/Brah opened a letter of credit (LC) for ten-million DM, with payment to be made upon board delivery. Here’s where it gets interesting.
If Bro/Brah took delivery on July 1, it’s stoked. Exchange rates hovered around 1.83 DM per dollar, and paying off the LC would only cost 5.48-million dollars. The difference, 317,808 dollars, could have gone directly to the bottom line or be passed along to distributors and consumers to grow the brand.
But say Bro/Brah took delivery October 15, when the exchange rate was 1.63 DM per dollar. Paying off the LC on those 50,000 boards then would set Bro/Brah back 6.15-million dollars-356,923 dollars more than it anticipated paying. With each board costing seven dollars more than expected, the entire business plan for the year is screwed before the first board hits the shelves.
So it’s no wonder most companies consider buying forward contracts on currencies when they open an LC. These are contracts businesses or individuals make with financial institutions to lock in the price of a currency to be bought or sold at a later date. The bank, or another third party, takes the risks-and the potential gains. The brand knows what it will pay or receive in its own currency.
Of course, manufacturers, distributors, or retailers paying or receiving funds in their own currency don’t have to worry about forward contracts. Lucky them.
Manufacturers can also hedge by asking distributors to pay in the foreign cu
rrency its dealing with. For example, if Bro/Brah asked its distributors or retailers to pay in deutschmarks, it has a natural hedge against fluctuations-since the cost of the U.S. dollar never enters the equation-and the risk shifts to the distributor/retailer.
And while most distributors are savvy enough to open futures or options to minimize risk, many retailers are not. According to Option/NFA’s President Geoff Power, that’s a mistake. “A lot of retailers think they aren’t doing enough volume to get involved with forward contracts on currencies, and that’s just not the case. It’s all about percentages, not volume.”
Bringing It Home
But does the global economy affect U.S. snowboard retailers? Yes and no. Companies wracked by tough times overseas might try to make up some of the loss in strong domestic markets-although how they would pull that off without anyone noticing isn’t clear.
The summer’s weak yen and the deep Japanese recession may have minimized gray market shipments from U.S. retailers, but the preexisting Japanese product glut and the crackdown on gray market sales by brands had already put a big dent in those sales.
So, does it matter? You bet.
When the dollar dropped, it was partially a signal that investors no longer believe the United States can be a safe haven if the rest of the world is in recession. And with the Consumer Confidence Index falling in October to its lowest level in nearly two years, even the bullish U.S. market is in question. If consumers pull back on their purchases, the economy will slow significantly.
During the ’90/91 recession, total resort visits dropped eight percent. In this current climate of lowered margins and consolidation, the last thing the snowboard industry needs is to be hit with diminished participation.
But we may still dodge that bullet. Banking reform in Japan, as U.S. bailout of Brazil, European economic aide for Russia, and lower fed interest rates may all to some degree help keep customers buying snowboards.
Because like it our not, bigger forces are invading our world, and as technology and communication improves, and economies become ever more interdependent, what happens an ocean away can no longer be ignored.