When Its Time To Change: K-Five Boarding House Alters Course For A Changing Market.

As Peter Brady once so eloquently sang, When its time to change, youve got to rearrange. Dont fight the tide, go along for the ride. You remember the episode. The Brady clan forms a singing troupe, but middle-brother Peter hits puberty, his voice changes, and entire family has to alter their plans.

Yep, the answers to all of lifes riddles can be found on The Brady Bunch. Episode number 65 aired January 14, 1972, and Jurgen Schultz was twelve years old. Who knows if Peters advice stuck with the young Schulz, but in the year 2000, after the best year in the history of Schulzs K-Five Boarding House, he began plans to drastically alter his store to stay up with a changing market.

Jurgen and his brother Tom, the owners of K-Five, knew the only thing riskier than trying something new was to do nothing different at all. So, two years later, in September 2002, Schulz closed his Encinitas, California, surf-skate-snow store and opened up a new, larger store just down the street. The new 10,000-square-foot location was twice the size of the old shop and featured a sophisticated audio-visual component, a CD-listening bar, video games and computer kiosks, and a variety of buildouts from his largest vendors. All in all, its a cutting-edge retail operation designed to outpace anything the chain stores or mall outlets could throw at it.

The risk paid off. According to Schulz in the last two years, K-Five has grown more than it did in the preceding fifteen years. Theres even plans to replicate this strategy with the other K-Five location in Poway, California. So what changes in the market did Schulz spot that told him it was time to change, and is there a lesson for other retailers in the K-Five model? We sat down with Schulz to find out.

What did you see in the market that made you say, Okay, we should probably take a fresh look at what were doing at retail?
Jurgen Schultz:

In 2000 there was sun in the spring and sun in the summer. There was warm water. It snowed. You had Hurley and Volcom breaking out. It was the miraculous year. You could do no wrong. After that year, because of distribution issues, our sales began slowing down. We had that tremendous growth spurt, but it didnt last.

When we have our best and most profitable years, its at the beginning of a new trend curve. A group of shops spot a new trend and run with it. Its retailing 101. The demand was high and the supply was low. People who normally didnt shop in K-Five were forced to shop here because they couldnt find the product anywhere else.

Its great when that happens. Essentially, the companies did all the marketing for you. They created the demand and gave you a certain amount of exclusivity. When it popped, people had to come to you. Moms were kicking and screamingthey dont want to pay 150 dollars for a skate deck or whateverbut they had to.

Those are the times when shops like mine make a lot of money catering to the mainstream. Its been about an eight-year cycle, and our ace in the hole was having product that nobody else had.

Now all thats changed. A lot of retailersincluding myself at the beginningwere trying to fight a losing battle. We wanted to keep that exclusivity.

The main vendorsthe publicly owned vendorshave made it perfectly clear that they have to grow. They havent hidden that fact at all. Sure, they may put a little spin on it, but ultimately theyre accountable to their shareholders. As they do that, their competitionwhether theyre publicly owned or nothave to step up and do the same thing.

Where they go the industry follows.

Absolutely. Theyre the leaders of the industry. Its nothing that Im happy with, but it is what it is. Ive pretty much given up fighting that battle, because theres nothing I can do to stop it at this point. We saw all this coming about three years ago.

How did that change your strategy?

What weve always hadand what were never going to loseis that active participant customerour surfer, our snowboarder, and our skater. The popularity of each sport may ebb and flow, but were never going to lose that guy who actually does it.

Unfortunately, thats probably not where you make most of your money.

Exactly. You cant make a living solely on that customer anymore, just like the major guys cant make a living just on us smaller shops anymore. Everyone has to gear toward the mainstream.

So our choiceonce we lost that huge edge of having a certain amount of exclusivitywas to go back to marketing or customer service or presentation. Those are your three big avenues with a small store.

Unfortunately, my conclusion is that you have to go somewhat mainstream, which just causes all sorts of internal conflict. You have to change because the markets changed. How you do that is up to you, and theres all sorts of ways of doing it. We decided wed try to make our stores completely different than everybody else, to present the product in a new way, to go into partnerships with these vendors we have great relationships with. At the same time, we have an obligation to promote smaller brands.

So you took the profits from that great year in 2000 and invested them back into your new shop?

Absolutely. Weve learned that youre either making a ton of money or youre losing money in this business. You have plan for both the peaks and valleys. Were all self-financed. We dont have any investors. Thats why it took that long to grow. Im not an MBA. Im a surfer who was turned into a businessman.

Kicking and screaming?

Kicking and screaming the whole way. But the light came on about three years ago at the SIMA conference. We saw where our vendors were going and we reacted to it. We took some risks. We took out loans and put seconds on our houses. But we realized that if we didnt change, we were going to go away. I think thats how its going to be for the next five years.

Do you feel like youve turned the corner, or are you still worried?

Well, you just never know. Everythings changing so quickly right now. There are so many issues: on-line, company stores, retailers expanding like crazy right on top of each other. So many things are out of my control that I cant be confident and say, Hey, weve turned the corner. If you get too comfortable, theyre going to catch you. Theres no mercy in business. A lot of retailers right now are having a hard time accepting that.

Do surf-shop owners feel a sense of entitlement?

Absolutely. Its a false illusion. Give it up. Its not that way anymore. I dont want to get too Zen, but you cant look at the past. A lot of guysincluding myselfwere beating themselves up saying, This is the way it used to be, and this is the way it should be. I did this. I did that. I helped this. I had this. It just doesnt matter anymore.

Develop good personal relationships with your vendors if that will help you, but you have to make yourself an asset to these companies. Whether thats through the right location or the appearance of your store. Whether its your image or your volumewhatever it is, you have to figure out a way to be able to play ball with these guys.

If youre going to be a small shop and sit there and whine, Hey, this bullshit. Youre opening everybody around me. Blah, blah, blah, theyre going to leave you in the dust. They have no choice.

Of course, there are always exceptions to the ruleif you have a really great location or whatever. There are guys who can pull that, but its a very short list.

Do you view yourself as being a marketing tool for the brands?

Absolutely. Thats why we did the store the way we did it. The major complaint from vendors is, Hey, you dont represent our line correctly. So weve given the vendors an opportunity to display their lines correctly. You work out the details with each vendor, because each situation is different. But as long as youre beneficial to the vendor and the vendor is beneficia
l to you, its a good relationship. But its a two-way street.

Im through complaining about distribution, but distribution issues will catch up to these vendors. If were doing X amount of money a month with a vendor, and they open a guy across the street from us, that amount is obviously going to go down.

And you can tell that?

And you can tell that. A lot of the vendors are playing a spin game: Hey, these mainstream outlets are dealing to a different customer. This is a mall crowd; its not your crowd. This is a Gen-X crowd, not your crowd. Its so bullshit its not even funny.

Is there a way that you can prove your case on that one?

Its really easy. Lets see, our sales dropped 50 percent as soon as Nordstrom started its fall anniversary sale. You want more proof then that, look at my customers. My core guy is still coming in. Im still selling trunks well, but my back-to-school business has gone away, and will only come back when the Nordstrom sale is over next week.

But I have no control over that. Its not going to change, so you have to figure out how to compete. You have to figure out how to compete in a business sense versus an entitled sense. Thats hard. Thats a lot of work for both vendor and the retailer.

The surf industry is fortunate in that all the main guys of these top vendors are surfers. They have to do what they have to do, but they understand they need certain key retailers to keep the lifestyle and allure of surfing going. Its pretty obvious when you look at Jeff Booths position or Royce Canslers new job that light has gone off. The key word though is key retailers.

So how do you make yourself a key retailer?

There are all sorts of ways of different was to do it. We chose to do it through the presentation of our store and by developing partnerships with our vendors. We were a little ahead of the curve from that standpoint. We stepped up, and we plan on doing it again. The formula has worked for us. Sales have grown tremendously.

So even with the expense of opening your superstore, youre still ahead of the game?

Were still ahead of the game. Not by much, but in this challenging climate right now, I consider that a real success.

So, yes, stores need to figure out how theyre going to step it up. A lot of guys are doing it by volume. I honestly am not afraid of the chain stores, whether its Hollister or anybody else.

How about Tillys?

Theyre going to effect me, but Im not their competition. Im more afraid of a fellow surf-shop owner coming into my area who knows what theyre doing, who understands the industry, and who will compete a lot harder for my core customer. Because as soon as beach and skate is outand it will bethose big-volume guys will drop those vendors like a rock.

Im sure thats why theyre opening their own company stores, because they know that, too. I assume theyre just hedging their bets all the way around.

Tillys just opened up down the street, and you also have the outlet stores nearby. Has that affected your relationships with your vendors?

What you have to do is hold your brands accountable. Thats the bottom line. In the good old days you had a great relationship. They protected you. You carried as much of their brand as you could. If you ate it, you ate it. It was part of the deal.

That relationship has changed. Now, whatever formula you come up withwhether its sales, whether its net, whether its terms or margin, or whatever formula you want to come up withyou have to hold them accountable. Essentially, if theyre not making you moneyor whatever you want from themthen you boot em.

Are you telling brands, Hey, if you go below a certain dollar per square foot, youre out? Is it that cut and dry?

Its not there yet, but if it keeps going the way its going, it will get there. Thats where I talked about holding your vendors accountable. If they flood the market, if the demand is less than the supplywhich is what it is right nowthen both partners need to set the rules.

All those guys at the companies are bright. Theyre way smarter than me. Theyll see the writing on the wall and figure it out. However, what you described is an interesting concept, because every single national sales manager shudders at that thought. But if thats how you hold them accountable or whether its a free surf trip is your choice. Everybody has their own itinerary, so retailers have to figure that out. The problem is, you have to make sure the vendors still need you.

Are manufacturers agreeing with you about these concepts?

The big edge that these surf companies have is that their leaders are still surfers. They have a personal stake in the lifestyle and understand that they still need that small-store element to make it viable and appealing to the mainstream.

What concerns me is when that next generation of surf-industry leaders come up and theyre all MBAs from Sony. Thats when its really going to be interesting. The attitude of those surf-business leaders isso farwhats kept their longevity alive.

In the snow and skate markets we really dont have a dialog with these companies, we have debates. They want to follow the surf companies as far as distribution goes, but they dont want to back it up. Theyre opening everybody around you and at the same time demanding growth and not working with you. No wonder three major retailers in this area dropped snow this year. Its not worth the hassle.

Are your surf vendors appreciative of the difficulties that the smaller retailer faces?

Yes, but I dont think they were. Thats where the Board Retailers Association {BRA} and Roy Turner have done fantastic job. Im known for saying stuff that just pops into my head. So usually if I say, Dude, your stuff sucks, they just ignore me. But if they hear that from 100 retailers across the country, their ears perk up. Thats where BRA will be very influential and extremely helpful for both retailers and wholesalers.

I want to make it very clear that Im not speaking for BRAonly for my store and myself. Im like the rookie of that group. I walked into the first BRA meeting with 25 years of experience, and I was the rookie. Those guys are all really smart, really savvy retailers. Ive learned a tremendous amount from them.

So the association will give vendors a better perspective on how hard it is to be a small retailer these days. For example, our sales are not that bad right now, but our overhead is going crazy. Rents are up, electricitys up 30 percent again, workmans comp doubled. Our growth is not keeping up with our expenses. Thats where a lot of frustration is coming from.

But the surf-industry vendors are starting to understand that. Weve opened a dialog that, Look, its not like were sitting here drinking champagne. Were working really hard, and its hard to compete at a level where were expected to be. Major vendors are starting to realize that. A classic example is Billabong hiring Royce Cansler. That was a brilliant move. It acknowledges right away that theyre concerned about younot that Billabong hasnt done a good job of that in the past. However, it just sets a new mental tone.

Does all this change make the job less fun?

It depends on your mindset. A lot of guys are set in their waysespecially the older retailers. It might not be worth the stress or the hassle for them. Again, most of us arent MBAs. There are certain retailers who will take it as a challenge and thriveonce they get past the anxiety stage. Other retailers will just do their deal and theyll be okay.

Whats the next step for you?

Weve got a good formula that seems to be working. Were going to continue to refine itits only been a year. However, in the last two years, weve grown more than we did in the previous fifteen.

Our goal is to get to maybe three or four stores. This store is our blueprint. The problem is that rent and overhead are huge obs
tacles, so it has to be the right situation. We want to grow slowly. We dont want to do stupid things. However, the opportunity for growth is now, when everything is down. Vendors want you to grow. They have the money. You need to take advantage of that.