The End of the Surf, Skate, and Snowboard Business

Group 2Back to the Beginning

The Final Days of Westbeach

The year was 1995. After 16 years in the surf, skate, and snowboard markets, it had become clear that my company Westbeach Snowboard wasn’t going to pay the mortgage or feed my family. There were too many companies making too much product for too few snowboarding customers. Profits were non-existent. Westbeach found itself taking bigger and bigger risks.

Finally, the inevitable happened. We had a $5 million order of snowboard jackets being manufactured in China, and we ran out of zippers. We told our suppliers we needed $30,000 worth of zippers on credit. They said no. We had extended ourselves repeatedly and had reached our limit. The goodwill of our suppliers had dried up. We asked our bank. They also said no. The bank then put us in special ac- counts – a euphemism for impending bankruptcy.

This was a do-or-die situation for Westbeach. We needed money for zippers, and we needed it quickly. In the seasonal apparel market, if you’re a month late in delivering your inventory, the consequences are dire.

A private equity (PE) firm called Mercantile Bancorp had been waiting on the sidelines. They quickly invested in Westbeach in exchange for 30 percent of our company, providing the capital we so badly needed to address the zipper crisis. Mercantile saw our value and believed a cash injection would allow us to flourish.

Even though we were in dire straits, giving up 30 percent of our company seemed unfair. My two partners and I had been working hard for years, always intent on maintaining our independence. Unfortunately, there was no alternative.

Mercantile suggested we form a board of directors made up of mentors with no vested interest other than helping three inexperienced owners negotiate their way through the world of governance and oversight. A guy named Blair Mullen was the operating partner for Mercantile inside Westbeach. Blair got our accounting systems straightened out and fixed our inventory procedures. From the very start, Blair did a good job, and I respected his work.

Not long after that, I was in Japan showing our line at Tokyo Levante – the office of our Japanese

distributor. I was wrapping up there, getting ready to head to Norway, when a fax from Blair came through. “I’ve decided to take over as CEO of the company,” Blair’s fax announced.

I was in shock. Even though I didn’t hold the title, I had always considered myself the unofficial CEO of Westbeach. I’d founded the company, and believed I drove the outcome of most key decisions. I hadn’t had a boss in 10 years. The whole scenario was the polar opposite of what I’d wanted to achieve by going into business for myself.

Team of One

I knew myself well enough to know that in crisis or survival situations, I often acted like a “team of one”, taking everything on because I couldn’t trust others to do what I thought was right. It seemed like Westbeach had always been in crisis.

On the other hand, Mercantile had also made many weak areas stronger and fixed things I hadn’t recognized as problems, due to my inexperience.

With three owners, we each wanted to use our third of the budget to make our own areas work effectively. But mediocrity is inevitable when there is not one final decision-maker to manage priorities, differentiate the company, and take advantage of a changing marketplace. Perhaps getting out of the way and accepting Blair as CEO was best for Westbeach.

Here we were, 15 years after I started Westbeach, and 10 years after partnering as a trio. We had a wholesale business with a few vertical retail stores, a Board of Directors, and an experienced CEO, but we still weren’t turning a profit. (By ‘vertical retail’ I mean we owned retail stores and essentially sold to ourselves, eliminating the middleman-wholesaler. Typically, a vertical retailer is able to create double the profits compared to other apparel companies that use a wholesale model.) Year after year, our mixed vertical and wholesale model just wasn’t working. After we’d covered our expenses, there was never any- thing left to move us to the next level.

The Snowboard Scene

Meanwhile, the snowboard market was about to hit its first major obstacle.

In 1995, the snowboard business was robust, particularly in Japan. But, by 1996, both the Japanese yen and its snowboard market began to falter. Japan represented 30 percent of our global sales. I was concerned. We still had our lease obligations, wages, operating costs, and everything else. If 30 percent of our sales went away, our company would collapse.

Within a few years, the snowboard market – just like the surf and skate market before it – entered a widespread product commoditization phase, followed by many mergers and acquisitions. As consumers begin to see products as commodities, they no longer see the unique features of individual products and often make purchasing choices based on price alone. Companies must merge with or acquire competitors to have enough product to spread expenses over more products. The only two public snowboard companies were Ride Snowboards (where my brother was VP of Brand) and Morrow Snowboards. Both companies had been hit hard trying to save their brands by limiting backdoor sales through fake overseas (Russian) companies to big Japanese trading houses.

As public companies, Ride and Morrow wanted to acquire companies to replace lost Japanese sales. They were playing the public market quarterly game and needed to show higher sales to maintain investor confidence. An easy solve was acquiring other snowboard apparel brands…brands such as Westbeach, which had been around since the beginning.

If we were going to get any money out of this business, we needed to sell. We’d already had talks

with Morrow, but those discussions had failed when Morrow decided to make their own apparel line.

Fortunately for us, the Morrow clothing brand was not successful.

Negotiating with Morrow

As Westbeach was a proven brand in the global snowboard apparel market, Morrow came back to the table. Unbeknownst to Morrow, we were desperate. It was a Monday, and by that Friday we wouldn’t be able to make payroll. We knew Morrow was operating without a chief financial officer. At this point, I’d had Westbeach for almost 18 years, earning an average of $40,000 per year.

On Wednesday, Morrow bought Westbeach for $15 million, based purely on brand value. This would be a lesson about the value of the brand and what cannot be measured before someone else is willing to pay.

The sale of Westbeach to Morrow had come with specific strings attached – primarily the requirement for me to work for Morrow and relocate to their headquarters in Salem, Oregon.

Because I love to learn, I was excited to observe what happened to a company’s culture when it merged with another.

In my tenure at Morrow, I’d had one good idea. It was a yoga graphic T-shirt that the Japanese snow- boarders loved. From the inspiration of the T-shirt, the next Japanese snowboard contest started with a yoga warm-up – on snowboards.

Unfortunately, my 12-month obligation to Morrow in 1997 lasted only eight months. Morrow had spent their last $15 million buying Westbeach, and my job in future business development ended when I suggested the company pivot from snowboard hardware and apparel into mountain biking.

My 18-year MBA

I was officially unemployed. After Mercantile and the banks took their share and after our original debts were covered, each partner took home about $1 million (or $800,000 after taxes). For as long as I could remember, I’d been grinding it out, working long hours, constantly travelling. Having this new financial cushion was an indescribable relief. For the first time in a very long time, I could breathe.

Westbeach was not profitable. Our two vertical retail stores made $1 million dollars a year while our international wholesale business lost $1 million dollars in the same span of time. Inside of this was a lesson worth billions: a purely vertical retail model, a principle that would be key to my next business venture. Insights like these are why I’ve come to think of my Westbeach years as my “18-year MBA.” It was an education that would prove far more valuable than the $800,000 I walked away with. My years travelling and manufacturing for Westbeach in China would come to be one of my greatest assets.

Coming out of university, I knew nothing about the production of fabric, how to open stores, or how to form partnership agreements. I knew nothing about selling or collecting money. I was inexperienced in the business of business. I knew nothing of financing, deals, and transactions. I was also a terrible negotiator. In fact, in many ways, I wanted to be a Phys Ed teacher, like my dad.

More than anything else, I wanted to help people achieve their full potential.