Why wakeboard companies fail

If you don’t follow the wakeboard industry, it is ripe with lessons learned from one failed company to the next. This isn’t exclusive to wakeboarding either. There are dozens of creative hardgoods companies that eventually fold, never to be heard from again.

Most fail from unidentified costs eating away at margins over time [running out of money]. We’re going to give some insight into a few of the strategies larger market leaders use to keep their spot at the top of a small industry.

Organizing and understanding your finances so your sales strategy remains focused is a difficult task for any company, and particularly difficult for new startups. Almost all new companies are underfunded and as a result employees are tasked with multiple jobs typically performed by a team. The ability to focus on the truly important tasks then becomes a talent in itself.

We’re going to outline a few of the strategies larger market leaders use to retain their market share and make it difficult for your new business to ‘break through’ to sustainable, positive cash flow sales cycles.

Understanding a few of these strategies can help new brands find success sooner and steer clear of the mistakes of past failed companies. While understanding why smaller companies fail certainly has informed how we plan our own strategy, we haven’t completely avoided the same difficult situations they were up against.

What’s ironic is that despite the creativity that surrounds many new outdoor [hard goods] companies, they just aren’t that creative in differentiating their business strategy from their competitors. They look at other direct competitors in the space and assume ‘this is the way it works’. They build the brand around the same principals hoping to score a small percentage of market share or dig out a profitable niche. Each situation is unique and we don’t have the full answer ourselves, but we do know heeding this same advice can get you into trouble.

Rule #1: Know The Industry Size

What can be measured matters for all well run businesses. So it’s really important to understand the size and scope of an industry to get an accurate estimate for projecting your sales and setting budgets. One standard indicator of industry size is total industry revenue.

Projected or current total revenue for an industry is very important metric to know for a few reasons. If you watch Shark Tank this is also the #1 qualifying factor for a shark’s investment besides the people running the day to day business.

The smaller an industry’s total revenue, the less resilient it is to the influences and finances of a single industry leader [and the investors receiving a return on their investment]. In smaller industries, this can make growth very difficult if you play by the same rules and compete using the same sales strategies as the major players. We’ll talk more about this in a moment…

First let’s take a look at the size of the wakeboard industry for context. We’ve found the revenue of the entire wakeboard industry [everything except boat and cable sales] at it’s absolute highest peak was 100 million in total revenue for all companies combined. Today, we know using our own indicators of sales and 10 years of data, we peg it at about 25-60 million. If you’re surprised, keep in mind this is a cottage industry compared to other general business categories. The market leaders and successes are about the same profitability as your local chain of fast casual restaurants.

If you’re surprised at the size, outdoor brands tend to be a more creative outlet for emerging trends in design and working in them is highly sought after because of the lifestyle they promote. Industry publications also help these industries appear more polished and love to hype the industry numbers to new players because it brings in new life. While industry publishers are vital to the success of an industry, they also have a vested interest and the industry data supplied by them is often misleading.

As is common for most other industries, let’s assume that the majority of sales are dominated by a single company or conglomerate. This happens to be the case in almost all general business categories, not just wakeboarding and other hard goods action sports industries. Furthermore, these market leaders tend to be under ownership of a much larger parent company where the main business operates outside the action sports / wakeboard lifestyle industry. This allows brands to share the financial support and resources of a much larger entity.

Why industry size matters…

The outdoor or lifestyle / adventure industries can be exciting and rewarding industry to work in. These industries also tend to attract a lot of experienced and successful retired executives that apply their broader business strategies to much smaller industries like wakeboarding, surfing, snowboarding, etc.

What’s in it for the larger players? Besides the lifestyle, many of these larger entities view the action sports industries as a write-off for their parent companies.

You see apparel juggernauts like Nike move in and out of the action sports or adventure / outdoor lifestyle space. The growth and demand is not large enough to move in unison with the company’s long term growth standards in comparison to their other segments.

The point is, small industry size makes it difficult for most small startup businesses to operate profitably. A single mistake, error, or just bad luck can kill a business in a small growth industry. In short, less cash is needed for an established competitor to ‘own’ the industry with shrewd strategies and keep supply in line with demand.

Second, know that competition in a small industry is not a good thing…

Competition is not a positive sign of industry innovation or health. There are some pros to a competitive industry – yes, competition can drive innovation. However, there are many downsides to consider as well.

The single most important factor to consider is what heavy competition does to the price of a product. As more companies enter a market where supply outpaces demand, the very first thing that happens is price drops [as is the case for action sports industries]. Therefore price becomes the determining factor for sales when there is a bunch of undifferentiated sitting on the shelf. Margins quickly start to erode. This means you have to sell more to make the same amount of profit. Low margins have an inverse effect on innovation and R&D as competition heats up. Competition begins to become more risk averse.

So what happens? Industry players then compete for volume…

In a volume game in a small market, the leaders win. Let me explain.

Rule #2 Timing is Everything.

The market leaders produce earlier and in larger numbers every year. This strategy captures the initial spike in demand and profit at its peak in the sales cycle. As the sales cycle matures, product demand weakens, forcing a reduction in price because supply outpaces demand. As demand continues to weaken, other competitors usually follow suit in the price drop to liquidate inventory, churn product back into cash before the sales cycle starts over again.

The market leaders finance their development and capture the spike in demand as early as possible. They can flood a product category as demand spikes. As demand softens and margins erode, the leaders then take a loss with any remaining supply until the next sales cycle hits. They can accomplish this in smaller industries where a parent company has the financial resources to supply the entire market demand for the product.

In short, smaller or startup companies need to overcome this and focus on the product, their customers and how to differentiate their sales strategy as early in the startup process as possible.

Rule #3 Differentiate into other product categories

Now, remember most industry leaders own not only a single product category, but a broad assortment of different products within an industry.

Burton is now largely an apparel company.

Surfing in any form is all the rage with wakeboard companies.

This is extremely dangerous for a smaller company with not as much cash.

So while smaller companies fighting for a small share of an already small industry, the larger industry leaders are focusing on other product categories that provide much larger profits. They fund those other product categories and their sales cycles quickly. They continue this cycle to offset the demand fluctuations between different product categories.

The key point to remember here is that as demand for a particular product category matures, the market leaders are willing to break even or even take a loss in one product category to capture the profitability of another product category, locking in the startups in a sales cycle that is extremely hard for the smaller guys to win.

Here’s what we found:

Trying to compete in the same retail channels as the market leaders for the last 3-5 years we found our sales flattened off much quicker than we expected. After polling the top 5 largest USA wakeboard retailers and using our best backend spy software analytics. We figured the maximum ‘sell through’ between all the major specialty retailers in the USA is somewhere around 4-10 million in total.

So navigating the waters of the retail sales channel in a small, competitive industry is extremely difficult if you want to make it profitable in the long run. Many entrepreneurs also lose sight of the costs to finance products while it sits on the shelf of your local shop. I wrote about a few of them here.

So we learned there is a lot of external factors at play in the retail market that can drain your time, energy, and most importantly cash as a young company. Before planning your next venture study the major players and the exact size of the industry, keeping in mind exactly how reliable the data based on what incentives they have financially.

Interested in learning more about how the hardgoods industries operate? Freeskier published an article about Jskis. In it, Jay explains critical insight from his decades of experience of competing at a retail level running multiple snow ski brands.