Wipeout: How surf wear got caught in a rip

Not long after Dare Jennings sold Mambo, the counter-culture surf clothing brand he started in the late 1980s, to the listed apparel company, Gazal Corporation almost 15 years later, he knew the brand would never be the same again.

In and around 2000, you’d be hard pressed to walk down the street without seeing someone wearing a t-shirt featuring the irreverent designs inspired by Jennings’ days spent surfing and his nights spent taking in the sights and sounds of Sydney’s live music scene. Now, if a Gen Y wants to try on a piece of Mambo clothing, they need to search deep in the back of their dad’s or possibly older brother’s closet.

Jennings describes his feeling of disassociation from the brand he created soon after it found its way into the hands of a marketing team spurred on by the quarterly reporting responsibilities of a public company.

“To take that [public company] view you have to take the brand past the point of where it should ever go,” Jennings says.

Jennings’ experience goes to the core of the issue the investment and marketing community is coming to terms with when they think about whether surf wear and “board sport” brands can in fact survive and prosper in the current market.

The issue is not so much a question of whether the younger generation of surfers will be willing to wear a brand they see their parents wearing; rather, it is the resilience of the brand as it moves away from the core group it represents and further into the realm of pure fashion.

The board sports market is coming off a massive growth period that began in the early 1990s, which CBA analyst Jordan Rogers says pushed the concept further into the mainstream than the people who were involved in the conception of the movement in the ’70s and ’80s ever expected it could go.

The effects of that growth have been felt by surf brands across the spectrum, including Quiksilver, Billabong and Rip Curl in the subsequent slow down or “unwinding” of growth potential in the segment, Rogers says.

Rip Curl, the Torquay, Victoria-based surf brand, remains privately held which, according to Neil Ridgway, Rip Curl’s group advertising and marketing chairman, suits the brand and its ability to stick close to its core customer base without spreading itself too thin in the fashion market. Surfers will only ever have a pair or two of board shorts at any one time, and Ridgway says Rip Curl’s long-tailed marketing campaigns respect this. For example, Rip Curl’s last big marketing spend was 2½ years ago when it built a surf adventure with spin-off advertising and products around an Indonesian surf safari in line with it’s “The Search” logo.

“The Search is in hiatus now, we won’t dial that up again for a while, but when we do, we’ll get a whole new influx of interest,” Ridgway says. “In the mean time, it’s all about technical [ads for] board shorts and technical dry suits.”

Rip Curl recently said in a statement it had received unsolicited approaches from international organisations seeking to invest in the company.

Quiksilver was also founded in Victoria but listed on the New York Stock Exchange in 1986. Quiksilver’s stock is trading near its 10-year lows after its share price peaked in the mid-2000s.

Late in 2011, Billabong revealed the first evidence of growth unwinding when it told the market it expected to report declining sales across the globe. The company blamed an unseasonably warm winter in the northern hemisphere and a cooler start to the summer for the declines but the investment community was quick to pounce as the recent spate of acquisitions of brands and retail outlets gave the company, already facing tight debt covenants, limited breathing room.

Following an initial bid by buyout firm TPG, Billabong raised equity at a discount to repay debt, reported its first annual loss, sold off its fastest growing brand, Nixon, closed stores and fired workers. Billabong’s recently appointed chief executive, Launa Inman, has subsequently laid out the company’s transformation program, the success of which is underpinned by Billabong’s ability to breathe life into its fabled brand.

At the heart of the plan is the push Billabong will make to capture a broader portion of the listed company’s existing customer base, without diluting penetration of what it considers to be its core customer.

As Shaun Cousins, a J PMorgan analyst explains, increasing sales within a market for action sports brands can have the effect of alienating the core customers or “image leaders”, which are defined by Billabong’s own research as the board sport fanatics and board sports participants, accounting for 19 per cent of the company’s customer base.

“These customers drive the sales of the remaining 81 per cent of customers and hence any loss of interest from the image leaders would have a detrimental impact on sales,” Cousins writes in a recent note.

Surf wear companies are all too aware of the impact any drift away from their core customers can have on future earnings.

“When you are in hard times, you have to be careful with how you choose to stay relevant,” comments Ridgway.

Ridgway says Rip Curl is unlikely to venture into areas like Billabong’s recent Metallica board shorts.

“I get that the music thing is part of the whole experience of being young but short-term wins don’t do anything for the brand in the long term,” he comments.

While the investment and marketing community agree the Billabong brand still carries a significant value, a question mark remains over how much that company can leverage it to broaden its customer base.

At its recent results announcement, the company cut $182 million from the value it attributes to its brand, valuing the brand equity at $252.1 million; an admission by the company it has lost some of its sway following the events of recent months, CBA’s Rogers says.

The inherent value in Billabong’s brand has been propping up the company’s corporate performance, Brand Finance Australia managing director Tim Heberden says.-

He says Billabong has a high brand value to enterprise value ratio (58 per cent), which implies that the brand is “working hard” for the business.

In its 2012 study, Brand Finance ranked Billabong the 19th most valuable brand in Australia among ASX-listed companies, above David Jones (21), Target (24), Myer (25), Harvey Norman (29) and Kmart (30).

Whether the company’s residual brand value is enough to turn sales around and deliver more than double the $84 million 2012 financial year earnings, and do it by the 2016 financial year as targeted under its transformation program, remains to be seen.

How Billabong and its surf brand peers compete for market share will be central, not only to their ability to meet growth targets, but also to their brand survival, Melbourne Business School associate professor Mark Ritson says.

Ritson adds that going head to head with the likes of Zara, H&M and TopShop in what’s termed the “fast fashion” segment would be a mistake by Billabong.

The big difference between the fast fashion model and the model that is naturally purveyed by board sports brands is that board sport retailers have three opportunities to get their products to market, says Rogers: winter, summer and high summer.

Fast fashion can turn around a new line from concept to stock in retailers within a couple of months, he adds.

While Inman commented recently at Billabong’s annual meeting that the surf retailer did not intend to “mess around with the DNA of the company”, Virginia Shriverdecker, a consultant hired by the company in June to research the relevance of the brand and its goodwill among customers, says there is an opportunity for Billabong to “stand out” among its peers by drawing on attributes of the fast fashion industry.

While Shriverdecker is reluctant to elaborate on the extent to which Billabong could draw influences from the fast fashion approach, she says Billabong has the opportunity to “bring a fresh, new and exciting approach to the [surf wear] category”.

Overall, while the analyst community believes the transformation program is generally sound, and that Inman’s decision to focus on fewer brands is positive, the risks associated with expanding market share remains high.

“We expect new management to be more direct with the team on global collaboration, product marketing, systems and financial reporting. This will likely lead to significant culture change and could blunt some level of entrepreneurialism,” JPMorgan’s Cousins notes.

“The culture within the organisation may take a significant period of time to change and furthermore, could be faced with some resistance and lead to staff turnover.”

Meanwhile, Jennings says he is having success with the lifestyle brand he started after walking away from Mambo all those years ago.

He says Deus ex Machina, the brand that combines surfing with motorcycles, and with whatever else inspires Jennings to ride on and tinker with, now has healthy retail stores in
Bali, and Venice, Italy, with headquarters in Australia.

While Jennings says he believes the Billabong brand has the strength to be revitalised and maintain its relevance, he notes that Mambo’s greatest value was its culture.

“When it [Mambo] was ours, we went instinctively with what worked,” he says.

“When it went public, everyone had their two bob’s worth and it was difficult to keep the brand on track . . . When you lose the culture it becomes a rag trade only.”

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