SierraSnowboard.com just got axed by Burton, the industry’s largest producer of hard and soft goods. There is some disagreement over the terms of the license, and when/whether the retailer is allowed to mark down current year’s merchandise and to what extent, etc. Sierra dropped prices on Burton gear like 40% a few weeks ago, and they’re blowing it all out at 50%. Here’s my initial thoughts on the blowup. I’m trying to remain as neutral as possible here, without pointing fingers at either party, placing blame, or whatever. It’s just my perspective.
I see a lot of economic on the forums and around the interwebs. I don’t want to get in a pissing match, so I’m going to try and take a level-headed approach as best I can. One error in their logic is the assumption that if Sierra did not discount Burton snowboards, that Sierra would still sell the same quantity of Burton snowboards. This is demonstrably false. They will just have more unsold merchandise even later in the year when it is even harder to sell.
In most industries, the manufacturer sells the product to the retailers at a price which is sure to cover their costs. Then, the retailer sells the products to consumers, makes a nice margin. The manufacturer’s risk is that they produce in advance, and may not be able to move all their inventory on to retail shelves at such a price to satisfy their margins. The retailers’ risk is that they may not be able to sell the merchandise at a price which exceeds their costs (of acquisition, overhead, etc.)
And there is no magic formula for business success—whether you’re a manufacturer, a distributor, a retailer. Nobody knows with certainty how many to make a year in advance. It’s all a calculated gamble. If you overproduce, you’re going to get stuck with a bunch of unsold merch and you’re going to lose money. If your business model consists of “offloading that risk on to our retailers” then you’re not doing right by them, and you’re not doing right by your customers, either.
Now, when the retailer takes a loss in order to cut losses, or sells at a discount in order to move inventory and make room for stuff that will better help him stay in business, the manufacturer has already made their margin on that product at the time it was sold to the retailer. It makes no difference whether the retailer sells the product, if it is stolen from the retail shop, or whether the retailer decides to burns it all to the ground. The manufacturer has already made his margin. If the stuff can’t sell, obviously it might send some signal about what to do next year, but that is the beauty of the price function—it’s only the most fucking important thing in all of economics, so deal with it.
If the manufacturer can’t support marketing of their new models at a market-price (as opposed to “MSRP” which is the economic equivalent of reading tea leaves) then they’re doing something wrong. They’re spending too much on “marketing” and not enough on developing products which give consumers a bigger bang for their buck by leveraging technology to make equipment less expensive (but still profitable) or by developing new technologies at affordable prices.
Look – online and discount sales hasn’t killed any industry yet. But we constantly hear about how it’s going to destroy snowboarding or the music industry or whatever. What it does do is to force change in the way things are done. Dinosaurs don’t like this. Some go extinct, and others adapt to the changing environment. It’s the organizations which are most able to adapt to changing pressures that succeed in the long run.
Further reading at The Angry Snowboarder and Deserts Don’t Snow, and an “open letter to Jake Burton Carpenter” posted at the Burton forums.
