Can Billabong market its way back into the black?

In releasing both a big financial loss and a new strategic plan, Billabong’s CEO, Launa Inman, stopped short of bagging the lack of financial and commercial discipline in the company she took over in May. The iconic surfwear brand began life as a wholesaler, but later started opening its own shops. With Inman’s appointment came a promise to deliver a strategic plan to save the business, and to answer critical questions about the reasons for its poor performance.

In doing so today, Inman repeatedly complimented the company’s entrepreneurial leadership. But Inman’s own analysis of Billabong’s current position and future potential made the gaps in management all too clear: no research about who the customers are or about what they want, no research on the industry itself, no global financial reporting, a mish-mash of suppliers, and knee-jerk reactions to recent business issues that did more harm than good.

“We need to hold on to the great entrepreneurs [who started the company],” she told investors and analysts. “We need to retain the culture, but become more disciplined. We need to plan and to measure results to ensure the strategy is executed.”

Billabong’s report card was bad: a net loss after tax of $275.6 million on revenue of $1.55 billion, which was down 7.9%.

The company reported significant costs, impairments and charges of $336.1 million, a figure much higher than the proceeds of its partial sale of its best-performing brand, Nixon, which raised $201.4 million.

What went wrong?

Inman says Billabong did not make a mistake going into retail; but it did make mistakes in the way it did so.

The result?

The company has already closed 58 stores, reducing store numbers to 634, and intends to close another 82 in the current financial year.

Paying out leases on closed stores, selling off the inventory at reduced prices, then the reduction in sales from fewer outlets and the partial sale of Nixon all contributed to the significant and exceptional items.

Then a big American customer, PacSun dropped Billabong and started making its own house brand.

When sales fell, the company slashed its marketing budget. “In our quest to save profit, we cut our marketing budget, but that reduced our sales,” Inman told analysts and investors today, shouldering responsibility for a decision taken before her time. “Then, because of poor sales, we ended up with excess stock and had to mark it down.”

This year’s results

It’s not unusual for a new CEO to make a bit of a write-down at the start of their tenure. Billabong has taken all the pain of selling off its surplus stock at discount prices into 2011-12.

Doing so allows it to allocate a relatively small amount – about $80 million – to restructure its operations over the next four years.

This helps Inman to draw a line under the past management, and achieve the growth figures she has set out – $155 million EBITDA (earnings before interest tax depreciation and amortisation) by 2016 –which have been broken down into six specific areas of change.

Inman pointed out that the total sportswear market is $15 billion, and is growing at about 4% a year.

Which brands will lead the company’s recovery?

Inman believes she can add another $65 million to EBITDA by brand building. She has identified the brands that she believes will deliver the bucks: Billabong ($25 million) and three smaller brands: Element, DaKine and RVCA ($40 million).

This defines Inman’s solution as essentially a marketing one. She wants to convert awareness of the brand into sales. In Australia 86% of people know the brand, but 46% have actually bought it. The number that Inman is interested in is the 53% who would consider buying it in the future.

In America, 47% of the population have heard of Billabong, and only 14% have ever bought it. It’s a big opportunity, in Inman’s view.

Inman points out that Billabong has done well with all the brands it has bought over recent years, with every one of them making more money that they did when they were bought.

Still, she is planning to focus a big marketing effort on only three: skate brand, Element; hiking brand, Dakine; and RVCA, a youth brand.

Why these three somewhat unknown brands? Because their conversion rates are high. Although only 32% of people have heard of Element, 11% have bought Element products, for example.

The problem today is that Billabong is undifferentiated from competitors, such as Quiksilver. When it launched 40 years ago, the idea of a surfwear brand was unique. Now, it is not.

“We want to be famous for something,” says Inman. However, her chosen goal – to be famous for continuously setting a new standard in board sports through youthful lifestyle brands and experiences – did not run off the tongue. The broad point is clear: Billabong needs to be seen as different.

The customers Billabong wants, and what they want from Billabong

Billabong’s core customers are the sports fanatics – the people who surf, snowboard or skate every week, and the participants, who get to it every so often. There are another 34% of people who have active lifestyles, and are passionate about these sports, but do not participate. These offer a big opportunity, Inman says.

There are 34% who have same values but don’t participate as much. This is all about ‘psycho graphic values’: how they perceive themselves and what products they want. The 19% are the image leaders, the trendsetters. The others say, ‘I may not be the best surfer but I think like them, act like them and am passionate about the sport.’ We can stretch the Billabong brand to target the 34% without offending the core customer.”

This opportunity was questioned by an analyst, who pointed out that Billabong has been selling to “non-participating” customers for a long time, and how would this strategy be different.

“What the research has shown, is that it is not just about the market segment. The question is have we been able to satisfy them? There is no particular outstanding label in the market. And we have the skills. It is all about the product, understanding what the consumers want.

Using the stores to build brand

Billabong’s stores are cluttered, full of old stock and sell under a range of “banners”. Inman says: “We need to use the front of our stores, improve our visual display, and have a clear marketing plan. It is all about traffic when it comes to retailing. If you can attract customers, and keep them in the store for eight minutes, they are likely to buy.”

The problem, however, is that Billabong doesn’t know what it wants. “We are not quite sure how the stores should look,” Inman admits.

Billabong has cut as many of its stores as possibly, however. Inman has appointed a global head of retail, Collin Haggerty, to “sweat the assets”. The target is to lift the performance of the remaining stores from the bottom to the top. In particular, Inman wants the lowest 92 stores, which have average sales of $69 million and are making a loss, into the next bracket, on average revenue of $107.

Over the next four years, that will add another $35 million to EBITDA, Inman believes.

E-commerce brands

The company has two investments in e-commerce sites: Surfstitch and Swell, with sales of $30 million and $20 million respectively last year.

Inman has been criticised for her lack of online experience in taking up the Billabong appointment, and is moving fast to outline the online opportunity. “This is our greatest opportunity and we will integrate this with our bricks and mortar,” she says.

“We are going to get them onto one platform, over time. So when a consumer comes into our store if we haven’t got the product they want, they can go online or on their mobile whilst in our store, look at stock levels, and order through Billabong or Surfstitch. This is totally integrated retailing.”

Surfstitch sells about 300 other brands, which Inman sees as valuable market research. “We get to understand what is happening and what the trends are.”

The company recently started a site for the Billabong brand in America and it is almost bringing in 4% of total US sales, she says.

Asked by an analyst whether this means it is breaking even, Inman says that 4% is about the breakeven mark.

How to achieve the change

Billabong will climb out of its hole as a global company. Inman has already done the global checklist and knows the numbers.

She is going to slash 15% of the company’s styles. Why? Before about 22% of them deliver 80% of sales. She will cut suppliers by 35% because 85% of purchases are generated by 19% of suppliers.

She has appointed three new global heavyweights: the aforementioned Colling Haggerty, as global head of retail; Chris Zyner, head of human resources: and Andy Laws as head of strategy. She has a swag of consultants to help her out.

She will set up a “transformation” office dedicated to the turnaround. Inman says the strategy will succeed because it is based on research – finding out what has happened in the businesses, who the customers are and what they want to buy.