Surfpolitik Billabong: The headline act in need of support

In: Surfpolitik by Stu Nettle 322 Comments Mon 19th Dec '11

Tags: pipeline masters , australian surf business magazine , business , Billabong , Phil Jarratt

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It's a no-brainer for a newspaper sub-editor whenever a surf story crosses their desk. Such good slang and so many puns. Take your pick for the good news stories: 'Riding a wave of success' or 'Swell times in Sydney' and for the tales of woe: 'Billabong wiped out on profit warning'. That's how the sub-editor at the Sydney Morning Herald described yesterday's dramatic plunge at the Australian stock exchange and the news was indeed woeful.

Following a company warning that sales growth had slowed, Billabong shares lost nearly 50% of their value in the biggest one day fall since it floated in 2000. At close of trade they were just $2.03. To give perspective, in January Billabong was trading at $9.00. Yet they've since been on a slippery downward slope and appear unable to find any purchase.

The reason for Billabong's dire predicament is a cavalier, and costly, retail plan that was rolled out just as customers were closing their wallets. In the last three years Billabong, traditionally a manufacturer, has made a charge at the market by acquiring retail space at an impressive clip. Since 2008, the company has spent more than $400m on wholesale and retail businesses, with more to come as a result of prior agreements.

Billabong own many smaller brands, such as RVCA, Kustom, Element and Von Zipper, and the retail push is an attempt to expand their revenue streams. After all, once you manufacture everything sold in a surf store the next logical step is to buy the store itself. Billabong now own Surf, Dive N' Ski, Jetty Surf, Rush Surf, Surfection and Canada's West 49 chain of stores. They also own many former independent stores, such as Bay Action, S-Cape and Big Kahuna, all in Byron Bay.

According to Phil Jarratt, writing for Australian Surf Business Magazine, in the financial year 2010-11 "Billabong almost doubled the number of its company owned doors to 639" and "exposed it to more shopping centre leases than Woolworths."

The rationale for Billabong's retail conquests is deceptively simple: by controlling the retail space they can increase the margin on their own brands while reducing the margins on their competitors who were also now their customers. It sounds easy, deceptively so.

Another favourite newspaper headline riffs on the idea of 'The Perfect Storm'. Taken from the book by Sebastian Junger and used by newspapers when a confluence of circumstances align to create the worst possible outcome. A perfect storm is exactly what Billabong has sailed into.

After embarking on their audacious retail buying spree Billabong drained their coffers and pushed their credit into the red just as consumer retail spending was itself drying up. The combined effects of US recession, the Euro zone splitting, twin Japanese disasters, and circumspect shoppers in Australia provided Billabong's metaphorical perfect storm. And, as per the script, it hit right when they were at their most overstretched and vulnerable.

Which brings us to the low point of todays share price plunge. Which itself happened just a week after a high point in Billabong's year – the Pipeline Masters, contested in huge, perfect surf and won by a brave, deserving surfer. There should have been accolades and applause in the Billabong camp. Instead there is dread for what the future holds.

For surfers the obvious question is how it might affect the pro tour. Billabong sponsor four contests on the World Tour including the two most exciting contests – the Pipe Masters and Teahupoo. This year in Tahiti there were rumours of friction between Billabong and Tahitian authorities with one observer, who was in Teahupoo for the contest, questioning if Billabong would return. This was despite the incredible surf the contest scored and attendant webcast viewers Billabong recorded.

Billabong has another year to run on its Teahupoo license so on the surface it would appear that a return to Tahiti is assured for 2012. Yet this week Quiksilver suddenly walked out of a three year deal on the New York Pro so the licensees are clearly not bound by any deals made with the ASP.

Neither the ASP or Quiksilver would divulge the reason for walking away from New York though limited return on investment is assumed to be the most likely reason. Hawkish city regulations, amongst other things, made the New York competition, which included a music and fashion festival, a very expensive contest to stage. Quiksilver have had their own financial woes lately and in better times they may have simply sailed on, but not now.

Billabong have shown a strong commitment to sponsoring World Tour contests yet if they also chose to jettison a marquee event few would be surprised considering the current status of the company.

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