He took advantage of the vacation to renew old acquaintances, and his business card now reads “Senior Consultant, Arthur Touche Associates.”
When I walked into the bar, Slats was back in his favorite stall, pouring himself boilermakers from a bottle of Old Granddad and a schooner of something golden brown. In the old days his choice was Old Milwaukee.
“Slats, you look prosperous,” I said.
“I shorted all my ski stocks,” he smirked. “Made out big in the September slide.” He poured a shot and pushed it across to me.
“How did you know to do that?” I asked.
“Look at the participation,” he said. “Assume for a minute that the market isn’t growing.”
“Well, of course.”
“Assume for a minute that it hasn’t grown in a long time.”
“But skier days are up.”
“Yeah, but that’s just because the real nut cases are skiing more often. There hasn’t been a flood of new customers in 25 years.”
“Okay. But it will come. That’s what all the new marketing programs are for.”
“Bull. All the old marketing programs just prevented a market contraction. And that’s the best these guys can realistically hope for.”
“What’s your point?”
“Assume that the market is not going to grow. Assume that we’re trapped in this whiskey bottle with the same bunch of skiers and snowboarders we’ve had for years.”
“Okay.”
“Now look at your company. If no one’s pouring more whiskey in, where’s your growth coming from?”
“Market share?”
“Yeah. Either you steal market share or you climb into another bottle, like real estate or golf.”
“So if you don’t have access to another market…”
“It means that the big guys seek growth by gobbling up the smaller guys. And when all the smaller guys are gone, the big guys have reached a market share ceiling. We call this a mature market. That’s when no amount of marketing will bring growth.”
“What happens then?”
“Chainsaw Al happens. The board of directors wants profits to grow, and if there’s no sales growth then the incremental profit has to come from cost cutting. But you can only cut costs so far before the operation begins to collapse.”
“Obviously.”
“So then the successful private operators are tempted to break out of the niche by going public. You slash costs for a year to make the bottom line look great and float the paper. It provides a huge inflow of capital you use to continue buying up the competition and maybe freshen up the product. But after a year or two, the new public board of directors realizes that management, which has spent its entire career in the ski business, has no coherent plan for growth, either inside or outside the ski business. Bye bye management.”
“But what if the company does have coherent growth plans?”
“Then you’ll need to bring in managers with expertise in those fields. When I see a public company run by lifelong ski bums, that’s when I know I can go short.”
“What about the strong brand names? Doesn’t that consumer franchise count for something?”
“Not really. If a company is stuck in a niche, with a brand name and sales force that’s recognized only in the snowsport storefronts, it’s still not pulling in new sales. It will live on smaller and smaller budgets and then on smaller and smaller profits. The board will cut commissions and salaries. Eventually, everyone will have to leave the company except a core group with outside incomes. It’ll become a society of trust funders, all of them travelling the circuit in pursuit of what amounts to a self-liquidating hobby.”
“A hobby?”
“Hey, it’s a sport, not a business. It’s a rich man’s hobby.”
“Are there exceptions?”
“Maybe. The rules apply everywhere—at the resort companies, the hardgoods business and even the publications. A couple of the apparel manufacturers and sunglass companies have broken their bottles—you can actually get non-skiers to buy parkas and shades, which means you can get into general distribution if you’re real smart. Then you’re running a business.”
“So when do you get back in?”
“Maybe when Sam Sell, Chuck Boat et al, gobble up some bankruptcies and start turning the brands around. Maybe soon. But that’s easier to do with private companies. I’ll start perking up when I see some of these IPOs go private again. Maybe I’ll give Sam some of my profits on the September shorts.”
Seth Masia has all his eggs in the high-tech basket. You can e-mail him at [email protected].
