Billabong Case Study
Billabong International Ltd., is a leading surfwear and skatewear company, and one of Australia’s iconic brands. From humble beginnings on the Gold Coast in 1973, it has grown through international expansion, diversification and acquisitions to become a leading international surfwear grown its commitment to the global boardsports sector through athlete sponsorship, event hosting and management and support of industry bodies.
But in 2013 the company was in serious trouble. After a couple of years of poor results Billabong International lost $859.5 million last financial year – more than three times its market value – after writing off the value of brands1 such as Billabong and Element by more than $600 million. It stock price had tumbled from a once high of about $18 to a mere 40 cents (see chart below). Billabong risked going bankrupt before a bail out by an American investment group Centrebridge and Oaktree offering a $386 million debt and equity rescue package last September.
Under the leadership of new CEO Neil Fiske, the company is now engaging in a bold turnaround strategy. Is it too little, too late?
1 A brand’s value is an intangible asset listed on the balance sheet of a company. Billabong International de-‐valued their brands by $600m contributing to the large financial loss.
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BBG: Billabong Interna:onal Limited -‐ Stock Price History
Company History
Billabong was founded on Australia's Gold Coast in 1973 by surfer and surfboard shaper Gordon Merchant and his then partner, Rena. Those early days were rather inauspicious, with the pair designing boardshorts at home, cutting them out on the kitchen table and then carting the finished product around to the local surf shop to sell. The business found immediate traction, with surfers drawn to the superior functionality of the Billabong boardshorts. The next step for the fledgling brand was to introduce the better local surfers to Billabong and incorporate them in the marketing of the brand. Company-‐sponsored contests and special events would later follow.
By the 1980s, Billabong International had firmly established its place in Australian surf culture and was ready for international expansion. The initial focus was on the large North American market and, again, the brand enjoyed success. Sales began to grow in other offshore markets, licenses were granted in a number of territories including New Zealand, Japan and South Africa, and in the late 1980s a new beachhead was established in Europe. Through the 1990s the surf industry grew exponentially and professional surfing gained a newfound respectability. The company also followed its core customers into other boardsports markets, including skate, snow and wake, where it replicated its proven business model. By the close of the decade, Billabong had been restructured to capitalise on the growing global opportunities in the boardsports sector.
The restructure set the foundation for an initial public offering on the Australian stock exchange in mid 2000. This gave the company greater impetus and the financial capacity to grow the business. Some seven months after the public float the company demonstrated its growth plans with the acquisitions of the Von Zipper sunglasses brand. Four months later, the company acquired the emerging Element Skateboards brand and went on the build the brand using the same business model as the original Billabong brand. The successful integration of those businesses saw the company add to its stable of brands in following years, with Honolua Surf Company acquired in January 2004, Kustom footwear and Palmers Surf in September 2004, a controlling interest in the beachculture airport-‐retail business in November 2005 (later converted to 100% ownership) and Nixon watches and accessories in January 2006. Other businesses were also established, including the Element footwear range and various branded retail stores around the world.
In 2007 the Group continued to build its brand portfolio with the acquisitions of the specialist wetsuit brand Xcel and girls swimwear brand Tigerlily. This was followed in 2008 with the acquisition of the Sector 9 skateboard brand and the DaKine premium boardsport accessories brand.
In late 2009 the Company formally entered the online sales channel through the acquisition of US-‐based boardsport retailer Swell.com and the purchase of an interest in Australia's Surfstitch.com. In March 2010 the Company enhanced its skate offer through the signing of an agreement to license the California-‐based Plan B skateboard brand. This was followed in July 2010 by the acquisition of the California-‐based RVCA brand, the completion in September of the acquisition of the West 49 retail chain in Canada and the completion of the acquisitions of Australia's Jetty Surf, Surf Dive 'n' Ski (SDS) and Rush retail banners in November.
In April 2012 Billabong completed the transfer of its Nixon brand into a new joint venture company. The joint venture saw Nixon become an independent business owned by Billabong International and
Trilantic Capital Partners (each holding approximately 48.5%) and Nixon management holding the balance of approximately 3%.
In July 2013 Billabong completed the sale of its DaKine brand to Altamont and West 49 brand in February 2014.
Billabong on a Trail of Growth by Acquisition
The first decade of 2000 saw Billabong International acquire a portfolio of sports brands.
Von Zipper, an eyewear brand, was acquired in early 2001 and the acquisition of skateboarding apparel and hard good brand Element was announced in July 2001.
The acquisition of the Kustom surf shoe brand, as part of Billabong's purchase of the Australian Gold Coast-‐based Palmers Surf company, was disclosed in September 2004. The following year in December, an official press release was published to announce the acquisition of Nixon Inc., a watch and accessories brand in the board sports market.
The acquisition of wetsuit and technical watersport accessories brand Xcel became effective on 1 September 2007, and Jodhi Meares's Tigerlily brand (young female surfwear) was acquired shortly thereafter in December of the same year. The Tigerlily decision represented the first time that Billabong had acquired a brand focused exclusively on the 'girls' market, and the intention of management was to position the new addition so that it complemented the company's own 'Billabongs Girls' line.
In 2008 Billabong continued with the consistent acquisition activity that occurred in 2007 and announced four acquisitions over four successive months. Following the acquisition of the Gold Coast store Kirra Surf in May, the company announced its acquisition of the retail operations of Quiet Flight, a retail company on the east coast of the US that had already been operating licensed Billabong and Element retail outlets in Times Square, New York, US. The Quiet Flight deal resulted in the addition of 14 Quiet Flight and Surf Warehouse retail stores, most of which were located in Florida, US. Then in June 2008, the founders of the Sector 9 skateboard company accepted an offer from Billabong that also included the purchase of the Gullwing skateboard truck brand. Finally in August, Billabong confirmed the acquisition of boardsport accessories brand DaKine, which specialises in backpacks, bags, gloves and accessories, in a press release that projected that "DaKine is expected to contribute approximately 4% of Billabong International Limited’s Group sales in the 2008-‐09 financial year".
Billabong's retail expansion continued into late 2008 with the November purchase of the United Kingdom (UK)-‐based 13-‐store retail chain Two Seasons for an undisclosed sum. Billabong only announced a single acquisition in 2009 with the purchase of Swell, a US-‐based online retailer of boardsports brands, for an undisclosed sum.
Billabong commenced 2010 with the signing of a ten-‐year licensing deal with popular skateboard company Plan B, and Plan B subsequently entered into a partnership arrangement with Element. In May 2010, Billabong's retail expansion continued with the acquisition of American surf retailer Becker Surf & Sport in May (the Becker deal included the business' online operations, but not its surfboard operations), followed by the purchase of prominent Canadian action sports retailer West
49 in late June. Further acquisitions were then announced in the remainder of 2010: the acquisition of apparel brand RVCA was confirmed in July and the label's founder Pat Tenore explained his decision in the Billabong press release: "One of the key things about Billabong is its respect for the creative independence of each of its brands and that level of flexibility will allow RVCA to maintain its identity while benefiting from the support of the wider Billabong group"; after RVCA, Billabong then returned to the retail market and ended the year with the October acquisition of the Australian retail stores Surf Dive 'n' Ski and Jetty Surf—from vendor General Pants Group—for an undisclosed amount.
Current Overview of Operations
Today Billabong’s core business includes the marketing, distribution, wholesaling and retailing of apparel, accessories, eyewear, wetsuits and hardgoods in the boardsports sector under the Billabong, Element, Von Zipper, Honolua Surf Company, Kustom, Palmers Surf, Xcel, Tigerlily, Sector 9 and RVCA brands. The company has approximately 4,000 staff worldwide and its shares are publicly listed on the Australian Securities Exchange. Billabong’s products are licensed and distributed in more than 100 countries and are available in approximately 10,000 retail outlets worldwide. Products are distributed through specialised boardsports retailers and through the Company's own branded retail outlets. The majority of revenue is generated through wholly-‐owned operations in Australia, North America, Europe, Japan, New Zealand, South Africa and Brazil. The Company's brands are marketed and promoted internationally through association with high profile professional athletes, junior athletes and events.
Latest Financial Results
Billabong’s financial results (June, 2014) for the continuing operations show a profitable business.
A full description of current operations is available in the annual report available on Blackboard.
Corporate Structure
Turnaround Strategy
The new company mantra under the new CEO Neil Fiske is Fewer, Bigger, Better.
“Fewer, bigger, better businesses. Fewer, bigger, better brands. Fewer, bigger, better styles…. suppliers… marketing programs…IT systems…capital investments.
This philosophy will pervade everything we do. The easiest way to make money is to make the big ideas bigger.
Make no mistake. This is a turnaround.”
“This is a complex, difficult turnaround. We are not daunted by challenges we face, but neither do we underestimate them.”
“Quite simply, the business over the last several years has become enormously complex and diversified. We have been trying to do too many things – and none of them particularly well. Building global brands takes one skill set. Running regional multi-‐brand retail is something totally different. And being a pure play multi-‐brand e-‐commerce business is another thing altogether. Then multiply
that complexity by a regionalized organization structure with independent decision making and different operating infrastructures. As complexity grew, we lost focus. We confused the organization.”
“As someone said to me on my first global tour of the Company: “We need clarity. Are we a retail company with brands… or are we brands with retail?” I believe the greatness of Billabong lies in the authenticity, heritage and aspiration of our brands. Period. That’s what we do best. That’s what we need to build upon. The core of this business is good. It’s profitable and can be even more profitable. It has real growth potential. Our direction will put the focus back on that core. I know that Billabong, globally, in Australia and especially here on the Gold Coast, has an iconic status. That means when you hit turbulent times there will be no shortage of opinions and speculation. So let’s not lose sight of the facts. The Billabong brand is still the number one brand in specialty surf shops in both Australia and the US. It has over 90% awareness and high regard in the target demographic. And by the way the current world champion, Joel Parkinson.”
New Strategy Overview
New CEO Neil Fiske outlined a 7 part turn-‐around strategy:
I. Brand: Building powerful global brands is seen as the core of what Billabong does well. “I believe the greatness of Billabong lies in the authenticity, heritage and aspiration of our brands. Period. That’s what we do best. That’s what we need to build upon.” Strategic focus on the big three brands (Billabong, Element, RVCA) and emerging brands that have global scale, but are locally responsive.
II. Product: Build a strong merchandise planning and buying. Develop clear assortment strategies with a balance of global versus regional mix, and fewer, larger style to reduce product lines by 25%.
III. Marketing. Develop an integrated marketing plan 12 month calendar by region. Develop customer database, with emphasis on digital to target the 15-‐18 year target consumer, customer relationship management.
IV. Omni-‐Channel. Mix of online, own stores and wholesale to other retailers. The best customers shop in all channels. Drive retail profitability through closures, productivity, rent negotiations and inventory management. Unify three channels to build scale. Invest to build key wholesale accounts.
V. Supply-‐Chain. Large cost reductions possible through productivity improvements. Currently logistics costs are 50-‐100% higher than industry benchmarks. Aim to improve productivity stock turnover from 2.4X to 4X over next few years. Diversify out of China for cost and capability. Move to fewer, bigger suppliers.
VI. Organization. Alignment of organizational structure with new strategy. Develop global brand structure for the big three brands. Strengthen the merchandizing, design and marketing teams through new talent. Build global scale and capability in four critical areas: finance, the supply chain, IT and direct to customer platform (online sales). Recruiting talent for key positions in the leadership team. Rationalizing the administration by eliminating low priority work and streamlining layers and diversity (doing fewer things bigger and better).
VII. Financial Discipline. Key cost reductions (inventory management, logistics, administrative streamlining) to fund the “marketing war chest”.
Turnaround Status (December 2015)
Early indicators of success
Key Actions to Date
Brand
• Re-‐signed founders of Element, RVCA and VonZipper • Re-‐signed 2012 ASP World Champ Joel Parkinson • Signed marquee next generation athlete Jack Robinson
Portfolio actions
• Sold West 49 • Strategic review of SurfStitch and Swell
Distribution changes
• Country tiering • Chile, Peru to distributor model (Forus) • Smaller brands to distributors outside of Tier 1 countries
Restructuring
• Organisational re-‐alignment • Europe downsizing • South Africa restructuring
Talent
• Executive team: Ed Leasure, Jean-‐Louis Rodrigues, Mara Pagotto, Bennett Nussbaum • Global Billabong Brand President: Shannan North • Billabong Womens team (Global GM Susan Branch, Global Design Lisa Stemmler, Global
Merchandising, Global Marketing) • Billabong Mens Design: Brad Lancaster • Billabong Sales: Jason Shelton (US) Justin Cook (Australia) • Billabong Creative Marketing: Michael Minter • Acting General Manager Asia Pacific: Paul Burdekin • Latin America Vice President: Felipe Motta • Merchant and Design bench strength
Financial / Corporate
• $135 Million placement (shares issued) • $50 Million rights offering • Asset-‐based lending completed • Board renewal complete
The Surfwear Market
Here is one commentator’s view about Billabong’s brand prospects.
Regaining their ‘cool’: can the big three surf brands recover?
by Marketing ON 2 October 2013
By Andrew Warren
Australia’s ‘big three’ surf brands have found themselves in choppy financial waters. Last week, Billabong, one of Australia’s most iconic surf brands, confirmed a $386 million refinancing agreement with US consortium Centerbridge-‐Oaktree Capital Management acquiring a 40% share, guaranteeing the struggling brand’s short-‐term future after it posted an $859 million loss last financial year.
Like Billabong, public surf company Quiksilver has reported declining revenues, asset write-‐downs and growing losses, recently announcing third-‐quarterly earnings had declined 84%. Privately-‐owned Rip Curl has also been in profit free-‐fall. In mid-‐2012 Rip Curl founders Brian Singer and Doug Warbrick engaged Bank of America Merrill Lynch to help source a prospective buyer for the brand. The planned sale was abandoned in March with a lack of interest at the asking price of $400 million.
The current woes are a long way from the heady days of the 1990s and 2000s, which saw each of the big three surf brands aggressively pursue international expansion and high-‐profile sports sponsorship deals.
So, why have the Big Three surf brands found themselves struggling? And what is the way to calmer waters?
Heady ride, then dumped Each of the big three had grown embryonically in the 1970s alongside the rising popularity of the beach and surfing in Australia and California. The people running each business were avid surfers themselves and brands established strong credibility within surfing subculture. Billabong, Quiksilver and Rip Curl clothing came to symbolise surfing’s laid-‐back, counter-‐cultural values, equally consumable by non-‐surfers that identified with the lifestyle.
The 1990s and 2000s saw Quiksilver and Billabong aggressively acquire emerging youth labels (DC Shoes, Rossignol Skis, Element, RVCA, Dakine, Mrs Palmers surf gear, Nixon watches) to consolidate market share. The brands’ integrated business operations by funding new retail stores, buying-‐up existing chains and standardising design. Between 2005 and 2011 Billabong purchased some 600 retail outlets; 150 of which have closed in the last 12 months. Large department chains have also featured prominently and agreements with surf brands were intended to facilitate greater access to non-‐surfing consumers.
The companies’ fortunes further rode on a re-‐organised World Championship Tour which included highly publicised surfing events on every inhabited continent. Snowboarding and skateboarding rose to greater prominence and complemented the values already imbued in the surf brands. New and highly profitable markets emerged in Europe and Asia.
Regaining their ‘cool’ Yet, as the big three surf brands grew so did a disconnect between global commercial ambitions on the one hand, and maintaining local subcultural credibility on the other hand. Ironically commercial success has also been the source of their troubles.
The big three have lost their ‘cool’ with young people – their core demographic. Exposed to increasingly fast fashion cycles the Big Three have been unable to move expensive, out-‐of-‐fashion clothing.
What then does the future hold for the surf business? The big three are now attempting to reconnect with this ‘core’ by creatively refocusing their brands. You can now order ‘custom’ designed clothing from Quiksilver. Rip Curl has begun playing-‐up a ‘craft’ association and the ‘authentic’ nature of their surf products – tracing back to the company’s custom surfboard manufacturing roots.
More sustained efforts to reconnect with core consumers might involve re-‐focusing on design and clothing styles distinctive to local markets. Such an approach worked well for Billabong in South Africa during the early 2000s when surf shop owner Cheron Kraak received a licence from Billabong founder Gordon Merchant to design and manufacture clothing locally.
In 2005 Kraak helped Billabong win a fashion award as the most popular female youth brand in South Africa. Billabong bought back the licence in 2007, started supplying stores with generic designs and sales in the country have since tanked. Opportunities also exist to grow online retail, which currently makes up around 10% of the big three’s overall sales.
But what appears increasingly probable is that at some point in the future the big three will themselves be acquired by larger retail corporations. The case of Volcom is instructive.
Volcom began life from Southern California’s surf/skate subcultures in 1991 and grew rapidly in the early 2000s using the slogan “Youth Against Establishment”. In 2005 the brand floated on the New York Stock Exchange. However, by 2011 Volcom had seemingly reached growth limits and was acquired for $607 million by French luxury fashion conglomerate Kering (formerly PPR). After delisting Volcom, Kering re-‐energised the brand by increasing funding to select action sports events and athletes. Volcom is now outperforming the big three, with sales growth for the first half of 2013 increasing 19%.
Space to grow Despite the wobbles in the Australian market, the global demand for surf-‐styled apparel is expected to remain strong and there are some useful lessons among some of the newer entrants.
Hollister, a spin-‐off of US retailer Abercrombie & Fitch has successfully moved into surf clothing and retail in the last decade. And smaller, culturally engaged brands are also emerging. One example is the Byron Bay label, Afends. Afends has experienced dramatic growth in the last three years, trading in loud, edgy apparel sold through independent stores supplemented by a strong online presence. The brand has a growing following amongst young surfers and skaters in Australia and California and shuns advertising in the usual surf media outlets. The problems being experienced by the Big Three has actually created space for the growth of creative, independent surf brands, thanks to the reduced threat of acquisition.
Problems facing the large surf brands such as Billabong are a reminder that doing business in surfing is volatile and inherently risky. But the big three will survive in one form or another. The challenge for them and other emerging brands is to maintain subcultural credibility.
This article was originally published at The Conversation.
Read the original article. http://theconversation.com/regaining-‐their-‐cool-‐can-‐the-‐big-‐three-‐surf-‐brands-‐recover-‐18406
Andrew Warren does not work for, consult to, own shares in or receive funding from any company or organisation that would benefit from this article, and has no relevant affiliations.