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STRATEGY

Case Study: Gambling You Can Turn Around a Business

Micky McDonald ran Westbeach for 5 years. Then the company went bankrupt. Was it time to walk away--or buy it?
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Micky McDonald figured that the little snowboard clothing company he had been running for the previous five years was history. His boss, the owner of Vancouver-based Westbeach Sports, had decided not to invest any more dollars in a business that had lost $1.4 million in 2005 and was looking at additional red ink in 2006. The company filed for bankruptcy in May and McDonald agreed to stay on, helping the trustee look for buyers for the Westbeach brand.

There were a few nibbles, but all of the buyers were dragging out their due diligence and McDonald just assumed he would soon be out of a job; he already was getting calls from headhunters. If creditors didn't doom the company, McDonald figured, the marketplace would probably do the job. If the company canceled its orders for the following season, its jackets and pants would be out of stores for at least a full year. By then, Westbeach would be of little interest to anyone.

But before the trustee found a bidder, McDonald received an intriguing phone call from Frankie Hon, owner of Westbeach's Hong Kong manufacturer, Charterlink, which was on the hook for the fabric required in filling those orders. What if the production run were made on Charterlink's dime? And what if the company were reorganized, with McDonald, Charterlink, and a third partner as the new owners? "The clock was ticking and we had to get a deal done in order to get these goods to market," McDonald says.

It would be a big risk. Snowboard apparel, once a cottage industry made up of several hundred tiny companies, is now a $137 million business in the U.S. alone and includes major players such as Burton, Quiksilver, and Billabong. Their combined marketing and merchandising muscle dwarfs anything coming out of Westbeach, which has 10 employees, $7.3 million in revenue, and little or no presence in the United States (Canada and Europe are its main markets).

And yet, McDonald felt a connection to Westbeach, where he had weathered three ownership changes over nine years. The company had been part of snowboarding culture since the 1980s, around the time he was introduced to the sport in the Austrian Alps. Maybe it was worth a chance.

McDonald had been a sportswear sales and marketing manager in the United Kingdom when he came across Westbeach during a vacation in British Columbia. In those days, snowboarding was still the province of young daredevils looking for thrills that went beyond skiing down a sculpted hill. Commercially, no one paid much attention and snowboard apparel was typically an extension of the tight-fitting bright-colored jackets and pants found in alpine skiing. But Westbeach and its looser-fitting clothes stood out. "They were almost indestructible, very waterproof, and very rugged," McDonald remembers. In 1990, he became a Westbeach distributor in the U.K., and several years later he opened a subsidiary in Innsbruck, Austria.

By the mid-'90s, the sport's popularity was skyrocketing. Yet the industry lacked experienced businesspeople. Inventory levels and marketing costs ballooned under the assumption that the sport would keep growing at stupendous rates. When that didn't happen, Westbeach and others began to struggle. Oregon-based Morrow Snowboards, which was looking to get into apparel, wound up buying Westbeach in 1997, but that company soon stumbled and was forced into bankruptcy. In 1999, the snowboard side of Morrow's business was sold to K-2, with Westbeach eventually taken over by a partnership. Two years later, one of the partners bought out the others, and McDonald was sent back to Canada to be president.

His marching orders: Expand the business without losing money. One of his first steps was pulling out of the U.S. market. The company had been spending 80 percent of its marketing budget on advertising in American publications--even though just 5 percent of total revenue was coming from U.S. buyers. On the production side, he moved manufacturing from China to Vietnam, where costs were lower and import duties and quotas more favorable. That boosted margins without raising retail prices. The company lost $600,000 in 2002, broke even in 2003, and made a little money in 2004.

But there was no room for missteps, and in 2005 a six-week dock strike in Vancouver proved disastrous. "When you're in a season-sensitive and time-sensitive business and you don't make deliveries on time to your customers, they start to ask for discounts," McDonald says. Westbeach lost $700,000 after retailers and suppliers canceled orders. There were other problems, such as overspending on marketing efforts in an attempt to compete with the bigger sports and apparel companies. Smaller names got squeezed out; at a major trade show last year, there were just 95 snowboard brands, compared with 360 in 1995.

But McDonald knew that the Westbeach brand had proved popular and resilient, despite his employer's refusal to invest in it. Perhaps the company did have a future. To be sure, he was concerned about taking on the responsibility--and financial risk--of co-owning a business. As president, McDonald often found himself making mistakes and learning on the fly. "I took my eye off the ball on really fundamental things," he admits. A more seasoned chief executive might have kept the company out of bankruptcy. But the more McDonald thought about it, the more Frankie Hon's suggestion to buy the company made sense.

The Decision

In June 2006, just a few weeks after the bankruptcy filing, McDonald, Hon, and Khanh To, another Westbeach contractor, bid $450,000 on the company's assets. Three days later, their offer was approved and Westbeach Apparel Canada Ltd. was formed, with the three men as equal partners.

The trio now runs a super-lean operation, with one-person departments for design, marketing, accounts payable, customer service, finance, logistics, and PR. McDonald, who holds the title of president and heads up marketing efforts, is focusing on the places where Westbeach does best--Quebec, British Columbia, Ontario, and portions of Europe. "What I'm acutely aware of is the resources I have and the resources my partners have," McDonald says.

The partnership's five-year business plan has Westbeach reaching $50 million in revenue by 2011. It's an ambitious target, but McDonald points to a number of strengths, including a well-established brand--one that goes back to the sport's early days--and sustained loyalty among smaller, nonchain retailers in Canada and Europe. And it's not just outerwear; Westbeach relies heavily on high-margin T-shirts and sweatshirts that can generate big money during the off-season and attract nonsnowboarders who want to be identified with the sport.

Weaknesses? McDonald points to customer service, inexperienced management, a checkered financial history, and the presence of so many global competitors that can leverage their surfing, skateboarding, and snowboarding divisions into a single "action sports" category. That's why McDonald is reluctant to reenter the U.S. market, which he says is too expensive. "On paper, you would think that a Vancouver-based company would look at the U.S. and say that's a no-brainer because it's just across the border," he says. "But it could just as well be a million miles away."

Westbeach's "less is more" argument centers on developing innovative merchandise, such as a camouflage-patterned polyurethane-coated snowboard jacket called the Phenom. Priced at $485, it's made with light-absorbing crystals that glow in the dark and features inside pockets for goggles, an MP3 player, and ski passes. Westbeach has the exclusive rights to the technology used in making the fabric through the 2006--07 season, but after that it's available to everyone. That's the problem with trying to be innovative in snowboarding: The competition catches up quickly.

Then again, Westbeach is used to making midflight adjustments. "These chances don't come along very often in life," McDonald says of the decision to bid on the company. "I've taken a gamble and I'm very, very glad. Now all I have to do is work very hard."

The Experts Weigh In

Don't ignore the U.S.

Westbeach has lacked some of the branding and innovation skills of other brands. But what it has done very well is stay connected to its community. To me, that is the sole reason it exists. For a kid from Vancouver, it's part of your experience. You see friends wearing it and it has a certain meaning in the snowboard culture. The trick is developing and managing a business outside your backyard. I don't think you can ignore the U.S. To be a legitimate player in the market, you have to have success in Asia, North America, and Europe.

Brad Steward
Founder
Bonfire Snowboarding
Portland, Oregon

Keep it real

The snowboarding market is stable now, but it's going to improve. In the next few years, we're going to see a bump in the population of 12- to 15-year-olds--the prime age for participating in board sports. Teenagers in that age bracket are fairly mercurial, but they're also very savvy and they look for authenticity, which could be a good thing for Westbeach. Authenticity means that this product is really made for snowboarders because this company understands how a snowboarder thinks, feels, and acts--and it builds a product around that.

Marie Case
Managing Director
Board-Trac
Trabuco Canyon, California

Expand cautiously

The decision to focus on a fairly small piece of the market was probably a good one. By staying small, Westbeach can get a certain credibility and let customers know what the brand is and what it stands for. Once the company establishes that, it becomes easier to expand distribution without damaging the brand. Westbeach is in a position where it can start to expand, but cautiously. You can kill yourself by trying to grow a winter-only business too quickly. Can Westbeach get to $50 million in revenue? It can, but it will take a while.

Jeff Harbaugh
Consultant
Jeff Harbaugh & Associates
Seattle

Last updated: Feb 1, 2007




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