Worthless or not, Billabong still has the reigning champ. Photo: ASP/Kirstin
Last week, there was a minor uproar among the lay-people who keep an interested eye on the surf industry – all 15 of us – when CNN reported that Billabong had declared itself, on its annual accounting balance sheet, as “worthless.” This was not, as it turns out, a soul-searching mea culpa by the company that still employs the reigning world champ and counts among its subsidiaries Element, Von Zipper, Sector 9, RVCA, Kustom, Palmers, and Xcel, among others. It was an economic statement. When it came time on their report to declare the carrying value of Billabong, they put it at zero Australian dollars.
As someone with little ability in math and only a vague interest in the market, that number presented a contradiction: how can a company be worth zero dollars and yet still be selling t-shirts at my local surf shop, and paying Joel Parkinson his monthly check? This obviously is a step or two beyond Adam Smith and his pin factory.
I started asking around and the answers I got were surprising. Despite the fact that Billabong has had an atrocious year, they probably aren’t as close to the brink as it has often been hinted in the media. In fact, the very notion of a “brink” for a company as large as Billabong is somewhat grey. The first person I spoke to was the Billabong spokesman Tim Fogarty who hit me with a somewhat generic but nonetheless illuminating quote from an unnamed accountant:
“As part of the 2013 result, we had to write down the value of our brands on the balance sheet. It is an accounting requirement and works such that Billabong, being our biggest brand, inevitably absorbs a larger proportion of our overheads. In no way does it mean that it, nor any of our other brands, are not worth anything.”
“Or in other words,” Fogarty clarified, “accountancy made us do it.” He continued: “What we have looked to do, though, is to ensure we put Billabong in the best possible place to begin a rebuilding process. We’ve been around since 1973 and there have been some challenging times, but the last year would be among the toughest. Having secured the future of the Company it’s about putting the focus on the brands – not the balance sheet.”
If you read that closely, you can start to see that the big fat 0 is a small part of a larger plan, although the effectiveness of that plan is yet to be seen. We all know that the PR man isn’t exactly going to tell you that the ship is sinking, even if the water is lapping at his knees, but the gist of what he was saying was corroborated by Jeff Harbaugh, a consultant who specializes in action sports. “The people saying that Billabong is worthless don’t understand the accounting they’re reading,” Harbaugh said. “It’s true that they wrote off the brand, but that doesn’t mean it has no value. When things are really bad, sometimes companies choose to write off every questionable asset just to clean up the balance sheet. Often, that has value in future accounting periods because you end up showing more earnings than you would have if you hadn’t written those assets down or off.”
Such a move may be especially important in closing the troubled buyout deal that Billabong has been looking to broker with the California-based Altamont Capital Partners–a private equity group with investments in used cars and sausages, among others.
Though apparently savvy, what it would not do is offset some of the larger problems that the surf industry is facing, which Harbaugh lists as the lousy economy, the relative niche position of the industry, the growth of online sales taking money from the brick and mortar locations, and competition from large, non-endemic companies. “Big companies like Nike have resources way outside anything we in the action sports business have,” he said. They also have a better understanding of the customer in the broader fashion, youth culture market. It probably often makes sense for action sports based companies to stay in their niche, but that’s hard to do at some point if you’re committed to growth. Notice that of all the action sports companies who have gone public, only Zumiez is successful and independent. At some point as you grow, you get away from the customers your brand resonates with and are competing with much bigger companies where the customers may know your brand but don’t relate to your story in the same way as your core customers.”
He offered Burton as an example: “They changed their name years ago from ‘Burton Snowboards’ to ‘Burton’ with the idea of moving into the fashion space. While they are the biggest player in action sports, they are a little player in the fashion industry.”
Dougall Walker, the ex-General Manager of Billabong International and current CEO of Volcom Australia, added the constant pressure to stay relevant to consumers to this already comprehensive list of problems. “To continue to be aspired to by current as well as past generations of customers, brands need to keep evolving while at the same time maintaining their core DNA,” he explained. “A simple theory but not so easy to put into practice, particularly so when under the pressure of being a publicly listed company that has to continually grow to keep financial analysts and shareholders happy. The founders and first-generation management teams of companies such as Bong and Quik were very successful at maintaining this balance even through the transition into Listed companies. However as they either moved on or stepped aside from running day to day operations, the new generation of company ‘leaders,’ reporting to a board of directors with little or no comprehension of the brands DNA, have not been as successful in keeping that balance.”
His comments point to the surf industry conundrum of running a cottage industry on a global level – big money does not always mean best management. If Billabong is able to use improved numbers to bolster its refinancing deal with the Altamont group (or any of the various groups sniffing around Billabong), they will still have to find a more balanced way to answer to a board of directors who may sit very far from the beach.
According to both Walker and Harbaugh, Billabong is unlikely to fail. It has enough name recognition that it would be almost impossible for it to disappear completely, but it can, according to Walker, fall into the purgatory of the outlet mall. “If it continues to fail then there is a great chance it will never be able to operate in the same market space again but a shadow or the brand will still be commercial in broader, less desirable market spaces like Op and Hang Ten have done,” he said.
Even an ex-Bonger Walker was reluctant to write the company off. “Billabong is an incredibly strong brand that employs hundreds of talented and passionate people,” he said. “The core business is still very strong and is producing quality aspirational products but it is being dragged down by the ‘corporation’ that runs it. Replace or make major changes to the ‘corporation’ and Billabong will have the opportunity to get back on track.”
