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Seeking New Horizons
O.C. surfwear companies corner $4.1 billion industry by taking marketing message world wide.
By MIchael ReicherPublished: August 05, 2004
In the wide world of design and fashion, a band of suntanned entrepreneurs have carved out a multi-billion dollar niche. Huntington Beach and Irvine have become the Milan and Paris of the surf apparel industry.
Cheeky models and brooding hunks may strut spotlighted European runways wearing the newest in high fashion from Versace, Hugo Boss, and Gucci. But it is along Orange County’s meandering 42-mile shoreline that the styles and designs that define surfwear worldwide are dreamed up. From boardshorts to sundresses to sandals, the casual wear from Quiksilver, O’Neill, Hurley and others who call Orange County home have revolutionized casual wear from sea to sea and many zip codes in between.
The industry began in the 1950s with a handful of surfboard shapers designing T-shirts promoting their boards. But as the allure of the ocean and its laid-back lifestyle has grown, so has the pursuit of the comfortable beach style.
Entrepreneurs such as Bob McKnight, Kelly Gibson, and Bob Hurley sensed the trend and today are riding a wave of prosperity only dreamed about when Brian Wilson first wrote the quintessential surf tune “California Girls.”
The surf apparel capital today is Orange County, a sun drenched slice of Southern California where major companies are breaking sales records and tripling in size in recent years.
Quiksilver, based in Huntington Beach, was the first manufacturer to reach $1 billion in annual sales. Anaheim-based Pacific Sunwear is the world’s largest specialty surf retailer and is expected to reach $1.2 billion in sales this year. O’Neill Clothing, in Irvine, has grown from 50 employees to 150 in just three years. The growth has been explosive. It may not be headline news to those inside the marketing and design departments at local surfwear firms. But Wall Street and mainstream apparel companies like Gap and Abercrombie and Fitch have certainly taken notice and have tried to catch the same retail wave in recent years. In fact, total surfwear sales hit $4.14 billion in 2003, a staggering 25 percent increase in less than a year, according to the Surf Industry Manufacturers Association (SIMA).
For major manufacturers like Quiksilver, growth has come from expanding globally and acquiring competitors. With exclusive retail stores in Times Square in New York City, mainland China and a growing number of European cities, Quiksilver is the 800-pound gorilla dominating the market.
But the acquisition and diversification power of Quiksilver is not enjoyed by all brands. For example, Hawaiian Island Creations of Irvine is somewhat limited because of its relatively small marketing budget and inability to purchase other companies.
“We’re a small fish in this big surfwear sea,” says HIC president Ron Yoshida.
The company, which has been making surfboards for more 25 years, also is limited in apparel sales by retail traditions that impact its hard goods division.
Local retailers, Yoshida says, prefer to carry surfboards exclusively of other shops. Therefore, if one shop in a particular town carries HIC boards (and clothes), then the other shops are reluctant to carry the clothes.
But surfboard shaping helps sell the HIC clothing line, too. In 2003, Surfing Magazine gave HIC shaper, Eric Arakawa, its shaper of the year award. Also, Andy Irons, the current world champ, rides HIC boards, adding cool to the company brand.
“We’d love to expand to other stores, but then we’d be competing directly with the big guys,” says Yoshida. “Which is hard, because their volume of sales allows for incredible build-outs.”
Big brands, like Quiksilver and O’Neill invest major amounts of capital to create splashy in-store and window displays to capture consumers’ attention and gain greater market share.
It is a hopeful sign for Yoshida that retail surfwear giant PacSun recently announced plans to expand offerings of smaller surf brands like HIC in select locations, a move that will boost the fortunes of those companies in the shadow of industry leaders like Quiksilver.
Blonde rocket fuel
According to industry insiders, much of the sales boom in recent years has been fueled by the explosion of the women’s surf market. “You have women now, and girls, that are [surfing] just as much as guys,” says Bob McKnight, CEO of Quiksilver. Quiksilver, which released its Roxy line of girls surfwear in 1991, has been credited by other apparel manufacturers wtih opening the door to this lucrative market.
“The women’s market will continue to grow. At some point, it will eclipse the men’s market,” says Tony Cherbak, an industry analyst for Deloitte and Touche in Costa Mesa.
Cherbak and some of the main manufacturers point out that women tend to buy more clothes than men. A girl might purchase six pairs of boardshorts, they say, while a typical guy “lives in his boardshorts.”
Women have begun living in boardshorts, too, says Chris Mauro, editor of Surfer Magazine. The boom in female surfing, he says, has ignited a media frenzy, from last summer’s hit feature length film “Blue Crush” to “MTV Surf Girls.”
Board-Trac Market Research, an Orange County company that follows industry trends, reports a 70 percent increase in the number of female surfers from 2001 to 2003.
Females surfers now are accepted in the water. Mauro says that this is part of an American “renaissance period in surfing,” where “you can be accepted wearing and surfing whatever.”
Renaissance stoke spreads to the heartland
Mauro contrasts today’s renaissance period with the narrow-mindedness in the 1980s and 1990s. He says that back then, only one style of clothes and one style of shortboard (a type of surfboard usually under 6’5”) was acceptable.
“Now it’s a very diversified culture,” says Mauro. “Surfing has aged. Dads are out surfing now with their kids.”
As the surf community itself tolerates more styles, it also is getting used to sharing its style with mainstream America.
“People sense that we’re on to something cool and individualistic,” says Mauro.
Quiksilver helps spread the lifestyle by sponsoring “MTV Surf Girls,” a traveling reality show based on bronzed female competitors.
“I have this big belief that the surf culture really influences all walks of life. From food, to fashion, to language, to clothing, to music, to art,” says McKnight.
Quiksilver Entertainment, which executive produced the MTV show, also has created children’s books, videos, and other television programs to promote the surfing and action-sports lifestyles.
Danny Kwock, a long-time Newport Beach surfer and president of Quiksilver Entertainment, says, “Kids in the Midwest call in and say ‘Now I know the difference between longboarding and shortboarding.”
Quiksilver’s mission, according to Kwock and McKnight, is to “broaden the stoke,” or to spread the surf lifestyle as far and wide as possible, so that the entire industry can grow.
“We invite everyone to the party,” says Kwock, who has encouraged other brands such as Hurley and Volcom to participate in “Surf Girls.”
By broadening the sport’s appeal, Kwock says that surfers everywhere benefit. More jobs for surfers and cleaner water are two results of companies that give back to the industry, says Kwock.
Giving back while on colorful surf explorations has been Quiksilver’s most unique philanthropy. In 1999 it renovated a 75-foot diving and survey vessel named The Crossing for a continuous science expedition/surf exploration.
This voyage pairs marine biologists with pro surfers to check the health of reefs and explore uncharted surf spots.
As these types of philanthropic/marketing missions grow because of increased sales, so do the number of people affected by the surf lifestyle.
“Wall Street people used to tell us it was a bad business model because surfing was so niche,” says Kwock. “We said, ‘We don’t care what you think.’”
But he also admits that Quiksilver has heard complaints from core surfers since it began spreading the surfing lifestyle.
“There are always going to be people who don’t agree,” Kwock says. “There are more girls surfing, now, and most surfers accept it, but there will always be that guy who resents it.”
Girls are just one example of the expansion of surfing through efforts such as Quiksilver’s. Kwock also mentions the disdain in some parts of the surf community at having more surfers in the water than before.
“It’s a tough balance on how you do it,” he says. Since Quiksilver donates money and gives back to the surfing community, he believes that its role in crowding the lineup is mitigated.
But according to Kwock, Quiksilver is different than some other surf companies. Because “the guys at the top [have] salt in their blood.”
A young brand
Other surf manufacturing executives argue that their employees’ blood contains just as much sea sale. Kelly Gibson, the President of O’Neill Clothing, says that most of his employees surf on a weekly basis.
Surfing is at the core of O’Neill, which was formed when, in the 1950s, northern California surfer Jack O’Neill developed one of the first wetsuits. The company still manufacturers wetsuits in Santa Cruz, while the clothing line has been produced in Irvine since the early 1990s.
Gibson says that in the last five to 10 years his company has been trying to “refocus” as a young brand, with a target market of 15 to 19.
“You try to build a customer for life within that age group,” he says. “Once you own that customer, when he’s in his 20s and 30s, he’ll keep coming back to a brand that he really loved as a teen.”
In order to connect better with youth, Gibson recently hired Thom McElroy as branding manager. McElroy, who owned his own communications firm, has worked previously with youth clients such as Vans footwear and Microsoft Xbox.
Other innovations at O’Neill have stemmed from investment in product design teams. It now sends teams to New York, London and Tokyo to monitor the latest trends.
“We’re not just rushing into a season,” he explains. “We’re more prepared.”
This preparation he attributes to McElroy and his extensive market research, but much of the product creation is still instinctual, according to Gibson.
“A lot of it comes from the gut. We’re big on doing the research, sure, but you want to make sure that it looks like O’Neill when it leaves the building as well,” says Gibson, who wears sandals and jeans to work.
Giving back through sponsorships of young surfers is one way that O’Neill connects to the core surfer, but the main link to actual surfers for O’Neill and the other apparel manufacturers is obviously the retail stores, especially those that sell hardgoods.
Core surf vs. copy surf
Selling hardgoods, such as boards and wax, creates an environment where young surfers, who are also called “grommets” or “groms,” can “hang out, look at the equipment, talk to the people in the shop, smell the wax, feel the vibe, hear the music, and talk the talk,” says McKnight at Quiksilver.
“The core retailer is selling the stoke of our industry right now,” says O’Neill’s Gibson.
There has been a movement recently in the surf industry to protect and to reinvest in the core retail shops. For example, manufacturers such as Quiksilver O’Neill host surf shop challenges, where teams of surfers affiliated with a certain core retail shop compete against each other. They also invest heavily in store window displays.
Against who are these core shops competing for business? Non-core retailers, who in many cases create their own private labels, are the largest threat to the surf apparel industry, according to manufacturers and industry observers.
McKnight views the infiltration of non-core retailers such as the Gap, Hollister and Abercrombie and Fitch, as the biggest threat.
“If there are too many malls, department stores, and specialty stores creeping in,” says McKnight, “it could really damage the distribution mode of our products.”
He points to these stores’ mimicking the surf look and cutting their prices as the largest threats. Instead of having that core relationship with the surfers, these stores just copy the look of the lifestyle, says McKnight.
“Every time media says that surf is cool, they jump in.”
McKnight would rather people buy surf clothes made by the companies run by surfers, the originators of the lifestyle.
“We’re the companies that take care of the beach environment, look after the surfers, and look after the core accounts,” he says.
So while McKnight and the other manufactures are protecting the core surf shops, their only established channel to reach the middle of America is PacSun, a mall retailer, which does not carry hardgoods, but does carry the major surf brands along with its own private labels.
“PacSun is a legitimate seller of the culture,” says Mauro, “but it’s really a boutique.”
McKnight complains that PacSun, which was founded in Newport Beach, doesn’t give as much floor space and marketing attention to the endemic surf brands, such as Quiksilver and Billabong, as it does to its own private labels.
“They’re great friends of ours,” says McKnight of PacSun executives, “but I need some exposure in those land-locked areas.”
While PacSun did not comment on its Quiksilver’s floor space concerns, it did highlight some cooperative efforts between Pac Sun and its brands.
“Our role is to work with our brands to satisfy the customer’s desire for fashion products within this lifestyle parameter,” says Tim Harmon, president of Pacific Sunwear.
One program developed by PacSun and its brands is their preseason testing program, where brands can introduce a new item into certain PacSun stores.
“The purpose of preseason testing,” says Harmon, “is to validate the next season’s offerings while mitigating the risk for the brands and PacSun.”
Last season, the retail giant tested boardshorts and discovered that solids and pieced styles, or those with multiple patterns, would be more popular than anticipated. Because of that testing, additional styles were created and ordered, and PacSun had a very successful season as a result.
“No one wants 15,000 units of a bad design represented in PacSun across the country,” Harmon says. “It’s bad for the brand and it’s bad for PacSun.”
And what’s bad for PacSun has a significant impact on the industry. Pac Sun has 707 stores located in all 50 states and Puerto Rico.
Harmon says that his main competition comes from other lifestyle concepts in the casual apparel industry, such as preppy, hip hop and gothic/alternative.
To target the urban/hip hop consumer, Pacific Sunwear developed its d.e.m.o. chain, a series of stores that cater to the urban lifestyle. According to the company’s website, much of the stores’ fashion influence comes from hip hop music and personalities.
Besides PacSun, the other specialty retailers that compete for the surfing lifestyle consumer are Hollister and the mainstream retailers mentioned earlier.
McKnight hopes that consumers will embrace authentic boardriding brands, such as Quiksilver, Billabong and Hurley, instead of the “wannabes” like the Gap and Hollister.
Mastering global uncertainty
Authentic brands embracing each other may be required to expand into some Eastern European markets, which according to Casey Koteen, editor of Transworld Surf Biz, present the newest opportunities for growth.
Koteen says that some of the European business communities are still mysterious. He points to the Chek Republic and Poland as examples where the cultural differences, business regulations and copyright laws are still being sorted out.
McKnight says Quiksilver’s target markets include Central and South America, Germany, Russia, Middle East, and China.
But current world unrest inhibits some growth, says McKnight. He explains that much of the surfwear business is based on people purchasing clothes while on beach vacations. Since some people have been traveling less, global unrest takes a toll on sales.
Beyond the beach
In a major industry turning point, surfwear giants have expanded into apparel and equipment for other action sports, such as snowboarding and skateboarding, linking the allure of the beach with the thrill of the downhill run.
The surfing and skate markets are both targeted by Sole Technologies, which manufactures shoes under three distinct brands. One of its brands, Etnies, is designed for the action sports enthusiast, who might surf and skate. The other two are designed for different styles of skateboarders.
Besides building market share, this diversification allows Sole to weather downcycles in particular markets, says Sole Technology Vice President of Marketing Don Brown.
“Whether the surf market goes up or down in the future,” Brown says, “we’ve got a diversified portfolio. We are more than just a surf company.”
Deloitte analyst Cherbak agrees with the advantages of diversification. The O.C. companies that have expanded to the whole board-sports lifestyle, he says, and haven’t “pidgeon-holed” in a particular sport, will do the best.
Quiksilver’s recent acquisition of D.C. Shoes, a San Diego-based skate shoe company, is a good example of industry diversification. In order to match the wide distribution capabilities of Quiksilver with the shoe know-how of D.C., Quiksilver purchased the private company for $87 million in March.
A grown-up industry
After starting out in little places near the beach with sand on the floor, surfwear companies are moving into more corporate-like facilities. Sole Tech, for example, recently won the 2004 Golden Nugget Award for best office/professional building 60,000 square feet and over.
“It makes the employees feel secure, that they’re working for a strong company that cares about the environment employees work in,” says Brown.
“I think that it represents a parallel with the growth of the industry,” Brown continues. “The manufacturers each year have been moving into bigger and bigger buildings.”
Mauro, the editor of Surfer, agrees with Brown. “We have grown up,” he says. “It’s real business now.” OCM
–Michael Reicher is a freelance journalist based in Newport Beach.
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Surf Fashion Through The Decades
From Victorian bathing costumes to bare bottoms, those who love the sun have always made a fashion statement. Here’s a look at beach styles through the decades.
Pre-1900s: Pure Stoke
The sport of ancient Hawaiian kings, surfing was revered as a connection to the unpredictable beauty of the ocean. Fashion of the day had no barriers or limits. In fact, there were no tan lines because there was no clothing. It was surfing at its simplest.
1950s-60s: Boards on the Breast
Surf Fashion began in the heyday of Elvis Presley, when surfers “wore their surfboard shapers logos on their chests,” says Marie Case, founder of Board-Trac market research and a long-time Southern California resident. T-Shirts by Dale Velzy, Greg Knoll, and others were born out of pride and comfort. Nancy and Walter Katin, canvas boat cover designers from Surfside, California created some of the first surf trunks. Kanvas by Katin, Hang Ten, and Birdwell Beach Britches were among the first companies to manufacture surf trunks from canvas. The drawback of these trunks, though, was that the canvas chafed surfers and restrained flexibility.
1970s: Race to the Starting Line
Quiksilver and Ocean Pacific both designed more comfortable shorts made from lightweight fabric that was more flexible and comfortable to surf in. While Op claims to have been the first, Quiksilver actually was formed in Australia two years before Op, in 1970. However, Op indelibly etched short corduroy men’s shorts into everyone’s mind.
1980s: Gotcha!
Fluorescents blinded the world’s surf community. South African surf star Michael Thompson’s Gotcha and other companies rocked the day-glo. Quiksilver clothed its “new school” surfers such as Danny Kwock from Newport Beach in Echo beach prints. These bombastic board shorts included pink polkadots, triangles and checkerboards.
1990s: No More Flossing
Men solved chafing in the 1970s, women solved wedgies in the 1990s. In order to avoid bikini flossing, Quiksilver designed the first surfing shorts for women under its Roxy label. Girls could be more comfortable while surfing and still feminine, says Surfer Magazine editor Chris Mauro. With these shorter versions of men’s trunks, Roxy swung the women’s surf market wide open.
2003: Freak of Man
What’s your R&D budget on that pair of trunks? O’Neill recalibrated the industry’s approach to boardshorts in 2003 when it produced the Superfreak boardshorts. Minimal seams and exotic fabric, which both contribute to comfort, earned the company the Surf Industry Manufacturer’s Association product of the year award.
—Michael Reicher
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Bob McKnight: Surfing’s Most Powerful Executive
Bob McKnight is the Bill Gates of the surfwear industry. He is more than the CEO of the world’s largest surfwear company, Quiksilver. He is an industry giant who began selling t-shirts and surf trunks from shop-to-shop and now has fellow executives worldwide measuring his every word and marketing move. Earlier this year at an industry summit meeting in Cabo San Lucas, he was the keynote speaker who lured surf and apparel leaders from around the world. When McKnight speaks, the industry listens. And why not? On any industry list of note, he ranks as the most powerful figure. His company is the first to post $1 billion in annual sales. He has launched an entertainment network, is active in global efforts to save endangered undersea reefs and improve science education in classrooms and he revolutionized active beachwear for women with the red-hot Roxy apparel line. At 50, McKnight is the tsunami of his industry. OC METRO contributor Michael Reicher recently interviewed the USC business graduate, who now lives in Laguna Beach, on the state of his industry and Quiksilver’s strategies to open even more markets.
OCMETRO: I understand that Quiksilver believes it is important to take care of the core retailer. How you guys do that?
BOB MCKNIGHT: That’s where our business began globally. Whether it was in Torquay (Australia) with little surf shops or here in Newport at Newport Surf and Sport and Val Surf and Hobie. Those were our first three accounts. We are one of the few industries that have a very loyal following of core, small, mom and pop shops. And in our case, these shops carry equipment, which is surfboards, wax, wetsuits, and skateboards. Kids want to go there and want to hang out, look at the equipment, talk to the people in the shop, smell the wax, feel the vibe, hear the music and talk the talk.
It’s not so much that we take care of the shops to do more business, we do it because it is the most important part of what we do. It is our connection to the core of the sport. It’s almost like everyday you have to breathe. Everyday we have to make sure that we’re on a one-to-one relationship with these core accounts. They’re critical to not just Quiksilver, but to our whole industry. It’s really something we have that a Hollister and a Tommy Hilfiger, or people like that do not have. They do not have a core, loyal customer base that is really in the business of selling a lifestyle to the core audience.
OCM: So by selling the beach lifestyle, you end up giving back to everybody that’s involved. Is that right?
MCKNIGHT: My whole message to the SIMA (Surf Industry Manufacturers Association) group down in Cabo was that our biggest challenge, was that we should all be on the same page, to grow the pond. I give a couple of examples like McDonalds, where they proved that they could put a stand-alone McDonalds and it does X amount of business. They could do all the promotions they want, but it will still do X amount of business. The second that they put a whole bunch of their competitors around them and form a food court, they did more business and so did everybody else. I’m out to grow the pond and to influence people, in particular teenagers, around the globe that our lifestyle of surf, skate, snow is cool. We’ll all (Billabong, Hurley, Volcom) benefit instead of trying to kick each other’s ass. So the people whose ass we should be trying to kick are the private label guys, the importers, the wannabes, the guys that every time media says that surf is cool, they jump in. Those are the guys we should be working against, not against ourselves.
OCM: Do you mean the Gap and those kinds of companies?
MCKNIGHT: All of that. Every time surf is happening, the Gap, for example, carries Hawaiian shirts. I don’t want people to buy Gap Hawaiian shirts. I want them to buy ours, Billabong, Volcom, O’Neill or Rip Curl. We make better Hawaiian shirts, we’re the companies that take care of the beach environment, look after the surfers and look after the core accounts.
OCM: What do surf brands offer that the other lifestyles and brands would not?
MCKNIGHT: In a location where they might not know about us, such as the Midwest, why would someone buy us versus Hollister? That’s a good question. I think that they’d buy Hollister now more than us only because they’re uneducated about what the real thing is. I mean, we’re so busy spending time and energy looking after the core accounts and the ocean and the team, and events and advertising with the core media that we don’t have money to go out there and do a billboard in St. Louis. And we probably don’t have enough customer base to justify a store there yet. But that will all be in time. I can assure you that as we grow, meaning as the industry grows, and gains some breadth of product distribution and marketing in the Midwest that we’ll be there. It’s going to take some time, but we have plenty of time.
OCM: Do you think that having wave parks in the middle of Kansas will help?
MCKNIGHT: I think that would be great. But as we know they’re very expensive. There are wave parks that just slosh water around, but we’re talking about real waves. I think that will help. Skate parks will help, of course. The mountains help in the winter. All that stuff is helpful. Generally speaking, the business that’s done in the Midwest is done through malls. Aside from PacSunwear, there’s no other mall-based specialty retailer that really carries all of us brands. It goes PacSunwear and then right into private label.
OCM: What do you think of Pac Sun?
MCKNIGHT: I love them, but they’re not really in the business of featuring brands the way we would like them featured. I would love it if they made a huge deal in their stores about Quiksilver, Volcom, Billabong, D.C., all the brands that they carry, so that we get some marketing benefit out of it. I think that they definitely market the PacSunwear brand and then say, ‘come on in here and here’s a rounder of board shorts.’
OCM: OK. Let’s talk about global expansion. lans?How do you see the turmoil in the Middle East? How does that affect your expansion plans
MCKNIGHT: I think that the whole global unrest is frightening. When people get scared because of terrorism, they tend to first of all, not spend as much money, and number two, they don’t travel, which is bad. But generally what happens to counter that is Americans stay in America (and spend locally).
OCM: What do anticipate for future of the surf apparel market?
MCKNIGHT: I think that it will continue to stay healthy and growing. There are more participants now than ever, and growing. There’s probably three generations of people now that surf. There’s me, my father and my son. These activities are very youth-oriented, so you have a whole younger group doing these sports, rather than playing baseball, playing basketball, etc. And you have women now, girls that are doing it just as much as guys. So the market is definitely growing. And you add that to the very large youth market that’s already there, and more and more kids are gravitating towards these sports everyday. They’re growth sports, versus some of these other sports are in decline. So I think that you see a pond that will grow.
OCM: You mentioned the girls line as a new growth angle. Where do you see future Quiksilver growth—into more diverse product lines, or targeting new markets?
MCKNIGHT: We grow by all those mechanisms. We’re doing more product for the core, so that will grow. That includes denim, shoes, watches, eyewear, technical gear. We’ll definitely grow by adding new classifications, like this last year we added shoes, but there will be more things like that in our future. We will definitely grow geographically, into the inland empires of the world, meaning the Midwest here, Central and South America, Germany, Russia, Middle East, China, etc. We will definitely grow globally, just by plugging in all our brands and divisions and labels into our global platform, now that we own the Quiksilver brand, worldwide.
OCM: Ok, so do you have some companies in mind for acquisition?
MCKNIGHT: We always have things in mind, but there’s nothing on the table. But acquisition is part of our growth model. As we grow from our billion, one or two, that we’ll do this year, to our $3 billion (in gross revenues), acquisitions will be part of that.
—Michael Reicher
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Cheeky models and brooding hunks may strut spotlighted European runways wearing the newest in high fashion from Versace, Hugo Boss, and Gucci. But it is along Orange County’s meandering 42-mile shoreline that the styles and designs that define surfwear worldwide are dreamed up. From boardshorts to sundresses to sandals, the casual wear from Quiksilver, O’Neill, Hurley and others who call Orange County home have revolutionized casual wear from sea to sea and many zip codes in between. The industry began in the 1950s with a handful of surfboard shapers designing T-shirts promoting their boards. But as the allure of the ocean and its laid-back lifestyle has grown, so has the pursuit of the comfortable beach style. Entrepreneurs such as Bob McKnight, Kelly Gibson, and Bob Hurley sensed the trend and today are riding a wave of prosperity only dreamed about when Brian Wilson first wrote the quintessential surf tune “California Girls.” The surf apparel capital today is Orange County, a sun drenched slice of Southern California where major companies are breaking sales records and tripling in size in recent years. Quiksilver, based in Huntington Beach, was the first manufacturer to reach $1 billion in annual sales. Anaheim-based Pacific Sunwear is the world’s largest specialty surf retailer and is expected to reach $1.2 billion in sales this year. O’Neill Clothing, in Irvine, has grown from 50 employees to 150 in just three years. The growth has been explosive. It may not be headline news to those inside the marketing and design departments at local surfwear firms. But Wall Street and mainstream apparel companies like Gap and Abercrombie and Fitch have certainly taken notice and have tried to catch the same retail wave in recent years. In fact, total surfwear sales hit $4.14 billion in 2003, a staggering 25 percent increase in less than a year, according to the Surf Industry Manufacturers Association (SIMA). For major manufacturers like Quiksilver, growth has come from expanding globally and acquiring competitors. With exclusive retail stores in Times Square in New York City, mainland China and a growing number of European cities, Quiksilver is the 800-pound gorilla dominating the market. But the acquisition and diversification power of Quiksilver is not enjoyed by all brands. For example, Hawaiian Island Creations of Irvine is somewhat limited because of its relatively small marketing budget and inability to purchase other companies. “We’re a small fish in this big surfwear sea,” says HIC president Ron Yoshida. The company, which has been making surfboards for more 25 years, also is limited in apparel sales by retail traditions that impact its hard goods division. Local retailers, Yoshida says, prefer to carry surfboards exclusively of other shops. Therefore, if one shop in a particular town carries HIC boards (and clothes), then the other shops are reluctant to carry the clothes. But surfboard shaping helps sell the HIC clothing line, too. In 2003, Surfing Magazine gave HIC shaper, Eric Arakawa, its shaper of the year award. Also, Andy Irons, the current world champ, rides HIC boards, adding cool to the company brand. “We’d love to expand to other stores, but then we’d be competing directly with the big guys,” says Yoshida. “Which is hard, because their volume of sales allows for incredible build-outs.” Big brands, like Quiksilver and O’Neill invest major amounts of capital to create splashy in-store and window displays to capture consumers’ attention and gain greater market share. It is a hopeful sign for Yoshida that retail surfwear giant PacSun recently announced plans to expand offerings of smaller surf brands like HIC in select locations, a move that will boost the fortunes of those companies in the shadow of industry leaders like Quiksilver. Blonde rocket fuel According to industry insiders, much of the sales boom in recent years has been fueled by the explosion of the women’s surf market. “You have women now, and girls, that are [surfing] just as much as guys,” says Bob McKnight, CEO of Quiksilver. Quiksilver, which released its Roxy line of girls surfwear in 1991, has been credited by other apparel manufacturers wtih opening the door to this lucrative market. “The women’s market will continue to grow. At some point, it will eclipse the men’s market,” says Tony Cherbak, an industry analyst for Deloitte and Touche in Costa Mesa. Cherbak and some of the main manufacturers point out that women tend to buy more clothes than men. A girl might purchase six pairs of boardshorts, they say, while a typical guy “lives in his boardshorts.” Women have begun living in boardshorts, too, says Chris Mauro, editor of Surfer Magazine. The boom in female surfing, he says, has ignited a media frenzy, from last summer’s hit feature length film “Blue Crush” to “MTV Surf Girls.” Board-Trac Market Research, an Orange County company that follows industry trends, reports a 70 percent increase in the number of female surfers from 2001 to 2003. Females surfers now are accepted in the water. Mauro says that this is part of an American “renaissance period in surfing,” where “you can be accepted wearing and surfing whatever.” Renaissance stoke spreads to the heartland Mauro contrasts today’s renaissance period with the narrow-mindedness in the 1980s and 1990s. He says that back then, only one style of clothes and one style of shortboard (a type of surfboard usually under 6’5”) was acceptable. “Now it’s a very diversified culture,” says Mauro. “Surfing has aged. Dads are out surfing now with their kids.” As the surf community itself tolerates more styles, it also is getting used to sharing its style with mainstream America. “People sense that we’re on to something cool and individualistic,” says Mauro. Quiksilver helps spread the lifestyle by sponsoring “MTV Surf Girls,” a traveling reality show based on bronzed female competitors. “I have this big belief that the surf culture really influences all walks of life. From food, to fashion, to language, to clothing, to music, to art,” says McKnight. Quiksilver Entertainment, which executive produced the MTV show, also has created children’s books, videos, and other television programs to promote the surfing and action-sports lifestyles. Danny Kwock, a long-time Newport Beach surfer and president of Quiksilver Entertainment, says, “Kids in the Midwest call in and say ‘Now I know the difference between longboarding and shortboarding.” Quiksilver’s mission, according to Kwock and McKnight, is to “broaden the stoke,” or to spread the surf lifestyle as far and wide as possible, so that the entire industry can grow. “We invite everyone to the party,” says Kwock, who has encouraged other brands such as Hurley and Volcom to participate in “Surf Girls.” By broadening the sport’s appeal, Kwock says that surfers everywhere benefit. More jobs for surfers and cleaner water are two results of companies that give back to the industry, says Kwock. Giving back while on colorful surf explorations has been Quiksilver’s most unique philanthropy. In 1999 it renovated a 75-foot diving and survey vessel named The Crossing for a continuous science expedition/surf exploration. This voyage pairs marine biologists with pro surfers to check the health of reefs and explore uncharted surf spots. As these types of philanthropic/marketing missions grow because of increased sales, so do the number of people affected by the surf lifestyle. “Wall Street people used to tell us it was a bad business model because surfing was so niche,” says Kwock. “We said, ‘We don’t care what you think.’” But he also admits that Quiksilver has heard complaints from core surfers since it began spreading the surfing lifestyle. “There are always going to be people who don’t agree,” Kwock says. “There are more girls surfing, now, and most surfers accept it, but there will always be that guy who resents it.” Girls are just one example of the expansion of surfing through efforts such as Quiksilver’s. Kwock also mentions the disdain in some parts of the surf community at having more surfers in the water than before. “It’s a tough balance on how you do it,” he says. Since Quiksilver donates money and gives back to the surfing community, he believes that its role in crowding the lineup is mitigated. But according to Kwock, Quiksilver is different than some other surf companies. Because “the guys at the top [have] salt in their blood.” A young brand Other surf manufacturing executives argue that their employees’ blood contains just as much sea sale. Kelly Gibson, the President of O’Neill Clothing, says that most of his employees surf on a weekly basis. Surfing is at the core of O’Neill, which was formed when, in the 1950s, northern California surfer Jack O’Neill developed one of the first wetsuits. The company still manufacturers wetsuits in Santa Cruz, while the clothing line has been produced in Irvine since the early 1990s. Gibson says that in the last five to 10 years his company has been trying to “refocus” as a young brand, with a target market of 15 to 19. “You try to build a customer for life within that age group,” he says. “Once you own that customer, when he’s in his 20s and 30s, he’ll keep coming back to a brand that he really loved as a teen.” In order to connect better with youth, Gibson recently hired Thom McElroy as branding manager. McElroy, who owned his own communications firm, has worked previously with youth clients such as Vans footwear and Microsoft Xbox. Other innovations at O’Neill have stemmed from investment in product design teams. It now sends teams to New York, London and Tokyo to monitor the latest trends. “We’re not just rushing into a season,” he explains. “We’re more prepared.” This preparation he attributes to McElroy and his extensive market research, but much of the product creation is still instinctual, according to Gibson. “A lot of it comes from the gut. We’re big on doing the research, sure, but you want to make sure that it looks like O’Neill when it leaves the building as well,” says Gibson, who wears sandals and jeans to work. Giving back through sponsorships of young surfers is one way that O’Neill connects to the core surfer, but the main link to actual surfers for O’Neill and the other apparel manufacturers is obviously the retail stores, especially those that sell hardgoods. Core surf vs. copy surf Selling hardgoods, such as boards and wax, creates an environment where young surfers, who are also called “grommets” or “groms,” can “hang out, look at the equipment, talk to the people in the shop, smell the wax, feel the vibe, hear the music, and talk the talk,” says McKnight at Quiksilver. “The core retailer is selling the stoke of our industry right now,” says O’Neill’s Gibson. There has been a movement recently in the surf industry to protect and to reinvest in the core retail shops. For example, manufacturers such as Quiksilver O’Neill host surf shop challenges, where teams of surfers affiliated with a certain core retail shop compete against each other. They also invest heavily in store window displays. Against who are these core shops competing for business? Non-core retailers, who in many cases create their own private labels, are the largest threat to the surf apparel industry, according to manufacturers and industry observers. McKnight views the infiltration of non-core retailers such as the Gap, Hollister and Abercrombie and Fitch, as the biggest threat. “If there are too many malls, department stores, and specialty stores creeping in,” says McKnight, “it could really damage the distribution mode of our products.” He points to these stores’ mimicking the surf look and cutting their prices as the largest threats. Instead of having that core relationship with the surfers, these stores just copy the look of the lifestyle, says McKnight. “Every time media says that surf is cool, they jump in.” McKnight would rather people buy surf clothes made by the companies run by surfers, the originators of the lifestyle. “We’re the companies that take care of the beach environment, look after the surfers, and look after the core accounts,” he says. So while McKnight and the other manufactures are protecting the core surf shops, their only established channel to reach the middle of America is PacSun, a mall retailer, which does not carry hardgoods, but does carry the major surf brands along with its own private labels. “PacSun is a legitimate seller of the culture,” says Mauro, “but it’s really a boutique.” McKnight complains that PacSun, which was founded in Newport Beach, doesn’t give as much floor space and marketing attention to the endemic surf brands, such as Quiksilver and Billabong, as it does to its own private labels. “They’re great friends of ours,” says McKnight of PacSun executives, “but I need some exposure in those land-locked areas.” While PacSun did not comment on its Quiksilver’s floor space concerns, it did highlight some cooperative efforts between Pac Sun and its brands. “Our role is to work with our brands to satisfy the customer’s desire for fashion products within this lifestyle parameter,” says Tim Harmon, president of Pacific Sunwear. One program developed by PacSun and its brands is their preseason testing program, where brands can introduce a new item into certain PacSun stores. “The purpose of preseason testing,” says Harmon, “is to validate the next season’s offerings while mitigating the risk for the brands and PacSun.” Last season, the retail giant tested boardshorts and discovered that solids and pieced styles, or those with multiple patterns, would be more popular than anticipated. Because of that testing, additional styles were created and ordered, and PacSun had a very successful season as a result. “No one wants 15,000 units of a bad design represented in PacSun across the country,” Harmon says. “It’s bad for the brand and it’s bad for PacSun.” And what’s bad for PacSun has a significant impact on the industry. Pac Sun has 707 stores located in all 50 states and Puerto Rico. Harmon says that his main competition comes from other lifestyle concepts in the casual apparel industry, such as preppy, hip hop and gothic/alternative. To target the urban/hip hop consumer, Pacific Sunwear developed its d.e.m.o. chain, a series of stores that cater to the urban lifestyle. According to the company’s website, much of the stores’ fashion influence comes from hip hop music and personalities. Besides PacSun, the other specialty retailers that compete for the surfing lifestyle consumer are Hollister and the mainstream retailers mentioned earlier. McKnight hopes that consumers will embrace authentic boardriding brands, such as Quiksilver, Billabong and Hurley, instead of the “wannabes” like the Gap and Hollister. Mastering global uncertainty Authentic brands embracing each other may be required to expand into some Eastern European markets, which according to Casey Koteen, editor of Transworld Surf Biz, present the newest opportunities for growth. Koteen says that some of the European business communities are still mysterious. He points to the Chek Republic and Poland as examples where the cultural differences, business regulations and copyright laws are still being sorted out. McKnight says Quiksilver’s target markets include Central and South America, Germany, Russia, Middle East, and China. But current world unrest inhibits some growth, says McKnight. He explains that much of the surfwear business is based on people purchasing clothes while on beach vacations. Since some people have been traveling less, global unrest takes a toll on sales. Beyond the beach In a major industry turning point, surfwear giants have expanded into apparel and equipment for other action sports, such as snowboarding and skateboarding, linking the allure of the beach with the thrill of the downhill run. The surfing and skate markets are both targeted by Sole Technologies, which manufactures shoes under three distinct brands. One of its brands, Etnies, is designed for the action sports enthusiast, who might surf and skate. The other two are designed for different styles of skateboarders. Besides building market share, this diversification allows Sole to weather downcycles in particular markets, says Sole Technology Vice President of Marketing Don Brown. “Whether the surf market goes up or down in the future,” Brown says, “we’ve got a diversified portfolio. We are more than just a surf company.” Deloitte analyst Cherbak agrees with the advantages of diversification. The O.C. companies that have expanded to the whole board-sports lifestyle, he says, and haven’t “pidgeon-holed” in a particular sport, will do the best. Quiksilver’s recent acquisition of D.C. Shoes, a San Diego-based skate shoe company, is a good example of industry diversification. In order to match the wide distribution capabilities of Quiksilver with the shoe know-how of D.C., Quiksilver purchased the private company for $87 million in March. A grown-up industry After starting out in little places near the beach with sand on the floor, surfwear companies are moving into more corporate-like facilities. Sole Tech, for example, recently won the 2004 Golden Nugget Award for best office/professional building 60,000 square feet and over. “It makes the employees feel secure, that they’re working for a strong company that cares about the environment employees work in,” says Brown. “I think that it represents a parallel with the growth of the industry,” Brown continues. “The manufacturers each year have been moving into bigger and bigger buildings.” Mauro, the editor of Surfer, agrees with Brown. “We have grown up,” he says. “It’s real business now.” OCM –Michael Reicher is a freelance journalist based in Newport Beach. Back to top Surf Fashion Through The Decades From Victorian bathing costumes to bare bottoms, those who love the sun have always made a fashion statement. Here’s a look at beach styles through the decades. Pre-1900s: Pure Stoke The sport of ancient Hawaiian kings, surfing was revered as a connection to the unpredictable beauty of the ocean. Fashion of the day had no barriers or limits. In fact, there were no tan lines because there was no clothing. It was surfing at its simplest. 1950s-60s: Boards on the Breast Surf Fashion began in the heyday of Elvis Presley, when surfers “wore their surfboard shapers logos on their chests,” says Marie Case, founder of Board-Trac market research and a long-time Southern California resident. T-Shirts by Dale Velzy, Greg Knoll, and others were born out of pride and comfort. Nancy and Walter Katin, canvas boat cover designers from Surfside, California created some of the first surf trunks. Kanvas by Katin, Hang Ten, and Birdwell Beach Britches were among the first companies to manufacture surf trunks from canvas. The drawback of these trunks, though, was that the canvas chafed surfers and restrained flexibility. 1970s: Race to the Starting Line Quiksilver and Ocean Pacific both designed more comfortable shorts made from lightweight fabric that was more flexible and comfortable to surf in. While Op claims to have been the first, Quiksilver actually was formed in Australia two years before Op, in 1970. However, Op indelibly etched short corduroy men’s shorts into everyone’s mind. 1980s: Gotcha! Fluorescents blinded the world’s surf community. South African surf star Michael Thompson’s Gotcha and other companies rocked the day-glo. Quiksilver clothed its “new school” surfers such as Danny Kwock from Newport Beach in Echo beach prints. These bombastic board shorts included pink polkadots, triangles and checkerboards. 1990s: No More Flossing Men solved chafing in the 1970s, women solved wedgies in the 1990s. In order to avoid bikini flossing, Quiksilver designed the first surfing shorts for women under its Roxy label. Girls could be more comfortable while surfing and still feminine, says Surfer Magazine editor Chris Mauro. With these shorter versions of men’s trunks, Roxy swung the women’s surf market wide open. 2003: Freak of Man What’s your R&D budget on that pair of trunks? O’Neill recalibrated the industry’s approach to boardshorts in 2003 when it produced the Superfreak boardshorts. Minimal seams and exotic fabric, which both contribute to comfort, earned the company the Surf Industry Manufacturer’s Association product of the year award. —Michael Reicher Back to top Bob McKnight: Surfing’s Most Powerful Executive Bob McKnight is the Bill Gates of the surfwear industry. He is more than the CEO of the world’s largest surfwear company, Quiksilver. He is an industry giant who began selling t-shirts and surf trunks from shop-to-shop and now has fellow executives worldwide measuring his every word and marketing move. Earlier this year at an industry summit meeting in Cabo San Lucas, he was the keynote speaker who lured surf and apparel leaders from around the world. When McKnight speaks, the industry listens. And why not? On any industry list of note, he ranks as the most powerful figure. His company is the first to post $1 billion in annual sales. He has launched an entertainment network, is active in global efforts to save endangered undersea reefs and improve science education in classrooms and he revolutionized active beachwear for women with the red-hot Roxy apparel line. At 50, McKnight is the tsunami of his industry. OC METRO contributor Michael Reicher recently interviewed the USC business graduate, who now lives in Laguna Beach, on the state of his industry and Quiksilver’s strategies to open even more markets. OCMETRO: I understand that Quiksilver believes it is important to take care of the core retailer. How you guys do that? BOB MCKNIGHT: That’s where our business began globally. Whether it was in Torquay (Australia) with little surf shops or here in Newport at Newport Surf and Sport and Val Surf and Hobie. Those were our first three accounts. We are one of the few industries that have a very loyal following of core, small, mom and pop shops. And in our case, these shops carry equipment, which is surfboards, wax, wetsuits, and skateboards. Kids want to go there and want to hang out, look at the equipment, talk to the people in the shop, smell the wax, feel the vibe, hear the music and talk the talk. It’s not so much that we take care of the shops to do more business, we do it because it is the most important part of what we do. It is our connection to the core of the sport. It’s almost like everyday you have to breathe. Everyday we have to make sure that we’re on a one-to-one relationship with these core accounts. They’re critical to not just Quiksilver, but to our whole industry. It’s really something we have that a Hollister and a Tommy Hilfiger, or people like that do not have. They do not have a core, loyal customer base that is really in the business of selling a lifestyle to the core audience. OCM: So by selling the beach lifestyle, you end up giving back to everybody that’s involved. Is that right? MCKNIGHT: My whole message to the SIMA (Surf Industry Manufacturers Association) group down in Cabo was that our biggest challenge, was that we should all be on the same page, to grow the pond. I give a couple of examples like McDonalds, where they proved that they could put a stand-alone McDonalds and it does X amount of business. They could do all the promotions they want, but it will still do X amount of business. The second that they put a whole bunch of their competitors around them and form a food court, they did more business and so did everybody else. I’m out to grow the pond and to influence people, in particular teenagers, around the globe that our lifestyle of surf, skate, snow is cool. We’ll all (Billabong, Hurley, Volcom) benefit instead of trying to kick each other’s ass. So the people whose ass we should be trying to kick are the private label guys, the importers, the wannabes, the guys that every time media says that surf is cool, they jump in. Those are the guys we should be working against, not against ourselves. OCM: Do you mean the Gap and those kinds of companies? MCKNIGHT: All of that. Every time surf is happening, the Gap, for example, carries Hawaiian shirts. I don’t want people to buy Gap Hawaiian shirts. I want them to buy ours, Billabong, Volcom, O’Neill or Rip Curl. We make better Hawaiian shirts, we’re the companies that take care of the beach environment, look after the surfers and look after the core accounts. OCM: What do surf brands offer that the other lifestyles and brands would not? MCKNIGHT: In a location where they might not know about us, such as the Midwest, why would someone buy us versus Hollister? That’s a good question. I think that they’d buy Hollister now more than us only because they’re uneducated about what the real thing is. I mean, we’re so busy spending time and energy looking after the core accounts and the ocean and the team, and events and advertising with the core media that we don’t have money to go out there and do a billboard in St. Louis. And we probably don’t have enough customer base to justify a store there yet. But that will all be in time. I can assure you that as we grow, meaning as the industry grows, and gains some breadth of product distribution and marketing in the Midwest that we’ll be there. It’s going to take some time, but we have plenty of time. OCM: Do you think that having wave parks in the middle of Kansas will help? MCKNIGHT: I think that would be great. But as we know they’re very expensive. There are wave parks that just slosh water around, but we’re talking about real waves. I think that will help. Skate parks will help, of course. The mountains help in the winter. All that stuff is helpful. Generally speaking, the business that’s done in the Midwest is done through malls. Aside from PacSunwear, there’s no other mall-based specialty retailer that really carries all of us brands. It goes PacSunwear and then right into private label. OCM: What do you think of Pac Sun? MCKNIGHT: I love them, but they’re not really in the business of featuring brands the way we would like them featured. I would love it if they made a huge deal in their stores about Quiksilver, Volcom, Billabong, D.C., all the brands that they carry, so that we get some marketing benefit out of it. I think that they definitely market the PacSunwear brand and then say, ‘come on in here and here’s a rounder of board shorts.’ OCM: OK. Let’s talk about global expansion. lans?How do you see the turmoil in the Middle East? How does that affect your expansion plans MCKNIGHT: I think that the whole global unrest is frightening. When people get scared because of terrorism, they tend to first of all, not spend as much money, and number two, they don’t travel, which is bad. But generally what happens to counter that is Americans stay in America (and spend locally). OCM: What do anticipate for future of the surf apparel market? MCKNIGHT: I think that it will continue to stay healthy and growing. There are more participants now than ever, and growing. There’s probably three generations of people now that surf. There’s me, my father and my son. These activities are very youth-oriented, so you have a whole younger group doing these sports, rather than playing baseball, playing basketball, etc. And you have women now, girls that are doing it just as much as guys. So the market is definitely growing. And you add that to the very large youth market that’s already there, and more and more kids are gravitating towards these sports everyday. They’re growth sports, versus some of these other sports are in decline. So I think that you see a pond that will grow. OCM: You mentioned the girls line as a new growth angle. Where do you see future Quiksilver growth—into more diverse product lines, or targeting new markets? MCKNIGHT: We grow by all those mechanisms. We’re doing more product for the core, so that will grow. That includes denim, shoes, watches, eyewear, technical gear. We’ll definitely grow by adding new classifications, like this last year we added shoes, but there will be more things like that in our future. We will definitely grow geographically, into the inland empires of the world, meaning the Midwest here, Central and South America, Germany, Russia, Middle East, China, etc. We will definitely grow globally, just by plugging in all our brands and divisions and labels into our global platform, now that we own the Quiksilver brand, worldwide. OCM: Ok, so do you have some companies in mind for acquisition? MCKNIGHT: We always have things in mind, but there’s nothing on the table. But acquisition is part of our growth model. As we grow from our billion, one or two, that we’ll do this year, to our $3 billion (in gross revenues), acquisitions will be part of that. —Michael Reicher |
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