Analysis of Volcom Inc.
Volcom Inc. SWOT Volcom was acquired by PPR in May 2011, I did the analysis from the standpoint that Volcom’s management still remained independent. 1) Volcom’s advertising and promotional strategy consisted of athlete sponsorship, print advertisements, branded events, online marketing, branded retail stores, music, film, and the Featured Artist Series.
The company has stayed true to its board sport heritage since day-one recognizing a portion of their customers to be “poseurs” or groups of people who want to fit in with the current fad but have no real connection to what the brand represents. Through their corporate sponsorship of extreme sport athletic events and the development of both a music label & production company, Volcom has found a low-cost grassroots way to market their product line to loyal customers.
This doesn’t mean that Volcom doesn’t value the business of the “poseur” or fad-follower customers, but management has maintained a strategy that will target and maintain their core market without “selling out”. Volcom has established itself as a true board sport company, producing products & a marketing strategy in-line with that concept. This strategy runs from the bottom all the way up to top management; when examining the board of directors you find that the majority of professional in key roles have come from a skate, surf, and board background.
Who better to design the overall direction for a company looking to stay true to its extreme sport roots than people who have been involved in that very industry their entire lives. Volcom has continue to integrate the mentality of those involved in extreme sports throughout their business strategy; the companies very logo “The Volcom Stone” represents the euphoric state one feels when riding, whether it’s on snow, water, or concrete.
The very philosophy behind the brand, outlined as “youth against establishment,” demonstrates how management is in touch youth culture and the cultivation of young creative thinking. Volcom was established during a period of time when skating, surfing and boarding was looked down upon, the philosophy youth against establishment only help to solidify the brand loyalty of people who connected with this movement. “The people behind the company consider themselves to be a family of people not willing to accept the suppression of the established ways. (Volcom Case 22). Overall when evaluating this company you couldn’t ask for a management team and marketing strategy more in-line with the company’s mission and philosophy; this is a company created by the very same type of people that Volcom is targeting. 2) Volcom’s distribution strategy is somewhat unique but to date has been very effective as the company has expanded across the United States and into markets abroad.
The company has practiced a reinforced its elite brand image by selling it in distribution areas that promote this concept, such as independent skate and surf shops (promoting the ideal that Volcom was created by boarders for boarders) and high-end retail chains. Volcom specifically targeted retailers in that were already involved in the board sport market, thus maintaining the Volcom brand and also quickly and effectively making the Volcom product line available to consumers who appreciate the product.
Retails companies like Pacific Sun and Zumiez were perfect outlets to distribute the Volcom product since they already attracted consumers involved in the board sport concept. Not only was Volcom’s management team very effective at distributing their products to retailers that would promote their brand image but they also collaborated with these specialty retailers by providing in-store marketing displays, which included racks, wall units, and point-of-purchase materials that promote its brand image.
To date Volcom’s management team has been very effective in both promoting their brand name as well as practicing savvy business strategies to get their product line recognize and purchased. Would stood out the most when examining Volcom’s distribution strategy was their persistence in maintaining the brand name without compromise. From the ground up Volcom has practiced a distribution strategy in-line with its mission, always seeking to maintain the concept of a company that was created by boarders for the youth in revolt or anyone involved in the board sport culture.
Strengths * Management understands their customers base; CEO was formerly a Quicksilver sponsored surfer as well as a marketing professional experience in this industry, managements background in the extreme sports world has promoted a management direction that has protected the authenticity of the brand – Management is constantly evaluating its outsourced production ensuring quality control and flexibility in re-evaluating sourcing and manufacturing decisions * Clothing line suits a loyal niche market, specifically people who are involved in extreme sports product line is diverse including clothing for men, boys, girls, footwear, swim, snow and with the purchase of Electric: sunglasses, goggles, bags and belts * Low cost and effective grassroots marketing design: – Sponsorship of the events & athletes (Shaun White) that are synonymous with the extreme sport circuit (great advertising to their target market) i. e. Featured Artiest Series Diversified their products including a record label which has signed several successful bands (that perform music particularly popular with their customers) and produces extreme sports movies both continue to contribute to their market exposure – Produced effective print ads in popular extreme sports magazines, involved in online marketing – Branded retail stores * Volcom sports an exciting and interactive website; particularly targeted at the youth and extreme sport enthusiasts; provides a venue where customers can “hang out” and communicate with one another Website provides updates on extreme sport contest, and provides free videos of their sponsored athletes * Large distribution network: lifestyle retailers like Pacific Sun and Zumiez along with large amounts of independent surf shops and retail stores, additionally they have about 20 of their own retail stores * Integrated SKU, that provided management with a summary of all departments as well as a summary report outlining business and financial trends * Sound financials with large amounts of cash on-hand and high earnings yield
Weakness * Clothing products are very interchangeable with competitors * Target customers (youth) are very unpredictable and often change their taste and sense of style * Large segment of their customers aren’t true extreme sport followers but are what is commonly called a “poseur”, and will only purchase the Volcom product to fit the lifestyle; causing reduced brand loyalty and an increased opportunity for Volcom clothing to be part of a phase that eventually passes Volcom products are constantly in jeopardy of being a fad, opening the possibility to lose large amounts of revenue * Huge amount of extremely similar competitors which limits its margin potential * Volcom is reliant on outsourced production companies, therefore they can be influenced by the financial woes (international market exposure) * Reliant on external distributors like Pacific Sun, a company who has been facing financial difficulties, forced to close stores and reduce inventories
Opportunities * To date Volcom has expanded smartly overseas, and there are still opportunities to continue expansion considering overseas business makes up less than 45% of its revenue * Volcom can continue to aggressively expand its effective licensing strategy into more foreign markets due to its low cost * Licensing strategy targeting existing apparel makers, has inexpensively built a Volcom brand name in foreign markets.
As licensing agreements expire they can greatly increase their profit margins overseas by taking over complete operational control * Volcom’s acquisition of Electric, a popular sunglass brand can help Volcom branch out into new markets that can enable the company to collect a more diverse customer base * Volcom is sitting on close to $80 million in cash with limited debt.
This gives them the ability to invest large amounts of money in R&D and expansion Threats * Large amounts competitors all with very similar and interchangeable products (very substitutable) – Good possibility of new entrants to the market, many extreme sport athletes start their own brand lines after making a name in the competitive circuit (new competition) * Majority of distribution network depends on independent retail stores, (i. e.
Pac Sun), Volcom has no influence on their success or management; if retailers fail Volcom loses distribution channels and in turn revenue lines * As Volcom’s licensing agreements overseas expire and they take over operational control with reduced understanding of foreign markets, Volcom runs the risk of becoming out of touch with local trends * Gross margin, operating margin, and MFI return on capital have been trending down since the IPO in 2005 * Volcom’s cash is being tied up in ever increasing inventory and accounts receivable tallies, if left unresolved this could reduce the amounts of cash Volcom can spend on expansion and R&D Financial Analysis I. Liquidity Ratios Current Ratio = Current Assets/Current Liabilities| VLCM| 2006| 8. 8| 2007| 6. 02| 2008| 6. 5|
The current ratio is a short-term indicator of a company’s ability to pay its short-term liabilities from short-term assets; how much of current assets are available to cover each dollar of current liabilities. If a company’s current ratio is below 1 then the company may have problems meeting its short-term obligations. Volcom has consistently held a strong Current Ratio providing that they will have no trouble meeting their short-term liabilities. Cash Ratio = Cash + Cash Equiv / Current Liabilities | VLCM| 2006| 5. 5| 2007| 3. 17| 2008| 2. 9| The cash ratio is most commonly used as a measure of company liquidity. It can therefore determine if, and how quickly, the company can repay its short-term debt.
Volcom again is very liquid with a strong Cash Ratio across all three years; this measures the amount of cash & equivalents on hand compared to liabilities. II. Profitability Ratios Net Profit Margin = Net Income/ Net Sales| VLCM| 2006| 28. 1%| 2007| 25. 6%| 2008| 13. 3%| Net Profit Margin shows how much after-tax profits are generated by each dollar of sales. As stated earlier in my SWOT, each year since 2005 (IPO) Volcom’s profit margins have been reducing. Since, Volcom continues to increase its revenues this ratio shows that the company needs to better manage its costs. ROI = Net Income / Shareholders’ Equity| VlCM| 2006| 21. 5%| 2007| 19. 3%| 2008| 11. 2%|
Return on Investment measures the rate of return on the total assets utilized in the company; a measure of management’s efficiency, it shows the return on all assets under its control, regardless of the source of financing. Volcom has been less efficient using its assets to generate returns as the company progressed to 2008, this can most likely be attributed to the beginnings of the mortgage backed security crisis and ensuing financial downturn. III. Activity Ratios Inventory Turnover = Net Sales / Total Inventory| VLCM| 2006| 12. 34| 2007| 13. 14| 2008| 15. 57| The Inventory Turnover ratio should be compared against industry averages. A low turnover implies poor sales and, therefore, excess inventory. A high ratio implies either strong sales or ineffective buying.
Volcom has a high turnover ratio and for a clothing distributor their numbers are right in line with average; allowing us to conclude that Volcom has had strong sales over the past three years. Fixed Asset Turnover = Sales / Fixed Assets| VLCM| 2006| 17. 8| 2007| 10. 99| 2008| 12. 5| Fixed asset turnover measures the utilization of the company’s fixed assets; measures how many sales are generated by each dollar of fixed assets. Volcom’s Fixed Asset ratio has been steadily declining over the past 3 years, allowing us to conclude that as the company has expanded they haven’t been as effective in using their fixed asset investments to generate revenue. IV.
Leverage Ratios Debt to asset ratio = Total debt / total assets| VLCM| 2006| 5. 8%| 2007| 14. 6%| 2008| 12. 6%| The debt to asset ratio measures the extent to which borrowed funds have been used to finance the company’s assets. Volcom’s debt/asset ratio is fairly low, meaning that its assets are financed more through equity rather than debt. Companies with high ratios are placing themselves at risk, especially in an increasing interest rate market. Current Liabilities to equity = Current Liabilities / Shareholders’ Equity| VLCM| 2006| 11. 5%| 2007| 16. 9%| 2008| 14. 1%| This ratio measures the short-term financing portion versus that provided by owners.
A ratio generally means that a company has been aggressive in financing its growth with debt. This can result in volatile earnings as a result of the additional interest expense. Volcom’s ratio is generally pretty low, affectively growing the company without large amounts of reliance on short-term financing which in turn protects them from high interest expenses. Analysis Volcom is a very solid company, with a management team that is very in touch with its target market, or the board culture. They’ve created a Volcom brand name that is recognized by anyone who is involved with extreme sports, and at every level of business the company has attempted to promote their mission and philosophy of a true board sport company.
In terms of their brand name, I can provide no recommendations as how to improve it, they are a company who knows who they are and what they want to be. To date Volcom has practiced extremely effect distribution methods across the United States and overseas, domestic targeting retailers that are both in-line with their core values and already have ties to the board sport movement. Intelligent acquisitions of retailers, opening of Volcom brand stores, and the buying out of Electric has allowed for the effective expansion of the company throughout the U. S.. Overseas their practice of licensing agreements have been an extremely effective method of bringing their product lines to new markets at a low-cost.
This is mainly due to Volcom being able to utilize overseas retailers expertise of local markets and trends. The only real concern I have with Volcom is as their licensing agreements expire and the company takes over operational control overseas, Volcom will need to continue to stay in-touch with the local markets, and effectively manage their increased international exposure. As Volcom increases its stake overseas, there is great potential to generate large capital returns but also experience huge loses. If they continue to stick to the Volcom core values and maintain an intelligent strategy to expand overseas, I see Volcom as a company that will be around for years to come.