Changing retail wave left surf brand in choppy seas

The once high-flying company has fallen victim to its own shortcomings, writes Elizabeth Knight.

The path of Billabong's demise is littered with poor investment decisions, strategy blunders and flat-footed management responses to structural changes in market conditions. The poor broader retail environment just exacerbated the problems.

When entrepreneurial surfer Gordon Merchant created the Billabong brand in the 1970s, it had serious credibility. In the tight and difficult-to-impress surfing circles, it passed all the tests to receive a coveted stamp of approval. For more than 20 years it grew its popular Billabong surfwear brand - selling the must-have product primarily to small surfwear shops dotted around Australia's vast coastline and increasingly into international markets.

It wasn't until after 2000, when the company listed on the Australian Stock Exchange, that it started to broaden its horizons - buying new brands such as VonZipper and Element to add to its portfolio.

It was during the mid-2000s, when Billabong was at its peak growth period, that the seeds were sown for its ultimate corporate challenge.

The retail landscape had started to change and the small surf shops that made up Billabong's retail arteries for distribution began to consolidate. Larger operators started buying up smaller shops, dividing them into massive territories. Many of the small independents that remained formed loose co-operative buying groups, covering multiple stores. Where once the big manufacturers such as Billabong and Quiksilver had the product and could command terms, the power was shifting to the retail operators who started to dictate who the surf brands were able to sell through.

As early as 2004 Billabong had a small number of retail stores, but in response to the growth in the mega retail groups it took a massive strategic decision to dive deeply into retail to get control of the relationship with its customers.

At the start of this decade it had 639 stores around the world and it had morphed into a vertically integrated manufacturer and retailer of surf, skate and ski gear and various accessories.

Further complicating matters, some of the large retailers that were not bought out by Billabong were also taking the bit between their teeth and expanding into manufacturing. The market was getting messy and crowded.

But history shows there was no earnings harvest from the myriad brand acquisitions. Meanwhile, this slew of expensive debt-infused acquisitions had placed a strain on the company's balance sheet. It was a dangerous pincer - increased interest costs and slowing cash flow.