Innovation

Return of the underdog

Written by Richard Wright

Micky McDonald was vacationing in Austria in 1988, when he happened upon a small ski-rental outfit that encouraged him to try his hand at snowboarding. Despite the primitive equipment—”ski boots and bindings literally nailed to a board,” says McDonald—after one run, he was hooked.

So began an adventure that would lead McDonald, 18 years later, to ownership of Vancouver-based Westbeach Apparel Canada Ltd., Canada’s oldest maker of clothing for snowboarders. “It became a totally consuming passion,” says McDonald. How else to explain this Scotsman’s fierce loyalty to a quintessentially Canadian company that has wiped out on more moguls in its 28-year run than any neophyte boarder.

Westbeach had struggled through the arrival of well-heeled competitors, three owners and fluctuating weather conditions, when inexperienced leadership and a lack of financial controls put the company on a slippery slope. The teetering firm finally toppled in 2005, when a truck strike closed the Port of Vancouver, leaving Westbeach unable to ship products to customers. By May 2006, the cash-strapped firm had filed for bankruptcy.

While Westbeach is now carving a new path, its story provides a cautionary tale for any company looking to grow without the right leadership skills. “I was inexperienced as a CEO,” says McDonald, “I was a whiz at sales and marketing, but not at bottom-line accounting and financial control. That was a mistake that cost us badly.”

Founded in 1979 by Chip Wilson (who later founded Lululemon Athletica Inc.) and three partners, Westbeach initially sold clothing designed for skaters and surfers before it spied opportunity in the growing snowboard market. In 1987, the firm became the world’s first manufacturer of snowboard clothing, and its edgy, innovative designs won favour with the young, hip boarder crowd.

McDonald, too, became a fan. On a snowboarding vacation in Whistler, B.C., he’d noticed that everyone was wearing Westbeach. “The product blew me away.” So much so that in 1989 the former marketing manager quit his job to begin distributing Westbeach clothing in the U.K. He would eventually open a new office in Innsbruck, Austria.

By 1996, Westbeach had three retail stores, a staff of more than 40, a list of 1,000 dealers carrying Westbeach products worldwide. The company’s sales reached $12.2 million.

Despite that success, says McDonald, the company was perennially cash-poor. Snowboarding became the “it” sport, and Westbeach poured money into inventory and marketing on the assumption the growth would continue. Instead, the market slowed and Westbeach struggled. Indeed, financial troubles plagued the firm over the next four years, as the company changed hands three times. In 1997, Westbeach was sold to U.S. skateboard maker Morrow S.B. Inc. “But unbeknownst to Westbeach at the time,” says McDonald, “Morrow was also in financial difficulty.” Two years after paying US$4.35 million to purchase the company, Morrow sold Westbeach to West Palm Beach, Fla.-based Wyndcrest Partners Ltd. for US$2.45 million. Wyndcrest dissolved in 2001, and Westbeach fell to partner Jeff Kukes. McDonald, who had watched Westbeach rise and fall, was invited to take the helm.

Westbeach had posted a loss of $1.6 million in 2001. “All the big players had joined the game: Nike, Adidas, Salomon. There was this little Canadian company with huge brand equity that had never really had a chance,” says McDonald. “It had been passed from pillar to post, suffered every kind of financial difficulty, and I wanted to root for the underdog.”

To reduce costs quickly, McDonald retreated from the U.S. market. “We were spending 80% of our marketing on a market that produced 20% of our revenue. My plan was to dominate our own backyard,” says McDonald. He also began sourcing his products from Vietnam rather than local manufacturers.

Still, McDonald acknowledges his enthusiasm outstripped his abilities. Even while making some positive strides, he was learning on the job. In an attempt to become all things to all markets, for example, Westbeach strayed from its core market—outerwear—and began developing products such as women’s purses and miniskirts that had no long-term potential.

McDonald admits he was also seduced by distributor interest. “If you have a good brand, people want it. So we’d get distributors begging for our product even in markets that will earn us just peanuts,” says McDonald. “It’s flattering.” As a result, Westbeach spread itself too thin, investing in markets with little or no return.

An absentee owner didn’t help. McDonald says he was handicapped in part by Kukes’ lack of passion and physical distance from the action. Based in West Palm Beach, Kukes visited Vancouver only once between 2002 and 2005. “He wasn’t personally embedded in the firm and didn’t understand how it operated,” says McDonald. “He wasn’t there to give me answers to questions I needed answered.”

Though sales stalled, the profit picture improved, from a $600,000 loss in 2002 to break even in 2003. “In 2004, we actually made a couple of hundred thousand,” boasts McDonald. But with the firm’s nose just above water, says McDonald, “2005 hit us like the perfect storm and basically took us right out.”

First, a trucker strike closed the Port of Vancouver for June and July, leaving most of Westbeach’s fall line on the docks. “As much as our retailers have empathy, if our competitors are importing through Seattle or Calgary or Toronto, they’ve delivered on time,” says McDonald.

Then, McDonald increased marketing to move products. “But if you have lower revenue and you put more money into marketing to try to drive the product already in stores so the retailers have some success, then you’re spending money you don’t have,” he says. “We lost $700,000 to the trucker strike, and we didn’t adjust our spending appropriately.”

McDonald believed he had Kukes’ agreement to ride out the storm with a spending splurge, but he didn’t. “I wanted to see it work, but I was tired of losing money,” Kukes told PROFIT. “Overheads were disportionately high for the volume of business being done.” With $2.3 million outstanding on its line of credit with HSBC Bank Canada, on May 5, 2006, Westbeach filed for bankruptcy.

McDonald found it difficult to walk away from a company he believed had potential. (Westbeach already had orders worth $6.5 million for the 2006 ski season.) So, that July, McDonald and two local Vancouver entrepreneurs—Frankie Hon, who owns the firm that manufactured Westbeach clothing, and Khanh To, a retired factory owner—bought Westbeach out of bankruptcy.

Khanh To agrees much of Westbeach’s troubles stemmed from an absentee owner. McDonald steered Westbeach, he says, but at critical junctures, he needed Kukes’ participation and just didn’t get it. With three committed owners, To says, “We’re optimistic about the future.”

Already, Westbeach has trimmed its workforce and it recently moved from its pricey Gastown location in downtown Vancouver to smaller, less expensive facilities on Powell Street.

The company has brought in an experienced financial manager, Derek Anderson, formerly of PricewaterhouseCoopers, to complement McDonald’s marketing savvy. “He knows the numbers and he’s a good strategist,” says McDonald. Anderson has already pruned the company’s product list, and reduced the number of distributors.

“On the product side, the plan is to focus on what we’re good at,” says McDonald. “There was a tendency to dilute the brand. What people really expect from us is good outerwear. If we go back to our core product, we cut out a lot of development cost, sampling costs.”

McDonald is also compiling an advisory board. “The thing to do is to have a good group of mentors,” he says, “people who’ve done it before, operated businesses successfully.”

Still, experts and mentors are all very well, says McDonald, but the best insurance against personal inexperience is personal experience. He has learned from his mistakes, and he’s grateful. “It’s hard to say,” admits McDonald, “but I’ve learned a lot in the last four years at somebody else’s expense.”

Originally appeared on PROFITguide.com
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