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Unlocking Billabong Group’s Value

When things aren’t so swell: the story of Billabong
On 27 August 2012, new Billabong CEO Launa Inman strode onto the platform to give an audience of business analysts, journalists and executives a presentation entitled ‘Unlocking Billabong Group’s Value’. Having only been appointed to the position in May following a brief period as a consultant to the ailing business, Inman could have been forgiven for feeling a little nervous. After all, Billabong had once been one of the darlings of Australian business, appearing to have taken on the world and won. By 2012, however, after more than four decades in business, the company was facing the very real threat of being bought cheaply by another business (itself an irony given Billabong’s favourite growth strategy of buying up other businesses around the world). It was collapsing under the weight of a perfect storm of debt; economic recessions in several of its key markets; and unfavourable currency movements as the Australian dollar grew in strength.
Should we be surprised at this situation? Of course not! Organisations rise and fall all the time, and nowhere is this more the case than in the business sector. Every decade, hundreds of the businesses that make up the lists of the ‘biggest and best’, such as the Fortune 500, simply disappear; they are acquired by competitors, often suffering from bad management and poor leadership, and falling victim to rapidly changing trends in technologies, fashions and customer tastes.
The great management writer Peter Drucker called it ‘the theory of the business’. Organisations, quite logically, continue to do what made them successful in the first place. They build plans and processes and policies and procedures around these things, making it almost impossible to change when they must. In fact, within such organisations, the commitment to those things that ‘made us great’ is virtually always also a commitment to inevitable decline. Who will speak up and say that things must change before it’s too late? Will anyone listen? Businesses rise, and businesses fall. Billabong ended up being ‘dumped’ by a wave more forceful than those on which its founders rode year after year to peaceful, prosperous shores.
Billabong began back in 1973 when Gordon Merchant decided to try his hand at making surfwear (after spending many years shaping surfboards), with the help of his wife Rena. Billabong’s first customer was Brothers Nielsen surf shop at Surfers Paradise. By 1983, the brand had expanded into the United States via a licensee, Bob Hurley. The Merchants provided the money to build the branch from Hurley’s base at Huntington Beach, California. Reflecting on this time, Gordon Merchant has stated the operation almost brought down the company.1
For a little bit there, we thought we were going to go down … I remember waking up in a cold sweat, terrified. Rena was a tower of strength through those periods. She would hold it together and we’d just keep working away.2
A 1997 article emphasised that the Porsche-driving Merchant, like his colleagues at Quicksilver and Rip Curl, had taken advantage of ‘a worldwide boom in demand for functional and stylish surfwear’.3 The author also noted that Merchant had a relaxed management style, ‘attending meetings in shorts and a polo shirt, sitting with his feet on 480the table while executives gather around on cane lounges’. Prophetically, the author concluded ‘whether the surfwear boom will continue is anyone’s guess’.
Just as it looked like Billabong would go under, one of its sponsored surfers, Mark Occhilupo, won 1985’s OP Pro event. With increased awareness and subsequent sales in the US, Merchant decided to tackle new markets such as Europe and Japan. Fast forward to 1998, and Billabong had become a global brand. It wasn’t a major name, but it had established a strong niche in surf wear and related products. Some of these products were beginning to spill over into larger fashion-related segments of the market.
Then, the company began to change. Bob Hurley, who had built up Billabong’s annual US sales to more than $60 million, had increasing differences of opinion with Gordon Merchant. He dropped his Billabong license and established his own start-up venture, taking all of the key US employees with him.4 Soon after, Rena, who had remained in the business despite being divorced from Gordon, wanted out. Two Gold Coast property developers and lawyers, Matthew and Scott Perrin, soon bought Rena’s stake in the company. Another key executive, Doug Spong, was also left on the outer, despite creating and growing the company’s highly successful accessories division. Billabong was in preparations to list on the Australian Stock Exchange in order to turn investments into cold, hard cash. When the company listed in 2000, Gordon Merchant’s personal wealth was estimated at $255 million. By 2004, it was said to be almost half a billion dollars, and he retained a large shareholding in the company.
Having become CEO, Matthew Perrin launched Billabong on an ambitious strategy of growth by acquisition, with the company acquiring Element Skateboards and Von Zipper Sunglasses in 2001, as well as Kustom Shoes and Honolua Surf Co. in 2004. It expanded rapidly in Europe under the management of former plumber Derek O’Neill and, with sound leadership from former pro surfer Paul Naude, the US operation recovered. By 2009, three Australian companies — Rip Curl, Quicksilver and Billabong — held 60 per cent market share of the global surfwear market.
Merchant had long aimed to grow the business at 15–25 per cent each year, and had achieved these targets year after year. However, he had been slowly reducing his role at Billabong, spending several months each year surfing. Thus, Perrin’s strategy of growth via acquisition was almost a necessity.5 Achieving similar growth year on year becomes harder, as this is sought on a bigger base. In other words, growth on a low revenue base is much easier to achieve when compared to yearly growth that is, in effect, compound growth on a much larger base. Following the purchase of Element in July 2001 for $20 million,6 Billabong’s share price rose from a starting price of $3.15 to $9.10 in August 2002, valuing the company at $1.8 billion.7 Soon after, Perrin sold most of his own shares without warning, providing him with a $66 million windfall but alarming the market.8 Unable to regain the confidence of his board and the market, Perrin resigned within a few months.9 (Interestingly, in October 2012, Perrin faced a Brisbane court on charges of fraud following three companies in which he had part-ownership going bust.)10
Perrin was replaced by Billabong’s European head, Derek O’Neill. For O’Neill, a surfer, the aim of the game was to continue the company’s ‘surfing culture’, since he had ‘saltwater in the veins’.11 He would continue the company’s existing strategies since ‘there’s not a lot broken’.12 Billabong’s growth continued. Sales in 2003 increased almost 33 per cent, with profits up 20 per cent.13 Following the purchase of Honolua (for $19 million) in 2004, US sales grew another 30 per cent and European sales were up by 13 per cent.14 While O’Neill warned, in 2005, that Billabong’s growth curve couldn’t last forever,15 demand continued to grow — a combination of ‘image conscious teenagers and big-spending parents’.16 Acquisitions continued, including the purchase of watch retailer Nixon for $97 million in late 2005.17
While 2006 sales were less impressive, the company’s share price was $14.71 with further increases predicted.18 Its acquisitions in the years that followed included Amazon (New Zealand’s biggest surf retailer) in 2006; Xcel (a US wetsuit company) in 2007; as well as bikini brand Tigerlily, US retail chain Quiet Flight and skateboard brand Sector 9 in 2008. In the same year, one journalist questioned how ‘generations X and Y would react to squeezed discretionary spending in an economic downturn’, thus impacting Billabong’s bottom line.19 In 2010, Billabong also acquired 138 retail stores in Canada, Californian brand RVCA, and the Australian chains Surf Dive ’n’ Ski and Jetty Surf.
By late 2011, Billabong’s profits had nose-dived. The high value of the Australian dollar, poor economic conditions in the US and Europe, and changing fashions had begun to take their toll, as had the growing shift to online retailing. Former pro surfer Rob Bain believed that Billabong had lost ‘cool’ as it had become ‘popular’, stating that:
When a mum smoking a ciggie outside a shopping centre out west is wearing a Billabong T-shirt and they’re still trying to sell to the kid on the beach, you reach a point where you’ve just got too big.20
In April 2012, Billabong sold half of Nixon for $276 million to reduce its debt levels and announced that it would cut 400 jobs.21 In May, Launa Inman was appointed CEO after Derek O’Neill was sacked. The company had also seen off two approaches from private equity firms keen to buy it at a bargain price. With shares at 85 cents and little market confidence in the company, Inman announced her key strategies. These included:
• reducing Billabong’s product range (there were more than 25 000 items!)
• more efficiently serving its 13 000 wholesale customers, rationalising its supplier base (with over 500 suppliers)
• closing loss-making retail stores (with 625 retail outlets at the time)
• aiming to recapture customer perceptions of the company as a ‘cool’ brand, building its online capabilities
• trialling new retail formats
• making its ‘culture of creativity’ more receptive to change.22
But is it too late for Billabong? JPMorgan analyst Shaun Cousins is pessimistic, stating that ‘The culture within the organisation may take a significant period of time to change and furthermore, could be faced with some resistance and staff turnover’.23 On the other hand, Mambo founder Dare Jennings argues that any loss of what is special about Billabong’s culture will be the final nail in the company’s coffin, since ‘When you lose the culture, it becomes a rag trade only’.24 In February 2013, it was announced that Peter Bryant, the former chief financial officer of Billabong’s US operations, would oversee a company-wide restructure. Meanwhile, at least two companies were considering takeover bids.25
1. Given the information contained in the case study and the concepts that you have considered throughout this book, do you think that Billabong will be able to return to its former glory with Inman’s strategies? Why or why not?
2. Given current trends towards ‘fast fashion’ (in which some manufacturers are able to move from concept creation to having new products in retail stores in less than two months), do you think that a company like Billabong can embrace this model? Explain your answer.
3. As the case study states, it is arguably inevitable that virtually every business will rise and fall over time. It might be argued that Billabong would fail as soon as its natural markets stopped growing and fashions moved on. What do you think? Justify your answer.

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