April 25, 2016
Main Street Monday — What Small Business Lenders Learn from the Sport Chalet Bankruptcy
By Bob Coleman
Editor, Main Street Monday
Saturday I woke up to discover my hometown’s signature company filed for bankruptcy.
Sport Chalet is shuttering its 47 stores throughout the West by the end of the month.
The company developed a cult of sport enthusiasts who knew this was the go-to-place to learn about and buy all type of cool sporting goods equipment. Over the years, I have dropped thousands of dollars on running shoes, skis, camping and hiking equipment, soccer shoes, baseball gloves and bicycles from my home-town retailer.
So, what went wrong? First, compare the original location strewn across a number of eclectic buildings on La Canada’s Main Street — an old grocery store, a warehouse, even a defunct gas station used for ski rentals, with today’s new location.
Back in the day, stuff was crammed into tiny rooms and lofts. The floors creaked and the scent of mildew permeated from the carpets. Mixed with all the new stuff on sale on the floor it smelled what I thought sporting goods stores should smell like! Mountain climbers climbed up the front facade of the building. A portable pool was set up in the parking lot for the scuba divers.
It was all torn down and replaced with a sanitized wannabee big box store with expensive corporate offices in an adjacent building.
Oh, did I mention the parking!
Parking in the new development is a mess. What took an easy less than 30-second walk to the old front door(s) now is a nightmare with a horrible two story parking structure that is difficult to navigate. Then, you take your life in your hands as you stroll across a street where cars roar past you while you are in the crosswalk.
Sad end to wonderful history.
This sound familiar? An immigrant and his wife live in the business for two years, sleeping in rollaway beds, cooking over a single-burner propane stove and showering with a garden hose to achieve the American dream.
The business was bought for $2,500 in 1959 with Norman selling his car for the down payment. The rest? From the 3F access to capital trio of friends, family and fools. Irene took a job at Bank of America and brought home $96 every two weeks.
Norman believed in “riches in niches,” or “a blue ocean strategy.” He started out by selling skis in the winter and tennis rackets in the summer. Soon, Sport Chalet was one of the first sporting good stores to sell scuba equipment, surfboards and mountain-climbing gear.
His motto? “Be the best.” Employees were experts in their hobbies, and their products.
The concept worked. Eventually a chain was born that peaked with 55 stores in the Western U.S. Annual sales topped $360 million — with 3,800 employees.
So, what went wrong?
- The Internet. The company failed to adapt with an effective online presence. Back in the day, I bought numerous pairs of size 4E New Balance running shoes from Sport Chalet. But, with Amazon’s one-click ordering platform and two-day delivery, I can now order the same shoes in less than one minute at a lower price — with easy returns if I don’t like them for any reason. Bonus! I don’t have to stand in line only to answer questions from the cashier if I would like to donate $1 to the cause d’jour or why don’t I sign up for their credit card to save 10%.
- Losing Focus. Norman became obsessed with developing the land around him for a new store and headquarters. For over twenty years he bought up all the property around the original store. He poured $60 million dollars into a project that was finally built — in 2008. If he committed the same dollars and energy into Sport Chalet, he may have made it work. Sadly, Norman Olberz passed in 2011.
- Losing Reputation. Sport Chalet shed it’s niche, cult approach and became a generic retailer that couldn’t scale and compete with the Dick’s Sporting Goods and Walmarts of the world.
- Failing to Retain its Customers. Sport Chalet lost me years ago to Amazon. Compare their operation to REI that has grown to 143 stores with a membership model focusing on outstanding customer service and exclusive equipment that its customers perceive they can’t get from Amazon. Sports Chalet never developed signature lines of products. And, they lost their “expertise” culture as their unique selling proposition disappeared.
Three Takeaways for Bank Loan Underwriters
The three takeaways from the Sport Chalet failure for small business lenders underwriting loans to sporting good retailers:
- Understand a retailer’s unique selling proposition. Coleman’s SBA loan data shows 14% of sporting good retailers have failed since 2000. Retailing will continue to be a challenging lending niche for banks. Get the answer to the question of what does the retailer offer the customer to make them want to get into the car, fight the parking, look forward to interact with staff — versus Amazon’s one-click platform?
- Be skeptical of the pitch that if all the debt can just be refinanced into a lower payment, the borrower will magically become an expert operator. Does the applicant have a successful track record since the recession? Sports Chalet hasn’t turned a profit in years, just churning debt packages.
- Is the borrower focused on their core source of cash flow? Or, are they trying to “branch” out into other ventures outside their area of expertise?
It’s all about global cash flow baby!