Both Vans and Volcom are interesting case studies in how brands can either succeed, or disappoint within large corporate engines. In recent years Volcom has floundered, while Vans has grown non-stop. It now looks likely that Volcom will be sold by its French owner, luxury brand company Kering, who recently announced it would sell its Puma business. In this article Ed Prendergast explains why Vans is the vanguard at VFC and why Volcom might be feeling vanquished at Kering.
So why has Volcom struggled while Vans succeeded?
Clearly the segment has been a tough space for the past ten years, but it appears that Volcom was lost in a large conglomerate which, to their credit, has shown spectacular growth in its flagship brands (Gucci, Yves Saint Laurent etc.).
Volcom was purchased in 2011 by Kering for US$608m. The business was generating reasonable profit margins, however over the next five years it went into losses. The operation broke even in 2017, however sales still fell 6% indicating that the turnaround was generated by cost cutting, not sales growth.
It appears Volcom is simply too small for Kering to focus on. It constitutes less than 2% of total company sales, and did not seem to enjoy any rub-off from Kering’s other sport/leisure brand, Puma. Brands need active range updates and dynamic marketing which obviously costs money. Imagine trying to get the board’s attention when Gucci is growing at 40%, generating 2bn Euro in gross profit, and is almost 30 times larger than Volcom!
Kering hasn’t confirmed it will sell Volcom, but it appears likely given the Puma exit. Private equity now owns most of the large surf companies including Billabong as soon as the Boardriders deal is completed (which we discussed now looks certain HERE,) and are therefore likely to be interested. As part of a larger group which is focussed on category there is a great turnaround opportunity given the strength of the brand. We’d guess Kering will struggle to get anywhere near their US$608m price however given the brand is not profitable – but will they care? Kering is valued at over US$60bn, and its share price has almost tripled over the past 2 years driven by growth in Gucci etc.
Let’s guess that an optimistic buyer might think they could generate a post-tax margin of say 5% on Volcom sales of US$282m (a profit of US$14m), and were prepared to pay ten times that number, the business would be sold for US$140m. But in reality it’s a buyers’ market and paying up front for a potential turnaround would be bold.
Vans’ success lies in stark contract to Volcom. The business was acquired by global footwear and apparel company VF Corporation in 2004 for $400m. Since then the growth has been stunning. Vans’ sales have almost tripled since 2010 to become VF Corp’s largest business with sales of US$2.3bn.
Vans is now eight times bigger than Volcom. Shoes are the main game at Vans, constituting 80% of its sales. VF Corp has successfully cross pollinated technical product development across its brands, exemplified by Vans water repelling shoes (“All Weather Mountain”) which shared aspects of VF’s other brand Timberland, while retaining its own credibility and brand identity. They have also managed to cross-sell between their logos without cannibalising each brand (45% of Vans customer also buy North Face gear – VF Corp’s second biggest brand). The board at VF Corp clearly know the space and have nurtured Vans through focussed product development and marketing.
Back in 2004 when VF bought Vans it was considered a tired brand. Maybe there’s the opportunity for the next owner of Volcom.
About the Author; Ed Prendergast is a finance analyst with Pengana Capital. The Pengana Capital Group is a diversified funds management group specialising in listed equities. Founded in 2003 and headquartered in Sydney, with offices in Melbourne and Singapore, Pengana currently manages over AUD$3 billion across a range of international and Australian equity strategies. Ed Prendergast was twice ranked the top small companies’ broking analyst in Australia by BRW magazine.
