Billabong Is Riding Out Turnover

The news hit Southern California’s surf apparel industry like a tsunami: Bob Hurley, who built Billabong USA into one of the biggest and coolest names in the rag business, was leaving to form a new company that would compete directly with Billabong.

His disclosure last summer was the equivalent of Lee Iacocca leaving Ford Motor Co. in the late 1970s to join rival Chrysler Corp. And it left some wondering if a shaken-to-the-core Billabong could continue its reign as one of the top three names in the $1.7-billion surf wear industry.

But as Hurley wraps up his 16-year involvement with Billabong in the coming weeks, the Australia-based label is positioning itself to grow even bigger than it did under the veteran Hurley.

During the last eight months, Billabong founder Gordon Merchant has rebuilt the company by snagging another highly regarded industry insider to run it. He’s also managed to keep much of its experienced sales force intact. And he’s opened an impressive new U.S. headquarters in Irvine.

Now, the “new” Billabong is set to ship its summer line in early April and buyers who have seen the clothes say they look good.

“They’re going to come back with a vengeance,” said Peter Townend, marketing director for surf wear maker Rusty International in Irvine.

Many are crediting the rebuilding of Billabong to its new president, former Gotcha International executive Paul Naude, 42. Merchant also has won some new admirers.

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But the new Billabong still must prove itself where it matters most: in the hearts and minds of young and extremely fickle buyers.

“It’s really an unknown quantity right now,” said Eric John, owner of Laguna Surf & Sport. “The bottom line is, it’s not going to be the same because it’s coming from different sources. Whether it’s going to be better or worse, who knows? But it’s going to be different.”

The rebuilding of Billabong has been a formidable job considering that Hurley said last year that he was taking his entire 130-member crew with him to launch his venture, Hurley International. That team cranked out $70 million in sales for privately held Billabong USA in 1998.

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In this sandstorm of uncertainty, Merchant regained his footing in large part by choosing Naude (pronounced “naw-day”), a former professional surfer whose framed surf trunks now hang in his new office.

Born in South Africa, Naude began making surfboards there in the 1970s, the same decade that the Canadian-born Hurley opened Hurley’s Surfboards in Costa Mesa. As a professional surfer, Naude competed internationally, ranking in the top 30 in the mid-1970s. He also wrote and took photographs for surfing publications and even launched his own surfing magazine, Zig Zag, before becoming Gotcha South Africa’s licensee in 1981.

In 1992, Naude transferred to Gotcha International’s Irvine headquarters, where he became executive vice president of sales and merchandising for Gotcha Sportswear. He left the company in 1997 to start Ocean Fortune Trading Ltd., a production sourcing company in Laguna Beach that he has since sold.

Naude and Merchant met last year when Merchant was combing the coastline for someone with the right “overall vision” to lead Billabong USA. Merchant had decided to put together a new management team and oversee the operation himself, instead of licensing another apparel company to handle Billabong’s U.S. operations.

“The surf industry is rather unique,” Merchant said. “Unless you’re a surfer and understand what your customer is thinking and feeling, you’re going to find it really tough in this marketplace.”

Merchant relied on a similar instinct 16 years ago, when he first met Hurley and Joe Knoernschild, who was Hurley’s partner in the early Billabong venture. They seemed “trustworthy,” Merchant said, the types of people he wanted to introduce Billabong to the United States. But neither had much business experience or financial backing, Merchant said.

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But by any measure, Hurley was successful, transforming Billabong from an underground label that appealed to the core surf market into a nationally respected brand. Along the way, he created an intensely loyal following. Store owners say they could count on Hurley to deliver a solid product and to conduct his business dealings honorably. If, for example, a “cash flow crisis” hit Laguna Surf & Sport, Hurley’s company would give the store an extra month to pay the bill, said John, the store owner.

“In our business, there’s not anybody who is--I don’t want to sound corny--but who is as loved and respected as Bob Hurley,” said Duke Edukas, co-owner of Surfside Sports in Newport Beach. So when the 43-year-old Hurley announced that he was forming a new company, many lined up behind him.

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One of Naude’s challenges, industry experts said, will be to quickly align himself with the Billabong name. In the retail industry, he is closely associated with Gotcha, which still is struggling to regain the hip image it last had in the late 1980s.

Merchant and Naude have recruited executives, designers, production experts and artists from a host of local companies, including Hurley International, Rusty, Gotcha, Katin Inc. in Costa Mesa, and Mossimo Inc. and O’Neill Sportswear, both in Irvine.

“They’ve built a great team already, at the expense of everyone else’s,” said Bill Sharp, Katin’s former president.

Naude is taking the adjustments in stride.

“There has been a lot of movement,” he said. “I know I’m not too popular, but you do what you have to do.”

Some expect a blistering competitive battle to erupt between Hurley and Merchant once Hurley’s licensing agreement with Billabong expires in June.

Billabong employees have been forced to choose between the two companies. Some of Hurley’s sales representatives and workers decided to stick with Billabong, where the commission checks are fatter. Naude says 10 of Billabong’s 15 sales representatives stayed with the company. Hurley maintains that 15 out of 24 are still with him.

Retailers estimate that top Billabong sales representatives made between $250,000 and $400,000 a year. In the first years of Hurley’s company, those same salaries could plunge to $50,000 to $80,000, they estimate.

“Even with good growth, it might take them six to seven years to recoup the loss,” said Edukas of Surfside Sports.

Hurley said it’s too soon to make such predictions. “To say that Hurley [commission] checks would be that much less is not based on logic,” he said. “It’s all a tossup from where I see it.”

Industry experts said Merchant eventually could come out ahead financially because he is the majority shareholder in the “new” Billabong USA. Instead of getting a royalty of 5% of the U.S. company’s sales--which came to about $3.5 million last year--Merchant will get the lion’s share of the company’s profit.

“It will probably turn out to be to his advantage,” said Charles Riotto, executive director of the International Licensing Industry Merchandisers’ Assn. in New York. “He should be able to put together a deal that would put him ahead of where he was before.”

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Those who have seen samples say the new Billabong product looks strong, although Naude said there’s not much difference in the look, just more fabric selections and some minor changes in detail.

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For now, John of Laguna Surf & Sport is putting his money on Hurley, which he expects to “hit big” in the marketplace.

“I’m going to take all the money I bought Billabong with and I’m going to put it right into Hurley,” he said. “The reason I loved Billabong so much, those are all the reasons I love Hurley now.”

He’s taking a more cautious approach with Billabong.

“Making a sample line is one thing,” he said. “But let’s wait till it hits the shelf. Let’s see how it sells through.”

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Not Your Typical Office

The surf industry’s corporate culture would send the average accountant scurrying for his briefcase. Here, according to Billabong President Paul Naude, are some of its nuances.

* Dress code: None. “It is ‘preferable’ that employees wear shirts.” Don’t be caught dead wearing a necktie

* Hours: Depends upon surf conditions. “In the summer, if there’s a good south swell running, you’ll be looking for people.”

* Perks: Showers, for sand removal; surfboard racks.

Source: Billabong USA