Dive Stores, the Internet and the Industry, Part IV

In the past three issues, we’ve explored the effect of the Internet on divers, raising the question of whether the age-old industry mantra “support your local dive shop” may be a dying business model. Scuba gear and dive travel can be purchased cheaply and conveniently over the Web. Training is offered at resorts worldwide, in comfortable warm water. Gear can be shipped to third parties for factory-authorized service and returned overnight. Used gear can be acquired on eBay or at chains such as Play It Again Sports. From California to Maine, tanks can be filled at small sports shops or even grocery stores at dive sites. There are 50 fewer dive stores now than seven years ago. Will the trend continue?

A few manufacturers (notably, Aqualung and Scuba Pro) cling to the support-your-local-dive-shop model, allowing their products to be sold only through authorized brick-and-mortar dealers. Dealers sell the gear at manufacturer-dictated prices, while in return gaining marketing support and sales and service training. Manufacturers’ warranties usually require the diver to return the gear to the dealer for annual servicing or repair. Aqualung and Scuba Pro do not allow their authorized dealers to sell their products on the Internet.

The manufacturer’s suggested retail price typically allows retailers a 50 percent gross profit on equipment (which is also a 100 percent markup — a “keystone markup.” This permits a small store to make a decent profit. However, gray-market discounters such as LeisurePro have disrupted the arrangement. They get equipment from channels other than the manufacturer and take slimmer markups. So, many divers have migrated to gray-market sellers on the Internet, where they save hundreds of dollars on major gear.

Most small dive stores can’t meet the Internet prices, as an article in Dive Business Magazine points out. Here’s why:

Consider the difference between working on a 50 percent gross profit and a 40 percent gross profit. For example, suppose an average customer spends $500 on each purchase at Ben’s Dive Shop and Ben pays $250 for those goods. The gross profit is $250. If the monthly overhead (rent, phone, utilities, employees, insurances, etc.) is $20,000, Ben has to have 80 of those customers in a month to cover his nut (80 × $250 = $20,000).

However, Ben is losing customers to the Internet, so to compete, he gives away accessories to add value and lowers his prices. The customer is getting about a 17 percent discount because what Ben has been buying for $250 he is now selling for $417. He’s making $166 per sale (40 percent gross profit). But his $20,000 overhead hasn’t changed, so to make it back, he has to attract half again as many customers. Instead of 80 sales, he has to make 120. For a small dive store, jacking up a customer base by 50 percent is very difficult. And that may not even be enough, because Internet discounts, especially when there is no sales tax, can amount to more than 17 percent.

To many manufacturers, supporting a local dive store is not about preventing them from cutting prices or using the Internet, but rather enabling them to profit. Even longtime holdout Oceanic sees online sales as critical to its business. Doug Krause, product manager for the Oceanic and Aeris brands, told Undercurrent, “The Internet is becoming the equivalent of the Yellow Pages — it will soon be a standard means of making life easier for our customers.”

On its Web site, Oceanic offers an “online convenience store.” Once a shopper finds a particular product and price, he can be directed to nearby dealers and authorized Internet resellers, such as www.scuba.com. He can buy the item in person or can buy online, and the dealer ships the merchandise and earns a commission. Dive stores can link from their own websites to Oceanic’s, where a shopper can get more information. It’s not an entirely free marketplace, because dealers must follow Oceanic’s pricing guidelines, but there is a range of discounts from the list price.

Internet Sales for the Small Manufacturer

Sue Swigart, owner of Dive Goddess in Fort Worth, TX, has abandoned the old model. Until 2001, she sold her fashion skins and accessories through dive shops and had exhibited at various dive expos, but she told Undercurrent, “It just wasn’t working for us, the dive shops or the customer.” While selling wholesale, she also had been e-tailing through www.divegoddess.com although at higher mark-ups so as not to compete with dive stores. After four years, says Swigart, “It was obvious that mom-and-pop stores just couldn’t produce enough volume. The customers were frustrated because whatever size or print they wanted was not the one the dive store had.” She also had to insist on minimum orders from shops. “Because we could not afford to offer onesy-twosy orders at a wholesale price.”

Since going all online, Swigart notes, “We have never looked back. We can offer discounts without worrying about stepping on any toes. We can instantly announce, via e-mail, to all our customers that we have new products. We ship all over the world. The catalog accurately reflects exactly what is available to ship within 48 hours . . . None of this would have been possible without the Internet.”

But that puts her in direct competition with dive shops, at least in the eyes of two magazines: Dive Training and Sport Diver. They refuse to carry ads for “rogue businesses.” It’s how they protect their own products. Dive Training is distributed free through dive shops and editorializes monthly about how consumers should support their local dive shop. If dive shops disappear, so does the magazine’s distribution. Swigart learned that Sport Diver “does not to sell advertising to any advertiser who does not sell through dive shops.” The magazine is owned by PADI, and a strong dive shop network is necessary to attract new divers for PADI training.

But with resistance, there is hope

For many years the Diving Equipment and Marketing Association (DEMA), diving’s trade group, seemed to ignore the Internet, as least publicly. No more. It has recognized that the Internet “is not going away,” says DEMA’s Nicole Russell. “We must learn to live with it.”

Dave McClure, president of the US Internet Industry Association has presented Internet seminars at DEMA trade shows. Besides being an Internet guru, McClure is a partner in www.scuba-challenge.com, a community of recreational divers, organized as a virtual dive shop, tour operator and dive information center. He has noted that while 71 percent of the shops surveyed by Dive Center Business were actively working to keep customers from buying off the Internet, other shops were putting excess inventory up for bid on eBay. Obviously, there is no single dive business strategy regarding the Internet. McClure believes, however, that dive shops can effectively use e-commerce as an important weapon in their sales arsenal.

And some are. Next issue, we’ll show how one dive store has stopped whining about the Internet, taken advantage of technology to develop loyalty and expanded sales. It’s a 21st-century shop.