FANZZ Sports: An end of an era

Yesterday, FANZZ Sports was sold to Ames Watson Capital, LLC, a Maryland-based holdings company. In the move half of FANZZ corporate staff was let go. How did they get here? What went wrong?

I remember going to FANZZ at my rundown Pine Ridge Mall in Pocatello as a kid. Despite Pocatello not being a shopping hub even before internet shopping, the FANZZ store in Pocatello managed to stay open. It was a favorite of mine to go into and see the Jazz apparel. It was the only place in Pocatello that one could find a Jazz hat, shirt, or jersey. As a kid my father would take me in and talk sports with young manager there while I watched ESPN on the television hanging from the wall and looked at my nirvana: sports merchandise. FANZZ has a special place in my heart. It was at that very same FANZZ that I grew up going into that I worked between acting contracts. It was that same FANZZ that gave me my first management opportunity. Soon I would transfer clear across the country to a new FANZZ location in Indiana. All in all, I worked there for about three years. So as you can guess, the story of FANZZ getting bought out by a holdings company hit me a bit differently than everybody else. The reason is I know what it means because I know the challenges we were going through during my time there. I wanted to provide some color to the situation because there were many people let go from FANZZ and probably quite a few stores in the crosshairs after the announcement. Let’s go through what that means.

When I entered the FANZZ company back in 2010, retail in general was starting to feel the pains caused by the real estate crisis and the growing trend of internet-based retailers. FANZZ had rarely, if ever, taken on debt. FANZZ was owned by the Larry H. Miller group, the same group that owned the Utah Jazz. That line between organizations was blurred often as the CEO of FANZZ, Bob Hyde, did double duty as he also was the full-time CFO of the Utah Jazz. FANZZ was a small chain of stores in Idaho, Utah, Nevada, California, Colorado, New Mexico, and, surprisingly, Texas. Their growth had been pretty organic up until this point without any major land grabs. They had grown store by store.

Then FANZZ decided to grow exponentially, whether that was because they recognized an opportunity in brick and mortar across the country, or the LHM group had come into some extra money due to the lockout, I’m not quite familiar with the strategy and forecasting behind the situation. They were going to grow exponentially. It would take this ragtag group of stores across a few Western States and bring them East. It actually was in this move that I moved across the country to the town of Lafayette, Indiana for a FANZZ store in the Tippecanoe Mall.

Buying Minimums

To understand the future problems FANZZ would come to suffer you first have to understand buying minimums. When you go to your favorite FANZZ store in Utah, you’ll find a wide variety of Jazz apparel. But when the FANZZ stores bought that shirt, they actually had to buy it with a minimum quantity. Those minimum quantities can range from small amounts like 50-100 to 500-1000 depending on the shirt. The reasoning is those suppliers that make the apparel—Nike, Adidas, New Era, etc.—are trying to make money. If they know a team is not that popular—hello, Utah Jazz—the minimum quantity will be higher because if they’re making that shirt for a run of 100 they’re not make a Golden State Warriors shirt that could easily be sold everywhere.

This will come to prove important.

The California Expansion

The first major expansion was in California. This seemed like the most logical expansion. Remember those minimums? Well buying product for California would prove easy because California teams—save the Sacramento Kings—are pretty popular around the country. FANZZ could easily hit minimums while they were growing there and distribute the surplus around to their other stores. The goal of the growth was to more densely populate these areas with their stores. They added more stores in the Southern and Northern California.

These stores proved to be very successful as California teams were doing well those years. The other reason these stores did well was a result of brand recognition. For those that need a refresher on brand recognition, think McDonalds. If a new McDonald’s opens up in your area, no one needs to tell you what a McDonald’s does. It has brand recognition. Due to FANZZ already being in Californians could more readily recognize that FANZZ was a sports apparel shop. This brand awareness was a key to California stores success. With the California stores showing positive returns, FANZZ then started their more ambitious plans: the plan to expand East.

The Eastward Expansion

Unlike the Western Expansion into California, FANZZ was in uncharted territory in the Midwest and East. They didn’t have brand recognition, they didn’t have any existing store fronts, and they had no experience with the supply chain aspect of their business as it pertained to these new markets. They had strategies, of course, but this was uncharted waters.

They opened up stores in Iowa, Nebraska, Kansas, Illinois, Indiana, Ohio, Wisconsin, Pennsylvania, New York, and Massachusetts. In the course of a year they had grown from ~45 stores to close to 100.

This monumental growth so shortly after the California expansion led to a brain drain. There wasn’t enough leadership to move around the stores so local talent was brought in. This brought a breakdown in culture and procedures. Turnover was high in these stores. Brand recognition was terrible. Ask past managers of those Midwest and Eastern stores and a lot of people tell you people would call those stores during the first few months open and ask if they sold fans or industrial fans.

But there was a larger problem looming: Inventory.

The Unexpected Pivot

After the huge year, the company was being prepared for the third year of massive expansion. This time FANZZ was going to hit 150 stores—except it didn’t. Whether it was the losses FANZZ took in the Midwest and Eastern stores, the increase costs of purchasing and shipping, cold feet of upper management, lack of leadership, or all of it combined, FANZZ decided not to increase stores to take a step back, slow down, catch up, then the following year they would ramp up again. Here’s a little secret though, no business slows down when they’re making money. But this move proved very costly to FANZZ business.

Why?

Remember those buying minimums I told you about earlier? When FANZZ expanded Eastward they had done it with the intention of having a third straight year of expansion. That’s important because those stores they had opened in the Midwest and East were basically on islands. In Utah, you can’t go to a mall without seeing FANZZ. Imagine being the only FANZZ in the state. Now imagine the popular teams in that state are not popular ANYWHERE else, like Iowa or Iowa State. FANZZ still needs to buy product for that store in Iowa in order to provide product for those people, BUT they’re running into the minimums problem I mentioned earlier. So in order to get products they needed they went above those minimums with either the idea that more stores were opening before the next deliveries of these massive purchases arrived or that they’d sell through over the course of the year.

When FANZZ decided to abort on their continuing expansion and take a year off, they left themselves with only one remaining option when it came to dealing with the impending overstock problem: hope that the new FANZZ store opens up pent up demand that wasn’t forecasted, or to put it simply, they had to hope it’d sell.

It didn’t happen. A nightmarish inventory problem occurred with stores having backrooms filled with overstocked merchandise of the same t-shirts. The problem was then compounded by a resilience in upper management to discount that product. Overstock grew. With no new stores being opened the inventory sat unsold in back rooms and in off-site storage locations. Meanwhile, behind the scenes, FANZZ was working with suppliers to see if they could return product, cancel orders, and find new homes for the overstock. This all happened while new orders were still being bought and shipped to stores.

The Freeze

With overstock mounting, FANZZ decided they had to do something drastic to cut down on the product. They still didn’t discount it heavily, but they did put a major freeze on all new purchases. While stores in the West weren’t as affected by this, the Midwest and Eastern stores had a rough time during this. New product was not going to be ordered unless inventory levels were brought down in each store location. Those isolated stores in the Midwest and East had to dig their way out before they could see light. Sales dropped while there was a focus on enhanced merchandising to rotate the stale product. Turnover in these stores increased as the task of cycling through this inventory was sometimes insurmountable. Leadership rotated.

Meanwhile during this time, FANZZ was constructing its brand new headquarters with new offices and warehouse. While stores were struggling for product, the investment in new facilities seemed to occur. At the same time, FANZZ made a huge purchase of Just Sports in the Northwest. So once again, huge inventory problem mounting and money is being shifted to another monumental project while current issues have not been resolved.

The Dated Online Store

FANZZ decided at this same time that they’d put their emphasis on the brick and mortar stores with the online store as their backup. This “omni-channel” way of thinking caused headaches in the stores with the online store frequently taking the best product from storefronts while leaving the overstocked goods remaining. It also duplicated costs. Say for example an item is purchased by FANZZ. It goes to FANZZ warehouse where they distribute it to the stores. Then that same item would be purchased online where it’d be shipped again to wherever the customer is. That extra step of that item going to the stores creates cost. Not a big amount, but that adds up quickly. Efficiencies like this were the bane of the website.

The website also looked older when compared to competitors. Online-only competitors cropped up like Fanatic and Fans Edge. Their sites were SEO-optimized and looked more modern. It was easier to purchase and find more product there. FANZZ website was usually behind in posting new items due to lack of support and funding. The online only competitors didn’t have to deal with the overhead cost of managing 100+ stores.

Stores became islands

The one year slow down of expansion became two years which became three and so on. The only additional expansion of FANZZ was their purchase of Just Sports which was pretty much a turnkey purchase. Those stores already had people ready to go.

The stores in the Midwest and the East were the bane of the buying teams’ existence. In order to get past minimums they had to get creative whether that was hopping onto a larger retailers purchase for 20-30 shirts which seems easy but it’s a pain and not scalable. A lot of the times requests for product went something like this:

“We need some of “x jersey” because he’s blowing up. We have a waiting list of 15 people who’d buy it today if we could get them.”

“Well ... the minimum is 150. Can you sell 150?”

“No ...”

“Sorry, that’s all we can do.”

The isolated stores in the Midwest and East either found ways to survive through the efforts of good managers grinding to overcome the issues or they were closed.

Steve Starks era

Steve Starks took over in 2014. His time there is what propelled him to President of the Utah Jazz. He cleaned things up a ton whether that was finding efficiencies in buying, creating better discounting practices in order to make faster inventory turns, and decided it was time to cut bait with a lot of the stores in the East that were weighing the company down. Those required a ton of effort, time, and investment. FANZZ was starting to roll again.

The hard thing about licensed apparel is you can have excellent buyers, excellent forecasting, a great team, and a down season from one of the nation’s top teams can tank all of those efforts as that down year sinks demand. It’s a fickle business. It’s why a lot of companies invested in online only services years ago. Licensed apparel requires a ton of inventory that is not the same across the board. One t-shirt will have numerous variations depending on the team. That’s 30 different shirts. Then take that same shirt and it has five different sizes. That’s 150 different shirts just for one league. Then spread that across all the leagues and inventory can mount. Then you’re spreading that all across the country. If the teams in one store’s market tank, that store is in the red. That store can have one of the best managers in the company and still fall prey to the fickle demon of sports apparel demand.

Looking back at the past 10 or so years, FANZZ was trying to overcome a market filled with competitors by trying to blitz it during a recession when no one was looking. It was a bold strategy, but partly due to execution, partly due to changing consumer purchasing habits, and partly due to the fact that sports apparel is just a very unforgiving business when a market’s sports team is terrible, it just didn’t shake out the way they wanted.

[Editor’s Note: For the people who are still with FANZZ, I hope the new ownership treats them right and is committed to finding a new way for them to operate so they can be successful, profitable, and stick around in the marketplace. It’s a great company. For the ones who were on the cutting block with the transition, I hope you land on your feet. Many of you were my friends, and so I feel for you guys.]

[Correction: In a previous version, it was said that FANZZ had moved out of their headquarters. They are still at the same office.]