icebreaker: the china entry decision - yolawriterph.yolasite.com/resources/case-icebreaker.pdf ·...

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________________________________________________________________________________________________________________ Professor Joseph B. Lassiter, III and Research Associate Dan Heath prepared the original version of this case, “Icebreaker: The US Entry Decision,” HBS No. 806-006. This version was prepared by Professor Joseph B. Lassiter, III.. HBS cases are developed solely as the basis for class discussion. Cases are not intended to serve as endorsements, sources of primary data, or illustrations of effective or ineffective management. Copyright © 2006 President and Fellows of Harvard College. To order copies or request permission to reproduce materials, call 1-800-545-7685, write Harvard Business School Publishing, Boston, MA 02163, or go to http://www.hbsp.harvard.edu. No part of this publication may be reproduced, stored in a retrieval system, used in a spreadsheet, or transmitted in any form or by any means—electronic, mechanical, photocopying, recording, or otherwise—without the permission of Harvard Business School.

J O S E P H B . L A S S I T E R , I I I

D A N H E A T H

Icebreaker: The China Entry Decision It was March 2006. Jeremy Moon, founder and CEO of Icebreaker, was staring out a rain-

spattered window by the baggage carousel at Pudong Airport, near Shanghai. A banner celebrating the upcoming 2008 Olympics had caught his eye as he exited the terminal building. It had been another grueling 18-hour flight from Wellington, New Zealand. For Moon, this had become an annual trip, not because Icebreaker sold its products here, but because Icebreaker sourced its products here. As he looked around the baggage area, he saw the logos of many of his competitors on the crumpled apparel of his fellow travelers. Moon wondered if the time had come for Icebreaker to enter the China market.

Moon had founded Icebreaker in 1995 in Wellington. Since then, Icebreaker had essentially created the merino wool apparel category for the outdoor market...and a profitable business that he expected would grow to over $50 million in sales during 2006. Icebreaker’s most important supplier was a fellow New Zealander—the company's clothing line was made from 100% pure New Zealand merino wool. (See Exhibit 1 for a photo of a merino sheep.) Before Icebreaker, most outdoor clothing was made from synthetic materials—polypropylene, nylon, or polyester. Now buyers had an all-natural option. Downhill skiers, mountain bikers, snowboarders, desert trekkers, and weekend hikers wore Icebreaker clothing—the best-selling items were thermal underwear and mid-layer tops. Icebreaker was also very popular with urban types who wished they were skiing or hiking but never seemed to have the time. (See Exhibit 2 for shots of Icebreaker products.)

Before Icebreaker, wool clothing was perceived as "hot and itchy." This perception emerged from the fact that wool was hot and itchy. Icebreaker’s merino wool clothing, though, had a lot of advantages over traditional wool. (See Exhibit 3 for a comparison of a merino fiber with competing fibers.) The clothes were light and breathable while providing good insulation. The fabric had a sleek, non-itchy texture and felt like silk next to the skin. The clothes were durable and machine-washable, and they were surprisingly resistant to odor. Icebreaker charged a premium for these qualities—the company's apparel typically commanded a 30-35% price premium over comparable synthetic alternatives.

There were two secrets in the Icebreaker clothing formula. The first, of course, was the key ingredient—superfine merino fibers. The second, and not so obvious, was the way Icebreaker had learned to process this wool. The merino is a breed of sheep known for its fine wool. And, New Zealand was home to the best quality merino in the world. (The country had over 3 million merinos, versus about 4 million people.) Icebreaker’s design, marketing, merchandizing, and wool-sourcing

This document is authorized for use only in 352:819 (BUSA900334) Channels of Dist. by Associate Professor Debi Mishra from May 2010 to August 2010.

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were centered in New Zealand. But, building up the supply chain and the processing know-how to deliver that clothing to a world-wide marketplace had carried Icebreaker to every corner of the globe searching for the best technology. It was this search that had first carried Moon to Shanghai in 2002.

Icebreaker had been profitable since its second year of operation—albeit modestly for the first few years. Moon said, "A fellow director declared in 1997 that this was the first company he had been involved in where you could drink the profits. And, still remain sober."

Icebreaker had grown rapidly in New Zealand by working directly with a select set of retailers and, in 1998, began to export internationally. There just weren’t enough New Zealanders (or Australians) to support the business, much less Moon’s ambitions. Moon’s first foray to the Northern Hemisphere had carried him to Europe. Icebreaker showed its products at ispo, the Munich-based International Trade Show for Sports Equipment and Fashion to gather market intelligence and to recruit local distributors. By 2002, Icebreaker had fared particularly well in Europe by working through distributors, where the brand was stocked in over 200 stores. Also by 2002, margins had grown enough to allow investment on a new front for expansion: the giant US market.

Even though the company’s initial push into the US in 2002 using a third-party distributor proved to be a disappointment, Moon persevered never doubting that Icebreaker would be a big hit in the US, despite the presence of entrenched rivals such as Columbia, North Face, Patagonia, and Marmot. In the fall of 2004, Moon recruited his own US team based in Ketchum, Idaho and led by Troy Ballard. With Ballard’s drive, direct contact with retailers and adaptation of Icebreaker’s merchandizing, US sales began to skyrocket

In the US, Moon followed the same core strategy that had been effective for Icebreaker in New Zealand—it was an “epicenter strategy”, based on working directly with a specific set of the top-ranked specialty outdoor and snow sports retailers in select resort and vacation areas. Visitors to these signature areas were exposed to Icebreaker by the local retailer and then they carried Icebreaker clothing and the Icebreaker message back to their home markets. And so, awareness of Icebreaker spread. Ultimately, Moon hoped to use direct-to-consumer advertising and an e-commerce presence in North America. This would let Icebreaker leverage its on-the-ground US sales and distribution infrastructure. The company’s US sales were likely to be more than $10 million in the 2006 season.

Back in 2002, a lot of people had told Moon that he was crazy to enter the US market “on his own”, without partnering with one of the big US outdoor apparel companies. He knew a lot of people would tell him he would be crazy to enter China. But, then maybe he was crazy and maybe that’s why Moon had built a $40 million-a-year business by 2005 that looked to power its way to $50 million a year in 2006—selling “wool undies from down under.”

The Founding of Icebreaker In 1992, Jeremy Moon graduated with a masters degree in marketing from Otago University. He

took a job with CM Research, a market research company. Moon enjoyed the work but had the itch to start his own company.

Then, in 1994, he met a farmer, Brian Brakenridge, who would change his life. Brakenridge and his wife Fiona raised merinos on the remote Pohuenui Island. On a trip to North America, the Brackenridge’s had met the owner of an outdoor store, who mentioned his unsuccessful efforts to get outdoor clothing made from natural fibers. Sensing a business opportunity, the Brackenridge’s resolved to make merino wear.


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They worked with a local manufacturer to create merino thermal wear. They sold a bit of the thermal wear—at first labeled “New Zealand High County” and later renamed “Ice Breakers”—through their own Pohuenui lodge and through a retail store in Blenheim.1

Then came Sir Peter Blake. Blake was a famous adventurer and sailor who, at the time, was preparing for a round-the-world yacht race. Blake had a chance meeting with Brakenridge, who gave the explorer some merino underwear to try out. Blake was so impressed that he ordered the Ice Breakers underwear for his entire crew.

After the expedition, Blake recounted a story that would become part of the company's founding mythology. Blake said he had worn the underwear for 40 straight days—with comfort and without odor. (Blake later greeted Brakenridge as “the sheep farmer responsible for stopping my undies from smelling.”)2

When Brakenridge met Moon in 1994, he gave some product samples to Moon, as he had to Blake. Moon was immediately taken with the product. He believed there was an “intrinsic goodness” to it. "It felt like nothing I had worn before—soft and natural without the itch of wool, and it breathed beautifully, so I was kept at an even temperature regardless of what I was doing. I wore it mountain biking, wore it round the house, wore it to bed. I became addicted to the feeling and couldn't take it off."

Brakenridge had never quite figured out how to market the product effectively. He was still selling small volumes of the product in a couple of idiosyncratic locations. Moon, with his love of marketing, could see wider commercial potential for the fabric. Inspired, Moon quit his job, mortgaged his house, and bought half of the fledgling company—which had no assets other than some prototype underwear and an idea. In late 1994, at age 25, Moon became Managing Director.

Moon locked himself in his bedroom and spent three months writing the business plan for Icebreaker (which was technically still named "Ice Breakers" at that point). It was a 3-year plan designed to define the vision and key milestones, and it was used to attract advisors to help him develop the company’s financial and strategic plan.

One of these advisors was Peter Travers, a retired executive from the Bank of New Zealand. (Moon had gone to university with Travers' son, Hamish.) Travers mentored Moon, giving him guidance on finance and business planning. “Peter asked me for the financials. I said ‘what are they?’” Travers wasn’t discouraged and eventually told Moon that if he could find five other investors, he'd be the sixth.

Travers' interest was a critical factor in attracting other investors, especially Noel Todd, a director of Todd Corporation, New Zealand’s largest private company. (Moon was friends with Todd's daughter, Juliet.) In turn, once Todd had agreed to invest, Moon says, the round was oversubscribed. By early 1995, Moon had raised $250,000 in seed capital.

Moon's first goal was to develop, with brand consultant Brian Richards, a "brand blueprint"—establishing the core attributes of the brand and brand story, as well as a way for it to evolve over time. Moon knew that the brand's attributes had to emerge from the attributes of merino wool. "We weren't making [the attributes] up, we were just clarifying what was already inherent. It was only after we developed that idea architecture that we engaged design. That may seem back-to-front to

1 Rebecca Macfie, "Moonstruck: Inside Icebreaker," Unlimited (February 1, 2005): p. 68.

2 Sir Peter Blake KBE was a Kiwi adventurer in the mold of Sir Edmund Hillary, leading his country to two successive America’s Cups. Tragically, while promoting environmental awareness as a UN goodwill ambassador, he was murdered by “pirates” off Macapa at the mouth of the Amazon.



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conventional thinking but I wanted the product to be a physical manifestation of the values of the brand story."3

Rebecca Macfie, a writer for New Zealand’s Unlimited magazine, describes the brand development stage:

Nearly half the company’s seed capital—around $100,000—was invested in brand development before a single item of clothing was made. For six weeks in early 1995 Moon, branding expert Brian Richards, and a team from Design Works brainstormed the vision behind the brand with nothing in front of them but a small piece of white merino fabric. “The outdoor clothing story in the 90s was about sweaty men climbing mountains as quickly as possible,” says Moon. “Icebreaker was to be about the relationship between people, and between people and nature. Brian brought this beautiful idea of kinship with nature to the table as a story-telling platform.”

Refinements almost Shakespearean in their subtlety were made to the language of the brand: Ice Breakers became Icebreaker (“it’s active rather than passive,” explains Moon); the word "nature" rather than "natural" would be used (“natural had connotations of hippies, nature had connotations of adventure and the bush and sea”); the word "wool" (itchy, heavy) was banished—the product was to be known as merino.

Then came months of design work: clinching the logo, choosing fonts and colour palettes, and even producing a brochure packed with photographic images depicting men and women at one with nature (but still not a single product in sight).4

Finally, in November 1995, the first Icebreaker products—merino underwear in blue or white—were ready for sale. Moon hit the road to persuade retail buyers to carry the products.

Successes and Challenges Icebreaker earned about $110,000 in revenue in its first year of business. The next several years

saw exponential growth—to $1.1 million in 1997 and $2.2 million in 1998. (See Exhibit 4 for Icebreaker's revenue growth.) In 1998, the company began to move successfully beyond thermal underwear to mid-layer clothing, such as fashionable light-weight sweaters designed to be worn over Icebreaker underwear.

In the first few years of business, Moon learned a couple of key lessons. First, and most encouragingly, his vision for the company seemed to be on target. Icebreaker was, at heart, the synthesis of an innovative product with a compelling brand. Both elements were succeeding. Demanding outdoor customers were enthusiastic about the technical performance of Icebreaker's merino wool. Icebreaker products consistently out-performed in "head-to-head" media tests against other competitors. Furthermore, the investment in Icebreaker's core brand message seemed to be paying off. The emphasis on "kinship with nature" was providing clear differentiation at the retail level. Feedback was highly positive from both retailers and end users.

The second lesson was that the company was benefiting tremendously from word of mouth. Moon began to hear stories about customers who bought Icebreaker while away on vacation—perhaps they stumbled onto the clothing retailer at a ski resort and bought some Icebreaker underwear. Then, when those customers returned from vacation, they'd bring the brand home with

3 “Success by DesignNZ,” a report and strategic plan from the Design Taskforce, in partnership with the New Zealand government, in support of the Growth and Innovation Framework (GIF) , May 27, 2003, p 60-61

4 Macfie, Unlimited



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them. They'd go searching for the brand in their home cities—and tell friends, who'd walk into retailers asking about Icebreaker. Moon was struck by the "portability" of the brand story—he had not expected the company's story to be quite so viral.

The most difficult challenge in the business was proving to be the supply chain. Moon was determined to keep Icebreaker out of the manufacturing business—he wanted to keep tight control of the supply chain but avoid ownership of it. But, this was proving to be a challenge. It was difficult to find supply partners who could meet the company's quality standards—particularly given the relatively low volume of production required in the first few years of operation.

Icebreaker's first production run yielded a bunch of tops with sleeves that were six inches too short—the fabric had shrunk after it had been cut. Moon said, "I thought, 'Great, we have our first range of clothing for 10-year-olds.' It was $30,000 worth of clothing and represented a large chunk of our working capital. I sold the run as second-quality garments, and we ended up making only a small loss. But we learned a valuable lesson. My definition of a mistake is something bad that happens twice."

The second production run did not turn out much better. The fabric spent too long in the pre-wash stage and came out yellow instead of white. Moon creatively called the color "buttercup" and positioned it as a new shade to Icebreaker's retailers. (Buttercup was not a success.)

Even the starting point of the supply chain—the merino wool—was a challenge. There was plenty of wool available, but not all wool was created equal. Moon said, "Merino wool is like grapes: It can vary hugely in quality both regionally and from season to season, so you have got to control it rigorously in order to make the best wine."

In 1997, a wool grower from Central Otago called Moon to report that an item of Icebreaker apparel she'd bought was not up to the firm's public standards of wool quality. This report really bothered Moon. "She told me that she worked so hard to grow the perfect fiber and that I was screwing it up with the bad batch that we used. I suddenly realized that it was a huge risk if we didn’t control the procurement of the raw material at the source, and ended up partnering with the growers to achieve this.” Moon began building a process for controlling the quality of the wool supply, which started directly with the people who ran the merino stations. Icebreaker defined attributes of wool quality—including fiber diameter, length, strength, color, and purity—and paid growers a premium, often up to 20%, to meet these high standards. Wool was first measured against these specifications on the farm, and later the bales of wool were laser-tested as a second check before Icebreaker accepted the shipment.

From a sheep's back to a human's back, the steps of the production process were:

1. Shearing the wool 2. Cleaning & combing the wool 3. Spinning the wool into yarn 4. Knitting the yarn into fabric and pre-washing it so it became machine-washable 5. Cutting the fabric and constructing the finished garment

The first two steps were conducted in New Zealand. The remaining steps, Icebreaker learned, had to be outsourced abroad.

Icebreaker slowly worked the kinks out of its supply chain as demand for its products continued to grow. In 2002, revenue had grown to about $9 million—and, significantly, international demand had outgrown New Zealand demand for the first time. This scale gave the company much greater negotiating strength with its suppliers. In fact, Icebreaker began to require all of its suppliers—from merino farmers to apparel manufacturers—to sign an exclusivity agreement. They could only



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produce merino wool apparel for Icebreaker. “This let us control our IP, invest confidently in our supply chain, and keep our competitors out,” said Moon.

On the processing side, Moon had visited Shanghai in 2002 to identify contract-apparel manufacturers. He was able to use contacts from the New Zealand wool industry and help from New Zealand government-sponsored trade associations to arrange meetings and gather intelligence about what his options were. The apparel businesses in China had a long—literally ancient—history. Most Western textile buyers came to China for two reasons. They were hunting for low-cost suppliers of commodity items like socks or underwear. Or, they were hunting for suppliers who could meet the chaotic demand characteristics of the fashion business. Moon had been hunting for something else. He sought to craft a unique supply-chain optimized for the technical apparel as well as the material handling and production techniques for the merino fibers used by Icebreaker. In Shanghai, Moon found a textile “epicenter,” years ahead of anything available to him in New Zealand.

By 2005, Icebreaker had assembled “the United Nations of supply chains in China” doing business with specialized, technology-leading companies that had located operations in the Shanghai area. It always amused Moon that he had ended up coming to Shanghai to do business with a “French wool blender, a German wool spinner, a Chinese textile manufacturer, a Japanese quality control auditor, and a Danish shipper.” (See Exhibit 5 for a map of the company's worldwide supply chain.)

On the merino side, Moon had signed a $6.6 million deal in 2003 to buy 500 tons of merino wool from a select group of New Zealand farmers. He said, "The ability to purchase the best possible wool from designated stations is a pivotal factor in the brand's success."5

By 2005, Icebreaker had the financial resources to tender a $29 million, three-year supply contract to New Zealand’s wool growers at a 30% premium to the market. This established Icebreaker as the #1 buyer of New Zealand merino wool, controlling approximately 10% of the country's total Merino shear (and about 25% of the premium 18-20 micron merino wool supply) gathered from some 60 South Island stations.

This system of supply exclusivity, Moon thought, could potentially become one of the company's key competitive barriers after the merino wool category became more established. Knock-offs were inevitable, but if Icebreaker had locked up the highest-quality providers, competitors would have a hard time replicating Icebreaker's products. In other words, anyone could make a merino wool shirt, but not everyone could make a merino wool shirt with Icebreaker qualities (both technical and aesthetic).

Moon’s Marketing Philosophy Since the founding of the company, Moon had consistently stressed that Icebreaker was a

marketing company, not an apparel manufacturing company. “The top of the pyramid is our brand identity and our values,” he said. “The marketing systems flow from that, and the product systems flow from our marketing systems.”

Moon believed that, to be a pure marketing company, Icebreaker had to avoid constraints in its operating ability. The company outsourced its manufacturing and warehousing. "We'd rather invest in building intangible assets such as graphic design and apparel design capability, supply chain management systems, and efficient financial and management information systems," he said.

Moon and his brand team relied on intuition as well as direct personal contact with customers and retailers, rather than market research, to guide new product development. Moon did not trust

5 Dene Mackenzie, "Icebreaker signs $6.6 million wool deal," Otago Daily Times, March 17, 2003.



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research to generate innovative concepts. He said, "If you do research and ask consumers to design a new beer, they're likely to come up with something that's a mix of Heineken and Steinlager. People talk about what they know. What we want to do is constantly engineer the creative leaps that will keep us at the very forefront of innovation and deliver to people what they don't expect."

Moon called this being "design-led."6 He believed there were three types of companies: "Production-led companies that make what they can, market-led companies that make what the market wants, and design-led companies that take an intuitive leap and create something that people haven't seen before. I decided to build a design-led company because the price premium is normally attached to design-led. You're creating something unique and with that comes a position of power in the market."7

Traditional market research was used primarily to “pre-test” ideas that the team had generated internally. "We find research almost a threat to creativity if it's misapplied, but it is a very good way to measure whether some of the creative initiatives that come out of Icebreaker are on strategy or not." Moon likes to use customer focus groups to weed out the "duds," the least attractive 10% to 20% of the pieces in a new collection.

Lessons Learned from US Distribution In 2002, Moon had made the decision to enter the US market. He felt he didn’t have time to

establish an Icebreaker presence on the ground, so he began searching for a distribution partner. He attended the industry's major trade show, Outdoor Retailer, in Salt Lake City.

At the trade show, Moon met with the top 10 CEOs in the industry to explore partnership opportunities. “I had to be very confident and sometimes pushy to get an opportunity to meet them, but they all listened intently to what I was offering and many could see straight away that it was a strong idea.” He received offers from 3 of the 10. One of the offers was rejected because the company was a potential direct competitor in merino apparel. Another was rejected because the company—a major synthetic brand—insisted on a co-branding exercise, which Moon felt would undercut the long-term, “one-with-nature” positioning of Icebreaker in the minds of consumers.

That left one option, a manufacturer of a non-competing, outdoor clothing line who was prepared to invest the funds required to build up Icebreaker as an independent brand. Moon struck a deal with them. The manufacturer’s own brand was a compatible sibling, so Moon had high hopes that the distributor could succeed with Icebreaker's line.

But the relationship proved to be disappointing. Fewer than 50 stores had agreed to carry Icebreaker’s products, even though the risk for new retailers was not particularly high. Icebreaker had agreed to fill initial inventory orders as small as $1,500. As the 2003 sales trends in the US materialized, Icebreaker did not even break $250,000 for the season.

Moon believed that the distributor simply had not been paying enough attention to the Icebreaker brand—it was such a small part of the distributor’s business that perhaps they were not investing the time needed to launch the brand. Moon knew that the brand did not sell itself—an outdoor buyer’s first thought when introduced to a line of “wool clothing” was to protest that it would be “heavy, prickly, and itchy.” Educating buyers about the unique properties of merino wool, as opposed to regular wool, was a large part of the sales process and the key to building the new category. (See

6 Vicki Jayne, "Breaking Market Ice," NZ Marketing (September 4, 2002): 20.

7 “Success by DesignNZ,” a report and strategic plan from the Design Taskforce, in partnership with the New Zealand government, in support of the Growth and Innovation Framework (GIF) , May 27, 2003, p 60-61.



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Exhibit 6 for an explanation of the properties of Icebreaker merino wool and Exhibit 7 for testimonials to the effectiveness of Icebreaker products.)

Worse, Icebreaker had no real leverage over the distributor. Moon was frustrated by his inability to drive changes. He concluded that Icebreaker needed tighter control over distribution if it was going to crack the US market. He decided not to renew the distributor’s contract for the fall 2004 season, electing instead to open his own US distribution operation.

Moon knew he could not rely entirely on New Zealanders to crack the huge American market. "So I begin hunting for a US leader who could build a US-based team but was sympathetic to the New Zealand approach as well as to our values and our brand. I found that with Troy Ballard. Actually, he found me.” Ballard had worked in the ski and outdoor industry and had spent time in New Zealand. As fortune would have it, Ballard's former boss from the surf business knew Moon's family and made the introduction.

Icebreaker had gone to Europe first because Moon thought it was more fragmented and hence an easier as a place to get started. But, the US market was ultimately the more important one for Icebreaker for multiple reasons. First, at $2 billion per year, it was by far the largest market worldwide for outdoor apparel. Second, in the outdoor market, the US trends tended to influence the European market. Succeeding in the US would help defend Europe. Third, the US was simply a more convenient market than Europe—it was only 12 hours away from New Zealand by plane, versus 27 for Europe. Furthermore, there was no language barrier. “Except for the accents,” added Moon. Finally, Moon believed that Americans had a special affinity for New Zealand. "Most Americans I've spoken to have a view of New Zealand as representing ‘Paradise Lost.’ And it’s true, especially where we source our merino," he said.

In settling on his US distribution strategy, Moon made a fundamental decision to position Icebreaker as a technical apparel company, selling through outdoor and snow sports retailers, as opposed to an outdoor sportswear company, selling through fashion retailers. No company had ever launched in both channels at once, and Moon didn’t believe Icebreaker could be the first.

In this category, the technical features of the product were paramount. The buyers for outdoor retailers were looking for features that would satisfy their demanding customers, such as durability, breathability, and insulation, in addition to a sense of style.

Icebreaker competed against such American giants as North Face, Patagonia, and the relative newcomer SmartWool, which was the first company other than Icebreaker to explore merino wool apparel. The competition was sophisticated—North Face and Patagonia had already established themselves as brands that were technical enough for hard-core outdoors people, but fashionable and aspirational enough to satisfy urban yuppies. SmartWool, too, had a loyal following that had grown attached to the company's merino wool socks. In 2005, US-based Timberland, a $1.5 billion-per-year footwear and apparel manufacturer paid $82 million for SmartWool which had 2005 sales of $42 million. Moon wondered if the change in ownership would prompt SmartWool to leverage their customer loyalty by expanding from merino socks to merino clothing, just as Icebreaker had chosen to expand into merino outerwear from merino underwear.

Within the American technical space, Icebreaker relied on two traits to separate it from the competition. First, it would stress the unique properties of New Zealand merino wool, which provided all the performance features of high-tech fabric while retaining the appeal of a renewable natural material. Second, the company capitalized on an edgier, somewhat fashion-oriented side of its brand image. In fact, the company’s origins as a New Zealand startup helped to establish its exoticism. The success of the Lord of the Rings movie franchise, shot in New Zealand, had stimulated the American public’s fascination with New Zealand. (Icebreaker supplied 1200 garments to the



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Lord of the Rings crew as a wrap present from the Producer, Barry Osborne.) Moon believed that Icebreaker could differentiate itself from the American competition, but he also worried that there was less “distance” between Icebreaker and the typical outdoor apparel company than between Icebreaker and the typical fashion/sportswear company. And he believed “distance”—tangible, defensible separation from the competition—created value, but success would require fashion’s seasonal modification of designs to freshen the product line.

The biggest advantage of the technical strategy was that Icebreaker had already made it work in New Zealand, and it was beginning to work well in Europe, particularly in the UK and Germany. Icebreaker's team had spent years developing relationships with outdoor retailers in New Zealand and understanding the sales and distribution variables involved in serving the retailers. Much of this knowledge appeared to be transferring to the US market.

Another advantage was that Icebreaker could compete, favorably, on the objective metrics that dominated the technical market. Skiers and climbers and mountain bikers wanted clothing with certain properties—light but insulating, odor-resistant, soft but durable. In head-to-head tests with other clothing brands, Moon knew that Icebreaker would fare well. Moon thought that Icebreaker would compete well on fashion attributes as well, but fashion was inherently subjective. He believed there was an advantage in entering the market by competing on more objective turf.

Moon also thought a lot about the long-term migration path of the brand. He believed that it would be easier for Icebreaker to migrate from the technical category to the fashion category rather than vice versa. Technical excellence could add to a brand’s fashion allure. On the other hand, fashion allure could actually hurt the brand’s image in the technical market. No one would buy a Gucci shirt at REI. In fact, even carrying a Gucci shirt would hurt REI’s street credibility with its customers.

Moon was aware of brands that had migrated between the two categories and, in keeping with his intuition, the brands had always migrated from technical to fashion positioning. For instance, North Face—the well-respected technical outerwear company—had launched a brand called A15, which it was distributing into fashion environments.

The disadvantage of the technical apparel market was its size. While there were 1,500 outdoor/ski shops in the US, Moon believed that probably only 300-400 of these shops were sophisticated enough to sell the Icebreaker story. This put a very tangible cap on Icebreaker’s growth potential. Furthermore, it would be more labor-intensive to distribute in the outdoor market than in the fashion market. A single buyer for Nordstrums or Neiman-Marcus, for instance, could potentially pave the way for Icebreaker in 60 stores. But the only technical chain with a comparable store count, REI, was one that Moon was reluctant to pursue.

REI, a 70-store national chain based in Seattle, Washington, was the largest US retailer in the outdoor sports category. Other distribution possibilities included regional chains such as Eastern Mountain Sports (in the northeast US) and the myriad independent stores. The independents were scattered and idiosyncratic, but were typically a single store with a single buyer in an “epicenter” resort location, such as Vail or Aspen. He believed that approaching REI before the independents would be a mistake. The independents, despite their small size, had enormous credibility in the industry. Moon thought that, to make the technical strategy work, Icebreaker would need to win over the independents first. After the independents had embraced the brand, Icebreaker could expand its distribution to the regional chains and REI. It was the independents who knew how to lift a brand out of the clutter and decided if it was worth their while to do so.

The bottom line, then, was that there were very few economies of scale in the technical market. Each individual buyer still had to be convinced, painstakingly, of the brand’s merits—and often a



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buyer in this market controlled only a single store and the consumer traffic that it could attract. Still, the 2005 US season had been very encouraging and the $10 million-per-year US sales rate expected in 2006 led Moon to believe that the decision to put his own distribution group on the ground had been the right one. Consumers who had found out about Icebreaker while vacationing in Aspen or Vail or Park City where beginning to e-mail Icebreaker in New Zealand from their hometowns in Boston, Los Angeles, Houston, New York or even Tokyo, Beijing, and Munich asking for catalogues and on-line buying options. The word was spreading. Icebreaker was growing. The issue was not if, but when should the next round of international market development be launched.

Requirements for Chinese Distribution Every time Moon visited China and got off a plane or entered a hotel lobby, he saw more and

more Chinese wearing the same synthetic pullovers, fleece vests, and weatherproof gear that Westerners wore. And, these items carried logos from his competitors: Patagonia, North Face, Adidas, PradaSport, and the like.

Moon had been coming to China since 2002. As far as he was concerned, no place on earth had changed as much as Shanghai. He had seen the city transformed, apparently evolving on each and every visit. Streets had grown crowded with Mercedes-Benz, BMWs, Toyota SUVs, Range Rovers and, by an accident of history, even American Buicks. Super luxury retail outlets had spread along the Bund (Shanghai’s dazzling riverfront district), selling Steinway pianos, Ducati motorcycles, Brioni suits, Cartier jewelry, Valentin fashions, and the list went on and on and on. Even, the more mundane Western labels were being carried to Chinese consumers by the likes of French hyper-retailer Carrefour who had been in the market for nine years. Wal-Mart was expected to enter Shanghai in 2006, but already had some 50 stores across China. Prominent local retailers like Beijing Hualian carried international brands such as Coca Cola, Nestle, Perrier or even nationally-identified commodities like New Zealand lamb or Argentinean beef. Western goods flashed across the screens of the ever-popular Western movies. Young Chinese saw movies where the action heroes—the Tom Cruises and the Chow Yun-Fats—wore technical apparel from Nike, North Face, and even Patagonia—gear like Icebreaker. More and more Western goods were both appreciated and sought by young, affluent urban Chinese consumers.

In entering China, Moon believed that Icebreaker would need to come to market as an outdoor sportswear company, not a technical apparel company. China just did not have enough specialty outdoor and snow sports retailers in focal point resort and vacation areas to consider a technical apparel strategy. He believed you could not use Icebreaker’s US, or even the European, model in China. The company’s products would be need to be distributed more like outdoor sportswear which in the West used fashion retailers such as Barneys, Saks Fifth Avenue, Harrod’s, or Neiman Marcus. In deciding whether to carry the Icebreaker line, a buyer for one of these chains would analyze whether Icebreaker’s “fashion apparel” fit the store’s customer profile.

In China, Icebreaker would need to emphasize the fashion attributes of its clothing: quality, style, and luxury. Icebreaker would compete head-to-head against brands such as Hugo Boss or Prada Sport, or even Gucci. The technical aspects of the clothing would not be crucial from a practical perspective—not many Chinese customers were likely to spend the morning shopping along Shanghai’s Bund and the afternoon kayaking up the Yangtze River. Rather, the technical features would need to add to the brand’s cachet—similar to the way that SUVs emphasize four-wheel-drive capability even though the typical buyer isn’t likely to go offroading.

The Chinese fashion distribution network was extensive, evolving, and very willing to experiment with Western goods, which was potentially a huge advantage. While there was some mystery in how to approach Chinese retail buyers, there was real mystery about what these buyers would be seeking



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for their customers. Furthermore, the fashion positioning would put Icebreaker in a much larger, much more chaotic market than its classical technical positioning. In total, there were probably 1000 target stores in the high-end fashion retail category in the most prosperous parts of China, with the possibility of tripling that number if the smaller, independent stores were included in the mix. In the technical apparel category, Moon was aware of only 5-10 target stores, organized by local entrepreneurs who either had seen technical gear in their travels or “gotten access” to apparel from Chinese suppliers of Icebreaker’s competitors like North Face or Patagonia.

By 2006, almost all of the major fashion brands had established distribution in China. Some were using 3rd-party distributors who served multiple brands. Some had set up their own local distribution groups, much like Icebreaker had on entering the US market. Moon knew that setting up his own group would require a substantial investment in hiring and management as well as identifying that key hire—that “Troy Ballard”—who had the talent and contacts to drive the effort. On the bright side, the pool of suitable candidates (Western-oriented fashion distribution reps) was pretty easy to target, and they all talked with one another.

On the other hand, there was no guarantee that Chinese fashion buyers would embrace the Icebreaker brand for their customers. Moon did not know if the “one-with-nature” message of his brand would really connect with enough Chinese retail buyers and urban consumers. But, then, what was “enough” customers? Even if a new variation on the message was not required, Icebreaker might still need to alter its existing product line, tailoring its clothes for the desires of the Chinese consumers. This could well put a strain on the product development and manufacturing functions. In fact, a huge success in the Chinese fashion market could ironically prove to be a huge problem for Icebreaker. If a line of clothing was a runaway success, the department stores would deplete their inventory quickly and look to Icebreaker for rapid replenishment. That might require Icebreaker to invent a “fashion-friendly” supply chain far sooner than the US or Europe markets might require.

Regardless of Icebreaker’s marketing abilities, this would be an enormous challenge: selling the apparel of an unknown brand and an unknown category. Could Icebreaker establish the merino wool category even with the support of knowledgeable reps who could explain the fabric to Chinese buyers and merchandisers? Would Chinese customers buy “natural fiber” clothes or would they see synthetics as more “modern”? On the other side of the issue, would Icebreaker be giving too much advantage to its competitors by staying out of the Chinese retail chains? Sales reps and consumers that might have been advocates for Icebreaker would turn into advocates for Icebreaker’s competitors, simply because Icebreaker was not there.

Lessons Learned from Watching Others Enter China During the 18-hour flight from Wellington, Moon had recalled the stories he had heard from other

Westerners trying to sell into the China market. The stories told him of differing motivations and differing results:

Most of the China-entry stories that I have heard were “big” company stories. Coca Cola had been in China since before World War II and returned quickly as China liberalized. Today, GM’s Buick Automobile Division is a huge success in China, largely because of a reputation for being the “automobile of the Chinese elite” established before World War II. Back then, 1-in-5 cars were Buicks. I don’t think I have ever seen a Buick in the US, much less met someone who would buy one. In certain businesses like the electronics business, everybody is here: Nokia, Motorola, Hitachi, Intel, or Siemens. They moved here for labor cost advantages or to gain access to the local market as required by Chinese government trade negotiations. You know, doing the kinds of things “big” companies do—making acquisitions, joint ventures, local licensing agreements. Some of the “big” companies act like they make



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money in China. Others act like they just spend money in China, but then they can afford to take “The Long March.” Icebreaker can’t afford to “buy its way” into this market.

A few of the China entry stories are “small” company stories.

Some “small” companies go into the “sourcing-from-China-as-a-business” such as PCH Holdings, the electronics manufacturing services supplier based in Cork, Ireland, or Darwin Partners, the IT consulting and applications services provider based in Boston. These companies carry the labor cost, skill mix, and time-shifting advantages of Chinese sourcing to the world. But, these “sourcing” stories are fundamentally about selling to Western buyers, not Chinese buyers.

Many “small” companies are carried to China by a “big” customer and then learn how to sell into the local markets. I remember hearing about Teradyne, the US-based semiconductor test equipment company. When it was a small company, Teradyne came to China because its “best” customers came here. The Teradyne equipment came with the factory “design”. Teradyne set up a local service & support operation, then the local Teradyne team began to adapt its US products for local Chinese customer needs. Eventually, Teradyne set up a factory in Shanghai and began to ship to their customers around the world. Similarly, western consumer products are entering on the coattails of Carrefour, Tesco, and Wal-Mart. The “big” customer essentially expects the small company to meet their need, helps cover the cost of getting in front of Chinese customers—and provides the “decision making pressure” to get the “small” company to go ahead and enter the market.

Other “small” companies just see opportunity and decide to enter China “on-their-own”, usually by hiring a local distributor or an independent sales agent. In most businesses, there are always the international trade shows like ipso China in our business where you can meet everybody and gather some market intelligence. (See Exhibit 8 for the ipso China trade show update.) In some businesses, there are well-known industry-specialized sales representatives. This can be particularly true for certain technical equipment, medical products, and even consulting services. These products tend to have the relatively high prices and margins required to support direct selling and direct buying. In some cases, the rise of Internet-based trading platforms like China’s Alibaba, or even the US’s eBay have substantially reduced the costs of Western suppliers finding Chinese buyers. But, still there is still the whole “trust” issue. Every “small” company doing business in China needs to be aware of the lack of IP (intellectual property) protection and the persistent stories about counterfeiting. You have to ask yourself, “Are you selling product or are you just supplying a competitor with prototypes?”

Finally, some “small” companies come to China because they have to.

Ducati Motorcycles has followed the luxury brand rush to China, in part because of Chinese demand for exotic, high-end products and in part because of intense, competitive pressure in Europe and America from Japanese motorcycle manufacturers pushing up market from the bottom-end of the motorcycle market.

I have heard that Steinway recently focused on China because it had seen persistent, long-term slowing in the demand for pianos in North America and Europe. Classical pianists are “rock stars” in China. “Affluent” Chinese customers value the prestige of association with luxury brands in general and pianos in particular. Even “less-than-affluent” Chinese consumers associate classical piano playing with education and discipline which are characteristics highly valued in Chinese culture. This created a significant local market among the wealthy individuals and for outfitting hotels and music schools with Steinway’s unique,



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handcrafted concert grand pianos. Now, Steinway has even partnered with China’s Pearl River Piano Company, the world’s largest piano company to produce pianos specifically designed for high-volume, low-cost manufacture. They say they well sell these “Chinese pianos” both in China and abroad.

Companies come here for lots of reasons. Some apply to Icebreaker and others don’t.

The Decision to Act Moon pondered the strengths and weaknesses of staying focused on the US and Europe versus

broadening his attack to China. The decision weighed on him. He was confident in Icebreaker’s future success in the US market. But, could he afford to take his focus off the U. S. market? Moon remarked, “Everything always seems to take more time, effort, skill —and more plane trips, than you think it will.”

Meanwhile, his huge American competitors—such as Patagonia and North Face—were well-aware of the burgeoning success of Icebreakers merino wool apparel. Moon felt they were going to attack him in the US. Moon knew that they were beginning to launch China strategies. If these competitors got momentum in the Chinese market over the next year or two, how could Icebreaker establish its merino differentiation in China? If Icebreaker launched in China, would it attract the counterfeiters that plagued every luxury good manufacturer that entered the Chinese market? Worse, would Icebreaker’s entry spawn local copycats that would try to commoditize the world-wide merino outdoor apparel category that Moon had invented? Could he keep the uniqueness of his brand in the mind of the customer? Or, were urban China and alpine New Zealand just worlds apart? (See Icebreaker in use in the Southern Alps, New Zealand in Exhibit 9.)

It always came down to a decision. A cold drizzle fell as Moon’s shuttle pulled away from the Pudong terminal building, headed for downtown Shanghai. Could he let Icebreaker keep putting off a China entry or did Moon need to get into the game, before someone else claimed pole position?



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Exhibit 1 A merino sheep

Source: Company.

Exhibit 2 Icebreaker products

Source: Company.


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Exhibit 4 Icebreaker revenue, 1998-2006e

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Source: Company.

Exhibit 5 Global Footprint of a Global Brand

Source: Company.

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Exhibit 7 Testimonials to the effectiveness of Icebreaker products

“Icebreaker is ideal for snowboarding. I stay warm all day and don't overheat or cool down no matter what the climate. Days of -25°C are no problem and I can wear my Icebreaker out that night.” Pam Bell, Olympic Snowboarder

“We were two experienced NIWA scuba divers on our first Antarctic diving mission, faced with the challenge of how to keep warm while diving under 5 metres of ice beneath a frozen lake. The key was to find suitable underclothing that could be worn under the dry suits and that could handle extreme cold conditions and some expected leakage through our suits. We looked at all the options and Icebreaker clothing was decided upon. We wore a layered clothing system throughout the day and evening either as diving underclothing or as extreme cold weather outdoor clothing or on its own as a casual dress around base camp.” Tracey Edwards and John Clayton, Antarctic Diving Mission

“We biked alongside 8,000 metre peaks and conquered 5,000 metre passes. Only in Tibet is it possible to bike within arm's length of the highest point of earth - Mt Everest. And Tibet boasts the world's longest downhill from a point of 5,200 metres at La Lung La to below 800 metres in Nepal - in just over 160 kilometres of steep descent. We rode over 2,500 kilometres and wore our Icebreakers continuously (day and night) for 90 days, and I only needed one set. Tibet is the mountain biking paradise and Icebreaker is the secret to endurance in these extreme conditions.” Kym McConnell, Author of ‘Tibet Overland' -- the mountain bike bible on biking the world's highest plateau

“It was awesome here, like standing on top of the world, not a whisper, just you’re racing heartbeat, and an overwhelming sense of both humility and achievement. And what more fitting place than this to be wearing that incredibly warm and comforting Icebreaker gear - as we have always done during our travels over more than 150,000kms thru' 46 countries.” Peter Travers, leader of the New Zealand expeditions team Below: 15,476 feet on top of the Himalayas, journeying in their Land Rovers from Kyrgyzstan to India

“I can honestly say that Icebreaker is by the far the best product I have ever used for training and racing in. In particular, weight and reliability were paramount for the Everest Marathon as once the race had started you didn't have any second chances, you just kept going no matter what the conditions were like. The starting temperature was approximately -20°C and the finish line temperature approximately +14°C. Icebreaker kept me warm in the low temperatures and breathed once the weather warmed up over the 42kms. In comparison to the garments worn by other competitors from around the world, Icebreaker was by far superior.” Nicholas Cowie, Everest Marathon 27.02.01

“I spent nine weeks living in a tent on the edge of the East Antarctic Ice Sheet, researching rock records for past and future global climate stability. No wardrobe and no washing facilities within two hours' helicopter flight. Wearing my Icebreaker next to the skin was definitely the preference for warmth, long-term comfort and ease of the olfactory senses.” Jeremy Mitchell, Geology Researcher - Transantarctic Mountains, Antarctica

“When you are among the icebergs, driving hard for a world record, the last thing you need is to have to strip to change your grundies. I didn't change my Icebreakers for 40 days and 40 nights. They didn't itch at all, were comfortable at all times, were very warm, didn't get whiffy (as most polyprop does after a few days) and dried quickly when damp... Icebreaker is a real breakthrough for sporting and outdoors people who want minimum bulk and maximum protection against the elements.” Sir Peter Blake KBE, Skipper ENZA, Trophee Jules Verne (non-stop around the world sailing record)

Source: Company.



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Exhibit 8 ispo China

Icebreaker NZ

Dear Mr Moon,

Growth, increases, development: these are all terms, which we often hear in connection with China these days. The second ispo china from March 13 to 16, 2006 finished with more square meters, more brands and more conferences, seminars and talks.

The most important point, however, which the great majority of exhibitors agree upon, is that ispo china succeeded in motivating important and � above all � the right retailers to visit the trade fair. As a result, the quality of visitors was excellent.

This reflects the �maturing� of the market and especially the targeted and efficient visitor canvassing for ispo china. Since the beginning of 2004, various measures have been undertaken, which have ensured and will ensure that purchasers of various store sizes from all areas of sports, from all of China and the complete Asian-Pacific world go to ispo china.

Here are a few examples of the measures taken:

>> Roadshow 2004 � 2006 - 18 cities with more than 1,500 direct retailer and media contacts >> Brand Book - 10,000 (ispo china 05) and 15,000 (ispo china 06) copies were distributed to retailers. >> ispo china newsletter - More than 10,000 recipients in China >> SNAP � Sport News Asia Pacific - More than 20,000 copies have been distributed to retailers every two months. >> Visitor Planer - More than 20,000 copies were sent to retailers from 13 countries. >> Key Account Program - Personal invitations and travel packages were sent to the most important Chinese retailers and department stores in collaboration with the media, associations and exhibitors. >> Cooperation with the media - Invitations to more than 100 Chinese and international journalists; Communication to more than 2,000 journalists worldwide >> Free guest tickets for all exhibitors - Customer invitations in collaboration with the exhibitors

In line with requests of our customers, we are already going to hold ispo china starting this year in the summer and move the winter trade fair to Beijing starting in 2007.

ispo china summer 06: 21 � 24 August 2006 Shanghai New International Expo Center (SNIEC)

ispo china winter 07: 14 � 17 March 2007 Beijing Agricultural Exhibition Center

Consequently, we are providing you with a professional platform for your winter and spring collections/products as well as for your summer and fall ones.

We are also introducing a new price structure in the wake of this changed trade fair concept.

All exhibitors of the past ispo china winter 06 will receive a 50% discount on the substantially reduced price of the summer event (85 euro/sqm instead of 170 euro/sqm).

We would like to thank you for your trust in us and will prepare both trade fairs with the enthusiasm, commitment and quality conditions, which you know from us, to provide you with the highest quality platform in the Asian-Pacific market � ispo china.

Your ispo china Team

P.S.: Please do not hesitate to contact us should you have any questions. You can find more detailed information about the past trade fair in the final report at the following link: Final report

Source: Company.


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icebreaker: the china entry decision - yolawriterph.yolasite.com/resources/case-icebreaker.pdf ·...

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