Billabong, one of the world’s best-known surf brands and a home-grown business success story, is on its deathbed. In August the company wrote down the value of both its famous brands to zero, along with that of skatewear line Element.

It’s far from the heady days of Billabong’s prime. Formed in 1973 by Australian couple Gordon and Rena Merchant, Billabong parlayed success at home during the boom years of surfing apparel into rapid overseas expansion in the 1980s and 90s. Like the founders of rival brands Rip Curl and Quiksilver, the Merchants knew Australian surf culture inside-out and were soon remarkably successful in selling it to the rest of the world.

In the early years, Australian surf brands were seen as counter-cultural rebels and held what industry veteran and Sneakerfreaker founder Simon Wood describes as an “outlaw mystique”. The companies were mostly started by surfers for surfers, but the laid-back style soon gathered cultural currency and the major surf brands became big business.

Suburban Australians opted in on the beach-bum aesthetic and a once-marginalised pastime was now a cultural touchstone. It appeared that the wave would never break.

But surfers themselves have gradually deserted the fashion offerings of Quiksilver, Billabong and Rip Curl and, regardless, are not the fashion leaders they once were. Non-surfing consumers now have less incentive than ever to adopt the traditional surf aesthetic still on offer. The “made by surfers for surfers” mantra of the industry’s early days is now a distant memory when it comes to the major brands.

Industry veteran Jon Wilson, whose Balin surf brand was born just a year after Billabong’s arrival, says the brand perception of surfing’s big names is suffering a generational strain.

“The guy that was buying it 20 years ago is still buying it and you know, he’s now the dad of the kid that doesn’t really want to look like his dad”, he explains. “There’s some pretty ugly fat guys wearing Billabong T-shirts. They haven’t addressed that and I don’t know how they’re going to.”

The outlook now is bleak. The Billabong write-down announcement followed a 13.5% decline in sales and an annual loss of $773m, three times the size of its market capitalisation of $229m. It amounted to a $252m write-down in value and an astonishing admission that their once-ubiquitous surfwear brand was worthless. The news was emblematic of an industry-wide crisis.

Billabong was publicly listed in 2000 but its resultant buying spree, which included watch company Nixon and cult skate brand Element, has had dire consequences for the parent company. The moves pushed Billabong to peak valuation of $US3.45bn in 2007, but serious cracks began to emerge in the acquisition strategy, with Billabong soon selling off Nixon and fighting for its life. The one-time market behemoth was subsequently decimated by store closures, staff lay-offs and growing debt.

Along the way, 158 stores, 75% of the company’s suppliers and 15% of its European staff have gone, forcing them into a $386m refinancing deal with Oaktree Capital Management LP and Centerbridge Partners LP.

Acting chief executive Peter Myers labelled it “a tumultuous year” for Billabong, who’d been the constant target of takeover and refinancing bids for much of his predecessor Launa Inman’s reign. Chairman Ian Pollard described it as “the most challenging period in the company’s history.”

Elsewhere, Quiksilver has also been hit hard by the downturn in the surfwear market, with their last quarterly losses topping the $32m mark. California-based surfwear retailer Pacific Sunwear has been hit equally hard.

As late as October 2012, Gordon Merchant had been in a position to take a $694m offer from TPG Capital for Billabong, which amounted to $3.30 a share, but would not accept less than A$4 a share, a knock-back that cost him a $234m payout. As his surfing empire crumbled around him, Merchant could at least be thankful that the sale of some of his shareholding and related diversification had insulated him against a personal wipe-out. His own private wealth now outstrips that of the company he started on his kitchen table by a factor of three, none of which is any comfort to Billabong shareholders.

Billabong’s heavy investment in their own retail stores was initially advantageous and it was the combination of retail and real estate that made them an intriguing proposition for capital investors. The retail footprint allowed the company to control the way their product was presented in store and give them strong geographical reach. But all the while their brand equity has weakened, leaving them horribly exposed to the fickle nature of fashion.

The rapid growth of Billabong also came at a cost for other players in the Australian market. For Jon Wilson’s Balin brand, market conditions became tougher.

“They went on a buying spree and consequently they were controlling all of the retail space so there was no room for brands like us,” he says. Balin had been exporting apparel to the UK and through an extensive Australian distribution network but withdrew from the market altogether in 2009.

Wilson now sells boards and equipment to a more loyal band of enthusiasts, “guys who actually go surfing”. He says Billabong’s strategy of aggressive retail store buy-outs seemed a winner on the surface, but that “they were collecting a lot of dead wood as well”.

“Let’s say you buy 20 stores, you’re buying their whole systems and management and everything and integrating that into what you’re doing. Out of those 20 stores, there might be half of them not making any money either.”

Speaking of Billabong’s troubles, market analyst Todd Guyot recently told Financial Post: “You can see how much the core business has deteriorated over the last few years. There’s still a massive challenge to get the business going right.” He added: “It probably isn’t cool anymore for the youth of today to wear Billabong.”

Wood says it is not only the trouble associated with over-priced acquisitions that has sunk Billabong and its like, but consumer indifference and a long-term shift away from surf-inspired fashions. “If enough people were buying they’d power through those troubles.”

He says brands have failed to adapt to changing consumer demands and more sophisticated and fashion-forward customers. “If you’re standing still, rigor mortis sets in fast these days. It’s a brutal world out there,” he explains.

The youth fashion market in particular has become resistant to the overtures of surf brands, causing a significant dip in popularity for the major brands in Australia.

Billabong’s struggles also pose a potentially dire scenario for professional surfing, which relies heavily on their corporate backing. They and other brands have scaled back sponsorship deals and the implications are grave if Billabong disappears. “They’ve put a lot of money into the sport. The whole professional circuit would just die if they pulled out,” says Wilson.

Yet through all this it’s the boom and bust history of surf and skate apparel that may give the major brands some small amount of optimism. Another homegrown label, Mambo, originally garnered a cult demand with a series of iconic T-shirt designs that appealed the Australian taste for larrikinism. The designs of Reg Mombassa and Mambo’s “farting dog” T-shirt brought the brand infamy and notoriety. By 2004 it had ditched the iconic design in an attempt to move with the fashion times and reinvigorate the brand, but nine years on it has revived itself as a heritage act. That an old stager has come back and posted record profits provides some reason for optimism during surfwear dog days.

“The aesthetic will bounce back at some point, but it will take a bold new vision to capture the attention of consumers on a globally meaningful level,” explains Wood. Whether that reinvention of the industry is driven by the major brands remains to be seen.

Amid their troubles, a wave of smaller and more fashion-forward independent surf brands have surfaced, while Asos-style online retailers and youth-targeted department store chains like Topshop, Zara and H&M have created a much more competitive retail landscape for the industry dinosaurs.

Wilson’s experiences with Balin highlighted the demanding consumer landscape that surf brands now face. “I don’t think the magic’s disappeared,” he says. “I think what’s happened is that it’s come up against a lot of competition … of course kids have got – I wouldn’t call it more disposable income – they’re spending their parents’ money on other options. The dollars are spread more thinly now on desirable things for young kids.”

Wilson remains upbeat about Billabong’s prospects. “I reckon there’ll be a lot of people who know what’s going on who’ll know how to resurrect the business,” he says. I think they’re quite capable of doing it. I still think it’s a great business and there are people there that have got a vision for it.”

Wood says it will be an uphill battle for the major surf brands to fully recover. “They certainly don’t seem to have had any strategy for creative renewal [and have not] invested in technology over the past two decades. It’s a long way back for brands like Billabong and Quiksilver. Along the way, they lost the magic formula.

“As we have seen, the consequences of an obsession with getting bigger and bigger can be terminal.”