Athletic Footwear Industry Analysis

1
Athletic Footwear Industry Analysis

• Angela Gieras
• Jeremy King
• Tara McNeill
• Tom Parrish

January 17, 2003
2
Background

• Athletic footwear was first developed by the
  ancient Greeks in order to provide protection
  when moving over rough terrain in varying weather
  conditions.
• The modern athletic shoe was developed in
  eighteenth century England as a result of an
  increasing interest in the sport of running and
  other outdoor activities.
• Joseph William Foster founded the first
  large-scale sports shoe company in Boulton, UK in
  the 1890s. During this period, other sport
  shoes could be found in mail order catalogues,
  such as Sears and Montgomery Wards.
• In 1917, the Converse and Keds corporations
  entered the American athletic shoe market.
• In 1958, Joseph William Fosters grandson renamed
  his grandfathers company Reebok .
• Athletic footwear forever changed in 1962 when
  Phil Knight and Bill Bowerman created "Blue
  Ribbon Sports," the forerunner of Nike.

Source Digital Dissertations Gurian, Brian.
The Impact of the Sneaker and the Sneaker
Industry on Modern Society. St. Johns
University, 2002.
3
Size of Market

• In the first half of 2002, NPD Group estimates
  that athletic footwear spending resulted in 1.4
  year-to-year growth to 7.40 billion from 7.29
  billion in the comparable year-earlier period.
  (Euromonitor)

Source The NPD Group, Inc.
4
Size of Market
Source The NPD Group, Inc.
5
Expected Growth Rate

• According to the Sporting Goods Manufacturers
  Association, athletic footwear accounts for
  almost 35 of all footwear purchases. (The NPD
  Group, Inc.)

Source Euromonitor
6
Growth Rates in Sports Participation
Source National Sporting Goods Association
7
Market Sales - Seasonality

• The US market for footwear is seasonal in nature
  due to consumer spending patterns, with higher
  back to school, Christmas, and Easter holiday
  seasonal sales.

Source Euromonitor and The NPD Group, Inc.
8
Market Sales

• In 2001, NPD estimates that spending for athletic
  footwear rose 2 to 15.42 billion, from 15.12
  billion in 2000.
• Consumers purchased 401.9 million pairs of
  athletic shoes, down 1.5 from 408.0 million
  pairs in 2000.
• The average price paid per pair rose 3.5, to
  38.36, from 37.05 in 2000 however, this was
  still well below the 40.07 paid in 1998.
• Running shoes captured the biggest share of
  consumer spending, with 29.0 of the total
  market. Sales of running shoes rose 3.8 to
  4.55 billion, from 4.38 billion in 2000.

Source Standard Poors Net Advantage
9
Consumer Demographics

• Baby Boomer Generation
• Born 1946-1964
• 77 million Americans
• Healthcare, leisure, retirement compete for
  fashion dollars
• Fashion spending is waning, but still spend the
  most
• Conservative, large sizes appeal to this group
• Generation X
• Born 1965-1976
• Are typically marketed to in a similar fashion as
  Generation Ys
• Marketing focus may be lost between Baby Boomers
  and Generation Y

Source Standard Poors Net Advantage
10
Consumer Demographics

• Generation Y
• Born 1977-1994
• 75 million Americans (25 of population)
• Focus of marketing in recent years
• Teen girls spend 75 of earnings on clothing and
  accessories
• Comparatively, teen boys spend 52
• Loyal to footwear and apparel name brands
• Generally support smaller footwear companies in
  tune with fashions
• Comprised one-quarter of all athletic footwear
  spending
• Advertisers attempt to reach more through
  non-traditional mediums (i.e. Internet)

Source Standard Poors Net Advantage
11
Athletic Footwear Purchases by Age
Source National Sporting Goods Association
12
Market Segments
SourceEuromonitor
13
Product Segments
Source SGMA International
14
Consumer Purchasing Habits

• Traditional
• Mall
• Retail outlets
• Shoe store

• Non-traditional
• Internet, television (i.e. QVC, HSN, ShopNBC)
• Footwear is one of fastest growing categories on
  QVC HSN
• QVC and HSN reach 100 million homes
• ShopNBC reaches 52 million homes

Source Footwear Journal USA
15
Consumer Purchasing Habits

• Who?
• Men spend more per pair and buy more pairs of
  athletic footwear than women
• Womens and Childrens shoe sales growing more
  rapidly than Mens
• Nearly 33 of all athletic footwear spending is
  done by those aged 13-24
• Less than 30 of athletic shoes purchased are for
  use in sports or fitness activities

• How?
• Internet orders (via websites)
• Telephone orders (i.e. QVC)
• Walk-in orders (mall, outlets, etc)

Source SGMA International Standard Poors
Net Advantage
16
Major Competitors

• Nike- Principal business activities involve
  design, development, and worldwide marketing of
  quality footwear, apparel, equipment, and
  accessory products. The largest seller of
  athletic footwear and athletic apparel in the
  world. All footwear products are produced outside
  the United States by independent contractors.
  Nike places emphasis on high quality construction
  and innovative design.
• Adidas- German based Adidas-Saloman is the second
  largest manufacturer of athletic equipment,
  footwear , and apparel in the world. Adidas
  America oversees marketing, merchandising,
  distribution, and sales of Adidas products in the
  U.S. Their mission is to become the best sports
  brand in the world. Adidas believes in creating
  a product to perform. Form follows function.

Source Company websites and company 10K reports,
competitor information from Standard Poors
17
Major Competitors

• Reebok International- Global company engaged in
  the design and marketing of sports and fitness
  products, including footwear, apparel, and
  accessories. They devote significant resources
  to advertising products to a variety of audiences
  through various media. Revenues are primarily
  driven from wholesale distribution of products to
  selected athletic specialty stores, high-end
  retail shops, as well as sporting goods and
  department stores.
• New Balance Athletic- A privately held company in
  Massachusetts, New Balance was founded as a
  manufacturer of arch supports and orthopedic
  shoes. New Balances mission is to be
  recognized as the worlds leading manufacturer of
  high performance footwear and apparel.

Source Company websites and company 10K reports,
competitor information from Standard Poors
18
Major Competitors

• Skechers U.S.A.- A newer player in the athletic
  footwear market. A global leader in the
  lifestyle footwear industry, Skechers designs,
  develops, and markets lifestyle footwear that
  appeals to trend-savvy men, women, and children.
  Product offerings have grown from utility-styled
  work boots to include sports, casual, dress,
  dress casual, and roller skates.

Source Company websites and company 10K reports,
competitor information from Standard Poors
19
Best Selling Product Categories

• Nike- Running, basketball, childrens,
  cross-training, and womens shoes
• Adidas- Basketball, training, baseball, football,
  urban, originals, workout, and walking
• Reebok International- Running, walking , aerobic
• New Balance Athletic- Running, walking,
  cross-training
• Skechers U.S.A.- Casuals, utility, steel toe

Source Company websites and corporate 10K reports
20
Competitor Business Strategies

• Nike
• High quality construction
• Innovative design
• Collection based marketing
• Focus sales on distributors, licensees, and
  subsidiaries

• Adidas
• Form follows function
• Marketing department begins design process
• Greater emphasis placed on design for an
  athletes need

Source Nike website and 10K and Adidas website
21
Competitor Business Strategies

• Reebok
• Grow sales through distribution channels
• Focus on relationship with major sports figures
  to enhance brand image
• Resources devoted to advertising through various
  media

• Skechers
• Fashionable footwear
• Does not concentrate on performance
• International expansion by leveraging domestic
  brand image
• Building brand image

Source Reebok and Skechers websites and 10K
reports
22
Brand Development

• According to Forrester Research, 69 of teens
  said that when they find a brand they like, they
  remain loyal
• Firms use celebrities and athletes
• Nike Michael Jordan and Tiger Woods
• Skechers Brittany Spears
• Adidas Kobe Bryant

Source Drivers of Change, http//www.duke.edu/w
eb/soc142/team2/drivers.html
23
2001 Competitor Ratio Analysis
Source Bloomberg and Adidas consolidated
financial statements, financial information
unavailable for New Balance
24
2000 Market Share of Athletic Shoe Competitors
Source Market Share Reporter
25
Historical Government Legislation and Trade
Restrictions

• May 1974 Multifibre Agreement (MFA) import
  quotas replace the regulations under the GATT
  agreements as the primary regulator of footwear
  trade
• Protects countries whose domestic industries are
  severely threatened by imports
• December 1993 North American Free Trade
  Agreement (NAFTA)
• Created the worlds largest free trade zone
  between the United States, Mexico, and Canada
• July 1995 The World Trade Organization created
  the Agreement on Textiles and Clothing (ATC) to
  replace the Multifibre Agreement
• May 2000 Caribbean Basin Trade Partnership Act
  (CBTPA) and the African Growth and Opportunity
  Act (AGOA), passed under the heading of the Trade
  and Development Act
• Effective October 1, 2000, authorized for eight
  years
• Duty-free treatment and reduced duties on
  footwear imports for potentially 72 countries

Source The Politics of Footwear,
http//www.duke.edu/web/soc142/team2/Politics.html
26
Historical Government Legislation and Trade
Restrictions (cont.)

• April 2001 Summit of the Americas Conference in
  Quebec
• Delegates agreed to a draft to eliminate all
  trade barriers within North and South America,
  final text due January 2005
• October 2001Vietnam Bilateral Trade Agreement
• Established normal commercial trade relations
  subject to annual review by Congress
• October 2001 Bilateral Trade Agreement with the
  Kingdom of Jordan
• Mandates that all footwear articles must meet
  the basic 35 local content origin rule
• November 2001 China enters the World Trade
  Organization
• China allowed to ship apparel and footwear to the
  U.S. under reduced tariffs
• December 2001 Congress directed attention to
  numerous labor issues in the footwear industry,
  but instituted no actions regarding sweatshop and
  child labor conditions

Source The Politics of Footwear,
http//www.duke.edu/web/soc142/team2/Politics.html
27
Latest Trade Legislation

• July 2002 Trade Act of 2002
• Trade Promotion Authority (TPA) grants the
  President the right to negotiate trade agreements
  and gives Congress the final authority to approve
  or disapprove those agreements
• Andean Trade Preference Act (ATPA)
• Duty-free access to virtually all footwear from
  the Andean region (Bolivia, Columbia, Ecuador,
  and Peru)
• Retroactive modifications to the May 2000
  Caribbean Basin Trade Partnership Act (CBTPA) and
  the African Growth and Opportunity Act (AGOA)
• Expected Consequences of Latest Legislation
• Increase in imports from the Caribbean basin and
  Andean region, and to a lesser extent sub-Saharan
  Africa
• Erosion of Asias share of U.S. imports in the
  short term
• Increasing amounts of footwear imports from China
  in the long-run
• Eventual erosion of Mexican and Caribbean share
  of U.S. imports due to lower labor costs in China
  

Source Standard Poors Net Advantage
28
Labor Practices

• Labor practices and environmental issues in the
  footwear industry have been historical issues
• Example Nike (Historical)
• In Indonesia, production workers were paid 86
  cents per hour for a 12 hour day, no overtime, no
  breaks
• In Vietnam, factory workers earned 20 cents per
  hour
• In China (where Nike has 40 of its production),
  workers worked 84 hours per week and earned 1.50
  per shoe made
• The International Labor Office reports a recent
  trend in self-regulation, including voluntary
  initiatives, due to pressure from labor and
  special interest groups
• Footwear companies are concerned with public
  image and corporate citizenship

Source The Politics of Footwear,
http//www.duke.edu/web/soc142/team2/Politics.html
29
Labor Practices (cont.)

• Government Actions
• President Clinton worked with UNITE to form
  worldwide labor regulations for the footwear
  industry, limiting the work week to 60 hours and
  establishing a minimum wage

Source The Politics of Footwear,
http//www.duke.edu/web/soc142/team2/Politics.html
30
Economic Factors

• Apparel and footwear sales are driven strongly by
  economic conditions, demographics, and pricing
• With expected economic recovery in 2003, footwear
  sales should begin a gradual recovery
• A wave of consolidation is expected as firms
  attempt to gain leverage in distribution
  channels. The slow economy has led athletic
  footwear manufacturers to lay off workers, freeze
  hiring, find less expensive sourcing, and cut
  non-fixed costs like technology, travel, and
  entertainment

Source Standard Poors Net Advantage
31
Benefits of Economic Downturn

• Retailer position becomes If it isnt moving,
  mark it down while bad for margins, it is good
  for inventory
• Since 1995, the industry inventory-to-sales ratio
  has declined

Source Standard Poors Net Advantage
32
Consumer Confidence Index

• Declines in the Consumer Confidence Index tend to
  curtail spending on discretionary items like
  apparel and footwear, causing retailers to reduce
  and cancel orders
• September 11 terrorist attacks dramatically
  slowed consumer spending, exacerbating the
  problem
• While consumer spending for athletic footwear was
  up about 7 before the attacks, sales dropped
  more than 10 after
• In October 2002, the Consumer Confidence Index
  reached a nine year low of 79.4

Source Standard Poors Net Advantage
33
Consumer Confidence Index (cont.)

• Consumer spending is expected to rise 3.0 for
  the full-year 2002 and 2.5 in 2003
• Disposable income expected to rise 5.8 in 2002
  and 4.7 in 2003

Source Standard Poors Net Advantage
34
Good News for Consumers, Bad News for
Manufacturers

• Poor economy and high competition leads to
  extreme price pressure, deflating prices and
  margins
• Consumers are more value-conscious, wanting
  quality at a low price evident in the growth of
  mass merchant and off-price retail stores
• Discounts and bargain shopping maintained sales
  level, but hurt profit margins
• While spending for all men, women, and childrens
  athletic shoe categories increased, the pattern
  of buying more for less was consistent among all
  segments
• Years of price promotion have tarnished the image
  of athletic footwear
• Also contributing to price deflation have been an
  increase in imports and market share gains by
  discounters
• Despite a 6 rise in average prices for athletic
  shoes in 2001, which reversed the trend beginning
  in 1997, analysts believe the reversal is
  temporary

Source Standard Poors Net Advantage
35
Average Price of Athletic Footwear
Source National Sporting Goods Association
36
Options for Survival

• There is a necessity to diversify in terms of
  product line, market segment, and distribution
  channels
• Options
• Acquisition
• Eliminates competitors
• Expands acquirers top line and market share
• Example Nike acquired surf wear manufacturer
  Hurley International
• Licensing
• Offer new products while leveraging current
  brands
• Example Perry Ellis International has swimwear
  licenses with Nike and Reebok

Source Standard Poors Net Advantage
37
Expected Change in the Industry

• Product diversification
• Athletic apparel viewed as the new growth
  component for firms
• Slower growth due to competition and
  price-conscious consumers
• Granting of exclusive rights to retailers by
  manufacturers
• Issuing limited editions of high-fashion and
  high-tech models
• Increased competition from the growing popularity
  of traditional designer shoes, which have taken
  on more athletic designs, and casual shoe styles
• Athletic footwear manufacturers introducing
  styles not meant for sports and targeting
  different segments (i.e. girls, women, and older
  casual wearers)
• Increased number of imports

Source Standard Poors Net Advantage
38
Industry Trade Organizations

• Footwear Industries of America (FIA)
• National association for footwear manufacturers,
  importers, distributors, and suppliers to the
  leather and allied trades
• Represents the industry in Washington, DC
• Footwear Distributors and Retailers of America
  (FDRA)
• Provides representation on U.S. and international
  government relations for U.S.-based retail chain
  shoe retailers and the footwear brands
• National Shoe Retailers Association (NSRA)
• Founded 1912
• Trade organization representing independent shoe
  retailers
• Athletic Footwear Association (AFA)
• Founded 1982
• Serves an international group of athletic
  footwear manufacturers and marketers
• About 140 members
• Part of the Sporting Goods Manufacturers
  Association (SGMA)

Source Contacts and Links, www.infomat.com/info
rmation/research/industry/
Reports/USA_Footwear.html
39
Sources

• An Inside Look at Americas Sneaker Biz. SGMA
  International. 14 Jan. 2003 gma-press-releases.html.
• Apparel and Footwear Industry Survey. Standard
  and Poors Net Advantage. 15 Jan. 2003
  .
• Athletic Footwear. 14 Jan. 2003
  sult.html.
• Athletic Footwear a Mature Industry. SGMA
  International. 14 Jan. 2003 gma-press-releases.html.
• Athletic Footwear Adjusting to a Changing
  Market. SGMA International. 14 Jan. 2003
  .
• Athletic Footwear Sales Climb 2 in 2001 As
  Customers Pay More Per Pair. SGMA International.
  14 Jan. 2003 ses.html.
• Adidas. Annual Report. 14 Jan. 2003
  .
• Adidas. About Adidas. 14 Jan. 2003
  .
• Bloomberg. Financial Analysis Report. Nike. 15
  Jan. 2003.
• Bloomberg. Financial Analysis Report. Reebok.
  15 Jan. 2003.

40
Sources (cont.)

• Ellis, Kristi. AAFA Joins the Call for Free
  Trade The U.S. Apparel and Footwear Trade Group
  Reversed Its Longstanding Support of Protective
  Tariffs for Footwear. Footwear News. 24 Jun.
  2002.
• Ellis, Kristi. Lobbyists Say Trade Act Falls
  Short Only Columbia, Peru, Bolivia, and Ecuador
  to See Footwear Duty, Quota Breaks. Footwear
  News. 19 Aug. 2002.
• Footwear in the USA. 15 Jan. 2003
  .
• Footwear in the USA. 15 Jan. 2003
  try/reports/USA_footwear.html.
• Footwear in the USA. Footwear Journal USA. Jul.
  2002.
• Footwear Industry. 15 Jan. 2003
  .
• Footwear Production. US Census Bureau. 15 Jan.
  2003 .
• Gurian, Brian. The Impact of the Sneaker and the
  Sneaker Industry on Modern Society A Review of
  the Transformative Powers of an Icon. St. Johns
  University. 2002. 15 Jan. 2003 com/dissertations/preview_all/3056600.

41
Sources (cont.)

• Howell, Mike McNulty. Footwear Industry Weathers
  Economic Storm. Rubber Plastics News. 7 Oct.
  2002.
• Lazich, Robert S. Sports Shoe Market. Market
  Share Reporter (Detroit Gale) 2003.
• New Balance. Fact Sheet. 15 Jan. 2003
  .
• Nike. Edgar Online, Inc. 10K report for Nike.
  14 Jan. 2003.
• Reebok. Edgar Online, Inc. 10K report for
  Reebok. 14 Jan. 2003.
• Research and Statistics. National Sporting
  Goods Association. 14 Jan. 2003
  328.
• Skechers. Edgar Online, Inc. 10K report for
  Skechers. 14 Jan. 2003.
• Taylor, Sarah. Phoning It In Footwear Is Now
  One of the Fastest Growing Categories for
  Home-Shopping Networks QVC HSN and ShopNBC
  Vendors Couldnt Be More Thrilled, but Retailers?
  Thats Another Story. Footwear News. 29 Jul.
  2002.
• US Sporting Goods Market Outlook 2002. SGMA
  International. 14 Jan. 2003 gma-press-releases.html.

42
Sources (cont.)

• Company Websites
• www.adidas.com
• www.asics.com
• www.newbalance.com
• www.nike.com
• www.reebok.com
• www.skechers.com