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Athletic Footwear Industry Analysis Angela Gieras Jeremy King Tara McNeill Tom Parrish January 17, 2003.

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Presentation on theme: "Athletic Footwear Industry Analysis Angela Gieras Jeremy King Tara McNeill Tom Parrish January 17, 2003."— Presentation transcript:

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 ATHLETIC FOOTWEAR MARKET SIZE ESTIMATES Retail Dollars in Billions 1998199920002001 Change 00-01 Mens$8.470$8.037$8.236$8.541+3.7% Womens3.9514.1944.4864.418-1.5% Childrens2.3322.3272.3942.461+2.8% TOTAL$14.753$14.558$15.115$15.420+2.0% Source: The NPD Group, Inc. 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)

4 Size of Market ATHLETIC FOOTWEAR MARKET SIZE ESTIMATES Pairs Sold in Millions 1998199920002001 Change 00-01 Mens155.200161.661170.316175.010+2.8% Womens106.486115.755125.999119.973-4.8% Childrens106.508102.986111.676106.961-4.2% TOTAL368.194380.402407.990401.943-1.5% Source: The NPD Group, Inc.

5 Expected Growth Rate TOTAL FOOTWEAR SOLD IN THE UNITED STATES – MARKET FORECASTS Market Size (billions of dollars) Growth Rate 2001$40.0- 2002$40.61.5% 2003$41.72.7% 2004$42.82.6% 2005$44.02.8% 2006$45.22.7% Source: Euromonitor According to the Sporting Goods Manufacturers Association, athletic footwear accounts for almost 35% of all footwear purchases. (The NPD Group, Inc.)

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. SALES BY QUARTER Dollars in Billions 1234 1999$3.209$3.663$4.015$3.671 20003.4533.3074.0574.299 20013.8823.4743.9964.068 Change 00-01 +12.4%+5.1%-1.5%-5.4%

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 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 Consumer Demographics 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 Sample Market Segment Percent Purchasing Athletic Shoes Female Clerical/Sales21.5% Female Executive22.9% Female Crafts/Repairs30.6% Female Professional26.6% Male Clerical/Sales 22.0% Male Executive 25.0% Male Crafts/Repairs18.4% Male Professional22.6% Men20.0% Women19.2% Source:Euromonitor

13 Product Segments Retail Sales in $ Billions 199920002001Change 00-01 Running$4.076$4.383$4.549+ 3.8% Basketball2.6062.5242.822+11.8% Cross training2.1262.2822.220- 2.7% Walking1.2671.2241.218- 0.5% Athleisure1.121.937.971+ 3.6% Recreational boots.466.922.802-13.0% Hiking.757.726.678- 6.6% Tennis.524.469.571+21.7% Sports sandals.349.378.355- 6.1% Aerobic.320.227.216- 4.8% Other.9611.0431.018- 2.4% 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,

23 2001 Competitor Ratio Analysis RatioNikeAdidasReebok Profit Margin6.73.415.21 Inventory turnover4.292.745.01 Return on Assets10.825.096.83 Total Debt/Equity40.4174.3553.34 Current Ratio2.262.072.88 Return on Net Worth15.3620.5514.26 # of employees22,70013,9416,700 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,

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 2001:Vietnam 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,

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,

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,

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, Reports/USA_Footwear.html

39 Sources An Inside Look at Americas Sneaker Biz. SGMA International. 14 Jan. 2003. Apparel and Footwear Industry Survey. Standard and Poors Net Advantage. 15 Jan. 2003. Athletic Footwear. 14 Jan. 2003. Athletic Footwear: a Mature Industry. SGMA International. 14 Jan. 2003. 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. 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. 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.

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. 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.

42 Sources (cont.) Company Websites – – – – – –

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