Sports FootwearIndustryAnalysis

Zara YuJung Chen Ann Marie Puente Ali Akbar Sahiwala

DM 662 Money & Markets June 15 2014

Footwear Industry - North America

Introduction

Leading Company Profiles

Nike is one of the world's leading designer, marketer and distributor of athletic footwear, apparel, equipment and accessories for a range of sports and fitness activities. Widening product lines coupled with strong marketing and innovation has contributed to Nike's rising market share in the global footwear market.

Adidas AG produces sportswear and sports equipment. It offers its products primarily through three brands: adidas, TaylorMade and Reebok. Its strong brand portfolio does not only enhance the market position but also boost its topline.

V.F. Corporation designs, manufactures, or sources from independent contractors various apparel and footwear products primarily in the United States and Europe. The company offers outdoor apparel, footwear and equipment, sports and adventure footwear and a wide range of clothing and accessories.

The athletic footwear industry consists of a various manufacturers, wholesalers and retailers. Major wholesalers in the U.S. market own their own brand names and typically source shoes from independent manufacturers. The retail segment of the industry ranges from owners of large multinational chains to small local businesses.

Athletic shoe companies have been around since the late 1800’s, and have evolved over the centuries.

Market Aspects

Concentration:

Barriers to Entry:

Competition:

Supplies:

Advertising:

Distribution:

Pricing:

Manufacturing:

Customer Appeal:

The footwear industry is highly concentrated, with the top 50 companies generating about 75% of industry revenue.

Relatively high barriers to entry exist due to firms commanding strong brand loyalty. Additionally, economies of scale plays a major role in how companies operate, as production costs have to be minimized, research and development budgets must be considerable and outreach must be very strong to compete effectively.

A range of competing firms dominate the market, each of which aims to target specific segments according to price, sport category, styling and age factors. Offerings from fast fashion and lifestyle brands serve as external competitors and are impacting sales of athletic footwear.

Typical athletic shoes are constructed from raw materials like cotton, rubber and foam. All these major inputs are commodity goods sourced internationally.

Sportstars and celebrities sign million dollar product endorsements annually. Billions are spent in advertising around main sporting events, throughout the media.

Shoe stores compete with department stores, mass merchandisers, apparel retailers, Internet retailers, and some shoe manufacturers.

Price remains an important consideration though product quality, innovation and performance levels are increasingly being demanded by a more sophisticated customer base.

Major firms have experienced considerable public pressure regarding labor practices of their suppliers and manufacturers, forcing them to set up standards to ensure quality of product, decent factory working conditions and better logistics.

Many brands are focusing on female consumers, who desire the same level of high-quality sportswear but with fashion appeal.

DM 662 Money & Markets Zara YuJung Chen | Ann Marie Puente | Ali Akbar Sahiwala

Key Industry Development Milestones

Athletic shoe companies have been around since the late 1800’s, and have evolved tremendously over the time. Liverpool Rubber Company developed the Plimsoll shoeThe J.W. Foster company formed - predecessor of ReebokKeds company formedConverse All Stars first producedAdi Dassler equipped Jesse Owens of the USA Olympics team with shoesAdidas formedNike formedAir Jordans’ first producedNike has dominated as the leading athletic shoe

1800’s

1830’s 18951916191719361948196419802000’s

DEFINE

2

50.0 %1.9 %2.9 %

6.3 %

8.7 %

30.2 %

Men

Female Infant

Male Infant

Girls

Boys

Women

Customer Breakdown in the U.S.

Source: Athletic Footwear Industry Report

18

10

12

14

16

20

2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

Billion U.S. Dollars Source: © Statista 2014

Consumer purchase of footwear in the U.S. 2002 to 2012

$ 185 Billion

$ 75 Billion

$ 14 Billion

US Athletic Footwear

Global AthleticFootwear Market

Global Footwear Market

Size of Footwear Industry

Source: Athletic Footwear Industry Report

Environment Governance

Connectivity

Security

Demographics

Health & Wellness

- Energy Escalation- Water Inadequacy- Changing Climate- Ecosystem Breakdown

- Democracy Expansion- Multinationalism

- Ease of Access to Information- Free-flowing Finance- Homogenization of Global Culture- Mobility Addiction

- Peace & Terrorism

- Coming of Age in the Southern Hemisphere- Women in a New Light- Illiteracy Persists- Mutiplying Mega-Cities- Income Divides & Bridges

- Hunger & Malnourishment- The Spread of Obesity- Disease Outbreaks

Triple Bottom Line Principles

Source: © Nike Sustainability Business Report FY10-11

Footwear Industry - North America

Industry Size & Growth

The U.S. athletic footwear represents roughly 19% of the global athletic market and is considered the biggest independent market in the world. The industry is measured in terms of monetary value from footwear components sold.

Sport footwear products purchased were estimated at 14.14 billion U.S. dollars in 2002. By 2012, the value has increased to 19.03 billion U.S. dollars, a substantial 34% increase.

Market Insights

Sportswear in the U.S. was a significant beneficiary of the increasing trend towards health and wellness. Given this factor, sportswear is one of the most commonly counterfeited types of apparel as major brands are easy to recognize in a generally commoditized market.

MEASURE

DM 662 Money & Markets Zara YuJung Chen | Ann Marie Puente | Ali Akbar Sahiwala3

Nike Inc

VF Corp

adidas Group

Under Amour Inc

Skechers USA Inc

Others

U.S. Footwear Market Share 2013

Source: © 2014 Euromonitor International

20.2%

5.9%5.4%2.9%

2.3%

63.3%

Revenue from 2010 to 2013 AdidasNike Puma

2010

2011

2012

2013

11.527.141.89

13.438.081.99

14.549.152.1

14.549.461.93

Billion U.S. DollarsSource: © Statista 2014

Footwear Industry - North America

Transparency

The industry is increasingly being evaluated by how transparent brands are.

One aspect includes how firms manage their supply chain; they have been demanding access inside factories for quality control and benchmarking.

Additionally, firms are engaging with third party manufacturers to ensure compliance with human rights groups, allowing workers to voice their workplace concerns and deploy fair wage programs to ensure safety for all.

In terms of reporting to external community/stakeholders, firms have exerted effort in reporting sustainability progress, which is becoming industry norm.

Safety standards like BlueSign are being increasingly adopted across the industry.

Industry Benchmarks

Product Enhancement

EVALUATE

DM 662 Money & Markets Zara YuJung Chen | Ann Marie Puente | Ali Akbar Sahiwala4

Safety:

Chemistry:

Sustainability:

Virtualization:

Responsiveness:

Leading Sustainability Efforts

The industry is adopting the BlueSign standard in order to be safe, specially by eliminating toxic and hazardous chemicals. The adidas Group was the first global brand to introduce a total ban on key hazardous chemicals in the workplace. adidas Group replaced hazardous glues with water-based chemicals in their athletic shoe offerings and have led in the development of technical training to help build knowledge of health and safety in countries such as China and India.

The adidas Group has already committed to phase out the use of long-chain PFCs by no later than January 1, 2015. As a further step, the company commits to being 90 percent PFC free in its products as of June 15, 2014, and 99 percent PFC-free by no later than December 31, 2017.

Brands are expected and evaluated now based on how sustainable their internal systems and product offerings are. Production and design efforts are being conducted via Life Cycle Assessments, producing footwear with materials and processes less harmful to environment. Product packaging is being improved, to minimize materials wastage, distribution costs and to enhance brand image.

Businesss are investing efforts increasingly to rely on computer based modeling and displays, meaning less footwear samples need to be produced. Virtualization thus not only improves sustainability but also allows for innovation, speed, cost savings, and thus creativity.

Although evolving, brands are now expected to be increasingly responsive to consumers. Products are expected to go beyond the normal expectations and utilize latest technologies such as wearable technology, syncing to mobile devices and allowing results to be shared on social media.

Nike has set sustainability design standards that are being seen as industry benchmarks. The following diagram is based of the framework used by the Sustainability Apparel Coalition, which is based of Nike’s design standards.

Footwear Industry - North America

Meta Trends

Overarching meta trends affect various industries and the athletic footwear market is no exception. Scarcity of competing resources makes production and material development difficult.

Additionally, consumer awareness of major world issues is increasing exponentially through the widespread adoption of social media and technology across the world.

A worldwide lens on sustainability issues mandates greater regulation. Currently, voluntary and pilot programs are being adopted such as the Sustainable Apparel Coalition. The future will require mandatory compliance as governments will have to soon adopt these measures.

Innovation Spheres

PROJECT

REFERENCES

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With the advancement of technology and 3D printing, it is questionable whether footwear manufacturing in 15 years will exist as it does today. For instance, 3D printers in-house also allow for quick prototyping rather than waiting for a sample from the factory.

In addition, technology will serve as a bridge for brands to be responsive to consumer needs through customization based on individualized data and preferences. Design Management can be utilized because strategic technology can be leveraged to create innovation and hence provide shareholder value.

The current state indicates many of these initiatives are in testing/pilot phase. In the near future, business models may need to change based on advancement of these technologies; for instance, local manufacturing at 3D printer hubs would lead to lower costs due to ease of prototyping and scaled production.

To ensure a competitive edge, the industry will increase efforts to discover and create materials to enhance performance. By extension, companies will claim intellectual property and rights to specialized materials to remain competitive.

- Cramer, B. (2013, 9 Oct.). Athletics Footwear Industry: No Hurdles In Sight. Business and news RSS. Retrieved from http://www.bidnessetc.com/20791-athletics-footwear-industry-hurdles-sight/

- Sha�oe, R. (2014). Athletic Shoe Industry Analysis. Small Business. Retrieved June 12, 2014, from http://smallbusiness.chron.com/athletic-shoe-industry-analysis-74098.html

- ReportLinker. (2014). Footwear Industry: Market Research Reports, Statistics and Analysis. Retrieved from http://www.reportlinker.com/ci02119/Footwear.html

- BoF - The Business of Fashion - Fashion News, Analysis and Business Intelligence from the leading digital authority on the global fashion industry. Retrieved from http://www.businessoffashion.com/

- Tischler, L. (2011, January 11). Intel's Virtual Footwear Wall for Adidas Turns Boutiques Into Shoe-topias [Video]. Fast Company.

Retrieved from http://www.fastcompany.com/1715933/intels-virtual-footwear-wall-adidas-turns-boutiques-shoe-topias-video

- bluesign® system | bluesign global website. (2014). bluesign® system bluesign global website. Retrieved from http://www.bluesign.com/industry/bluesign-system#.U5jeT42Sxy8

- Sustainable Business Report. (2014).NIKE, Inc. Retrieved from http://www.nikeresponsibility.com/

- Sustainability Reports. (2014). adidas Group - Retrieved from http://www.adidas-group.com/en/sustainability/reporting-policies-and-data/sustainability-reports/

- Liszewski, A. (2013, March 14). New Balance Adopts 3D Printing To Create Hyper-Customised Track Shoes. Gizmodo Australia.

Retrieved from http://www.gizmodo.com.au/2013/03/new-balance-adopts-3d-printing-to-create-hyper-customised-track-shoes/

- Timberland Community | Green Index®. (2014). Timberland Community. Retrieved from http://community.timberland.com/earthkeeping/green-index/

- Jerry, W. (2014). Research Hub. Industry Analysis: Shoe. Retrieved from http://www.valueline.com/Stocks/Industries/Industry_Analysis__Shoe.aspx