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Athletic Footwear Industry

Rob Pannell,Kyle Ewanouski, Vaibhav Gupta, Venkat Koduru

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Why athletic footwear?

• Constant observable shift in consumer preferences due to seasonality

• Relevant to college students since most as consumers of athletic shoes and involved in sports team

• High (45%) gross margin; strong focus on marketing

• Nearly all inputs are outsourced except for end-retailing

• Push to cut out retailers, and sell directly to consumer

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Industry Structure

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Quick Figures

Global Footwear Market

$185 billion

Global Athletic Footware Market

$75 billion

US Athletic Footware

$14 billion

• US Athletic Footwear represents roughly 19% of global athletic footwear market

• Asia-Pacific market is expected

Avg Gross Margin:

45%

Avg Net Margin:

7%

Avg Marketing Expense: 10%

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Shoe DistributionShoe Manufactures

Retailers

Customers

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Types of Shoes• Based on survey data by NPD group of purpose of

athletic footwear• Nearly 50% of sales is for “Casual Athletic” and

“Running”

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Customers• 50% of sales in the US are to men, 30% to

women, and 20% to children/infants• Males account for roughly 60% of sales to

children and infants, so trend is not reversing

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Let’s look closer• Though Men bought the same number of athletic

shoes, they purchased more expensive ones• Women too purchased more expensive shoes, but

they purchased less shoes• Children’s shoes (though only 15%) of the

market, are the fastest growing area

2011 to 2012

Dollar % Change Unit % Sales

Men +6% flat

Women -3% -5%

Children +13% +4%

Infants +7% flat

Total +4% -1%

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Consolidated Industry

US HHI = 2,713• Highly concentrated domestic market• Nike and Addidas (including Reebok brand) make

up 80% of market share• Smaller, specialized players that focus on

particular segments all with limited market share

Global HHI = 1,581• Moderately concentrated global market• Nike and Addidas (largest global players) make up

49% of market share

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Specialization• Only the Nike,

Adidas (Reebok), and New Balance brands offer products for a wide range of sports

• Most of the other manufactures specialize in only a few segments

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Key Success Factors• Low internal costs• Economies of scale & scope• Manufacturing efficiency

oOutsourcing of majority of manufacturing & automation

• Establishment of brand names• Quality control• Establishment of export markets• Compliance with government policies

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SWOT Strengths

• Low product costs, and high prices (avg. gross margin: 45%)

• High net margin (avg. roughly 10%)• Strong brand loyalty• Lean organizations (money not tied

up in factories, manufucatuing workers); most costs can be easily reversed (marketing)

Weaknesses

• Low penetration of price sensitive consumer market (especially important in European market)

• Numerous ethical problems at manufacturing facilities (problem not limited to Nike)

Opportunities

• Growth in emerging markets (mainly in Asia-Pacific region) – growing wealth and internationalization

• Many global marketing opportunities to increase exposure (World Cup, Olympics, etc)

Threats

• Rising competition from counterfeited goods in growth markets

• Slow growth in US• Negative growth in Europe

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Nike• 42% domestic market share• Purchased Converse in 2003 for $305 million• Focus on selling higher-priced “customized” shoes

directly to customer – NikeId.com• Focus on technology – Nike+ product with Apple

Nike Revenue(millions $)

Gross Margin

Net Margin Marketing Expense

2012 24,128 43.40% 9.21% 11.24%

2011 20,862 45.58% 10.22% 11.73%

2010 19,014 46.28% 10.03% 12.39%

2009 19,176 44.87% 7.75% 12.26%

2008 18,627 45.03% 10.11% 12.39%

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Adidas• 39% domestic market share (12% Reebok brand)• Purchased Reebok in 2006 for $3.8 billion• Globally Adidas is the more popular brand, US

Reebok• In 2006, signed 11 year contract to become

official NBA clothing providero Increased revenue by 51%; Increased US market share

Addidas

Revenue(millions $)

Gross Margin

Net Margin

Marketing Expense

2012 19,347 47.73% 3.53% 10.09%2011 17,347 47.54% 5.02% 10.21%2010 15,587 47.79% 4.74% 10.74%2009 13,495 45.39% 2.36% 9.90%2008 14,038 48.67% 5.96% 10.48%

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Under Armor• Focus is actually on specialized t-shirts• Only began offering footwear in 2006; negligible

current footwear market shareo But growing brand + strong brand loyalty = expectation of higher

market share in the future

• Growing net margins

Under Armour

Revenue(millions $)

Gross Margin Net Margin

2012 1,834.9 47.92% 7.02%2011 1,472.6 48.41% 6.58%2010 1,063.9 49.87% 6.44%2009 856.4 48.23% 5.46%2008 725.2 48.94% 5.27%

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Puma• U.S Market share only 6%• Global market share is 7%• Owned by PPR conglomerate• Large presence in European market

o Increased raw material costs and reduced demand have damaged margins

• But above average gross margin

Puma Revenue(millions $)

Gross Margin Net Margin

2012 4,252.3 48.28% 2.14%2011 3,911.7 49.63% 7.64%2010 3,517.8 49.69% 7.46%2009 3,199.3 51.30% 5.12%2008 3,281.2 51.76% 9.19%

Survey Results & Pricing Strategies

Premium Pricing• Footwear products are listed at an

above average priceo Nike Lebron X P.S. Elite + Enabled

priced at $279.99

• (Why?) o Higher prices influence customers’

perceptions of product as they often equate higher prices to higher performance and an overall better product, in comparison to lower priced goods

Penetration Pricing•Footwear products are listed at a lower price than competitors in order to gain attention and support from new potential customers

• Li-Ning leading sport brand in China attempting• Just signed Dwayne Wade in 2012

(Why?) •Companies attempt to gain market share and long term survival amongst the industry by attracting customers simply through the use of marginally lower costing products than their well known competitors

Promotional Pricing•Footwear products are often listed as on sale or part of a “Buy one Get one” offer for a limited time(Seasonality of products)o Jordan AJ 2012 Lite- Men’S Width D-

Medium$149.99Now $99.99

(Why?)•Companies utilize promotional pricing in order to further attract the attention of price sensitive consumers and in turn develop a long term customer loyalty to the specific brand or provider

Temporal Pricing• Assume that when a sport is out of season the

price of footwear specific to that sport in fact drops or goes on sale to provoke spending by consumers.

Value Based Pricing

•Pricing Footwear products according to the amount and degree of benefits that that specific product provides to the customer, as opposed to pricing the product in regard to how much it takes to actually make it

• (Nike’s average basketball shoe costs around $12 to manufacture)

(Why?) •VBP is utilized in order to capture more consumer surplus and works best when providers have an accurate idea of just what consumers are willing to pay for specific goods

High-Low Pricing•Footwear products are originally priced higher than competing products, and once initial consumer interest and popularity begin to diminish, prices are significantly lowered through the use of sales techniques such as:

opromotional effortsoCoupons odiscount rates

(Why?)•Initial high prices captures extensive revenue from customers willing to pay premium prices for popular products, and once the majority of customers tend to stray away, discount rates and slashing of high prices make customers feel products are more affordable

Advertising

Lebron James• Lebron James in 2003 signed a 7 year, $93

million deal with Nike and in 2010 resigned with Nike for an undisclosed amount known to be greater than $10 million per year.

Kobe Bryant In 2003 Kobe Bryant signed a 5 year,

$45 million deal with Nike. His current contract with Nike is unknown but believed to be an amount greater than his previous one.

Derrick Rose

• Durant signed a 7 year, $60 million deal with Nike after turning down a 7 year, $70 million deal and $12 million signing bonus with Adidas. Durant says he has history with Nike dating back to the 8th grade.

In February of 2012, Derrick Rose signed a 14 year, $250 million contract with Adidas. Derrick Rose was MVP of the league at age 22 before tearing his ACL.

Kevin Durant

Michael Jordan• Jordan signed a 5 year contract with Nike in

1984 for $500,000 per year and Nike stock options bringing the deal to over $7 million for 5 years.

• Today Michael Jordan earns an estimated $60 million a year from the Nike/Jordan brand.

• Air Jordans are responsible for 58% of all basketball shoe sales today and $2.5 billion in sales for Nike.

Second Degree Price Discrimination

•“Firms offer a menu of different packages” or in this case different athletic footwear options “designed in such a way that consumers sort themselves out (self-select) by choosing different packages.”

•Different products offering different benefits to the consumers that allows the public to self select for the specific good they desire

• (Nike Lebron X priced at $180.00 vs. Nike Hyperdunk Low priced at $120.00 vs. Nike Zoom Hyperchaos priced at $90.00)

o Similar Product Different Name• (Nike Lebron X vs. Hyperdunk)

Nike Lebron X vs. Nike Hyperdunk

Nike Lebron X priced at $180.00 Nike Hyperdunk priced at $140.00

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Summary• Slow unit sales growth in developed markets; increasing in

emerging markets• Margin growth in developed markets• Highly concentrated industry domestically; moderately

concentrated globally• Second degree pricing discrimination frequently used with mainly

penetration pricing, promotion pricing, premium pricing, and hi-lo pricing, value based pricing

• Recap on trends and raw data:o Many from survey said that they though shoes were overpriced

but also said that they had a high willingness to payo Shift in consumer preferences due to intense advertising –

consumers prefer celebrity endorsed or technology enhanced shoes with higher markups

• Industry Growth:o Increased margins in developed marketso increased brand awareness in both developed and developing

marketso Favorable demographic shifts in emerging markets

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Recommendations• Industry wide recommendations:

o Increase prices through more technology advancements and celebrity endorsements (limited scope for increased sales in developed markets)

o Expand market share with lower priced shoes in $25 to $50 rangeo Green marketing campaign: Proved successful for Nike

• Company recommendations:o Nike: Focus on improving working conditions and PR image which are

hurting growth in certain segmentso Adidas: Increase market penetration in the USo Under Armor: Mainly focused on football and running. Should focus on

expanding product lineup.o Puma: Expand market share outside Europe and expand product line to

enhance premium pricing and penetration pricing