ATHLETIC FOOTWEARINDUSTRY ANALYSIS

Economics of Management and StrategyTufts University

Medford, Massachusetts

May 1, 2006

TABLE OF CONTENTSTABLE OF CONTENTS...............................................................................................................................2

1.0 INTRODUCTION TO ATHLETIC FOOTWEAR INDUSTRY.........................................................4

2.0 INTERNAL RIVALRY...........................................................................................................................6

2.1 MARKET DESCRIPTION...........................................................................................................................6

2.2 PRODUCT PROLIFERATION.....................................................................................................................7

2.2.1 Mergers and Acquisitions..............................................................................................................8 Adidas-Salomon AG and Reebok......................................................................................................82.2.2 Stride Rite Corporation and Saucony............................................................................................92.2.3 Nike and Converse.........................................................................................................................9

2.3 INTERNAL PRODUCT PROLIFERATION..................................................................................................10

2.4 BRAND IMAGE, PRODUCT IDENTITY, AND CUSTOMER LOYALTY........................................................10

2.4.1 Advertising...................................................................................................................................11 Entertainment and Celebrity Marketing Campaigns......................................................................11 World Cup 2006..............................................................................................................................12 Creative Niche Advertising.............................................................................................................132.4.2 Distribution Decisions.................................................................................................................14 Retail...............................................................................................................................................14 Personalization...............................................................................................................................142.4.3 Grassroots Marketing..................................................................................................................15

2.5 NEW PRODUCT DEVELOPMENT............................................................................................................15

2.5.1 Keeping up with Competition.......................................................................................................15 High End Running Shoe Examples.................................................................................................162.5.2 New Products and Brand Image..................................................................................................16

3.0 ENTRY BARRIERS..............................................................................................................................17

3.1 MARKET OVERVIEW............................................................................................................................17

3.2 IMAGE...................................................................................................................................................17

3.3 LICENSING AND RETAIL AGREEMENTS................................................................................................17

3.4 ECONOMIES OF SCALE.........................................................................................................................18

3.4.1 Marketing.....................................................................................................................................183.4.2 Research and Development..........................................................................................................19

3.5 ECONOMIES OF SCOPE..........................................................................................................................20

3.5.1 Umbrella Branding......................................................................................................................203.5.2 Consolidation..............................................................................................................................21

3.6 STRATEGIES FOR ENTRY......................................................................................................................22

4.0 SUBSTITUTES AND COMPLEMENTS............................................................................................23

4.1 INTRODUCTION.....................................................................................................................................23

4.2 EXTERNAL SUBSTITUTES......................................................................................................................23

4.2.1 Footwear Sales Cycle..................................................................................................................234.2.2 Substitutability of Other Footwear..............................................................................................24

4.3 COMPLEMENTS.....................................................................................................................................24

2

5.0 SUPPLIER POWER..............................................................................................................................27

5.1 MATERIALS FOR PRODUCTION.............................................................................................................27

5.2 STANDARDIZATION WITHIN PRODUCTION............................................................................................27

5.3 EASE OF SUPPLIER TRANSFER..............................................................................................................28

6.0 BUYER POWER....................................................................................................................................29

6.1 BUYER CONCENTRATION.....................................................................................................................29

6.2 BUYER LEVERAGE IN PRODUCT NEGOTIATION...................................................................................29

6.3 EFFECTS OF RETAIL AND VENDOR CONSOLIDATION...........................................................................30

6.4 CURRENT AND EMERGING RETAIL CHANNELS....................................................................................32

6.4.1 Department Stores.......................................................................................................................326.4.2 Factory Outlets and Vendor Stores..............................................................................................346.4.3 Mall Specialty Stores...................................................................................................................356.4.4 Strip Specialty Stores...................................................................................................................366.4.5 Online Stores................................................................................................................................37

7.0 CONCLUSION.......................................................................................................................................38

8.0 WORKS CITED.....................................................................................................................................39

9.0 Company Websites Cited.......................................................................................................................43

3

1.0 INTRODUCTION TO ATHLETIC FOOTWEAR INDUSTRY

The U.S. market for athletic footwear includes all producers of non-cleated,

rubber and plastic footwear designed in an athletic style or for athletic use. The industry

is a collection of smaller, segmented, yet often overlapping markets, defined by both the

price and the purpose of the shoes. For instance, there are mini-markets for shoes

designed for each of many sports and other purposes: basketball, running, walking,

tennis, and casual wear. The greatest overlap between these categories is between

performance shoes and casual wear. Many people wear running shoes or basketball shoes

on a daily basis in a non-athletic setting. One can walk or play basketball in running

shoes. Therefore, there is some degree of overlap between most segments.

The industry is dominated by a few large firms, while the majority of other

players have less than 5% market share. The graph below shows the market share

breakdown by sales volume for 2004, before the merger of the #2 and #3 firms, Adidas

and Reebok.

Athletic Footwear Industry Market Share by Sales Volume

42%

27%

12%

6%

5%3%

2% 1%

1% Nike

Adidas

Reebok

Puma

New Balance

Skechers

K-Swiss

Vans

Asics

Saucony

These firms fight for market share through non-price competition, on strategies

such as strengthening brand image and increasing product proliferation. The success of

each firm is greatly dependent upon its marketing campaigns. The brand image of the

4

Source: Hoover.com

Domestic Production vs. Imported Footwear (Millions of Pairs per Annum)

0

500

1000

1500

2000

2500

Imports

Domestic Production

major firms is created by extensive marketing campaigns and celebrity endorsements.

Consumers associate themselves with a particular brand and tend to stick with the brand

with which they are comfortable. Entry to the industry is difficult as brand loyalties are

high.

The United States is the

world’s largest importer of

athletic footwear, which is

primarily manufactured in Asian

nations. The graph at right shows

the trend in US footwear

production and imports. Most

firms design the sneakers and

outsource their manufacturing to

foreign producers. The sneakers are then distributed to major retailers and are sold to the

consumer through a variety of channels.

The following provides an analysis of Porter’s Five Forces relating to the athletic

footwear industry; internal rivalry, entry barriers, substitutes and complements, supplier

power, and buyer power.

5

2.0 INTERNAL RIVALRY

2.1 Market DescriptionPrice competition in this industry is relatively non-existent in its traditional form.

The means by which firms compete with respect to price is by introducing products at

several different price levels in order to reach all areas of the market. There are only a

few firms who compete in every sector of the market with regards to intended purpose (as

well as price): namely Nike, Adidas, Reebok, and New Balance. Smaller firms usually

specialize in particular types of shoes. For example, Brooks and Asics specialize in

running, K-Swiss in tennis, and Vans in skating and lifestyle shoes. This results in a

collection of specialized markets with far fewer firms competing than in the overall

market for athletic footwear. The following chart shows the companies that participate in

the various segments of the market as defined by the left column.

Source: Company websites of producers listed.

Type of Shoe\

Company

Nik

e

Ad

idas

Ree

bok

New

Bal

ance

K-S

wis

s

Con

vers

e

Pu

ma

Asi

cs

Van

s

Bro

oks

AN

D1

Str

ide

Rit

e C

orp

Sp

ira

Miz

un

o

Sau

con

yRunning X X X X X X X X X X

Walking X X X X X X

Basketball X X X X X X

Children’s X X X X X

Tennis X X X X X

Lifestyle X X X X X X X

Skating X X

Cross-Training X X X X

Soccer X X X X

In terms of growth and sales for individual categories, running footwear accounts

for 25% of total athletic shoe sales and has been experiencing the strongest growth. As

seen in the above table, this is the category with the most participants. Its sales have

increased by nearly 25% in certain countries. Other sneakers, such as those designed for

basketball have been experiencing no growth at all. Women’s footwear sales were up 11-

13% overall, while skating shoe sales declined nearly 10%.

In the sneaker industry, the products are somewhat differentiated by design but

the players also try and emphasize the differences in their advertising. As a result, there is

an emphasis on non-price competition. With athletic footwear, consumers consider both

price and purpose, and firms attempt to produce shoes that compete in several different

price brackets. The U.S. sneaker industry is considered a mature industry although the

numbers in the table below, on footwear sales in the last decade, suggest that there is still

some amount of growth in the overall market.

U.S. Branded Athletic Footwear Sales (Millions of $)

Revenues 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005E

Nike 2529 3261 3797 3252 3325 3327 3128 3052 3005 3225 3358

Reebok 1405 1193 1229 1062 909 926 931 932 1036 1087 1141

New Balance 151 201 265 346 550 750 794 910 910 1022 1053

Adidas 355 390 465 910 845 840 700 810 750 790 822

K-Swiss 89 76 92 145 264 197 205 245 369 395 403

Converse 208 194 285 167 132 144 133 181 245 305 320

Puma 32 23 23 32 43 58 82 121 172 209 230

Other 2134 2170 2227 1826 1857 1961 2120 2290 2552 2766 2828

Total 6574 7215 7983 7396 7486 7804 7672 7994 8253 8890 9201

Source: (Ohmes 2006)

2.2 Product ProliferationFirms seek to increase their market share by widening their range of products

through mergers, acquisitions, and internal production decisions. The first tactic

discussed in this section is the increasing consolidation of the industry as a result of

several recent deals. To complement the mergers, firms are increasing their product range

in an attempt to capture more segments of the market. This section will discuss several

recent acquisitions demonstrating this tactic and analyze the impact of these mergers on

the overall market.

2.2.1 Mergers and Acquisitions

Adidas-Salomon AG and Reebok

The deal that has been making the largest headlines recently is that between

European giant Adidas-Salomon AG and strong U.S. competitor Reebok. This merger of

two of the largest companies in the industry creates a combined $12 billion company to

compete with the industry leader, Nike, which is valued at $14 billion (Carr 2005). This

deal fulfills two strategic goals for Adidas. First, it allows Adidas to further expand into

the “lifestyle” market. Adidas has long been considered a very strong performance brand

but has failed to develop the brand image that has allowed Nike’s products, including its

signature Michael Jordan basketball shoes, to become synonymous with style in the

American marketplace (Karnitschnig and Kang 2005). Reebok on the other hand, has had

success recently in increasing its appeal to the fashion-conscious, urban buyers that

Adidas has failed to attract (Karnitschnig and Kang 2005). By acquiring the Reebok

brand and maintaining it separately from the flagship Adidas brand, Adidas will be able

to take advantage of both segments of the market without sacrificing the image of either

brand. This is the same tactic used by Nike in its 2003 acquisition of Converse which will

be discussed later in this section. The second objective that Adidas seeks to achieve

through the merger is to further solidify its position in the U.S. market, where Nike

continues to be the dominant player.

Adidas will benefit from Reebok’s strong foothold in the U.S., as it will gain

distribution options from greater access to and leverage with primary retail chains like

Foot Locker and Finish Line. Nike has historically been dominant in terms of its

relationships with these retailers (Karnitschnig and Kang 2005). Additionally, the

acquisition has brought the Adidas/Reebok U.S. market share to 21%, bringing them

much closer to Nike’s 36% share. For further information on the relative market shares of

the individual competitors, please see the table below, comparing U.S. to Global sales

and market shares.

Branded Athletic Footwear Market Share 2004 *Sales in millions of wholesale $

Company U.S. Sales* U.S. Market Share Global SalesGlobal Market

Share (%)Nike 3225 36.3 6780 33.2Reebok 1087 12.2 1963 9.6New Balance 1020 11.5 1357 6.6Adidas 795 8.9 3150 15.4K-Swiss 395 4.4 480 2.4Converse 305 3.4 905 4.4Vans 275 3.1 395 1.9Puma 209 2.4 1396 6.8American Sporting Goods (Avia, Ryka, Nevados, Turntec) 205 2.3 303 1.5Asics 197 2.2 920 4.5Keds/Pro-Keds 136 1.5 203 1Foot-Joy 124 1.4 180 0.9Fila 120 1.3 305 1.5Saucony 104 1.2 141 0.7Sole Technology 100 1.1 140 0.7And 1 95 1.1 175 0.9Mizuno 59 0.7 287 1.4Hi-Tec 59 0.7 191 0.9Brooks 54 0.6 126 0.6Lotto 7 0.1 141 0.7Other 319 3.6 873 4.3Total 8890 100 20411 100

Source: (Drbul et al. 2006)

2.2.2 Stride Rite Corporation and Saucony

Another recent acquisition is of Saucony by the Stride Rite Corporation, which

already includes brands such as Keds, Pro-Keds, Sperry Top-Sider, Grasshopper, and the

Tommy Hilfiger line. The addition of the Saucony brand will allow Stride Rite to break

into the athletic performance market, where it has not previously been represented.

Additionally, the acquisition will allow Saucony to break into the children’s market

(Ryan 2005).

2.2.3 Nike and Converse

In 2003, Nike purchased Converse. One reason was to add a lifestyle shoe to their

product line that would appeal to a group that did not already buy Nike products

Converse was a good acquisition because Nike wanted to capture the typical Converse

consumer, who looks for retro sneakers like Converse’s long-established Chuck Taylor

line. Maintaining these customers required that Nike not taint the Converse products with

their own brand name, therefore, Nike has allowed Converse to continue to operate as a

separate entity (Marseille and Roos 2005).

2.3 Internal Product ProliferationIn addition to acquiring new brands and area expertise through mergers and

acquisitions, firms also enter new sectors of the market through internal production

decisions. There are two ways in which they do this. The first is by simply producing a

new product under their primary brand name to fulfill the requirements for a product in

an area outside their current specialty. One example is Asics’ decision in the early 1990s

to branch out from its focus on performance running footwear to introduce a basketball

shoe (Bohnslay 2005). This attempt proved unsuccessful for Asics, which speaks to the

difficulty of breaking into a market segment in this way. In other situations, a firm may

decide to direct a particular brand that it controls or creates toward a new segment of the

market. For example, Nike has historically refused to market its Nike brand sneakers

through low cost retailers. In order to enter the market for low to medium cost footwear,

Nike has geared its Starter brand, which it acquired in 2004, towards this area. In 2005,

Nike entered into a deal with Wal-Mart to sell Starter brand shoes priced at under $40

through the discount retailer (Kang 2005).

2.4 Brand Image, Product Identity, and Customer loyaltyAnother significant component of industry members’ strategies to increase market

share is the strengthening of brand image, product identity, and customer loyalty through

marketing. Companies expend considerable effort and resources attempting to convince

their customers that sneakers made by other companies are imperfect substitutes.

Currently, Nike appears to have been the most successful in this endeavor, followed

closely by the newly joined Adidas-Reebok entity with its two flagship brands. Nike’s

shoes are considered to be quality and stylish. Reebok’s are comfortable and casual, and

the Adidas brand boasts superior performance and is “perceived as a professional,

technically orientated brand with strong European roots” (Kang 2006). Smaller

companies like Vans and DC shoes have succeeded in creating a strong brand image in

the eyes of young skateboarders and extreme sports followers. Puma in the past was seen

as “the brand that mixes the influence of sport, lifestyle and fashion” (Europe Intelligence

Wire). The methods by which they accomplish this include various forms of advertising,

distribution choices, and so-called grassroots marketing.

2.4.1 Advertising

The top athletic shoe companies compete in advertising, aimed at building the

image of the brand and the products they are trying to market. To provide an illustration

of the high level of these expenditures, the following chart lists the advertising

expenditures both independently and jointly of the recently merged firms, Adidas and

Reebok.

Adidas and Reebok Marketing and Advertising Expenditures 2001-2004 (in millions of $)

Marketing and Advertising Spending 2001 2002 2003 2004Adidas 656.7 775.2 911.9 1090.7Reebok 329.2 344.1 383.4 435.3Adidas and Reebok 985.9 1119.3 1295.3 1526.0

Marketing and Advertising expenditures as % of Net SalesAdidas 12% 12.6% 12.9% 13.6%Reebok 11.0% 11.0% 11.0% 11.5%Adidas and Reebok 11.6% 12.1% 12.3% 12.9%

Net Sales (in millions of $)

Adidas 5470.9 6136.4 7083.0 8047.2Reebok 2992.8 3127.8 3485.3 3785.3Adidas and Reebok 8463.7 9264.2 10568.3 11832.5Source: (Drbul et al. 2006)

Entertainment and Celebrity Marketing Campaigns

Celebrity marketing campaigns are a key way in which athletic shoe makers seek

to differentiate their brands and associate their shoes with professional athletes and other

celebrities. The most successful examples are the signature lines and endorsement

contracts that firms, particularly Nike, Adidas, Reebok, and AND1 have with

professional basketball players. The most famous of these company-player relationships

is between Nike and Michael Jordan. Despite Jordan’s retirement several years ago, the

Air Jordan line continues to be a huge source of profit and brand support for Nike. A new

shoe launched in February of this year at a retail price of $175 and several other models

are sold at around $125 (Kang 2006). At $175, the new Air Jordan shoe out-prices Nike’s

most technologically advanced running shoe, the Air Max 360, retailing at $160. The

success of the Jordan and other signature lines has been and continues to be instrumental

in Nike’s image as a stylish performance brand. This image has allowed Nike to

differentiate its products from those of its competitors, particularly Adidas, whose image

has thus far failed to break out of the realm of basic technical performance (Karnitschnig

and Kang 2005). While Nike has had the most success with basketball endorsements,

other firms have also utilized this technique. For example, Reebok has a $70 million

contract with Chinese NBA player Yao Ming (Barbaro 2006). This “star” marketing

extends beyond the U.S. and into international borders. In late 2005, Nike spent $44

million on endorsing an Indian cricket team, and made the team the “world’s most valued

brand in team sponsorship” (Barbaro 2006).

The use of celebrity and other entertainment marketing tactics extends beyond the

basketball arena into many different types of shoes and entertainment genres. DC Shoes

recently released a line of shoes designed by the popular musical group Linkin’ Park.

Reebok has agreements with rap artists 50-Cent, Jay-Z, and Nelly (Drbul et al. 2006).

Another entertainment-based marketing campaign is the agreement between Adidas and

Microsoft that involves Xbox kiosks in Adidas stores and Adidas contributing content to

Xbox consoles, in hopes that the alliance will help to drive sales of both companies’

products (DME).

World Cup 2006

In light of the upcoming 2006 World Cup, Adidas is spending approximately

$200 million over the next few months to market its soccer products. Adidas is an official

sponsor of the tournament and its ads will be the only ones seen during the television

coverage, as it paid to have its American competitors excluded. While it has not started

developing signature soccer shoes, Adidas’ ad campaign will feature soccer star David

Beckham, the most recognizable and stylish face in the sport. Adidas CEO Herbert

Heiner was quoted in Business Week as saying, “It’s vital for Adidas ‘to dominate the

World Cup’” (Holmes 2006). Adidas’ significant involvement is encouraged by the

positive results from its involvement in 2002, when it sponsored the Japanese national

soccer team and saw sales go up 30% (Barbaro 2006). Although soccer cleats are not the

same as sneakers, the company is hoping to enhance their overall brand image and to

have their name transcend individual sports In response to Adidas’ World Cup ad

campaign and its exclusion from TV ads, Nike has teamed up with Google to develop a

friend networking site devoted to everything soccer. The website, entitled Joga.com, and

the corresponding ad campaign take their name from the phrase “joga bonito,” which in

Brazilian Portuguese means “play beautifully.” The site will also feature French soccer

player Eric Cantona and Brazilian soccer star Ronaldinho (Wentz 2006).

Creative Niche Advertising

Smaller companies have used marketing as a means of creating their own unique

niche in the market. Puma, a company that makes soccer, running, and lifestyle shoes,

has emphasized its position as a trendy brand. During the 2002 World Cup in Japan,

while Nike and Adidas spent millions of dollars on conventional advertising, Puma used

sushi bars in fifteen cities around the world including New York, Hong Kong, and

Madrid to showcase its product. Puma branding director Antonio Bertone noted that

Puma’s target market of fashion-conscious twenty-somethings are “eating sushi anyway.”

The company also began running a commercial that featured former English soccer

player Vinnie Jones and other Puma sponsored athletes in a sushi restaurant (Tkacik

2002).

Not all major ad campaigns feature celebrity athlete endorsements. New Balance

has a long standing policy against such endorsements. Instead, it relies on campaigns

featuring every day people. One of their most recent campaigns ran under the slogan

“There are two motivations in sports. Which is yours? For love or money?” which

emphasized their focus on producing shoes for everyone who enjoys sports, not just star

athletes (White 2005). This strategy complements their original product positioning as a

company for serious runners that also makes shoes in all widths, for athletes of different

abilities and shoes sizes.

2.4.2 Distribution Decisions

Retail

Firms also make decisions regarding the distribution of their shoes in line with the

brand image they wish to maintain. Nike refuses to sell its flagship brand to low cost

retailers. In October 2005, Nike stopped selling to Sears in response to its merger with

Kmart. Sears will continue to carry products from Adidas, New Balance, Reebok, and

Sketchers (Hoovers.com). Though Nike does not sell products under the Nike brand to

discount retailers, it does target some of its other brands toward that market. Analysts

suggest that Nike will work with Sears again using one of its other brands, most likely

Starter (Kang 2005).

Other companies such as Brooks and Spira choose to market their products almost

exclusively to specialty running stores. Brooks Sports, which is a subsidiary of the

Russell Corporation, focuses on “high-performance running shoes” and considers itself

“the brand of choice among discerning runners of all abilities”

(www.brooksrunning.com). Spira Footwear, a young company that makes running shoes

with springs in the bottom, also plans to use this type of distribution decision to market

its shoes. Despite that their shoes are revolutionary, they lack aesthetic appeal. The

company’s CEO, Andy Krafsur, has suggested that the company needs to establish itself

“in the small stores where people explain the technology” (Gregory 2005).

Personalization

One unique distribution tactic that has entered the market place in the last few

years is allowing customers to design their own shoes. Nike pioneered this venue with the

introduction of the NikeID service in the spring of 2005 which allows customers to

personalize their shoes. Nike ID allows buyers to choose their own colors, materials, and

in some cases, add a wide variety of logos and images to the shoes (NikeID.com). Adidas

has also begun using this method in its soccer cleats. The new +F50 Tunit line allows the

customer to customize the weight of the shoe chassis, the weight of the cleats, and the

overall fit of the shoe (Holmes 2006).

2.4.3 Grassroots Marketing

Companies also seek to attract new customers and cultivate customer loyalty by

introducing young athletes to products that fit their particular needs. The firms believe the

products will market themselves on the basis of their quality and suitability to the wearer.

Of the major shoe competitors, New Balance made the most use of this technique. They

used this strategy in their 2004 acquisition of Warrior Lacrosse. The company’s founding

chairman, Jim Davis, notes that the objective of the acquisition is “to work with coaches

to get kids in the right shoes, and after we hope that they become loyal customers”

(Pereira 2004). This dynamic is also part of Nike’s justification for its World Cup ad

campaign and determination to take the soccer market from Adidas. Soccer is considered

“an important gateway to brand loyalty with children worldwide” (Holmes 2006).

2.5 New Product DevelopmentSneaker companies constantly seek to develop new technologies and products to

keep up with other competitors and to maintain their brand image. This type of

development is particularly important in performance sneakers, though producers of

casual foot wear also seek to develop new styles to keep up with trends in consumers’

preferences.

2.5.1 Keeping up with Competition

For many performance brands, it is important to sell products based on the latest

technology in order to have a competitive product in the top–of-the-line market. These

new technologies can then be introduced into lower priced footwear and other types of

sneakers to help companies maintain their presence in different market segments or break

into new ones.

High End Running Shoe Examples

In the current running market, there are three new high end models. The Nike Air

Max 360, priced at $160, features a foamless mid-sole that provides increased cushioning

durability, reduced weight, and improved stability. The Asics Gel-Kinsei, priced at $165

as the highest priced shoe Asics has ever brought to market, includes technology that

allows cushioning to adjust to the wearer’s needs as well as more durable cushioning

features. The Adidas 1, at $250, includes a microprocessor that adjusts the shoe’s

cushioning to the needs of the wearer. According to a Citigroup report, the Air Max 360

is expected to drive growth due to its potential to evolve into a technology that will be

attractive to specialty runners, a target group Nike is partly losing to Brooks and Asics.

Furthermore, Nike plans to introduce basketball and cross-training shoes based on the

same technology (Citigroup 2006).

2.5.2 New Products and Brand Image

New products can also enhance the image of a brand. The Nike Free, which lets

runners feel as if they are running barefoot, is an important product because it indicates a

shift in the way Nike views the interaction between their products and their consumers

(Citigroup 2006). The Free is meant to be used as a training tool to strengthen runners’

feet (Davis 2005). Another example is the Adidas 1 discussed above. This hi-tech shoe

will likely reinforce Adidas image as a firm at the forefront of athletic technology.

3.0 ENTRY BARRIERS

3.1 Market OverviewRelatively high barriers to entry exist in the athletic footwear industry due to

obstacles like strong brand loyalty and economies of scale and scope. Though new

entrants will have little problem gaining raw materials or labor, they do face the

enormous difficulty of establishing popularity in an industry with extremely image-

conscious consumers and one of the world’s strongest brands.

3.2 ImageStyle-conscious consumers, guided in part by effective marketing, want shoes that

will enhance their image and not just cover their toes. Customers notice whether their

shoes have a swoosh or a lack thereof, thus entrants will have difficulty winning them

over without these symbols and the cool-factor that goes with them. Even in the athletic

shoe sector, the importance of fashion over function is rising. The “fashionization of

shoes” took off in 1997, when Puma enlisted designer Jil Sander to create a limited-

edition women's running shoe to ignite its lackluster image and sales (Orecklin 2002).

While the biggest firms routinely use established designers, entrants with limited capital

will be hard pressed to convince such revered professionals to sign contracts. Existing

shoe companies also have a financial advantage due to consumers’ willingness to pay

high prices for name brand shoes, especially those offered in limited editions. For

instance, Adidas’ sneakers created by designer Japanese Yohji Yamamoto retailed for up

to $590 (Orecklin 2002). While the image barrier is high, it is not insurmountable. With

its “endorsed by no one” policy, New Balance has proven that by creating a suitable

niche, high priced designers and endorsements are not a requirement for success in the

industry.

3.3 Licensing and Retail AgreementsAccess to endorsement and distribution opportunities constitutes a second barrier

for new firms. The bigger sneaker companies have already established agreements with

athletes, teams, and retailers. The top sneaker manufacturers sponsor the most successful

athletes and organizations in order to impress and win customers. For instance, Nike has

deals with golfer Tiger Woods, soccer player Ronaldinho, and the Brazil soccer team,

(Genereux 2006). Adidas and Reebok together hold a “solid portfolio” of agreements

with athletes from Yao Ming and David Beckham, to teams like Real Madrid and the four

major sporting leagues in the US (NBA, NHL, NFL and MLB) (Drbul et al 2006).

Newcomers will not only have trouble finding teams and players without ties but also

will lack the capital for these contracts. Like customers, retailers are also affected by the

prominence of a particular brand. Footwear stores are more likely to save shelf space for

an incumbent than a new company because the established brands have a history of good

sales. As a result, new companies must work harder to have their goods seen. The barrier

of overcoming the existing relationships with athletes and retailers will narrow entry.

3.4 Economies of ScaleThe athletic shoe industry faces significant economics of scale and scope, which I

will explore in the next two sections. First, the sneaker industry faces economies of scale

because the total cost of manufacturing shoes goes down as output increases and the fixed

costs of machinery, marketing, and research will be spread out. I will discuss the last two

special cases of economies of scale in further detail below.

3.4.1 Marketing

The athletic shoe industry faces economics of scale in advertising, giving cost

advantages to incumbency. Larger firms can afford higher advertising expenditures than

any new firm could, and they are likely to place more ads in the first place. It would be

difficult for a start-up firm to compete with Nike given that the brand, its trademark

“swoosh,” and its simple slogan, “Just do it,” are known and valued worldwide. These

high marketing expenditures can result in higher quality advertisements; in 2005, the two

largest firms by market share, Nike and Adidas, won a total of 4 (out of 18 given) Gold

Clio Awards in the Television/Cinema ad category (http://www.clioawards.com/home/).

Furthermore, incumbents have lower advertising costs per potential customer due to

larger advertising reach. For instance, because Adidas sneakers are sold in more stores

than Saucony ones, ads for Adidas are more effective because viewers inspired to buy

Adidas shoes will have an easier time following through. Customers who see a Saucony

ad may give up before they find a store with the shoes they want or may even settle for a

different brand’s (Besanko 2003).

3.4.2 Research and Development

In a day and age when shoe manufacturers are putting microprocessors in our

sneakers, the value of technological expertise in this industry is growing. The sneaker

industry has economies of scale in Research and Development (R&D) because incumbent

firms that established research centers years ago have experience and know-how that sets

them ahead of potential entrants. Companies like Nike can afford to put more money into

R&D due to larger sales volume, leading to even more of a learning effect. Nike’s Sport

Research Lab in Oregon is near 13,000 square feet and boasts owning “virtually every

variety of muscle sensor, pressure platform, breath analyzer, foot scanner and thermal

imaging device” to test and design potential new products (Nikebiz.com). The upfront

cost of setting up a comparable facility to test and examine products is certainly a barrier

to entry. Reebok and Adidas, now merged, will invest roughly €130 million in R&D,

according to an industry report (Drbul et al, 2006).

Years of research can go into developing a single new cushioning system: New

Balance’s website features their technology for cushioning and shock absorption called

N-ergy 2.0 and Abzorb SBS, which was developed over three years

(newbalance.com/techcenter/tech/featured_tech.html). Coincidentally, Adidas’ adidas_1

shoe and its continuously adjusting cushioning level was also released after three years of

research (adidas.com). These years of research usually pay off, because shoes with high-

tech elements can be sold at higher prices. As discussed in the previous section, Adidas

launched the Adidas 1 last year at $250, and Nike launched the Air 360 for $160

(Genereux 2006).

After spending so much on technological research, footwear companies patent

their new shoe features so that competitors can not imitate them. These patents make

entry more difficult because potential entrants must design their shoes without infringing

on the protected designs. The market leader Nike has a significant lead in numbers of

patents. According to a search of the US Patent and Trademark Office website, Nike has

registered 1830 patents, where as the separately listed Reebok has 363 and Adidas has

149, while New Balance has just 20 (US Patent and Trademark Office). Nike recently

sued Adidas for patent infringement, asserting that Adidas used elements of Nike’s

SHOX cushioning technology in developing the Adidas Kevin Garnett and A3 shoes

(Hoover.com).

3.5 Economies of ScopeAnother entry barrier is the economies of scope in the athletic shoe industry,

allowing incumbent firms to enjoy cost savings by producing a wider range of related

goods.

3.5.1 Umbrella Branding

One special case of economies of scope is “umbrella branding.” Most of the top

athletic footwear competitors have already expanded the variety of goods and services

they produce by venturing into athletic apparel and equipment. By doing so, they are able

to leverage their reputation from one sector to another. Consumers choose brands they

recognize and trust, and so athletic shoe makers have incentive to expand their product

range. The U.S. athletic apparel market at $20 billion wholesale is a good target because

it is nearly three times the size of the athletic footwear industry (Ohmes 2005). In the

figure below, you will see the footwear companies that also make athletic apparel (or vice

versa) and their market shares as of August 2005:

Nike is not only the market share

leader with athletic footwear but also with

sports apparel, as they have over a fifth of

the apparel market. They produce items

ranging from watches and eyewear, to more

related products such as athletic apparel and

bags (Nikebiz.com). Nike can introduce

Brand Market Share (Current $)

Nike 20.65Columbia 10.27Adidas 7.72Champion 2.54North Face 2.40New Balance 0.79Puma 0.50Source: Shanley and Svezia 2005

these products with less risk because consumers infer that all products under the brand

umbrella are high quality. Furthermore, if the new products introduced are

complementary (like socks are to sneakers) firms will achieve synergies in production.

For example, Nike’s research on the way the foot works can help them design both more

supportive socks and sneakers. Many companies have made the link between sneakers

and apparel explicit, by linking them under the same name as their shoes. For example,

Nike introduced the Jordan line of shoes and then brought out t-shirts with the same name

to boost sales for both categories.

Though Nike is a clear leader, other footwear companies see the growth potential

and are following suit. For example, in 2003, New Balance signed seven additional

licensing deals to put its logo on gear from sunglasses to exercise equipment (Fonda

2004). Umbrella branding helps the expanding company and by default deters entrants

because they will not need to spend additional money on promotion to develop credibility

in the eyes of consumers, retailers, and distributors (Besanko 2003).

3.5.2 Consolidation

Larger incumbents also control entry by strategically acquiring smaller sneaker

companies. The sneaker industry has faced considerable consolidation recently, with the

aforementioned acquisitions of Reebok by Adidas, Saucony by Stride Rite, Converse by

Nike, and so on. Entering firms that are successful and gain market share pose threats to

the larger players. As a result, the major players preemptively buy smaller sneaker

companies before they grow too large and pose serious competition. The incumbents

have budgets large enough that they can simply buy up smaller companies, rather than

risking a loss in market share to them. The incumbent firms essentially make it

impossible for a new entrant to grow substantially without takeover. These acquisitions

allow the buyer to reap benefits from both increased scope and association with the new

trends in footwear. Potential entrants that notice this tendency but want to remain

independent may just choose not to enter in the first place.

3.6 Strategies for EntryWhile barriers to entry are relatively high, there are a few key strategies that

would allow an entrant into the sneaker industry. The first strategy is specialization.

Many companies have successfully entered the athletic footwear market by targeting a

specific niche of consumer or designing for a particular activity. Designing footwear for

certain types of consumers or activities is no new task. Reebok gained its popularity by

doing just this in the early 1980s: Realizing that competing with established companies

such as Nike and Adidas would be tough, Reebok designed shoes for aerobics just before

aerobics ballooned in popularity across the US. As a result, their sneaker the Freestyle

became one of the best-selling shoes in history, they got a temporary lead over Nike in

the athletic-shoe industry, and they gained loyal customers who buy their products to this

day (Hoover.com). Today, newer companies are still using this tactic. The footwear

company Crocs started in 2002, making colorful, extremely comfortable clogs for boating

and outdoor use, and now they boast a wide product range and sales of $108.6 million

(Hoover.com)

The second strategy for entry is for non-sneaker companies with established

brands to enter the footwear market. Just as sneaker companies have expanded to apparel

and equipment, many apparel and equipment manufacturers are doing the same - moving

into the footwear sector for wider scope. Many clothing designers sell sneakers, from

Tommy Hilfigger to Gucci. Other companies have moved from seemingly unrelated

accessories to footwear, the most notable example being Oakley. Oakley, best known for

their sunglasses, brought their shoes to market in the mid 1990’s, and they have been a

huge success world-wide. The Oakley shoe is a unique hybrid of sneaker and hiking

shoes that are durable and fashionable. In 2000, Oakley’s Net sales skyrocketed 41%,

totaling $363.5 million. Since these companies have already established loyal customers

in other sectors, they are able to break into the sneaker market with less difficulty. Oakley

and the other designers are able to sell sneakers relatively well due to the fact that they

have already established well-known brands. These apparel companies rely on their

established brand images in order to capture sneaker consumers, who place high

importance on image and branding.

4.0 SUBSTITUTES AND COMPLEMENTS

4.1 IntroductionThere are thousands of shoes available on the market today. How do consumers

know which ones to buy? Currently, the market for footwear is filled with substitutes for

sneakers. The primary complements to sneakers are other types of sports apparel, such as

t-shirts, socks, shorts, and jackets.

4.2 External SubstitutesAlthough sneakers are the most popular footwear in the world, there are a

tremendous number of substitutes within the footwear umbrella. These include boots,

slippers, dress shoes, flip-flops, and other non-athletic footwear. Some of the major

producers of these shoes include Steve Madden, Sketchers and Nine West.

Lifestyle athletic shoes have seen the largest annual growth rates, with Puma

leading the way with a sales increase of more than 50%. One of the most successful non-

athletic footwear companies, Steve Madden, is well known for its thick high heeled shoes

introduced in the mid 1990’s. Sketchers shoes are incredibly popular among young

women and show strong sales. In Q4 of 2005, Steve Madden reported sales of $91.4

million which is an increase of 8.2% from the previous quarter (Just-style.com).

Sketchers’ non-athletic shoe department has also been growing lately due to the

introduction of their heel-less shoes, also known as sneaker mules, Heel-less shoes are

widely popular in Europe, but have not penetrated many other markets. Recently, heel-

less shoes have gained popularity in the U.S., causing the primary promoter of these

shoes, Sketchers, to experience healthy sales figures. In 2004, Sketchers’ sales increased

6.2% with total sales equaling $222 million for that year (Just-style.com).

4.2.1 Footwear Sales Cycle

Like other types of apparel, footwear experiences a seasonal sales cycle. See the

graph below for the month-to-month changes in footwear sales. There is little year-to-

year variability in the sales, as seen by the proximity of the lines representing 2003, 2004,

and 2005. Sneaker sales peak between August and September, when many students are

buying back-to-school wardrobes. Sales then decline during the fall-early winter months,

mostly due to seasonably colder and inclement weather conditions. During the holiday

season, footwear sales goes up with many other products, specifically driven by boots

and waterproof walking shoes appropriate for the cold, winter months. For example, in

the holiday shopping period of 2001, sales of boots increased by over 100% while

sneaker sales only increased by 2.2%. During the holiday season, outdoor footwear

accounts for as much as 15-20% of all footwear sales (Ohmes 2005). During summer

months, sales of sandals and

heel-less shoes increase.

Sales of summer footwear,

including sandals and open-

heel shoes and excluding

sneakers, increased by nearly

70% in the summer of 2001,

while sneakers experienced

an increase of 50% in sales.

4.2.2 Substitutability of Other Footwear.

Although many substitutes to athletic shoes exist, there is little evidence

suggesting that they will ever replace sneakers. One industry report says that “Though

we continue to monitor fashion trends and any potential movements in

the athletic versus brown-shoe dichotomy, we continue to see little

evidence suggesting significant shift to brown shoes” (Ohmes 2005).

Indeed, athletic sneakers serve many functions for customers and are

not perfectly substituted by any other footwear.

4.3 Complements

The most popular sneaker complement is sports apparel. Overall U.S. sports

apparel sales rose 12.9% in 2004, while other regions saw higher sales growth: 31.3% in

the Asian Pacific and 19.8% in Europe (Ohmes 2005). According to SGMA

International, young adults represent nearly 40% of all consumer sports apparel

purchased in 2004, and women outspend men in this sector. For many years, the best

selling sport apparel world-wide has been T-shirts (ANSOM).

Region: Apparel Sales Increase/Decrease (2004):

Asia Pacific 31.3% increase $138.8 million

Europe/Middle East/Africa 19.8% increase $409.7 million

South Americas 8% decrease $35.5 million

Sales of apparel can represent a large part of the sneaker companies’ revenue. See

the graph below for an illustration of apparel versus other sources of revenue for Nike

and Reebok.

Both Nike and adidas have looked to the golf market to expand their scope. Nike

developed golf clubs and a line of apparel for their sponsored golfer, Tiger Woods, to

capitalize on his success (Hoover.com). Adidas bought TaylorMade in 1998, which is

now the #2 golf club maker, and at the end of 2002 it acquired the Maxfi brand of golf

balls and accessories (Hoover.com). The move was meant to bolster the company's

golfing products portfolio.

There are also some unusual complements to foot wear. As mentioned earlier,

Adidas and Microsoft have agreed to help each other promote the other’s business.

Furthermore, Ecko recently released a game called “Mark Ecko’s Getting Up”, which

many retailers have bundled together with Ecko shoes.

As seen in the graph above, as the sales of apparels go up, so do the sales of

athletic footwear. Furthermore, as the sales of sports equipment goes up, so do the sales

of athletic footwear. This is clear sign that sport apparel and sporting equipment are not

only complements to each other, but also to sneakers.

Total U.S. Sales

2004

Sports

Equipment

2003

Sports

Equipment

2004

Athletic

Footwear

2003

Athletic

Footwear

2004

Apparel

2003

Apparel

0

100

200

300

400

500

600

700

800

900

1000

Market

US

Sa

les ($ m

illion

s)

5.0 SUPPLIER POWER

5.1 Materials for Production

A typical athletic shoe is constructed from three major raw materials: cotton,

rubber, and foam. The cotton is generally a synthetic blend to increase both durability and

strength. Some models also include a waterproofing agent in the fabric. The shape of the

sole is formed from rubber. In fact, the sole is a major focus of research in each of the

main firms, because its physical properties are crucial to determining the comfort,

support, and lifespan of the shoe. The rubber is always vulcanized, through a simple

chemical process that adds durability and strength to the rubber. Foam acts as padding

within the shoe. Its composition varies, but foam is a simple material to produce at low

cost.

All three major inputs are commodity goods. Firms do not set the price of these

items; rather the market determines their value. The producing firm’s only choice is

quantity of production.

5.2 Standardization within Production

The major firms in the market have experienced considerable pressure from the

public regarding the labor practices of their suppliers and manufacturers. Partially in

response to these image-damaging statements, the major firms have set up a system of

standards. Nike and Adidas both work only with approved manufacturers/suppliers that

meet the labor standards that they require. They have created this system so that the

quality of product, the factory working conditions, and the logistics of delivery can be

held to a higher standard. Those firms not meeting these conditions are penalized and

contracts are not renewed. Not only is this good PR for the firms, but also it normalizes

the quality of service that they will encounter when dealing with a supplier.

To reach the acceptable level, a supplier must make a commitment to their

employees and an investment in their facilities. This investment is a barrier to entry for

smaller manufacturing houses that desire Nike or Adidas’s business. Once a supplier has

become a Nike supplier they often become dependent on that contract. Nike sets their

prices and buys in enormous volumes.

5.3 Ease of Supplier Transfer

When dealing with commodity items like cotton, rubber, and foam, there is little

to stop large footwear companies from switching between suppliers. Any supplier that

meets the requirements of the firm will be able to supply such homogenous products. The

major firms in the market are able to switch suppliers quickly without worry of a

significant decrease in quality. They have the power over the suppliers. Therefore,

supplier power is extremely low in this industry.

6.0 BUYER POWER

6.1 Buyer Concentration

Athletic footwear retailers range from smaller shoe stores such as Footlocker to

large department stores such as Wal-Mart. The top 25 retailers generate approximately

two-thirds of the sales of athletic footwear, a value approaching $15 billion. Traditional

retailers like Finish Line and Footlocker dominate the sales landscape, but new players

have emerged in the form of big box stores and vendors opening their own merchandise

stores and outlets. Long-term market growth for athletic shoes in the United States is

projected to persist in the low single digits, so market share will be the key driver of

earnings growth for each market participant (Genereux 2006).

6.2 Buyer Leverage in Product Negotiation

It appears that the lack of concentration at the buyer level would inhibit margins

while allowing vendors to determine base prices for their product. Also, retailers have

little power or influence in the design of the product resulting from the large number of

industry participants. Under current market conditions, buyer power is relatively weak.

Large players like Nike and Adidas are able to dictate the price points of each pair of

shoes they sell. They have full creative rights to the design and manufacturing of their

footwear. However, Footlocker’s acquisition of Foot Action and Gart’s merger with

Sports Authority are microcosms of an across-the-board power consolidation within the

footwear retail industry (Yurman et. al 2005). As fewer retailers control larger market

shares, small vendors who have entered the market through a small retailer will find it

more difficult to maintain market share. Regardless, larger firms like Nike and Adidas

will continue to maintain the name recognition and infrastructure to remain industry

leaders through their aggressive acquisition of smaller companies threatening to take

market share.

Growing margins are another indication that buyer power is increasing. Lower

cost structures, smaller inventories, and growing market share through consolidation have

benefited the major footwear retailers. A decrease in industry-wide margins in 2001 has

been met with larger margins through until 2004; see the table below. This trend is

expected to continue for the next five years.

Source: Ohmes 2005

6.3 Effects of Retail and Vendor Consolidation The consolidation phase of the footwear industry has spurred increases in the

growth rate for many retailers by allowing them to purchase a diversified range of shoes

from each large athletic footwear company. “Famous Footwear President Joe Wood

commented that the department store consolidation coupled with a strong cycle in athletic

footwear has driven some of the gains in the family footwear sector. Shoe Carnival CEO

Marc Lemond believes that the strength in women’s fashion was driven by more

emphasis on footwear and apparel” (Genereux and Graham 2006). This consolidation is

expected to continue through the next couple years. Thomson Financial estimated that the

announced deals between athletic footwear companies increased to $40 billion in 2004,

compared with an estimated $10 billion in 2002. In 2005, mergers are estimated to have

surpassed the $40 billion record set by deals in 2004. The major transactions included

“Gart’s merger with The Sports Authority for approximately $378 million (closed in

August 2003); Foot Locker’s acquisition of Footaction for $225 million (completed in

May 2004); and Dick’s acquisition of Gaylan’s for $362 million (completed in July

2004); VF’s acquisition of Reef for $188 million (closed in April); American Sporting

Goods’ acquisition of And1 (announced in May); Wolverine’s licensing agreement with

Patagonia (announced in June), with the first product line expected to launch in spring

2007; Amer Sports’ acquisition of Salomon from Adidas for €485 million (completed in

October); and Timberland’s acquisition of SmartWool for $82 million (announced in

November” (Drbul et al 2006). These mergers have increased the market share for a

select group of companies, thus giving them bargaining power over the brands because

there are fewer buyers to sell their footwear.

The 2005 fiscal year marks the first time since 1998 that square footage of retail

floor space has increased. From 1999-2004, overall retail space for athletic footwear

dropped by 21% as a result of overcapacity, bankruptcy filings, and consolidation. In that

time period, footwear companies promoting a diversified set of retail offerings (sporting

goods and apparel) were able to withstand the loss of earnings growth in the athletic shoe

category until the up-tick seen in 2005 (Yurman et al 2005).

6.4 Current and Emerging Retail Channels

(Susquehanna Financial Group)

6.4.1 Department Stores

The large department store shoe category includes Wal-Mart, Sears, JC Penney,

Kohl’s, Target, and others. These companies have traditionally been in the business of

selling athletic shoes with a price point under $50 and selling to the masses. In America,

50% of all footwear purchases are under $50. Attempting to open new markets for itself,

Nike’s recent purchase of Starter Brands may have changed the face of the industry.

The $14 billion athletic shoe value industry is large and growing as shown by the

above graph, and Nike aligned itself to take advantage of expanding its markets without

hurting the Nike brand image. The 2004 purchase of Starter for $43 million gave Nike a

premium brand in the value market. Signing a partnership with Wal-Mart, Nike

negotiated an agreement to design the Starter shoes yet released themselves from the

manufacturing process. After Nike creates the shoes, the designs must be approved by

Wal-Mart. Next, the design is taken to a manufacturing plant where the shoes are made

and sold to Wal-Mart. Nike does not receive direct revenue from the sale of Starter

athletic shoes, but is paid royalties and design fees by Wal-Mart. While this partnership

may not maximize potential revenue for the Nike, it gives the vendor a profit channel

without having to make the necessary capital expenditures to produce and ship the

product. The discount market has been trying to find a way to counter clearance sales at

specialty stores and this new method has opened the barrier between the two channels.

Nike is encouraged by estimates of strong revenue growth and plan to turn the

Starter/Wal-Mart marriage into a billion dollar business (Drbul 2006). This strategic

alliance created by the supplier and buyer will allow for economies of scale, becomes

Nike’s link to the value market, and is Wal-Mart’s opportunity to market a premium

value shoe. The value net created by this relationship will create value for the customer

and bottom line savings for the retailer and vendor. Much of the influence and transaction

Source: Banc of America Securities

costs are mitigated by Nike’s new relationship as shoe designer and logo licenser. Wal-

Mart can buy directly from the factory as they had been doing in the past in order to

avoid new costs.

Dick’s Sporting goods separates itself with an emphasis on athletic equipment,

which comprises 60% of their sales. The Sports Authority has made a name for itself by

being the only national sports department store. This strategic advantage allows the

company to establish its brand presence and increase buyer power for all sporting goods

because of their large volume. Hibbett is unique in that they have found that placing

small sporting stores located in areas that cannot handle large department stores can be a

profitable business model. Each company used a different strategy for attaining

profitability, and all are successful at maintaining their advantages in a competitive

market (Ohmes 2005). As the influence of these sporting goods stores increases

throughout the country, their buyer power will increase as athletic footwear sales

increase. The large amount of square footage of footwear sales space is an indicator that

these corporations will concentrate on footwear as a large portion of their business.

6.4.2 Factory Outlets and Vendor Stores

Reebok, Nike, Adidas, Puma, and other major brands have led the move to

capitalize on a new growth market, running their own brand name stores. These stores

threaten the health and buyer power of the current retailers in the athletic footwear

industry by competing directly. Also, this highly integrated business model allows the

companies to increase margins and boost brand presence. Adidas has experienced a 13%

increase in margins for 2005, mainly because of the rapid growth of its stores unit. They

currently have 714 stores and plan to increase that number to 800 by the end of 2006

(Drbul 2006).

Nike has been able to grow their NikeTown and factory store models with

increasing success. “At the end of fiscal 2005 (June fiscal year end), the company

operated 184 owned retail stores in the United States, including 77 factory stores, 11 Nike

stores, 12 Niketowns, four employee-only stores, and 80 Cole Haan, Converse, and

Hurley stores, and 190 non-U.S. stores, for a total store count of 374, compared with 330

stores at the end of fiscal 2004” (Ohmes 2005). Nike currently has been concentrating on

expansion into China with its Nike-branded storefronts. China is the next frontier for

driving revenue growth in the footwear industry, and Nike has the brand awareness

advantage in Asia over all other major brands.

With the vertical integration present with vendor retail stores, the point-of-sale

storefront is the last frontier in the chain. It is apparent that operating wholly-owned

manufacturing plants is not a margin-driver, but the retail stores, the last link in the chain,

is proving a valuable tool for growth. Advertising costs can decrease considering that the

storefront becomes an interactive marketing symbol. Also, the escalation of opening

brand name retail stores will inherently put a dent in the sales of the specialty and

department stores, potentially inviting conflict with retailers. Preliminary sales statistics

are currently unavailable for most vendors, and the impact has not yet posed a significant

threat to Footlocker and Finish Line. Within two to five years these outlets will be

competing more directly with the department stores on pricing, slashing stick prices on

last year’s brand name models. Specialty stores will not see significant sales decreases

because their niche is selling the newest, most stylish shoes on the market. However,

overall buyer power will be weakened by the prevalence of these vendor stores.

6.4.3 Mall Specialty Stores

Footlocker and Finish Line dominate the mall specialty store segment of the

athletic footwear market. These stores are focused on the newest trends in footwear and

stock footwear with higher price points than other segments of the athletic footwear

industry. There are added risks to carrying such a narrow scope of styles and market

presence. Finish Line is expected to experience slow growth in the short term because of

its over-saturation of Nike products (60% of all products) and questionable adaptability to

the active lifestyle market (Genesco Rises 2006). Future growth for Finish Line will

come through nationwide mall expansion ushering in a greater brand presence and larger

sales volume.

Source: Banc of America Securities (Ohmes 2006)

Mall specialty stores, the buyer of many different brands of shoes, have incentives

to diversify their brand offerings to protect themselves from dramatic changes in market

development. Too much reliance on one or two brands of shoes will disable the ability of

the retailer to change with the trends. “In an attempt to better serve its urban markets

Finish Line has segmented its store base into five demographic groupings: urban,

suburban, mixed, metro/campus, and Hispanic” (Genereux 2006). Also, diversifying their

product line will decrease the power vendors have over the mall specialty market. A

company showcasing Nike as 40% of its footwear offerings will likely be subservient to

Nike’s preferences and intentions. If that store wanted to change its footwear options

from mostly Nike to mostly Puma or New Balance, it could lose its customer base.

6.4.4 Strip Specialty Stores

Famous Footwear, the uncontested leader in strip mall specialty footwear stores,

has had to change its business plan in order to stay ahead of the discount shoes store

competition. Their competition, Shoe Carnival, has historically specialized in non-athletic

footwear for the family. Famous Footwear recently targeted women aged 25-45 and took

their priorities into consideration with store redesigning and price-point management.

The redesigned stores have a larger middle aisle, lower shelves, and better presentation

for their athletic shoes, most priced between $30 and $120 (Balousek 2006). Although

this market segment has been able to revamp its image, there is very little buyer power.

Strip specialty stores carrying low and high priced footwear, and do not generate enough

sales to garner the attention of the vendors. These chains cannot compete with the

specialty stores at the higher price points (Ohmes 2006).

6.4.5 Online Stores

The online presence of shoe retailers is small but powerful. Nike has created a

shoe-building website to provide the customer with a fun, interactive experience. The

online sales arena does not appear to be a threat to buyer power because of its limited

success. Pure online stores shoebuy.com and zappos.com are placing small amounts of

pressure on brick-and-mortar stores to debut online websites to compete in this new sales

arena. The main disadvantage to online shopping is the lack of interaction with the

product. In electronics markets, product specifications are uniform among companies

while athletic footwear must be tried on to determine the best fit. Not a sales driver or

threat to buyer power, online stores are likely to be used as an advertising vehicle in the

present and near future.

7.0 CONCLUSION

Athletic footwear companies live and die by their perceived brand image in the

marketplace. Producers compete primarily on non-price elements, such as marketing and

types of products sold. Sneakers compete seasonally with many other types of footwear

such as sandals, work boots, and dress shoes. Nike and the now merged Adidas-Reebok

claim a huge percentage of market, followed by smaller competitors like Puma and Vans,

with well-established niche markets. Entry by small firms is difficult because the large

brands have strong consumer loyalty, plus economies of scale and scope. Success post-

entry is often met with buyout offers from larger companies that are both worried about

increased competition and hoping to lead the next big trend in sneakers. Shoe companies

are able to exert extensive power over their suppliers due to the homogeneous nature of

the three raw materials essential in the sneaker-making process: cotton, vulcanized

rubber, and foam. Buyer power in the industry has historically been low, but recent

consolidation has provided retailers more bargaining power in terms of price and

marketing.

In the future we expect the trend of buyouts and mergers to continue as the

producers continue to have incentives to consolidate. The industry is aging and looking to

expand its reach into apparel and higher technology outlets. Nike and Adidas are leading

the research and development of new technologies such as automatic comfort

adjustments and microprocessor inserts within the athletic shoes. Innovation in this

industry is essential to keep customers interested in the product. Lastly, the divide

between performance athletic shoes and lifestyle footwear will be a defining

characteristic of product marketing and alignment over the next several years.

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9.0 COMPANY WEBSITES CITED

Corporation Home PageAdidas http://www.sopadidas.com/

AND1 http://www.and1.com/section/products

Asics http://www.asicsamerica.com/

Brooks http://www.brooksrunning.com/

Converse http://www.converse.com/index.asp?b

Crocs http://www.crocs.com

K-Swiss http://www.kswiss.com/

Mizuno http://www.mizunousa.com/

New Balance http://www.newbalance.com/

Nike http://nikebiz.com

Niketown http://niketown.nike.com/niketown/

Puma http://store.puma.com/

Reebok http://store.reebok.com/

Saucony http://www.saucony.com/

Spira http://www.spirafootwear.com/

Stride Rite http://www.striderite.com/

Vans http://shop.vans.com/