Athletic Footwear Industry

1.Athletic FootwearIndustry Analysis Angela Gieras Jeremy King Tara McNeill Tom Parrish January 17, 2003

Athletic footwear was first developed by the ancient Greeks in order toprovide protection when moving over rough terrain in varying weather conditions.

The modern athletic shoe was developed in eighteenth century England as a result of an increasing interest in the sport of running and other outdoor activities.

Joseph William Foster founded the first large-scale sports shoe company in Boulton, UK in the 1890s.During this period, other sport shoes could be found in mail order catalogues, such as Sears and Montgomery Wards.

In 1917, the Converse and Keds corporations entered the American athletic shoe market.

In 1958, Joseph William Fosters grandson renamed his grandfathers company Reebok .

Athletic footwear forever changed in 1962 when Phil Knight and Bill Bowerman created "Blue Ribbon Sports," the forerunner of Nike.

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

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

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

In 2001, NPD estimates that spending for athletic footwear rose 2% to $15.42 billion, from $15.12 billion in 2000.

Consumers purchased 401.9 million pairs of athletic shoes, down 1.5% from 408.0 million pairs in 2000.

The average price paid per pair rose 3.5%, to $38.36, from $37.05 in 2000; however, this was still well below the $40.07 paid in 1998.

Running shoes captured the biggest share of consumer spending, with 29.0% of the total market.Sales of running shoes rose 3.8% to $4.55 billion, from $4.38 billion in 2000.

Baby Boomer Generation

Born 1946-1964

77 million Americans

Healthcare, leisure, retirement compete for fashion dollars

Fashion spending is waning, but still spend the most

Conservative, large sizes appeal to this group

Generation X

Born 1965-1976

Are typically marketed to in a similar fashion as Generation Ys

Marketing focus may be lost between Baby Boomers and Generation Y

Generation Y

Born 1977-1994

75 million Americans (25% of population)

Focus of marketing in recent years

Teen girls spend 75% of earnings on clothing and accessories

Comparatively, teen boys spend 52%

Loyal to footwear and apparel name brands

Generally support smaller footwear companies in tune with fashions

Comprised one-quarter of all athletic footwear spending

Advertisers attempt to reach more through non-traditional mediums (i.e. Internet)

Traditional

Retail outlets

Shoe store

Non-traditional

Internet, television (i.e. QVC, HSN, ShopNBC)

Footwear is one of fastest growing categories on QVC & HSN

QVC and HSN reach 100 million homes

ShopNBC reaches 52 million homes

Men spend more per pair and buy more pairs of athletic footwear than women

Womens and Childrens shoe sales growing more rapidly than Mens

Nearly 33% of all athletic footwear spending is done by those aged 13-24

Less than 30% of athletic shoes purchased are for use in sports or fitness activities

Internet orders (via websites)

Telephone orders (i.e. QVC)

Walk-in orders (mall, outlets, etc)

Nike-Principal business activities involve design, development, and worldwide marketing of quality footwear, apparel, equipment, and accessory products. The largest seller of athletic footwear and athletic apparel in the world. All footwear products are produced outside the United States by independent contractors.Nike places emphasis on high quality construction and innovative design.

Adidas-German based Adidas-Saloman is the second largest manufacturer of athletic equipment, footwear , and apparel in the world.Adidas America oversees marketing, merchandising, distribution, and sales of Adidas products in the U.S.Their mission is to become the best sports brand in the world.Adidas believes in creating a product to perform.Form follows function.

Source: Company websites and company 10K reports,

competitor information from Standard & Poors

Reebok International-Global company engaged in the design and marketing of sports and fitness products, including footwear, apparel, and accessories.They devote significant resources to advertising products to a variety of audiences through various media. Revenues are primarily driven from wholesale distribution of products to selected athletic specialty stores, high-end retail shops, as well as sporting goods and department stores.

New Balance Athletic-A privately held company in Massachusetts, New Balancewas founded as a manufacturer of arch supports and orthopedic shoes.New Balances mission is to be recognized as the worlds leading manufacturer of high performance footwear and apparel.

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

Nike-Running, basketball, childrens, cross-training, and womens shoes

Adidas-Basketball, training, baseball, football, urban, originals, workout, and walking

Reebok International-Running, walking , aerobic

New Balance Athletic-Running, walking, cross-training

Skechers U.S.A.-Casuals, utility, steel toe

Source: Company websites and corporate 10K reports

High quality construction

Innovative design

Collection based marketing

Focus sales on distributors, licensees, and subsidiaries

Adidas

Form follows function

Marketing department begins design process

Greater emphasis placed on design for an athletes need

Reebok

Grow sales through distribution channels

Focus on relationship with major sports figures to enhance brand image

Resources devoted to advertising through various media

Skechers

Fashionable footwear

Does not concentrate on performance

International expansion by leveraging domestic brand image

Building brand image

According to Forrester Research, 69% of teens said that when they find a brand they like, they remain loyal

Firms use celebrities and athletes

Nike: Michael Jordan and Tiger Woods

Skechers: Brittany Spears

Adidas: Kobe Bryant

May 1974: Multifibre Agreement (MFA) import quotas replace the regulations under the GATT agreements as the primary regulator offootwear trade

Protects countries whose domestic industries are severely threatened by imports

December 1993: North American Free Trade Agreement (NAFTA)

Created the worlds largest free trade zone between the United States, Mexico, and Canada

July 1995: The World Trade Organization created the Agreement on Textiles and Clothing (ATC) to replace the Multifibre Agreement

May 2000: Caribbean Basin Trade Partnership Act (CBTPA) and the African Growth and Opportunity Act (AGOA), passed under the heading of the Trade and Development Act

Effective October 1, 2000, authorized for eight years

Duty-free treatment and reduced duties on footwear imports for potentially 72 countries

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

April 2001: Summit of the Americas Conference in Quebec

Delegates agreed to a draft to eliminate all trade barriers within North and South America, final text due January 2005

October 2001:Vietnam Bilateral Trade Agreement

Established normal commercial trade relations subject to annual review by Congress

October 2001: Bilateral Trade Agreement with the Kingdom of Jordan

Mandates that all footwear articles must meet the basic 35% local content origin rule

November 2001: China enters the World Trade Organization

China allowed to ship apparel and footwear to the U.S. under reduced tariffs

December 2001: Congress directed attention to numerous labor issues in the footwear industry, but instituted no actions regarding sweatshop and child labor conditions

July 2002: Trade Act of 2002

Trade Promotion Authority (TPA) grants the President the right to negotiate trade agreements and gives Congress the final authority to approve or disapprove those agreements

Andean Trade Preference Act (ATPA)

Duty-free access to virtually all footwear from the Andean region (Bolivia, Columbia, Ecuador, and Peru)

Retroactive modifications to the May 2000 Caribbean Basin Trade Partnership Act (CBTPA) and the African Growth and Opportunity Act (AGOA)

Expected Consequences of Latest Legislation

Increase in imports from the Caribbean basin and Andean region, and to a lesser extent sub-Saharan Africa

Erosion of Asias share of U.S. imports in the short term

Increasing amounts of footwear imports from China in the long-run

Eventual erosion of Mexican and Caribbean share of U.S. imports due to lower labor costs in China

Labor practices and environmental issues in the footwear industry have been historical issues

Example: Nike (Historical)

In Indonesia, production workers were paid 86 cents per hour for a 12 hour day, no overtime, no breaks

In Vietnam, factory workers earned 20 cents per hour

In China (where Nike has 40% of its production), workers worked 84 hours per week and earned $1.50 per shoe made

The International Labor Office reports a recent trend in self-regulation, including voluntary initiatives, due to pressure from labor and special interest groups

Footwear companies are concerned with public image and corporate citizenship

Government Actions

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

Apparel and footwear sales are driven strongly by economic conditions, demographics, and pricing

With expected economic recovery in 2003, footwear sales should begin a gradual recovery

A wave of consolidation is expected as firms attempt to gain leverage in distribution channels.The slow economy has led athletic footwear manufacturers to lay off workers, freeze hiring, find less expensive sourcing, and cut non-fixed costs like technology, travel, and entertainment

Retailer position becomes If it isnt moving, mark it down while bad for margins, it is good for inventory

Since 1995, the industry inventory-to-sales ratio has declined

Declines in the Consumer Confidence Index tend to curtail spending on discretionary items like apparel and footwear, causing retailers to reduce and cancel orders

September 11 terrorist attacks dramatically slowed consumer spending, exacerbating the problem

While consumer spending for athletic footwear was up about 7% before the attacks, sales dropped more than 10% after

In October 2002, the Consumer Confidence Index reached a nine year low of 79.4

Consumer spending is expected to rise 3.0% for the full-year 2002 and 2.5% in 2003

Disposable income expected to rise 5.8% in 2002 and 4.7% in 2003

Poor economy and high competition leads to extreme price pressure, deflating prices and margins

Consumers are more value-conscious, wanting quality at a low price evident in the growth of mass merchant and off-price retail stores

Discounts and bargain shopping maintained sales level, but hurt profit margins

While spending for all men, women, and childrens athletic shoe categories increased, the pattern of buying more for less was consistent among all segments

Years of price promotion have tarnished the image of athletic footwear

Also contributing to price deflation have been an increase in imports and market share gains by discounters

Despite a 6% rise in average prices for athletic shoes in 2001, which reversed the trend beginning in 1997, analysts believe the reversal is temporary

There is a necessity to diversify in terms of product line, market segment, and distribution channels

Options

Acquisition

Eliminates competitors

Expands acquirers top line and market share

Example: Nike acquired surf wear manufacturer Hurley International

Licensing

Offer new products while leveraging current brands

Example: Perry Ellis International has swimwear licenses with Nike and Reebok

Product diversification

Athletic apparel viewed as the new growth component for firms

Slower growth due to competition and price-conscious consumers

Granting of exclusive rights to retailers by manufacturers

Issuing limited editions of high-fashion and high-tech models

Increased competition from the growing popularity of traditional designer shoes, which have taken on more athletic designs, and casual shoe styles

Athletic footwear manufacturers introducing styles not meant for sports and targeting different segments (i.e. girls, women, and older casual wearers)

Increased number of imports

Footwear Industries of America (FIA)

National association for footwear manufacturers, importers, distributors, and suppliers to the leather and allied trades

Represents the industry in Washington, DC

Footwear Distributors and Retailers of America (FDRA)

Provides representation on U.S. and international government relations for U.S.-based retail chain shoe retailers and the footwear brands

National Shoe Retailers Association (NSRA)

Founded: 1912

Trade organization representing independent shoe retailers

Athletic Footwear Association (AFA)

Founded: 1982

Serves an international group of athletic footwear manufacturers and marketers

About 140 members

Part of the Sporting Goods Manufacturers Association (SGMA)

An Inside Look at Americas Sneaker Biz. SGMA International. 14 Jan. 2003 .

Apparel and Footwear Industry Survey. Standard and Poors Net Advantage. 15 Jan. 2003 .

Athletic Footwear. 14 Jan. 2003 .

Athletic Footwear: a Mature Industry. SGMA International. 14 Jan. 2003 .

Athletic Footwear: Adjusting to a Changing Market. SGMA International. 14 Jan. 2003 .

Athletic Footwear Sales Climb 2% in 2001 As Customers Pay More Per Pair. SGMA International. 14 Jan. 2003 .

Adidas. Annual Report. 14 Jan. 2003 .

Adidas. About Adidas. 14 Jan. 2003 .

Bloomberg. Financial Analysis Report. Nike. 15 Jan. 2003.

Bloomberg. Financial Analysis Report. Reebok. 15 Jan. 2003.

Ellis, Kristi. AAFA Joins the Call for Free Trade; The U.S. Apparel and Footwear Trade Group Reversed Its Longstanding Support of Protective Tariffs for Footwear.Footwear News . 24 Jun. 2002.

Ellis, Kristi. Lobbyists Say Trade Act Falls Short; Only Columbia, Peru, Bolivia, and Ecuador to See Footwear Duty, Quota Breaks.Footwear News . 19 Aug. 2002.

Footwear in the USA. 15 Jan. 2003 .

Footwear in the USA.Footwear Journal USA . Jul. 2002.

Footwear Industry. 15 Jan. 2003 .

Footwear Production. US Census Bureau. 15 Jan. 2003 .

Gurian, Brian. The Impact of the Sneaker and the Sneaker Industry on Modern Society: A Review of the Transformative Powers of an Icon. St. Johns University. 2002. 15 Jan. 2003 .

Howell, Mike McNulty. Footwear Industry Weathers Economic Storm.Rubber & Plastics News . 7 Oct. 2002.

Lazich, Robert S. Sports Shoe Market.Market Share Reporter (Detroit: Gale) 2003.

New Balance. Fact Sheet. 15 Jan. 2003 .

Nike. Edgar Online, Inc. 10K report for Nike. 14 Jan. 2003.

Reebok. Edgar Online, Inc. 10K report for Reebok. 14 Jan. 2003.

Research and Statistics. National Sporting Goods Association. 14 Jan. 2003 .

Skechers. Edgar Online, Inc. 10K report for Skechers. 14 Jan. 2003.

Taylor, Sarah. Phoning It In; Footwear Is Now One of the Fastest Growing Categories for Home-Shopping Networks QVC; HSN and ShopNBC; Vendors Couldnt Be More Thrilled, but Retailers? Thats Another Story.Footwear News.29 Jul. 2002.

US Sporting Goods Market Outlook 2002. SGMA International. 14 Jan. 2003 .

Company Websites

www.adidas.com

www.asics.com

www.newbalance.com

www.nike.com

www.reebok.com

www.skechers.com

Lifestyle

Athletic Footwear Industry