Mergers and consolidations will continue to shrink the number of players in the $40 billion global sporting goods industry in 2004. That's the forecast of The Mercanti Group, a boutique investment banking firm that served as the advisor to K2, Inc. in that company's acquisition of Rawlings Sporting Goods Company and Brass Eagle last year, as well as numerous other transactions.
Mercanti's outlook is predicated on a view that smaller companies are continuing to lose traction in their uphill struggle to respond to the demands of larger retailers and are losing ground to larger competitors on the manufacturing and sourcing sides of the business. In its most recent report on the Branded Consumer Products market, Mercanti asserted that the fragmented sporting goods supply side of the equation must consolidate in order to serve the demands of larger sporting goods retailers that have been successfully consolidating their side of the industry and now want to deal with a smaller number of, yet larger suppliers.
“The outlook for sporting goods manufacturers and wholesalers is very similar to the situation faced by packaged food producers when the grocery store retailers consolidated,” said James D'Aquila, one of Mercanti's three senior managing directors. “At that time, the packaged food companies responded by merging in order to meet the scale and price demands of the larger, surviving grocery store chains. The recent sporting goods retail consolidation and growth of big box national retailers has generated a few large leaders, such as GART Sports, The Sports Authority, Dick's Sporting Goods, Big 5 Sporting Goods, Galyans, Cabela's, and Gander Mountain. On the manufacturing side, we're beginning to see the expected response from companies such as Nike, AmerGroup, Reebok and K2 as they recognize and leverage size to maintain or build their market positions,” D'Aquila said.
In its report, Mercanti maintains that as the larger retailers continue to grow, they will demand better pricing from sporting goods wholesalers and manufacturers. To meet this demand and to satisfy their desire to work with fewer vendors, sporting goods wholesalers and manufacturers will have to consolidate and become larger to create infrastructures capable of reaching a scale that will profitably deliver the pricing expectations of the key sporting goods retailers.
“The vendors that will prosper over the next five years will be those that have adequate depth and breadth of products and the ability to manufacture a source product in a highly effective manner,” D'Aquila said.
America is spending more time outdoors. Mercanti's research cited the outdoor sporting goods industry whose sales have increased from $14.7 billion to $19.0 billion between 1991 and 1996. Fueling that growth has been an increase in the total days of participation in fishing and hunting activities by 22% and 9%, respectively. The dollar amount spent on fishing and hunting equipment went up by 23% and 46%, respectively, during the same five-year period.
“In addition to this, the overall demographic trends affecting America are also having a profound impact on the sporting goods industry,” D'Aquila added. “Baby Boomers are resisting the effects of aging more than any generation preceding them and, as they continue to recognize the benefits of regular exercise, there will be an increase in demand for those products that enable the integration of a fitness program into everyday life. These Baby Boomers have the financial resources to dedicate more of their time and money toward leisure and recreational activities.”
D'Aquila noted that teens and young adults are increasingly shunning team and group sports and turning toward high-intensity, extreme sports that appeal to the individual thrill seeker. Large numbers of Generation Y have defined their lifestyles based on further pushing the envelope in sports passed down from Generation X, such as BMX biking, skateboarding, surfing and in-line skating.
D'Aquila said many traditional sporting good manufacturers, such as K2, are taking notice of this trend and introducing products to meet new demand for high-intensity, extreme sports.
As an example, K2 recently announced a definitive agreement to acquire Brass Eagle Inc. (Nasdaq:XTRM), a manufacturer and distributor of paintball sports equipment. Worldwide, there are an estimated 8.7 million paintball enthusiasts who generated sales of more than $370 million at wholesale in 2002.
