If this was a State of the Union address, we would have to proclaim that the State of the Athletic Footwear business is great for 2005 and the foreseeable future. Sports Executive Weekly has assessed the trends of the last year and the trends emerging for this year and compiled a fairly broad view of the athletic footwear market from performance specialty and mall specialty to family footwear and sporting goods.
A full footwear report, which expands on this top-line overview, is included in Sports Executive Weeklys first annual report on the health of the sporting goods industry due out in early May. The report is free to Sports Executive Weekly subscribers.
Despite the rough week last week on Wall Street, SEW sees the athletic footwear market at the front end of a significant growth curve that may keep momentum into the early part of the next decade. This view is based on research conducted by our team and others, as well as anecdotal feedback from retailers, vendors, and analysts. At the heart of this growth is an alignment of a number of key metrics that work in favor of the market.
For the last decade, the athletic footwear market has stagnated as sales were traded between categories, price-points, and brands. The sector saw no significant growth that didnt cannibalize the rest of the market. The elements that we see driving the renewed energy, increased sales, improving margins, and a stronger bottom line in this market over the next five years are derived from a number of broader trends we addressed in our research.
A Perfect Storm currently exists in the market where both units and average selling prices are improving at the same time. As opposed to the shifts in market trends seen in the last ten years, the growth of the performance business is not coming at the expense of classics or fashion athletic. It is incremental unit growth that is not being driven by lower prices.
Consolidation of vendors and retailers has led to less choice for both sides of the table that has created a new business paradigm, which relies much more on enhanced communication and openness between retail and vendor partners to deliver mutual benefits to the bottom line for both parties.
Partnership initiatives that take days, if not weeks, out of the supply chain are clearly at the heart of a new willingness by retailers to share more information about their business than in the past. The same partnership has extended beyond the traditional buyer-seller relationship to include sourcing, operations, and planning teams on both sides of the business.
A strong economy has fueled incredible growth in the “Luxe” categories and consumers have again moved back into a trend of conspicuous consumption that fuels a rather viral “keeping up with the Jones” phenomenon, which has helped boost average selling prices in just about every channel in the retail market.
A trend to fitness as a lifestyle is driving a look on the street and in the mall that presents performance product as cool and fashionable once again. Not since the aerobics fitness boom of the Eighties have we seen so much energy in core categories that signal strength in this business.
Eurostyle and Classics as fashion kept athletics in the game over the last few years. The job done by Puma and others that built the sport style business over the last three years has to be given credit for keeping athletic footwear on the minds of the consumer in the suburban and upscale urban boutique markets. Without the energy here, the consumer may have well solidified their move to the casual footwear business and made it harder for them to return to athletic footwear. In the ethnic urban market, it has been the continued solid performance of the Classics business from K-Swiss, Nike, Reebok, and New Balance that has provided the perfect hook-up to a hot denim business.
As we assess the impact of these broader elements, Sports Executive Weekly has developed an outlook for the athletic footwear market that signals solid growth in the sector for the next three to five years. In assessing the opportunities in the business for the balance of the decade, the market should stay focused on five key trends that will drive it forward.
1. Performance Footwear, as a category, is in the early stages of a significant growth curve.
Based on our assessment of the market, this business is just now starting to gel as the market moves from a base of Fashion Performance to now impact the brands that are holding the cards in the Technical Performance market. The growth in this market in the next two to three years will continue to center on Running as a category. Other performance categories will see growth, particularly in the cleated categories, but Basketball and Cross-Training are going to be on the outside looking in for the next few seasons.
Renewed energy in the Basketball category will require breakthrough product from a vendor that will stimulate interest and energy again in this business. SEW sees no such product on the horizon at this time.
From a channel perspective, Sporting Goods and Run Specialty are expected to outpace the other channels as retailers here begin to capitalize on their status as specialists in equipment for the enthusiast to expand their footwear business. The market will see more brands take a bigger position here as sporting goods retailers start to commit training resources to their shoe departments to sell higher-priced goods. Asics is the darling here and Brooks is starting to make a move as they broaden their penetration at Dicks beyond the Galyans doors they have occupied to-date, a move that will be easier to support going forward due to Russell Corp.s year-end acquisition of the running brand. Mizuno and Saucony are still focused primarily on the specialty end of the business, but are logical next candidates for sporting goods as they broaden their mix.
2. The supply chain will continue to shrink.
Retailers and vendors will continue to plan their businesses for a combination of auto replenishment and shorter lead-time goods. In an effort to improve the bottom line, the retailer has drained just about every ounce of savings from their operations, with some coming dangerously close (and a few too close) to impacting sales on the floor as they cut back merchant teams and store floor personnel.
New or broader partnerships with vendors will continue to help expand margins as brands maintain ownership of core styles deeper into each season through auto-replenishment or quick response. For in-season goods, its the move to short lead-time goods that is gaining momentum as retailers look to react more quickly to seasonal products that they see as potential big-hitters.
Some speculate that as much as 50% of the efficiencies gained in the supply chain can be accomplished through increased dialogue between vendor and retailer as well as better communication between a vendors sales, planning, and production teams. Is some cases, its just the addition of a planning team that makes the difference of weeks instead of months in getting more product to market.
3. Average selling prices will continue to increase over the next two years.
Retailers will see benefit from a consumer base that is ready, willing, and able to trade up in price. Much of this is driven by the growth of performance footwear, but SEW also sees the trend occurring within a number of categories. A number of factors are at play here, but SEW sees two elements to the trend.
First, the stronger economy creates a more upbeat consumer who is again willing to invest in better product. The market is just starting to recover from the burst of the market bubble of the late nineties and the impact of the 9/11 attacks in the U.S. As nascent democracies break out in the Middle East and central Asia, the U.S. consumer has almost a post World War II glow in their eyes as they start to emerge from what has been five years of bad news.
Secondly, the spat between Nike and Foot Locker should not be under-estimated for its impact on how retail is now developing. A move to a value play in the mall by the worlds largest athletic footwear retailer was effectively stymied by the 800-lb gorilla that refused to surrender control of their brand. The result was a broader athletic footwear market and a healthier mall that is again the focal point for marquee footwear rather than the fight-for-market-share-at-all-costs that it had become two years ago. If this had gone the other direction the landscape today could well be a very different situation.
4. Family Footwear as a channel will continue to expand as a key destination for athletic footwear.
A number of elements are at play on this trend that is also on the front end of a growth curve. One family footwear chain had a number of solid players from the athletic business working their relationships to secure better product from vendors in an effort to raise the bar in the channel. Success bred more investment as a number of brands started to see the results of new efforts by that team to re-position family footwear as a destination for the athletic footwear consumer. As the cycle continues, the channel becomes increasingly successful with product north of $75 instead of the old grind that kept goods in the $39.95 to $49.95 range.
The other key component here is the growing importance of the womens athletic footwear consumer. The department stores have not done a great job addressing the needs of this expanding consumer base that is “running for a cause” and driving sales growth for womens performance product at a much higher rate than mens.
5. Mass Retail will become the third leg in a stratified brand strategy at retail.
Nikes experiment with its recently-acquired Starter brand at Wal-Mart may just be the start of a new distribution channel for relevant athletic footwear that could challenge vendors and retailers that have focused more on price rather than product in the category. The 400+ store test this Spring sees just a few products in the market and by no means represents a major presentation of the Starter brand. But Nike Inc.s capability to dig into their archives to inject performance characteristics into Starter product retailing at $39 could certainly challenge some in the mid-market that havent stepped up their commitments to better product.
With these five key elements at work the athletic footwear market should experience high single-digit growth in 2005, with performance footwear outpacing the balance of the business. The trend to performance is not expected to moderate for the next few years and running can be expected to continue to lead the growth. SEW also sees the walking category benefiting from the shift to performance, but any upside here will be based on compelling product rather than a category shift. Classics have not slowed down, but may see some moderation in the urban malls as Foot Locker and Finish Line build on their commitment to performance.
There couldnt be a better time to be in the athletic footwear business with a strong brand name that stands for something in the minds of the consumer. The downside will be felt by those brands that didnt protect brand integrity during the challenges of the last five years or those that have no real technology platform from which to build for the future.
