Athletic Footwear Industry Analysis

Angela Gieras Jeremy King Tara McNeill Tom Parrish

January 17, 2003

Background
Athletic footwear was first developed by the ancient Greeks in order to provide 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.
Source: Digital Dissertations: Gurian, Brian. The Impact of the Sneaker and the Sneaker Industry on Modern Society. St. Johns University, 2002.

Size of Market
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 yearearlier period. (Euromonitor) ATHLETIC FOOTWEAR MARKET SIZE ESTIMATES
Retail Dollars in Billions 1998 1999 2000 2001 Change 00-01

Mens Womens Childrens

$8.470 3.951 2.332

$8.037 4.194 2.327

$8.236 4.486 2.394

$8.541 4.418 2.461

+3.7% -1.5% +2.8%

TOTAL

$14.753 $14.558 $15.115 $15.420

+2.0%

Source: The NPD Group, Inc.

Size of Market
ATHLETIC FOOTWEAR MARKET SIZE ESTIMATES
Pairs Sold in Millions 1998 1999 2000 2001 Change 00-01

Mens Womens

155.200 161.661 170.316 175.010 106.486 115.755 125.999 119.973

+2.8% -4.8% -4.2%

Childrens 106.508 102.986 111.676 106.961

TOTAL

368.194 380.402 407.990 401.943

-1.5%

Source: The NPD Group, Inc.

Expected Growth Rate

According to the Sporting Goods Manufacturers Association, athletic footwear accounts for almost 35% of all footwear purchases. (The NPD Group, Inc.) TOTAL FOOTWEAR SOLD IN THE UNITED STATES MARKET FORECASTS Market Size Growth Rate (billions of dollars) 2001 2002 2003 2004 2005 $40.0 $40.6 $41.7 $42.8 $44.0 1.5% 2.7% 2.6% 2.8%

2006
Source: Euromonitor

$45.2

2.7%

Growth Rates in Sports Participation

2001 SPORTS PARTICIPATION - 2001 vs. 1996 SPORTS WITH THE GREATEST POSITIVE AND NEGATIVE CHANGE Participated more than once (in millions) Seven (7) years of age and older Percent Change 106.3% 72.4% 26.5% 15.4% 10.3% -35.1% -36.0% -36.1% -49.1% -49.4%

Sport Skateboarding Snowboarding Backpack/Wilderness Camping Golf Running/Jogging Volleyball Ice/Figure Skating Racquetball Step Aerobics Roller Skating (2x2)
Source: National Sporting Goods Association

2001 9.6 5.3 14.5 26.6 24.5 12 5.3 3.4 5.7 7.7

1996 4.7 3.1 11.5 23.1 22.2 18.5 8.4 5.3 11.3 15.1

Market Sales - Seasonality

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. SALES BY QUARTER Dollars in Billions
1 2 3 4

1999 2000 2001

$3.209 $3.663 $4.015 $3.671 3.453 3.882 3.307 3.474 4.057 3.996 -1.5% 4.299 4.068 -5.4%

Change +12.4% +5.1% 00-01

Source: Euromonitor and The NPD Group, Inc.

Market 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.

Source: Standard & Poors Net Advantage

Consumer Demographics
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

Source: Standard & Poors Net Advantage

Consumer Demographics
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)

Source: Standard & Poors Net Advantage

Athletic Footwear Purchases by Age

ATHLETIC FOOTWEAR PURCHASES BY AGE 2001 US Population 19.8% 5.7% 9.7% 13.5% 16.2% 22.4% 12.7%

Under 14 14-17 18-24 25-34 35-44 45-64 65 & Older

2001 26.6% 8.4% 6.1% 11.7% 14.6% 23.2% 9.4%

2000 28.1% 8.8% 5.5% 12.7% 14.6% 22.4% 7.8%

1999 30.7% 9.5% 5.5% 12.0% 15.1% 19.7% 7.5%

1998 28.6% 8.4% 5.9% 13.8% 15.3% 20.4% 7.6%

Source: National Sporting Goods Association

Market Segments
Sample Market Segment Female Clerical/Sales Female Executive Female Crafts/Repairs Female Professional Percent Purchasing Athletic Shoes 21.5% 22.9% 30.6% 26.6%

Male Clerical/Sales
Male Executive Male Crafts/Repairs Male Professional Men Women

22.0%
25.0% 18.4% 22.6% 20.0% 19.2%

Source:Euromonitor

Product Segments
Retail Sales in $ Billions 1999 2000 2001 Change 00-01 + 3.8% +11.8% - 2.7% - 0.5% + 3.6% -13.0% - 6.6% +21.7% - 6.1% - 4.8% - 2.4%

Running $4.076 $4.383 $4.549 Basketball 2.606 2.524 2.822 Cross training 2.126 2.282 2.220 Walking 1.267 1.224 1.218 Athleisure 1.121 .937 .971 Recreational boots .466 .922 .802 Hiking .757 .726 .678 Tennis .524 .469 .571 Sports sandals .349 .378 .355 Aerobic .320 .227 .216 Other .961 1.043 1.018

Source: SGMA International

Consumer Purchasing Habits

Traditional Mall Non-traditional Internet, television (i.e.

Retail outlets
Shoe store

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

Source: Footwear Journal USA

Consumer Purchasing Habits

Who? 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 How? Internet orders (via websites) Telephone orders (i.e. QVC) Walk-in orders (mall, outlets, etc)

Source: SGMA International & Standard & Poors Net Advantage

Major Competitors
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

Major Competitors
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 Balance was 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.
Source: Company websites and company 10K reports, competitor information from Standard & Poors

Major Competitors
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 footwear that 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.

Source: Company websites and company 10K reports, competitor information from Standard & Poors

Best Selling Product Categories

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

Competitor Business Strategies

Nike High quality Adidas Form follows

construction
Innovative design Collection based

function
Marketing department begins design process

marketing
Focus sales on distributors, licensees, and subsidiaries

Greater emphasis
placed on design for an athletes need

Source: Nike website and 10K and Adidas website

Competitor Business Strategies

Reebok Grow sales through Skechers Fashionable footwear

distribution channels
Focus on relationship with major sports

Does not concentrate

on performance International expansion

figures to enhance
brand image Resources devoted to advertising through various media

by leveraging domestic
brand image Building brand image

Source: Reebok and Skechers websites and 10K reports

Brand Development
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

Source: Drivers of Change, http://www.duke.edu/web/soc142/team2/drivers.html

2001 Competitor Ratio Analysis

Ratio Profit Margin Nike 6.7 Adidas Reebok 3.41 5.21

Inventory turnover
Return on Assets Total Debt/Equity Current Ratio

4.29
10.82 40.41 2.26

2.74
5.09 74.35 2.07 20.55

5.01
6.83 53.34 2.88 14.26

Return on Net Worth 15.36 # of employees

22,700 13,941 6,700

Source: Bloomberg and Adidas consolidated financial statements, financial information unavailable for New Balance

2000 Market Share of Athletic Shoe Competitors

Other 25% Nike 42%

New Balance 10% Reebok 12% Adidas 11%

Source: Market Share Reporter

Historical Government Legislation and Trade Restrictions

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

Historical Government Legislation and Trade Restrictions (cont.)

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

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

Latest Trade Legislation

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

Source: Standard & Poors Net Advantage

Labor Practices
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 selfregulation, including voluntary initiatives, due to pressure from labor and special interest groups Footwear companies are concerned with public image and corporate citizenship
Source: The Politics of Footwear, http://www.duke.edu/web/soc142/team2/Politics.html

Labor Practices (cont.)

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

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

Economic Factors
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

Source: Standard & Poors Net Advantage

Benefits of Economic Downturn

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

Source: Standard & Poors Net Advantage

Consumer Confidence Index

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

Source: Standard & Poors Net Advantage

Consumer Confidence Index (cont.)

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

Source: Standard & Poors Net Advantage

Good News for Consumers, Bad News for Manufacturers

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

Source: Standard & Poors Net Advantage

Average Price of Athletic Footwear

Aerobic Shoes Baseball/Softball Basketball Shoes Boat/Deck Bowling Shoes Cheerleading Cross Training Shoes Cycling Fitness Football Golf Shoes Gym Shoes/Sneakers Hiking Shoes/Boots Hunting Boots Jogging/Running Skateboard Shoes Soccer Shoes Sport Sandals Tennis Shoes Track Shoes Trail Running Shoes Volleyball Shoes Walking Shoes Water Sport 2001 $42.68 $40.92 $54.92 $30.09 $35.94 $36.25 $47.01 $56.96 $42.60 $46.51 $61.86 $27.57 $47.85 $65.13 $50.31 $44.60 $35.35 $24.36 $32.89 $47.28 $56.39 $53.72 $42.26 $14.26 2000 $41.25 $40.65 $57.16 $31.03 $31.74 $39.09 $48.27 $51.00 $42.99 $47.23 $60.97 $27.04 $47.54 $64.43 $50.36 $42.27 $34.22 $23.88 $33.19 $48.68 $57.23 $54.67 $42.16 $13.93 Change 2000-2001 3.5% 0.7% -3.9% -3.0% 13.2% -7.3% -2.6% 11.7% -0.9% -1.5% 1.5% 2.0% 0.7% 1.1% -0.1% 5.5% 3.3% 2.0% -0.9% -2.9% -1.5% -1.7% 0.2% 2.4% 1996 $40.06 $39.41 $54.01 $29.35 $36.21 $35.26 $48.39 na $40.95 $45.88 $53.81 $24.41 $42.64 $54.52 $45.44 na $33.51 $23.33 $29.15 na na $46.81 $39.66 $12.03 Change 1996-2001 6.5% 3.8% 1.7% 2.5% -0.7% 2.8% -2.9% na 4.0% 1.4% 15.0% 12.9% 12.2% 19.5% 10.7% na 5.5% 4.4% 12.8% na na 14.8% 6.6% 18.5%

Source: National Sporting Goods Association

Options for Survival

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
Source: Standard & Poors Net Advantage

Expected Change in the Industry

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
Source: Standard & Poors Net Advantage

Industry Trade Organizations

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)

Source: Contacts and Links, www.infomat.com/information/research/industry/ Reports/USA_Footwear.html

Sources
An Inside Look at Americas Sneaker Biz. SGMA International. 14 Jan. 2003 <http://www.sgma.com/sgma-press-releases.html>. Apparel and Footwear Industry Survey. Standard and Poors Net Advantage. 15 Jan. 2003 <http://www.netadvantage.standardandpoor.com/>. Athletic Footwear. 14 Jan. 2003 <http://www.hoovers.com/search/advanced/company/result.html>. Athletic Footwear: a Mature Industry. SGMA International. 14 Jan. 2003 <http://www.sgma.com/sgma-press-releases.html>. Athletic Footwear: Adjusting to a Changing Market. SGMA International. 14 Jan. 2003 <http://www.sgma.com/sgma-pressreleases.html>. Athletic Footwear Sales Climb 2% in 2001 As Customers Pay More Per Pair. SGMA International. 14 Jan. 2003 <http://www.sgma.com/sgma-press-releases.html>. Adidas. Annual Report. 14 Jan. 2003 <http://usa.adidas.com/company>. Adidas. About Adidas. 14 Jan. 2003 <http//www.usa.adidas.com>. Bloomberg. Financial Analysis Report. Nike. 15 Jan. 2003. Bloomberg. Financial Analysis Report. Reebok. 15 Jan. 2003.

Sources (cont.)
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 <http://www.euromonitor.com/mrm/default.asp>. Footwear in the USA. 15 Jan. 2003 <http://www.infomat.com/information/research/industry/reports/US A_footwear.html>. Footwear in the USA. Footwear Journal USA. Jul. 2002. Footwear Industry. 15 Jan. 2003 <http://www.duke.edu/web/soc142/team2/>. Footwear Production. US Census Bureau. 15 Jan. 2003 <http://www.iteds.treas.gov>. 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 <http://wwwlib.umi.com/dissertations/preview_all/3056600>.

Sources (cont.)
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 <http://www.newbalance.com>. 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 <http://www.nsga.org/public/pages/index.cfm?pageid=328>. 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 <http://www.sgma.com/sgma-press-releases.html>.

Sources (cont.)
Company Websites www.adidas.com www.asics.com www.newbalance.com www.nike.com

www.reebok.com
www.skechers.com