Athletic Footwear Industry

Athletic Footwear Industry1Rob Pannell,Kyle Ewanouski, Vaibhav Gupta, Venkat KoduruWhy athletic footwear?Constant observable shift in consumer preferences due to seasonalityRelevant to college students since most as consumers of athletic shoes and involved in sports teamHigh (45%) gross margin; strong focus on marketing Nearly all inputs are outsourced except for end-retailingPush to cut out retailers, and sell directly to consumer2Industry Structure33Quick Figures4Global Footwear Market

$185 billion

Global Athletic Footware Market

$75 billion

US Athletic Footware

$14 billion

US Athletic Footwear represents roughly 19% of global athletic footwear marketAsia-Pacific market is expected

Avg Gross Margin:

45%

Avg Net Margin:

7%

Avg Marketing Expense: 10%Shoe Distribution5Shoe Manufactures

RetailersCustomersTypes of ShoesBased on survey data by NPD group of purpose of athletic footwearNearly 50% of sales is for Casual Athletic and Running

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Customers7

50% of sales in the US are to men, 30% to women, and 20% to children/infantsMales account for roughly 60% of sales to children and infants, so trend is not reversing

Lets look closerThough Men bought the same number of athletic shoes, they purchased more expensive onesWomen too purchased more expensive shoes, but they purchased less shoesChildrens shoes (though only 15%) of the market, are the fastest growing area82011 to 2012Dollar % ChangeUnit % SalesMen+6%flatWomen-3%-5%Children+13%+4%Infants+7%flatTotal+4%-1%Consolidated IndustryUS HHI = 2,713Highly concentrated domestic marketNike and Addidas (including Reebok brand) make up 80% of market shareSmaller, specialized players that focus on particular segments all with limited market share

Global HHI = 1,581Moderately concentrated global marketNike and Addidas (largest global players) make up 49% of market share9Specialization

10Only the Nike, Adidas (Reebok), and New Balance brands offer products for a wide range of sportsMost of the other manufactures specialize in only a few segmentsKey Success FactorsLow internal costsEconomies of scale & scopeManufacturing efficiencyOutsourcing of majority of manufacturing & automationEstablishment of brand namesQuality controlEstablishment of export marketsCompliance with government policies

11SWOT12 Strengths

Low product costs, and high prices (avg. gross margin: 45%)High net margin (avg. roughly 10%)Strong brand loyaltyLean organizations (money not tied up in factories, manufucatuing workers); most costs can be easily reversed (marketing)

Weaknesses

Low penetration of price sensitive consumer market (especially important in European market)Numerous ethical problems at manufacturing facilities (problem not limited to Nike) Opportunities

Growth in emerging markets (mainly in Asia-Pacific region) growing wealth and internationalizationMany global marketing opportunities to increase exposure (World Cup, Olympics, etc) Threats

Rising competition from counterfeited goods in growth marketsSlow growth in USNegative growth in Europe Nike42% domestic market sharePurchased Converse in 2003 for $305 millionFocus on selling higher-priced customized shoes directly to customer NikeId.comFocus on technology Nike+ product with Apple

13NikeRevenue(millions $)Gross MarginNet MarginMarketing Expense201224,12843.40%9.21%11.24%201120,86245.58%10.22%11.73%201019,01446.28%10.03%12.39%200919,17644.87%7.75%12.26%200818,62745.03%10.11%12.39%Adidas39% domestic market share (12% Reebok brand)Purchased Reebok in 2006 for $3.8 billionGlobally Adidas is the more popular brand, US ReebokIn 2006, signed 11 year contract to become official NBA clothing providerIncreased revenue by 51%; Increased US market share14AddidasRevenue(millions $)Gross MarginNet MarginMarketing Expense201219,34747.73%3.53%10.09%201117,34747.54%5.02%10.21%201015,58747.79%4.74%10.74%200913,49545.39%2.36%9.90%200814,03848.67%5.96%10.48%Under ArmorFocus is actually on specialized t-shirtsOnly began offering footwear in 2006; negligible current footwear market shareBut growing brand + strong brand loyalty = expectation of higher market share in the futureGrowing net margins

15Under ArmourRevenue(millions $)Gross MarginNet Margin20121,834.947.92%7.02%20111,472.648.41%6.58%20101,063.949.87%6.44%2009856.448.23%5.46%2008725.248.94%5.27%PumaU.S Market share only 6%Global market share is 7%Owned by PPR conglomerateLarge presence in European marketIncreased raw material costs and reduced demand have damaged marginsBut above average gross margin16PumaRevenue(millions $)Gross MarginNet Margin20124,252.348.28%2.14%20113,911.749.63%7.64%20103,517.849.69%7.46%20093,199.351.30%5.12%20083,281.251.76%9.19%Survey Results & Pricing Strategies

Premium PricingFootwear products are listed at an above average priceNike Lebron X P.S. Elite + Enabled priced at $279.99

(Why?) Higher prices influence customers perceptions of product as they often equate higher prices to higher performance and an overall better product, in comparison to lower priced goods

Penetration PricingFootwear products are listed at a lower price than competitors in order to gain attention and support from new potential customersLi-Ning leading sport brand in China attemptingJust signed Dwayne Wade in 2012(Why?) Companies attempt to gain market share and long term survival amongst the industry by attracting customers simply through the use of marginally lower costing products than their well known competitors

Promotional PricingFootwear products are often listed as on sale or part of a Buy one Get one offer for a limited time(Seasonality of products)Jordan AJ 2012 Lite- MenS Width D- Medium$149.99Now $99.99(Why?)Companies utilize promotional pricing in order to further attract the attention of price sensitive consumers and in turn develop a long term customer loyalty to the specific brand or provider

Temporal PricingAssume that when a sport is out of season the price of footwear specific to that sport in fact drops or goes on sale to provoke spending by consumers.

Value Based PricingPricing Footwear products according to the amount and degree of benefits that that specific product provides to the customer, as opposed to pricing the product in regard to how much it takes to actually make it(Nikes average basketball shoe costs around $12 to manufacture)

(Why?) VBP is utilized in order to capture more consumer surplus and works best when providers have an accurate idea of just what consumers are willing to pay for specific goods

High-Low PricingFootwear products are originally priced higher than competing products, and once initial consumer interest and popularity begin to diminish, prices are significantly lowered through the use of sales techniques such as:promotional effortsCoupons discount rates

(Why?)Initial high prices captures extensive revenue from customers willing to pay premium prices for popular products, and once the majority of customers tend to stray away, discount rates and slashing of high prices make customers feel products are more affordable

Advertising

In talking about Advertising we are going to talk mainly about the basketball shoe market to go more in depth and be more specific with our examples. Other sports are very simliar to what we will see happened with basketball. Nike sponsors many high profile athletes in the NFL and you have Under Armor sponsoring top players like Tom Brady, Ray Lewis and Cam Newton. Nike has exclusivity rights to the NFL. In baseball Derek Jeter is sponsored by Jordan. IN basketball though there is not much equipment aside from your jersey, so it is even more important for these companies to get the high profile athletes because everyone is looking at what is on their feet. Adidas is the main sponsor but athletes can wear whichever shoes they prefer.29

In our survey we asked what brands people associated with certain sport.While Nike was the brand which people associated most with Baseball, basketball and football, Jordan was the brand associated most with basketball.

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Building upon this we asked which brand each individual preferred when buying a new pair of athletic shoes. Our survey results overwhelming showed that 71% of people would would choose Nike, Adidas coming in 2nd with 10% followed by Jordan, Reebok and Under Armor (a relatively new company) and the other being Puma.31

In looking more in depth into advertising, we looked at some commercial data that shows the breakup of commercials by each company. This has Reebok, Adidas, Under Armor and Nike grouped together and shows which months are most popular when advertising on TV. March and April are popular months due to March Madness and the NBA Playoffs along with the beginning of baseball season. When you look at August, this is a popular month as school approaches as well as football season. Interesting to see that during the holiday season, commercials arent at their highest percentage.32

This is just the number of commercials by month by each company. Reebok of all companies appears to spend the most money on advertising during March April and August. Reebok used to have exclusivity right to the NFL before Nike took them over last year. Under Armor advertises most during football season, whats perceived to be there most popular sport. Adidas advertises most during March and April, March madness and NBA playoffs. Adidas is the major sponsor of the NBA.33

Interesting to see that Music channels and realty TV are generally the most popular when it comes to advertising on certain networks. Targeting high school and college kids along with people in their 20s-early 30s who would be found watching those channels. Sports networks are the next most popular networks. As you can see from the data, Under Armor is very specific in their advertising. Nike Reebok and Adidas branch out to many different demographics.34

Breakdown, you can see the majority of commercials that the companies have on music and reality ty networks along with the sports networks.35Lebron JamesLebron James in 2003 signed a 7 year, $93 million deal with Nike and in 2010 resigned with Nike for an undisclosed amount known to be greater than $10 million per year.Kobe BryantIn 2003 Kobe Bryant signed a 5 year, $45 million deal with Nike. His current contract with Nike is unknown but believed to be an amount greater than his previous one.Derrick RoseDurant signed a 7 year, $60 million deal with Nike after turning down a 7 year, $70 million deal and $12 million signing bonus with Adidas. Durant says he has history with Nike dating back to the 8th grade.In February of 2012, Derrick Rose signed a 14 year, $250 million contract with Adidas. Derrick Rose was MVP of the league at age 22 before tearing his ACL.Kevin DurantMichael JordanJordan signed a 5 year contract with Nike in 1984 for $500,000 per year and Nike stock options bringing the deal to over $7 million for 5 years.Today Michael Jordan earns an estimated $60 million a year from the Nike/Jordan brand.Air Jordans are responsible for 58% of all basketball shoe sales today and $2.5 billion in sales for Nike.

When you go onto Foot Lockers website and sort basketball shoes by prices, highest to lowest, the first page of results that comes up shows these shoes. There is a direct correlation between the price of a shoe and the athlete associate with it. 39

Looking at our study, older people are indifferent about whether or not the shoes they buy are worn by a high profile athlete so this pricing strategy mainly affects the middle school and high school demographic.40Second Degree Price DiscriminationFirms offer a menu of different packages or in this case different athletic footwear options designed in such a way that consumers sort themselves out (self-select) by choosing different packages.

Different products offering different benefits to the consumers that allows the public to self select for the specific good they desire(Nike Lebron X priced at $180.00 vs. Nike Hyperdunk Low priced at $120.00 vs. Nike Zoom Hyperchaos priced at $90.00)Similar Product Different Name(Nike Lebron X vs. Hyperdunk)

Nike Lebron X vs. Nike Hyperdunk

Nike Lebron X priced at $180.00 Nike Hyperdunk priced at $140.00

Nike has them most selection of shoes and offers products across a wide range of prices. Reebok Under Armor Adidas price their shoes relatively high and dont offer lower priced option along with Jordan. While Nike does offer the most selection, their prices are the highest among the basketball shoe market followed by Jordan which is owned by Nike.43

Many of the options are centrally located around the 75-150 dollar range. Jordan Adidas and Reebok dont even offer prices below of $50.44SummarySlow unit sales growth in developed markets; increasing in emerging marketsMargin growth in developed marketsHighly concentrated industry domestically; moderately concentrated globallySecond degree pricing discrimination frequently used with mainly penetration pricing, promotion pricing, premium pricing, and hi-lo pricing, value based pricingRecap on trends and raw data:Many from survey said that they though shoes were overpriced but also said that they had a high willingness to payShift in consumer preferences due to intense advertising consumers prefer celebrity endorsed or technology enhanced shoes with higher markupsIndustry Growth:Increased margins in developed marketsincreased brand awareness in both developed and developing marketsFavorable demographic shifts in emerging markets45RecommendationsIndustry wide recommendations:Increase prices through more technology advancements and celebrity endorsements (limited scope for increased sales in developed markets)Expand market share with lower priced shoes in $25 to $50 rangeGreen marketing campaign: Proved successful for Nike

Company recommendations:Nike: Focus on improving working conditions and PR image which are hurting growth in certain segmentsAdidas: Increase market penetration in the USUnder Armor: Mainly focused on football and running. Should focus on expanding product lineup.Puma: Expand market share outside Europe and expand product line to enhance premium pricing and penetration pricing46