Athletic Footwear Industry Christine Bell, Mariana Pinos, Michael Turner, Jordan Winawer

Agenda Introduction Industry Analysis Pricing Strategies Raw Data Analysis Our Recommendations

Why the Athletic Footwear Industry? Relevance of the Industry College students are one of the largest consumers of athletic footwear as athletes on varsity or intermural teams. Observable changes in the market due to seasonality of customer preferences

Why the Athletic Footwear Industry? Well known manufactures in the industry: Nike Under Armor Adidas Major focus on advertisements and pricing strategies in the industry Growing/Profitable Industry

Industry Analysis

Industry Analysis Athletic Apparel Industry http://www.statisticbrain.com/footwear-industry-statistics/ 57.6% of sales in the athletic apparel industry come from athletic shoes 34.5% of sales come from men’s shoe sales 23% of sales come from women’s shoe sales 30% of the sales in the shoe industry come from the sale of athletic shoes 20% from men's athletic shoes 10% from women’s athletic shoes

Industry Analysis Athletic shoe industry experienced a change Undifferentiated products Brands had to many close substitutes No longer capture the interest of consumers Resulted in the industry we see today Market and brand segmentation http://www.nytimes.com/2000/02/09/business/cooling-consumer-demand-for-athletic-shoes-shrinks-nike-s-profit.html But the real culprit in the mid 90’s was lack of segmentation.  Brands essentially made the same shoes for every retailer.  Every retailer wanted to look like Footlocker back then, creating far too much duplication of products and brands. When the soft patch occurred, the cars in the freight train piled up behind. Today, brands (and retailers) understand their roles. Channels and markets are clearly defined, avoiding duplication and redundancy.  If the industry were to hit a soft patch or lull, there are guard rails in place to avoid catastrophe. http://www.forbes.com/sites/mattpowell/2014/04/08/sneakernomics-when-will-the-sneaker-cycle-end/

Industry Analysis

Industry Analysis 20 years of growth seen in sports participation Driver of demand for athletic shoes Growth is expected to continue causing a 0.3 percentage point increase by 2019

Industry Analysis Seasonality Back to school Sport seasons Fall Football Golf Winter Indoor Track & Field Basketball Spring Baseball Outdoor track & field Summer

Industry Analysis Four-Firm Concentration Ratio: http://finance.yahoo.com/news/athletic-footwear-market-us-2015-180300312.html http://www.forbes.com/sites/mattpowell/2014/05/15/sneakernomics-highlights-of-sneaker-sales-q1-2014/ http://fdra.org/latest-news/march-2014-atheltic-footwear-executive-summary/ CRM= 64%+9%+4%+3%= 80% 80% of the market share in the market is concentrated in the top 4 companies

Industry Analysis Herfindahl-Hirschman Index HHI= 4244.415 Highly concentrated According to market research and reported by Yahoo Finance only 25 firms have any major marginal presence in the athletic footwear industry

Industry Analysis Sports-Style Athletic Footwear Recent developments in market segmentation Sports-Style Athletic Footwear

Industry Analysis Research and Development A major selling point for the high end shoes in the industry The focus of this research moves away from the aesthetic appeal of the sport-style to focused on 4 categories comfort performance injury prevention durability Studies the different needs of women and men in sports Not a large expense when compared to sales Studies the footwear needs of athletes in their respective sports Adidas spends 0.9% of their net sales revenue and 2% of their operating costs Adidas 46% of their sales id from footwear Adidas produced 96% of their their footwear in Asia Economies of scales, automoated production huge in the foowear industry Nike and adidas annual reports Research PDF I downloaded for the industry

Industry Analysis Threats of New Entrants Industry has medium to low threat of new entrants High barriers to entry for the industry. Few firms hold most of the market share Consumers have strong brand loyalty Economies of scale They have exclusive contracts with suppliers and existing supply chains Also, to capture the interest of top athletes, company’s need to do research and development to produce the shoes that give their users the best results.

Industry Analysis Threat of Rivalry The athletic footwear industry faces a medium to high threat High brand loyalty Still some growth in the industry Differentiation among companies in the industry As the growth slows in US in future years increased competition in the industry

Industry Analysis Threat of substitute products Threat is low At the high end, there are not many other shoes that can be worn safely while doing serious athletic activities Large amounts of research and development used to protect athletes from injury Sport specific shoes reduce the substitution among the different categories of athletic shoes

Industry Analysis Power of buyers Threat is medium Throughout 1990s and early 2000s, buyers where able to influence the practices of the top company in the athletic footwear industry to make changes to their supply chain and outsourcing standards Fierce loyalty to brand http://www.businessinsider.com/how-nike-solved-its-sweatshop-problem-2013-5

Industry Analysis Power of suppliers Power of supplier is low After Nike’s public relationships problems, corporations in the industry are very sensitive to public opinion of their suppliers Many potential suppliers to only a few athletic companies Huge power imbalance

Industry Analysis http://www.bidnessetc.com/20791-athletics-footwear-industry-hurdles-sight/ 2013 report by Bidness Etc has 2014 estimates gross margins in the athletic footwear industry up to 44.7% of the sales revenue

Industry Analysis Nike Founded 1964 Hold 64% of the market First mover advantage in globalizing their supply chain Owns the Jordan Brand and Converse Adidas Founded 1920 Holds 9% of the market Acquired Reebok in 1990s Is the official apparel partner of NBA till 2017

Industry Analysis New Balance Founded 19 06 Very small market share in the US Is know for products that are made in the US Privately held company Asics Founded 1949 4% of the domestic market share in the industry Introduced in the US in 1977 Heavily focused on research and development of their products Japanese company

Industry Analysis Under Armour Founded 1995 Holds 2% of the market share in the domestic athletic shoes market Know for its performance apparel made from breathable and lightweight materials

Industry Analysis 98% of athletic shoes are imported Move led by Nike Influenced by transportation costs Rubber prices are major input in athletic shoes Production takes place in southeast Asia Prices effected by automotive demand and sales throughout the world http://www.businessinsider.com/how-nike-changed-the-shoe-industry-2014-4

Pricing Strategies

Pricing Strategies Premium Customization Pricing Price Skimming/Versioning Bundling

Premium Pricing Mark-ups can be upwards of 300% Highly marketed and advertised High consumer willingness to pay

Premium Sales Increasing Despite charging huge mark-ups, “premium” shoe sales are increasing In 2013 sales of men’s athletic shoes over $100 grew 20% and represented a third of sales, 75% for last four years – Forbes But, how?

Mechanisms for Premium Pricing Athletic shoes as a fashion statement “Sneakerhead” population Regulated supply and excess demand

Athletic Shoes in Fashion “85% of all athletic shoes are never worn for the intended purpose” – Forbes .com

“Sneakerhead” Cult-like following of shoe aficionados (Harry Potter, Lord of the Rings, Star Wars) Highest WTP for certain shoes (time and money) Value footwear for the story and history

Regulated Supply and Excess Demand Shoe companies are very effective at keeping supply below demand to maintain exclusivity and “rareness” Some models of Nike’s signature styles sell out hours after release. Excess demand evidenced by “resellers” Can be another mark-up of 200% of retail price

Premium Pricing: Air Jordan 10 Estimated production cost per pair of Air Jordans: $16 Air Jordan 10 “Powder Blue” released on February 22, 2014 for $170 Grossed $35 million on the first day

Pricing Strategies Premium Customization Pricing Price Skimming/Versioning Bundling

Customization Pricing Second-degree price discrimination implemented by Nike, Adidas, New Balance, and Reebok Allows customers to customize the color and/or material of existing models of athletic shoes Charge a mark-up from the price of the standard shoe (except Adidas)

Customized Shoes Mark-Ups New Balance and Reebok have limited styles available for customization. Nike and Adidas have a large percentage of styles available for customization but Adidas does not charge a premium. Average: 40% (31% w/o outlier) Max: 113% (New Balance) Min: 4% (Reebok)

Customization: New Balance 574 113% mark-up

Pricing Strategies Premium Customization Pricing Price Skimming/Versioning Bundling

Price Skimming/Versioning Prices initially very high but decline as the style or color grows older Capture more price sensitive consumers through 2nd degree price discrimination

Price Skimming: Nike Air Max Tailwind 7 Originally released in late 2014 for $110 Currently listed on Nike.com for $89.97 (22% discount)

Pricing Strategies Premium Customization Pricing Price Skimming/Versioning Bundling

Bundling Shoe manufacturers will bundle two similar styles together or bundle two complimentary products Shoes/shoes, shoes/socks, shoes/shoe cleaner Not as common as other strategies Geared highly towards “sneakerhead” community and high WTP consumers

Bundling: Asics Gel-Kayano Pack Released in 2013 to celebrate the 20 year anniversary of their 1993 classic Kayano Runner style $300 with a limit to 1,993 pairs worldwide Contained the 93’ Kayano Runner and the newer Gel-Kayano in exclusive colorways

Raw Data Component

Aims of Raw Data Research To determine if there is a correlation between the popularity of a sport and the price of its footwear To determine if there is a correlation between the price of footwear for a sport and the amount of complementary products needed to play that sport To analyze consumer brand loyalty Determine how much competitors would have to lower prices in order for consumers to switch brands

Is there a correlation between the popularity of a sport and the price of its footwear?

Higher Popularity=Higher Cost? If relationship exists, we expect football cleats to be priced the highest, followed by baseball, basketball, etc.

Prices of Football Cleats

Prices of Baseball Cleats

Prices of Basketball Shoes

Prices of Soccer Cleats

Prices of Golf Shoes *Under Armour is still waiting on the release of its first golf shoe

Prices of Running Shoes

What we would expect… PRICE Popularity (decreasing) 

Actual Results PRICE Popularity (decreasing) 

Is there a correlation between the price of footwear and the amount of other equipment needed to play the sport? We expect that athletic footwear for sports that require many pieces of equipment will be cheaper than footwear for sports with minimal equipment

Amount of complimentary goods needed for each sport (other than footwear) Football: pads, helmet, football, gloves -average cost=$426 Baseball: bat, baseball, glove, batting gloves -average cost=$506 Basketball: basketball -average cost=$29.99 Soccer: soccer ball -average cost=$25 Golf: set of clubs -average cost=$500 (but last over span of many years) Running: ✖

Relationship Between Complementary Goods and Price of Footwear Running shoes Soccer Basketball Golf Football Baseball # of other pieces of equipment needed

To what extent does brand loyalty affect how much consumers of athletic footwear are willing to spend?

Consumer Loyalty and Pricing of Athletic Footwear

Survey Results % Brand

% Level of Loyalty

How much would the competition’s prices have to drop for consumers to switch brands? Survey results say 40% on average This number indicates that brand loyalty has a large impact on purchase decisions in the athletic footwear industry

Our Recommendations for the Industry Overall Cater to the aging population Lower price of footwear to increase market share with this new generation Create a product line for the older generation to maintain brand loyalty Cater to increased world population/ Create luxury goods to meet increased demand for these products Find alternatives to lower input prices from these developing countries. http://www.census.gov/prod/cen2010/briefs/c2010br-03.pdf Larger cohorts of older Americans Less likely to exercise than younger generations Consumer demand possibly decrease in future

Industry’s Current State According to IBS World, the prices of shoes are expected to grow in the years between 2015 and 2020 at a 0.9% compounding growth rate After the recession, the years between 2010 and 2015 experienced a 1.3% compounding growth rate for shoe prices Growing Industry with many opportunities for investment http://clients1.ibisworld.com/reports/us/bed/default.aspx?bedid=5188 Oil crisis 80s 90s oil price shock Early 2000s tech boom and 9/11 2007-2011 the great recession and recovery

Investment Recommendations Suggested companies to invest in: Nike Top company in the industry NLF recently signed a 5-year deal with Nike until 2019 Increase in contracts with universities as primary vendor for athletic departments Under Armour New Balance New deals with Global Soccer Market http://www.census.gov/prod/cen2010/briefs/c2010br-03.pdf

Pricing Strategy Recommendations Nike Focus on Premium Pricing Increase prices for special footwear products to maximize profits Under Amour Customization Pricing and mark up Focus on Running Shoes Adidas Implement Mark-up for Customizations Increase Reebok Market Share Expand footwear lines in Reebok Increase brand Awareness http://www.census.gov/prod/cen2010/briefs/c2010br-03.pdf

Questions?