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ATHLETIC FOOTWEAR

INDUSTRY ANALYSIS

Economics of Management and Strategy


Tufts University
Medford, Massachusetts

May 1, 2006
TABLE OF CONTENTS
TABLE OF CONTENTS...............................................................................................................................2

1.0 INTRODUCTION TO ATHLETIC FOOTWEAR INDUSTRY.........................................................4

2.0 INTERNAL RIVALRY...........................................................................................................................6

2.1 MARKET DESCRIPTION................................................................................................................................6


2.2 PRODUCT PROLIFERATION............................................................................................................................8
2.2.1 Mergers and Acquisitions..............................................................................................................8
Adidas-Salomon AG and Reebok............................................................................................................8
2.2.2 Stride Rite Corporation and Saucony..........................................................................................10
2.2.3 Nike and Converse.......................................................................................................................10
2.3 INTERNAL PRODUCT PROLIFERATION...........................................................................................................10
2.4 BRAND IMAGE, PRODUCT IDENTITY, AND CUSTOMER LOYALTY.......................................................................11
2.4.1 Advertising...................................................................................................................................11
Entertainment and Celebrity Marketing Campaigns............................................................................12
World Cup 2006....................................................................................................................................13
Creative Niche Advertising...................................................................................................................14
2.4.2 Distribution Decisions.................................................................................................................14
Retail.....................................................................................................................................................14
Personalization.....................................................................................................................................15
2.4.3 Grassroots Marketing..................................................................................................................15
2.5 NEW PRODUCT DEVELOPMENT...................................................................................................................16
2.5.1 Keeping up with Competition......................................................................................................16
High End Running Shoe Examples.......................................................................................................16
2.5.2 New Products and Brand Image..................................................................................................16
3.0 ENTRY BARRIERS..............................................................................................................................18

3.1 MARKET OVERVIEW.................................................................................................................................18


3.2 IMAGE....................................................................................................................................................18
3.3 LICENSING AND RETAIL AGREEMENTS.........................................................................................................18
3.4 ECONOMIES OF SCALE...............................................................................................................................19
3.4.1 Marketing.....................................................................................................................................19
3.4.2 Research and Development.........................................................................................................20
3.5 ECONOMIES OF SCOPE...............................................................................................................................21
3.5.1 Umbrella Branding......................................................................................................................21
3.5.2 Consolidation..............................................................................................................................22
3.6 STRATEGIES FOR ENTRY............................................................................................................................23

4.0 SUBSTITUTES AND COMPLEMENTS............................................................................................24

4.1 INTRODUCTION.........................................................................................................................................24
4.2 EXTERNAL SUBSTITUTES...........................................................................................................................24
4.2.1 Footwear Sales Cycle..................................................................................................................24
4.2.2 Substitutability of Other Footwear..............................................................................................25
4.3 COMPLEMENTS.........................................................................................................................................25

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5.0 SUPPLIER POWER..............................................................................................................................28

5.1 MATERIALS FOR PRODUCTION ...................................................................................................................28


5.2 STANDARDIZATION WITHIN PRODUCTION......................................................................................................28
5.3 EASE OF SUPPLIER TRANSFER....................................................................................................................29

6.0 BUYER POWER....................................................................................................................................30

6.1 BUYER CONCENTRATION...........................................................................................................................30


6.2 BUYER LEVERAGE IN PRODUCT NEGOTIATION..............................................................................................30
6.3 EFFECTS OF RETAIL AND VENDOR CONSOLIDATION ......................................................................................31
6.4 CURRENT AND EMERGING RETAIL CHANNELS..............................................................................................33
6.4.1 Department Stores.......................................................................................................................33
6.4.2 Factory Outlets and Vendor Stores.............................................................................................35
6.4.3 Mall Specialty Stores...................................................................................................................36
6.4.4 Strip Specialty Stores...................................................................................................................37
6.4.5 Online Stores...............................................................................................................................38
7.0 CONCLUSION.......................................................................................................................................39

8.0 WORKS CITED.....................................................................................................................................40

9.0 COMPANY WEBSITES CITED..........................................................................................................44

3
1.0 INTRODUCTION TO ATHLETIC FOOTWEAR INDUSTRY

The U.S. market for athletic footwear includes all producers of non-cleated,
rubber and plastic footwear designed in an athletic style or for athletic use. The industry
is a collection of smaller, segmented, yet often overlapping markets, defined by both the
price and the purpose of the shoes. For instance, there are mini-markets for shoes
designed for each of many sports and other purposes: basketball, running, walking,
tennis, and casual wear. The greatest overlap between these categories is between
performance shoes and casual wear. Many people wear running shoes or basketball shoes
on a daily basis in a non-athletic setting. One can walk or play basketball in running
shoes. Therefore, there is some degree of overlap between most segments.
The industry is dominated by a few large firms, while the majority of other
players have less than 5% market share. The graph below shows the market share
breakdown by sales volume for 2004, before the merger of the #2 and #3 firms, Adidas
and Reebok.

Athletic Footwear Industry


Market Share by Sales Volume

2% 1%
3% Nike
5% 1%
Adidas
6% Reebok
Puma
42% New Balance
12%
Skechers
K-Swiss
Vans
Asics
27% Saucony

Source: Hoover.com

These firms fight for market share through non-price competition, on strategies
such as strengthening brand image and increasing product proliferation. The success of
each firm is greatly dependent upon its marketing campaigns. The brand image of the

4
major firms is created by extensive marketing campaigns and celebrity endorsements.
Consumers associate themselves with a particular brand and tend to stick with the brand
with which they are comfortable. Entry to the industry is difficult as brand loyalties are
high.
The United States is the Domestic Production vs. Imported Footwear
(Millions of Pairs per Annum)
world’s largest importer of 2500

athletic footwear, which is 2000

primarily manufactured in Asian 1500


Imports
Domestic Production
1000
nations. The graph at right shows 500

the trend in US footwear 0

68

90

99

03
80

95

97

01
production and imports. Most
19

19

19

19

19

19

20

20
firms design the sneakers and
outsource their manufacturing to
foreign producers. The sneakers are then distributed to major retailers and are sold to the
consumer through a variety of channels.
The following provides an analysis of Porter’s Five Forces relating to the athletic
footwear industry; internal rivalry, entry barriers, substitutes and complements, supplier
power, and buyer power.

5
2.0 INTERNAL RIVALRY

2.1 Market Description


Price competition in this industry is relatively non-existent in its traditional form.
The means by which firms compete with respect to price is by introducing products at
several different price levels in order to reach all areas of the market. There are only a
few firms who compete in every sector of the market with regards to intended purpose (as
well as price): namely Nike, Adidas, Reebok, and New Balance. Smaller firms usually
specialize in particular types of shoes. For example, Brooks and Asics specialize in
running, K-Swiss in tennis, and Vans in skating and lifestyle shoes. This results in a
collection of specialized markets with far fewer firms competing than in the overall
market for athletic footwear. The following chart shows the companies that participate in
the various segments of the market as defined by the left column.

Stride Rite Corp


New Balance

Converse

Saucony
K-Swiss

Mizuno
Reebok

Brooks
Adidas

Type of AND1
Puma

Spira
Asics
Vans
Nike

Shoe\Company

Running X X
X X X X X X X X
Walking X X
X X X X
Basketball X X
X X X X
Children’s X X
X X X
Tennis X X
X X X
Lifestyle X X X X X X X
Skating X X
Cross-Training X X X X
Soccer X X X X
Source: Company websites of producers listed.

In terms of growth and sales for individual categories, running footwear accounts
for 25% of total athletic shoe sales and has been experiencing the strongest growth. As
seen in the above table, this is the category with the most participants. Its sales have
increased by nearly 25% in certain countries. Other sneakers, such as those designed for
basketball have been experiencing no growth at all. Women’s footwear sales were up 11-
13% overall, while skating shoe sales declined nearly 10%.
In the sneaker industry, the products are somewhat differentiated by design but
the players also try and emphasize the differences in their advertising. As a result, there is
an emphasis on non-price competition. With athletic footwear, consumers consider both
price and purpose, and firms attempt to produce shoes that compete in several different
price brackets. The U.S. sneaker industry is considered a mature industry although the
numbers in the table below, on footwear sales in the last decade, suggest that there is still
some amount of growth in the overall market.

U.S. Branded Athletic Footwear Sales (Millions of $)


Revenues 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005E
Nike 2529 3261 3797 3252 3325 3327 3128 3052 3005 3225 3358
Reebok 1405 1193 1229 1062 909 926 931 932 1036 1087 1141
New Balance 151 201 265 346 550 750 794 910 910 1022 1053
Adidas 355 390 465 910 845 840 700 810 750 790 822
K-Swiss 89 76 92 145 264 197 205 245 369 395 403
Converse 208 194 285 167 132 144 133 181 245 305 320
Puma 32 23 23 32 43 58 82 121 172 209 230
Other 2134 2170 2227 1826 1857 1961 2120 2290 2552 2766 2828
Total 6574 7215 7983 7396 7486 7804 7672 7994 8253 8890 9201
Source: (Ohmes 2006)

2.2 Product Proliferation


Firms seek to increase their market share by widening their range of products
through mergers, acquisitions, and internal production decisions. The first tactic
discussed in this section is the increasing consolidation of the industry as a result of
several recent deals. To complement the mergers, firms are increasing their product range
in an attempt to capture more segments of the market. This section will discuss several
recent acquisitions demonstrating this tactic and analyze the impact of these mergers on
the overall market.

2.2.1 Mergers and Acquisitions

Adidas-Salomon AG and Reebok


The deal that has been making the largest headlines recently is that between
European giant Adidas-Salomon AG and strong U.S. competitor Reebok. This merger of
two of the largest companies in the industry creates a combined $12 billion company to
compete with the industry leader, Nike, which is valued at $14 billion (Carr 2005). This
deal fulfills two strategic goals for Adidas. First, it allows Adidas to further expand into
the “lifestyle” market. Adidas has long been considered a very strong performance brand
but has failed to develop the brand image that has allowed Nike’s products, including its
signature Michael Jordan basketball shoes, to become synonymous with style in the
American marketplace (Karnitschnig and Kang 2005). Reebok on the other hand, has had
success recently in increasing its appeal to the fashion-conscious, urban buyers that
Adidas has failed to attract (Karnitschnig and Kang 2005). By acquiring the Reebok
brand and maintaining it separately from the flagship Adidas brand, Adidas will be able
to take advantage of both segments of the market without sacrificing the image of either
brand. This is the same tactic used by Nike in its 2003 acquisition of Converse which will
be discussed later in this section. The second objective that Adidas seeks to achieve
through the merger is to further solidify its position in the U.S. market, where Nike
continues to be the dominant player.
Adidas will benefit from Reebok’s strong foothold in the U.S., as it will gain
distribution options from greater access to and leverage with primary retail chains like
Foot Locker and Finish Line. Nike has historically been dominant in terms of its
relationships with these retailers (Karnitschnig and Kang 2005). Additionally, the
acquisition has brought the Adidas/Reebok U.S. market share to 21%, bringing them
much closer to Nike’s 36% share. For further information on the relative market shares of
the individual competitors, please see the table below, comparing U.S. to Global sales
and market shares.

Branded Athletic Footwear Market Share 2004


*Sales in millions of wholesale $
Global Market
Company U.S. Sales* U.S. Market Share Global Sales
Share (%)
Nike 3225 36.3 6780 33.2
Reebok 1087 12.2 1963 9.6
New Balance 1020 11.5 1357 6.6
Adidas 795 8.9 3150 15.4
K-Swiss 395 4.4 480 2.4
Converse 305 3.4 905 4.4
Vans 275 3.1 395 1.9
Puma 209 2.4 1396 6.8
American Sporting Goods (Avia,
Ryka, Nevados, Turntec) 205 2.3 303 1.5
Asics 197 2.2 920 4.5
Keds/Pro-Keds 136 1.5 203 1
Foot-Joy 124 1.4 180 0.9
Fila 120 1.3 305 1.5
Saucony 104 1.2 141 0.7
Sole Technology 100 1.1 140 0.7
And 1 95 1.1 175 0.9
Mizuno 59 0.7 287 1.4
Hi-Tec 59 0.7 191 0.9
Brooks 54 0.6 126 0.6
Lotto 7 0.1 141 0.7
Other 319 3.6 873 4.3
Total 8890 100 20411 100
Source: (Drbul et al. 2006)

2.2.2 Stride Rite Corporation and Saucony


Another recent acquisition is of Saucony by the Stride Rite Corporation, which
already includes brands such as Keds, Pro-Keds, Sperry Top-Sider, Grasshopper, and the
Tommy Hilfiger line. The addition of the Saucony brand will allow Stride Rite to break
into the athletic performance market, where it has not previously been represented.
Additionally, the acquisition will allow Saucony to break into the children’s market
(Ryan 2005).

2.2.3 Nike and Converse


In 2003, Nike purchased Converse. One reason was to add a lifestyle shoe to their
product line that would appeal to a group that did not already buy Nike products
Converse was a good acquisition because Nike wanted to capture the typical Converse
consumer, who looks for retro sneakers like Converse’s long-established Chuck Taylor
line. Maintaining these customers required that Nike not taint the Converse products with
their own brand name, therefore, Nike has allowed Converse to continue to operate as a
separate entity (Marseille and Roos 2005).

2.3 Internal Product Proliferation


In addition to acquiring new brands and area expertise through mergers and
acquisitions, firms also enter new sectors of the market through internal production
decisions. There are two ways in which they do this. The first is by simply producing a
new product under their primary brand name to fulfill the requirements for a product in
an area outside their current specialty. One example is Asics’ decision in the early 1990s
to branch out from its focus on performance running footwear to introduce a basketball
shoe (Bohnslay 2005). This attempt proved unsuccessful for Asics, which speaks to the
difficulty of breaking into a market segment in this way. In other situations, a firm may
decide to direct a particular brand that it controls or creates toward a new segment of the
market. For example, Nike has historically refused to market its Nike brand sneakers
through low cost retailers. In order to enter the market for low to medium cost footwear,
Nike has geared its Starter brand, which it acquired in 2004, towards this area. In 2005,
Nike entered into a deal with Wal-Mart to sell Starter brand shoes priced at under $40
through the discount retailer (Kang 2005).

2.4 Brand Image, Product Identity, and Customer loyalty


Another significant component of industry members’ strategies to increase market
share is the strengthening of brand image, product identity, and customer loyalty through
marketing. Companies expend considerable effort and resources attempting to convince
their customers that sneakers made by other companies are imperfect substitutes.
Currently, Nike appears to have been the most successful in this endeavor, followed
closely by the newly joined Adidas-Reebok entity with its two flagship brands. Nike’s
shoes are considered to be quality and stylish. Reebok’s are comfortable and casual, and
the Adidas brand boasts superior performance and is “perceived as a professional,
technically orientated brand with strong European roots” (Kang 2006). Smaller
companies like Vans and DC shoes have succeeded in creating a strong brand image in
the eyes of young skateboarders and extreme sports followers. Puma in the past was seen
as “the brand that mixes the influence of sport, lifestyle and fashion” (Europe Intelligence
Wire). The methods by which they accomplish this include various forms of advertising,
distribution choices, and so-called grassroots marketing.

2.4.1 Advertising
The top athletic shoe companies compete in advertising, aimed at building the
image of the brand and the products they are trying to market. To provide an illustration
of the high level of these expenditures, the following chart lists the advertising
expenditures both independently and jointly of the recently merged firms, Adidas and
Reebok.

Adidas and Reebok Marketing and Advertising Expenditures


2001-2004 (in millions of $)
Marketing and Advertising Spending 2001 2002 2003 2004
Adidas 656.7 775.2 911.9 1090.7
Reebok 329.2 344.1 383.4 435.3
Adidas and Reebok 985.9 1119.3 1295.3 1526.0
Marketing and Advertising expenditures as % of Net Sales
Adidas 12% 12.6% 12.9% 13.6%
Reebok 11.0% 11.0% 11.0% 11.5%
Adidas and Reebok 11.6% 12.1% 12.3% 12.9%

Net Sales (in millions of $)


Adidas 5470.9 6136.4 7083.0 8047.2
Reebok 2992.8 3127.8 3485.3 3785.3
Adidas and Reebok 8463.7 9264.2 10568.3 11832.5
Source: (Drbul et al. 2006)

Entertainment and Celebrity Marketing Campaigns


Celebrity marketing campaigns are a key way in which athletic shoe makers seek
to differentiate their brands and associate their shoes with professional athletes and other
celebrities. The most successful examples are the signature lines and endorsement
contracts that firms, particularly Nike, Adidas, Reebok, and AND1 have with
professional basketball players. The most famous of these company-player relationships
is between Nike and Michael Jordan. Despite Jordan’s retirement several years ago, the
Air Jordan line continues to be a huge source of profit and brand support for Nike. A new
shoe launched in February of this year at a retail price of $175 and several other models
are sold at around $125 (Kang 2006). At $175, the new Air Jordan shoe out-prices Nike’s
most technologically advanced running shoe, the Air Max 360, retailing at $160. The
success of the Jordan and other signature lines has been and continues to be instrumental
in Nike’s image as a stylish performance brand. This image has allowed Nike to
differentiate its products from those of its competitors, particularly Adidas, whose image
has thus far failed to break out of the realm of basic technical performance (Karnitschnig
and Kang 2005). While Nike has had the most success with basketball endorsements,
other firms have also utilized this technique. For example, Reebok has a $70 million
contract with Chinese NBA player Yao Ming (Barbaro 2006). This “star” marketing
extends beyond the U.S. and into international borders. In late 2005, Nike spent $44
million on endorsing an Indian cricket team, and made the team the “world’s most valued
brand in team sponsorship” (Barbaro 2006).
The use of celebrity and other entertainment marketing tactics extends beyond the
basketball arena into many different types of shoes and entertainment genres. DC Shoes
recently released a line of shoes designed by the popular musical group Linkin’ Park.
Reebok has agreements with rap artists 50-Cent, Jay-Z, and Nelly (Drbul et al. 2006).
Another entertainment-based marketing campaign is the agreement between Adidas and
Microsoft that involves Xbox kiosks in Adidas stores and Adidas contributing content to
Xbox consoles, in hopes that the alliance will help to drive sales of both companies’
products (DME).

World Cup 2006


In light of the upcoming 2006 World Cup, Adidas is spending approximately
$200 million over the next few months to market its soccer products. Adidas is an official
sponsor of the tournament and its ads will be the only ones seen during the television
coverage, as it paid to have its American competitors excluded. While it has not started
developing signature soccer shoes, Adidas’ ad campaign will feature soccer star David
Beckham, the most recognizable and stylish face in the sport. Adidas CEO Herbert
Heiner was quoted in Business Week as saying, “It’s vital for Adidas ‘to dominate the
World Cup’” (Holmes 2006). Adidas’ significant involvement is encouraged by the
positive results from its involvement in 2002, when it sponsored the Japanese national
soccer team and saw sales go up 30% (Barbaro 2006). Although soccer cleats are not the
same as sneakers, the company is hoping to enhance their overall brand image and to
have their name transcend individual sports In response to Adidas’ World Cup ad
campaign and its exclusion from TV ads, Nike has teamed up with Google to develop a
friend networking site devoted to everything soccer. The website, entitled Joga.com, and
the corresponding ad campaign take their name from the phrase “joga bonito,” which in
Brazilian Portuguese means “play beautifully.” The site will also feature French soccer
player Eric Cantona and Brazilian soccer star Ronaldinho (Wentz 2006).
Creative Niche Advertising
Smaller companies have used marketing as a means of creating their own unique
niche in the market. Puma, a company that makes soccer, running, and lifestyle shoes,
has emphasized its position as a trendy brand. During the 2002 World Cup in Japan,
while Nike and Adidas spent millions of dollars on conventional advertising, Puma used
sushi bars in fifteen cities around the world including New York, Hong Kong, and
Madrid to showcase its product. Puma branding director Antonio Bertone noted that
Puma’s target market of fashion-conscious twenty-somethings are “eating sushi anyway.”
The company also began running a commercial that featured former English soccer
player Vinnie Jones and other Puma sponsored athletes in a sushi restaurant (Tkacik
2002).
Not all major ad campaigns feature celebrity athlete endorsements. New Balance
has a long standing policy against such endorsements. Instead, it relies on campaigns
featuring every day people. One of their most recent campaigns ran under the slogan
“There are two motivations in sports. Which is yours? For love or money?” which
emphasized their focus on producing shoes for everyone who enjoys sports, not just star
athletes (White 2005). This strategy complements their original product positioning as a
company for serious runners that also makes shoes in all widths, for athletes of different
abilities and shoes sizes.

2.4.2 Distribution Decisions

Retail
Firms also make decisions regarding the distribution of their shoes in line with the
brand image they wish to maintain. Nike refuses to sell its flagship brand to low cost
retailers. In October 2005, Nike stopped selling to Sears in response to its merger with
Kmart. Sears will continue to carry products from Adidas, New Balance, Reebok, and
Sketchers (Hoovers.com). Though Nike does not sell products under the Nike brand to
discount retailers, it does target some of its other brands toward that market. Analysts
suggest that Nike will work with Sears again using one of its other brands, most likely
Starter (Kang 2005).
Other companies such as Brooks and Spira choose to market their products almost
exclusively to specialty running stores. Brooks Sports, which is a subsidiary of the
Russell Corporation, focuses on “high-performance running shoes” and considers itself
“the brand of choice among discerning runners of all abilities”
(www.brooksrunning.com). Spira Footwear, a young company that makes running shoes
with springs in the bottom, also plans to use this type of distribution decision to market
its shoes. Despite that their shoes are revolutionary, they lack aesthetic appeal. The
company’s CEO, Andy Krafsur, has suggested that the company needs to establish itself
“in the small stores where people explain the technology” (Gregory 2005).

Personalization
One unique distribution tactic that has entered the market place in the last few
years is allowing customers to design their own shoes. Nike pioneered this venue with the
introduction of the NikeID service in the spring of 2005 which allows customers to
personalize their shoes. Nike ID allows buyers to choose their own colors, materials, and
in some cases, add a wide variety of logos and images to the shoes (NikeID.com). Adidas
has also begun using this method in its soccer cleats. The new +F50 Tunit line allows the
customer to customize the weight of the shoe chassis, the weight of the cleats, and the
overall fit of the shoe (Holmes 2006).

2.4.3 Grassroots Marketing


Companies also seek to attract new customers and cultivate customer loyalty by
introducing young athletes to products that fit their particular needs. The firms believe the
products will market themselves on the basis of their quality and suitability to the wearer.
Of the major shoe competitors, New Balance made the most use of this technique. They
used this strategy in their 2004 acquisition of Warrior Lacrosse. The company’s founding
chairman, Jim Davis, notes that the objective of the acquisition is “to work with coaches
to get kids in the right shoes, and after we hope that they become loyal customers”
(Pereira 2004). This dynamic is also part of Nike’s justification for its World Cup ad
campaign and determination to take the soccer market from Adidas. Soccer is considered
“an important gateway to brand loyalty with children worldwide” (Holmes 2006).
2.5 New Product Development
Sneaker companies constantly seek to develop new technologies and products to
keep up with other competitors and to maintain their brand image. This type of
development is particularly important in performance sneakers, though producers of
casual foot wear also seek to develop new styles to keep up with trends in consumers’
preferences.

2.5.1 Keeping up with Competition


For many performance brands, it is important to sell products based on the latest
technology in order to have a competitive product in the top–of-the-line market. These
new technologies can then be introduced into lower priced footwear and other types of
sneakers to help companies maintain their presence in different market segments or break
into new ones.

High End Running Shoe Examples


In the current running market, there are three new high end models. The Nike Air
Max 360, priced at $160, features a foamless mid-sole that provides increased cushioning
durability, reduced weight, and improved stability. The Asics Gel-Kinsei, priced at $165
as the highest priced shoe Asics has ever brought to market, includes technology that
allows cushioning to adjust to the wearer’s needs as well as more durable cushioning
features. The Adidas 1, at $250, includes a microprocessor that adjusts the shoe’s
cushioning to the needs of the wearer. According to a Citigroup report, the Air Max 360
is expected to drive growth due to its potential to evolve into a technology that will be
attractive to specialty runners, a target group Nike is partly losing to Brooks and Asics.
Furthermore, Nike plans to introduce basketball and cross-training shoes based on the
same technology (Citigroup 2006).

2.5.2 New Products and Brand Image

New products can also enhance the image of a brand. The Nike Free, which lets
runners feel as if they are running barefoot, is an important product because it indicates a
shift in the way Nike views the interaction between their products and their consumers
(Citigroup 2006). The Free is meant to be used as a training tool to strengthen runners’
feet (Davis 2005). Another example is the Adidas 1 discussed above. This hi-tech shoe
will likely reinforce Adidas image as a firm at the forefront of athletic technology.
3.0 ENTRY BARRIERS

3.1 Market Overview


Relatively high barriers to entry exist in the athletic footwear industry due to
obstacles like strong brand loyalty and economies of scale and scope. Though new
entrants will have little problem gaining raw materials or labor, they do face the
enormous difficulty of establishing popularity in an industry with extremely image-
conscious consumers and one of the world’s strongest brands.

3.2 Image
Style-conscious consumers, guided in part by effective marketing, want shoes that
will enhance their image and not just cover their toes. Customers notice whether their
shoes have a swoosh or a lack thereof, thus entrants will have difficulty winning them
over without these symbols and the cool-factor that goes with them. Even in the athletic
shoe sector, the importance of fashion over function is rising. The “fashionization of
shoes” took off in 1997, when Puma enlisted designer Jil Sander to create a limited-
edition women's running shoe to ignite its lackluster image and sales (Orecklin 2002).
While the biggest firms routinely use established designers, entrants with limited capital
will be hard pressed to convince such revered professionals to sign contracts. Existing
shoe companies also have a financial advantage due to consumers’ willingness to pay
high prices for name brand shoes, especially those offered in limited editions. For
instance, Adidas’ sneakers created by designer Japanese Yohji Yamamoto retailed for up
to $590 (Orecklin 2002). While the image barrier is high, it is not insurmountable. With
its “endorsed by no one” policy, New Balance has proven that by creating a suitable
niche, high priced designers and endorsements are not a requirement for success in the
industry.

3.3 Licensing and Retail Agreements


Access to endorsement and distribution opportunities constitutes a second barrier
for new firms. The bigger sneaker companies have already established agreements with
athletes, teams, and retailers. The top sneaker manufacturers sponsor the most successful
athletes and organizations in order to impress and win customers. For instance, Nike has
deals with golfer Tiger Woods, soccer player Ronaldinho, and the Brazil soccer team,
(Genereux 2006). Adidas and Reebok together hold a “solid portfolio” of agreements
with athletes from Yao Ming and David Beckham, to teams like Real Madrid and the four
major sporting leagues in the US (NBA, NHL, NFL and MLB) (Drbul et al 2006).
Newcomers will not only have trouble finding teams and players without ties but also
will lack the capital for these contracts. Like customers, retailers are also affected by the
prominence of a particular brand. Footwear stores are more likely to save shelf space for
an incumbent than a new company because the established brands have a history of good
sales. As a result, new companies must work harder to have their goods seen. The barrier
of overcoming the existing relationships with athletes and retailers will narrow entry.

3.4 Economies of Scale


The athletic shoe industry faces significant economics of scale and scope, which I
will explore in the next two sections. First, the sneaker industry faces economies of scale
because the total cost of manufacturing shoes goes down as output increases and the fixed
costs of machinery, marketing, and research will be spread out. I will discuss the last two
special cases of economies of scale in further detail below.

3.4.1 Marketing
The athletic shoe industry faces economics of scale in advertising, giving cost
advantages to incumbency. Larger firms can afford higher advertising expenditures than
any new firm could, and they are likely to place more ads in the first place. It would be
difficult for a start-up firm to compete with Nike given that the brand, its trademark
“swoosh,” and its simple slogan, “Just do it,” are known and valued worldwide. These
high marketing expenditures can result in higher quality advertisements; in 2005, the two
largest firms by market share, Nike and Adidas, won a total of 4 (out of 18 given) Gold
Clio Awards in the Television/Cinema ad category (http://www.clioawards.com/home/).
Furthermore, incumbents have lower advertising costs per potential customer due to
larger advertising reach. For instance, because Adidas sneakers are sold in more stores
than Saucony ones, ads for Adidas are more effective because viewers inspired to buy
Adidas shoes will have an easier time following through. Customers who see a Saucony
ad may give up before they find a store with the shoes they want or may even settle for a
different brand’s (Besanko 2003).

3.4.2 Research and Development


In a day and age when shoe manufacturers are putting microprocessors in our
sneakers, the value of technological expertise in this industry is growing. The sneaker
industry has economies of scale in Research and Development (R&D) because incumbent
firms that established research centers years ago have experience and know-how that sets
them ahead of potential entrants. Companies like Nike can afford to put more money into
R&D due to larger sales volume, leading to even more of a learning effect. Nike’s Sport
Research Lab in Oregon is near 13,000 square feet and boasts owning “virtually every
variety of muscle sensor, pressure platform, breath analyzer, foot scanner and thermal
imaging device” to test and design potential new products (Nikebiz.com). The upfront
cost of setting up a comparable facility to test and examine products is certainly a barrier
to entry. Reebok and Adidas, now merged, will invest roughly €130 million in R&D,
according to an industry report (Drbul et al, 2006).
Years of research can go into developing a single new cushioning system: New
Balance’s website features their technology for cushioning and shock absorption called
N-ergy 2.0 and Abzorb SBS, which was developed over three years
(newbalance.com/techcenter/tech/featured_tech.html). Coincidentally, Adidas’ adidas_1
shoe and its continuously adjusting cushioning level was also released after three years of
research (adidas.com). These years of research usually pay off, because shoes with high-
tech elements can be sold at higher prices. As discussed in the previous section, Adidas
launched the Adidas 1 last year at $250, and Nike launched the Air 360 for $160
(Genereux 2006).
After spending so much on technological research, footwear companies patent
their new shoe features so that competitors can not imitate them. These patents make
entry more difficult because potential entrants must design their shoes without infringing
on the protected designs. The market leader Nike has a significant lead in numbers of
patents. According to a search of the US Patent and Trademark Office website, Nike has
registered 1830 patents, where as the separately listed Reebok has 363 and Adidas has
149, while New Balance has just 20 (US Patent and Trademark Office). Nike recently
sued Adidas for patent infringement, asserting that Adidas used elements of Nike’s
SHOX cushioning technology in developing the Adidas Kevin Garnett and A3 shoes
(Hoover.com).

3.5 Economies of Scope


Another entry barrier is the economies of scope in the athletic shoe industry,
allowing incumbent firms to enjoy cost savings by producing a wider range of related
goods.

3.5.1 Umbrella Branding


One special case of economies of scope is “umbrella branding.” Most of the top
athletic footwear competitors have already expanded the variety of goods and services
they produce by venturing into athletic apparel and equipment. By doing so, they are able
to leverage their reputation from one sector to another. Consumers choose brands they
recognize and trust, and so athletic shoe makers have incentive to expand their product
range. The U.S. athletic apparel market at $20 billion wholesale is a good target because
it is nearly three times the size of the athletic footwear industry (Ohmes 2005). In the
figure below, you will see the footwear companies that also make athletic apparel (or vice
versa) and their market shares as of August 2005:

Brand Market Share


Nike is not only the market share (Current $)
leader with athletic footwear but also with Nike 20.65
Columbia 10.27
sports apparel, as they have over a fifth of Adidas 7.72
the apparel market. They produce items Champion 2.54
North Face 2.40
ranging from watches and eyewear, to more New Balance 0.79
related products such as athletic apparel and Puma 0.50
Source: Shanley and Svezia 2005
bags (Nikebiz.com). Nike can introduce
these products with less risk because consumers infer that all products under the brand
umbrella are high quality. Furthermore, if the new products introduced are
complementary (like socks are to sneakers) firms will achieve synergies in production.
For example, Nike’s research on the way the foot works can help them design both more
supportive socks and sneakers. Many companies have made the link between sneakers
and apparel explicit, by linking them under the same name as their shoes. For example,
Nike introduced the Jordan line of shoes and then brought out t-shirts with the same name
to boost sales for both categories.
Though Nike is a clear leader, other footwear companies see the growth potential
and are following suit. For example, in 2003, New Balance signed seven additional
licensing deals to put its logo on gear from sunglasses to exercise equipment (Fonda
2004). Umbrella branding helps the expanding company and by default deters entrants
because they will not need to spend additional money on promotion to develop credibility
in the eyes of consumers, retailers, and distributors (Besanko 2003).

3.5.2 Consolidation
Larger incumbents also control entry by strategically acquiring smaller sneaker
companies. The sneaker industry has faced considerable consolidation recently, with the
aforementioned acquisitions of Reebok by Adidas, Saucony by Stride Rite, Converse by
Nike, and so on. Entering firms that are successful and gain market share pose threats to
the larger players. As a result, the major players preemptively buy smaller sneaker
companies before they grow too large and pose serious competition. The incumbents
have budgets large enough that they can simply buy up smaller companies, rather than
risking a loss in market share to them. The incumbent firms essentially make it
impossible for a new entrant to grow substantially without takeover. These acquisitions
allow the buyer to reap benefits from both increased scope and association with the new
trends in footwear. Potential entrants that notice this tendency but want to remain
independent may just choose not to enter in the first place.
3.6 Strategies for Entry
While barriers to entry are relatively high, there are a few key strategies that
would allow an entrant into the sneaker industry. The first strategy is specialization.
Many companies have successfully entered the athletic footwear market by targeting a
specific niche of consumer or designing for a particular activity. Designing footwear for
certain types of consumers or activities is no new task. Reebok gained its popularity by
doing just this in the early 1980s: Realizing that competing with established companies
such as Nike and Adidas would be tough, Reebok designed shoes for aerobics just before
aerobics ballooned in popularity across the US. As a result, their sneaker the Freestyle
became one of the best-selling shoes in history, they got a temporary lead over Nike in
the athletic-shoe industry, and they gained loyal customers who buy their products to this
day (Hoover.com). Today, newer companies are still using this tactic. The footwear
company Crocs started in 2002, making colorful, extremely comfortable clogs for boating
and outdoor use, and now they boast a wide product range and sales of $108.6 million
(Hoover.com)
The second strategy for entry is for non-sneaker companies with established
brands to enter the footwear market. Just as sneaker companies have expanded to apparel
and equipment, many apparel and equipment manufacturers are doing the same - moving
into the footwear sector for wider scope. Many clothing designers sell sneakers, from
Tommy Hilfigger to Gucci. Other companies have moved from seemingly unrelated
accessories to footwear, the most notable example being Oakley. Oakley, best known for
their sunglasses, brought their shoes to market in the mid 1990’s, and they have been a
huge success world-wide. The Oakley shoe is a unique hybrid of sneaker and hiking
shoes that are durable and fashionable. In 2000, Oakley’s Net sales skyrocketed 41%,
totaling $363.5 million. Since these companies have already established loyal customers
in other sectors, they are able to break into the sneaker market with less difficulty. Oakley
and the other designers are able to sell sneakers relatively well due to the fact that they
have already established well-known brands. These apparel companies rely on their
established brand images in order to capture sneaker consumers, who place high
importance on image and branding.
4.0 SUBSTITUTES AND COMPLEMENTS

4.1 Introduction
There are thousands of shoes available on the market today. How do consumers
know which ones to buy? Currently, the market for footwear is filled with substitutes for
sneakers. The primary complements to sneakers are other types of sports apparel, such as
t-shirts, socks, shorts, and jackets.

4.2 External Substitutes


Although sneakers are the most popular footwear in the world, there are a
tremendous number of substitutes within the footwear umbrella. These include boots,
slippers, dress shoes, flip-flops, and other non-athletic footwear. Some of the major
producers of these shoes include Steve Madden, Sketchers and Nine West.
Lifestyle athletic shoes have seen the largest annual growth rates, with Puma
leading the way with a sales increase of more than 50%. One of the most successful non-
athletic footwear companies, Steve Madden, is well known for its thick high heeled shoes
introduced in the mid 1990’s. Sketchers shoes are incredibly popular among young
women and show strong sales. In Q4 of 2005, Steve Madden reported sales of $91.4
million which is an increase of 8.2% from the previous quarter (Just-style.com).
Sketchers’ non-athletic shoe department has also been growing lately due to the
introduction of their heel-less shoes, also known as sneaker mules, Heel-less shoes are
widely popular in Europe, but have not penetrated many other markets. Recently, heel-
less shoes have gained popularity in the U.S., causing the primary promoter of these
shoes, Sketchers, to experience healthy sales figures. In 2004, Sketchers’ sales increased
6.2% with total sales equaling $222 million for that year (Just-style.com).

4.2.1 Footwear Sales Cycle


Like other types of apparel, footwear experiences a seasonal sales cycle. See the
graph below for the month-to-month changes in footwear sales. There is little year-to-
year variability in the sales, as seen by the proximity of the lines representing 2003, 2004,
and 2005. Sneaker sales peak between August and September, when many students are
buying back-to-school wardrobes. Sales then decline during the fall-early winter months,
mostly due to seasonably colder and inclement weather conditions. During the holiday
season, footwear sales goes up with many other products, specifically driven by boots
and waterproof walking shoes appropriate for the cold, winter months. For example, in
the holiday shopping period of 2001, sales of boots increased by over 100% while
sneaker sales only increased by 2.2%. During the holiday season, outdoor footwear
accounts for as much as 15-20% of all footwear sales (Ohmes 2005). During summer
months, sales of sandals and
heel-less shoes increase.
Sales of summer footwear,
including sandals and open-
heel shoes and excluding
sneakers, increased by nearly
70% in the summer of 2001,
while sneakers experienced
an increase of 50% in sales.

Source: Ohmes 2005

4.2.2 Substitutability of Other Footwear.


Although many substitutes to athletic shoes exist, there is little evidence
suggesting that they will ever replace sneakers. One industry report says that “Though
we continue to monitor fashion trends and any potential movements in
the athletic versus brown-shoe dichotomy, we continue to see little
evidence suggesting significant shift to brown shoes” (Ohmes 2005).
Indeed, athletic sneakers serve many functions for customers and are
not perfectly substituted by any other footwear.

4.3 Complements

The most popular sneaker complement is sports apparel. Overall U.S. sports
apparel sales rose 12.9% in 2004, while other regions saw higher sales growth: 31.3% in
the Asian Pacific and 19.8% in Europe (Ohmes 2005). According to SGMA
International, young adults represent nearly 40% of all consumer sports apparel
purchased in 2004, and women outspend men in this sector. For many years, the best
selling sport apparel world-wide has been T-shirts (ANSOM).

Region: Apparel Sales Increase/Decrease (2004):


Asia Pacific 31.3% increase  $138.8 million
Europe/Middle East/Africa 19.8% increase  $409.7 million
South Americas 8% decrease  $35.5 million

Sales of apparel can represent a large part of the sneaker companies’ revenue. See
the graph below for an illustration of apparel versus other sources of revenue for Nike
and Reebok.

Both Nike and adidas have looked to the golf market to expand their scope. Nike
developed golf clubs and a line of apparel for their sponsored golfer, Tiger Woods, to
capitalize on his success (Hoover.com). Adidas bought TaylorMade in 1998, which is
now the #2 golf club maker, and at the end of 2002 it acquired the Maxfi brand of golf
balls and accessories (Hoover.com). The move was meant to bolster the company's
golfing products portfolio.
There are also some unusual complements to foot wear. As mentioned earlier,
Adidas and Microsoft have agreed to help each other promote the other’s business.
Furthermore, Ecko recently released a game called “Mark Ecko’s Getting Up”, which
many retailers have bundled together with Ecko shoes.
Total U.S. Sales
1000

900

800

700

600

500

400

300

200
US Sales ($ millions)

100

0
2003 2004 2003 2004 2003 2004
Apparel Apparel Athletic Athletic Sports Sports
Footwear Footwear Equipment Equipment

Market

As seen in the graph above, as the sales of apparels go up, so do the sales of
athletic footwear. Furthermore, as the sales of sports equipment goes up, so do the sales
of athletic footwear. This is clear sign that sport apparel and sporting equipment are not
only complements to each other, but also to sneakers.
5.0 SUPPLIER POWER

5.1 Materials for Production


A typical athletic shoe is constructed from three major raw materials: cotton,
rubber, and foam. The cotton is generally a synthetic blend to increase both durability and
strength. Some models also include a waterproofing agent in the fabric. The shape of the
sole is formed from rubber. In fact, the sole is a major focus of research in each of the
main firms, because its physical properties are crucial to determining the comfort,
support, and lifespan of the shoe. The rubber is always vulcanized, through a simple
chemical process that adds durability and strength to the rubber. Foam acts as padding
within the shoe. Its composition varies, but foam is a simple material to produce at low
cost.
All three major inputs are commodity goods. Firms do not set the price of these
items; rather the market determines their value. The producing firm’s only choice is
quantity of production.

5.2 Standardization within Production

The major firms in the market have experienced considerable pressure from the
public regarding the labor practices of their suppliers and manufacturers. Partially in
response to these image-damaging statements, the major firms have set up a system of
standards. Nike and Adidas both work only with approved manufacturers/suppliers that
meet the labor standards that they require. They have created this system so that the
quality of product, the factory working conditions, and the logistics of delivery can be
held to a higher standard. Those firms not meeting these conditions are penalized and
contracts are not renewed. Not only is this good PR for the firms, but also it normalizes
the quality of service that they will encounter when dealing with a supplier.
To reach the acceptable level, a supplier must make a commitment to their
employees and an investment in their facilities. This investment is a barrier to entry for
smaller manufacturing houses that desire Nike or Adidas’s business. Once a supplier has
become a Nike supplier they often become dependent on that contract. Nike sets their
prices and buys in enormous volumes.
5.3 Ease of Supplier Transfer
When dealing with commodity items like cotton, rubber, and foam, there is little
to stop large footwear companies from switching between suppliers. Any supplier that
meets the requirements of the firm will be able to supply such homogenous products. The
major firms in the market are able to switch suppliers quickly without worry of a
significant decrease in quality. They have the power over the suppliers. Therefore,
supplier power is extremely low in this industry.
6.0 BUYER POWER

6.1 Buyer Concentration


Athletic footwear retailers range from smaller shoe stores such as Footlocker to
large department stores such as Wal-Mart. The top 25 retailers generate approximately
two-thirds of the sales of athletic footwear, a value approaching $15 billion. Traditional
retailers like Finish Line and Footlocker dominate the sales landscape, but new players
have emerged in the form of big box stores and vendors opening their own merchandise
stores and outlets. Long-term market growth for athletic shoes in the United States is
projected to persist in the low single digits, so market share will be the key driver of
earnings growth for each market participant (Genereux 2006).

6.2 Buyer Leverage in Product Negotiation


It appears that the lack of concentration at the buyer level would inhibit margins
while allowing vendors to determine base prices for their product. Also, retailers have
little power or influence in the design of the product resulting from the large number of
industry participants. Under current market conditions, buyer power is relatively weak.
Large players like Nike and Adidas are able to dictate the price points of each pair of
shoes they sell. They have full creative rights to the design and manufacturing of their
footwear. However, Footlocker’s acquisition of Foot Action and Gart’s merger with
Sports Authority are microcosms of an across-the-board power consolidation within the
footwear retail industry (Yurman et. al 2005). As fewer retailers control larger market
shares, small vendors who have entered the market through a small retailer will find it
more difficult to maintain market share. Regardless, larger firms like Nike and Adidas
will continue to maintain the name recognition and infrastructure to remain industry
leaders through their aggressive acquisition of smaller companies threatening to take
market share.
Growing margins are another indication that buyer power is increasing. Lower
cost structures, smaller inventories, and growing market share through consolidation have
benefited the major footwear retailers. A decrease in industry-wide margins in 2001 has
been met with larger margins through until 2004; see the table below. This trend is
expected to continue for the next five years.

Source: Ohmes 2005

6.3 Effects of Retail and Vendor Consolidation


The consolidation phase of the footwear industry has spurred increases in the
growth rate for many retailers by allowing them to purchase a diversified range of shoes
from each large athletic footwear company. “Famous Footwear President Joe Wood
commented that the department store consolidation coupled with a strong cycle in athletic
footwear has driven some of the gains in the family footwear sector. Shoe Carnival CEO
Marc Lemond believes that the strength in women’s fashion was driven by more
emphasis on footwear and apparel” (Genereux and Graham 2006). This consolidation is
expected to continue through the next couple years. Thomson Financial estimated that the
announced deals between athletic footwear companies increased to $40 billion in 2004,
compared with an estimated $10 billion in 2002. In 2005, mergers are estimated to have
surpassed the $40 billion record set by deals in 2004. The major transactions included
“Gart’s merger with The Sports Authority for approximately $378 million (closed in
August 2003); Foot Locker’s acquisition of Footaction for $225 million (completed in
May 2004); and Dick’s acquisition of Gaylan’s for $362 million (completed in July
2004); VF’s acquisition of Reef for $188 million (closed in April); American Sporting
Goods’ acquisition of And1 (announced in May); Wolverine’s licensing agreement with
Patagonia (announced in June), with the first product line expected to launch in spring
2007; Amer Sports’ acquisition of Salomon from Adidas for €485 million (completed in
October); and Timberland’s acquisition of SmartWool for $82 million (announced in
November” (Drbul et al 2006). These mergers have increased the market share for a
select group of companies, thus giving them bargaining power over the brands because
there are fewer buyers to sell their footwear.
The 2005 fiscal year marks the first time since 1998 that square footage of retail
floor space has increased. From 1999-2004, overall retail space for athletic footwear
dropped by 21% as a result of overcapacity, bankruptcy filings, and consolidation. In that
time period, footwear companies promoting a diversified set of retail offerings (sporting
goods and apparel) were able to withstand the loss of earnings growth in the athletic shoe
category until the up-tick seen in 2005 (Yurman et al 2005).
6.4 Current and Emerging Retail Channels

(Susquehanna Financial Group)

6.4.1 Department Stores


The large department store shoe category includes Wal-Mart, Sears, JC Penney,
Kohl’s, Target, and others. These companies have traditionally been in the business of
selling athletic shoes with a price point under $50 and selling to the masses. In America,
50% of all footwear purchases are under $50. Attempting to open new markets for itself,
Nike’s recent purchase of Starter Brands may have changed the face of the industry.
Source: Banc of America Securities

The $14 billion athletic shoe value industry is large and growing as shown by the
above graph, and Nike aligned itself to take advantage of expanding its markets without
hurting the Nike brand image. The 2004 purchase of Starter for $43 million gave Nike a
premium brand in the value market. Signing a partnership with Wal-Mart, Nike
negotiated an agreement to design the Starter shoes yet released themselves from the
manufacturing process. After Nike creates the shoes, the designs must be approved by
Wal-Mart. Next, the design is taken to a manufacturing plant where the shoes are made
and sold to Wal-Mart. Nike does not receive direct revenue from the sale of Starter
athletic shoes, but is paid royalties and design fees by Wal-Mart. While this partnership
may not maximize potential revenue for the Nike, it gives the vendor a profit channel
without having to make the necessary capital expenditures to produce and ship the
product. The discount market has been trying to find a way to counter clearance sales at
specialty stores and this new method has opened the barrier between the two channels.
Nike is encouraged by estimates of strong revenue growth and plan to turn the
Starter/Wal-Mart marriage into a billion dollar business (Drbul 2006). This strategic
alliance created by the supplier and buyer will allow for economies of scale, becomes
Nike’s link to the value market, and is Wal-Mart’s opportunity to market a premium
value shoe. The value net created by this relationship will create value for the customer
and bottom line savings for the retailer and vendor. Much of the influence and transaction
costs are mitigated by Nike’s new relationship as shoe designer and logo licenser. Wal-
Mart can buy directly from the factory as they had been doing in the past in order to
avoid new costs.
Dick’s Sporting goods separates itself with an emphasis on athletic equipment,
which comprises 60% of their sales. The Sports Authority has made a name for itself by
being the only national sports department store. This strategic advantage allows the
company to establish its brand presence and increase buyer power for all sporting goods
because of their large volume. Hibbett is unique in that they have found that placing
small sporting stores located in areas that cannot handle large department stores can be a
profitable business model. Each company used a different strategy for attaining
profitability, and all are successful at maintaining their advantages in a competitive
market (Ohmes 2005). As the influence of these sporting goods stores increases
throughout the country, their buyer power will increase as athletic footwear sales
increase. The large amount of square footage of footwear sales space is an indicator that
these corporations will concentrate on footwear as a large portion of their business.

6.4.2 Factory Outlets and Vendor Stores


Reebok, Nike, Adidas, Puma, and other major brands have led the move to
capitalize on a new growth market, running their own brand name stores. These stores
threaten the health and buyer power of the current retailers in the athletic footwear
industry by competing directly. Also, this highly integrated business model allows the
companies to increase margins and boost brand presence. Adidas has experienced a 13%
increase in margins for 2005, mainly because of the rapid growth of its stores unit. They
currently have 714 stores and plan to increase that number to 800 by the end of 2006
(Drbul 2006).
Nike has been able to grow their NikeTown and factory store models with
increasing success. “At the end of fiscal 2005 (June fiscal year end), the company
operated 184 owned retail stores in the United States, including 77 factory stores, 11 Nike
stores, 12 Niketowns, four employee-only stores, and 80 Cole Haan, Converse, and
Hurley stores, and 190 non-U.S. stores, for a total store count of 374, compared with 330
stores at the end of fiscal 2004” (Ohmes 2005). Nike currently has been concentrating on
expansion into China with its Nike-branded storefronts. China is the next frontier for
driving revenue growth in the footwear industry, and Nike has the brand awareness
advantage in Asia over all other major brands.
With the vertical integration present with vendor retail stores, the point-of-sale
storefront is the last frontier in the chain. It is apparent that operating wholly-owned
manufacturing plants is not a margin-driver, but the retail stores, the last link in the chain,
is proving a valuable tool for growth. Advertising costs can decrease considering that the
storefront becomes an interactive marketing symbol. Also, the escalation of opening
brand name retail stores will inherently put a dent in the sales of the specialty and
department stores, potentially inviting conflict with retailers. Preliminary sales statistics
are currently unavailable for most vendors, and the impact has not yet posed a significant
threat to Footlocker and Finish Line. Within two to five years these outlets will be
competing more directly with the department stores on pricing, slashing stick prices on
last year’s brand name models. Specialty stores will not see significant sales decreases
because their niche is selling the newest, most stylish shoes on the market. However,
overall buyer power will be weakened by the prevalence of these vendor stores.

6.4.3 Mall Specialty Stores

Footlocker and Finish Line dominate the mall specialty store segment of the
athletic footwear market. These stores are focused on the newest trends in footwear and
stock footwear with higher price points than other segments of the athletic footwear
industry. There are added risks to carrying such a narrow scope of styles and market
presence. Finish Line is expected to experience slow growth in the short term because of
its over-saturation of Nike products (60% of all products) and questionable adaptability to
the active lifestyle market (Genesco Rises 2006). Future growth for Finish Line will
come through nationwide mall expansion ushering in a greater brand presence and larger
sales volume.
Source: Banc of America Securities (Ohmes 2006)

Mall specialty stores, the buyer of many different brands of shoes, have incentives
to diversify their brand offerings to protect themselves from dramatic changes in market
development. Too much reliance on one or two brands of shoes will disable the ability of
the retailer to change with the trends. “In an attempt to better serve its urban markets
Finish Line has segmented its store base into five demographic groupings: urban,
suburban, mixed, metro/campus, and Hispanic” (Genereux 2006). Also, diversifying their
product line will decrease the power vendors have over the mall specialty market. A
company showcasing Nike as 40% of its footwear offerings will likely be subservient to
Nike’s preferences and intentions. If that store wanted to change its footwear options
from mostly Nike to mostly Puma or New Balance, it could lose its customer base.

6.4.4 Strip Specialty Stores


Famous Footwear, the uncontested leader in strip mall specialty footwear stores,
has had to change its business plan in order to stay ahead of the discount shoes store
competition. Their competition, Shoe Carnival, has historically specialized in non-athletic
footwear for the family. Famous Footwear recently targeted women aged 25-45 and took
their priorities into consideration with store redesigning and price-point management.
The redesigned stores have a larger middle aisle, lower shelves, and better presentation
for their athletic shoes, most priced between $30 and $120 (Balousek 2006). Although
this market segment has been able to revamp its image, there is very little buyer power.
Strip specialty stores carrying low and high priced footwear, and do not generate enough
sales to garner the attention of the vendors. These chains cannot compete with the
specialty stores at the higher price points (Ohmes 2006).

6.4.5 Online Stores


The online presence of shoe retailers is small but powerful. Nike has created a
shoe-building website to provide the customer with a fun, interactive experience. The
online sales arena does not appear to be a threat to buyer power because of its limited
success. Pure online stores shoebuy.com and zappos.com are placing small amounts of
pressure on brick-and-mortar stores to debut online websites to compete in this new sales
arena. The main disadvantage to online shopping is the lack of interaction with the
product. In electronics markets, product specifications are uniform among companies
while athletic footwear must be tried on to determine the best fit. Not a sales driver or
threat to buyer power, online stores are likely to be used as an advertising vehicle in the
present and near future.
7.0 CONCLUSION

Athletic footwear companies live and die by their perceived brand image in the
marketplace. Producers compete primarily on non-price elements, such as marketing and
types of products sold. Sneakers compete seasonally with many other types of footwear
such as sandals, work boots, and dress shoes. Nike and the now merged Adidas-Reebok
claim a huge percentage of market, followed by smaller competitors like Puma and Vans,
with well-established niche markets. Entry by small firms is difficult because the large
brands have strong consumer loyalty, plus economies of scale and scope. Success post-
entry is often met with buyout offers from larger companies that are both worried about
increased competition and hoping to lead the next big trend in sneakers. Shoe companies
are able to exert extensive power over their suppliers due to the homogeneous nature of
the three raw materials essential in the sneaker-making process: cotton, vulcanized
rubber, and foam. Buyer power in the industry has historically been low, but recent
consolidation has provided retailers more bargaining power in terms of price and
marketing.
In the future we expect the trend of buyouts and mergers to continue as the
producers continue to have incentives to consolidate. The industry is aging and looking to
expand its reach into apparel and higher technology outlets. Nike and Adidas are leading
the research and development of new technologies such as automatic comfort
adjustments and microprocessor inserts within the athletic shoes. Innovation in this
industry is essential to keep customers interested in the product. Lastly, the divide
between performance athletic shoes and lifestyle footwear will be a defining
characteristic of product marketing and alignment over the next several years.
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9.0 COMPANY WEBSITES CITED

Corporation Home Page


Adidas http://www.sopadidas.com/
AND1 http://www.and1.com/section/products
Asics http://www.asicsamerica.com/
Brooks http://www.brooksrunning.com/
Converse http://www.converse.com/index.asp?b
Crocs http://www.crocs.com
K-Swiss http://www.kswiss.com/
Mizuno http://www.mizunousa.com/
New Balance http://www.newbalance.com/
Nike http://nikebiz.com
Niketown http://niketown.nike.com/niketown/
Puma http://store.puma.com/
Reebok http://store.reebok.com/
Saucony http://www.saucony.com/
Spira http://www.spirafootwear.com/
Stride Rite http://www.striderite.com/
Vans http://shop.vans.com/