Athletic Footwear: Industry Analysis by JohnMValentine

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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 .................................................................................................................... 7 2.2.1 Mergers and Acquisitions ............................................................................................................ 8 Adidas-Salomon AG and Reebok .................................................................................................... 8 2.2.2 Stride Rite Corporation and Saucony .......................................................................................... 9 2.2.3 Nike and Converse ....................................................................................................................... 9 2.3 INTERNAL PRODUCT PROLIFERATION ..................................................................................................10 2.4 BRAND IMAGE, PRODUCT IDENTITY, AND CUSTOMER LOYALTY .........................................................10 2.4.1 Advertising ..................................................................................................................................11 Entertainment and Celebrity Marketing Campaigns .....................................................................11 World Cup 2006 .............................................................................................................................12 Creative Niche Advertising ............................................................................................................13 2.4.2 Distribution Decisions ................................................................................................................14 Retail ..............................................................................................................................................14 Personalization ..............................................................................................................................14 2.4.3 Grassroots Marketing .................................................................................................................15 2.5 NEW PRODUCT DEVELOPMENT............................................................................................................15 2.5.1 Keeping up with Competition ......................................................................................................15 High End Running Shoe Examples ................................................................................................16 2.5.2 New Products and Brand Image .................................................................................................16 3.0 ENTRY BARRIERS ............................................................................................................................. 17 3.1 MARKET OVERVIEW ............................................................................................................................17 3.2 IMAGE ..................................................................................................................................................17 3.3 LICENSING AND RETAIL AGREEMENTS ................................................................................................17 3.4 ECONOMIES OF SCALE .........................................................................................................................18 3.4.1 Marketing ....................................................................................................................................18 3.4.2 Research and Development .........................................................................................................19 3.5 ECONOMIES OF SCOPE .........................................................................................................................20 3.5.1 Umbrella Branding .....................................................................................................................20 3.5.2 Consolidation .............................................................................................................................21 3.6 STRATEGIES FOR ENTRY ......................................................................................................................22 4.0 SUBSTITUTES AND COMPLEMENTS............................................................................................ 23 4.1 INTRODUCTION ....................................................................................................................................23 4.2 EXTERNAL SUBSTITUTES .....................................................................................................................23 4.2.1 Footwear Sales Cycle..................................................................................................................23 4.2.2 Substitutability of Other Footwear..............................................................................................24 4.3 COMPLEMENTS ....................................................................................................................................24

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5.0 SUPPLIER POWER ............................................................................................................................. 27 5.1 MATERIALS FOR PRODUCTION .............................................................................................................27 5.2 STANDARDIZATION WITHIN PRODUCTION............................................................................................27 5.3 EASE OF SUPPLIER TRANSFER..............................................................................................................28 6.0 BUYER POWER ...................................................................................................................................29 6.1 BUYER CONCENTRATION .....................................................................................................................29 6.2 BUYER LEVERAGE IN PRODUCT NEGOTIATION ....................................................................................29 6.3 EFFECTS OF RETAIL AND VENDOR CONSOLIDATION............................................................................30 6.4 CURRENT AND EMERGING RETAIL CHANNELS ....................................................................................32 6.4.1 Department Stores ......................................................................................................................32 6.4.2 Factory Outlets and Vendor Stores .............................................................................................34 6.4.3 Mall Specialty Stores ..................................................................................................................35 6.4.4 Strip Specialty Stores ..................................................................................................................36 6.4.5 Online Stores ...............................................................................................................................37 7.0 CONCLUSION ......................................................................................................................................38 8.0 WORKS CITED ....................................................................................................................................39 9.0 COMPANY WEBSITES CITED .........................................................................................................43

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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
3% 5% 6% 42% 12% 2% 1% 1% Nike Adidas Reebok Puma New Balance 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 major firms is created by extensive marketing campaigns and celebrity endorsements. 4

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 world‘s largest importer of athletic footwear, which is primarily manufactured in Asian nations. The graph at right shows the trend in US footwear production and imports. Most firms design the sneakers and outsource their manufacturing to
2500 2000 1500 1000 500 0 Imports Domestic Production

Domestic Production vs. Imported Footwear (Millions of Pairs per Annum)

68

80

90

95

97

99

01 20

19

19

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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.

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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.

K-Swiss Converse

Running Walking Basketball Children’s Tennis Lifestyle Skating

X X X X X X X X X X X X X X X X X X X X X X X X X

X X

X

X X X X X

X X X

X X

X

Cross-Training X X X X Soccer X X X X

Source: Company websites of producers listed.

Saucony X X

Mizuno

Shoe\Company Nike Adidas Reebok

New Balance

Type of

Puma Asics Vans Brooks AND1 Stride Rite Corp

Spira

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 1113% 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
Nike Reebok New Balance Adidas K-Swiss Converse Puma Other Total 1995 2529 1405 151 355 89 208 32 2134 6574 1996 3261 1193 201 390 76 194 23 2170 7215 1997 3797 1229 265 465 92 285 23 2227 7983 1998 3252 1062 346 910 145 167 32 1826 7396 1999 3325 909 550 845 264 132 43 1857 7486 2000 3327 926 750 840 197 144 58 1961 7804 2001 3128 931 794 700 205 133 82 2120 7672 2002 3052 932 910 810 245 181 121 2290 7994 2003 3005 1036 910 750 369 245 172 2552 8253 2004 3225 1087 1022 790 395 305 209 2766 8890 2005E 3358 1141 1053 822 403 320 230 2828 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

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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.

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Branded Athletic Footwear Market Share 2004
*Sales in millions of wholesale $
Company Nike Reebok New Balance Adidas K-Swiss Converse Vans Puma American Sporting Goods (Avia, Ryka, Nevados, Turntec) Asics Keds/Pro-Keds Foot-Joy Fila Saucony Sole Technology And 1 Mizuno Hi-Tec Brooks Lotto Other Total U.S. Sales* 3225 1087 1020 795 395 305 275 209 205 197 136 124 120 104 100 95 59 59 54 7 319 8890 U.S. Market Share 36.3 12.2 11.5 8.9 4.4 3.4 3.1 2.4 2.3 2.2 1.5 1.4 1.3 1.2 1.1 1.1 0.7 0.7 0.6 0.1 3.6 100 Global Sales 6780 1963 1357 3150 480 905 395 1396 303 920 203 180 305 141 140 175 287 191 126 141 873 20411 Global Market Share (%) 33.2 9.6 6.6 15.4 2.4 4.4 1.9 6.8 1.5 4.5 1 0.9 1.5 0.7 0.7 0.9 1.4 0.9 0.6 0.7 4.3 100

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

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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

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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 Adidas Reebok Adidas and Reebok 2001 656.7 329.2 985.9 2002 775.2 344.1 1119.3 2003 911.9 383.4 1295.3 2004 1090.7 435.3 1526.0

Marketing and Advertising expenditures as % of Net Sales
Adidas Reebok Adidas and Reebok 12% 11.0% 11.6% 12.6% 11.0% 12.1% 12.9% 11.0% 12.3% 13.6% 11.5% 12.9%

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

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 11

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 12

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

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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

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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.

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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.

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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 imageconscious 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 limitededition 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

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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

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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 hightech 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

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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
Nike is not only the market share leader with athletic footwear but also with sports apparel, as they have over a fifth of the apparel market. They produce items ranging from watches and eyewear, to more related products such as athletic apparel and bags (Nikebiz.com). Nike can introduce

Market Share (Current $)

Nike 20.65 Columbia 10.27 Adidas 7.72 Champion 2.54 North Face 2.40 New Balance 0.79 Puma 0.50 Source: Shanley and Svezia 2005

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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.

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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.

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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 nonathletic 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, heelless 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-toyear 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, 23

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 openheel 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

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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: Asia Pacific Europe/Middle East/Africa South Americas

Apparel Sales Increase/Decrease (2004): 31.3% increase  $138.8 million 19.8% increase  $409.7 million 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.

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Total U.S. Sales
1000 900 800

US Sales ($ millions)

700 600 500 400 300 200 100 0 2003 Apparel 2004 Apparel

2003 Athletic Footwear

2004 Athletic Footwear

2003 Sports Equipment

2004 Sports 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.

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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. 27

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.

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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

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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

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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).

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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.

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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

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costs are mitigated by Nike‘s new relationship as shoe designer and logo licenser. WalMart 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

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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.

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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

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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.

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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 postentry 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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News. 19 Feb 2001, p4. 30. ―Media Roundup: Sports apparel getting everyday play‖. PR Week (US), 20 March 2006, p11. 31. Marseille, Justien and Ilan Roos. ―Trend Analysis: An Approach for Companies that Listen.‖ Design Management Review 16, no. 1 (Winter 2005): 68. 32. ―Microsoft, Adidas form global alliance‖. Europe Intelligence Wire, 6 Oct 2005. 33. McCall, William. ―Adidas-Reebok Merger Poses Challenge to Nike.‖ The America‘s Intelligence Wire, 26 Jan 2006. 34. McShane, Kate. ―NKE: A Look at the Air Max 360 – Gives Nike Opportunities for Growth.‖ Citigroup. Investext report. (Oregon: 31 Jan 2006) Niemi, Wayne. "Footwear Lifts Sporting Goods Firms." 3/13/2006. 35. ―NIKE, Inc.‖ Hoover‘s Online Report Builder. (5 April 2006). 36. Orecklin, Michele. ―Sneakers? Not. Fashion adds new bounce to the market for athletic footwear.‖ Time, March 11, 2002 v159 i10 pY4. 37. Ohmes, Robert. Apparel, Footwear & Textiles Industry Overview. Banc of America Securities, June 2005. 38. Pereira, Joseph. ―New Balance, Seeking Growth, Purchases Warrior Lacrosse.‖ Wall Street Journal, 2 Feb 2004, p. B3. 39. Powell, Matt. ―Running Ahead‖. SGB. New York: Feb 2006. Vol 39, lss 2; p16. 40. ―Press Information.‖ Brooks Running Website, < http://www.brooksrunning.com/corporate/press.phtml > (April 2006). 40. Ryan, Thomas J. ―Stride Rite Buying Saucony.‖ SGB 38, no. 7 (July 2005): p. 14. 41. Shanley, John, and Christopher Svezia. World Shoe Association Summary. Susquehanna Research Group, 11 August 2005. 42. ShoeStats – 2005. American Apparel & Footwear Association. http://www.apparelandfootwear.org. 43. Tkacik, Maureen. ―Puma Uses Sushi to Move Its Cleats.‖ Wall Street Journal, 9 May 2002, p. B8. 44. U.S. Census Bureau. Footwear Production – 2003. MA316A(03) – 1. Issued October 2004. http://www.census.gov/mcd/asm-as1.html

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45. United States Patent and Trademark Office. <http://patft1.uspto.gov/netahtml/PTO/search-bool.html> 46. White, Amy. ―New Balance Ad Push Spurns Endorsements.‖ Media, 12 Aug 2005, p. 13. 47. Wong, Alex. ― Nike:Just Don‘t Do It.‖ Newsweek, 20 Sept 2004, p. 40 48. Yurman, Joseph, Corey Benjamin, and Rachel Whittaker. The Very Definition of a Global Opportunity. Morgan Stanley, 6 July 2005. 49. ―Google Teams Up with Nike for ‗Joga‘ Football Fan Site.‖ Marketing Week, 23 Mar 2006, p.19.

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9.0 COMPANY WEBSITES CITED

Corporation
Adidas AND1 Asics Brooks Converse Crocs K-Swiss Mizuno New Balance Nike Niketown Puma Reebok Saucony Spira Stride Rite Vans

Home Page
http://www.sopadidas.com/ http://www.and1.com/section/products http://www.asicsamerica.com/ http://www.brooksrunning.com/ http://www.converse.com/index.asp?b http://www.crocs.com http://www.kswiss.com/ http://www.mizunousa.com/ http://www.newbalance.com/ http://nikebiz.com http://niketown.nike.com/niketown/ http://store.puma.com/ http://store.reebok.com/ http://www.saucony.com/ http://www.spirafootwear.com/ http://www.striderite.com/ http://shop.vans.com/

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