The Sports & Fitness Industry
The Tariff Issue
“First coming into 2019 for us is tariffs. The China tariff issue is just looming large. We have been working closely on it. There's a lot of uncertainty. Most of us want to have an answer one way or another. There's going to be some answers at the beginning of the year. My sense then is it will evolve and there'll be some back and forth and it'll be resolved at some point. But it makes it difficult for our folks to plan.
“Two things with tariffs quickly is whether they're going to be 10 percent or 25 percent and whether they will be extended into footwear, apparel, and basically all equipment, which is what's on the table as a possibility. That's number one, for what we do, but also as it affects the industry and as it relates to what other people are doing. There's a lot of effort to move production out of China … a lot of our folks are going to be spending time on that decision and supply chain and sourcing.
“There's a lot of effort to move production out of China or to shift products [made in China] that are going into the U.S. into different areas of the world instead.”
Challenges and Opportunities for Brands and Retailers
“Our sense is that the DTC (direct-to-consumer) focus is just going to continue to be such an urgency for everyone. It's already well entrenched, but it's clearly where there's investment being made on technology and on consumer connection.
“We do see some stabilization in some markets in 2019. For example, the baseball bat market, which is a very profitable and healthy business, has seen a lot of ups and downs. 2017 was a bad year because they had new bat standards. 2018 was a huge year. So now there should be some stabilization in that.
“We see the safety category continuing to sell product and not just in the traditional sports like football, but almost any sport, both men's and women's sports. Internationally, the issues around Anta buying Amer Sports and the idea of some serious investment in the United States by international retailers like Sports Direct and maybe Decathlon — there’s some energy around that.”
“Going into 2019 we're cautiously optimistic. We think that there's a lot of positives. The issues around tariffs and some other things add tremendous tension because of the uncertainty. But the overall market dynamics are basically healthy, not massively growing but basically healthy and providing opportunities for industry. Small but steady growth.
The issues around tariffs and some other things add tremendous tension because of the uncertainty. But the overall market dynamics are basically healthy.
“The PHIT ACT … that’s huge. We'll make a significant difference to promoting physical activity. It hasn't passed, but we're going to be back at it in 2019 and all in again. Most of the major professional sports leagues are really investing in growing participation in their own sport. But we still have a serious problem in this country with inactivity. We're seeing more and more people play less. We're concerned about that. Again, we've been saying for years the foundation is going to have to be some kind of physical education in schools where we're going to build up an active lifestyle from the beginning.
“The biggest issue that we're concerned about on this is the disparity between those with money who are active and those without money who are inactive. That is growing. So that's a big problem. We should be focusing on providing sports and fitness opportunities for all and particularly creating opportunities for folks who seem to be leaning towards more inactivity. Families of lower incomes really have an alarming inactivity rate. So that's a problem we all need to address.”
The Outdoor Industry
“I’m excited about the opportunities ahead for us in 2019 with the new Congress. We have 100 new members in the House of Representatives and around 11 new Senators. It’s an opportunity to really engage these new members and educate them on the $887 billion economic impact that the outdoor industry has on the U.S. economy and the 7.6 million jobs that are directly created by the industry. This will be a huge priority for the OIA.
“Having a little more balance of power with the House turning to Democrat control and the Senate still controlled by the Republicans will also provide an opportunity to get more things done.
“We have a changing of the guard in the Interior Dept. with Secretary Zinke moving on to new opportunities. The OIA is very interested to hear who the new nominee will be because we really want to get in there and talk to the new secretary about setting forth an outdoor recreation agenda that will be proactive and that will drive economic growth across the country. There is a real opportunity to look at the outdoor recreation industry, particularly in rural areas, and really take advantage of what those opportunities could be for small businessmen — outfitters, guides and retail. We also hope that the new Secretary will take a more balanced approach to public lands management. We don’t feel we had that with Sec. Zinke, but we’re hopeful that with the new secretary, there will be some more balance.”
There is a real opportunity to look at the outdoor recreation industry, particularly in rural areas, and really take advantage of what those opportunities could be for small businessmen.
“We are focused on the tariff issues. The Section 301 tariffs on China are impacting our industry. A lot of small businesses across the country are telling us these tariffs are hurting them. They’re concerned about new costs on the consumer. But it’s not just the small business owners. You’ve seen what’s happening with the stock market. Everyone is very concerned about the long-term health of our economy. Putting 25 percent tariffs on outdoor gear coming out of China is just unfeasible and will have detrimental impact on the broader U.S. economy. American families need to have some certainty that they won’t be taxed on the goods that they use to get outside and be more healthy.”
Retail and Consumer Confidence
“2019 is going to be a really interesting year because we’ve come off a pretty strong year retail-wise, even though brick-and-mortar is still trying to right-size versus ecommerce and online.
“But the American economy and the U.S. consumer has confidence. There is more disposable income, discretionary income in the pockets of our consumers. So, our hope is that we will continue to drive toward a record sales year. 2018 will be a record year with sales pushing $90 billion, which is amazing. 2019 will be the question. Will that continue? Will we continue to see growth? Or will some of the softening of the economy and the expectation that a recession is not too far away? Will that start to take hold as we see some of these cyclical trends take effect within our economy? Will that have an impact on footwear? That’s one of the big questions for 2019.”
“We spent most of 2017 worried about a tax reform bill negatively impacting the importing community, including just about every footwear company. We spent 2018, most of the time, worried about the trade war with China and whether or not the [Trump] administration would apply additional duties on Chinese-made footwear sold in the U.S. 2019 will be the year that we will continue to worry about the engagement with China, but I think the story of the year will be that the relationship is forever changed.”
“Beyond that, what is sustainability? Right now, brands like Allbirds and Adidas are defining what sustainability means to them and their consumers. But what does that mean on the back end? And how does the industry continue to build momentum in exploring sustainable materials, sustainable processes for producing footwear, shortening supply chains, using digital development? All these things are swirling around our minds here and how we can best serve the industry.”
2018 will be a record year with sales pushing $90 billion, which is amazing. 2019 will be the question.
Sourcing and China
“As an industry, we are about 69 percent of footwear volume out of China entering the U.S. market. It was 93 percent not too long ago. So we’ve been moving away, A lot of that has been driven by the athletic companies. But if you’re making cheap, mass retail footwear for working families, your Chinese import penetration in those categories is quite high and those companies are trying to search for ways to diversify. And the challenge for that is, What capacity is left in places like Vietnam? Will these duties come to fruition? For all of [China’s] challenges, it’s efficient. The footwear industry has been there for many years. They make the products we like, and the quality is great.
“And all things considered and all things being equal, the duty rate out of China is the same duty rate out of Vietnam and the same duty rate out of Indonesia. So as long as there’s not additional duties attached to Chinese-made footwear, there is not going to be a lot of incentive for these mass retail companies to leave China in droves.
And a lot of our brands are global. Just because they’re sticking around in China, it doesn’t mean they are selling that produced footwear in the U.S. marketplace. It might be for the European Union or Chinese consumers that are so important to the growth models for many of our companies.”
Specialty Retail and Curation
“As I see it, one of the biggest challenges for the running specialty channel is avoiding the commoditization of product that is out there in the market and available to customers. In other words, product that is carried in the store can in many cases be found virtually everywhere. And when price gets into the conversation, it becomes very difficult for stores to maintain a competitive level. So, for our channel and its success what we’re seeing is a very strong trend towards curating stores with product assortments that really speak to customers, that offer something new and differentiated that they don’t and can’t find online or can’t see online, or maybe in some cases isn’t available online. And we use the word curation on purpose. In essence, it’s about creating an experience for the visitor. And in that context, it’s very important for stores to ensure that they’re looking towards satisfying the needs of customers for the products that they expect to see in the store. But also, surprising and delighting that customer with something new, and again something differentiated and fresh, is really important.”
Dealing with the Direct-to- Consumer Issue
“We all know that direct-to-consumer sales from a brand strategy standpoint is here to stay. But as that strategy evolves, it’s important for brands to realize that they must do everything they can do to create a fair and level playing field for all channels of distribution, in particular specialty retail. Brands that offer very clean distribution that are laser-focused on protecting the integrity of their product online and the way they distribute it themselves and their connections to the customer and how they drive sales to the retailer — those are the brands that are going to win at specialty retail. When brands come up with strategies that are specific, and even exclusive strategies for specialty retail, those are the brands that are getting the attention of specialty retail. And those are the brands that are starting to get some traction when they’re trying to build their assortments at specialty.”
“I had assumed that before I started doing my research that tariffs and freight costs we’re going to be a big part of the conversation and a challenge. And yet the feedback that I received is that that’s kind of settled down. On the footwear side, we’re not seeing it, at least not yet. On the apparel side, there’s some noise about some higher tariff and freight costs. But we’re not really seeing the tariffs hit our market, at least not yet. And on the freight side, charges seem to have kind of settled down. Fuel charges, in terms of shipping and all that, have kind of moderated somewhat. We’re not seeing big increases there, but that’s not to say that that can’t happen in the near future. You never know, but that doesn’t seem to be a significant part of the conversation, at least not right now.”
“From a pure operational standpoint, the huge challenge for stores is profitability. The days of double-digit volume increases are gone. That was a wonderful time from 2000 to 2012. But it’s gone now and now the new normal is single- to mid-digit increases. And that’s fine, and that’s good healthy growth.
What we’re seeing is a very strong trend towards curating stores with product assortments that really speak to customers.
“But with small volume increases and relatively modest growth, how do you increase profitability? That means you have to have a laser focus on your margins. You have to have good inventory turns, having and securing that you’re very professional in terms of how you’re doing your buys and again how you’re managing that inventory. Having the right amount of inventory at the right time. Getting more inventory and what sells and then getting rid of inventory that isn’t.
“If you can’t count on big volume increases, then you have to be focused on your profitability. And while it’s a challenge, the better stores are managing that very well and finding that an increase in profitability through margin growth is the key to success.
“Just to recap the four things — the right product curation. You have to select and work with the brands that are willing to provide support for specialty retail and help create and prop up specialty retail by creating special programs for them. You have to connect with your customer and you have to be laser focused on profitability. It’s a lot of things to consider. But if you can do all those really well, that’s the key to success for specialty retail.”