By: Tom Ritter Issue: Global Trade Section: Collaborator Profile The sporting goods industry consists of a wide array of soft goods and hard goods manufacturers, brand sourcing companies and service companies. The products range from electronic score boards used at sporting competitions to the track suits worn by Olympic athletes. The outdoor sports market is comprised of camping equipment, hunting goods, skiing equipment and lifestyle sports activities. Many sporting goods manufacturers and suppliers are classified as small to medium sized businesses.
These companies and the sporting goods market as a whole have been severely affected by the economic downturn and are finding themselves altering their business models as a result. Bankruptcies have been seen in the retail sector as well as at the manufacturing level. The industry remains over supplied and is extremely competitive. Survival in today’s sporting goods market requires a well founded yet flexible business strategy.
Global trade is moving through its most challenging time since the 1930s and the sporting goods industry is not escaping the challenges. Global GDP is declining and may or may not have reached bottom at the time of this writing. Governments are spending unprecedented amounts of money, taking their countries into newly charted debt territory. The banking industry is under great stress. While government loans or guarantees may have stabilized the larger banks, many sporting goods suppliers and dealers are still experiencing a reduction in credit limits and more stringent loan requirements. Meanwhile, most companies continue to experience the same level of competition they encountered before the economic downturn began last fall.
While there are many varying economic forecasts, it is apparent that global GDP will likely decline in 2009 by between 2.0% to 2.75%, assuming the world economy reaches its bottom in the third quarter. Germany has reported a first quarter 2009 decline of 14.4% while Japan reported a 15.2% decline in the first quarter. At the same time, the U.S. reported a decline of 6.3% for the same period. The European Union has reported an overall decline of 4.4% for the first quarter in the Eurozone countries. Given the first quarter 2009 number for Germany, the overall number for the Eurozone may be revised downward.
The vast majority of sporting goods companies supply products for leisure time activities. As unemployment rises around the world and those who remain employed become reluctant to spend on leisure activities, it is expected that the global market for sporting goods sales will decrease by between 3% to 4% in 2009. Some regions and countries will see much steeper declines.
Many sporting goods importers hedge the currency risk by adding as much as 10% to their landed costs, retarding further a product’s price competitiveness. Uncertainty in exchange rates is also exacerbating turbulence in the sporting goods market and affecting the market dynamics. We have seen the dollar move from a low against the Euro of $1.54 in June 2008 to a recent high of $1.24 in February 2009 and presently is approaching $1.39. Distributors and retailers are having to hedge their pricing and those who guess incorrectly will either suffer from uncompetitive prices or, conversely, financial strains on their profit margins.
Alternatively, some U.S. companies quote their prices in foreign currencies, taking on the exchange risk, thereby hedging the risk over greater sales. The most common currencies used other than the dollar are the Euro and the Yen. These exporters are presently gaining a margin advantage against their European or Japanese competitors when the currencies are exchanged back into dollars. A significant amount of sporting goods are made in China and sold by international companies under their respective brands. These companies are able to hedge their market pricing since the Chinese government has loosely pegged its currency to the dollar. Many companies in the sporting goods market find their main competitors are either other U.S. companies or brands which source products in China. In these cases, the decline in the dollar is not offering a significant impact on their sales.
The economic effect on sales is wide and varied when specific countries are considered. Certain countries are still showing economic growth such as China and Brazil. Likewise, certain segments of the sporting goods industry are seeing an increase in sales such as the sport shooting market in the U.S. The dramatic increase in handgun sales in the U.S. is also enhancing the sales of shooting sports accessories.
Consumers are shopping for the lowest prices possible and expect many goods to be marked down. The internet is being used more frequently by consumers to establish the best “street price”. Likewise, more and more consumers are visiting discount or “value” stores. Independent specialty retailers are suffering and find it difficult to institute the cost cutting techniques to keep pace with their larger competitors.
Price is not the only consideration, however. A strong brand image is helping many companies maintain their price level and keeping their products on the store shelves as retailers look to consolidate their suppliers and offerings.
Inventory levels grew quickly as the consumer suddenly became reluctant to purchase and focused their attention on increasing their savings levels. Many economists now believe that the inventories are beginning to return to levels consummate with the shopping patterns of consumers. However, distributor and retail buyers have installed strict buying programs where they will only buy what is absolutely needed when it is needed.
Deep discounting is occurring where inventories are high at the retail, trade and supplier levels. The speed of the economic decline last fall caught many in the trade off guard. The international banking crisis is also having an effect on the market as a whole. Liquidity is essential to a competitive market. Given the nature of the sporting goods industry, this is especially true. Credit at the manufacturing, distribution, retail and consumer levels are the lifeblood of the industry. In October, 86% of senior loan officers surveyed by the Federal Reserve saw their lines of credit requirements and loan balance levels tighten significantly. As of April this year, 40% on average are still seeing tight credit markets. As a result, trade terms have taken on an even higher importance but slow payment and default risks are increased.
The following tables show the total U.S. exports and imports of sporting goods products through 2008. The figures for 2008 are erratic and do not fully show the affects of the dramatic slow down that occurred in the 4th quarter. It is expected that most of the countries listed will show weaker results for the first half of 2009.
The goal of most sporting goods companies has historically been to increase sales, profits and market share while elevating their brand recognition and image. In today’s troubling times and declining markets, maintaining sales and market share while holding the line on margins have become the watchwords.
Some have increased their marketing efforts to support their brand and pull sales through.
Deflation is still working its way through the market. Downward prices are putting great pressure on all businesses. Cost reduction and productivity gains are essential in order to survive in today’s global environment. Those companies that have in depth real time market intelligence and understand the market dynamics, their customers and marketplace will survive the current economic environment and become well positioned for the upturn when it begins.
A keen emphasis on cutting costs in manufacturing, sourcing and supply chain management have helped many companies improve their delivery times, offer “hot” pricing programs and improve their overall supplier performance. In summary, the head winds facing sporting goods companies are significant. Innovations in product design, sourcing, supply chain management and channel segmentation will be the ongoing focus of successful companies. Retailers will continue demanding even faster deliveries, revamped product mix and fewer suppliers. Consumers will continue to hunt for reputable brands offering the best prices and expect the product to be on the shelf when they want it.
Tom Ritter is President of Inter-Continental Business Associates Inc., a 30-year old international sales and marketing company based in Greenwood Village Colorado with offices in Lyon, France and Budapest, Hungary. They sell their products in over 75 countries and supply products to the sporting goods, public safety and military markets.