2017 is over and the long awaited results are in! With all the top sporting goods brands having declared their 2017 closing numbers we now have a comparison as to how the sporting goods industry has done broadly, against the overall world at large. So here is the break down.
IMF has reported a projected 3.7% growth in output globally in 2017 which was a good half a percentage point over 2016 and by the looks of it, this is expected to grow to a 3.9% into 2018 and 2019. Against this, the sporting goods industry has grown over 8.1% during the same period if one accounts for the biggest brands. That’s more than double the world growth, and with the projections above, it looks like it is going to continue to be a bumper year for the sporting goods business, with enough money in the world still to be spent on sports!
The biggest brands have all been pushing all year, and 2018 looks to be no different, with each one putting their best foot forward to ensure they capture the biggest part of the estimated half a trillion dollar market globally.
So did the top brands perform in 2017? Let’s take a look.
Summary for the Lazy or Time Constrained:
In terms of the top brands, this year squarely belonged to Adidas – a new product line that fired on all cylinders, a new management team and a lot of behind the scenes building blocks to drive the business forward. With a 16.3% growth YoY for the brand, the Adidas group grew at the fastest pace among competition at 14.7% with 20% gains in both China and North America. The relatively newer franchises rang true with customers with NMDs and the Ultraboost iterations despite the lack luster XR1s and expected slowdown on Superstars and Stan Smiths.
Puma came in on a close second, eclipsing the earlier number 3 brand to consolidate their position as a tour de force. Star power and the womens footwear business drove most of what Puma achieved with a 14% YoY growth in 2017. By all means a brilliant year which ended with the addition of Selena into their women powered star cast. With footwear driving the growth, it was the much loved and worn Heart, Fierce and Platform styles that led from the front, and from a country-wise point of view every region chipped in with double digit growth for the year, operating profit (EBIT) doubling from last year to 244 Mil Euro.
Nike, still led the roster from an absolute sales point of view, but it was a year that one would like to call a reset of sorts, with numerous ups and downs, the year ended with a stoic 4.1% growth for the Nike brand and 3.9% YoY growth from a group point of view. And while we could slice and dice the performance all we want, its largest losses in opportunity came from North America where it saw a reversal of fortunes for the year with a negative 1%. Overall key wins would have been their double digit growth in Greater China, and their extended online presence and partnerships to build and extend brand reach.
Under Armour was the other brand that had a lack luster year, a brand that will either be forged by fire or burn in its ashes. This year, while not a reset, saw the brand take all the right steps, with building and growing in the international markets and fresh attempts are making footwear. The results were 1-1, with exciting growth in the markets and a terrible year on footwear. North America was the place that really hurt Under Armour where it went backwards and that with the breakeven apparel performance ensured its position solidly at the bottom of the table. With a 3.1% growth YoY, this was behind the global average and something that would raise red flags all around. The task is clear here – every single department in Under Armour will need to dig in and perform to come out of this hole – more so the product and design team than anyone else.
The Full Story for the Interested and Invested:
The Full Year 2017 Story:
Despite everything said about the brand, Nike had a robust year. It was a year that saw some great styles shine with the Vapormax and Air Max 97s. It was a year where the NBA and basketball franchises grew and gained some traction and momentum, be it with the newer iterations of the Kyries or the launch of the PGs, or be it the connected NBA jerseys that made for a great story. Nike pushed its boundaries for the first time in a while with the Virgin Abloh collection to emerge into the fashion space while still staying true to its roots and franchises. The Sub-2 marketing campaign made for some great press and print and Nike ensured a double digit growth for greater China that would have made for a great relief given its sub-standard North American performance.
Nike continued to build on its direct to consumer segment and online sales, be it its own app or be it with partners of the likes of Zalando. Add to that Nike has extended its pilot program with Amazon based on positive results and have even had conversations with Alibaba for collaboration opportunities. This alone could possibly help Nike push its sales and margins and give it the head winds it needs to do 2018 proud and go beyond.
Overall Nike did nothing wrong. Except it lost ground to competition not because they misstepped, but because they refused to push the boundaries on product outside of their performance comfort zone. That said, with nothing wrong to fix, Nike started their own restructuring process as well to improve operational performance in the next few years. With the new Air Max franchise the 270, and the renewed vigor to build and expand the Jordan brand, be it in terms of reach by signing up collages or by expanding the customer base to include women specific styles and iterations, Nike has a roadmap on their own terms to face 2018. The key question will be, will Nike push its own boundaries and comfort zone to take a few chances and make a few splashes, or will it continue on its do-nothing-wrong path and things will settle down mind set. Only time will tell, and 2018.
With the power to change lives through sport and the inherent mission to be the best sports brand in the world, by geeky statistics, and something I shared over a year ago now stands revised. About 5 quarters ago I shared that Adidas as a brand was set to eclipse the Nike brand in 5 years time. Having had a stellar year, Adidas is, hold your breath, statistically only 3 years away from eclipsing Nike and achieving its mission! The year 2021 could well possibly see the resurgence of the German giant as number 1 as it straddles the best of both worlds in sport and fashion.
Adidas ticked off all the right boxes in 2017 starting off with ‘Original is never finished’, to cap off the superstars and stan smiths from the previous year and building on the newer NMD franchises and EQT. It built on its Parley campaign across months, to prove its sustainability commitment, and built its capabilities to reinvent the concept of sneakers and how they are made with its collaboration with Carbon and its Futurecraft 4D manufacturing aiming for 100,000 pairs by the end of 2018. And in the manufacturing arena, with its speed factories it continues to try and change the way sneakers will be manufactured as well.
Adidas launched the Nemeziz in football to change its strategy in that sport segment and began making realistic attempts with the Hardens to try and claw back in the basketball business (something that still looks like a distant dream).
And finally with its ‘Here to Create’ campaign taking root, all the above manufacturing techniques and dabbling with the concept of sustainability makes perfect sense, calling on everyone to think out of the box and deliver on innovation, sustainability and continue to defy convention.
Key challenges going into 2018 will be the need to realize new products and convert them into the massive successes from 2017. With NMDs being flooded in the markets (perhaps one to many in some markets) and losing their sheen, ultraboost being aped by every other brand, and the Pharrell sneakers not doing as well as one would have expected despite all that hype, the new is what will be tested this year.
Puma had a brilliant year and was the most balanced of the brands in terms of KPIs. They crossed the 4 Bil Euro mark for the time, taking it over $5 Bil USD. They edged out Under Armour to consolidate their number 3 position and grew across markets with double digit growth.
Their 5 point strategy from 2014 has started paying rich dividends and helped build a segment in the market that they can drive from the front. Be with the customer facing increased brand heat thanks to celebrities and collaborations, or leading the women’s footwear offer and overall competitive range. That coupled with the background strategy points of an improved quality of distribution and improving organizational speed, the brand is moving the right direction.
Puma continued to milk its team sport and motorsport businesses but led largely with their ‘Do you’ campaign with powerful ambassadors like Cara Delevingne and the New York Ballet. Rihanna and her Fenty collection continued to push convention and the onboarding of Selena Gomez towards the end of the year promises brand heat well into 2018.
The biggest challenges for Puma in 2018 would to keep their marketing juggernaut running hot as the they seem to have the product line up, at least on the women’s side of things covered with styles like the Muse, Defy and Phenom. Even on the men’s lifestyle side of things, their new RS-0 franchise will bring some much needed newness and test waters.Building on the men’s footwear is what will allow Puma to scale in the future, and this is one strategy they still need to keep thinking about and get just right.
While it might look like 2017 was a very forgettable year for Under Armour, it is undoubtedly a year that would have taught the brand a few lessons on every level. Be it on product level, or a financial level, or an expansion and growth level. It was a year of many lessons. Under Armour began its restructuring mid 2017 to help improve operational profitability, it expanded across the globe, as well it should have, however this also caused a 26% increase in inventory without as much gain overall, with a lacklustre US performance. Even on a product gross margin level, currency changes caused the brand to bleed money without having the aspirational product to allow for increased margins or mitigate product manufacturing costs.
For 2018, from a restructuring point of view, while the company might save $75 Million, the real test for the brand will be the product. Product is king, and no amount of financial corrections and operational corrections will account for average to bad product. While, it is fairly clear that international growth is continue for Under Armour due to the fact that it is small to non-existent in these markets, it will be the North American market that will decide the fortunes of this brand and the business going forward. With the footwear business still scratching around to find its own design sense and a something that will resound with the customer, Under Armour has its tasks quite clearly cut out. The finance guys have crunched the numbers to sustain another year, the operations guys will have to ensure the cost savings and continue building a plan to expand into newer markets, the marketing guys will have to etch something out of nothing to hype out the brand and the product and design team will feel the most heat to ensure they land some really good product that can finally become sustainable true franchises for the Under Armour brand.
As mentioned earlier with the global output finishing at an expected 3.7%, we saw an 8.1% overall in the sporting goods industry. In terms of markets, with North America, being the single biggest market for this industry by far, and its global output fairly flat, any growth over 2% for a brand would be considered positive and this is exactly where Adidas and Puma have scored with double digits, eating away at competition with UA registering a -3.3% and Nike a -1%. This is the one market that will and can change fortunes, and the brands would need to hold on to.
The next biggest market is the European market, where Western Europe is expected to grow in the mid 2% region and developing and emerging Europe to clock over 5% in 2018. Here is where we saw a continuation of the story from North America, except Nike has held its own in the market at 3.9%, but losing all the extra growth potential to Adidas and Puma which clocked double digit growth here as well.
Greater China, in 2018 is the one region to look out for and is currently part of a 2 horse race for the number 1 position. With Adidas clocking 20% and Nike 10% in 2017, the difference between the two has narrowed to only $200 Million with the potential for Adidas to eclipse Nike in 2018. This is one region to watch out for as this would represent potentially the largest market for most brands outside the United States over the next couple of years. With Nike and Adidas both the size of Under Armour and Puma in China alone, the potential is endless. Puma and Under Armour, both registered double digit growth here as well, 30%+ and 12% respectively. But with 6.5%+ growth planned for China in 2018, one would expect a prerequisite of 10% again and then some if there is desire to capture a larger share of this market. The key here for all brands will be ensuring all the three key facets- product relevance, consumer connect and right expansion (read profitable). This will be essential to ensure a sustainable future in this vast land of opportunity.
In all other parts of the world, be it the Middle East region or other Emerging Markets, the base here as well will be around the 6-7% mark, something all 4 brands achieved in 2017 and will be required to do again in 2018. The Middle East will make for an interesting study in this year with VAT kicking in in the UAE and Saudi Arabia and expected to be rolled out in the rest of the GCC region. This will be something to keep an eye out for.
Outside of conventional markets, the biggest market will be Online Retail for all brands and businesses in 2018 and the relationships they can forge with the top online retailer in the world today that are relevant to the sporting goods industry. Brands like Nike will have a clear edge here with their pilot with Amazon still going strong, their own improvements on their app and growing partnerships with the likes of Zalando in Europe and possible Alibaba in the east. With Adidas’s own growth of 57% YoY in the online segment, they too would be focused on these very same players, and Puma and Under Armour will have to continue digging in to build on their online business to get ahead of the curve.
A key to most of what conspired in 2017 was the dominance of the athleisure segment, where the brands that brought the product to the market made hay and the ones that did not, suffered. And this was true for both key segments of footwear and apparel. The likes of fashion forward Puma and Adidas, capitalized on their mixed lifestyle segment and franchises to power ahead for the year. Nike and Under Armour, more so known for their lack of fashion and lifestyle and inclination towards performance is what basically manifested in real terms in sales, with Under Armour losing out even on its most important segment, namely, apparel. One perhaps only wonders if Adidas could have done more on its apparel side, as the brand value and recall for the right product existed, and is one place that the brand perhaps missed a few tricks with slower sales, while Puma had a more comprehensive all-around performance.
All growth in 2017 for brands was driven by footwear, with Adidas clocking 18.5%, and Puma 17.6%. In terms of apparel, Puma was the only outlier with 7.5% and Nike and Adidas clocking 5% each. And apparel was exactly one place that saw Under Armour suffer. While it failed to make any progress on its footwear business, even apparel faltered with a subpar 1.8%, lower than even the world’s average growth, clearly missing the athleisure wave. A spot of bother one sees when we look at the final numbers, is how much Nike has backpedaled on its accessory business with a negative 7.8% and one wonders if there is more here than meets the eye.
Inventory and Gross margins
Gross margins on brands for Q4 strengthened with Adidas registering a +2.2% for the quarter allowing for a 0.8% increase for FY 2017, clocking the highest margins across brands at an overall level of 49.8%. Close on the heels were Puma, which infact had the best improvement on margins of 1.1% over last year, and came in at a very healthy 47.3%, with a 3% increase on their footwear over LY.
Under Armour and Nike both lost over last year with -1.5% and -2.1% respectively. Nike had the other distinction of being the worst of the four with overall margins at a low of 43.8%, something that perhaps was an impact of having too much product in the market and not correcting for the loss of sales in the US. Under Armour finished at 45% for 2017 and was still ahead of Nike despite having a really bad year overall.
In terms of inventory end of year, we had Adidas come in under last year overall by 2% despite registering all of that year on year sales growth, or perhaps even because of it (though it was 4% up on currency neutral terms). Nike was healthy and in line with its sales with about 6% over last year, Puma followed suit with 8% over LY, with only Under Armour running massive inventories of 26% over LY despite only registering a nominal 3% over last year. One foresees a fair bit of discounting from this brand if it has to get its inventory in line and improve its cash flow.
1. Going into 2018, the year will be the most demanding of all brands yet. With the IMF expected growth to clock 3.9%, the expectation from each of the brands would be to get to double digits overall for the end of 2018. While this may prove difficult for some of the brands, the goal post looks set in the spirit of dominance.
2. China emerges as an extremely important region for brands to concentrate on, as this could potentially be what balances the North American market performance.
3. The online business will continue to be built on with own apps and direct to consumer formats as well as the established online retailer of the likes of Amazon, Alibaba and Zalando.
4. New and fresh product will be key, as we may be in the peak phase of the athleisure wave, with brands needing to keep a keen eye on how it continues to change and manifest itself where customers will look for a point of difference as they always have, also supported by innovation in terms of design, style or functionality.
5. Keeping operational costs down and concentrating on profitability will be a key mantra for the brands alongside building on innovative and sustainable manufacturing for the future. This will be the early years of a phase in manufacturing that will build the future of the same, be it at a customization level, production efficiency level or innovation and cost efficiency level.
Disclaimer and Sources:
- All numerical values on the brands have been derived from their website and the analysis has been based on this.
- References: http://investors.nike.com/investors/news-events-and-reports/, http://investor.underarmour.com/, http://www.adidas-group.com/en/investors/financial-reports/ , http://about.puma.com/en/investor-relations/financial-reports/
- All numbers have been calculated to the best of the author’s ability and the conversion against the Euro has been taken as a constant on 1:1.22 to the dollar.
- All the content in this article are based purely on the author’s personal research and opinion and is not representative of his past, current or future employers.