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Faster, richer, healthier: the growth of sporting goods

London, 29 Feb 2016

Growing wealth across the world in recent years has made the consumer richer, but also more aspirational and health-conscious. This has helped revenue growth among sporting-goods manufacturers, an industry that is benefiting from changing social, fashion and production trends.

Macquarie Research estimates that the €285 billion global sporting-goods industry boosted sales by an average of 4.3 per cent a year between 2005 and 2014, or 1.5 times the pace of the broader consumer sector.

Annual sales are projected to grow between four per cent and 5.6 per cent until 2020.

Higher revenue is being matched by increasing profitability, with product innovations and improving supply chain management seen boosting profit margins.

While more people practice sports and outdoor activities than in the past - yoga, Crossfit, and marathon training have surged in popularity- sports brands have reinvented themselves as purveyors of a lifestyle choice.

"This is an industry that has experienced nice growth and should continue to do so on some very positive dynamics," says Andreas Inderst, Macquarie Securities consumer goods analyst.

He cites an "increased focus on fitness, the rising middle class in emerging markets, footgear turning into fashion, and an expanding direct-to-consumer business" for the positive growth outlook.

Gone are the days when an athletic garment or shoe was considered a niche product.

While more people practice sports and outdoor activities than in the past - yoga, Crossfit, and marathon training have surged in popularity- sports brands have reinvented themselves as purveyors of a lifestyle choice.

New technologies for better performance and customised products are among examples of trends that help build a personal experience when buying sports goods. This lifestyle positioning has been cemented recently by engaging directly with consumers through digital, social media and a brand’s own retail activities.

"People not only want to do more sports, but they also want to look sporty," says Inderst. "Not only on the pitch or the gym but also outside."

Nike and Adidas

Poster children for this sport-inspired lifestyle are Nike and Adidas, whose products are admired and imitated not just for their design and quality but also as fashion statements.

Nike, based in Oregon, US, and Adidas based in Bavaria, Germany, have global market shares of 16 per cent and 10 per cent respectively, across athletic footwear, apparel and equipment.

Both brands are at the cutting edge of technical innovation, but also rule the fashion sneakers area with products such as the Air Max 1 series developed by Nike, and the Stan Smith shoe developed by Adidas.

"More than 60 per cent of all sports sneakers are worn purely for leisure activities, for the street," explains Inderst.

"And both Nike and Adidas have the credentials and the authority in this space."

That’s a good position to have, as the top five players in athletic footwear have a global market share of 76 per cent, building a big barrier for new entrants.

By comparison, the top five athletic apparel companies make up 35 per cent of market share, while in sports equipment and accessories it is 17 per cent, according to Sporting Goods Intelligence.

Drivers

Macquarie’s Research has identified several trends driving demand in the sporting-goods industry:

  • an increasing focus on health and fitness by individuals and authorities
  • innovative new products with sophisticated designs and digital technology are stimulating interest in and demand for sports goods and gadgets
  • direct marketing with sales more frequently directed at each individual consumer
  • production automation which Macquarie estimates this could cut costs by 35 per cent
  • speed to market and local manufacturing, which could enable firms to quickly reach markets, react rapidly to demand trends, and avoid overstocking

According to Macquarie, the average profit margin before interest and taxes among 11 global sporting goods companies was 9.5 per cent in 2014. That margin is expected to reach 12 per cent by 2017.

China slowdown

One concern for investors over the past year has been the revenue stream for companies that sell to China, amid concerns around the future of China's economic growth.

There hasn’t been any sign of weakening demand in the Chinese market, perhaps supporting economists’ comments that it is undergoing a "soft" rather than a "hard" landing.

In fact, Nike in December reported a 38 per cent increase in earnings before interest and taxes from China in the six months ending 30 November 2015.

While other emerging markets, such as Brazil and Russia, may be struggling, investors have several sports events to look forward to in 2016 as demand triggers: most significantly, the Rio Olympic Games and the European football championship in France.

"The key risks are firstly macro-related," Inderst says. "And you have high foreign-exchange volatility."

Nevertheless, Macquarie’s overall view of the industry has a much more positive tone.

"It’s a very healthy industry with very exciting product innovation."

For more information on the report "Just doing it...faster" (20 October 2015) contact Macquarie Research.

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