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NEW BALL GAME

SPORTING GOODS RETAILER CONSOLIDATION MEANS FEWER PLAYERS BUT MORE STORES

By Rodger Brown

Maybe the most telling evidence that an industry has issues is that nobody comes to the party. This seems to be true with sporting goods. Attendance at the Sporting Goods Manufacturers Association’s annual Super Show had been dropping to the point that the event was no longer all that super. In 2004 the event had drawn 20,000 attendees, who visited 1,000 exhibitors across roughly 800,000 square feet. In 2005 attendance held steady, but the number of exhibitors fell to 700, now squeezed into 250,000 square feet of exhibit space. Then last year the association did not bother to release any statistics at all. So last year was indeed its last year.

Not that the group has given up. In June the replacement event, called the SGMA Spring Market, made its debut in Las Vegas, with a modest 354 exhibitors across 115,000 square feet of space. But registered retail buyers fell some 2,000 short of the hoped-for 8,000, and those who did attend were, in the mildest terms, reserved in their enthusiasm. Charlie Greco, president of Universal Event Management, which produced the show, told Tradeshow Week that the attendees spent precious little time with the exhibitors. “They got in and got out,” Greco said.

The disconnect is explainable, however, says SGMA spokesman Mike May. One trend that has bruised the sporting goods market is the very one that has realigned virtually every other business sector: consolidation. Chains such as Pittsburgh-based Dick’s Sporting Goods (315 stores), and Englewood, Colo.-based, industry leader Sports Authority (400 stores), have gobbled up smaller entities in recent years and are increasingly developing private-label lines of merchandise. That puts the retailers in the driver’s seat in dealings with vendors.

“When it comes to a trade show, before, a company would be dealing with a Dick’s, a Galyan’s, an Oshman’s, a Gart’s and Sports Authority,” said May. “Now there’s just a Dick’s and Sports Authority. You’re dealing with far fewer.”

This process has been accelerating. In 1998 Gart Sports Co. bought Sportmart, making Gart second to Sports Authority. In 2001 Gart acquired Oshman’s. Two years later Sports Authority squashed the Gart challenge by buying Gart. In 2004 Dick’s bought the 51-store Galyan’s Trading Company and late last year spent $225 million to add Golf Galaxy and its 61 stores.

Further, manufacturers have been opening their own stores. “For a retailer who traditionally had a partner relationship with the manufacturer, now there’s a partner-slash-competitor relationship with the manufacturer,” May said. “If you’re on the wrong side of the retailer, then you’re in bad shape, because it’s not like you have many more outlets to go to, to sell your tennis racket or running shoe or baseball cap or whatever.”

As with consolidation, manufacturer-to-retailer trends are not unique to sporting goods, of course. But one trend having an inordinate impact on sporting goods is the decline in sports participation. When it comes to vigorous physical activity, increasing numbers of Americans prefer to watch. “Casual participation in sports has been flat for years,” said John Horan, publisher of the newsletter Sporting Goods Intelligence. “The participation of kids keeps declining in favor of video games. There’s interest at the higher level of youth participation, because parents see it as a potential source for college scholarships. They’re the ones who’ll go out and buy a $300 bat. But you don’t see kids out playing football in the backyard anymore.”

May says the growth of league games makes up for some of the decline. “The number of people who play backyard football or sandlot baseball is down, but the number of organized, sanctioned events is up. Generally speaking, if someone is playing basketball, it’s because they’re playing on a formal league.”

This increase in structuralization is a double-edged sword, May says. “It’s nice to have a semblance of organization,” he said, “but you’d have more sales if there were people who said, ‘I want to get some cleats and play soccer. I don’t play for a team, but I play in the neighborhood.’ Same with basketball shoes or buying a mitt.”

To try and foster such grassroots sales of sports equipment, the industry has been backing legislation promoting physical education in the schools. The SGMA has successfully lobbied Congress to fund these programs, and the industry backs the PE4Life program, a nonprofit that distributed about $80 million in grants to schools this year. “If you have 50 kids show up at a Foot Locker to buy a new pair of sneakers because they need them for gym class, that’s 50 pairs of sneakers being sold. If there’s no P.E., it’s more like, ‘Well, I don’t need a new pair; I’ll just wear this old pair.’”

Thank goodness for fashion.

“The biggest growth area in sporting goods by far is in sports apparel,” said Eric Coonrod, an investment banker at The Mercanti Group, a Los Angeles-based financial advisory firm. In June Coonrod completed a study of the sporting goods industry that highlighted the growing significance of sports apparel. Sports apparel sales totaled $43.7 billion last year, Coonrod calculates, accounting for nearly 23 percent of overall apparel sales. That also represents a year-on-year growth rate 40 percent faster than that of general apparel, he says.

“Compression fabrics are huge,” said Coonrod, referring to the tight-fitting synthetics that wick away moisture and have made such brands as Under Armour successful. “They’re good for working out, but they’re also very fashionable. They’re something you can wear to the gym, but also something you could wear out to dinner if you wanted. These crossover brands are behind a lot of the growth.”

The crossover brand concept blurs not just fashion lines but statistics as well, making it harder to get an accurate reading of the industry. The National Sporting Goods Association calculates sales of all sporting goods (footwear, apparel and equipment) last year at about $52 billion, with apparel making up only about $11 billion of that. Though the association operates within a narrowly defined concept of sports apparel, Coonrod says his analysis includes “sports-inspired” lines. In athletic footwear, trends show that consumers are moving toward lower-cost, nonperformance, sports-inspired designs and away from the higher-priced, performance-oriented lines.

Coonrod’s study does confirm the consolidation in the sporting goods market, but he insists that the sector remains highly fragmented nonetheless. “Take Nike — it’s the largest sporting manufacturer in the entire world, and it only has 3.8 percent of the sports apparel industry,” he said.

So all agree that the trend of consolidating retailers will remain one of the industry’s greatest challenges. But there will continue to be plenty more stores opening, sources say. “It’s no secret that we’re going to see a lot of growth in the big-box stores,” Horan said. “The mall sector is very mature. Stores like Foot Locker, Finish Line — those are all very mature retail concepts. They’re pretty well built out, and, if anything, you’re seeing them contract a little.”

Horan says he’s going to be watching as Dick’s, Sports Authority and other chains move beyond the primary markets over the next few years. As their visibility grows, their marketing momentum will allow them to pioneer new territory, he says.

“The next step is for them to start building out into those secondary and tertiary markets,” said Horan. “Both of them have been [advertising] circular-driven retailers and have clustered in major markets so they can get leverage on their advertising spend.”

This need to cluster changes as these companies clear the landscape of competitors. “As they become more nationally recognized brands and do more television advertising and become less circular-driven, that gives them the ability to go after totally new markets,” Horan said. “They’ll just keep getting bigger.”