TABLE OF CONTENTS

TABLE OF
CONTENTS ..........................................................................................................................
.... 2

1.0 INTRODUCTION TO ATHLETIC FOOTWEAR

2.0 TABLE OF
CONTENTS ....................................................................................................................
.......... 2
3.0
4.0 1.0 INTRODUCTION TO ATHLETIC FOOTWEAR
INDUSTRY ........................................................ 4
5.0
6.0 2.0 INTERNAL
RIVALRY .......................................................................................................................
... 6
7.0
8.0 2.1
9.0
10.0 M
11.0 ARKET
12.0 D
13.0 ESCRIPTION
14.0 ......................................................................................................................... 6
15.0
16.0 2.2
17.0
18.0 P
19.0 RODUCT
20.0 P
21.0 ROLIFERATION
22.0 .................................................................................................................... 7
23.0
24.0 2.2.1 Mergers and
Acquisitions ............................................................................................................ 8
25.0
26.0
27.0 Adidas-Salomon AG and
Reebok .................................................................................................... 8
28.0
29.0 2.2.2 Stride Rite Corporation and
Saucony .......................................................................................... 9
30.0
31.0 2.2.3 Nike and
Converse .......................................................................................................................
9
32.0
33.0 2.3
34.0
35.0 I
36.0 NTERNAL
37.0 P
38.0 RODUCT
39.0 P
40.0 ROLIFERATION
41.0 ..................................................................................................10
42.0
43.0 2.4
44.0
45.0 B
46.0 RAND
47.0 I
48.0 MAGE
49.0 ,
50.0
51.0 P
52.0 RODUCT
53.0 I
54.0 DENTITY
55.0 ,
56.0 AND
57.0 C
58.0 USTOMER LOYALTY
59.0 .........................................................10
60.0
61.0 2.4.1
Advertising ......................................................................................................................
............11
62.0
63.0
64.0 Entertainment and Celebrity Marketing
Campaigns .....................................................................11
65.0
66.0
67.0 World Cup
2006 .............................................................................................................................1
2
68.0
69.0
70.0 Creative Niche
Advertising ............................................................................................................13
71.0
72.0 2.4.2 Distribution
Decisions ................................................................................................................14

The U.S. market for athletic footwear includes all producers of non-cleated, rubber and
plastic footwear designed in an athletic style or for athletic use. The industry is a
collection of smaller, segmented, yet often overlapping markets, defined by both the price
and the purpose of the shoes. For instance, there are mini-markets for shoes designed for
each of many sports and other purposes: basketball, running, walking, tennis, and casual
wear. The greatest overlap between these categories is between performance shoes and
casual wear. Many people wear running shoes or basketball shoes on a daily basis in a
non-athletic setting. One can walk or play basketball in running shoes. Therefore, there is
some degree of overlap between most segments. The industry is

dominated by a few large firms, while the majority of other players have less than 5%
market share. The graph below shows the market share breakdown by sales volume for
2004, before the merger of the #2 and #3 firms, Adidas and Reebok
These firms fight for market share through non-price competition, on strategies such as
strengthening brand image and increasing product proliferation. The success of each firm
is greatly dependent upon its marketing campaigns. The brand image of the major firms
is created by extensive marketing campaigns and celebrity endorsements.
Consumers associate themselves with a particular brand and tend to stick with the brand
with which they are comfortable. Entry to the industry is difficult as brand loyalties are
high. The United States is the
world‘s largest importer of
athletic footwear, which is primarily manufactured in Asian nations. The graph at right
shows the trend in US footwear production and imports. Mostfirms design the sneakers
and outsource their manufacturing to foreign producers. The sneakers are then distributed
to major retailers and are sold to the consumer through a variety of channels.
The following provides an analysis of Porter‘s Five Forces relating to the athletic
footwear industry; internal rivalry, entry barriers, substitutes and complements, supplier
power, and buyer power
2.0 INTERNAL RIVALRY 2.1 Market Description
Price competition in this industry is relatively non-existent in its traditional form. The
means by which firms compete with respect to price is by introducing products at several
different price levels in order to reach all areas of the market. There are only a few firms
who compete in every sector of the market with regards to intended purpose (as well as
price): namely Nike, Adidas, Reebok, and New Balance. Smaller firms usually specialize
in particular types of shoes. For example, Brooks and Asics specialize in running, K-
Swiss in tennis, and Vans in skating and lifestyle shoes. This results in a collection of
specialized markets with far fewer firms competing than in the overall market for athletic
footwear. The following chart shows the companies that participate in the various
segments of the market as defined by the left column. In terms of growth and sales for
individual categories, running footwear accounts for 25% of total athletic shoe sales and
has been experiencing the strongest growth. As seen in the above table, this is the
category with the most participants. Its sales have increased by nearly 25% in certain
countries. Other sneakers, such as those designed for basketball have been experiencing
no growth at all.
Women‘s footwear sales were up 11
-13% overall, while skating shoe sales declined nearly 10%. In the sneaker industry, the
products are somewhat differentiated by design but the players also try and emphasize the
differences in their advertising. As a result, there is an emphasis on non-price
competition. With athletic footwear, consumers consider both price and purpose, and
firms attempt to produce shoes that compete in several different price brackets. The U.S.
sneaker industry is considered a mature industry although the numbers in the table below,
on footwear sales in the last decade, suggest that there is still some amount of growth in
the overall market.
2.2 Product Proliferation
Firms seek to increase their market share by widening their range of products through
mergers, acquisitions, and internal production decisions. The first tactic discussed in this
section is the increasing consolidation of the industry as a result of several recent deals.
To complement the mergers, firms are increasing their product range in an attempt to
capture more segments of the market. This section will discuss severalrecent acquisitions
demonstrating this tactic and analyze the impact of these mergers on the overall market.
2.2.1 Mergers and Acquisitions
Adidas-Salomon AG and Reebok
The deal that has been making the largest headlines recently is that between European
giant Adidas-Salomon AG and strong U.S. competitor Reebok. This merger of two of the
largest companies in the industry creates a combined $12 billion company to compete
with the industry leader, Nike, which is valued at $14 billion (Carr 2005). This deal
fulfills two strategic goals for Adidas. First, it allows Adidas to further expand into
the ―lifestyle‖ market. Adidas has long been considered a very strong performance
brand
but has failed to develop
the brand image that has allowed Nike‘s products, including itssignature Michael Jordan
basketball shoes, to become synonymous with style in the American marketplace
(Karnitschnig and Kang 2005). Reebok on the other hand, has had success recently in
increasing its appeal to the fashion-conscious, urban buyers that Adidas has failed to
attract (Karnitschnig and Kang 2005). By acquiring the Reebok brand and maintaining it
separately from the flagship Adidas brand, Adidas will be able to take advantage of both
segments of the market without sacrificing the image of either brand. This is the same
tactic used by Nike in its 2003 acquisition of Converse which will be discussed later in
this section. The second objective that Adidas seeks to achieve through the merger is to
further solidify its position in the U.S. market, where Nike continues to be the dominant
player. Adidas will benefit from
Reebok‘s strong foothold in the U.S.
, as it will gain distribution options from greater access to and leverage with primary
retail chains like Foot Locker and Finish Line. Nike has historically been dominant in
terms of its relationships with these retailers (Karnitschnig and Kang 2005). Additionally,
the acquisition has brought the Adidas/Reebok U.S. market share to 21%, bringing them
much closer to Nike‘s 36% share.
For further information on the relative market shares ofthe individual competitors, please
see the table below, comparing U.S. to Global sales and market shares
2.2.2 Stride Rite Corporation and Saucony Another recent acquisition is of Saucony by
the Stride Rite Corporation, which already includes brands such as Keds, Pro-Keds,
Sperry Top-Sider, Grasshopper, and the Tommy Hilfiger line. The addition of the
Saucony brand will allow Stride Rite to break into the athletic performance market,
where it has not previously been represented. Additionally, the acquisition
will allow Saucony to break into the children‘s market
(Ryan 2005). 2.2.3 Nike and Converse In 2003, Nike purchased Converse. One reason
was to add a lifestyle shoe to their product line that would appeal to a group that did not
already buy Nike products.
Converse was a good acquisition because Nike wanted to capture the typical Converse
consumer, who looks for retro sneakers like Con
verse‘s
long-established Chuck Taylor line. Maintaining these customers required that Nike not
taint the Converse products with their own brand name, therefore, Nike has allowed
Converse to continue to operate as a separate entity (Marseille and Roos 2005).
2.3 Internal Product Proliferation
In addition to acquiring new brands and area expertise through mergers and acquisitions,
firms also enter new sectors of the market through internal production decisions. There
are two ways in which they do this. The first is by simply producing a new product under
their primary brand name to fulfill the requirements for a product in an area outside their
current specialty. One example is
Asics‘ decision in the early 1990s
to branch out from its focus on performance running footwear to introduce a basketball
shoe (Bohnslay 2005). This attempt proved unsuccessful for Asics, which speaks to the
difficulty of breaking into a market segment in this way. In other situations, a firm may
decide to direct a particular brand that it controls or creates toward a new segment of the
market. For example, Nike has historically refused to market its Nike brand sneakers
through low cost retailers. In order to enter the market for low to medium cost footwear,
Nike has geared its Starter brand, which it acquired in 2004, towards this area. In 2005,
Nike entered into a deal with Wal-Mart to sell Starter brand shoes priced at under $40
through the discount retailer (Kang 2005).
2.4 Brand Image, Product Identity, and Customer loyalty
Anothe
r significant component of industry members‘ strategies to increase market
share is the strengthening of brand image, product identity, and customer loyalty through
marketing. Companies expend considerable effort and resources attempting to convince
their customers that sneakers made by other companies are imperfect substitutes.
Currently, Nike appears to have been the most successful in this endeavor, followed
closely by the newly joined Adidas-
Reebok entity with its two flagship brands. Nike‘s
shoes are c
onsidered to be quality and stylish. Reebok‘s are comfortable and casual, andthe Adidas
brand boasts superior performance and is ―perceived as a professional, technically
orientated brand with strong European roots‖ (
Kang 2006). Smaller companies like Vans and DC shoes have succeeded in creating a
strong brand image in the eyes of young skateboarders and extreme sports followers.
Puma in the past was seen
as ―the brand that mixes the influence of sport, lifestyle and fashion‖ (Europe
Intelligence
Wire). The methods by which they accomplish this include various forms of advertising,
distribution choices, and so-called grassroots marketing. 2.4.1 Advertising The top
athletic shoe companies compete in advertising, aimed at building the image of the brand
and the products they are trying to market. To provide an illustration of the high level of
these expenditures, the following chart lists the advertising expenditures both
independently and jointly of the recently merged firms, Adidas and Reebok.
Entertainment and Celebrity Marketing Campaigns
Celebrity marketing campaigns are a key way in which athletic shoe makers seek to
differentiate their brands and associate their shoes with professional athletes and other
celebrities. The most successful examples are the signature lines and endorsement
contracts that firms, particularly Nike, Adidas, Reebok, and AND1 have with
professional basketball players. The most famous of these company-player relationships
is
between Nike and Michael Jordan. Despite Jordan‘s retirement several years ago, the
Air Jordan line continues to be a huge source of profit and brand support for Nike. A new
shoe launched in February of this year at a retail price of $175 and several other models
are sold at around $125 (Kang 2006). At $175, the new Air Jordan shoe out-
prices Nike‘s
most technologically advanced running shoe, the Air Max 360, retailing at $160. The
success of the Jordan and other signature lines has been and continues to be instrumental
in Nike‘s image as a stylish performance brand. This image has allowed Nike to
differentiate its products from those of its competitors, particularly Adidas, whose image
has thus far failed to break out of the realm of basic technical performance (Karnitschnig
and Kang 2005). While Nike has had the most success with basketball endorsements,
other firms have also utilized this technique. For example, Reebok has a $70 million
contract with Chinese NBA player Yao Mi
ng (Barbaro 2006). This ―
s
tar‖ marketing
extends beyond the U.S. and into international borders. In late 2005, Nike spent $44
million on endorsing an Indian cricket team, and made the team the ―world‘s most
valued brand in team sponsorship‖ (Barbaro 2006).
The use of celebrity and other entertainment marketing tactics extends beyond the
basketball arena into many different types of shoes and entertainment genres. DC Shoes
recently released a line of shoes designed by the popular musical group Linkin‘ Park.
Reebok has agreements with rap artists 50-Cent, Jay-Z, and Nelly (Drbul et al. 2006).
Another entertainment-based marketing campaign is the agreement between Adidas and
Microsoft that involves Xbox kiosks in Adidas stores and Adidas contributing content to
Xbox consoles,
in hopes that the alliance will help to drive sales of both companies‘
products (DME).
 World Cup 2006
In light of the upcoming 2006 World Cup, Adidas is spending approximately
$200 million over the next few months to market its soccer products. Adidas is an official
sponsor of the tournament and its ads will be the only ones seen during the television
coverage, as it paid to have its American competitors excluded. While it has not started
developing signature soccer shoes,
Adidas‘
ad campaign will feature soccer star David Beckham, the most recognizable and stylish
face in the sport. Adidas CEO Herbert Heiner was quoted in Business Week as saying,
―It‘s vital for Adidas ‗to dominate the World Cup‘‖ (Holmes 2006).
Adidas
‘
significant involvement is encouraged by the positive results from its involvement in
2002, when it sponsored the Japanese national soccer team and saw sales go up 30%
(Barbaro 2006). Although soccer cleats are not the same as sneakers, the company is
hoping to enhance their overall brand image and to have their name transcend individual
sports In response to Adidas
‘
World Cup ad campaign and its exclusion from TV ads, Nike has teamed up with
Google to develop a friend networking site devoted to everything soccer. The website,
entitled Joga.com, and
the corresponding ad campaign take their name from the phrase ―joga bonito,‖ which in
Brazilian Portuguese means ―play beautifully
.
‖
The site will also feature French soccerplayer Eric Cantona and Brazilian soccer star
Ronaldinho (Wentz 2006).
Creative Niche Advertising
Smaller companies have used marketing as a means of creating their own unique niche
in the market. Puma, a company that makes soccer, running, and lifestyle shoes, has
emphasized its position as a trendy brand. During the 2002 World Cup in Japan, while
Nike and Adidas spent millions of dollars on conventional advertising, Puma used sushi
bars in fifteen cities around the world including New York, Hong Kong, and Madrid to
showcase its product. Puma branding director Antonio Bertone noted that
Puma‘s target market of fashion
-conscious twenty-
somethings are ―eating sushi anyway.‖
The company also began running a commercial that featured former English soccer
player Vinnie Jones and other Puma sponsored athletes in a sushi restaurant
(Tkacik2002). Not all major ad campaigns feature celebrity athlete endorsements. New
Balance has a long standing policy against such endorsements. Instead, it relies on
campaigns featuring every day people. One of their most recent campaigns ran under the
slogan
―There are two motivations in sports. Which is yours? For love or money?‖ which
emphasized their focus on producing shoes for everyone who enjoys sports, not just star
athletes (White 2005). This strategy complements their original product positioning as
acompany for serious runners that also makes shoes in all widths, for athletes of different
abilities and shoes sizes. 2.4.2 Distribution Decisions
Retail
Firms also make decisions regarding the distribution of their shoes in line with the brand
image they wish to maintain. Nike refuses to sell its flagship brand to low cost retailers.
In October 2005, Nike stopped selling to Sears in response to its merger with Kmart.
Sears will continue to carry products from Adidas, New Balance, Reebok, and Sketchers
(Hoovers.com). Though Nike does not sell products under the Nike brand to discount
retailers, it does target some of its other brands toward that market. Analysts suggest that
Nike will work with Sears again using one of its other brands, most likelyStarter (Kang
2005). Other companies such as Brooks and Spira choose to market their products
almost exclusively to specialty running stores. Brooks Sports, which is a subsidiary of the
Russell Corporation, focuses on ―high
-performance
running shoes‖ and considers itself ―the brand of choice among discerning runners of all
abilities‖
(www.brooksrunning.com). Spira Footwear, a young company that makes running shoes
with springs in the bottom, also plans to use this type of distribution decision to market
its shoes. Despite that their shoes are revolutionary, they lack aesthetic appeal. The
company‘s CEO, Andy Krafsur, has suggested that the company needs to establish itself
―in the small stores

where people explain the technology‖ (Gregory 2005).

Personalization
One unique distribution tactic that has entered the market place in the last few years is
allowing customers to design their own shoes. Nike pioneered this venue with the
introduction of the NikeID service in the spring of 2005 which allows customers to
personalize their shoes. Nike ID allows buyers to choose their own colors, materials, and
in some cases, add a wide variety of logos and images to the shoes (NikeID.com).
Adidashas also begun using this method in its soccer cleats. The new +F50 Tunit line
allows the
customer to customize the weight of the shoe chassis, the weight of the cleats, and the
overall fit of the shoe (Holmes 2006). 2.4.3 Grassroots Marketing Companies also seek
to attract new customers and cultivate customer loyalty by introducing young athletes to
products that fit their particular needs. The firms believe the products will market
themselves on the basis of their quality and suitability to the wearer. Of the major shoe
competitors, New Balance made the most use of this technique. They used this strategy in
their 20
04 acquisition of Warrior Lacrosse. The company‘s founding
chairman, Jim Davis, notes that the objective of the
acquisition is ―to work with coaches
to
get kids in the right shoes, and after we hope that they become loyal customers‖

(Pereira 2004). This dynamic is also part of Nike‘s justification for its World Cup ad
campaign and determination to take the soccer market from Adidas. Soccer is considered
―an important gateway to brand loyalty with children worldwide‖ (Holmes 2006). 2.5
New Product Development
Sneaker companies constantly seek to develop new technologies and products to keep up
with other competitors and to maintain their brand image. This type of development is
particularly important in performance sneakers, though producers of casual foot wear also
seek to develop new styles to keep up with trends in consumer
s‘
preferences. 2.5.1 Keeping up with Competition For many performance brands, it is
important to sell products based on the latest technology in order to have a competitive
product in the top
–
of-the-line market. These new technologies can then be introduced into lower priced
footwear and other types of sneakers to help companies maintain their presence in
different market segments or break into new ones. High End Running Shoe Examples
In the current running market, there are three new high end models. The Nike Air Max
360, priced at $160, features a foamless mid-sole that provides increased cushioning
durability, reduced weight, and improved stability. The Asics Gel-Kinsei, priced at $165
as the highest priced shoe Asics has ever brought to market, includes technology that
allows cushioning to adjust to the wearer‘s needs as well as
more durable cushioning
features. The Adidas 1, at $250, includes a microprocessor that adjusts the shoe‘s
cushioning to the needs of the wearer. According to a Citigroup report, the Air Max 360
is expected to drive growth due to its potential to evolve into a technology that will be
attractive to specialty runners, a target group Nike is partly losing to Brooks and Asics.
Furthermore, Nike plans to introduce basketball and cross-training shoes based on the
same technology (Citigroup 2006). 2.5.2 New Products and Brand Image New products
can also enhance the image of a brand. The Nike Free, which lets runners feel as if they
are running barefoot, is an important product because it indicates a shift in the way Nike
views the interaction between their products and their consumers (Citigroup 2006
). The Free is meant to be used as a training tool to strengthen runners‘
feet (Davis 2005). Another example is the Adidas 1 discussed above. This hi-tech shoe
will likely reinforce Adidas image as a firm at the forefront of athletic technology. 3.0
ENTRY BARRIERS 3.1 Market Overview
Relatively high barriers to entry exist in the athletic footwear industry due to obstacles
like strong brand loyalty and economies of scale and scope. Though new entrants will
have little problem gaining raw materials or labor, they do face the enormous difficulty of
establishing popularity in an industry with extremely image-
conscious consumers and one of the world‘s strongest brands.

3.2 Image
Style-conscious consumers, guided in part by effective marketing, want shoes that will
enhance their image and not just cover their toes. Customers notice whether their shoes
have a swoosh or a lack thereof, thus entrants will have difficulty winning them over
without these symbols and the cool-factor that goes with them. Even in the athleticshoe
sector, the importance of fashion over function is rising. The ―fashionization of shoes‖
took off in 1997, when Puma enlisted designer Jil Sander to create a limited
-edition women's running shoe to ignite its lackluster image and sales (Orecklin 2002).
While the biggest firms routinely use established designers, entrants with limited capital
will be hard pressed to convince such revered professionals to sign contracts. Existing
shoe companies also have a
financial advantage due to consumers‘ willingness to pay
high prices for name brand shoes, especially those offered in limited editions. For
instance, Adidas‘ sneake
rs created by designer Japanese Yohji Yamamoto retailed for up to $590 (Orecklin 2002).
While the image barrier is high, it is not insurmountable. With
its ―endorsed by no one‖ policy, New Balance has proven that by creating a suitable
niche, high priced designers and endorsements are not a requirement for success in
theindustry.
3.3 Licensing and Retail Agreements
Access to endorsement and distribution opportunities constitutes a second barrier for new
firms. The bigger sneaker companies have already established agreements withathletes,
teams, and retailers. The top sneaker manufacturers sponsor the most successful athletes
and organizations in order to impress and win customers. For instance, Nike has deals
with golfer Tiger Woods, soccer player Ronaldinho, and the Brazil soccer team,
(Genereux 2006). Adidas and Reebok together
hold a ―solid portfolio‖ of agreements
with athletes from Yao Ming and David Beckham, to teams like Real Madrid and the four
major sporting leagues in the US (NBA, NHL, NFL and MLB) (Drbul et al 2006).
Newcomers will not only have trouble finding teams and players without ties but also
will lack the capital for these contracts. Like customers, retailers are also affected by the
prominence of a particular brand. Footwear stores are more likely to save shelf space for
an incumbent than a new company because the established brands have a history of good
sales. As a result, new companies must work harder to have their goods seen. The barrier
of overcoming the existing relationships with athletes and retailers will narrow entry. 3.4
Economies of Scale
The athletic shoe industry faces significant economics of scale and scope, which I will
explore in the next two sections. First, the sneaker industry faces economies of scale
because the total cost of manufacturing shoes goes down as output increases and the fixed
costs of machinery, marketing, and research will be spread out. I will discuss the last two
special cases of economies of scale in further detail below. 3.4.1 Marketing The athletic
shoe industry faces economics of scale in advertising, giving cost advantages to
incumbency. Larger firms can afford higher advertising expenditures than any new firm
could, and they are likely to place more ads in the first place. It would be difficult for a
start-up firm to compete with Nike given that the brand, its trademark
―swoosh,‖ and its simple slogan, ―Just do it,‖ are known and valued worldwide. The
se high marketing expenditures can result in higher quality advertisements; in 2005, the
twolargest firms by market share, Nike and Adidas, won a total of 4 (out of 18 given)
Gold Clio Awards in the Television/Cinema ad category
(http://www.clioawards.com/home/
). Furthermore, incumbents have lower advertising costs per potential customer due
tolarger advertising reach. For instance, because Adidas sneakers are sold in more stores
than Saucony ones, ads for Adidas are more effective because viewers inspired to buy
Adidas shoes will have an easier time following through. Customers who see a Saucony
ad may give up before they find a store with the shoes they want or may even settle for a
different brand‘s (
Besanko 2003). 3.4.2 Research and Development In a day and age when shoe
manufacturers are putting microprocessors in our sneakers, the value of technological
expertise in this industry is growing. The sneaker industry has economies of scale in
Research and Development (R&D) because incumbent firms that established research
centers years ago have experience and know-how that sets them ahead of potential
entrants. Companies like Nike can afford to put more money into R&D due to larger sales
volume, leading to even more of a learning effect.
Nike‘s SportResearch Lab in Oregon is near 13,000 square feet and boasts owning
―virtually every
variety of muscle sensor, pressure platform, breath analyzer, foot scanner and thermal
imaging device‖ to test and design potential new products (Nikebiz.com).
The upfront cost of setting up a comparable facility to test and examine products is
certainly a barrier to entry. Reebok and Adidas, now merged, will invest roughly
€
130 million in R&D, according to an industry report (Drbul et al, 2006). Years of
research can go into developing a single new cushioning system: New
Balance‘s website features their technology for cushioning and shock absorption called
N-ergy 2.0 and Abzorb SBS, which was developed over three years (
newbalance.com/techcenter/tech/featured_tech.html). Coincidentally, Adidas‘ adidas_1
shoe and its continuously adjusting cushioning level was also released after three years of
research (adidas.com). These years of research usually pay off, because shoes with high-
tech elements can be sold at higher prices. As discussed in the previous section,
Adidaslaunched the Adidas 1 last year at $250, and Nike launched the Air 360 for $160
(Genereux 2006). After spending so much on technological research, footwear companies
patent their new shoe features so that competitors can not imitate them. These patents
make entry more difficult because potential entrants must design their shoes without
infringingon the protected designs. The market leader Nike has a significant lead in
numbers of patents. According to a search of the US Patent and Trademark Office
website, Nike has registered 1830 patents, where as the separately listed Reebok has 363
and Adidas has 149, while New Balance has just 20 (US Patent and Trademark Office).
Nike recently sued A
didas for patent infringement, asserting that Adidas used elements of Nike‘s
SHOX cushioning technology in developing the Adidas Kevin Garnett and A3 shoes
(Hoover.com).
3.5 Economies of Scope
Another entry barrier is the economies of scope in the athletic shoe industry, allowing
incumbent firms to enjoy cost savings by producing a wider range of related goods. 3.5.1
Umbrella Branding One special case of economies of s
cope is ―umbrella branding.‖ Most of te top
athletic footwear competitors have already expanded the variety of goods and services
they produce by venturing into athletic apparel and equipment. By doing so, they are able
to leverage their reputation from one sector to another. Consumers choose brands they
recognize and trust, and so athletic shoe makers have incentive to expand their product
range. The U.S. athletic apparel market at $20 billion wholesale is a good target because
it is nearly three times the size of the athletic footwear industry (Ohmes 2005). In the
figure below, you will see the footwear companies that also make athletic apparel (or
viceversa) and their market shares as of August 2005:

Nike is not only the market share leader with athletic footwear but also with sports
apparel, as they have over a fifth of the apparel market. They produce items ranging from
watches and eyewear, to more related products such as athletic apparel and bags
(Nikebiz.com). Nike can introducethese products with less risk because consumers infer
that all products under the brand umbrella are high quality. Furthermore, if the new
products introduced are complementary (like socks are to sneakers) firms will achieve
synergies in production.
For example, Nike‘s research on the way the foot works can help them design both more
supportive socks and sneakers. Many companies have made the link between sneakers
and apparel explicit, by linking them under the same name as their shoes. For example,
Nike introduced the Jordan line of shoes and then brought out t-shirts with the same name
to boost sales for both categories. Though Nike is a clear leader, other footwear
companies see the growth potential and are following suit. For example, in 2003, New
Balance signed seven additional licensing deals to put its logo on gear from sunglasses to
exercise equipment (Fonda 2004). Umbrella branding helps the expanding company and
by default deters entrants because they will not need to spend additional money on
promotion to develop credibility in the eyes of consumers, retailers, and distributors
(Besanko 2003). 3.5.2 Consolidation Larger incumbents also control entry by
strategically acquiring smaller sneaker companies. The sneaker industry has faced
considerable consolidation recently, with the aforementioned acquisitions of Reebok by
Adidas, Saucony by Stride Rite, Converse by Nike, and so on. Entering firms that are
successful and gain market share pose threats to the larger players. As a result, the major
players preemptively buy smaller sneaker companies before they grow too large and pose
serious competition. The incumbents have budgets large enough that they can simply buy
up smaller companies, rather than risking a loss in market share to them. The incumbent
firms essentially make it impossible for a new entrant to grow substantially without
takeover. These acquisitions allow the buyer to reap benefits from both increased scope
and association with the new trends in footwear. Potential entrants that notice this
tendency but want to remain independent may just choose not to enter in the first place.
3.6 Strategies for Entry
While barriers to entry are relatively high, there are a few key strategies that would allow
an entrant into the sneaker industry. The first strategy is specialization. Many companies
have successfully entered the athletic footwear market by targeting a specific niche of
consumer or designing for a particular activity. Designing footwear for certain types of
consumers or activities is no new task. Reebok gained its popularity by doing just this in
the early 1980s: Realizing that competing with established companies such as Nike and
Adidas would be tough, Reebok designed shoes for aerobics just before aerobics
ballooned in popularity across the US. As a result, their sneaker the Freestyle became one
of the best-selling shoes in history, they got a temporary lead over Nike in the athletic-
shoe industry, and they gained loyal customers who buy their products to this day
(Hoover.com). Today, newer companies are still using this tactic. The footwear company
Crocs started in 2002, making colorful, extremely comfortable clogs for boating and
outdoor use, and now they boast a wide product range and sales of $108.6
million(Hoover.com) The second strategy for entry is for non-sneaker companies with
established brands to enter the footwear market. Just as sneaker companies have
expanded to apparel and equipment, many apparel and equipment manufacturers are
doing the same - moving into the footwear sector for wider scope. Many clothing
designers sell sneakers, from Tommy Hilfigger to Gucci. Other companies have moved
from seemingly unrelated accessories to footwear, the most notable example being
Oakley. Oakley, best known for
their sunglasses, brought their shoes to market in the mid 1990‘s, and they have been a
huge success world-wide. The Oakley shoe is a unique hybrid of sneaker and hiking
shoes that are durable and fashionable. I
n 2000, Oakley‘s Net sales skyrocketed 41%,
totaling $363.5 million. Since these companies have already established loyal customers
in other sectors, they are able to break into the sneaker market with less difficulty. Oakley
and the other designers are able to sell sneakers relatively well due to the fact that they
have already established well-known brands. These apparel companies rely on their
established brand images in order to capture sneaker consumers, who place
highimportance on image and branding. 4.0 SUBSTITUTES AND COMPLEMENTS 4.1
Introduction
There are thousands of shoes available on the market today. How do consumers know
which ones to buy? Currently, the market for footwear is filled with substitutes for
sneakers. The primary complements to sneakers are other types of sports apparel, such as
t-shirts, socks, shorts, and jackets.
4.2 External Substitutes

Although sneakers are the most popular footwear in the world, there are a tremendous
number of substitutes within the footwear umbrella. These include boots, slippers, dress
shoes, flip-flops, and other non-athletic footwear. Some of the major producers of these
shoes include Steve Madden, Sketchers and Nine West. Lifestyle athletic shoes have
seen the largest annual growth rates, with Puma leading the way with a sales increase of
more than 50%. One of the most successful nonathletic footwear companies, Steve
Madden, is well known for its thick high heeled shoes
introduced in the mid 1990‘s
. Sketchers shoes are incredibly popular among young women and show strong sales. In
Q4 of 2005, Steve Madden reported sales of $91.4 million which is an increase of 8.2%
from the previous quarter (Just-style.com). Sketche
rs‘ non
-athletic shoe department has also been growing lately due to the introduction of their
heel-less shoes, also known as sneaker mules, Heel-less shoes are widely popular in
Europe, but have not penetrated many other markets. Recently, heel-less shoes have
gained popularity in the U.S., causing the primary promoter of these shoes, Sketchers, to
experience healthy sales figures. In 200
4, Sketchers‘ sales increased
6.2% with total sales equaling $222 million for that year (Just-style.com). 4.2.1
Footwear Sales Cycle Like other types of apparel, footwear experiences a seasonal sales
cycle. See the graph below for the month-to-month changes in footwear sales. There is
little year-toyear variability in the sales, as seen by the proximity of the lines representing
2003, 2004, and 2005. Sneaker sales peak between August and September, when many
students are buying back-to-school wardrobes. Sales then decline during the fall-early
winter months, mostly due to seasonably colder and inclement weather conditions.
During the holiday season, footwear sales goes up with many other products, specifically
driven by boots and waterproof walking shoes appropriate for the cold, winter months.
For example, in the holiday shopping period of 2001, sales of boots increased by over
100% while sneaker sales only increased by 2.2%. During the holiday season, outdoor
footwear accounts for as much as 15-20% of all footwear sales (Ohmes 2005). During
summer months, sales of sandals and heel-less shoes increase. Sales of summer footwear,
including sandals and open-heel shoes and excluding sneakers, increased by nearly 70%
in the summer of 2001while sneakers experienced an increase of 50% in sales. 4.2.2
Substitutability of Other Footwear. Although many substitutes to athletic shoes exist,
there is little evidence suggesting that they will ever replace sneakers. One industry report
says
that ―
Though we continue to monitor fashion trends and any potential movements in the
athletic versus brown-shoe dichotomy, we continue to see little evidence suggesting
significant shift to
brown shoes‖ (Ohmes 2005).
Indeed, athletic sneakers serve many functions for customers and are not perfectly
substituted by any other footwear. 4.3 Complements
The most popular sneaker complement is sports apparel. Overall U.S. sports apparel
sales rose 12.9% in 2004, while other regions saw higher sales growth: 31.3% in the
Asian Pacific and 19.8% in Europe (Ohmes 2005). According to SGMA International,
young adults represent nearly 40% of all consumer sports apparelpurchased in 2004, and
women outspend men in this sector. For many years, the best selling sport apparel world-
wide has been T-shirts (ANSOM). Sales of apparel can represent a large part of the
sneaker companies‘ revenue.
See the graph below for an illustration of apparel versus other sources of revenue for
Nike and Reebok. Both Nike and adidas have looked to the golf market to expand their
scope. Nike developed golf clubs and a line of apparel for their sponsored golfer, Tiger
Woods, to capitalize on his success (Hoover.com). Adidas bought TaylorMade in 1998,
which is now the #2 golf club maker, and at the end of 2002 it acquired the Maxfi brand
of golf balls and accessories (Hoover.com). The move was meant to bolster the
company's golfing products portfolio. There are also some unusual complements to foot
wear. As mentioned earlier,
Adidas and Microsoft have agreed to help each other promote the other‘s business.

Furthermore, Ecko recently released a game called ―Mark Ecko‘s Getting Up‖, which
many retailers have bundled together with Ecko shoes. As seen in the graph above, as the
sales of apparels go up, so do the sales of athletic footwear. Furthermore, as the sales of
sports equipment goes up, so do the sales of athletic footwear. This is clear sign that sport
apparel and sporting equipment are not only complements to each other, but also to
sneakers. 5.0 SUPPLIER POWER

5.1 Materials for Production

A typical athletic shoe is constructed from three major raw materials: cotton, rubber, and
foam. The cotton is generally a synthetic blend to increase both durability and strength.
Some models also include a waterproofing agent in the fabric. The shape of the sole is
formed from rubber. In fact, the sole is a major focus of research in each of the main
firms, because its physical properties are crucial to determining the comfort, support, and
lifespan of the shoe. The rubber is always vulcanized, through a simple chemical process
that adds durability and strength to the rubber. Foam acts as padding within the shoe. Its
composition varies, but foam is a simple material to produce at low cost. All three major
inputs are commodity goods. Firms do not set the price of these
items; rather the market determines their value. The producing firm‘s only choice
isquantity of production.
5.2 Standardization within Production
The major firms in the market have experienced considerable pressure from the public
regarding the labor practices of their suppliers and manufacturers. Partially in response to
these image-damaging statements, the major firms have set up a system of standards.
Nike and Adidas both work only with approved manufacturers/suppliers that meet the
labor standards that they require. They have created this system so that the quality of
product, the factory working conditions, and the logistics of delivery can be held to a
higher standard. Those firms not meeting these conditions are penalized and contracts are
not renewed. Not only is this good PR for the firms, but also it normalizes the quality of
service that they will encounter when dealing with a supplierTo reach the acceptable
level, a supplier must make a commitment to their employees and an investment in their
facilities. This investment is a barrier to entry for smaller manufacturing houses that
desire Nike or Adidas‘s business. Once a supplier has
become a Nike supplier they often become dependent on that contract. Nike sets their
prices and buys in enormous volumes. 5.3 Ease of Supplier Transfer
When dealing with commodity items like cotton, rubber, and foam, there is little to stop
large footwear companies from switching between suppliers. Any supplier that meets the
requirements of the firm will be able to supply such homogenous products. The major
firms in the market are able to switch suppliers quickly without worry of a significant
decrease in quality. They have the power over the suppliers. Therefore, supplier power is
extremely low in this industry. 6.0 BUYER POWER 6.1 Buyer Concentration
Athletic footwear retailers range from smaller shoe stores such as Footlocker to large
department stores such as Wal-Mart. The top 25 retailers generate approximately two-
thirds of the sales of athletic footwear, a value approaching $15 billion. Traditional
retailers like Finish Line and Footlocker dominate the sales landscape, but new players
have emerged in the form of big box stores and vendors opening their own merchandise
stores and outlets. Long-term market growth for athletic shoes in the United States is
projected to persist in the low single digits, so market share will be the key driver of
earnings growth for each market participant (Genereux 2006).
6.2 Buyer Leverage in Product Negotiation
It appears that the lack of concentration at the buyer level would inhibit marginswhile
allowing vendors to determine base prices for their product. Also, retailers have little
power or influence in the design of the product resulting from the large number of
industry participants. Under current market conditions, buyer power is relatively weak.
Large players like Nike and Adidas are able to dictate the price points of each pair of
shoes they sell. They have full creative rights to the design and manufacturing of their
footwear. However, Footlocker‘s acquisition of Foot Action and Gart‘s merger with
Sports Authority are microcosms of an across-the-board power consolidation within the
footwear retail industry (Yurman et. al 2005). As fewer retailers control larger market
shares, small vendors who have entered the market through a small retailer will find it
more difficult to maintain market share. Regardless, larger firms like Nike and Adidas
will continue to maintain the name recognition and infrastructure to remain industry
leaders through their aggressive acquisition of smaller companies threatening to take
market share. Growing margins are another indication that buyer power is increasing.
Lower cost structures, smaller inventories, and growing market share through
consolidation havebenefited the major footwear retailers. A decrease in industry-wide
margins in 2001 hasbeen met with larger margins through until 2004; see the table below.
This trend is expected to continue for the next five years. 6.3 Effects of Retail and
Vendor Consolidation
The consolidation phase of the footwear industry has spurred increases in the growth rate
for many retailers by allowing them to purchase a diversified range of shoes
from each large athletic footwear company. ―Famous Footwear President Joe Wood
commented that the department store consolidation coupled with a strong cycle in athletic
footwear has driven some of the gains in the family footwear sector. Shoe Carnival CEO
Marc Lemond believes that the strength in women‘s fashion was driven by more
emphasis on footwear and apparel‖ (Genereux and Graha
m 2006). This consolidation is expected to continue through the next couple years.
Thomson Financial estimated that the announced deals between athletic footwear
companies increased to $40 billion in 2004, compared with an estimated $10 billion in
2002. In 2005, mergers are estimated to have surpassed the $40 billion record set by deals
in 2004. The major transactions included
―Gart‘s merger with The Sports Authority for approximately $378 million (closed in
August 2003); Foot Locker‘s acquisition of Footac
tion for $225 million (completed inMay 2004); and Dick‘s acquisition of Gaylan‘s for
$362 million (completed in July 2004); VF‘s acquisition of Reef for $188 million (closed
in April); American Sporting Goods‘ acquisition of And1 (announced in May);
Wolverine‘s licensing agreement with
Patagonia (announced in June), with the first product line expected to launch in spring
2007; Amer Sports‘ acquisition of Salomon from Adidas for €485 million (completed in