In its third-annual study focused on the sporting-goods industry, “Sporting Goods 2023: The Need For Resilience In A World In Disarray,” the World Federation of the Sporting Goods Industry (WFSGI) and McKinsey document the comparatively strong results delivered by the industry over the last two years but warn that potential recessionary conditions could derail progress for industry players in 2023.
The study identifies six actions to tackle the headwinds and four key trends to shape the active lifestyle industry in 2023.
“Resilience will be key to tackling the highly uncertain environment and preparing for the next wave of growth,” the report states. “In many ways, the sporting-goods industry is in a fortunate position. Compared with many other industries, the past two years have, in aggregate, been characterized by solid growth, equaling or outperforming pre-pandemic levels.
“Looking ahead, in the medium term, there are reasons for optimism that are especially driven by increasing awareness of health, fitness, and sports.
“In the short term, however, there could be clouds on the horizon. Rising costs, the potential threat of a larger recession, and continuing operational challenges might create headwinds in early 2023, putting companies under urgent pressure to embed resilience into their operations. That will likely mean going beyond raising prices to boost productivity, managing cash more rigorously, and finding the right balance between saving and investment.”
The study, commissioned by the WFSGI, reviews the trends presented in last year’s study and takes a deeper dive into trends that are most relevant for 2023.
Industry Sees Pressures In Back Half Of 2022
The study highlights that the sporting goods industry marked “another great year” in 2022 following a strong recovery in 2021, aided by steadily improving consumer sentiment, the loosening of pandemic-related restrictions, and robust orders partly due to early ordering to avoid the supply chain challenges of 2021.
However, the economic outlook in the second half of 2022 slowed amid geopolitical instability and the trajectory of interest rates with inflationary pressures weighing on consumer spending. McKinsey wrote, “The aggregate impact of these factors was a significant weakening in industry performance compared with 2021 (although still in advance of pre-pandemic levels). Sporting goods companies were able to raise prices, but not enough to offset declines in units sold. That said, some categories performed better than others, leading to both risks and opportunities for individual players.”
Going forward, the industry remains cautious. A survey of sporting goods firms taken by WFSGI and McKinsey in October 2022 found that six percent of sporting-goods companies were confident about their resilience and performance amid inflationary pressures and eroding consumer sentiment.
The three words that executives used most frequently to describe expected conditions in the industry in 2023 were “challenging,” “uncertain” and “unpredictable.” The biggest concerns in the second half of 2022 have been falling demand and excess inventory. Looking to the coming year, 22 percent of decision-makers expect both revenues and margins to contract by more than 5 percent.
Six Actions To Manage Uncertainty
The study identified six commercial, operational and financial levers active lifestyle companies could use to navigate inflationary pressures and potential recessionary conditions:
- Implementing smart pricing and channel management. Data and analytics, for example relating to price elasticity and competitor offerings, can inform flexible pricing strategies and revenue management to protect net margins and limit the impact of volatility. McKinsey estimates effective implementation could lead to a 5-to-15 percent revenue boost.
- Resetting return on investment. Decision makers were advised to consider conducting a top-down review of efficiency by channel and SKU to invest for growth. McKinsey’s analysis estimates this could lead to a 10 to 20 percent saving in marketing budgets and enhanced return on investment.
- Strengthening brand communications. Communications could be optimized and refocused on the brand’s core value proposition, which could help companies achieve a 2 to 5 percent revenue uplift.
- Building supply chain resilience. Reviewing sourcing and supply chains and applying next-generation levers to the cost base. McKinsey estimated a payback of 5 to 10 percent in possible savings.
- Fostering next-generation organization productivity. An agile approach and innovations such as robotic process automation can lead to longer-term savings of 5 to 10 percent, according to McKinsey. Warehousing and transportation costs could be reviewed to unlock productivity lever.
- Optimizing finance. Companies could focus on freeing up cash and exploring divestments and acquisitions.
Four Themes For 2023
The study suggests four key themes to guide the industry in the near term.
- Brand relevance increasing. McKinsey wrote, “Building brand heat and loyalty is more relevant than ever, especially in a recessionary context, where consumers tend to rely on trusted brands. The consumer journey is shifting, especially when shopping for lifestyle categories. Whereas previously, consumers were motivated first by factors such as functionality, design, and price, they are now increasingly driven by brand. Notably, the industry’s high performers in terms of value creation are characterized by high levels of brand equity and loyalty. In the lifestyle apparel category, sporting-goods companies are on a similar journey as fashion companies, involving a need to build strong and trusted brands that leverage the direct-to-consumer revolution, collaboration with other brands, and community marketing.”
- Sustainability: McKinsey wrote, “Time to deliver on promises. Brands, retailers, and manufacturers have made bold promises of a more sustainable future, but are they up to the challenge? With self-imposed deadlines on the horizon, it is time to deliver. Two priorities could shape their agendas: (1) plotting the path to net zero by setting CO2 baselines, defining emissions abatement curves, prioritizing decarbonization levers, and planning for the challenges ahead; (2) defining the company’s role in the growing circular economy, choosing from a range of business models to scale. In an environment where both regulators and consumers are targeting greenwashing, companies should carefully consider how they deliver on their actions and ambitions.
- Nearshoring: McKinsey wrote, “A potential solution for supply chain disruptions. Supply chain disruptions, higher trade barriers, and geopolitical turmoil are putting pressure on supply chain security and leading to higher costs. Nearshoring can unlock a range of benefits in a disruptive context: control and derisking of the supply chain, agility and speed, cost structure competitiveness, protection against trade barriers, and a more sustainable operating model in the eyes of consumers. Still, nearshoring does not always go according to plan, evidenced by the fact that some companies have recently reversed nearshoring decisions. Whether to nearshore or not should be decided at a product level, assessing exposure to supply chain shocks, the need for shorter lead times, and the economics. It is important that the nearshore country meets the requirements for raw materials and components and offers the right capabilities and capacity. A detailed business case should take into account a holistic set of variables to determine financial impact and feasibility, as well as potential government incentives.”
- Sporting-goods industry: a hot target for private investors. McKinsey wrote, “The sporting-goods industry has grown strongly over the recent years and is likely to continue on that path, amid rising consumer health awareness and deepening interest in outdoor lifestyles and athleisure apparel. In addition, the industry has proven to be more resilient in downturns, bouncing back faster than others. Furthermore, it comprises many smaller but well-differentiated brands, which make attractive targets for consolidation or growth plays. These factors have fueled interest among private investors, including venture capital firms, private equity funds, and companies, with the number of annual deals doubling in the past decade. Focus areas have included outdoor categories, connected fitness equipment, athleisure and activewear, and sustainable sportswear.”
The study also includes interviews with industry executives, including Barbara Martin Coppola, CEO, Decathlon; Colin Browne, interim president and CEO, Under Armour; Tim Boyle, CEO, Columbia Sportswear CO; Ann Miller, EVP, chief legal officer, Nike; and Hoa Ly, SVP, global sourcing, Adidas.
To read the full study, go here.