Sporting Goods Retail Executive Summary The sporting goods retailers range from national large-format stores in which customers can buy just about any equipment and apparel they need for any sporting events and seasons, to local specialty stores that only resell used sporting equipment or specialize in selling equipment and apparel for one specific sport. Because the industry is so fragmented, we define our industry as the national big-format sporting goods retailer industry, which includes stores that only sell, not buy and resell a wide range of sporting equipment and apparel for most sports and for all season.This definition excludes discount stores, such as Wal-Mart and Target, or department stores, such as Macy’s and Nordstrom’s; that dedicates only a small portion of their stores to sporting goods. We also exclude used sporting goods retailers such as Play-It-Again Sports. We’ve defined our industry under such conditions because we do not want to lose our focus with the many aspects of general retailing while not limiting ourselves to specialty stores, which mostly are private companies and that would have prevented from collecting necessary information.
This report presents factors influencing the profitability for sporting goods retailers and how each factor specifically affects the profitability of the industry’s incumbents. Such factors include: inventory management, suppliers and manufacturers of sporting goods, competition, increasing health awareness, and consumers’ disposable income. Concluding our report is the finding of the best and worst performers within the industry based on the criteria that are derived from the profitability factors.After studying the data gathered from a few selected companies competing in the industry and their performances are measured against our criteria we’ve determined that Dick’s Sporting Goods is the best performer while Sports Chalet is the worst performer of the industry.
Analysis: Profitability Factors Inventory The profitability of individual firms in the retail industry depends on the firm’s merchandising and marketing abilities. Thus, one of the major influences of profitability in the Sporting Goods Retail industry is inventory level and its mix in individual stores.The retail landscape of the past allowed for higher profit margin than today, which allowed for greater flexibility in the inventory level of each individual store. However, this landscape had changed drastically over the years and the profit margin had become razor-thin, which means that the flexibility of inventory level disappeared along with the margin (Fou, page 2). Keeping a high level of inventory drives up inventory turnover rate, which causes an increase in inventory holding costs, including warehouse rents.Besides driving up costs, increased inventory holding cost and turnover rate decrease productivity per worker and per square-foot of a retailer.
Due to the seasonality in the nature of demands in sporting goods such as surfboards and wetsuits for the summer; snowboards and snow boots for the winter, a large-format sporting goods retailer must have a sufficient inventory level to meet the seasonal demands to achieve the sales numbers. Inventory management for a sports retailer requires a level of expertise, because in many cases firms have had to eliminate profit by writing off bad inventory.Therefore, management has to keep in mind not to overstock in order to avoid below-margin blowout sales at the end of each season. Because of the short selling season nature of the sporting goods retail industry, it is extremely important for management to have a good control of inventory, thereby reducing costs and increasing profitability (Fou, page 3). It is just as important for large-format sporting goods retailers to have a wide range of product mix. As the baby-boom generation ages, those that are included in this generation are looking for ways to stay trim and fit without having to over exert their physical ability in doing so.Therefore, the baby-boomers are turning towards weekend hikes or simple exercise walks along trails or around the parks (“Shaping Up”). At the same time, large-format retailers also have to consider the growing popularity of trendy and seasonal sports such as snowboarding and surfing that have been gaining ground with the younger generations.
It is a good idea for sports retailers to not only offer sporting equipments but also offer sport apparel and accessories.Although consumers are leaning towards performance apparel such as Under Amour and Dry Road, there’s still a portion of consumers that are looking for functionality as well as fashion-conscious clothing articles. According to Business Wire, athletic clothes and shoes account for a quarter of the industry’s revenue. Based on one study, the generic private-label products that are available in a particular sporting goods retailer sell at around 5 to 6 percentage points higher than its branded products, such as Nike and Under Armour.Thus, sporting goods retailers should not only focus on branded products and should acknowledge that by spreading their product mix through carrying the private-label products is important to a firm’s profitability because of the higher profit margin that they offer.
It is imperative to the profitability of a firm that is competing in the large-format general sporting goods retail industry to have a wide range of products at the right level. This allows the firm to meet customers’ demands without having to deal with below-margin sales at the end of each season due to overstocking.Suppliers/Manufacturers The manufacturers and suppliers of sporting goods are oftentimes able to become direct competitors of the retailers that they supply the goods to. According to DataMonitor’s “Sport Equipments in the United States,” there exists a growing trend of big name manufacturers, such as Nike and North Face, cutting out “middle-man” retailers by selling their manufactured products directly to the end consumers through their own retail outlets.Not only do these suppliers and manufacturers are able to distribute goods through their brand retail outlets, but today’s technological advancements allow them to take advantages of the internet by selling directly to end-consumers through their own internet websites.
A consumer can conveniently go to Nike. com or K2. com to do a quick research of what the person is looking to buy. With a click of a button, the person can charge the product on his/her credit card, and the product is delivered to that consumer in a few days.This trend of suppliers and manufacturers becoming direct competitors of sports retailers shrinks the market share of each individual firm in the sporting goods retail industry by adding more players into the playing field. The end result is the decrease in firm’s profitability caused by the shrinking market share. Competition A report done by John Cronin for the Tiger Valuation Services indicates that there is a growing trend of retailers shifting their focuses more towards the superstore-type structure (Dick’s Sporting Goods and Sports Authority) through expansions or acquisitions.However, because these superstore-concept companies hold less than 50 percent of the market, the remaining goes to smaller companies and specialty stores.
While the superstores are able to attract a wide base of consumers with their broad product spectrum and a wide selection of brands while enjoying economies of scale due their sizes, the small specialty stores are able to maintain success through specialization in selling products for one line of sport, such as golf or hunting, or offer unique products that attract sport enthusiasts.Outside of selling sporting goods, retailers are competing in many different ways to expose their brands, such competitive activities include sponsorships of special sporting events and offerings of in-store services, just to name a few. A study done on a particular sporting goods retailer indicates that sponsoring special sporting events, such as Little League Baseball, enables the firm to work directly with the leagues and coaches in numerous ways at the same time exposes its brands by donating equipments to the leagues.
The layouts of each individual store may be a competitive edge for that particular store. For example, a certain area of a store may be dedicated to selling golf equipments and apparel. To differentiate its golf department from other stores’ golf departments, a store may consider putting in an indoor putting green and hitting area to attract more customers by allowing them to test out the clubs before buying committing.
This differentiating concept can be applied in other departments of a sporting goods retailer as well.A retailer may want to dedicate an area for a track to allow customers to test out athletic shoes in their shoes departments, or an in-house service area for bikes in their bicycle departments, etc. The various ways that a firm differentiates itself, by either offering special in-store services or reaching out to community and sporting events, can help that firm obtain a competitive edge against its competitors and thereby boosting its profitability because it is able to attract more customers.
Health Awareness As more and more are becoming aware of the many different health problems that face those who choose to lead an inactive lifestyle, consumers are choosing to invest more money into activities that are considered to be good for or can improve their health. Such investments include gym memberships, in-house exercising equipments, specialty sporting equipments such as mountain bikes or surfboards, or even as simple as athletic shoes for weekend hikes or runs.A study shows that nationally, Americans spend close to about $4 billion on exercise equipments, followed by golf equipments with total sales of $2. 5 billion. As consumers are more informed of health risks, they are realizing that it is not something that can be compromised, so more and more are willing to invest in exercising equipments or specialty sporting goods to take care of themselves. The purchases made by informed consumers about their health increase each firm’s profitability by increasing sales. Disposable IncomeBecause sporting equipments are not considered to be necessities, consumers’ disposable income has a positive effect on the profitability of a sporting goods retailer—the higher the disposable income, the more a consumer has to spend on luxury goods, including sporting equipments. A brief article on Dick’s Sporting Goods reveals that when the economy takes a turn for the worse and shrinks consumers’ income and spending, as a retailer of non-necessities, Dick’s is one of the first to take great loses in its sales.
Also due to the fact that the retailers in this industry do not diversify their product offerings compared to the general retailers like Wal-Mart or Target, who also sell books, music, bath products, as well as sporting goods, the firms in the sporting goods retail industry absorb greater impact of a depressing economy compared to retailers outside of the industry. Because sporting equipments are considered to be luxury items, consumers are more than likely to not make purchases of such items if they do not have any or have low disposable income to spend.When this is the case, then the profitability of a sporting goods retailer shrinks as consumers’ disposable income shrinks. An analysis of the factors driving performance at the top and bottom firms identified.
The factors driving performance at Sport Chalet are effective inventory control, exclusive deals with its buyers, core specialty merchandise, full-service approach to customer service, and an online store/consumer-commerce services. In 2007, Sport Chalet replaced its multiple homegrown merchandising and finance systems with mySAP™ ERP with the help of BearingPoint, a management and technology consulting firm.The upgraded system provides accurate, real-time information and help drive compliance with Sarbanes-Oxley requirements (Apparelmag, 2007).
As a result, Sport Chalet can improve decision making and automate manual processes. The company can also plan and allocate their inventory more effectively and efficiently by looking at which stores sell what types of product in the greatest quantities and allocate to that demand. The slow moving items can have less shelf-space or be discontinued. Customers are also more likely to find what they want in the right size or color.
In 2008, Sport Chalet obtained an exclusive three-year deal with USC and UCLA. The partnership gives Sport Chalet a presence at all USC and UCLA home football and basketball games through ads, signage, video and message board opportunities, direct marketing and retail promotions. This enables Sport Chalet to directly engage its target audience and “become the Official Sporting Goods Sponsor for two of the world’s top collegiate brands,” Craig Levra, chairman and CEO of Sport Chalet, said in a statement.As a result, the company has an opportunity to improve and expand their brand recognition.
Another driving force at Sport Chalet is its specialization in selling its core merchandise of higher-end branded products for serious sports enthusiasts (such as SCUBA, mountaineering, skiing, golf, and cycling) and carry some traditional sporting goods merchandise (such as footwear, apparel, and other general athletic products). The company also offers more than 50 complementary services (SCUBA training, canyoneering, kayaking instruction).The specialty items carried by Sport Chalet stores, targets a niche market, experienced core sports enthusiast, which its competitors may not have. This helps differentiate the company from its direct competitors. However, Sport Chalet’s core merchandise of higher-end branded products turns away price sensitive consumers, especially in this economic downturn. The large number of services (over 50 services) offered at Sport Chalet stores may also be disadvantageous because it has a huge fixed cost, requiring adequate staffing and training. In November 2008, Sport Chalet launched a new website: www.
portchalet. com, offered through GSI Commerce, Inc. Sport Chalet receives a license fee based on a percentage of sales generated by the Website (Reuters, 2009). The Internet has a huge customer base and having the website will help drive Sport Chalet sales and expand the market presence of Sport Chalet. In addition, the company offers a branding website, www. actionpass. com, which presents Sport Chalet’s in-store brands and specialty services. This site also serves the Company’s Action Pass members with notification of member-exclusive merchandise and experiences.
Action Pass will help lock in loyal customers of Sport Chalet and provide the customers with additional services that may not be found in other companies. The site also features athlete appearances and instructional information, and blogs to further engage the consumers to have an interactive and fun experience. Some of these factors driving performance for Sport Chalet are also driving performance for Dick’s, such as effective inventory control, full-service approach to customer service, and an online store/consumer-commerce services.
In 2003, Dick’s chose MicroStrategy Business Intelligence Platform to replace Cognos as its enterprise reporting standard (MicroStategy, 2003). Dick’s is able to perform sales, category, and inventory management analyses in order to more effectively track product sales, product mix, and inventory levels. Both Sport Chalet and Dick’s use a software application to manage their inventory and the tracking product sales, helping management make revenue-generating decisions.Dick’s also provides trained customer service professionals to enhance its customers’ shopping experience, but it only has professionals in the golf, bicycle, and fitness departments. According to Dick’s website, since January of 2009, the company has 444 active members of the Professional Golfers’ Association, 511 bike mechanics, and 359 certified fitness trainers at its 384 stores. In 2006, Dick’s launched a new site with GSI commerce, Inc, but has operated an e-commerce site since January 1999.The new online hubs provide interactive shopping experiences for customers and provide online communities, such as the bragging boards, where people of similar interest frequent even when they are not making a purchase. The redesigned online store intends to drive the authentic look and feel of the Dick’s Sporting Goods brand across channels, address the needs of the retailer’s key customer groups, and deliver a rich online shopping experience (gsicommerce, 2006).
This is the same provider for Sport Chalet, but Sport Chalet launched their first website nine years later fter Dick’s first website and about two years later after Dick’s newly designed site. Dick’s early launch of the company website, have given Dick’s an opportunity to first reach out to a broader consumer base thus capturing more customers and having the opportunity to push its brand to different markets where its physical stores cannot. For example, Dick’s was mainly located on the east coast and with the launch of its website, people on the west coast can view Dick’s website and easily place their orders through.Dick’s has also changed its approached to the e-commerce business. Under the previous contract with GSI, GSI was the seller of the merchandise and managed the online inventory. Therefore, Dick’s only recorded a royalty fee and revenue share which Sport Chalet currently still has with GSI (Investor Relations, 2008).
Under the new agreement between Dick’s and GSI, Dick’s will now record all sales, inventory costs, and fees incurred through GSI’s services. This will give Dick’s the ability to better control inventory and control the customer experience from an online standpoint.Other factors driving performance for Dick’s is its own growing private-label brands, and establishing good relations with its vendors. Dick’s private-label brands include Ativa, Acuity, Walter Hagen, Northeast Outfitters, PowerBolt, etc. Its private-label products typically contribute 5-6 percentage points higher than the typical branded goods (such as Nike, Under Armour, Adidas, Reebok, etc). Dick’s has put an increased emphasis on these private-label brands as they have grown as a percentage of total of sales from 5. 8 % in 2002 to 14.
1 % in 2006, refer to graph 1 (wikinvest, 2006).The private-label brands will continue to help Dick’s increase its gross profits. Dick’s ability to maintain good relations with its vendors is important because Dick’s receives discounted products and exclusive deals. According to Ed Stack, CEO of Dick’s, stated “We have been able to go out into the marketplace and buy products from our partners and our suppliers at reduced prices that we will be able to pass that value and those price concessions on to the consumer. ” This will help Dick’s through the economic downturn because consumers have less extra spending money.
According to wikinvest website, consumers view sports equipment, apparel, and footwear as luxury items. Dick’s has also established an exclusive lines of Nike ACG, Slazenger, Umbro, Reebok, Field & Stream and adidas baseball merchandise, which are available only in the Company’s stores. Many of Dick’s products have incorporated technical features such as GORE-TEX fabric which is waterproof and breathable. In addition, typically the well-known brands names have COOLMAX fabric, which take moisture away from the skin to the fabric, where the moisture evaporates faster (Investor Relations, 2008).By using these exclusive brands and features, Dick’s offer value products to its customers, obtain higher gross margins than the sales of the non-exclusive well-known brands, and help differentiate Dick’s Sporting Goods’ offering to its customers.
Dick’s also works closely with Nike to come up with concepts that works efficiently in the stores and advertising. Nike and Dick’s have a partnership where specialty shops can be created to give the image that is consistent with both brands. Many stores have gone as far as having sales associates funded by Nike to work the brand shop, in essence creating a store-within-a-store.Both benefit mutually with this partnership because Nike can showcase their products at a successful retailer and at the same time Dick’s has a globally known product, Nike, being sold at its stores. In 2008, Nike also teamed up with Dick’s Sporting Goods for a series of commercials featuring various professional athletes.
These commercials will help Dick’s brand being associated with world-class athletes and Nike. Recommendations for Sports Chalet: After analyzing the factors that drive profitability for both firms, we feel that Sport Chalet needs to consider our recommendations in order to remain competitive in the industry.The suggestions are aimed towards Mr. Craig Levra, current CEO and President of Sport Chalet. There are four main recommendations that would benefit Sport Chalet: a possible merger or joint venture with another firm, further expansion into other states, offer more varieties of products, and last is to evaluate current stores. Sport Chalet is a much smaller firm compared to Sport Authority and Big 5, its main competitors in its territory but will face even more competition with Dick’s recent acquisition of Chick’s Sporting Goods.
It will be very difficult for Sport Chalet to take on the industry’s largest competitors alone thus Sport Chalet would benefit greatly from a merger or joint venture with another sporting goods company. The other firm should not be located in the same region as Sport Chalet, but possibly located in the east coast. Since California has a highly competitive environment and has high costs associated with land/rent, expanding into the area would be very costly but by merging with Sport Chalet, these costs would be reduced.Sport Chalet should also seek another firm outside of its core market in an attempt to expand its influences into new regions. The cons to a merger include: current employee resistance to change, management conflicts, and disruption of company cultures. These negatives factors can be avoided or reduced if both firms take the time and effort to train employees dealing with a merger.
We feel that the positives outweigh the negatives and both firms would benefit from the ability to expand their influences on one another. The second option Sport Chalet should consider is further expanding its stores into new territories.With only 55 stores in 3 states, Sport Chalet has a small share of the market in comparison to Dick’s and Big 5 with over 300 stores each. In order to increase its share, it must increase its size and it must enter new states. Research should be a priority in selecting the geographical locations to enter. The locations should have few competing firms as well as an active community in regards to outdoors activities.
The population size should be considered and should be large enough to sustain the stores. Benefits from expanding into new states would include an increase share of the market as well as the potential for an increase in revenue.The downside to this strategy is that a large amount of capital will be needed and Sport Chalet currently has very little of that.
A loan would help get it started but eventually the loan will have to be paid back. In these current economic times, Sport Chalet may take a while to pay back the loan and the interest on the loan may hurt the company. If the new stores generate enough profit to cover the loan then this strategy will be very beneficial because Sport Chalet will have different locations to expand its brand and capture new customers.Another alternative for Sport Chalet would involve increasing the types of products it carries.
By adding a larger variety of products instead of focusing on premium products, Sport Chalet would be able to compete better against its rivals. Currently Dick’s offers a wider variety of products and many consumers have left Sport Chalet for this reason. Sport Chalet is neglecting a large amount of its consumers by offering a limited selection of items in its inventory. Not everyone is looking for premium products and Big 5 and Dick’s has proven that by selling exclusive products by private labels at discounted prices.Consumers are looking for the best products at the best prices but some are willing to sacrifice the brand name items for discounted ones as long as the products seem high in value. There are some downsides to this alternative. The first would be a cannibalization on sales of the premium products. This can be countered by decreasing the number of premium products Sport Chalet carries and would help decrease the chances of overstocking.
The second downside is finding a supplier that would be willing to produce products which are to be sold at discounted prices.Once a supplier is found, Sport Chalet will have the ability to cut costs by purchasing items at a discounted price but also carry a limited supply of premium products. The fourth suggestion deals with evaluating Sport Chalet’s current stores.
The firm should look at the bottom performing stores and consider closing them if the stores are unable to generate positive income, in a timely matter. Unfortunately in today’s recession, it will be difficult to gauge exactly what store will be able to turn around and what stores will continue to be in the red.The positive aspect would be saving money by cutting costs on stores that are doing poorly. Sport Chalet should also attempt to negotiate lease prices in order to further decrease costs. Since housing prices has dropped in its core market, Sport Chalet has an opportunity to negotiate a lower lease price. Dick’s has already started this strategy in an attempt to also cut costs. Cutting fixed costs can be one of the easier aspects to look at.
Reducing store hours and possibly reducing the amount of days a store will be opened during a week can affect the costs included in running a store.By evaluating the hourly sales, especially the first and last hour a store is opened, Sport Chalet can determine whether or not it would be beneficial for it to close an hour earlier or open half an hour later. This would reduce the costs it incurs paying its hourly employees as well as other fixed costs associated in operating a store.
This suggestion should only be used once stores are evaluated and the costs saved outweigh the potential sales during those hours. We feel that Sport Chalet should consider a combination of the suggestions above.Every company should attempt to reduce fixed costs in order to save money. By closing stores operating at a loss, Sport Chalet could focus on expanding into territories in hopes of generating a positive income.
To remain competitive, Sport Chalet should carry products that further compete with other firms in its industry. Offering a larger variety of products and reducing the amount of premium products can help save costs as well as attract consumers lost to other firms offering discounted prices on merchandise.A merger can help accomplish the goal of expanding into new regions as well as a chance to learn new ideas from another firm. Sport Chalet has to remain competitive if it wants to survive and with the increase of competition in the area it must act soon. Graph 1: Dick’s [pic] http://www. wikinvest. com/wiki/Dick%27s_Sporting_Goods_(DKS) References • “20,000 Companies Occupy the $25 Billion Us Retail Sporting Goods Industry. ” Business Wire.
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