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At start of ‘shakeout cycle,’ retailers prepare for a new reality

After America’s largest sporting goods chain goes under, when you gather hundreds of sporting goods manufacturers and retailers, the main topic of discussion is obvious. The Sports Authority’s bankruptcy means 20 million square feet of sporting goods retail is gone, and
apparently it will not be missed. TSA’s liquidation, in tandem with similar problems at Sports Chalet, City Sports and Golfsmith, meant that the dreaded “s” word, was on everyone’s mind at the recent Sports & Fitness Industry Association Leaders Summit in Denver.

“We’re at the beginning of a shakeout cycle and it’s impacting everyone short term and long term,” said Mitchell Modell, CEO of the sporting goods chain in the Northeast that bears his family name.

Short term: TSA’s bankruptcy flooded the market with 2 million pairs of heavily discounted sneakers between Memorial Day and the end of July, along with a million pairs of cleats. Long term, fundamental changes are coming. Merchants of every sort are finding it difficult to compete with their internet competition. Earlier bankruptcies by Borders and Circuit City, along with the continued struggles by department stores like Macy’s, which is closing 100 locations, are testimony to that. Supply has exceeded demand at sporting goods retail for some time.

Still, it’s a problem across categories. According to the International Council of Shopping Centers, in 2015 every American had 23 square feet of retail at his or her disposal; Australia was second, with about half that much.

“The country is just over-stored when you come down to it,” said Larry Franklin, president of Franklin Sports, longtime holder of MLB batting glove rights.

President Tom Cove said that, despite disruptions, sports and fitness product manufacturing “is an industry that’s still growing and vibrant.”
Photo by: TERRY LEFTON / STAFF
“Everyone in this room knows there’s too much brick-and-mortar retail,” echoed Doug Kelly, former president of Pro Player, Easton Sports, Russell Athletic and Mizuno, and now a private consultant. “Now the question everyone’s trying to figure out is, ‘How much is enough?’”

As evidence of retail oversaturation, Kelly cited the 24 Sports Authority stores that were once spread between Denver and Pueblo, Colo., a distance of about 115 miles. A few blocks from the conference, it was easy to find another example. On the 16th Street Pedestrian Mall, two Sports Fan licensed sports apparel and hard goods stores were separated by just five blocks.

Along with oversaturation, e-commerce was often cited as a principal reason for the distress among traditional sports specialty retailers, but there are multiple causes.

“Part of it is e-com,” Modell said, “but it’s also the election cycle and having more consumers’ dollars tied up in health care costs. Every retailer is wondering: If the minimum wage goes up, does that mean you try to do more with less?”

NPD Group Sports industry analyst Matt Powell said overexpansion and the debt taken on to build more stores were also to blame.

“The commonality in the bankruptcies of Sports Chalet, City Sports, Sports Authority and Golfsmith is that they were all highly leveraged,” Powell said. “If you are spending on debt service, you can’t be spending on logistics and e-commerce, which is what it takes to compete. The most amazing stat I saw out of the Sports Authority bankruptcy is that their sales had not grown in 10 years — and that was a time when the industry was having its most robust growth ever.”

To counteract what it termed an “inactivity pandemic” in America, the association is lobbying hard behind the PHIT bill, which would allow for reimbursement of physical activity expenses, including gym memberships and sports league fees, from pre-tax dollars from medical and flexible spending accounts.

Flagging team-sport participation has not been matched by disappointing financials among sporting goods manufacturers, though some were hurt by the retail bankruptcies.

“For all the disruption over the past six months, this [sports and fitness product manufacturers] is an industry that’s still growing and vibrant,” insisted SFIA President Tom Cove.

Is that a disconnect, or is retail a leading indicator?

“The retail side is foreshadowing a new reality,” said SFIA Chairman and Life Fitness President Chris Clawson. “The pipeline of product from manufacturers to retail is one thing. The question is and will be: After digestion, when will they eat again?”

The industry’s brick-and-mortar retailers know there’s a new reality. They are still coming to terms with exactly what that will be.

“Everyone’s re-examining their retail business from top to bottom,” Modell said. “We should all be asking: ‘If you went away tomorrow, who would miss you?’ Disney and Starbucks are the models there that we should all be emulating.”

Amazon’s Fouzan Mansuri (left) and Ryan Elvers talked about their company’s place in sporting goods sales.
Photo by: TERRY LEFTON / STAFF
> E-TAIL VS. RETAIL: Amazon executives speak at conferences about as often as the Chicago Cubs win the World Series. So perhaps it was because the Cubs have had the best record in MLB all season that two execs from the e-commerce giant’s sports division shared some thoughts in front of a room filled with both competitors and business partners.

Fouzan Mansuri, director and category leader of sports at Amazon, said the sports category was vital to Amazon because of its diversity and reach. “The vast majority of Amazon customers have purchased a sporting product within the past year,” he said. Families and students are the biggest groups with the Amazon Prime subscription service, and those segments also overindex on sports purchases.

Amazon’s video offerings, which include the NFL Films-produced “All or Nothing” seasonlong series on the Arizona Cardinals, are another reason sports are important at Amazon. Mansuri said those who have sampled Amazon video are more likely to become Prime members and more inclined to renew those memberships.

Asked about the biggest market misperceptions, Mansuri insisted that Amazon is not like Wal-Mart when it comes to dictating retail pricing. “The perception is that Amazon drives prices down, when in fact, all we do is follow the market … we try to match and follow prices,” he said.

Ryan Elvers, Amazon’s sports marketing lead, maintained that since 44 percent of all product research online starts at Amazon (compared with 34 percent for all search engines combined, he said), the site is as much of a “product research destination” as a web retailer. While Amazon’s 300 million accounts dwarf others, Amazon nonetheless fuels offline sales, Evers said. Both Amazon execs cited stats showing that for every dollar that starts offline and ends up in an online purchase, there are $6 that start online and result in offline purchases.

“We’re OK with that, because it means we’re building goodwill and trust by being part of the customer journey,” Elvers said.

Given Amazon’s vast selection, some in the room still were somewhat uneasy with Amazon’s presence, but noted it had yet to market itself as a sports superstore.

“There’s an open question there,” Elvers said. “Does Amazon Sports or any of our big categories become their own brand? That’s something that will play itself out over the next several years.”

Terry Lefton can be reached at tlefton@sportsbusinessjournal.com.

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