(SGI+) The year ahead should be more positive for the sporting goods market in general in view of mega-events such as the European Football Championships and the Summer Olympic Games in Tokyo, where climbing is going to be one of the new disciplines. Furthermore, the recent stock market rally suggests that the general economy is looking brighter than before, with trade tensions subsiding between the U.S. and China and between the U.K. and the European Union. The more recent projections by the International Monetary Fund (IMF) are just a little more pessimistic, predicting growth of 3.3 percent for the world economy.

At the same time, money has become cheaper, providing plenty of opportunities for new and hopefully smarter acquisitions. We would not be surprised if the consolidation of the sporting goods industry was to accelerate in the next decade, creating big new empires in the sector like LVMH in luxury goods, after last year’s momentous acquisition of Amer Sports by Anta Sports Products of China and other investors.

With the outdoor market not growing as rapidly as before, product diversification is becoming more desirable, and it can be conducted through external growth, as Rossignol showed a couple of years ago with its acquisition of Dale of Norway. The European Outdoor Group is calling for a broader definition of the outdoor sector, attracting boardsports brands like Burton.

We at the Compass have started to cover the snowsports segment more intensely, in partnership with SGI Europe, considering it an integral part of the outdoor sector. Adidas Outdoor is preparing the launch of a skiwear line, as reported elsewhere in this issue. Callaway Golf’s recent takeover of Jack Wolfskin indicates that even golf can be regarded in some ways as an outdoor sport, practiced in the midst of nature, requiring similar properties in the garments.

We also see new bridges being created between sports and fashion as sports participation trends are stagnating and consumers are wearing activewear and sneakers more often in their daily lives. The growing commonality of purpose has been recently highlighted by collaborations between sports brands like Adidas with Missoni and Prada, Jordan with Dior, Puma with Balmain and Rossignol with Tommy Hilfiger. The luxury segment of the outdoor market is thriving, as shown by the strong progress of Moncler and Canada Goose, which are both on the border between outdoor performance and urban fashion.

The growing fashion or lifestyle orientation of our sector, with a stronger focus on design than performance, is a growing component of the emotional content being attached to sports brands like Adidas and Nike. It is also one of the reasons why the sports equipment sector has been growing less rapidly than the athletic footwear and sports apparel sectors in the last few years, triggering Callaway Golf Company’s takeover of Jack Wolfskin and Acushnet’s acquisition of Kjus in 2019. Like the Anta-Amer deal, both of these transactions hinged not just on product diversification but also on geographical diversification, which may become a more important factor in M&A strategies.

Sports brands will continue to try to develop their business in China, whose sporting goods market continues to enjoy robust growth and whose fashion market overtook the U.S. for the first time last year. However, we think that they should also prepare the ground for stronger market penetration in relatively unexplored areas with strong potential, such as India and Southeast Asia.

Meanwhile, the pace of the supply chain’s transformation is accelerating, with new challenges and new opportunities opening up all the time on the technological, marketing and sales fronts, and with many new tools being placed at the disposal of vendors, retailers and consumers to make the best choices. It is forcing all the actors in the supply chain to be constantly on their toes and to update themselves more frequently in order to become real experts in their field and to work more closely together as a team. Cutting-edge ideas from young managers and start-ups are more necessary than ever to stay ahead of the game, and companies like Nike, Adidas, Decathlon and Asics have understood this.

The internet has just created a new channel for people to buy products. The number of physical stores is bound to continue to decline, but more and more retailers are developing an omni-channel sales model where the two forms of retailing are connected. The big brands will want to have “temples” in the big cities for image and convenience. Stores and malls will have to become more experiential for the customer. On the other hand, we believe in the development of highly specialized stores focusing on specific product categories and of hybrid neighborhood stores where the products on display are complemented by functional internet kiosks to create an “endless aisle.”

Aided by the internet, the major sports brands have continued to pursue the kind of verticalization that the luxury goods brands started many years ago, resulting in better margins and a better brand image in a somewhat flattish market environment, coupled with precious customer feedback for product innovation. Nike has been successfully leading the charge with its “direct offense,” seeking the customer’s engagement through multiple touchpoints. Its sales have continued to grow at a double-digit pace in spite of an increasingly selective approach at the wholesale level, as it has preferred to work more closely with the likes of JD Sports Fashion and Zalando to create a stronger brand experience rather than through the minor Spanish buying groups or through Amazon’s uncontrolled marketplace.

The process is bound to continue, considering that the world’s biggest luxury brand, Louis Vuitton, has achieved an operating margin of more than 40 percent while carrying out 100 percent of its sales through its own stores, and that own retail represents more than 60 percent of the turnover for other brands like Gucci and Prada. Lululemon has consistently shown that this is possible in the sporting goods sector. In China, the fastest-growing major sports market in the world, and the second-largest one, the relatively small role played by multi-brand retailers and the strength of e-commerce have allowed big brands like Nike and Adidas to achieve operating margins of more than 20 percent.

On the other hand, we find it interesting that a smaller challenger like Puma has been growing faster in a global playground dominated by Nike and Adidas through a series of quick and smart moves in all regions in terms of new product development, marketing and diversification. Under Armour did it before in the U.S. alone, and is now replicating the process in Europe and other markets.

What this means, in our opinion, is that there are potential benefits for participants in three-horse races or even bigger ones in any category of the sporting goods market, including the more fragmented outdoor market, perhaps because the new generations tend to be less loyal to specific brands than before. They insist on sustainability. Customers must be engaged differently to trigger purchase decisions. Smart and broad-minded managers guided by deep market intelligence will be required to stay ahead of the game.