Nike Strategy

Chapter 1

Introduction

Industry Overview

Overview of the Indian shoe industry

We can have an overview of the shoe industry with respect to some factors which can be categorized into 2 parts

1. Aggregate factors
2. Category factors

Aggregate factors

Size: The Indian footwear industry is largely in the hands of the unorganized sector. The size of the industry is Rs.70 billion in value terms and 620 million pairs in terms of volume. Of this 100 million belongs to the organized sector. In addition 40 – 45 per cent of the organized sector is composed of canvas and rubber shoes, mainly sports shoes. Of this, about 35 per cent can be estimated to fall under the category of the premium sports shoe segment. That means that the total market size of the premium sports shoe segment in India is approximately 35 million pairs.

Growth: The footwear industry as a whole is growing at a rate of 10 – 12 per cent per year. No clear-cut data regarding the growth of the sports shoe segment is available, but the growth rate is expected to be higher than the rest of the industry.  Since the phenomenon of international brands like Nike, Reebok, Adidas and Lotto being available in the Indian market is reasonably recent, there are still a considerable number of first-time buyers in the country. This coupled with the growing population and the increasing number of young people in the country; we can expect a growth rate of about 40 per cent in this segment.

Life Cycle Stage: If one were to place premium quality sports shoes in a product life cycle graph in the Indian context, one would find it in the period of rapid growth. The rage of possessing a pair of high quality and expensive sports shoes has just caught on and more and more international players are expected to enter the market. The market is therefore expected to grow even further and it will be a while before the product reaches the phase of maturity.

Cyclicity: The sports shoe industry in India as well as around the world displays a direct cyclicity with major sporting events of the world. There is generally an increase in sales during the Olympics and the Soccer and Cricket World Cups. Following these upsurges in sales, there are usually periods of low sales.

Seasonality: Again, the demand for sports shoes, as a whole is not really seasonal in nature. However, if we go deeper and look at individual models or shoe-types within the sports shoe industry, we may notice the slightest semblance of seasonality. For instance, soccer shoes are likely to enjoy more sales in the summer and monsoons than in winter owing to the fact that most soccer in the country is played at these times in a year. At the same time, since sports shoes are often used as fashion accessories and footwear, a buying flurry may take place in the months of October and November, during the festival of Diwali – the gift-giving period in India.

Marketing Mix: Sports shoes in India are usually distributed through company showrooms, franchisees and other retail outlets. Certain brands have their own exclusive company-owned showrooms, while others operate through franchisees. In addition, many distribute through retail outlets as well. As far as pricing is concerned, a sports shoe in India can cost anything between Rs.300 to Rs.11000 depending on the brand name, quality, and design of the shoe. For the premium brands, the lower limit can be raised to Rs.800.  The type and promotion varies from brand to brand. While most players use print media and billboards for advertising, some use television advertising as well. Celebrity endorsements are a common form of promotion for sports shoes in any country and India is no exception. Often, these companies also sponsor sporting events and sports programs on television in order to promote their product.

Category factors

Concentration: As mentioned before, the sports shoe market is about 40 – 45 per cent of the organized sector. This amounts to about 45 million pairs of sports shoes every year. This can be further split into the premium and general segments. In the premium segment, the major players are Nike, Reebok, Adidas and Lotto. Reebok is the largest player enjoying about 50 per cent market share. The rest is divided between the other players, with Nike having around 30 per cent of the overall market.

Power of Buyers: The end customer in this case does not have much power as a buyer. Bargaining power is not a factor in this industry as the prices are always fixed. Prices are also standardized across stores, which mean that no matter where you buy a pair of Nikes or Reeboks, they will cost the same. As far as the outlets and sellers of these products are concerned, their situation is pretty much the same. Most of the time these sellers are either franchisees or agents who do not have any say in the matter of prices.

Power of Suppliers: As can be inferred from the section on buyers, above, the power here lies in the hands of the suppliers. They decide upon the prices and sell them to the end user as well as intermediaries at standard and fixed prices. This is due to the fact that the product range itself is more or less standardized.

Rivalry: In the premium segment the rivalry is between only a few players. This means that competition is intense with only about 3 or 4 brands vying for the market. If the picture can be broadened to include the non-premium segment as well, the number of competitors increases. Multinationals like Nike and Reebok have hardly any presence in this segment, with only 1 or 2 models in this price category. But then, this is not the segment being targeted by these companies.

Pressure from Substitutes: Substitute products in this case are other forms of footwear. This is of course, true only in the case of people who use sports shoes as leisure or fashion wear. After all, a sports person cannot be wearing anything other than sports shoes. To be more detailed, substitute products are leather shoes and sandals. Again, since we are concerned primarily with the premium segment, we can narrow the substitutes down to expensive leather shoes and sandals. Premium users can be expected to switch brands and even the generic product, but usually do not downgrade to a lower price range.

Ease of Entry and Exit: For a domestic or new player, the entry barrier would be very high. Brands like Nike and Reebok are well established in the country and it would be difficult to displace them. In fact, all the players in the premium segment are international brands, with worldwide reputation and recognition. Although it would be possible for other well-established international brands (like Fila and LA Gear) to enter the market, it would be almost impossible for a local manufacturer to enter the segment under consideration. At the same time, following the implementation of WTO regulations, it has now become easier for multinational players to import shoes and penetrate the market in a big way. This makes it possible for them to achieve significant economies of scale, while cutting down on manufacturing costs.