Economic, geopolitical issues key concern for sporting goods industry

The concern facing many executives is whether inflation and weakening demand, alongside pressure on supply, represent the eve of a perfect storm and what can be done about it, says the ‘Sporting Goods 2022’ report.

Despite consumer pessimism due to the geopolitical situation in Europe, continued supply chain challenges, rising interest rates and inflation, spending remains strong, supported by a substantial increase in household savings in 2020 and 2021.

Rising inflation, and inflation expectations, are likely to reduce spending on sporting goods. During the pandemic, the sporting goods industry proved to be resilient. It recovered fast in early summer 2020 and maintained solid growth up until now.

However, recent economic developments suggest a change may be imminent, the McKinsey report said.

McKinsey’s European consumer study shows that spending intent on apparel, footwear and sports and outdoors equipment is declining. Given this, sporting goods categories are bucking the trend, one reason is a common behavior that occurs at the beginning of inflationary periods called ‘intent to action delay.’ In this state, consumers expedite planned purchases because they expect prices to rise.

Further polarisation of demand occurs because inflation does not affect everyone equally. Inflation has a varying impact on different income and age groups. This leads to polarisation of demand that will impact a company’s approach when it comes to pricing strategies, as outlined in the next section.

There is also a reduced inflationary impact on younger generations, who can change jobs more easily and thereby see salaries adjusted for inflation. Demand from these groups is more likely to remain steady, says the report.

Delays have caused out-of-stock situations for many sporting goods players. This has limited growth and impacted customer services already hurt by limited product availability.

Looking forward, a significant risk is excess inventory, as past blocked orders get unlocked and large flows of goods hit companies’ warehouses. Excess inventory could be especially problematic for in-season products, which would most likely need to be sold at discounted prices once the season ends.

The situation could get even worse if inflation accelerates further. This would exert cash-flow pressure on many players—especially retailers, but also brands and manufacturers, says the report.

Another element contributing to increasing complexity of supply chain networks is the recent increase in regulatory requirements that restrict imports from certain regions in Asia. These mean sporting goods players have less flexibility in setting up supply chains and may prompt some companies to review their supplier networks. In addition, the restrictions add administrative burdens and, in some cases, increase costs, it notes.

Input costs too have risen since early 2020, leading to companies struggling to maintain margins.

The report was authored by Sabine Becker, an associate partner in McKinsey’s Zurich office, Jessica Genta, a consultant there, and Alexander Thiel, a partner there. The fourth author, Kevin Bright, is a partner in the London office.

Fibre2Fashion News Desk (DS)