Is Sports Good an Early Casualty of Recession?
People are expected to spend less on their yoga pants and athletic shoes in 2023 and companies would do well to prepare a resilience strategy
Having posted robust growth in 2021, the sporting goods industry has seen intent-to-purchase dropping over 2022 with customers looking to reduce their spends on athletic shoes, and other sporting gear in the next twelve months. Companies would have to remain resilient to ride out this period of uncertainty while preparing for the next round of growth.
A report published by McKinsey says while lipstick may be recession-proof, yoga pants and other sporting goods could be hit hard by recession as people have less money to spend amidst rising inflation and higher interest rates. Companies need to embed resilience and not go for price hikes to offset this hit on their bottom lines.
Medium term looks robust; the near term doesn’t
In a report titled, “Sporting goods 2023: The need for resilience in a world in disarray”, the authors point out that compared with many other industries, the past two years have seen solid growth that equalled pre-pandemic levels. The medium term suggests optimism driven by increasing awareness around health, fitness and sports.
However, they warn that storm clouds could darken the short term picture with rising costs, the threat of recession and operational challenges creating headwinds during early 2023. These could put the industry under urgent pressure to embed resilience into their operations. “That will likely mean going beyond raising prices to boost productivity, managing cash more rigorously, and finding the right balance between saving and investment,” it says.
As inflation in 2022 rose to its highest levels in four decades in the US and Europe, barely 6% of sporting goods companies appeared confident of their resilience. The biggest concerns related to falling demand and excess inventory in the second half of the year, leading 22% of decision makers to expect contraction in both revenues and margins.
Consumer sentiment is falling, driven by factors including the war in Ukraine, higher energy prices, and rising interest rate increases, which have reduced household incomes and put pressure on discretionary spending,” says the report authored by Sabine Becker, Achim Berg, Raphael Buck, and Alexander Thiel.
Simple strategies to navigate the short-term trouble
The report exhorted the industry to develop strategies that could help navigate the current challenges, which includes refraining from raising prices, especially given the wide availability of affordable options. It suggested a holistic approach that takes into account six key action areas.
The first of these relate to implementing smart pricing and channel management using data analytics as a tool. The report says mapping price elasticity and competitor offerings could result in flexible pricing strategies that could limit the impact of volatility on the net margins and boost revenues by 5% to 15%.
It called upon decision makers to consider a top-down review of channel efficiencies one SKU at a time to reset the return on investment metrics. This could result in a 10% to 20% saving in the marketing budgets, the report says, adding that strengthening brand communications and its optimization should be a key focus area.
And finally, the report calls for an agile approach to innovations such as robotic process automation as part of leveraging their warehousing and transportation opportunities. In conclusion, the McKinsey report asks enterprises to leverage the slowdown to build a portfolio to drive synergies, elevate digital with a community and personalization focus and leverage analytics at scale to harness the power of data.
