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Under Armour – Challenging Nike in Sports Apparel Essay

Problem Statement

Under Armour is a sport performance apparel brand that is looking to move ahead of its competition and branch out into different sectors of the sporting goods industry. Kevin Plank and his company’s problem is that their footwear only makes up for about 15% of the firms revenue and they only generate about 6% of their revenue in international sales. In order to compete with the top brands in the industry, Under Armour must find a way to raise the revenues on its footwear and enter into the global market.

SWOT Analysis

Strengths * Brand Equity * High Profit to Earnings Ratio * Collegiate and Professional Sponsorships * Customer Loyalty – (U.S.) * Innovated| Weaknesses * Price * Limited Product Line * Product Focus is Narrowed * Not prominent internationally| Opportunities * Branch out internationally * Expand product line * More competitive pricing * Joint Ventures to maximize profits * Specialty Stores| Threats * Competition * Economic Recession * Substitute Products|

Company Overview

Under Armour is the originator of performance sports apparel. Kevin Plank and his company wanted to create a product that was able to keep athletes cool, dry, and light throughout sporting competition and workouts. Plank began marketing his products by giving them out to consumers to test out. As popularity grew, Plank created the name Under Armour and revenue began coming in. The company’s market share in the sports apparel industry is at 2.8%; about 4% lower than Nike and 2.5% lower than Adidas. There are roughly 25 brands that compete in this market that generates $60 billion in the US. Under Armour’s annual revenue growth from 2000-2005 rose at 127%, while the operating income grew at 124% during that same time. Under Armour has three main product lines that it generates revenue from.

The first is the apparel portion. This contains HeatGear, ColdGear, and All-SeasonGear. Apparel generates about 75% of the company’s total revenue. This is 45% higher than Nike branded apparel. The second line of product is footwear. Footwear makes up for less than 15% of Under Armour’s total revenue. This number is drastically lower than Nike’s 64% revenue from footwear. The final product line is accessories. This includes hats, bags, gloves, and other specialized equipment.

Under Armour Strategic Initiatives for Future Growth

1. Targeting additional consumer segments for the company’s ever-expanding lineup of performance products. 2. Continuing to broaden the company’s product offerings to men, women, and youths for wear in a widening variety of sports and recreational activities. 3. Growing global awareness of the Under Armour brand name and strengthening the appeal of Under Armour products worldwide. 4. Securing additional distribution of Under Armour products in the retail marketplace in North America via not only store retailers and catalog retailers but also through Under Armour factory outlet and specialty stores and sales at the company’s website. 5. Expanding the sale of Under Armour products in foreign countries and becoming a global competitor in the world market for sports apparel and performance products.

Porter’s Five Forces

1) Competitive Rivalry in the Industry

As mentioned, Under Armour is in tough competition with Nike and Adidas, along with other sport apparel brands. The thing these two companies hold over Under Armour is their international presence. Under Armour only generates 6% of its revenue from international markets. Nike and Adidas could look to increase their brand recognition and build up their marketing efforts internationally. Also Under Armour does not currently have and fabric patents on their products, which could allow for other companies to move in and use similar fabrics to make similar products.

2) Bargaining Power of Buyers

There are two types of buyers that Under Armour sells to. The first is direct-to-consumer sales. The firm’s direct-to-consumer sales accounted for about 30% of total revenue in 2012. When it comes to these sales, there is not much risk for Under Armour. Because of their strong brand recognition
and loyal customers, they can make changes when needed. The second buyers are wholesalers. Dick’s Sporting Goods is an example of a wholesaler that buys from Under Armour. In this instance, the wholesaler has some leverage over Under Armour. Wholesale revenue for the firm accounted for about 68% of its total. Dick’s Sporting Goods made up 10% of that number. These wholesalers could move away from Under Armour’s products and place competitors’ products in higher regards in their stores.

3) Bargaining Power of Suppliers

Under Armour’s products are manufactured by 27 different manufacturers across 14 different countries. Asia makes up the largest percent at around 55%, South/Central America is next covering about 20% of the manufacturing, and lately the Middle East has covered around 18%. Since Under Armour has such a spread manufacturing group, the bargaining power is relatively low for suppliers. This is favorable for Under Armour in the future and should keep them generating revenue from their current manufacturers.

4) Threat of New Entrants

As stated previously, Under Armour does not currently have any patents on its fabrics or products. This opens doors to other sports apparel companies looking to enter into the market. Although it would take a lot, marketing/advertising and promotion wise, there is still a slim chance of possible new entrants. In order for Under Armour to secure their product styles, they must patent the materials used to remain alone in performance apparel.

5) Threat of Substitute Products

The sport apparel industry has been growing over the years and is forecasted to continue to improve into the future. With all of technology and innovation occurring, there is chance for similar or substitute products to compete against Under Armour. The positive note is that Under Armour has such a strong brand recognition and loyal customer base that it is highly unlikely for a substitute performance apparel product to hinder Under Armour’s profits.

Critical Issues

1. Expanding in Global Markets

The global market revenue in athletic footwear is $65 billion. Nike makes up 17% of this market. Currently, Under Armour’s revenues come from 90% of North America sales. They have a high recognition in football. The selling of most merchandise in retail stores hurts its distribution channel. Its competitors, Nike and Adidas have distribution channels worldwide and maintain brand recognition across the globe.

2. Establishing market presence with females

Because of the company’s strong focus in football, the firm is looked at as ‘male oriented’. Under Armour’s advertising techniques prove this by their aggressive notion. In order to compete, there has to be a major focus on the female market.

3. Sport expansion (basketball and soccer)

Nike currently holds about 95% of the basketball shoe market. This is a sector that Under Armour is relatively new at entering. Also Under Armour has little value in the soccer industry. Soccer is the most globally known sport and competitors have a much stronger presence in the major soccer leagues in the world. Under Armour only have jersey sponsorships in four of the major leagues around the world.

Company Alternatives

Alternative #1 – Maintain Current Pace in Performance Apparel and not make any changes. Under Armour has been at a consistent growth over the past decade and looks as if it will continue this growth. Their strong brand recognition in the North American market will allow them to increase revenue and increasing individual stores will generate more revenue. The only problem with this alternative is that they will have trouble catching their competition (Nike/Adidas), because of their lack of presence globally and in the footwear industry. Alternative #2 – Increase Awareness Globally and Grow Footwear Brand Recognition in Asia Global awareness and the footwear industry are two key elements that make Under Armour’s competitors so attractive.

Under Armour’s international sales only make up about 6% of their total net sales. By penetrating these markets fiercely and growing their brand recognition, Under Armour has a chance to become tops in sports apparel and footwear. A few cons with this are that Nike and Adidas already have a strong, loyal customer base globally. Also Nike’s basketball shoes alone (including Jordan) have such a strong popularity among consumers.

Alternative #3 – Focus on the Female Industry

There is a lot to be made by dominating the female industry of sports apparel. With the society’s consciousness of staying healthy and becoming more active, it is a great industry to penetrate. Under Armour is looking to make females a priority in the future and look to provide a more direct selling experience for them. The threat of substitute products can affect this alternative. Also it is tough to tell if gaining the female sport apparel industry will make you compete closer to the current competition.

Recommendation

I believe the best alternative for Under Armour to gain leverage over its current competitors would be to use alternative #2: increase global awareness and grow its footwear brand recognition in Asia. First, I want to touch on Under Armour expanding globally. As mentioned, Under Armour’s revenue comes from 90% of North American sales. The company has done a great job by of latching onto athletes in the United States to improve their image. The most popular sport in the world is soccer. Under Armour’s competition have long-term contracts with many of the leagues and teams around the world. In order to increase brand awareness globally, the product or logo must been seen first. A major way for Under Armour to penetrate globally would be to sign more soccer teams in the major soccer leagues.

They currently sponsor Tottenham Hotspurs, but that is only one team in a major market. To be successful Under Armour would need to develop more soccer inspired products to go along with their sponsorships. A good way to get their products out to the international market more would be to use the same concept Kevin Plank used when starting up the company. Give out samples of their product to show how beneficial it is for the everyday and professional athlete. This would need to increase their advertising and promotion costs. In 2011, Under Armour spent $167.9 million on marketing and advertising. Their competitor, Nike, spent $2.45 billion during the same year. Signing prominent international athletes could be a key to building their brand image. The second aspect Under Armour needs to do to compete with Nike and Adidas is to create more revenue in the footwear industry.

In 2011, Under Armour’s footwear only made up about 12% of its total revenue. The same year, Nike’s footwear accounted for about 55% of its total revenue. Although Under Armour began as a performance apparel company, the key to these successful companies is their footwear presence in the market. The key target market to improve revenue and awareness for their footwear would be in Asia. Asia is currently the leader of the athletic footwear market. In the next 5-10 years, Asia is projected to make up about 40% of the total market. This is key for Under Armour because about 60% of their manufacturing is done in Asia. With increases in labor costs, it could lead to increased import costs for the company, which could lead to negative gross margins. By having the footwear products manufactured directly in the region they’re looking to exploit, it would help cut costs to penetrate the market.

References
Thompson, A., Peteraf, M., Gamble, J., & Strickland III, A. J. (2014). Crafting and executing strategy: The quest for competitive advantage. (19th ed., pp. C-42-C-58). New York, NY: McGraw-Hill Irwin. http://www.trefis.com/company?hm=UA.trefis#

(2013). New global athletic footwear market research report.PRWeb, Retrieved from http://www.prweb.com/releases/2013/11/prweb11284300.htm Finance.yahoo.com


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