Direct To Consumer: Athletic Gear Arena

As the online arena pushes for faster shipments and more personalized experiences, there doesn’t seem to be one area of retail that isn’t feeling some sort of pressure to ramp up offerings for consumers. One area that’s seen tremendous growth over the past few years has been the direct-to-consumer (DTC) aspect of retail. From recipes with all the ingredients packaged up like Blue Apron to manufacturing custom eye glasses for consumers via Warby Parker and sending out beauty product samples like Birchbox, there’s virtually no area of consumer retail that does not have some sort of DTC offering.

Having a more direct connection to customers on the individual level is something that today’s ultra-connected consumer not only comes to prefer but also comes to expect. Companies not providing personalization or a direct approach of some sort will likely have a hard time surviving in today’s consumer experience-focused mentality in the retail industry. One direct-to-consumer sector of retail that has started to become a bit more competitive and crowded over the past year just may surprise people: athletic sneakers and apparel.

While companies like The North Face, Patagonia and Under Armour jumped on the direct-to-consumer sales train with Amazon a while back, two of the larger athletic apparel companies held out for fear of diluting their brands. This year, Nike along with Adidas made the leap and decided to start selling as a third-party seller on Amazon.

In these two strategic partnerships, Amazon has reported double-digit growth in its online shoe business. Within the first two quarters of 2017, Amazon has been a major benefactor, seeing its sneaker business increase by 18 percent year over year, while the company saw a 35 percent increase between 2015 to 2016. And that was prior to the full integration of the Adidas and Nike announcements.

As a direct result from this, athletic shoe store Foot Locker saw a 28 percent decrease in its shares. While the company says it is not too worried about the online retailer, analysts are warning that it should start having some concerns. In Q2 of this year, the shoe retailer saw a 6 percent same-store sales decline, alongside a 4.4 percent year-over-year sales decrease down to $1.78 billion.

Investment banking company Cowen & Company’s analysts, led by John Kernan, wrote a note regarding the shift to online shopping and how it’s impacting the shoe company in question. “Foot Locker’s same-store sales and operating margin will continue to fall from peak levels as the transition to digital and supply of athletic and lifestyle footwear continues to shift to a variety of channels and emerging brands. Brands, like Nike with its SNKRS app, ship the shoe directly to you, removing the requirement of ever setting foot in a store.”

With Foot Locker’s sales success often tied to high-end footwear, analysts are concerned that the move to the online shopping direct-to-consumer channel may be a significant blow to the company’s future. The note added, “We think this overhang, along with Nike, Under Armour and Adidas’ plans to dramatically increase their own direct-to-consumer business, will prevent Foot Locker shares from seeing a meaningful multiple expansion.”

Nike’s move to a direct-to-consumer approach will likely help boost its overall sales — and it shows, with a 5.6 percent sales increase for the year. Adidas is also seeing some momentum, as the brand saw a 19 percent growth in 2016, thanks to its retro branded sneakers. While all of this bodes well, analysts are not too hopeful for Foot Locker or Finish Line, as both have seen downgrades by various firms.

UBS Analyst Michael Binetti shared his thoughts in a note this Monday on what’s happening with this particular footwear sector of consumer retail. He said, “For Foot Locker, in particular, while many of its stores are among the most compelling retail experiences in our U.S. specialty coverage group, we think the company will have to significantly accelerate closure of its lower-tier stores to properly absorb market share shift to the brand’s own DTC businesses (and to Amazon).”

The significant shift in the athletic apparel arena, in this case online shoe sales, over to direct-to-consumer selling and its resulting impact on brick-and-mortar stores is apparent with these recent analysts’ downgrades of stocks and predictions for the future. As more retailers move either a portion or the entirety of their sales over to a direct-to-consumer model, what’s happening with the athletic arena is the most egregious example we’ve seen to date.