New Balance tries to compete in a shrinking industry dominated by intensely competitive giants.
What should a small niche player do when its long-booming industry, dominated by intensely competitive giants, suddenly begins to contract? New Balance thinks -- hopes -- it has the answer
In June 1992 Jim Davis went to war. The chairman and CEO of New Balance Athletic Shoe Inc. assembled his top brass at a seaside camp to announce the onset of Operation Quick Strike. Decked out for the occasion in combat fatigues, "General" Davis delivered his "declaration of war" in the lingo of the revolutionary underdog. "It is not the large that will defeat the small," he told his high command. "It is the quick that will defeat the slow." Davis's choice of a military motif for his new campaign was appropriate. War had indeed broken out in the athletic-footwear business.
It's not surprising. Until the middle of 1991, the industry had been on a stupendous roll. It had surged with the start of the fitness craze, in the 1970s, and then rocketed through the 1980s, racking up annual growth rates as high as 20%. By last year footwear for running, tennis, basketball, and other sports accounted for 40% of all shoes sold in the United States. And all through that boom there was ample room for the top 25 brand-name manufacturers in the field.
Until the music stopped, that is. In the second half of 1991 and the first half of 1992, the U.S. athletic-footwear market suddenly contracted. Annual unit sales dropped from 393 million pairs to 381 million. Retail sales dipped by 2.6%. Analysts cited several reasons: the recession, market saturation, and a shift in consumers' tastes.
For all but the biggest names, a bare-knuckled brawl for market share has been under way. Nike Inc. and Reebok International Ltd. are the sneaker superpowers. Last year in the United States they had combined sales of sports footwear of $3.3 billion, more than half of the total market. But for the smaller players, and especially for those with less than 3% market share, the peril is great. "I think you'll see a number of them fade away," says analyst Gary Jacobson, who follows the industry for Kidder, Peabody & Co.
If any one of the niche players seems to have a loyal following, it's New Balance. For more than two decades it has made athletic shoes of quality comparable with the best in the industry. New Balance's special niche, however, is width sizing. All of its shoes come in true widths; some range from AA to EEEE. Few other manufacturers make anything beyond narrow or wide versions of selected products. Width sizing is difficult and expensive to do, but it makes for the most customized athletic footwear available.
"Among those who know the brand, the name New Balance is synonymous with quality," says Gregg Hartley, executive director of the Athletic Footwear Association (AFA). Unhappily for New Balance, those who know the brand are relatively scarce. In a New Balance consumer research study done in 1991, only 4% of Americans could identify the company as an athletic-shoe maker.
What's also unusual about New Balance is that it's one of the few companies still manufacturing sports shoes in the United States. Like virtually everyone else in the field, the twin giants Nike and Reebok long ago moved production to such countries as Korea, Taiwan, China, and Indonesia. But can a company that pays its factory hands $12 or $13 an hour, counting benefits, do battle with those whose Chinese workers make $80 a month? With lower labor costs generating higher margins, the industry leaders can afford to carpet bomb the country with advertising, fortifying their dominance.
This year alone Nike will spend about $120 million on advertising and millions more in payments to such athletes as Michael Jordan and Bo Jackson. Reebok is countering with an ad budget of some $100 million, including $20 million to promote Orlando Magic rookie star Shaquille O'Neal. Marquee names like those can bring in huge sales, particularly among the under-25 set.
New Balance has been hard-pressed to compete. A couple of years ago it ran ads claiming, somewhat forlornly, that it was "endorsed by no one." The company has always expected that people would buy its shoes because, quite simply, they fit better. But in an industry increasingly driven by slick ad campaigns, that hasn't been and may not be enough.
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The Company
Twenty-one years ago, on the day of the 1972 Boston marathon, a 28-year-old Davis bought New Balance. It wasn't much at the time -- six people in a Watertown, Mass., garage crafting 30 pairs of shoes a day. For a company founded in 1906 as an orthopedic-shoe maker, it hadn't gone very far. As an adjunct to its orthopedic line, New Balance started making athletic shoes commercially in 1962. Davis acquired it for $100,000.
His timing was superb. The running boom ignited in 1974, and two years later Runner's World rated a New Balance model as the best on the market. In fact, the company had 4 of the magazine's 10 top-rated running shoes. Suddenly, Davis had a hot product on his hands.
"Our biggest problem was getting enough product out the door," he says. "We went from doing $100,000 in 1972 to doing $60 million in 1982. Growing that dramatically, you're behind the eight ball all the way. It was out of control. We probably hit our peak in the mid-'80s, with sales of around $85 million and good profitability."
Then, between 1986 and 1989, even as the industry continued its expansion, New Balance's growth all but vanished. Davis blames himself. "We lost our focus," he says. "We didn't execute well. And we tried to chase Nike and Reebok in terms of design, which we never should have done. The result was a lot of closeouts, a lot of selling below the recommended wholesale price.
