Increased advertising. A $6-million advertising budget is a major step up for New Balance, but it's still small beer in an industry that's driven more by marketing than by product. "You could take the stripes off half the shoes on the market and no one could tell the difference," says Tedeschi. "Nike and Reebok have succeeded pretty much on marketing alone. They both spend more on advertising than New Balance has in revenues."
Domestic production versus price. Although 100% domestic production is Davis's goal, he claims the biggest impediment to all domestic sourcing is that when the athletic-footwear industry's heavyweights moved to the Orient, the American infrastructure fell apart. Davis has had to decide how much domestic production is worth to him. He knows it drives up his costs and the price of his product, but he has no intention of changing his manufacturing strategy. "We don't need lower-price-point shoes," Davis says. "We are not going to go to $40 retail. We want to make higher margins on $70 shoes that we can make here."
Still, in the current retail climate, cost factors are more important than ever, and price is as big a consideration for sneakers as for any other product. Consider Saucony, a division of Hyde Athletic Industries. In a Consumer Reports analysis of running shoes published in May 1992, the Saucony Jazz 3000 model was judged best in both the men's and women's categories. The magazine called the shoes "best buys" at $68 a pair. New Balance's highest showing for men's shoes was the eighth-ranked M997 model, at $120. It was beaten out by shoes from Nike (at $125, retail), Avia ($70), ASICS ($85 and $55), Adidas ($85), and even another Saucony model, the Azura II ($82). New Balance fared better in the women's ratings; judges ranked the company's W997 model second. Partly owing to that report, Saucony's share of the 1992 U.S. running-shoe market shot up from 3.8% to 7.6%. And, according to Hartley, 64% of athletic footwear sold last year was on discount, up from 62% in 1991.
So Davis's insistence on maximizing domestic production may cost him some sales. Everywhere he turns there are niche players grabbing for shreds of market share, and there is always the specter of the seemingly unstoppable Nike and Reebok. (Even last year, as overall demand fell, both companies continued to gain market share.)
Right now New Balance is more than holding its own -- as of January, orders were running 24% above the levels of a year ago -- but Davis's $200-million sales goal may prove to be elusive. "New Balance has a very specific niche, width-sized running shoes, that they're very good at," says Gary Jacobson, the Kidder, Peabody analyst. "But in terms of growth as they go forward, I'd say it's limited."
And while New Balance models are competitively priced today, cost pressure is building. "Everyone is looking for the most efficient place to make their shoes," says Peter Goehrig, general manager of ASICS's U.S. unit. "All of a sudden, with the market like it is, cost factors are more important than ever. So I think for someone to stick to a strategy because of an emotion -- wanting to make shoes in the USA -- will become more and more difficult."
Still, New Balance has a few advantages, the foremost being that most retailers like its products. That's critical in a field where the vast majority of buying decisions are made in the store. "New Balance's shoes are excellent," says retailer Chichelo. "Its quality control has always been good. Nobody has been as consistent as or can compare with it over the years."
Jim Davis can only hope that kind of retailer support is widespread enough to continue to differentiate New Balance from a crowded, and narrowing, field.
FAXPOLL: IS NEW BALANCE HEADED FOR A FALL?
What do you think? Do the elements of New Balance's strategy, as outlined in the foregoing article, make sense? Will they be enough to protect the company's niche or even foster growth? What mistakes are being made? What would you do differently?
1. In general, do you think the elements of New Balance's strategy, as outlined in this article, will be successful in defending the company's market share?
(Yes/No/Not sure/Other)
2. Which of the following strategic elements do you think will be most (or least) effective?
(Effective/Ineffective/Not sure)
Width sizing
Domestic manufacturing
Just-in-time retailing
"Made in the USA" marketing pitch
The quality pitch
New product lines
Increased advertising
3. If you were Jim Davis, what would you do differently?
4. In general, do you think domestic manufacturing can be a competitive advantage?
(Yes/No)
Why or why not?
5. Do you think it is or could be an advantage in your business?
(Yes/No/Not applicable)
6. How would you describe your business?
Manufacturer
Service company
Retailer/wholesaler
Distributor
Other
7. What is your position within the company?
Founder/owner
Top manager
Department head/supervisor
Employee
President/CEO
Other
8. Besides yourself, how many people does your company employ?
None
1-5
6-10
11-20
21-100
101-500
More than 500
9. What revenues did your company have for its most recent fiscal year?
Less than $500,000
$3 million-$9.9 million
$500,000-$999,999
$10 million-$49.9 million
$1 million-$2.9 million
$50 million or more
