WFSGI/McKinsey explores the impact of inflation on the sports industry

McKinsey has again partnered with the World Federation of Sporting Goods Industry (WFSGI) to update the sporting goods industry on the new challenges facing the business due to inflation and a emerging economic downturn, adding to existing pressures on input costs and supply chains.

The update follows the January release of WFSGI/McKinsey’s second annual report on the sporting goods industry, “Sporting Goods 2022: The new normal is here.”

“January feels like a decade ago,” said Alexander Thiel, Partner, Sporting Goods Practice Leader, EMEA, McKinsey, in a webinar discussing the update. “The situation has evolved enormously since then.”

The webinar also featured Kevin Bright, Partner, Global Consumer Price and Margin Management Practice Leader at McKinsey and Robbert de Kock, President and CEO, WFSGI.

McKinsey’s update analyzed three main factors to characterize the current dynamics of the industry: the impact of inflation on demand, supply chain issues and rising input costs. He then explored the possibilities of overcoming or mitigating the challenges.

The impact of inflation on demand
On the positive side, Thiel said demand in the sporting goods industry has proven resilient during the pandemic, recovering quickly across many categories in early summer 2020 and maintaining solid growth so far. .

As noted in its study “Sporting Goods 2022: The new normal is here”, the industry, emerging from the pandemic, continues to benefit from changing attitudes and behaviors that place a higher priority on health and fitness. active life.

“There are megatrends at work that are very positive on the demand side,” Thiel said. “Most importantly, all of our research shows that people around the world have never been more motivated to lead more active and healthier lives and incorporate exercise into their daily routines.”

Along with inflation, sporting goods is one of the few categories seeing “real demand,” accounting for a small portion of the sector’s growth based on an analysis of May and April figures from McKinsey.

Inflation is driving almost all of the growth in spending on fuel, groceries, travel and restaurants. Thiel said: “The underlying mega-trend is very healthy.”

However, recent research shows that consumers have reduced their discretionary spending, including sporting goods, showing that prices and mandatory household spending are growing faster than incomes.

Thiel noted that in the US, stimulus payments and the Paycheck Protection Program (PPP) are “putting money in people’s pockets”, and restrictions on dining out and travel early in the pandemic left more disposable income to spend on sporting goods in the early stages of the pandemic.

Thiel said: “There was excess cash coming out of the pandemic. People have spent a lot, especially young people, to a large extent on sporting goods. They wanted to splurge and treat themselves to new sporting goods quite often.

According to Thiel, given the surge in spending, as the economy reopened and personal savings declined, the drop to near zero percent in disposable income in the United States occurred for the first time in more of a decade. At the same time, central banks around the world raised interest rates, further reducing disposable income.

McKinsey’s recent European consumer research further showed that spending intentions on sports and outdoor clothing, footwear and equipment are on the decline. Overall, Europeans are the most pessimistic about the economy since 2020. Thiel said: “Even at the height of the pandemic, the economic outlook has not yet been so gloomy and negative, and we see those numbers go up, so the next numbers I’m sure we’re going to get in will be worse.

Thiel said it’s important to recognize that inflation doesn’t affect everyone equally, providing premium pricing opportunities in some cases, even in an inflationary climate. Generally speaking, higher income households are more resilient to inflation, and younger generations who can change jobs more frequently and see their wages adjusted to inflation, are also less impacted. Conversely, low-income households and older generations are likely to consume less. Thiel said: “The older you are, the more locked you are in certain life situations, certain jobs and certain localities.”

Input cost pressures
One of the drivers of inflation is rising input costs. Since early 2020, particularly in transportation and commodities, this has put pressure on industry margins, said WFSGI’s Robbert de Kock. Container freight rates have increased sevenfold from pre-pandemic levels. In response, many players have turned to air freight, despite a fivefold cost compared to sea freight.

Meanwhile, from the start of the pandemic in early 2020 until the first quarter of 2022, there was a significant increase in commodity prices, de Kock noted. Price increases included metals by 88%, cotton by 84%, fibers by 40% and rubber by 32%. An additional element contributing to the additional costs are the new official checks introduced by some governments, for example, concerning chemicals.

Supply chain disruption
Delivery times have increased significantly due to the pandemic-related disruption to global supply chains, including the unpredictable lockdowns still affecting Asia. Port bottlenecks and congestion reduced daily actively sailing container capacity by around 14% from the end of 2020 to the end of 2021 and further declines in the first half of 2022.

Terminal congestion, with yard dwell time for imported containers, has more than tripled in the United States since the start of the pandemic. Rail transport has also been affected, with congestion of intermodal cars peaking in 2021 and the first months of 2022.

On the positive side, freight rates have declined slightly and stabilized over the past few weeks, but the significant risk is excess inventory as orders blocked in the past are released and large flows of goods are coming into warehouses.

De Klok pointed to the high inventory levels seen at major chains, noting that inventory levels at Dick’s Sporting Goods were up 40% year-over-year beginning in the first quarter ended April 30. By the end of the first quarter, inventories had increased by a year. over a year by 32% at Walmart and 43% at Target.

De Klok said excess inventory could be problematic for seasonal produce, which would most likely need to be marked down once the season is over. The situation could worsen if inflation accelerates further, putting pressure on cash flow. De Klok said: “We have to understand how it’s going to happen, what’s going to happen and how we can deal with it.”

Another element contributing to the growing complexity of supply chain networks is the recent increase in regulatory requirements that restrict imports from specific regions of Asia; this means that sports players have less flexibility in setting up supply chains and could encourage companies to review their supplier networks. In addition, restrictions add administrative burdens and, in some cases, increase costs.

Building resilience in an inflationary climate
McKinsey’s Bright summarized three approaches to increasing a company’s resilience in an increasingly inflationary environment: smart pricing, assortment and business strategy, and proactive cost management.

Overall, Bright advises that when setting up a program to manage the impact of inflation, companies should use a phased approach, prioritizing measures based on their urgency and impact.

Regarding pricing, Bright highlighted the importance of understanding your customer, as inflation impacts different income and age segments and identifies which products are key value elements (KVIs).

Potential actions include rapidly increasing the prices of products with low elasticity of demand, non-KVI and no choice alternative or at a much higher price. Businesses have been advised to avoid promotions or consider raising prices for products with limited availability.

Other advice included adjusting prices regionally based on market dynamics and/or selectively changing prices in certain channels. Rebalancing between entry price levels and intermediate prices based on margin structures could help reduce consumers’ inclination to lower prices.

Overall, when it comes to pricing, Bright said suppliers and retailers were “much more nuanced” after some widespread increases when inflation first hit. He said some companies were looking to impose their second, third or fourth round of price increases, and pricing actions may now be “somewhat exhausted as leverage” to offset rising input costs.

Bright said, “There’s frankly, I think, consumer burnout and retailer burnout.”

In terms of assortment and business strategy, suggestions included discontinuing low-margin products in all price points and reducing especially low-margin products in the entry segment. An inflationary environment makes it more important to focus on aspects of the product beyond price that may justify higher prices, such as quality, durability, innovation, exclusivity, or brand storytelling. . Says Bright, “A lot of price perception is not about the actual price, but how people perceive the price.”

Businesses need to better understand the underlying trends driving raw material and transportation labor costs to better manage costs. Bright highlighted the benefits of greater visibility and transparency on commodity price changes. Says Bright, “Instead of taking 12 months to calculate the cost of goods sold across the entire product line, you can do it in six days or seven days with up-to-date information on where you think the products are moving. .”

The latest update from McKinsey is available here and his study “Sporting goods 2022: the new normal is here” to be found here.

Photo courtesy of World Athletics

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