Sports retail hits fragile high

Profits in sports retail are soaring, but increasing pressure from discounters and the OFT could presage a reduction in margins.

Sports retailers are topping the league of stock market-quoted retailers, with surging share prices and a growth in sales and store numbers that is the envy of other chains.

Blacks Leisure Group, JJB Sports and JD Sports have boomed over recent years, as teenagers look to sportswear as the latest fashion accessory. Market leader Sports Division and the Allsports chain are poised to join them on the stock market next year.

But recent events in the sports retail market have cast a shadow over its growth. Supermarkets have dipped a toe in the water of sports retailing, with Tesco stocking Adidas goods on a limited basis. The Office of Fair Trading has vowed to put an end to price fixing in the sports goods market, and if it’s successful, this could open the way for discount retailers to set up and drive down prices and margins.

At the end of last month, Kingfisher revealed its new sports-shop-in-a-Woolworths store, a concept which may be rolled out into other stores. It sells sports clothing and discounted replica football kits.

To top it all, the sports retailers’ core market of 20- to 34-year-olds is an age group which is declining in size.

Analyst Clive Vaughan of Verdict Research says: “It is a market which will become more competitive. The manufacturers will find it hard to maintain the margin structure. Woolworths and Toys R Us could move in.”

Sales through sports shops are expected to experience growth of some seven per cent this year to 2.9bn, according to analysts Corporate Intelligence. This comes on top of last year’s growth of 8.5 per cent. Average growth over the past five years has been about 6.7 per cent, compared with the retail average of 4.9 per cent.

But Corporate Intelligence says these growth rates will decline over the next five years, coming down to levels of about 4.5 per cent, which are similar to those of other retailers. Increased competition in the leisure market and the possibility of Premier League merchandise fatigue could contribute to this slowdown. The researchers also predict that prices could be driven down as supermarkets and other retailers see an opportunity to undercut multiple sports retailers.

It is ten months since the OFT declared war on price fixing in sporting goods. The body is convinced that the stores’ prices are being kept artificially high by manufacturers who forbid retailers to discount their goods, which is in breach of the law.

At the end of last month, the OFT fired its second shot in the battle, and extracted assurances from two manufacturers that they would not try to force minimum resale prices onto retailers which carried their replica football kits. Manufacturers Puma and Asics were accused by one retailer of cutting off supplies of replica kits after the shop owner sold them at a reduced price. The OFT found the manufacturers to be in breach of the Resale Prices Act 1976, and forced them to desist. This followed assurances gained in July from other manufacturers, including Ellesse.

OFT director general John Bridgeman says price-fixing is not only unfair on small retailers, but also reduces consumer choice. “It is bad for business because it protects inefficiency. It encourages wasteful forms of competition, such as excessive spending on advertising and promotions, which are of no benefit to the consumer.” If the OFT gets its way, this could mean a downward spiral of discounting. This could hit suppliers, forcing their prices down and leading to cuts in their advertising budgets. Fashion items somehow become less desirable when you find them in the bargain bucket.

But so far, none of the biggest manufacturers have been seriously affected by the OFT probe, though an OFT spokesman says: “There are investigations going on, and these could include some of the large manufacturers. But we are complaint-led, and retailers fear complaining could jeopardise future business.”

Much has been made of Tesco stocking Adidas sports goods, obtained through third parties, and undercutting the sports shops’ prices by up to 20 per cent. This was taken as a sign that supermarkets were coming to the rescue of the consumer, and would do for sports goods what they have done for food products, alcohol and petrol – cut prices. But it must be remembered that this was a headline-grabbing, one-off move, and that the Adidas goods were old stock, not part of the current range. Sportswear is a fashion item with a premium charged for being up-to-date, so unless Tesco can improve its supply source, it will be unable to regularly stock the goods for which consumers are willing to pay a premium.

Tesco’s move was supported by that other shopper’s friend, consumer affairs minister Nigel Griffiths. But Adidas says: “Adidas refutes suggestions that it operates a restrictive distribution policy. In fact, Adidas products can be found in virtually every high street in the country, through its many thousand retail outlets, which offer the quality, advice and service necessary.”

As the craze for sports clothes and trainers gathers speed, manufacturers are moving to update their ranges four times a year. This will add even greater premiums to the products, as the timescale on being “up-to-date” decreases. It will also make it more difficult for opportunists such as Tesco to move in on the market.

So in the immediate future the brands are unlikely to be brought to book by the OFT. This could be for many reasons: because the brands are not guilty as charged, or retailers are chicken or because many retailers, particularly in bigger chains, would not want to see an end to premium prices for sports goods.

There is growing evidence that discounting could hit the market, though if the sports brands maintain their fashion image and keep producing new ranges, price should be maintained. The multiple sports chains will continue to grow – taking sales from independents and benefiting from market growth. But Corporate Intelligence predicts the growth is levelling off, even with sporting events such as the World Cup coming up next year. The sports retailers may not be the darlings of the City for too much longer.

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