‘Industry must brace for headwinds’

ZURICH, Switzerland – Rising costs, the looming threat of a larger recession, low consumer confidence and continuing operational challenges are set to create headwinds, according to sports and bicycle industry executives. This is one of the key findings from the WFSGI (World Federation of the Sporting Goods Industry) and McKinsey’s latest annual report.

Jan-Willem van Schaik

In response to these developments, companies are looking to embed resilience into their operations by going beyond raising prices to boost productivity and finding the right balance between saving and investments.

Solid growth in 2022

In many ways, the sporting goods industry, and the bicycle industry in particular, has been in a fortunate position. Compared to other industries, the past two years have been characterised by solid growth, equaling or outperforming pre-pandemic levels. In the second half of 2022, the economic outlook darkened amid rising concerns over geopolitical instability and the trajectory of interest rates, which tightened constraints on both company and household budgets. The impact of these factors was a significant weakening in industry performance compared with 2021, with a 4-8% sales decline in the US in Q1-Q3 2022 versus 2021 across main categories.

Challenging environment for 2023

In 2022, consumer sentiment improved monthon-month reflecting looser Covid-19 restrictions in most markets – companies were plac- ing large orders in anticipation of demand and to avoid the supply chain challenges of 2021, and performance in the first half of the year was widely positive. However, inflation picked up due to the impacts of the war in Ukraine, with higher raw material and energy costs prompting some companies to raise prices. Meanwhile, consumer sentiment showed signs of deterioration, with a 40% decrease in consumers’ net intent to purchase sporting goods and a decline in discretionary spending. Supply chains gradually became more reliable, but the sudden increase in available products in destination countries, paired with declines in spending, led to widespread overstocking.

Megatrends

According to the WFSGI and McKinsey, 2023 is expected to be a challenging economic environment with continuing subdued consumer sentiment. This will require a holistic approach from sporting goods companies to focus on preserving demand and building resilience. WFSGI and McKinsey write that in 2023, four key themes will shape the industry:

• Brand relevance : Sporting goods companies are among the most effective brandbuilders in the world. As consumer expectations rise and brand relevance deepens, brand building is expected to become more important.

• Sustainability: Accelerating decarbonisation and scaling circular business models will be key for sporting goods companies to meet their aspirational sustainability targets.

• Nearshoring : In an era of supply chain disruption, more companies are likely to turn to nearshoring as an element of de-risking and speeding up their supply chain strategies.

• Profitable growth for private investments: The success of sporting goods brands has attracted a wave of private investments. This is especially true for complementary brands, brands with an elevated digital interaction with consumers, and analytics at scale.

“Measures of resilience will be key”

Alexander Thiel, McKinsey partner and leader sporting goods practice EMEA, said: “2022 started off extremely well for the sporting goods industry. Unfortunately, the war in Ukraine and rising inflation dampened consumer sentiment and led to a reduction of discretionary spend, impacting the sporting goods industry. Measures of resilience will be key to staying strong during the recession and preparing for the return.”

Robbert de Kock, president and CEO of WFSGI, said: “The industry has been an industry that outperformed others in the past years showing significant recovery and growth in 2021 and into the first half of 2022. Nearshoring has been one of the topics high on the agenda in many boardrooms, particularly in the bicycle industry. We have seen more and more companies making up their minds and taking things into consideration. If and how to imple- ment nearshoring, of course, depends on the industry and market. We have seen many assembly facilities established in Europe in the past years, but the connection with the supply chain in Asia still includes many challenges, as we have seen.”

It takes a few decades

Establishing a components industry is a unique process, and the European automotive industry has shown it might take a few decades to get it done. In the current situation, we will see that the true cost leaders and premium brands will move forward quickly in the bicycle industry, while the mid-market company will have to fight harder.

The international study has been conducted by the WFSGI and McKinsey in collaboration with the NPD Group.