By  on August 19, 2009

PARIS — After trumpeting their own branded retail networks as the magic ingredient in recent years, activewear firms are cooling their enthusiasm in these recessionary times.

While Puma carries out a review of its retail network, reports abound the firm will close its U.K. stores and that it’s looking for a buyer for the majority of its locations in Germany and in France.

Declining to comment on specifics, a spokeswoman confirmed the PPR-owned sports lifestyle company is evaluating the future of its stores in every single country as part of a larger reorganization. “We will decide which are to be continued and which are not to be continued,” she said, stressing: “You cannot assume that certain stores will be closed.”

Adidas, likewise, is reviewing underperforming stores in a wider restructuring initiative. “Eventually this could lead to the closure of some stores that don’t meet expectations, but as you know, that is a common and ongoing practice,” insisted a spokeswoman, adding the company continues to expand its store network.

The firm also is mounting a new retail organization, recently appointing Michael Stanier, a former Gap and Marks & Spencer executive, as chief retail officer, a new post. Stanier’s team is charged with maximizing growth, profitability and the consumer experience of the retail business, which generated more than 1.8 billion euros, or $2.65 billion at average exchange, in 2008.

While it’s only natural that brands would take stock of the retail business given a darker economic climate, the scale of potential cutbacks at Puma, for one, suggests that company-owned retail may not be the El Dorado it was once hailed by executives.

“For a couple of years now, we repeatedly heard that own retail adds to top-line growth with improvements in gross margins as well to profitability,” noted Thomas Rosenke, equity analyst at WestLB bank. “However, due to increasing operating costs — rents, personnel — the expansion strategy with own retail still has to prove its contribution to profitability in our view.”

While the march toward monobranded stores continued, the numbers failed to add up. In Europe, retail has been used more as a marketing tool than a selling machine, according to retail expert and former Adidas executive Dr. Steffen Stremme. Most consumer goods companies moved into premium locations for representation issues that weren’t profitable, noted Rosenke.

Opening monobrand stores was a defensive move in the first place, say experts. It was driven when brands realized their image and positioning weren’t respected by wholesalers, said Erwan Rambourg, luxury and sporting goods analyst for HSBC. “It’s a very promotional network, led more by the retailers and consumers than by the brands themselves,” he said. Take the U.K. “You have to come to London in January to see how miserable it is — the stores are all 70 percent off,” he said.

As discounting has intensified in the downturn, monobrand stores have struggled to compete. “The higher portion of fixed costs [for directly operated retail stores compared with the wholesale business] increases the risk of steeper profitability declines in a weakening demand environment,” stated a Royal Bank of Scotland report on Adidas AG.

“It clearly is not possible to achieve superior performance compared to other distribution channels during the crisis,” added Rosenke.

Taking the Adidas brand as an example, Rosenke noted like-for-like retail sales in the first half of 2008 rose in the double digits but only grew by high-single digits after nine months and were down to midsingle digits for the full year. “Thus, the third and fourth quarters must have been strongly negative,” he noted. By the first quarter of this year, like-for-like growth was down by double digits.

In China, where brands couldn’t open doors fast enough ahead of last year’s Olympics, own retail (via franchises with local partners) has struggled to deliver its promise.

The Adidas group saw sales there decline in the low-single digits in the first quarter of 2009 and is renegotiating rents for all its stores countrywide. Meanwhile, Belle International, a major franchise partner for sporting goods firms in China, has said it would close several underperforming Reebok stores in the country, according to the RBS report.

“Brands have realized they had loaded the network,” said Rambourg. “They were probably overexcited ahead of the Olympic Games and now they’ve had to reduce their expectations in terms of how quickly they can expand the network.”

Nonetheless, there still are new entrants. New Balance last week opened a 2,000-square-foot flagship in Beijing to showcase the American brand’s running shoe and apparel collections and predicted it could have 1,000 stores in China by 2012.

However, today, expansion in China is mainly taking place via outlet stores, with most Western brands developing that channel. “By opening outlets, they’re trying to educate consumers that there are other ways of buying with a discount in a cleaner environment,” said Rambourg.

“It’s a bit like in the States, where the outlet network is a big alternative to wholesale. It’s just starting in China,” he continued, noting that Nike better anticipated the downward trend there by rolling out an outlet channel before its competitors.

Overall, multibrand sports retailers in Europe seem to be weathering the storm better.

The Oxylane Group (formerly known as Decathlon) grew its comparable-store sales 5.3 percent in 2008, only slightly below a 7.5 percent uptick in 2007 to become France’s number-one clothing retailer last year. From January to April, meanwhile, sales at Intersport grew 6.5 percent versus the same period last year. (The company hasn’t broken out comparable growth rates).

In 40 years, Intersport has never been hugely affected by economic turbulence, claimed its chief executive officer Franz Julen, because sport, health and wellness remain important activities, particularly in a downturn when people need ways to relax. Across its 5,000 stores, performance goods (to be used for sport) are selling better than lifestyle or leisure products, he noted.

That continues a trend seen across France last year. Unit sales of sneakers destined for sport in 2008 grew 5 percent, while those for everyday wear dropped 7 percent, according to The NPD Group. Similarly, tops destined for practicing sport grew 12 percent and those for casualwear declined 10 percent.

Possibly explaining why monobrand stores might suffer more in the downturn, performance goods are simply better suited to the multibrand format, according to analysts. “If you look at most of the activewear companies, like Nike and Adidas, which are performance-driven companies, they need to be wholesale driven,” declared Rambourg. “If you’re a runner or you play tennis or basketball, you want to be able to compare brands for the technical aspects, for the designs, for the prices. If you’re a runner, it’s much more realistic that in Paris, say, you’ll be buying at Courir or Decathlon looking at Asics, Mizuno, Nike, Adidas or private label or whatever, rather than going to the Nike or the Adidas store on the Champs-Elysées, because you need to compare different brands.”

Unlike luxury goods companies such as Louis Vuitton, which is only sold through its wholly owned network, the way sporting goods are purchased is more like fragrances or watches and wholesale driven, he continued. “You need to be able to compare different technologies, different brands, different shapes, designs and prices. It’s the consumers’ choice.”

Own retail will never become the dominant network, apart from perhaps lifestyle as opposed to performance brands, he concluded. “I wouldn’t rule out that Puma is the only sporting goods brand that’s going to streamline its own stores,” said Rosenke. “It’s happening elsewhere: Hugo Boss is streamlining. It’s a phenomenon for the entire industry, not only for a couple of companies,” he said.

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