BOSTON — Nike, Adidas…New Balance?
Yes, New Balance.
The Boston-based brand actually ranked third in the performance footwear category in the year ending June 2018 behind the two activewear giants. And while the others might dominate headlines by paying millions to sports leagues, universities and pro athletes and by signing buzz-generating collaborations with pop stars and streetwear leaders, New Balance stays in the race with a strategy as well-tuned as a sub-2:05 marathon runner’s stride.
It is that strategy that New Balance plans to maintain as it aims for sales of more than $7 billion worldwide by 2023, according to chief executive officer Rob DeMartini.
Moreover, by continuing to focus on performance above all, the brand has become as hot among the streetwear set as many of its larger peers, especially in Japan, where it is the market leader in lifestyle.
A walk along the streets of Tokyo confirms that, with New Balance’s signature NB more prevalent than either Nike’s swoosh or Adidas’ three stripes. And as Japan goes, so often goes the rest of Asia, especially China, where the NB logo pops up on hordes of young consumers walking along in Beijing, Shanghai and even cities such as Xian.
But while New Balance’s reach continues to expand, there are some things that remain the same.
New Balance Athletics Inc. is headquartered in Boston’s Brighton neighborhood, just as it has been since it was founded 58 years ago by William Riley, a 33-year-old Englishman living in the States who created the New Balance Arch Co. to manufacture arch supports to improve shoe fit. He based the design on a chicken’s three-clawed foot that provided the bird with perfect balance and mimicked the design by creating an arch with three support points in the insole. It created its first pair of running shoes in 1938, and in the Fifties and Sixties, athletes increasingly sought out the company because of its expertise in handcrafting footwear.
The company today employs more than 7,000 people worldwide, operates five factories in the U.S. and one in Flimby, England, and has worldwide sales that DeMartini projected will hit $4.5 billion this year. And it is still privately owned by James S. Davis, who bought the business in 1972 and currently serves as chairman.
But while New Balance continues to be private — and according to DeMartini, will remain that way — the company has grown substantially over the years, moving beyond its footwear roots to offer a wide range of active apparel — a category it got into in 1978 — as well as equipment and gear for sports ranging from soccer, lacrosse and field hockey to baseball and cricket. In 2001, it acquired PF Flyers, and in 2008, it bought Vital Apparel Group to further expand the lifestyle footwear and apparel markets.
While the brand’s goal of sales of more than $7 billion in sales in the next five years is ambitious, DeMartini breaks it down as logically as a runner’s split times.
“We had $1.5 billion in sales in 2007 so that’s about 10 percent growth a year,” he said. “Right now, we have 4 percent market share globally, so gaining just one point gets us to $7 billion. It won’t be easy and we know nobody is going to hand it to us, but we can get there.”
For the 12 months ended June 2018, not only did New Balance rank third in the performance category, it also was fifth in the overall athletic market behind Nike, Brand Jordan, Adidas and Skechers, according to the NPD Group.
For DeMartini and his team, reaching that $7 billion milestone will mean staying true to its core. “We’re resolute in our strategy to be the world’s best running shoe brand — period,” he said. “We’re not trying to chase the market or follow what’s hot at the moment.”
He believes that “consumers root out authenticity incredibly quickly and when we do things that are not us, they tell us,” he said.
But at the same time, New Balance embraces its ability to be trend-right. “Our focus starts with performance, but we recognize we also have to have a sense of style,” DeMartini said.
It doesn’t hurt that within New Balance’s rich archives are products that are now deemed fashionable. “Almost all of it has historically been performance product,” DeMartini said. He pointed to the current “dad trend,” saying that a leading model, the company’s 608 sneaker, was “a core trainer before it was the shoe to go to a barbecue in.”
The same thing happened in Asia, where New Balance “refreshed running shoes from the past” that have now become popular in the lifestyle segment of the market.
But New Balance’s presence in Asia actually dates back quite some time. It has operated a subsidiary in Japan for three decades and has a design studio in Tokyo where it creates cutting-edge designs for markets around the world.
“Japan is our oldest subsidiary and has been our second biggest market for 30 years,” DeMartini said. “And our Tokyo Design Studio doesn’t design just for Japan, but for the global business; we just chose to put it there because it’s at the epicenter of on-trend merchandise. Just like our performance center is here in Boston.”
Jeff McAdams, director of international marketing for New Balance, said the Japanese subsidiary is “material to our history,” he said. “We’ve always had a strong market share and a history of design leadership in Japan,” he said.
Like the U.S., the business there is broken down into either performance or lifestyle and while it leads in lifestyle, it is third in performance.
“The Japanese consumers have an incredible desire for craftsmanship and New Balance is the only major brand still making a percentage of its product in the U.S. and the U.K. That’s the cornerstone of the business in Japan,” McAdams said.
In addition, New Balance seeds product to influencers there, a strategy that has paid off by attracting Millennials to the brand. “We have lifestyle marketing teams who stay connected to the local community,” he added.
What New Balance doesn’t do is pay people to endorse its product. McAdams said that, more and more, the impact of such people is declining, particularly in Asia. “Millennials increasingly recognize the difference between paid and not paid endorsements,” he said. “We’re not on the rooftops shouting because we believe authenticity is more important.”
But New Balance does have a roster of athletes who endorse the brand and whom McAdams said are “critical to our success. We partner with them and they meet certain criteria. They’re our first voice to the consumer on the performance side. They’re our wear testers and they validate our innovation. And they keep us young and fun.”
Also keeping New Balance young and fun is its association with school-age athletes. The brand sponsors the New Balance Nationals, the premier track and field event for high school students, the High School Tennis Championship as well as the Area Code Games, a player development program for high school baseball players.
On the college level it supports several schools, including all sports at the University of Maine and track and cross country at Columbia University in New York, Providence College in Rhode Island and Adams State in Colorado. In Japan, it also sponsors races at the university level as well as the Hakone Ekiden, a long-distance relay race that McAdams said is “their version of the Super Bowl.”
As a result of the strength of its lifestyle product — which DeMartini said represents about half of the company’s overall sales — New Balance is able to invest more in performance. “We have a lifestyle business because we have a performance business,” McAdams said.
To that point, the Japanese subsidiary recently became the sponsor of the Nagoya Women’s Marathon, the largest women’s-only marathon in the world with nearly 22,000 runners.
In addition, New Balance signed a deal in January with famous Japanese shoemaker Hitoshi Mimura to become the exclusive adviser to the company. Under the terms of the deal, Mimura will work to develop and supply New Balance product to top athletes around the world.
“He’s a household name among performance runners in Japan,” McAdams said. And the multiyear deal should help continue to bolster the brand’s standing in the run-up to the 2020 Olympic Summer Games in Tokyo.
New Balance also operates a flagship in the Harajuku neighborhood of Tokyo that opened in 2016. McAdams said the location was chosen deliberately for its ability to serve both an international consumer as well as a local one.
In addition to Japan, New Balance has subsidiaries in China, Asia-Pacific, Australia, New Zealand, South Africa, the U.K., Spain, Italy and Scandinavia. In other parts of the world, the company operates through a distributorship arrangement.
“We’re doing well in Asia, but China is an area of significant focus for us,” McAdams said. “We’re known as a lifestyle brand there because of Japan, but our primary focus as a company is performance.”
In China, the brand is bolstering its event and product marketing around its running expertise to grow that side of the business.
McAdams said that, over the past couple of years, a running boom has emerged in that country. “Three years ago, there were no visible signs of running,” he said, “but in the past 12 to 24 months, that has visibly changed. We liken it to the late Seventies/early Eighties in the U.S., and that’s very exciting to us.”
He said most Chinese runners have embraced shorter distances, but half and full marathons are also rising in popularity.
And as New Balance makes strides in the performance end, the lifestyle product also benefits. “The connectivity between lifestyle and performance is so critical,” McAdams said.
Interestingly, New Balance operates more than 4,000 retail stores globally. Of that number, slightly over 300 are in North America, and nearly 3,000 are in China, where the brand is completely vertical and set up a subsidiary around eight years ago. “We have no wholesale operation there,” he said. There are also around 900 stores in other parts of Asia, Latin America and Europe.
DeMartini said the low store count in the U.S. — “We have 160 licensed New Balance stores, 80 factory and 10 first-line stores,” he said — is intentional. “We don’t see that number growing a lot. Jim Davis and his team built the company to be the best partner to its wholesale partners.”
Unlike Asia, wholesale in the U.S., Japan and Europe continues to represent the biggest part of the business. The primary distribution model for the brand is run specialty retailers, which is where New Balance built its business in the Eighties and Nineties. These stores remain “critically important” in the U.S., McAdams said. “We continue to have very close ties.”
New Balance also sells on Amazon, which McAdams said is viewed “as an important extension of our online business. A material percentage of consumers go through Amazon on the path to buying footwear and apparel.”
DeMartini, whose background included Tyson Foods and Procter & Gamble before joining New Balance in 2007, said, “I grew up in another industry and from the brand perspective, retail looks easy, but when you get into it, you realize there’s nothing easy about it at all.”
That being said, in some instances, DeMartini said, “We feel a great responsibility and want to be fully in control, but in other places, we just want to be the best partner.”
That being said, direct-to-consumer continues to gain in importance. The company started opening flagships three years ago and now operates units in Tokyo, Seoul, Shanghai, Boston, San Francisco and London. Large stores, although not termed as flagships internally, operate in New York, Berlin, Milan and Madrid. The most recent opened in Shanghai in late 2017 in an emerging shopping district.
These stores are designed and built to serve as “gathering places,” he said. They offer special events and other experiences that are intended to “project the brand into the future,” he said.
Peering into his crystal ball, DeMartini characterized current sales as “good,” and projected that this year, growth will be “north of 10 percent. That’s a rate we’ve held for most of the last decade.”
New Balance performs best in the U.S. and Europe while Asia, which had been a leader for a while, has slowed a bit of late, he said. But U.S. sales are up 12 percent.
The brand is performing well in both performance and lifestyle, McAdams added, and in fact, revenues have exceeded the industry averages for the past three years.
Part of that is due to the successful collaborations that New Balance has created of late. The most recent was with Paul Smith, who designed a special UK 576 x Paul Smith sneaker targeted to the World Cup. It features the designer’s colorful signature stripe and was also intended to commemorate the 30th anniversary of the shoe.
Before that, it teamed with J. Crew, Kith and United Arrows to reinvent some of its popular sneakers to appeal to the young customers seeking exclusive, limited-edition product.
One of its most popular collaborations came in 2017 when it worked with Concepts, an upscale skateboard-skewed store in Cambridge, Mass., on a Made US 999 Hyannis sneaker that paid tribute to the company’s roots. It was introduced at the influential ComplexCon show in California.
But despite their popularity, McAdams said New Balance is cutting back on its number of partnerships.
“We’ve actually reduced the number of collaborations we’re doing over the last two years,” he said. “It’s not concern over our past partnerships, but to stay focused on quality and invest in performance.”
That includes creating special collections for both the New York and London marathons, where the brand stepped up as a sponsor in 2017.
“These are guideposts for our performance marketing efforts,” he said. “And they’re great venues for expanding our apparel business and showcasing that.”
Although New Balance was born as a footwear brand — DeMartini said shoes still accounts for 80 percent of sales — the company made a “declaration” several years ago to boost its apparel business.
“We created a whole new apparel division, headed by Deirdre Fitzgerald and we’ve seen a fivefold increase in sales over the past seven years,” McAdams said. Fitzgerald’s background included Talbots, J. Crew, Brooks Brothers and Bloomingdale’s.
Fitzgerald, whose official title is executive vice president of global apparel, said when she first joined New Balance nearly five years ago, she “saw a great opportunity and the commitment from leadership to build the business. As a team, we felt confident we could increase the fashion quotient without compromising on performance. We pushed the sophistication and relevance of our product and focused on storytelling through innovation, more frequent newness, print, color and modern trims.”
The biggest opportunities, she said, included expanding lifestyle product globally and increasing its reach with women.
“Apparel is growing more and more,” DeMartini said, referring to Fitzgerald as “the medicine we were looking for.” But he knows that in order to reach its goals, apparel sales have to continue to grow. “We know our apparel business needs to be bigger,” he said.
Like Fitzgerald, McAdams knows that can only happen by gaining the loyalty of women. “We’re working to increase our appeal to female runners,” McAdams said. “That will be the core of what we’re doing for the next five years.”
The breakdown between men’s and women’s is now around 50-50, DeMartini said, where “historically it’s been 70-30 men’s to women’s. We haven’t stated a goal for how large we’d like it to be, but we want both to grow quickly.”
McAdams said, New Balance three years ago launched a direct-to-consumer catalogue for women’s apparel and the circulation was 26 million within 30 months. “It was a significant investment and put us on the map,” he said.
In women’s, she said the company is seeing strength in “versatile pieces,” such as its Transform bottoms, En Route jackets and a new category, sweaters. “Our women’s product push in North America has really helped to drive strong average retail growth and new customer acquisition,” she said.
In addition, NB Athletics, which was launched last year within the lifestyle category, “has really resonated globally and plays on our track heritage. We are seeing a strong reaction to newness in running apparel through Q speed and NB heat collections,” she said.
Looking to the future, Fitzgerald said she hopes to “continue to drive our lifestyle proposition globally, and further invest in the expansion of our women’s business in North America. This fall we have two exciting innovation launches across multiples categories.” She pointed specifically to the Heat Loft jacket that will debut in September and the Radiant Heat Bonded jackets that will launch at the New York City Marathon in November. Children’s wear and accessories are also seen as growth drivers, she said.
But within all categories, New Balance is focused on infusing its products with the most advanced research and technology available through the efforts of its innovation lab in Massachusetts.
This appeals to its target customers who fall into three buckets: a metropolitan athlete who runs but is also “highly socially engaged,” McAdams said. “They want to perform but want to look good, too.”
Then there’s the style seeker, who McAdams said is “curated from head to toe.” The last is the “high school game changer.” By intensifying its focus on this segment, New Balance is seeking to increase its relevance with the younger consumer.
Looking ahead, McAdams said New Balance hopes to continue to increase its reach internationally. “We have a thriving business globally in Latin America, Chile and Brazil. Our newest division is in the Middle East, and we have a small but growing presence in the United Arab Emirates and India. That completes the global circle.”
While each market has “cultural nuances,” New Balance works to present “a single brand expression globally,” he said.
And while today’s company is a far cry from the arch and orthopedic shoe brand that Riley created over a century ago, the future appears bright for New Balance.