A Strategic Analysis of Foot Locker, Inc
A Strategic Analysis of Foot Locker, Inc
Introduction
Incorporated in April 7, 1989, Foot Locker Company is a retailer of shoes and apparel. The remarkable achievement and successful growth and expansion are observed in the approximately 3,220 stores spread in 27 countries in New Zealand, Asia, Europe and North America. Foot Locker operates though two major segments: Athletic Stores and Direct-to-Customers. Sweeney (2009) reports that through a diversification in footwear and apparel such as Lady Foot Locker, Foot Locker, Kids Foot Locker, Footaction, Runners Point Champ Sports and Sidestep, the company is a leading provider of athletic footwear and apparel. The success in growth and development of the firm stems from the strategic segmentation of the market. It provides footwear apparel along the global sneaker culture and has stores across different locations. For example, Foot Locker (2017) reports that as of early 2017, Foot Locker had 948 stores in the United States and 622 in Canada.
The Kids foot locker specializes in the production of footwear and apparel for young children across different ages. Besides the athletic stores, the Direct to customer segment of the company sell directly to clients through online based platforms, catalogues and mobile sites. Some of the notable online stores primarily devoted to the sale of Foot Locker footwear and apparel products include sp24.com, eastbayteamslaes.com and final-score.com. The sites offer a wide selection of products produced and sold by the company and provides a seamless link between physical stores and e-commerce. The Eastbay is one of the most successful online stores in the United States offering a complete sports solution.
Financial report revealed by Bloomberg (2018) Foot Locker, Inc. announced earnings results for the fourth quarter ended February 2, 2019. For the fourth quarter, the company announced sales was USD 2,272 million compared to USD 2,210 million a year ago. Operating income was USD 219 million compared to USD 76 million a year ago. Net income was USD 158 million compared to net loss of USD 49 million a year ago. Diluted earnings per share were USD 1.39 compared to diluted loss per share of USD 0.4 a year ago. For the full year, sales were USD 7,939 million compared to USD 7,782 million a year ago. Operating income was USD 699 million compared to USD 571 million a year ago. Net income was USD 541 million compared to USD 284 million a year ago. Diluted earnings per share were USD 4.66 compared to USD 2.22 a year ago.
Strategic Analysis
Dominant Industry Economic Characteristics
The global sports apparel industry has experienced exponential growth in the recent past. Data presented by Statista (2018) reveals that by 2017, the global footwear total market size was $246.07 billion and was expected to hit $320.44 billion by 2023. A significant percentage of the total volume, estimated at 37 percent of the global volume is controlled by the United States. However, new evidence from industry analysis reveals that United States is fast losing its dominance of the market to Europe and Asia. The fast growth in the middle class market in Asia and discretionary income levels are pointed out as some of major reasons behind the surge in Asia market.
Sweeney (2009) pointed out that one unique feature of the sports apparel and footwear industry is high level of fragmentation. The low barriers to entry encourage new players to enter the industry and stake claim in its promising multi-billion market. In the past years, especially after the end of the 2007/2008 economic meltdown, the industry has moved towards globalization. The implication for this is that companies to remain competitive, the must conceive and implement a global strategy. A successful conception and implementation of a global strategy offers a bundle of opportunities such as reduced cost of goods, an expanded market and a reduction in political and economic associated risks.
Besides fragmentation, the industry is strongly characterized by rapid technological change. Companies in the industry or willing to join the industry have no option but to adopt technological change to improve their levels of productivity and competitiveness. Dominant players in the industry such as Nike and Adidas have historically integrated technological advances in their operations to improve efficiency and enhance competitiveness.
Competition Analysis
The Porte’s five model analysis offers a viable way of assessing the competitive strength and position of the company in the industry. The model takes a look at the threat of potential entry, the power of substitutes, the power of suppliers, the power of buyers. To undertake a comprehensive analysis of the competitive forces in the industry, the study assessed the competitive structure among rival sellers and a summary of the collective strength of the five forces on profitability.
Competitive jockeying among rival sellers
The competitive jockeying among rival sellers presents a picture of the competition among sellers in an industry (Kach, Busse, Azadegan & Wagner, 2016). An analysis of the sports apparel and footwear industry reveals intense jockeying among the rival sellers perpetuated by the fragmented nature of the industry and the potential entry of new players. The fragmented nature of the industry means the large number of players each struggling for a market share contributes to intense jockeying.
Threat of potential entry
Low capital investment and competitor product line contributes to the high threat of potential entry into the market. Besides, the expansion of the middle class in Asia and the recovery of the global economy after the economic meltdown make the industry attractive to potential investors. Sweeney (2009) reported that the amount of start-up capital is a major factor of entry into a market. Besides, the product line and geographical extensions make the industry a low potential entry. The new entrants devise and implement global strategies that spur growth and create a room for intense competition.
Power of substitutes
An analysis of the industry reveals potency in the power of substitutes. Even though there is no direct substitute for clothing and shoes in general, consumers are willing to purchase low quality and less-known brands in times of low consumer confidence and decline in consumable income. The demand for products produced by brand names such as Foot Locker could take a major hit if customers develop discretionary spending patterns or in the event of an economic decline. He general understanding is that despite playing a potent role, substitutes present a real challenge to major players in the industry during periods of economic instability.
Power of suppliers
Porter’s model identifies the power of suppliers as an important measure of the competitive nature f an industry. An analysis of the sportswear apparel and footwear industry reveals a high power of suppliers. Arshed and Pancholi (2016) report that the high power of suppliers is due to the ease and motivation of manufacturers to integrate forward, the difficulty of retailers to integrate backward, the relatively smaller number of suppliers and the differentiated attributes of products in the industry. The differentiated products and the small number of dominant players further contribute to the high power of suppliers. The differentiated products support the existence of specialty retailers competing for the limited number of suppliers. The need to provide products that cement the buyer-seller relationship is such an industry makes the supplier hold high power. Sweeney (2009) attributed the high power of suppliers to the high demand of products that foundationally support a strong buyer-seller relationship.
Power of buyers
The buyers in the athletic apparel industry hold more powers than any other factor in the industry. The low switching costs, increased buyer’s purchasing flexibility, access to information about the products availed by sellers, potential decrease in demand and availability of low quality products in the market reinforces the power of buyers. Besides, Fowler (1999) reports that nature of an industry characterized by a strong buyer-seller relationship reinforces the power of the buyer.
Collective strength of five forces of profitability
The collective strength of five force of profitability and analysis of the structure of competition shows unfavorable market towards earning healthy profit margins. Thompson and Strickland (2008, p 73) reported “The stronger the forces of competition, the harder it becomes for industry members to earn attractive profits.” It is worth noting that the Porter’s five forces often continue to change and the industry may be more or less attractive in the future. A tabulated analysis of the five forces model is presented below
| Intensity of Competitive | 7 of 10 | Reasons: |
| Jockeying | Falling demand in marketplace | |
| Very fragmented industry with a large | ||
| number of competitors | ||
| Low cost involved in switching | ||
| purchases from one retail outlet to | ||
| another | ||
| Threat of Potential Entry | 8 of 10 | Reasons: |
| Low capital investment required for | ||
| start-ups | ||
| Companies can easily extend product | ||
| lines and geographical coverage | ||
| Power of Substitutes | 7 of 10 | Reasons: |
| A large number of less valued brand | ||
| substitutes | ||
| Power of Suppliers | 8 of 10 | Reasons: |
| Difficulty and expense of backward | ||
| integration | ||
| Ease and low expense of forward | ||
| integration | ||
| Industry contains differentiated | ||
| products | ||
| Small number of suppliers | ||
| Power of Buyers | 7 of 10 | Reasons: |
| Switching costs of buyers is low | ||
| Buyer demand is falling | ||
| Readily accessible information on | ||
| seller’s products and prices is | ||
| increasing | ||
| Buyers have purchase discretion and | ||
| can delay buying or do without | ||
| Collective Strength of the | 7.4 of 10 | |
| Five Forces on Profitability |
Drivers of Competition
Drivers of competition are the key agents that drive change in an industry. An analysis of the athletic apparel and footwear industry reveals for major drivers: the global economic health, the e-commerce trend, the personalization trend and the long-term globalization. The global economic health has significant influence on the consumer purchasing patterns. The conception and creation of international strategies that resonate with the mission of a company is key driver of growth. Globalization offers numerous opportunities for growth and expansion of companies. The e-commerce is another driving force that is shaping the athletic apparel and footwear industry. Online purchases are increasingly taking a sizable share of total sales for most companies and the shift towards online stores in the industry is a necessity. The last driving force in the industry is personalization. Leonidou, Aykol, Fotiadis, Christodoulides and Zeriti (2017) report that one thing that cements the relationship between a buyer and a seller is the feeling that a consumer is purchasing a product tailored to meet the unique personal needs of the customer. The personalization trend in the industry is building up and Foot Locker Company has to balance the trend without diluting the advantage of economy of scale.
Competitive Position of Major Companies
SWOT Analysis
These four elements comprise the SWOT (strength, weakness, opportunity, threat) of Foot Locker, Inc were assessed in this section.
Strengths and resource capabilities
A SWOT analysis on the company reveals four major sources of strengths and resource capabilities. These include experienced management team, current infrastructure, strong balance sheet and strong brand image.
Weaknesses and resource deficiencies
Evidence presented by data and research reveals that Foot Locker, Inc suffers from two major resource deficiencies: low inventory and reliance on mall traffic to drive sales. Over-reliance on mall traffic to drive sales is a major risk to future profitability. The changing trends in consumer purchasing patterns means the company has to diversify its traffic.
Market opportunities
As a strong brand name, Foot Locker, Inc has a few market opportunities it can capitalize on to stimulate growth. The four market opportunities identified include global growth and expansion, ability to negotiate lower occupancy rates with mall owners, the growth and expansion of lifestyle centers and the acceptance of high-tech products in the market.
Threats to company’s future profitability
Even though the company has few potential for growth, it is encompassed by a number of threats to its future profitability. First, the looming war of trade between the United States and its traditional trade partners such as China, Mexico and Canada places company at risk of reduced market size, tariffs and unfair competition in foreign markets. Other threats to the company include low entry barriers into the industry and the ease of forward integration by suppliers.
Strategy Formulation
The SWOT and PESTEL analysis presented above have provide detailed report on the external and internal environment of the athletic apparel and footwear industry and Foot Locker, Inc. Even though the company has made strategic choices in the past that has laid the foundation for the tremendous growth, Foot Locker, Inc has the opportunity to formulate strategies that push up profits and enhance the growth of its market share. Some of the proposed paths for improved profitability and growth include strategic international expansion, differentiating its stores from its competitors, expanding its marketing initiatives and increasing productivity with the current stores.
Expanding internationally
The forces of globalization and the growth of e-commerce have combined to offer a huge potential for growth for international companies. Despite having stores in major regions of the world, the economically growing and culturally changing Asia offers abundant opportunity for expansion. Even though the strategic expansion of the company to new markets is a mission of the brand and continues to occur, it is observed that great care must be attached on selecting markets with potential for growth. As the global economy gains stability and e-commerce becomes a must have tool for an international company, strategic international growth becomes an ideal strategy to improve profitability. Despite the fears of trade war between the United States and China, the global economy has remained largely resilient (Karmakar & Mukherjee, 2017) an indicator of the ability of the present trade set up to absorb major political shocks. In addition, the emergence of the BRIC nations offers a potential rich market for Foot Locker, Inc. The combined total population of the four BRIC nations is estimated to 3.06 billion as of 2017. Besides, the growth of the middle class in India, China and Brazil offers a huge potential for brand names such as Foot Locker, Inc. Karmakar and Mukherjee (2017) report “the economic development seen in the BRIC countries is posing an ever increasing challenge to the status of the United States as the foremost global economic power and with GDP in 2017 creeping up to over 18 trillion U.S. dollars, almost the same amount the United States generated in the same year, and quickly increasing growth rates, the possibility is becoming ever more real.” It is also important to note that some of the BRIC nations such as Brazil were not affected during the recent economic meltdown and as such could cushion the company from adverse economic turbulence in the United States which serves as its primary market.
Increasing productivity with current stores
The main aim of every business is to generate value for every investment. One of the proposed strategies for the firm is improving its current productivity levels of its stores. Even though the company has achieved modest growth in the past, focusing on stores that return greatest value for money is a viable option. For example, to increase the overall Return on Investments, the company needs to renovate performing stores and close down non-performing outlets. There is no doubt that such a move is likely to witness a growth in sales and higher returns on investments.
Marketing initiatives
The athletic apparel and clothing industry is one of the most competitive industries characterized by a few notable players and heavy investments in marketing initiatives. Sweeney (2009) reveals that a significant fraction of the marketing budget by Foot Locker, Inc goes to sports marketing programs. In its 2016 annual report, the CEO noted that the company supports specific sporting programs and partnerships with well-known third parties in initiatives designed to popularize awareness of the company’s brands. The threats of new entrants and changing consumer needs require an effective marketing response. The company needs to employ additional marketing primarily focused improving the visibility of is brands. There is need to need combine the sports marketing programs with congruent marketing initiatives that support the mission and vision of the company. There is no doubt that well crafted marketing programs and initiatives are key ways of unlocking a higher return on investments from advertising.
Creating value for its stockholders
Creating value for stakeholders involves the development of effective decisions that support the realization of broad organizational objectives. An analysis of the historical growth and expansion of the company reveals that Foot Locker, Inc relied heavily on offering impressive dividends as the most effective way to create value for stakeholders. For example, in 2007, report revealed by Reuters sow that in spite of recording a net profit of $45 million in net income, the company went ahead to pay $77 million in common stockholder dividends. An analysis of the company report further revealed that the CEO focused on increasing the total dividends payout by 20 percent in the year ended 2008. Even though most big companies emphasize on creation of value through impressive dividend payouts, there is a general agreement that companies can do more to create additional value for stockholders.
Differentiating from competitors
In an effort to differentiate from competitors, Foot Locker, Inc. is expanding its private brands to provide “more compelling assortments of name-brand athletic footwear by increasing the quantities of unique, exclusive and limited-distribution marquee goods” (Annual Report, 2008, 3). This strategic element is also an industry key success factor, as described above. Executing this strategy will help Foot Locker, Inc.’s brand become more distinctive from competitors in the future.
Merchandising renovations
In a competitive climate, one effective way to win over consumers is to develop physical stores that appeal to their eyes. Thompson and Strickland (2008) observed that the perceived appearance of a store is reflection of its products and associated brands. In a report to stakeholders in 2008 annual report, Matthew Sera identified the need for the company to undertake rigorous renovation exercises in a manner that resonate well with the central theme of the company. Modifying the interior, adding new features that consumers easily identify and defining the products and brands according to the desires of the consumers are key areas the company need to explore. These new features play a fundamental role in enhancing the visibility of the brand in a crowded market. Thompson and Strickland (2008) note that improved product visibility is important in unlocking the potential of a brand. In the case of Foot Locker, the strategy serves an effective way of improving the productivity of the stores and promoting the overall competitive advantage of the firm.
Strategic Implementation
Improvement in Inventory Management
There is need to conceive and promote a conservative approach to inventory management. One way to lower the overall costs of inventory management is to scale the overall costs to healthy levels. A report by Wild (2017) revealed that inventory reduction strategy offers a bundle of benefits for companies and help realize value for stakeholders. The best approach towards reducing inventory costs is developing internal capacity to improving forecast accuracy and reducing demand variability. Thompson and Strickland (2008) observed that companies that focus on addressing capacity issues, reducing manufacturing lot sizes and reducing supplier lead times often achieve the strategic goal of reducing the overall cost of inventory.
Differentiation
One of the key characteristics of successful firms is the ability to differentiate. To succeed, Foot Locker, Inc has to strategically implement differentiation as a key success factor in its operations. In a saturated market encompassed by stiff competition such as the athletic apparel and footwear industry, firms tend to develop strategies that distinguish their brands from those of their competitors. As an upper tier company, Foot Locker, Inc can successfully differentiate their products through private branding.
The best way to achieve this is to invest resources towards building demand for a private brand in order to differentiate it from the competitors. The exclusiveness of the brand implies that a customer purchasing the product is required to use the established distribution channels of the company. The development of a line of high quality and private label products that complement the broad product range is a key success factor for most retailers.
Merchandising
Merchandising of company products as key source of competitive advantage because of its ability to attract and retain loyal customers. In an incisive analysis of the role of merchandising, Thompson and Strickland (2008) reported that it is directly linked to the current and future profitability and an integral part of the image of a business.
Technology
Technology has been widely captured in numerous research articles as a major source of competitive. The challenge has always been the best way to adopt technology, especially in firms in competitive markets. Foot Locker, Inc can effectively make use of technology across all stages of product development to drive down costs and increase profit margins. Laudon and Traver (2016) pointed out that successful adoption of technology is a key to global expansion and closer coordination between manufactures and retailers.
Development of Multiple Sales Channels
The athletic apparel and footwear industry calls for development of multiple sales channels. The high power of buyer implies that companies must have to exploit the advantages of multiple sales to succeed. For Foot Locker, Inc to gain competitive advantage, improve sales and profitability and create value for stakeholders. The company has the potential to reap numerous benefits through strategic development of multiple sales channels.
In summary, the analysis has revealed that improve profit margins, Foot Locker, Inc need to conceive and implement key success factors which include differentiation, merchandising, technology and multiple sales channels.
Strategic Risk
An analysis of the sources of risk reveals that despite the few potential for growth, it is encompassed by a number of risks that hamper its future profitability. First, the looming war of trade between the United States and its traditional trade partners such as China, Mexico and Canada places company at risk of reduced market size, tariffs and unfair competition in foreign markets. Other threats to the company include low entry barriers into the industry and the ease of forward integration by suppliers. Besides, evidence presented by data and research reveals that Foot Locker, Inc suffers from threats: low inventory and reliance on mall traffic to drive sales. Over-reliance on mall traffic to drive sales is a major risk to future profitability. The changing trends in consumer purchasing patterns means the company has to diversify its traffic.
To address the risk, Foot Locker, Inc needs to focus on global expansion and focus on efficiency in its current and future operations. To address the potential risk of a fallout war in trade between the United States and its traditional partners, the company has no option but to pursue entry into new opportunistic markets which can serve a buffer in case of economic slowdown in its major traditional markets. Besides, it can effectively build strong networks and erect barriers to entry into the new markets. Implementing this strategy will cushion the firm from unforeseen risks associated with trade disputes between nations and provide opportunity for future cash flows and improved profitability.
Addressing the risk of low inventory and overreliance of sales from stores in malls can effectively be addressed through continued focus on efficiency of current operations. The focus should be increasing returns on its operations and focusing on areas that generate higher returns on investment. Successful implementation of this strategic focus calls for the closure of non-performing stores and expansion of performing ones. For Foot Locker, Inc, the success calls for a deeper analysis of the industry dynamics and the changes in the global markets.
Conclusion
External and internal analysis surrounding the Foot Locker, Inc reveals that the company is in a favorable situation to achieve growth. However, the company needs to address the internal weaknesses and external threats and effectively manage the risks in the industry. It will be in a much better and competitive position if it will align its strategic objectives to that of the industry. To achieve competitive advantage in a highly saturated industry, the firm must focus on global expansion and continued efficiency on its current and future operations.
References
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