E-Commerce Strategies Will Be Critical For Athletic, Footwear Brands

E-commerce will continue to dominate physical retail into the future as more brands seek out DTC (direct to consumer) strategies to reach changing consumer preferences, according to a new analysis from Morningstar.

Athletic and footwear brands were hit particularly hard early on in the pandemic, according to a new analysis of the sectors by Morningstar, which resulted in billions of dollars in inventory remaining locked in unopened stores. Share prices of many sportswear companies slumped by 50% or more as a result. But in the second half of 2020, demand for athleisurewear skyrocketed, all but eliminating liquidity concerns for manufacturers.

Online shopping took center stage during the course of the pandemic, as COVID-related restrictions shuttered shopping centers and physical retail store operations. Morningstar analysts predict DTC operations, both via e-commerce and bricks-and-mortar retail, will be the future for apparel manufacturers, noting that DTC allows for “better connections to consumers, data collection, and higher margins.”

But there’s a caveat: “only the strongest brands can eliminate wholesale partnerships without losing sales and customers,” the firm notes in a new report.

Morningstar calls out Nike as the activewear sector’s definitive e-commerce leader, noting that the brand is leading in digital and is “poised to widen its lead” over competitors.  Despite supply chain chaos globally, Morningstar predicts Nike has successfully reduced product lead times to the extent that its gross margins will rise to almost 50% from 45% over the next 10 years.

“We still believe there is a place for third-party retail despite the growth of DTC, but the balance of power has clearly shifted to leading manufacturers,” the report notes. “As the market leader, we think it is critical for activewear retailers to have strong relationships with Nike.”

Meanwhile, the firm cautions that Lululemon must balance a strong e-commerce presence with physical store operations.

“The market is rewarding Lululemon and a few other producers with high valuations, although there is some skepticism about the durability of the trend,” the report notes. “We think athleisure is here to stay and has been strengthened by the pandemic. However, we think the category is becoming very crowded. We view Lululemon’s valuation as extreme.”

The majority of US retailers have doubled down on their e-commerce investments, according to a survey by 451 Research earlier this fall.  Eight in 10 organizations surveyed say they are prioritizing investments in e-commerce operations either equally or ahead of in-store experiences, and 54% said they will hone in on mobile payments and buy-online, in-store pickup and curbside pickup services, an increase from 31% in Q2 2020.