5 Issues to Watch in the Year Ahead
After two years where business developments were dominated by impacts from a global pandemic — everything from supply chain costs to hiring and product availability — the world is faced with embracing the Year of the Rabbit with plenty of challenges. Some are new. Some are recurring. All will force retailers and brands to confront them to maintain their respective businesses, increase profitability, and embrace the evolving demands of footwear consumers in the U.S. and abroad.
1. A Recessionary Environment?
Fears of a recession in 2022 contributed to the worst performance year for U.S. stocks since 2008. Analysts are split on the severity and impact of any 2023 recession, but nearly all believe it will occur. And the Federal Reserve’s ongoing effort to bring down inflation, in part by raising interest rates at regular intervals, has CEOs and business leaders increasingly confident that a recession — generally defined as a decline in Gross Domestic Product (GDP) over two consecutive quarters — is on the horizon.
Although inflation declined for a sixth consecutive month, year-over-year, to 6.5 percent in November, The Kiplinger Letter predicts a 2023 recession “is now more likely than not.” Either way, year-over-year U.S. GDP is expected to slow this year from 2.0 percent in 2022 to 1.1 percent without a recession and 0.5 percent with one. Over the last 75 years, as the Wall Street Journal recently pointed out, corporate profits as a share of GDP — a proxy for profit margins — have declined during nearly every recession.
“Under almost any scenario, the economy is set to have a difficult 2023,” Moody’s Analytics chief economist Mark Zandi recently wrote in a report. Still, both Moody’s and Goldman Sachs are optimistic. Moody’s is sanguine about consumers ability to weather any economic slowdown this year thanks to the cooling inflation, and Goldman Sachs thinks the two-quarter downturn is avoidable altogether as growth, however miniscule, continues.
What does this mean for the footwear industry? It will be forced to navigate the emerging economic landscape with an assortment of measures that may include SKU and workforce reductions coupled with shifts in strategic priorities.
Some 26 percent of respondents to the latest World Footwear Business Conditions Survey, which reaches manufacturers, traders, and organizations of various sizes, expect industry employment levels to decline during the first half of 2023. Only 16 percent predicted higher employment. Meanwhile, 40 percent of respondents forecasted “strong” conditions for their respective business over the next month versus the 25.6 percent who called the health of their operation “weak” or “very weak.”
2. New Leaders Could Shape the Industry
No fewer than six major companies and retailers with significant footwear businesses — Adidas, Puma, Under Armour, Foot Locker, VF Corp. and Designer Brands – have new CEOs in 2023. Two of them, in Foot Locker and Under Armour, are being led by women for the first time. Mary Dillon joined Foot Locker from Ulta Beauty during the fall and Stephanie Linnartz, who left a career at Marriott Intl., will join Under Armour by the end of February. Having female leadership at the top of these two companies is notable in itself, as is the perspective both could bring to the future directions of the businesses.
Adidas, in need of a positive turnaround, will be led by former Puma chief Bjørn Gulden — he was credited with revitalizing Puma as its CEO. Puma is now being led by its former CCO, Arne Freundt, 42, who previously oversaw sales for Puma, including retail and ecommerce, and logistics.
VF Corp. is searching for a new CEO after the retirement of Chairman, President and CEO Steve Rendle. Benno Dorer, a VF Corp. independent director and a former Chairman and CEO of The Clorox Co., is VFC’s interim president and CEO, while Richard Carucci, a VFC director since 2009, is VFC’s interim Chairman.
And a planned succession is happening at Designer Brands Inc, with Doug Howe, DSW President set to succeed Roger Rawlins as CEO of Designer Brands Inc. on April 1.
These new leaders will likely have many difficult decisions to make this year, but will shifting the direction and focus of their respective brand(s) be one of them? Time will tell.
3. Casualization, Prices, and Margins
Will the trend toward more casual, comfortable fare, which gained momentum during the pandemic, continue to impact the footwear world? And how will casualization continue to impact share of closet for performance athletic and dress shoes? How will brands and retailers serving those segments respond?
Genesco-owned Johnston & Murphy, a longtime dress brand, used the pandemic to “re-imagine” itself, shake-up its product assortment and begin to attract younger consumers to the label, whose collection is now dominated by dressy uppers on lightweight outsoles. The brand now generates less than 10 percent of revenues from legacy dress styles. Traditional athletic brands may pivot to more retro-inspired silhouettes and hybrid aesthetics, but will they make pure casual offerings a bigger part of their assortments in the seasons ahead?
Rising Prices: Many footwear companies were forced to take “surgical” price increases on at least part of their assortments in 2022 due to higher transit and supply chain costs that were magnified by pandemic impacts. Both expenses have begun to recede, but don’t look for any significant product price cuts from manufacturers, who are likely to face squeezed operating margins and lower U.S. unit volumes in 2023. Already, some retailers have reported customers “trading down” and looking for “lower-priced alternatives” from their typical purchase. While some large retailers such as DSW will lean on their expanding owned-brand assortments to increase foot traffic and the changing purchase and price demands of their customer bases, independent shoe retailers and specialty running shops will have to be increasingly savvy with their open-to-buy dollars and perhaps, even more nurturing to the whims and needs of their loyal customer bases. Key vendors have already cut order volumes for 2023, in anticipation of lower volume demand, which might force these specialty retailers to again chase “hot selling” key introductions throughout the year. The scenario will be eerily similar during certain periods during the height of the pandemic when there were product scarcities due to supply chain bottlenecks.
Inventory Issues: While footwear manufacturers and retailers worked diligently to reduce bloated inventory levels during the fourth quarter of 2022 and annual holiday season, NPD Group Senior Industry Adviser Matt Powell believes their remains “far too much,” especially in footwear and apparel.
“This will cause brands to cancel or delay new products to clear the old,” Powell recently opined. “Footwear and apparel already look tired at retail. These actions will not freshen assortments…If it took 30 percent (or more) to move stale product in 2022, what will it take to move product in 2023? Every retailer knows the slippery slope of discounting. The brands have yet to figure this out.”
4. Acquisitions: Big & Small
Experts expect M&A activity to accelerate, albeit in a slower process due to the macroeconomic environment, this year after a tough 2022. But there will need to be more attention to compliance issues in the current economic climate with its higher interest rates to get deals completed. Antitrust risks in the U.S. and internationally are also potential M&A roadblocks today despite an increasing number of distressed assets.
In late 2022, DSW gobbled up footwear industry vet Tony Post’s Topo Athletic brand for its growing own brands portfolio and Wolverine Worldwide announced the divestitures of Keds and tannery businesses with deals likely closing during the first quarter. Other companies with portfolios of footwear brands may be forced to rationalize them if the economy bears down on them and a particular company fails to meet sales and profit objectives.
Meanwhile, at the independent retail level, expect to see more acquisitions in the year ahead. As smaller, family-run stores see ownership looking for exit plans, fellow independents have shown willingness and eagerness to take those businesses over.
5. Retail Trends
Look for footwear brands of all sizes to invest more in their digital capabilities given the everchanging landscape and consumer desire to engage with them in various ways whenever they want in the easiest way possible. The latter means new payment methods such as Venmo, Paypal, Klarna, and Afterpay and ways to checkout more simply.
On the brick-and-mortar front, CB Insights contends that technology that cuts costs and makes stores more efficient will remain a priority, including the concept of unattended checkout that includes cashierless checkout solutions such as mobile device self-scan. Also, the research firm says more retailers and brands have begun leaning on Artificial Intelligence (AI) to help with the drafting of detailed and specialized product descriptions, blog posts, emails, and advertisements.
Larger footwear retailers are already examining their store portfolios for potential closures due to underperformance and more reliance on DTC in the region. Academy Sports + Outdoors intends to open 80 to 100 new stores by 2026 and may eye former Bed, Bath & Beyond doors if that specialty chain files bankruptcy and eventually liquidates as some retail analysts have speculated.
On the independent retail front, look for nimble storefronts to continue finetuning their product offerings — moving on from brands whose DTC policies don’t take independent partners into account and increasing offerings from brands that make independent retail a priority. Also, look for independent footwear retailers to continue to increase their run and athletic offerings as they’ve shown they can excel in that side of the business.