Under Armour, Under Performing
By Gael Marchal, Hardy Drackett, Kali Poza, Robert Bigot, Venkat Srinivasan and Veronica Borrowdale
“We must protect this house” is Under Armour’s rally cry; however, in broadening its brand the company has failed to protect the market it created. Under Armour recently has made several strategic missteps compromising its unique position. Its failure to make difficult trade-offs and CEO Kevin Plank’s inability to articulate a clear strategic focus will ultimately dilute the Under Armour brand and hurt the bottom line.
Since its inception in 1996, Under Armour has been seen as an improbable success story in an extremely developed and competitive industry. It effectively created the performance apparel market, a blue ocean within the sports apparel industry. In this market, Under Armour’s focus was centered on compression fit and moisture wicking fabrics, a product that filled the needs of many athletes unhappy with the standard cotton t-shirt. This blue ocean allowed for tremendous company growth, expanding from $17,000 in sales in 1996 to $856.4 million in revenues in 2009. (2009 Annual Report) Along with this growth came a very strong and recognizable brand. In fact, according to a survey of teenagers, Under Armour “is now the #2 brand among teens, behind Nike”. (Lefton) Naturally, this success has bred imitation and, together with Under Armour’s failure to protect their position, the blue ocean has turned red.
More recently, Kevin Plank has demonstrated his lack of a clear vision for his company with many disparate remarks. In one instance, he has stated that “[Ralph Lauren is] still seen with respect, and yet they sell paint in Home Depot. We want the ability to sell paint in Home Depot in 20 years.” (Fourtitude.com) Around the same time, he insisted that, “What makes UA special is that we don’t make a bunch of crap for the mass market.” (Andrew) This general lack of focus has led UA to venture into several new product lines, with limited success.
One of the most notable departures from UA’s initial strategic focus is their entry into footwear, an intensely competitive market. In outlining the strategy to shareholders in 2009, Kevin Plank mentioned that he sees the footwear category outpacing apparel, and wants to capture a piece of that market. (2009 Annual Report) This market space, however, is extremely crowded with few opportunities to differentiate. As a result, UA's entry into athletic shoes consumed enormous resources with little gain.
UA’s failure in footwear can be attributed to the competition it faces from companies such as Nike, whose marketing budget in 2009 alone was 2.4 billion dollars, about three times Under Armour’s revenue. (Townsend) Nike launched its SPARQ trainers a month ahead of UA’s Prototype Trainers in an intentional attempt to deny UA market space. Nike wanted to “make sure the introduction of the cross-trainer [was] as painful as possible for Under Armour” (Gregory). Secondly, UA’s failure is partly due to the departure from its grassroots marketing strategy. UA spent $4.4 million on a Super Bowl ad for the launch of their cross-trainer shoe. That commercial scored near the bottom of all advertisements for the 2008 Super Bowl, recording a 4.93 rating out of 10 (USA Today), and led to a 33% drop in their stock prices. Its marketing expenses and lack of market share also contributed to a 75% decline in profits. (Gregory)
Despite UA’s struggles in footwear, it is attempting to enter the basketball shoe market. In speaking with an Under Armour insider, Under Armour is looking to “Reposition, Recalibrate, and Relaunch footwear.” Once again, it is trying to launch into a red ocean, where, in this case, Nike commands 95% of the market. Plank unabashedly stated: "Maybe I'm a little naive as we approach the footwear market, [and] maybe we don't recognize the fact that we're walking on a tightrope on the 55th floor. But the fact of the matter is, it feels right. And that's what brands are” (Gregory).
Under Amour’s recent attempts to focus its vision emphasizes areas outside of its core competencies. Under Armour is building a new innovation center which will be focused on research and development as well as manufacturing. Unfortunately, it is starting with manufacturing accessories such as eye wear. Eye wear is a red ocean dominated by Luxottica, “which makes around 50 million frames a year and is 50% bigger than its next six competitors combined” (Emsden). This, along with Luxottica’s control of major retailers such as Lens Crafters and Sunglass Hut, makes this another instance of Under Armour abandoning its roots and looking to compete in a red ocean.
Under Armour is failing to “protect the house” that it built when it introduced its unique and value added fabric to the apparel industry. It successfully created a demand in an untouched market which has built its brand to what it is today. Unfortunately, its existing strategy of broadening the brand is not only hurting its image but allowing competitors to tap into its once dominated market of moisture-wicking fabric. This is because Under Armour does not own the intellectual property rights to any of its fabrics or products. (2009 Annual Report) Any person or business who wants to enter the apparel industry and sell moisture wicking products can easily do so, at a lower cost. The blue ocean Under Armour created with its material is now easily imitated by many other companies, such as Nike, who can offer the same product through its larger, more successful, and international distribution channels. Since the suppliers own the rights to what they produce, Under Armour has no way of patenting any of its products, leaving the competitive landscape wide open and allowing anyone to come into its “house.”
How is Under Armour going to maintain – or better yet, advance – its strategic position?
The company has only one choice: refocus on the core business, and abandon the distractions the company has created for itself by trying to break into other red ocean markets with products that have no significant differentiation. Under Armour needs to deepen its position; not broaden it. Under Armour made a name for itself by being the first to market with innovative, moisture-wicking, compression fit athletic shirts. While the shirts were well-received in the market, this quick success encouraged the company to expand into other unsuccessful product lines. At the expense of its brand, UA continues to explore one money pit after another in search of a successful product line expansion.
The temptation to expand quickly in the face of success is luring, but does not have to be a fatal error for the company. There are several unexplored opportunities for the shirts that made the company great in the first place.
Under Armour executives pay lip service to the notion of expanding the company’s international presence – a strategy that experts say would serve the growing company well. However, analysts point out that the Under Armour is not exploiting the full potential of this opportunity. As a percentage of total sales, international sales have only increased by one per cent over the previous year, for a total of 7%. (2009 Annual Report)
UA suddenly dominated the market with its popular shirts, but did not patent them. It came as no surprise that other industry players large and small wanted a piece of the market. Nike, Adidas, and a host of others were able to access the same suppliers as UA to get the special moisture-wicking materials and apparel.
Without a patent or even an exclusive contract, the brand UA established by being first to market is the only thing separating it from the competition. With $187 million cash on hand in 2009, UA has the resources to get a controlling share of these suppliers, effectively preventing “copy cats” and restoring exclusivity to their product.
R&D to Expand Core Product Lines:
UA has recently expanded its efforts to include a R&D facility in Maryland, but Plank’s lack of focus here is alarming. Current R&D activities focus on creating accessories instead of improving existing products. These resources would be better allocated to tweak the moisture wicking apparel in ways that would make it relevant to new users.
After R&D, the logical next step is to introduce products to new users. Plank’s targeted grassroots marketing is what got UA off the ground, proving that good products in the right hands are a powerful way to build credibility with customers. This marketing can extend to emerging sports where there are strong niche followings and organized leagues, such as bike polo, ultimate Frisbee, and Australian Rules Football.
Without a refocus on UA’s core strengths, it will continue to waste its energy and resources. By trying to leverage its brand in pursuit of new products UA is sacrificing its greatest asset.
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This report was a group project for the Global Strategy class of Thunderbird School of Global Management Professor Nathan Washburn, Ph.D.