At your Leisure - 11 October 2004

Kitted-Out: The Sports Clothing and Footwear Retailers

On the UK high street, things have changed greatly in the past twenty years. Shop names come and go. Old favourites are replaced by shiny new firms. It's hard to keep up at times. But where these names come from and where they're going is of great importance to the health of high street retailing.

This At your Leisure looks at the key players in this market and their origins. Finally, we consider what the future may hold for these companies, some of which control the best known sports brands in Britain.

Image: Nike trainers - Nike is one of the top three brands in the market. Copyright: Simon Cataudo, stock.xchng.

The main players

All figures 2004, except Pentland Group (end 2002 figures).

JJB Sports plc

The firm is the UK's leading sports retailer. It was started in 1971 when it took over a single sports shop in Wigan. This original store had been set up by a person called JJ Broughton in the early 1900s. It was then bought by JJ Braddock and JJ Bradburn and because of this amazing coincidence of initials, the local people called the shop 'JJBs'.

Its current chairman, Dave Whelan, kept the name when he acquired the business; expanding the firm to four shops in 1976, and then to 120 stores by 1994, at which point the company was floated on the London Stock Exchange. JJB bought out what was at the time their closest rival, Sports Division, in 1998. Sports Division was owned by Scottish entrepreneur Tom Hunter, who had built the firm from a single outlet enterprise to a 240 shop operation. After integrating Sports Division into its activities, JJB Sports' business has nearly 450 UK outlets. Strongly identifying with its roots in Lancashire, the firm is concentrating on creating larger superstores and leisure facilities as part of its main operations.

In addition, there is the smaller discount store operation called Sports Soccer Ltd, which owns Lilywhites. The firm operates under branded stores known as 'Sports World'.

You can also view UK Sportswear Retailers as a Mind Map.

The overall market

In 2002, the UK sportswear market was calculated as being worth £4.05 billion, of which £2.9 billion is accounted for by clothing and £1.15 billion by footwear. Sportswear is worth just over 10% of the total UK clothing and footwear market.

Image: Only three brands dominate the sportswear market, with a few highly specialised brands following the main players.

Sportswear is a global industry, with production located in the Far East. Three large brands dominate: Nike, Reebok and Adidas. Below these are a number of highly specialised brands in the UK, for example Umbro, Hi-Tec Sports and the Pentland Group brands of Mitre, Speedo, Ellesse and Berghaus.

Company status is important

Looking at the list of key players in the sportswear market, it's clear that whilst most of the larger companies are plcs, there are exceptions to this rule. Let's remind ourselves of the benefits of public limited company status and work out why some firms convert to private limited status.

Why become a plc?

• Companies that are listed on the Stock Exchange can raise funds by issuing shares to existing or new shareholders.
• By raising capital on the stock market, firms can make investments to expand their business into new areas of activity.
• The alternative to issuing shares to the public would be either to sell shares to private individuals, or to borrow the money from banks.
• In addition, the owners of a company often desire the enhanced reputation that public limited company status brings.

But there are disadvantages to plc status:

• Freedom to buy or sell shares in a company brings the danger that your firm can be taken over by other firms or individuals.
• Management can become frustrated at the lack of control they have over their firm.
• The stock market can undervalue what the company is worth, by marking down its share price.
• Publicly quoted firms have a requirement to report their results frequently throughout the year. This can lead to sensitive information being made available to competitors. It can also add to a feeling in the market that the firm is under performing and therefore suited to being taken over.

Image: Share prices can go down as well as up - this may undervalue the company's worth. Copyright: Peter Mueller, stock.xchng.

Senior executives or chairmen of firms can become unhappy with the demands and conditions of being a plc. In some cases they will often decide that the firm should change back to private limited status. This may take the form of the managers themselves buying out the company. Alternatively, another firm may make an offer to buy the existing shares in the company. If this is accepted by the shareholders, the firm may be sold and revert to being a private limited company.

Are there examples in the sportswear market?

In the ten years (1994-2004) that JJB Sports has been a plc, competition in the retail sportswear market has intensified. Company profits fell in the last financial year and stock market analysts have grown concerned at the lack of value in the firm's performance. David Whelan, the company chairman, tried to take the company back into private ownership in 2003, as he was worried that the firm was becoming a takeover target. But his offer to buy existing shareholders out at a price of 220p per share was rejected by the JJB board of directors.

At the time of writing, (October 2004), JJB Sports announced that a venture capitalist firm called Cinven was involved in talks to take over the firm. Venture capitalists are investment firms who seek out struggling firms to take over and revitalise, before selling them for a substantial profit, often by floating them on the stock market. Interestingly, one of the possible other investors who might take over JJB Sports is Tom Hunter (the original owner of Sports Division), whose West Coast Capital investment company still owns 8% of JJB's shares.

It is thought that any possible takeover would be at a price of around 260p per share. This would value JJB Sports at approximately £600 million.

Conclusion

The UK retail sportswear market is dominated by five competing firms. It has grown through the last twenty years into a highly valuable operation. Changing demand patterns threaten the continued profitability of the major operators. Competition from the supermarket retailers makes plc sportswear companies likely takeover targets. The structure of the retail sportswear market can be expected to change over the coming months.