Footwear market competition: Can Nike and Adidas lead on innovation?

Competition in footwear is heating up as established leaders Nike (NKE) and Adidas (ADS.DE) are beginning to lose market share to newer competition such as On (ONON) and Deckers (DECK). Can established brands keep up with innovation and distribution compared to newer brands?

Aneesha Sherman, Bernstein Senior Analyst, joins Yahoo Finance to discuss the increasing competition in footwear and why innovation and distribution in the sector are key to success.

"Sneakers are not just for running anymore," Sherman explains, meaning there must be an emphasis on creativity in design. Sherman also highlights distribution as a critical issue for established brands: "These brands have also cut their presence at a lot of local running stores. If you go in to your local running specialty store, you're probably not going to see any Nike or any Adidas and so you're not going to buy any. That's been a huge challenge for them because these are differentiated, brand-heat-driving retail outlets that people go to for advice on what shoe to pick. If you're not in there, you're not getting selected. That's the other piece they need to gain back that also takes some time. "

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Editor's note: This article was written by Nicholas Jacobino

Video Transcript

BRAD SMITH: Competition in the footwear space is hot. Legacy brands now face more newcomers as Deckers, HOKA brand, and On Running as well increasingly eating up more market share. You've got staples like Nike and Adidas out there innovating. And analysts at Bernstein saying that there's two main reasons behind the shift. One of them is what I just mentioned, that innovation and distribution. Aneesha Sherman who is the Bernstein senior analyst joins us now. Aneesha, great to talk on this with you as always here. All right. So who's innovating, who's not from your perspective?

ANEESHA SHERMAN: The innovation from a technical perspective from the big legacy brands, Nike and Adidas is still really strong. They are still winning marathons. They still have the fastest running shoes. So if you're training for a marathon, they still have what you need. The challenge is design innovation. Sneakers are not just for running anymore. People are wearing them to work. They're wearing them to casual occasions. And that casualization trend means that you're not necessarily looking for the best carbon plate or midsole foam in your shoe. You're looking for something that looks different, looks interesting, looks fashion-forward. And that's where some of the newer niche brands have outperformed and the legacy brands have not.

SEANA SMITH: Aneesha, the ability for some of these legacy brands to win back some of that lost market share, do you see that being attainable? And what does the timeline look like for that?

ANEESHA SHERMAN: Yeah. So as Brad said, I mean, some of it is about innovation, some of it is about bringing out new designs. And I think we should see that this year. We should see them doing better than they've done. They've recognized the issue. And in April as we get into more of the spring-summer season, we should start to see more innovation come out.

But the other piece is about distribution. I mean, these brands have also cut their presence at a lot of local running stores. So if you go to in Europe, you go into your local running specialty store, you're probably not going to see any Nike or any Adidas. And so then you're not going to buy any.

And that's been a huge challenge for them because these are differentiated brand heat-driving retail outlets that people go to for advice on what shoe to pick. And if you're not in there, you're not getting selected. So that is the other piece they need to gain back, which also takes some time.

BRAD SMITH: Where are we at in the direct-to-consumer cycle because that's kind of what you're alluding to here as well is how these companies have really tried to pull in more of those interactions, those engagements with people who are huge fans, whether that be of hype or whether that just be of some of the mass product that they put out there. Where are we at in that cycle? And where do you expect perhaps them to lean back into some of those distribution mechanisms?

ANEESHA SHERMAN: So the idea behind going DTC was originally, as Nike put it, to cut out what they called undifferentiated retailers, retailers that they didn't see really promoting their brand, promoting their brand equity and they could do without. And I think that made perfect sense for a big brand like Nike, which already has about 100% brand awareness. They don't need to be in undifferentiated retailers.

I think the challenge is they then went a bit too far and cut out a lot of differentiated retailers like these running specialty stores, which actually do drive brand heat and do drive kind of interest and awareness building of their new product, especially new casual designs. And that's where they saw big share loss that they're now trying to reverse.

So yes, they are trying to get back into some of these retailers. It's not a complete reversal of the direct-to-consumer strategy, but it's kind of going back where they realize they pulled they pulled back too far and went too far DTC in cutting out differentiated positions, which they want to get back.