Cost of Production
Cost of production is something any company has to be concerned with for the sustainability of their business. Despite Under Armour being born in the US, the company today manufactures virtually nothing in-house and production is mainly outsourced to third-party manufacturers overseas which is common practice in the apparel industry. Their primary manufacturing warehouses are currently located in Asia, Central and South America, and Mexico. They do have one “quick-turn distribution center located in Glen Burnie, MD where they do most of their special order items like league and team apparel. Under Armour cost of goods sold margins have been fairly steady for a number of years contributing to their steady growth however increase a bit more drastically from 2015 to current. Cost of goods sold include manufacturing costs, transportation costs, and royalties paid to celebrities as a percentage of sales, among others. A large proportion of costs relate to fabrics used in manufacturing apparel. These are made primarily of synthetic fibers that require petroleum. The current trend in lower oil prices is likely to benefit gross profit margins for the firm in the near term. Below are a few charts displaying the cost of goods operating structure, revenue and earnings, as well as a SWOT analysis of the companies key strengths and weaknesses as seen by market analysts.
After analyzing numerous charts for the last few years it can be seen that an increasing trend in the cost of goods sold has taken place from 2002 with a sharp increase in 2014 in relation to Under Armour’s pricing. If supply costs increase, so will the cost to manufacture products, which changes the company’s profit margins and if costs are not adjusted according to product demand and projected sales the company would face huge profit losses affecting the whole structure of the business. Materials are not the only cost that UA has to consider in producing goods with Under Armour producing such a high percentage of goods outside of the United States, doing business with foreign countries can often lead to other cost variables such as: delayed shipping times due to international import and export regulations, currency exchange fluctuations and issues, and political and labor turmoil. One advantage Under Amrour has in this area though is that they “do not enter in any long-term agreements requiring the company utilizes any specific manufacturer or requiring the company to produce any of their lines for any specific duration of time “(Under Armour, 2018). One negative however would be For example, if UA were to default on a labor agreement with a country abroad, it could negatively affect their overall output of products, reducing their COGS.
Fixed costs for Under Armour consist of such categories as marketing, insurance and taxes. The term “fixed” means that the amount does not change with the level of output. These expenses are not like the cost of goods, which have many influences making them variable. When output of products increase, so does the cost of supplies to manufacture the products. The same goes when output activity decreases, so does the expense of supplies. Under Armour has been somewhat successful in predicting decreases in sales as they have been able to adjust the schedule on manufacturing their products. By implementing this adjustment, they have been able to reduce their variable costs, while simultaneously maximizing their profits. “We have expanded our business and operations rapidly since our inception and our net revenues have increased” to $4.98B in 2017 from $2.33B just 4 short years ago in 2013. (Under Armour, 2018)
The athletic apparel market is extremely competitive with multiple companies wanting to be on top. Under Armour’s direct competitors are Nike and Adidas holding the top 2 performance brands with the highest market percentage. While Adidas is more popular and established in European countries, Nike holds the top tier as the most recognized brand. Under Armour by far is the smallest and youngest of the three companies (Strider, 2016). These can be viewed as positive factors for UA as there is significant room for them to grow and take over additional market share by continuing to create innovative products to sway consumers buy in. However after taking a hit in 2017, Under Armour has been facing stiff competition on each side from Puma and New Balance.
There are many barriers to entry into the market for any new company wishing to gain entry but particularly in the sports industry. When UA entered the market, Kevin Plank was fortunate enough to use product innovation when he created his first “Cold Gear” shirt. This product was of superior quality and offered game changing results for athletes. Soliciting purchases from teams across the country along with celebrity athletic endorsements helped propel Kevin and Under Armour into the spotlight of performance apparel. The biggest barrier smaller companies face when wanting to enter any type of market is that of financial resources, or the capital requirements to start. They simply do not have the funds to promote their products like larger companies and do not have the resources to make enough prototypes to all potential consumers to try. Another potantial barrier for new companies is that of government policy (Barriers, n.d.). Based on regulations and limits to materials, company formation restrictions, import/export regulations, changes in tax laws, etc entrants can be faced with multiple parameters they have to meet in order to become established. Since Under Armour will be entering its 22nd year in public business, it is safe to say that they have effectively surpassed the barriers of entry. They now are on the defensive side trying to maintain and even grow their market share of the industry.
In 2017, one of Under Armour’s biggest areas of percentage gains was in Connected Fitness. This subsidiary business under the Under Armour umbrella incorporates four mobile applications: UA Record, MapMyFitness, Endomondo and MyFitnessPal (Under Armour, 2018). During the launch year in 2015, UA had approximately 160 million users register for these programs, with an additional 100,000 users registering daily, they continually gained traction in the market over the next 2 years. No other big name apparel company has ventured beyond their own named fitness application which has placed Under Armour ahead of their competitors in the digital fitness marketing strategy.
Taking all factors into consideration, the type of market structure UA and the apparel industry can be categorized into falls somewhere between an oligopoly and a monopolistic competition. A monopolistic competition has many firms, differentiated products and a high level of ease of entry. The apparel industry fits this set of criteria quite well. However, one could argue that it isn’t easy to enter a market that is full of multiple firms already selling similar products. An oligopoly market structure consists of few firms, can have both identical or differentiated products and has a low ease of entry. This type of market could also be associated with the apparel industry primarily due to the similarity of product lines and low ease of entry.
Since 2015 Under Armour has been embarking on an aggressive expansion program outside the United States, planning to have operations in over 40 countries by the end of 2018, taking its tally of international locations to over 800. By taking on additional operations outside of the United States, Under Armour is strategically placing itself in the global market to expand their goods. Since Adidas is well known and established within Europe, Under Armour should take strides to strengthen their presence in the sport of soccer and the FIFA World Cup. One suggestion would be to sponsor a team that qualifies for the World Cup tournament or be the exclusive provider of all the equipment. Brand recognition would be seen worldwide and fans would associate the brand with their favorite team. Within North America, Under Armour is best known for its association in the football world and despite football having the largest sports market with the Super Bowl, it is recommended that UA work on expanding their brand in other sports by connecting with lead athletes in their sport. Once those relationships are established, contracts can be added to incorporate teams of athletes broadening UA’s presence across thee sports spectrum. Other options of marketing based on the chart below could be sponsoring a driver or car in Nascar, providing uniforms, equipment, or signs for the Olympics; maybe sponsoring a specific venue. The possibilities are endless but the more a brand is seen at large venues the more consumers will remember it when they go to make a purchase. The chart below shows some of the best marketing events worldwide and year round.
Another perception of Under Armour’s brand is that it is associated more to men in the industry than to woman. As founder of Under Armour, Kevin Plank states, “Women’s apparel someday will be larger than our men’s apparel business, which is our goal.” By having this mindset, Plank will be able lead his team in expanding the female line of business. Women account for over 80% in household buying decisions, including all family members (Under Armour, 2018). Clothing decisions are not only based on what looks good, but also performance, durability, and functionality. Women are not afraid to spend a little more on products that have the qualities they are seeking, making such items worth the cost when broken down by number of uses and years of use. By taking these recommendations into consideration in expanding its business, Under Armour should be able to gain momentum in all lines of their market including apparel, footwear, equipment, and accessories; making it one of the best companies in the sports/athletic apparel industry.
- Barriers to entry: Factors preventing startups entry to a market. Retrieved from https://www.marsdd.com/mars-library/barriers-to-entry-factors-preventing-startups-from-entering-a-market/
- Biggest Sports Events for Marketing. (2018). Retrieved from https://www.statista.com/statistics/253353/brand-value-of-sport-events-worldwide/
- ECO-201 Final Project Guidelines and Rubrics. Retrieved from https://learn.snhu.edu/d2l/lor/viewer/viewFile.d2lfile/121111/9648,2
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- Under Armour Price Elasticity. (2018). Retrieved from http://investor.underarmour.com/financial-information/annual-reports
- Under Armour Financial Charts. (2017). Retrieved from https://www.fool.com/investing/2016/12/24/under-armour-inc-in-5-charts.aspx
- Under Armour Stocks and Charts. (2018). Retrieved from https://ycharts.com/companies/UA
- 3 Reasons Under Armour Cooled off. (2017). Retrieved from https://finance.yahoo.com/news/3-big-reasons-armour-cooled-off-110005201.html