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Justin Cornell

Bauer Performance Sports LTD Overview

"Bauer Performance Sports LTD (TSX:BAU) is a leading developer and manufacturer of ice hockey, roller hockey, and lacrosse equipment as well as related apparel. The company has the most recognized and strongest brand in the ice hockey equipment industry, and holds the top market share position in both ice and roller hockey. Its products are marketed under the Bauer Hockey, Mission Roller Hockey and Maverik Lacrosse brand names and are distributed by sales representatives and independent distributors throughout the world. Bauer Performance Sports is focused on building its leadership position and growing market share in all product categories through continued innovation at every level." ^[1]

History

Established in Kitchener, Ontario, Bauer has held a grasp on the ever expanding market of Hockey since 1927. Six years after its establishment, Bauer introduced a piece of equipment to the world that would change hockey forever. They were the first equipment producer to manufacture a skate with the blade permanently attached to the boot. Originally coined the “Bauer Supreme” line of skates, its supremacy was short-lived due to CCM’s introduction of a substitute known as the “Tack” boot. This particular boot was worn by NHL scoring champions from 1939-1969. It wasn’t until the marketing team at Bauer assigned endorsement privileges to Bobby Hull that the company really saw its full potential. Soon after the inclusion of Mr. Hull onto the Bauer team, the introduction of the TUUK blade holder further solidified the companies prominent market share. This holder, first introduced by the company in 1979 still remains the top choice among professionals today. ^[2]

What Bobby Hull had made fashionable back then began to spread quickly amongst teams in the NHL. Most notably, players on the Montreal Canadians such as Jim Roberts and Guy Lafleur began to also endorse the TUUK model. Its popularity rose to a climax in 1995 when its market share exceeded 95%. One year before this success peaked, Bauer’s parent company Canstar became a wholly owned subsidiary of Nike. The “cash cow” success of the now coined Nike Bauer remained in effect until 2008 when Nike divested itself from the company. In February of 2008 the company was bought by Roustan Inc. and Kohlberg & Co. for $200 million. Upon this deal being reached, Bauer changed its name back to Bauer Hockey. Soon after this acquisition, Bauer Hockey began diversifying itself into different market segments such as roller hockey and lacrosse. In 2010, Bauer purchased Maverik Lacrosse and with that announced it would be on the Toronto Stock Exchange as soon as 2011. Bauer Performance Sports LTD completed their IPO on March 30, 2011, generating Cdn$75 million of equity at Cdn$7.50 per share.^[3]

Business Segments

Ice Hockey

Bauer Hockey is the leading ice hockey equipment manufacturer in the industry from beginners to NHL players. Bauer produces every piece of equipment for players and goaltenders. This includes sticks, skates, and protective equipment. Ice hockey is played in more than 68 countries and by more than 6 million people globally. The largest markets continue to be Canada and the United States. Registered players do not include professional or other leagues including college hockey. Participant registration has been stagnant over the past decade, growing at around 1-2% per year, but the number of unregistered or “casual” players cannot be accurately counted and is estimated to be growing as well. Continued growth is important and the popularity of the sport is constantly increasing.The ice hockey equipment market sold approximately $555 million in 2010, with 62% of sales attributed to skates and sticks. Regardless of that fact, 2010 market share in the equipment sector is at 45% for Bauer. Bauer's top notch R&D enable they to produce high performance eqiupment that is available not only to NHL and other elite players, but any player at any level. During the current 2010-2011 NHL season, 90% of players use at least one piece of Bauer equipment.^[4]

Roller Hockey

Roller hockey has become an important and profitable venture for Bauer Performance Sports LTD. They acquired Mission and together they both produce separate lines of equipment under the names of Mission and Bauer. Estimated participants in roller hockey was 1.4 million in 2009, and roller hockey sales were $25 million in 2009. These numbers are growing and are anticipated to continue that way. This number is a rough estimate because many roller hockey participants are not registered with different governing bodies. It is easy to play anywhere, which allows for plenty of unsanctioned play.^[5]

Advantages of the roller hockey market for Bauer is that like lacrosse, they have the convenience of manufacturing plants already making similar products. Under the Bauer brand, roller skates utilize the same boot as ice hockey, the only difference is a holder that will house wheels instead of a blade. Other protective equipment made by Bauer can also be used without changes in roller hockey. These include gloves, shin guards, elbow pads, helmets, sticks, and shoulder pads. Bauer is currently second in roller hockey, behind none other than Mission who holds the number one spot. This give Bauer the top market share in both roller and ice hockey. Some would say that having both companies operate in roller hockey cannibalizes their own market. This is somewhat true because people many times are stuck between both Mission and Bauer products. However, offering the top 2 product lines offers more competition for other companies and will draw more sales to Bauer Performance Sports LTD. The Mission line is purely roller hockey and has been the choice of roller hockey players for years. The Bauer line will be popular with ice hockey players who also play roller hockey. The equipment is the same and someone who loves Bauer’s ice hockey equipment will purchase their roller hockey equipment as well instead of having to switch brands. Basically having both brands caters both types of players more effectively.^[6]

Lacrosse

Lacrosse is a team sport played mainly in Canada and the United States. Since the turn of the century lacrosse has been the fastest growing team sport with an annual growth in participation rate of 10.6%. In 2009 there were over 500,000 registered players in the United States and about 150,000 in Canada, with this number expected to grow at a steady rate in the foreseeable future. In 2010 Bauer acquired Maverik, a cutting -edge lacrosse equipment and apparel company based in Long Island City, New York. Maverik produces lacrosse stick parts such as the head and shaft, as well as protective equipment. Lacrosse is played in youth, college, and professional divisions in both the United States and Canada.^[7]

Apparel

Bauer Performance Sports LTD produces apparel that is branded under Bauer, Mission, and Maverik. This includes clothing, hats, etc. as well as performance apparel, jerseys, and socks. The global ice hockey related market for apparel is estimated at $300 million in 2010. This segment allows for high profit margins as well as an added source of revenue from those interested in hockey or lacrosse.^[8]

SWOT Analysis

Strengths

Bauer prides itself on the large market share it has in the sport of ice and roller hockey. Internal studies within the company lead them to believe that they have more market share than the next three companies below them combined. They maintain the top market position in all ice hockey equipment except for sticks, which they are second to Easton. It should also be noted that Bauer enjoys 90% unaided brand awareness, something most companies never even hope to achieve. Expenditures in Research and Development are also more than adequate compared to industry standards, and this is a specific and crucial strength for Bauer. By constantly developing top of the line products every year, they allow younger consumers the options to continually upgrade in quality while they are growing out of past equipment. Also a major component to Bauer’s success is the support they have gained from professional NHL players and various professional hockey platforms. It is impossible to watch any broadcasted NHL game without seeing the Bauer name on the majority of players, and this isn’t by accident. Bauer realizes the advertising potential that the professional hockey realm represents, and they do everything possible to cater to those teams and events. Bauer also does a superb job making timely acquisitions to incorporate successful businesses into their company, such as their purchases of Mission and Maverik.^[9]

Weaknesses

Albeit Bauer has a dominant presence in its related industries, no company is without weaknesses. Bauer, with all its marketing strengths previously explained, also depends heavily on growing markets. Much of its investments in lacrosse and women’s hockey are based on forecasts and there is heavy reliance on the explosion of participants. While registration for both sports has been steadily increasing, this does not mean that this will remain the case. Bauer has to take the risk of losing large investments to try and capitalize on what they see as an untapped market. Another weakness for Bauer, as with any other company, is the economy’s current recession. This is mentioned because it is somewhat inflated in Bauer’s case due to the expensive nature of the sports they participate in. Also worth acknowledging is the intensity of competition that Bauer experiences. Being at the top of the industry makes them the organization to beat, and all related companies in the field are looking to oust them in any way possible.^[10]

Opportunities

The obvious opportunities for Bauer are seizing the emerging markets related to their industry. At this point in time, lacrosse is a main focus for the company as the market is supposed to grow by 40 percent to 90 percent in the next five years. This market also has a high representation of young consumers, with over 90% of U.S. players being under the age of 18. This again gives Bauer the opportunity to target a segment with a high replacement cycle. Women’s hockey is also an opportunity on their radar, as female hockey participation has doubled in the last decade. Apparel sales are not necessarily an untapped market for Bauer, but pushing their clothing lines has much room for improvement. This includes team apparel and bags, performance apparel, and lifestyle apparel. A huge opportunity for Bauer to prepare for is the 2014 Olympics in Russia. Not only is this another emerging market they want to conquer, but the international stage of the Olympics provides Bauer with amazing promotional potential. In essence, the Olympics are a gift to the company, allowing them to penetrate the Russian market and display their excellence to the world. ^[11]

Threats

Threats to Bauer exist within the markets that they have been in, and even more so in the new markets they have entered. They do have market share in a majority of hockey equipment, but as explained earlier Easton surpasses them in hockey sticks. Who is to say that Easton or Reebok concentrate on separate pieces of equipment to start to lower Bauer’s choke hold on the market? It is this kind of intense competition that Bauer must constantly deal with. This is not only present in the hockey segment, but threats are very apparent in the newly established lacrosse sector. Bauer’s acquisition of Maverik was only a stepping stone in the road to becoming a force in the lacrosse market. They have very little awareness and market share in this portion of the sports market, and even with the new brand they have a lot of work to do. While the investment was made in order to move quickly into an emerging market, the threat of failure and flushed costs are looming over Bauer’s head.^[12]

Porter's 5 Forces Analysis

Threat of New Entrants

This threat is low due to the high capital requirements needed to enter the market. The raw materials, R&D costs, equipment costs, and heavy marketing needed to become profitable shows this. Another reason this is low is due to the concentration of companies and therefore the large market share each have.

Threat of Substitutes

The threat of substitutes is very high because of the high cost associated with hockey and even lacrosse. Hockey equipment is very expensive, especially the high end performance products offered by Bauer. To compound this, ice sessions are very expensive, costing anywhere from $150 and hour and up. Most organized hockey teams use a minimum of 4 hours a week on average. Roller hockey has all of the costs of equipment that ice hockey has, but the fees for rink usage can be decreased depending on where it is played. Even though lacrosse does not have high ice session fees, it is still expensive to completely outfit a player.

For these reasons it is easy for a substitute to be other less expensive sports such as basketball, football, soccer, and baseball. The list of substitutes goes even farther to other sources of physical activity and leisure activities. This includes video games, reading, or watching television.

Buying Power of Consumers

The bargaining power of consumers is low for many reasons. The first is a concentration of companies in the market. Buyers have also shown they are not price sensitive because high performance products continue to the the greatest source of revenue for Bauer. Huge loyalty to Bauer and Mission products also keeps this threat low.

Supplier Power

The supplier power for Bauer is low because their large market share has supplier’s salivating at the thought of a long-term relationship and they know it. Bauer will be a huge source of business to its suppliers as they continue to increase production of their product offerings. Suppliers must fight to gain loyalty with the powerhouse of the industry, and may likely have to lower their prices in order to maintain that. Otherwise, Bauer has a long list of people waiting to adhere to their rules and regulations.

Competitive Rivalry

The competition faced by Bauer Performance Sports is medium. In ice and roller hockey Bauer and Mission together hold huge market shares. This allows Bauer to not only fund important R&D, but hinders the competition. R&D is huge for the industry and those who can produce the latest and greatest products will gain market share. However it will take a lot for Bauer and Mission to have a large drop. In contrast they have big competition in lacrosse and apparel markets. Maverik is a small company and it is hard to be a clear cut leader in something like apparel. There are so many companies operating, competition is large.

Competitors

Ice Hockey

The ice hockey market is very concentrated into 3 companies, Bauer, Easton, and Reebok. There are very few companies that have little market share, and therefore present little risk to the big 3. Over 80% of the market is controlled by these companies.

Reebok is #2 in market share behind Bauer Hockey. They are also #2 in each category other than sticks. Reebok manufactures equipment in each category and they own another big name in hockey equipment, CCM. CCM has been around almost as long as Bauer and contributes to Reebok in protective, helmets, and skates. With their long history, many players are still loyal to CCM.

Easton manufactures equipment in every category except for goalie equipment. They just entered the helmet category a few years ago, which can contribute to its #3 market share. Easton has a long history in stick manufacturing. They were the first to introduce a composite stick that is in one piece, and therefore did not have a separate shaft and blade. This was the biggest stick innovation to date, but every other company has the technology today. Still, Easton has many loyal users and continues to lead the stick category.^[13]

Roller Hockey

Bauer Performance Sports LTD owns both Bauer and Mission, which are the #2 and #1 companies in roller hockey by market share. Just like in ice hockey, Bauer Performance Sports LTD holds the dominant market share because of high performance products and their popularity in ice hockey. The main competitors include Reebok (who also owns CCM), Easton, and Tour. There are other small companies, but with the roller hockey equipment market so small, it is hard to compete with the large companies who can continuously produce better products.^[14]

Lacrosse

Bauer Performance Sports LTD recently acquired Maverik Lacrosse, who is small in regards to market share. The big competitors in this market include Brine, Warrior, STX, deBeer, and Cascade. This market is more fragmented and much of the reason these companies have held their market share is because of their long standing presence in the market. In the past decade, there has not been much increase in technology of products in this industry, which causes consumers to feel there is little differentiation between products. This industry is growing at an amazing rate, but with a parent company like Bauer Performance Sports LTD, more funding can be driven to Maverik than other lacrosse competitors. Compound this with Bauer's industry leading R&D, Maverik could develop better products in this market.^[15]

Apparel

This market is the most fragmented of them all. Not only do all of the competitors listed above produce their own branded apparel, but they also compete with Underarmour, the biggest producer of performance apparel across the all sports. Where Bauer Performance Sports taps into this market the most is in casual apparel that does not compete Underarmour's performance apparel. Brand loyalty is not as high in this segment as it is in equipment, because clothes are essentially the same except for what is written on it. However, this does not mean there is no loyalty, as for those customers who are brand loyal, Bauer has a clear edge.^[16]

Marketing and the 4 P's

Product

Bauer, Mission, and Maverik have a constant goal of producing better and more technologically advanced products year after year. Together they produce all the equipment and apparel a consumer may need in each of these sports. Their products speak for themselves and helped them garner a 90% unaided brand awareness. They categorize their products into elite, performance, and recreational levels. Elite for professional players wanting only the best products and will pay a premium for them. Performance being high level players who want top products, but may not pay the price premium for the best equipment. Recreational players are not looking for the best equipment, they play less and are looking for the best value.^[17]

^[18]

Price

In each market they participate in, equipment is offered from all price points. A point is made to produce the latest and greatest product, but offer equipment for those who are new, or who won't spend top dollar. A key concept to note is that even the low end product offering increase in performance and technology year after year.^[19]

Place

Bauer Performance Sports LTD products are stocked in brick and mortar stores, as well as online. Most retail hockey equipment stores stock equipment for ice hockey, roller hockey, and lacrosse.This is also the same with online retailers as well. Unlike many other industries, there is no price advantage to shopping online. The type of equipment also keeps people going to store where they can size and test out equipment properly.^[20]

Promotion

Bauer makes a point to do more than traditional marketing in respect to the hockey industry. They invest in sports marketing and product placement at elite levels, but they also concentrate on interacting with core consumers at all skill levels directly at the point of play. They create one-on-one brand interactions where consumers make purchasing decisions, research products, and play the game: in the store, online, in hockey arenas, at tournaments and in dressing rooms. Their direct-to-consumer marketing strategy creates strong brand affinity with consumers and allows for direct interaction with, and valuable feedback from, their consumers. For ice hockey, their direct-to-consumer marketing is primarily targeted at the ‘‘hockey crazy kid’’ who plays hockey at least 30 times annually. Management estimates that this group accounts for approximately two-thirds of all annual hockey equipment purchases. Bauer has executed several ‘‘industry firsts’’ and strives to market their products to increase brand awareness through retail in-store marketing, digital marketing, and “grassroots” marketing.

niggers in-store marketing allowed Bauer to introduce their first ever exclusive “shop in shop” and “monobrand” stores in select European markets. These shops are built and funded jointly by retailers, distributors, Bauer, and feature exclusively Bauer product and merchandising. Digital marketing was a huge initiative, as Bauer was one of the first hockey brands with an interactive website and they continue to bring new interactive technologies to the hockey consumer. Today, approximately 85% of their core target consumers research product purchases and brands online and rely on manufacturer websites as an influential factor concerning purchase. The website provides brand, product, and NHL athlete features as well as video testimonials featuring professional and amateur players communicating the performance advantages of the equipment. In 2010, Bauer.com enjoyed over 1.6 million unique visitors. They have also created an interactive Facebook community with over 80,000 ‘‘friends’’. Lastly, “grassroots” marketing enables Bauer to sponsor and host interactive events and conduct on-ice demonstration programs. For example, in September 2010, they expanded their on-ice demonstration program with ‘‘The Bauer Experience’’, targeting 20,000 consumers across 16 North American cities. Additionally, they sponsored and hosted interactive events at nearly 20 of the world’s top youth tournaments. Their grassroots efforts connect the Bauer brand with over 150,000 consumers annually.^[21]

Sales

In the United States and Canada, Bauer Performance Sports LTD uses sales representatives to help develop and grow sales to retailers in these countries. They travel to stores, show new products, and help greatly with overall customer service. In the Nordic Countries, Bauer employees help to coordinate sales and customer service remotely. Sales is categorized into 2 different sales seasons. This are "back to hockey' from April to September and "holiday' season from October to March. The reason this model was developed in 2005 was to help retailers better manage their inventory, as other companies in this industry offer only a single annual order window.

Bauer offer' "a platform of competencies, processes and tools that jointly maximizes the business success of Bauer and our customers. The initiative includes regular retail management education, web-based order facilitation, and online inventory management tools, including the ability to place and check orders and inventories 24 hours a day, seven days per weeks. In Fiscal 2010, approximately 45% of our orders were received on-line through our web portal, CustomerOne."^[22]

Supply Chain Analysis

Logistics

Bauer Performance Sports LTD has redesigned their distribution model for more efficient shipments which are able to be delivered quickly to customers and reduce overall costs. Over the last five fiscal years ending May 31, 2010, they have steadily decreased their distribution costs as a percentage of sales from 6.5% in fiscal 2006 to 4.1% in fiscal 2010 and expect further benefits from their cost reduction initiatives. Bauer Performance Sports LTD currently sells directly to their retailers in North Amercia and in Nordic Countries when they distribute their products, which include sticks and helmets, as well as all Maverik products. They outsource the distribution of their products outside of North America to a third-party logistics provider in Boras, Sweden. These strategies allow for cost savings and efficiency.^[23]

Procurement

Bauer has an exclusive vendor base that provides the majority of the supplies needed for production. Over 90% of Bauer’s production outside of North America occurs in China and Thailand. This technique is used because it saves Bauer tremendous amounts of money due to lower labor costs, materials handling costs, and logistics costs. That being said, there are still many problems that could arise from production overseas, such as sub par quality or longer lead times. Bauer prides itself on quality and innovative products, and any lapse in quality will result in lost sales and customers for them. Bauer has employees in Thailand and China that communicate with vendors and manufacturers regarding sourcing and quality control. Although they have employees overseas, Bauer has had problems in the past with suppliers and manufacturers failing to meet quality standards. In such a fast paced industry, with trends changing every other month, it seems Bauer cannot afford to have products it cannot sell due to lack of quality. This is especially detrimental to Bauer when the product is produced overseas and the lead time for a new shipment is generally anywhere from 4 to 12 weeks.

Many of their manufacturer agreements and vendors have been in place for over 10 years and some as long as 30 years. Bauer has exclusive contracts with multiple suppliers and manufacturers. This is done so Bauer can be sure that its technology and trade secrets are kept in house and will not be leaked to competitors. Exclusive manufacturers can be trained and taught the specific methods Bauer requires, but it can be a problem if something occurs with one of the manufacturers or vendors. In the case of performance or quality issues, Bauer has the right to terminate any contract with no more than 30 days notice. Additionally, they train secondary suppliers and manufacturers so if one fails, another can step in rather quickly. This is very important because the hockey and lacrosse industries are so rapidly changing that it is essential that Bauer’s supply chain is extremely efficient and very flexible, so it can adapt to new demands and new trends in the industry without losing valuable time and money. ^[24]

Research and Development

Bauer Performance Sports LTD's R&D is based on the principles developed through ice hockey product development. This strategy has been integrated into roller hockey and is currently adding Maverik into this process. Bauer uses a 5 year program of R&D before the product is actually launched. Throughout this process they have a continuous loop of receiving feedback in order to make further improvements. This is done by users from NHL players and below. Bauer also has a partnership with McGill University to conduct research from the flex of a stick to testing of protective equipment. Bauer currently has 300 patents, 300 trademarks, and 50 patents pending. Bauer spent 3.9% of revenues in fiscal year 2010 on R&D, which allows them to release 100-150 new products each year and lead the industry in this category.^[25]

^[26]

Financial Analysis

April 13th was a big day for Bauer as they released their financial reports for both the last 9 months and last 3 months as of Febuary 28th, 2011. These are the first Bauer has released since completing their initial public offering. What we see in this information is not only impressive, but also shows some issues they may have. Some of the amazing highlights include increases in net revenue (21%), gross profit (38%), and adjusted EBITDA (48%) in comparison to the same 9 months of last year. Net revenues can be attributed to increasing registration of hockey players, brand recognition, and high quality products. Many players will only use Bauer equipment and others are catching onto this trend. Increased gross profit percentage is important because it shows that Bauer has been able to keep a larger percent of revenues. This can be due to cutting costs and at the same time producing quality products, which players will pay a premium over other brand for. Another advantage is a 25% increase in net revenues for apparel, which have a higher profit margin than equipment due to material costs. The future also looks promising for Bauer due to booking orders for the upcoming “back to hockey” season increasing 32% over last year for a total of $178.4 million. This is the time when Bauer releases the newest products to allow players to gear up with the latest and greatest equipment for the upcoming season.^[27]

From this table we see that Bauer has good numbers in comparison to Adidas Group (owns Reebok) and Easton-Bell Sports (privately held). Not only does Bauer beat measures of profitability, but they also are ahead in solvency. Bauer is much smaller than Adidas Group, who owns many other companies other then Reebok, but Bauer also has huge market share and other competitive advantages earlier stated.

References

1. ↑ Bauer Performance Sports Investor Information
2. ↑ Bauer Long Form Prospectus
3. ↑ Bauer Long Form Prospectus
4. ↑ Bauer Long Form Prospectus
5. ↑ Bauer Long Form Prospectus
6. ↑ Bauer Long Form Prospectus
7. ↑ Bauer Long Form Prospectus
8. ↑ Bauer Long Form Prospectus
9. ↑ Bauer Long Form Prospectus
10. ↑ Bauer Long Form Prospectus
11. ↑ Bauer Long Form Prospectus
12. ↑ Bauer Long Form Prospectus
13. ↑ Bauer Long Form Prospectus
14. ↑ Bauer Long Form Prospectus
15. ↑ Bauer Long Form Prospectus
16. ↑ Bauer Long Form Prospectus
17. ↑ Bauer Long Form Prospectus
18. ↑ Bauer Long Form Prospectus
19. ↑ Bauer Long Form Prospectus
20. ↑ Bauer Long Form Prospectus
21. ↑ Bauer Long Form Prospectus
22. ↑ Bauer Long Form Prospectus
23. ↑ Bauer Long Form Prospectus
24. ↑ Bauer Long Form Prospectus
25. ↑ Bauer Long Form Prospectus
26. ↑ Bauer Long Form Prospectus
27. ↑ Bauer Long Form Prospectus