Dicks Sporting Goods: Demand and Supply Forces

Abstract

Microeconomics is one of the most critical disciplines in business studies and also one of the most intuitive. The law of demand and supply is one of the oldest laws; it has been applied in business even before the advent of currencies. This paper will look at the sporting goods industry with a particular focus on Dicks Sporting Goods. The paper will look at the various demand and supply forces surrounding the company’s multiple goods and services; a special segment will analyze the events of the 2020 pandemic and the many forces that affected the industry in such a small period. The report will also look at the price elasticity of goods and services offered by Dick’s.

More specifically, it will be observed whether all its products can fit into one price elasticity category. As will be observed, Dick’s has made many acquisitions over the years and has made remarkable diversification of its operations. The effect of these many divisions on overall elasticity will be analyzed. Finally, this report will look at the market structure that Dick’s Sporting Goods falls into. The fine line between categorizing it as either an oligopoly or a monopolistic competition organization will be dissected. Dick’s is one of the most important organizations in the US as it is a relic of the brick-and-mortar past, striving to survive in a new dawn of e-commerce and somehow succeeding.

Dick’s Sporting Goods

Dick’s Sporting Goods is an American sporting products retailer established in 1948 by Richard Stack. It has an estimated 850 outlets across the US and employs approximately 30000 people as of 2018 (Dick’s – about Us, n.d.). The company is the largest retailer of sports products and is a Fortune 500 firm (Dick’s – about Us, n.d.). It is a publicly-traded company listed on the New York Stock Exchange (NYSE) with the ticker DKS. Dick’s Sporting Goods had revenue of 8751 million USD in the financial year ending January 20, 2021(Dick’s Income Statement, n.d.).

It also posted an operating income of 741 million USD and a net income of 530 million USD (Dick’s Income Statement, n.d.). DKS had total assets of 7753 million USD and total liabilities of 5413 million USD (Dick’s Balance Sheet, n.d.). As of April 13, 2020, DKS is trading at 82.18 dollars.

Demand and Supply for Dick’s Sporting Goods Products

Dick’s main retail stocks comprise a catalog of products targeted at consumers with an interest in sporting activities providing equipment, footwear, and apparel. Its catalog includes products for men, women, and children (Dick’s – about Us, n.d.). It has been hypothesized that Dick’s targets families because families typically spend a lot on sporting activities. For this reason, demand for the products is susceptible to shifts in disposable income. In addition to general sports goods, the company also operates stores specializing in golfing, fishing, and hunting products. Dick’s products are sensitive to income changes in the population; when the target customers have more income, they will demand more products.

According to a Mckinsey report, the sporting goods industry declined for the first time since the 2008 financial crisis. The first lockdown affected sales negatively, but there was a bounceback after the first wave of lockdown (Becker et al., 2021). It was, however, noted that sports goods companies were more resilient compared to other apparel manufacturers due to changing tastes attributed to a fitness and health craze (Becker et al., 2021). It has been documented that the 2020 COVID-19 meltdown caused reduced income as many people were laid off and outdoor activities were forbidden (Becker et al., 2021).

Despite these factors, sporting goods outperformed other apparel in demand because of a shift in categorization; fitness and health had become a necessity as consumers sought to become healthier to fight the pandemic. In this case, sporting goods had won the substitute goods race over general apparel.

Income Boost Increases Sales

There is a direct link between consumers’ disposable income and retail sales. After the first lockdown, Dick’s store sales reduced by 29.5% because of covid19-related restrictions, but revenue recovered quickly after re-openings and increased demand. Dick’s reported increased sales in their June 12, 2020 report (Wang, 2020). One of the factors that the company had attributed the increased sales to was stimulus checks. The increased disposable income for consumers had caused an increase in demand.

E-Commerce Effects on Supply

One of the most significant factors affecting the sporting goods industry is a change in consumer shopping habits. There has consistent growth in the industry’s total sales reaching $100 billion in 2016 (Salpini, 2018). The industry has benefited from growth in the fitness and health industry over the years as customers are now wearing sports apparel in their everyday activities. However, despite the growth, giants in the sector have closed as consumers shift from in-store to digital purchases. While the overall industry grew by 40% between 2011 and 2016, digital purchases recorded a faster growth of 159% (Salpini, 2018). In response to the rise in e-commerce, sports goods retailers are establishing an online presence so that consumers can purchase products digitally.

Dick also operates a sales channel online with capabilities for browsing products, placing orders, and scheduling deliveries. The company’s Golf Galaxy and Field and Stream also operate similar digital channels. In addition to the websites, the company also offers a mobile app. Online stores have an easier start-up cost compared to physical stores; this has caused an entry of new suppliers that have reduced the demand for legacy stores, causing them problems to the extent that some have had to file for bankruptcy.

Dick’s Sporting Goods Products Elasticity

Elasticity is a core concept in demand; it measures how sensitive a variable is to another. In price elasticity of demand, one measures how sensitive the quantity of a product demanded is to changes in price. The factors that affect price elasticity include the number of substitutes available, how well a product can be substituted, and the proportion of a consumer’s budget consumed by the product. Time under consideration is also an important factor.

Dicks has a wide array of products that cannot fit one elasticity category. The company’s general sports apparel arm ranges from sportswear for men, women, and children with a specific target for families. These are normal goods that are considered sensitive to price changes and can be considered relatively elastic. These are not luxury goods given the type of suppliers that supply to Dick’s. Dick’s leading suppliers are Nike, Adidas, and Under Armour; these products are hardly a necessity and hardly a luxury.

Dick’s products would not enjoy the kind of luxury treatment enjoyed by Louis Vuitton or Burberry. The effect of price increment on Dick’s sales would depend on whether the increase has come from suppliers, in which case it would be an industry-wide phenomenon. However, if Dick’s placed a premium on their products, its competitors such as the North Face, REI, and Big Sporting Goods Corporation would benefit from fleeing customers.

Besides stocking products from major sports apparel manufacturers such as Nike, Dicks also operates its own private labels. In 2017, Dick’s dropped 20% of its suppliers- mainly the small ones- to create more room for its private labels. In this regard, Dick’s is not just a supplier of Nike products but also its competitor (Keenan, 2017). Sports apparel has a high price elasticity because of the large number of suppliers and their position as neither necessities nor luxury, which tend to be inelastic to price changes.

Dick’s field and stream and golf paraphernalia divisions have a specific aura that qualifies them as luxury. This is compounded by the fact that Dick’s specifically places their stores in affluent areas to target wealthy populations. This further illustrates the difficulty of placing Dick’s entire catalog into one class of price elasticity. Their private brands can be elastic because they are easily substitutable. However, golf clubs would most likely not be as elastic since golf merchandise customers are probably wealthy.

Dick’s Sporting Goods Market Structure

Dick’s Sporting Goods, together with its big competitors in the sports goods industry, qualify to be a monopolistic market structure. A monopolistic competition market structure is where organizations produce slightly differentiated products, and entry is easy (Boyes & Melvin, 2016). This is the case with the sporting goods industry. It is not a monopoly because even though Dick’s is one of the largest sporting goods companies in the US, there are still other competitors. One could be tempted to classify it as an oligopoly because the big 5 controls a considerable size of the market, but it fails the test because entry into the sporting goods retail business is not difficult (Boyes & Melvin, 2016). It also fails the oligopoly test because the firms, even the big five, are not interdependent and do not develop a common strategy.

Another reason the industry fails the oligopoly test is that one firm does not determine the price of the goods for others to follow suit; for instance, Amazon utilizes dynamic pricing to its pricing. Dynamic pricing is when a company offers different prices to different customers based on their behavior. Dynamic pricing is mostly an e-commerce innovation; since most sporting goods companies such as Dick’s specialize in physical outlets, this would be difficult to implement.

Dick’s qualifies as a monopolistic competition firm because there are many suppliers and customers in the market, and no business has complete control of the price. In the sporting goods industry, consumers use non-price qualities to select their products. Firms also operate under the assumption that their actions will not affect competitor products. This is evidenced by Amazon using dynamic pricing that is not widely adopted (FerrĂ©, 2020). There are also no barriers to entry or exit.

Nike, Adidas, and other sports goods manufacturers have expanded their direct-to-consumer businesses, which accounted for 33% of their total sales in 2020 (FerrĂ©, 2020). They also face stiff competition from other retail chains such as Walmart and Macy’s that also sell sporting products. There is also no barrier to exit given the folding of The Sports Authority and Sport Chalet.

Conclusion

This paper has dissected the sports goods industry with a particular focus on Dick’s Sporting Goods. Dick’s started as a single store and was founded in 1948 by Richard Stack. His sons have run the company since 1984. The company went public in 2002 and today operates more than 850 outlets across the US. The company is a retailer of leading sports goods brands ranging from Nike, Adidas, and Under Armour. The company has done some consolidation over the years, acquiring Galyan’s in 2004 and Golf Galaxy in 2006. It also acquired Sports Authority’s brand and intellectual property. The company dropped 20% of its suppliers in 2017 in favor of its private brands. This was a restructuring bid to avoid the fate of its peers who had closed shop.

The paper has also looked at Dick’s price elasticity, where it was concluded that most of Dick’s products are neither necessities nor luxury despite Dick’s strategically placing its stores in affluent neighborhoods. For this reason, they are sensitive to price increases and changes in the disposable income of the median consumer. However, some divisions, such as Golf Galaxy, can be categorized as luxury since the average golf merchandise buyer is not the median income earner. For this reason, these products may not possess the rigidity of essentials.

On the market structure, it was observed that Dick’s belongs to a monopolistic competition because there are many firms and consumers in the sports goods industry. The firms also act quite independently, and there is no explicit cooperation to control the market by the leading players. It is also observed that the entry and exit of firms into the industry are also relatively easy. Dick’s is one of the US’s largest sports goods but faces stiff challenges, mainly from the e-commerce paradigm. The company will have to adapt to new business mechanisms or follow in the footsteps of other industry giants who folded.

References

Becker, S., Berg, A., Kohli, S., & Thiel, A. (2021). State of the sporting goods industry 2021. McKinsey. Web.

Boyes, W. J., & Melvin, M. (2016). Microeconomics (Tenth edition). Cengage Learning.

Dick’s Sporting Goods faces a big problem: Analyst. (n.d.). Web.

Dick’s sporting goods inc (Dks) balance sheet—Yahoo finance. (n.d.). Web.

Dick’s sporting goods—About us. (n.d.). Web.

FerrĂ©, I. (2020). Dick’s sporting goods inc (Dks) income statement—Yahoo finance. Web.

Keenan, J. (2017). Dick’s sporting goods dumps 20% of its suppliers. Total Retail. Web.

Salpini, C. (2018). The state of sports retail: How athleisure keeps changing the game. Retail Dive. Web.

Wang, P. (2020). Why dick’s sporting goods is seeing a rebound. The Motley Fool. Web.

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