Entrepreneurship Class- Case Analysis

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W16597 BROOKS SPORTS: COMPETING AGAINST THE GIANTS1 Wiboon Kittilaksanawong and Andrew Jiro Poplawski wrote this case solely to provide material for class discussion. The authors do not intend to illustrate either effective or ineffective handling of a managerial situation. The authors may have disguised certain names and other identifying information to protect confidentiality. This publication may not be transmitted, photocopied, digitized, or otherwise reproduced in any form or by any means without the permission of the copyright holder. Reproduction of this material is not covered under authorization by any reproduction rights organization. To order copies or request permission to reproduce materials, contact Ivey Publishing, Ivey Business School, Western University, London, Ontario, Canada, N6G 0N1; (t) 519.661.3208; (e) [email protected]; www.iveycases.com. Copyright © 2016, Richard Ivey School of Business Foundation Version: 2016-09-27

We knew a commitment to putting the runner first and creating both fantastic product and memorable experiences for them was a big idea—a billion dollar idea.2

Jim Weber, CEO Brooks Sports

With its company philosophy of “Run Happy,” Brooks Sports, Inc. (Brooks) strove to inspire and promote an active lifestyle through its innovative gear, enabling its customers to run longer, farther, and faster. The company began as a small shoe company in 1914 and had endured a number of growths and declines in its 100 years of operations.3 Nearly bankrupt at the turn of the century because of its attempt to compete with diversified athletic brands, and falling victim to a number of unsuccessful acquisitions, Brooks had finally found a strategy to compete in the sports market. Operating as an independent subsidiary of Berkshire Hathaway Inc., and under the direction of chief executive officer (CEO) Jim Weber, Brooks focused entirely on the niche running market, transforming from a brand that generated only US$65 million in sales in 2001,4 to one that generated over $500 million in 2014.5 In 2014, Brooks had set its sights on becoming a $1 billion brand by 2020.6 In the past, few companies focused on the small but growing running industry; however, with the running market becoming increasingly competitive, would Brooks’s runner-focused strategy carry the company to its $1 billion goal by 2020, or would Brooks be forced to shift to a diversified approach as the running market became more crowded? BROOKS SPORTS’ BEGINNINGS Founded by Morris Goldenberg in Philadelphia, Pennsylvania in 1914, Brooks began as a manufacturer of bathing shoes after acquiring the Quaker Shoe Company and quickly expanded its production to include athletic footwear after early success.7 In the 1920s, Brooks began producing baseball cleats, and in the 1930s, it expanded its production to include football cleats, ice skates, and boxing shoes. Brooks’s growth followed the popularity of sports throughout the United States; as market demand expanded, so did the company’s product lines. However, by continuing to expand its product range, Brooks went 60 years without distinguishing itself to customers until the 1970s.

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Page 2 9B16M150 Frank Shorter’s 1972 Olympic marathon gold medal and Bill Rodgers’ marathon victories inspired more than 25 million Americans to purchase their first running shoes and start long-distance running during a period referred to as “the first running boom.” 8 During this period, running shoe and apparel manufacturers grew rapidly, while marathons and other long-distance running events began appearing throughout the country and were completed by many new runners. Notably, these races were largely run by men, and few women ran at the time.9

Before the running boom, large sporting goods stores and mall retail stores carried a large range of athletic shoes at competitive prices, offering discounts and sales to attract customers. Yet these stores placed little emphasis on training employees and providing knowledge of running products, instead focusing on sales and profits. The running boom brought the introduction of specialty running stores (i.e., stores dedicated to solely running), which offered a number of advantages to consumers, including specialized customer service, running education from experienced athletes, local running community support, and shoes not available online or in national chain stores. Recognizing these advantages, runners began shifting their buying preferences, and running specialty stores became the “lifeblood of the running industry and sport, providing a sense of community and spreading the knowledge and passion to all levels of runners.” 10 During the running boom, Brooks introduced the Vantage, the first running shoe assisting runners with over-pronation to prevent injuries occurring from excessive inward rolling after landing. Led by this new product, Brooks soared to become one of the top three shoe brands by the 1970s, unaware that an upstart and rival company would soon grow to challenge it. CHASING NIKE Founded in 1964, Blue Ribbon Sports originally operated as a distributor for Japanese shoemaker Onitsuka Tiger.11 Under this partnership, Blue Ribbon Sports opened its first retail store in California and quickly expanded its retail and distribution to Massachusetts. In 1971, bearing the “Swoosh” logo, and acting independently under the name Nike, the company launched its first Nike athletic shoes. 12 By patenting its “Nike Waffle Trainer” and trademarking its Swoosh logo, Nike became a household name throughout the United States as it entered the same running market dominated by Onitsuka and other brands (including Adidas and Brooks) in the 1970s. Backed by high-profile endorsements and “Nike Air” technology, sales rose rapidly—from $10 million in 1970 to $270 million in 1980. By 1980, Nike held a 50 per cent market share in the U.S. athletic shoe market and opened itself up to an initial public offering.13 Reaching $1 billion in sales and diversifying into a wider range of athletic shoe fields, Nike was quickly becoming the envy of all athletic companies. As strong comparisons were made with Nike, Brooks began extending its operations to mirror those of Nike by branding products, endorsing athletes, and diversifying into new sports. 14 For nearly eight decades, Brooks had produced a variety of footwear to complement its running shoes, while also signing top athletes like Dan Marino and James Worthy for endorsements. However, what was highly successful for Nike devastated Brooks’s business. By the end of the 1970s, comparisons between the two companies had ended. Diversification led to an overextension into too many different sports, causing a rapid decline for Brooks’s identity and position in the athletic industry as a running company. Without steady success across all of its product lines, Brooks was left overexposed to the business downturn and its operations grew inefficient in production, leading to financial difficulties. Brooks began cutting costs by sacrificing quality, utilizing cheaper materials in the designing and manufacturing of its

Page 3 9B16M150 footwear, lowering prices to regain customers, and distributing its products to discount chain stores with retail prices as low as $20—a significant decrease from its earlier $70 pricing point. Consequently, tarnished by inferior products and a poor business strategy, Brooks began losing credibility and received heavy criticism from customers. As the company shifted away from its core competency, running, it lost its position in the 1980s and faced the daunting challenge of winning back customers in the increasingly competitive niche market. MOVING IN DIFFERENT DIRECTIONS: NEW OWNERS, LEADERS, AND STRATEGIES Declining in the athletic industry, Brooks was acquired by Wolverine World Wide, Inc. (Wolverine) in 1982. With the goal of leveraging its Hush Puppies brand, Wolverine aimed to restore the declining image of Brooks’s shoes. However, Wolverine failed to allocate adequate resources to Brooks, instead focusing on growth from acquisitions and internal development by acquiring Town & Country, Viner Bros., and Kaepa in 1982, while also developing its own shoe line called Body Shoe.15 After a decade with little focus on Brooks’s failing shoes, Wolverine’s net income fell from $15.5 million in 1981 to $2.1 million in 1984, while Brooks experienced eight years of consecutive unprofitability and losses totalling $60 million in 1992.16 In 1993, a privately held Norwegian holdings company, the Rokke Group, became Brooks’s owner, purchasing the brand for $21 million.17 Looking to create a new identity for Brooks, the Rokke Group consolidated and relocated Brooks’s headquarters to the state of Washington. Despite ambitious goals to recover Brooks’s image in the athletics industry, the Rokke Group failed to integrate Brooks and develop synergies with its other brands. Instead, Brooks faced internal conflict over a direction for the company and continually delayed new shoe releases. Once one of the top three brands in the running shoe market, by 1993, Brooks had fallen to 25th, controlling only 0.4 per cent of the domestic market. The company began desperately searching for a new leader and strategy to turn it around. In 1994, Helen Rockey was selected as Brooks’s president by the Rokke Group, becoming the first female leader of a major athletic shoe company in the United States.18 Rockey had been selected because of her strong background in the sports industry and immense success at Nike. Following an analysis of Brooks’s operations, she began implementing changes to guide Brooks toward a unified vision for its stakeholders with the following goals:19  Increase sales and profits by 25 per cent in the next three to five years.  Re-engineer Brooks’s products to focus exclusively on runners.  Discontinue the production of all other sports categories.  Stop retail store sales to concentrate on specialty running store distribution. By reverting back to its original runner-focused business model, Brooks aimed to shed its identity as a diversified athletic manufacturer, with Rockey stating, “Nike is in the entertainment business; we’re in the running business.” 20 Rockey began shifting attention to the design of Brooks’s footwear products, creating three objectives to instill confidence in Brooks’s new brand image:  Promise new and revamped product excellence with a reduced defect rate.  Emphasize operational efficiency with timely delivery.  Provide sales support through marketing that incorporated individual retail stores. Regarding Brooks’s return to concentrating solely on runners, Rockey stated that “with a niche brand, you

Page 4 9B16M150 have the opportunity to really target a focused segment of consumers and talk to them and service them.”21 Brooks sponsored runners and utilized the running community in its marketing strategy, looking to build closer bonds with retailers and the community while eliminating endorsements and only spending $750,000 a year on running publications and magazine advertisements. However, these marketing changes shifted the company’s target market. Brooks sacrificed the rising youth athletic market to target 35- to 54-year-old runners, the strongest niche of the running market at the time. With an increasing number of retail locations selling Brooks’s shoes, sales growth followed: Brooks recognized profitability in its first year under Rockey’s leadership.

In light of this growing success, Rockey believed the time was right to extend operations into running apparel. In 1997, Brooks released running and fitness apparel, creating a strong financial boost and second revenue source. Between 1995 and 1999, its sales increased an average of 30 per cent annually, orders from specialty running shops rose by 84 per cent, and its apparel accounted for 15 per cent of the company’s total sales. By the end of 1999, Brooks appeared to be revitalized and positioned for success in the new century. Despite the turnaround, the Rokke Group chose to focus more on the commercial fishing and real estate industries and, in 1998, sold Brooks to venture capital firm J.H. Whitney & Company for $40 million.22 Rockey left Brooks to join Just for Feet Inc., leaving Bruce Pettet, vice-president of sales and marketing, to run the company.23 Although he followed the same strategy as Rockey, Pettet was unable to lead Brooks to further success due to a lack of leadership, dedication, and commitment to the company. Upon leaving the company for a Colorado apparel, footwear and accessories company called Airwalk International LCC in 2000, Pettet was replaced by Eric Dreyer, former vice-president of Brooks’s footwear and apparel department.24 Like Rockey, Dreyer believed that the future of Brooks would be in the niche running segment, and he shifted the company’s positioning to target the high-end segment of the running industry.25 However, the running community was slow to adjust to the strategic shift, and it appeared Brooks would become bankrupt within the early 21st century. JIM WEBER AND THE SECOND RUNNING BOOM Surrounded by growing concerns for the declining company, Weber replaced Dreyer as Brooks’s CEO in 2001. As the company’s fifth CEO in nearly two years, he faced a number of challenges while pursuing the turnaround and revival of Brooks. 26 When Weber took over, Brooks was known for two high- performance stability running shoes that were introduced in the 1990s: the Beast and the Addiction.27 Weber referred to the shoes as “barbecue and lawn-mowing shoes” because its customers only wore the shoes for non-running, recreational activities. Yet the two products comprised over half of Brooks’s business. Weber’s initial thought after becoming CEO was, “Brooks was like every other athletic footwear company, only a lot smaller. [Brooks] didn’t have the marketing spend. Our brand was tired and running on fumes.”28 He knew the company would require something special to survive in the competitive athletic industry. Conveniently, at the same time that Brooks was seeking revival, a new running boom was growing in the 1990s, known as “the second running boom.”29 Unlike the first running boom, which focused almost entirely on competition among adult males, the second running boom centred on the social, health, and fashionable aspects of running, along with the sense of accomplishment. The aim was not to run for a record time but rather to run for charitable causes or take control of one’s life by losing weight and reducing stress.30 Through training programs, community events, and themed races, a new demographic of runners began to surface. Women also began putting on shoes and running, allowing companies to

Page 5 9B16M150 expand their product lines to target female runners. From 1990 to 2012, every year but 2003 saw a new record in the number of finishers in U.S. running events (see Exhibits 1 and 2).31 Brooks decided to stop competing with its larger, established competitors, because, as Weber stated, the company was “everything to everybody and [consequently] . . . sixth, seventh, or eighth at everything.”32 Weber understood that “by doing one product, [Brooks] stopped confusing customer[s].”33 Accordingly, Brooks created a high-tech testing lab and an expanded shoe trail program and focused its design and development on technical running. As part of this new strategic intent, Brooks concentrated on its Beast and Addiction shoes while developing alternative running shoes, resulting in the creation of the Adrenaline GTS, geared toward runners with normal feet. Brooks aimed to be the exclusive running brand and expanded its product line to satisfy runners of all ages and styles. Rather than spending precious resources on advertising and hoping to attract customers, Brooks went straight to runners’ feet. By sending sales representatives to specialty running stores, the company built relationships with these stores and connected directly with its target consumers. Brooks also created a group of “gurus”—field marketing employees who promoted the brand and sold products at retail locations, run expositions, fun runs, and community events. Through its focused strategy, Brooks made developments that were impossible for larger brands competing in multiple athletic categories (i.e., beyond running) to replicate. Recognizing Brooks’s strong turnaround and growth in the running market, Russell Corporation (Russell) purchased the company for approximately $115 million in 2004.34 Brooks’s sales were estimated to be $95 million at the time, and sales were projected to equal the acquisition cost by 2005.35 Russell had started as an athletic uniform manufacturer in 1973, aiming to strengthen its position in the athletic market through acquisitions of established sporting brands. Once Brooks was acquired by Russell, Weber stated that “Russell understands the athletic industry and the specialty store environment, and [it believes] passionately in the Brooks brand, strategic vision, and plans for growth.”36 Russell planned to leverage its track business with high schools and colleges together with Brooks, while also expanding the company’s apparel line. However, the synergy between the two companies was never achieved, resulting in another sharp decline in Brooks’s positioning in the market. RUNNING IN THE RIGHT DIRECTION: THE BERKSHIRE HATHAWAY ACQUISITION In 2006, after further rapid decline, a merger agreement was completed for Berkshire Hathaway Inc. (Berkshire) to acquire Russell at a cost of nearly $600 million, which included the acquisition of Brooks.37 One of the world’s largest multinational holdings companies, Berkshire was founded in 1893 and was owned by Warren Buffett, who had grown the company’s revenue to nearly $200 billion in 2014.38 Berkshire owned over 70 companies and was a minority investor in a number of other companies, including clothing and shoes manufacturing companies. The acquisition allowed Berkshire to enter a new market, with Brooks competing at the premium end of the running segment. Buffet described the acquisition: “Brooks is doing what it should every day to provide a great product for people who are out there running, doing what they love, being healthy.”39 Under Berkshire’s ownership, Brooks gained no significant synergistic financial or operational benefits; instead, Brooks continued to make independent strategic moves, aspiring to shift its position to the top of the running market, with Berkshire expecting to see only its positive financial returns. As Brooks was only a small operationally independent part of the large Berkshire portfolio, it was unclear whether Brooks would finally achieve sustainable growth and profitability in the running market.

Page 6 9B16M150 Under Berkshire, Brooks began utilizing a variety of unique marketing and promotional techniques that followed its “Run Happy” motto. In 2009, the company partnered with Competitor Group to connect with runners at Competitors’ Rock ‘n’ Roll Marathons, which had grown from 13 national races per year in 1988 to 24 national and six international events. The global races allowed Brooks to gain stronger brand recognition as the exclusive running company at the Competitor Group events. Additionally, the company travelled to hundreds of independent running events each year, bringing a double-decker British-style bus featuring “running-themed carnival games, an arcade of oddities, and the world’s biggest shoe.”40 Brooks also visited college campuses to create viral videos with students for social networking. Through these grassroots marketing strategies, Brooks connected with local runners and communities at a low cost, remaining consistent with its small marketing budget by avoiding high-cost strategies like television advertisements. One observer noted, “With limited marketing dollars, [Brooks gets] way more value than bigger companies.”41 Competing with Nike (which achieved $26 billion in sales in 201542) was a challenge, because “Nike [spent] more [in a morning] on marketing than [Brooks spent] in a whole year.”43 Running had traditionally been a very serious sport, with proponents following dedicated training schedules and striving to achieve weekly and monthly mileage goals. Brooks’s “Run Happy” motto turned that idea on its head by conveying a fun, light-hearted brand image, while also offering a superior running shoe for its customers. RUNNING TO NEW COMMUNITIES: GLOBAL EXPANSION In 2012, Brooks announced the opening of its first Asian subsidiary, Brooks Sports K. K. in Japan.44 Brooks entered Japan—which was home to the world’s second-largest running market—through a partnership with Custom Produce Inc. (CPI), a Japanese importer and retailer of foreign apparel, accessories, and athletic equipment.45 Although critics questioned Brooks’s choice of Japan to enter the Asian running market, Weber stated, “To reach our goal to be the leader in performance running by 2020, we need partners who share our passion for running and an appreciation for our Run Happy spirit . . . CPI is that partner for us in Japan.”46 Brooks Sports K. K. was the company’s first entry into the Asian market, but it was the second subsidiary for the company; Brooks’s first subsidiary had opened in Germany in 2002 and focused on Europe, the Middle East, and Africa. In 2013, the Tokyo Marathon became the sixth World Marathon Major, joining the United States and Europe as holders of the other five.47 The number of runners in Japanese marathons had increased by over 240 per cent over the past five years, and over 28 million runners had made long-distance running an integral part of their lifestyle in Japan. However, Japan was also home to Japanese athletic company ASICS. In a brand-loyal country, ASICS had grown from its split with Nike to become a significant force in the Japanese athletic market, producing footwear and equipment designed for a range of sports and generating nearly half of its income from the Japanese market. There were many differences between the Japanese retail channels that sold Brooks’s products and the specialty running stores Brooks relied on in its domestic market. While specialty running stores in the United States were completely focused on runners, Brooks’s shoes in Japan were sold through large athletic sporting stores that failed to provide the same level of service for runners looking to purchase specialized running shoes. In addition, many of Brooks’s direct competitors had a strong presence in these retail stores. Dependent upon retail stores, the competitive Japanese market was not an ideal environment to foster Brooks’s growth in Asian markets—especially since the company was focused only on the running segment. To compete with ASICS and other brands, it seemed that Brooks would have to replicate its successful focused strategy in Japan and other international markets.

Page 7 9B16M150 A BRAND 100 YEARS IN THE MAKING Brooks celebrated its 100th anniversary in 2014, announcing that it had reached one of its major goals— $500 million in revenues—ahead of schedule. With products in more than 60 countries, Brooks was seeing global brand momentum. In 2011, its international business grew by 26 per cent, relative to 20 per cent in 2010. In specialty running stores, Brooks grew its number one market share position to 31 per cent.48 Additionally, Brooks’s Ghost 6 shoe maintained its foremost spot in the growing neutral footwear category at specialty running stores, while the Adrenaline GTS shoe remained the top choice for runners for the sixth straight year. Brooks also moved its headquarters just outside of Seattle to get closer to runners and the 27-mile Burke-Gilman Trail, with Weber stating that “the opportunity to be so close to our customers is amazing.”49 Brooks’s new headquarters also included the company’s first retail store, called Brooks Trailhead: “more than a store, it’s a place to gather with friends, start workouts and celebrate a good run,” ran the marketing.50 The retail store displayed Brooks’s history, and offered shoes, apparel, and accessories. Looking forward, Brooks had set its sights on becoming a $1 billion brand by 2020.51 In order to achieve these goals, would Brooks need to develop a different strategy to capture a stronger share of the running industry? THE RUNNING MARKET: OVERCROWDED WITH NEW ENTRANTS In 2004, only eight athletic brands competed in the U.S. running industry: Adidas, ASICS, Brooks, Mizuno, New Balance, Nike, Reebok, and Saucony; however, by 2014, there were over 34 brands (see Exhibit 3).52 For newer entrants, the low cost of production and high retail selling points were attractive for market entry, but newer companies were encountering resistance from specialty running stores operating with limited inventory space. In 2014, the sales from running-related retail in the United States was $7.5 billion (up from $7 billion in 2013 and $6 billion in 2006), while the international running market was expected to be $11 to $12 billion in running-related retail sales (see Exhibit 4).53 In addition, the number of female runners overtook the number of male runners in the United States, creating a growing target market for running brands (see Exhibit 5). Sales of running/jogging shoes totalled $3.09 billion in 2013 (up 2 per cent in total dollars from 2012), while units rose to a record 46.25 million (from 44.62 million in 2012) (see Exhibit 6).54 The market had rapidly expanded with trail, triathlon, and obstacle races like Tough Mudder and the Color Run. In 2013, there were over 23,000 timed races and 19 million people running at least twice a week in the United States. As the global running market was projected to reach $20 billion in 2015, international athletic brands were focusing more resources toward the niche running market. Facing the rise of new competitors and the diversity of running brands, one strategy for Brooks was to return to product diversification to increase its sales and profits in order to achieve its 2020 business goals. With successful diversification, Brooks would be able to increase its economy of scope when the new businesses were related. In the past, diversifying the Brooks brand had weakened the company’s strategic assets and led to its downfall. Yet with Brooks successfully focused on the running market, perhaps the company could leverage its past failure with its diversified experiences to become a successful diversifier. Would Brooks risk diversifying itself again to achieve its $1 billion goal by 2020? SPECIALTY RUNNING CHANNEL: A SALES DILEMMA Although Brooks took control of the multi-billion dollar specialty running-shoe market with a 29 per cent market share, the specialty-running channel only accounted for 10 to 20 per cent of the $20 billion running market. In 2014, there were just over 800 running specialty shops—a small number compared to

Page 8 9B16M150 the amount of company-owned stores possessed by Brooks’s competitors (see Exhibit 7). Brooks owned only one retail store, relying on its local retail partnerships for growth, while companies like ASICS and Nike owned hundreds of company-owned retail stores globally, in addition to their presence in general retail and athletic stores. Furthermore, the specialty running stores that sold Brooks’s running products also sold those of its direct competitors. Brooks was facing the challenge of expanding distribution while remaining true to its core customers. In the past, specialty-running stores were useful for helping runners find the correct running shoe for their running style and feet. In 2014, runners already knew what they wanted in their running shoes. The Internet had become one of the strongest competitors for specialty-running stores because it offered the same products for a cheaper price (see Exhibit 8). Weber believed that “you can’t stop a runner from getting their second or third pair [online], but what we can manage is that they are full price and presented as a premium product.” Accordingly, Brooks stopped selling its inventory on Amazon and ended its relationships with another 50 Internet-only resellers from 2010 to 2014 (see Exhibit 9).55 As a niche company and against increasing competition, Brooks’s core dilemma was whether to grow through external or internal opportunities to achieve its $1 billion goal. A MARATHON OR A SPRINT TOWARD THE 2020 GOALS While competing at the premium end of the running market, a number of challenges stood between Brooks and its $1 billion 2020 goal. How would the company increase international sales? By diversifying into apparel, could Brooks leverage its past diversification failures to become a successful company in new athletic markets? Did the company possess the capability to manage a diversified business? Would the lack of Brooks’s retail stores hurt its global brand presence? Weber insisted that economic downswings did not change business for the company because “running has proven to be somewhat recession and economic pressure resistant . . . all you need is a pair of shoes, and you go out the door.”56 He believed that “as millions of people around the world make running a key part of their fit, healthy lifestyles . . . [Brooks’s] goal is to be their number one choice for gear.”57 For Brooks, the race to its $1 billion sales goal was becoming more of a marathon than a sprint.

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EXHIBIT 1: RUNNING-EVENT FINISHERS 1990–2012

Source: Adapted from “2013 State of the Sport—Part III: U.S. Race Trends,” Running USA, July 28, 2013, accessed June 6, 2016, www.runningusa.org/state-of-the-sport-race-trends.

EXHIBIT 2: U.S. RUNNING PARTICIPATION NUMBERS

Survey Category Total Participants 2012–2013 Difference

(%) Sports & Fitness Industry Association (SFIA) Total Runners Run/jog at least once

54,188,000 5.3

SFIA Core Participants Run/jog 50+ days/year 29,843,000 1.2 SFIA Total Trail Runners Run on trails at least once 6,792,000 17.0 SFIA Total Adventure Racing Participated 1+ time 2,095,000 29.5 SFIA Casual Adventure Racing Participated 1 time 901,000 34.0 SFIA Core Adventure Racing Participated 2+ times 1,194,000 26.3 National Sporting Goods Association (NSGA) All Runners Run/jog 6+ days/year

41,996,000 4.9

NSGA Frequent Runners Run/jog 110+ days/year 9,944,000 7.8 NSGA Occasional Runners Run/jog 25–109 days/year 19,514,000 5.1 NSGA Infrequent Runners Run/jog 6–24 days/year 12,538,000 2.5

Source: Adapted from “2013 State of the Sport: 2013 US Race Trends,” Running USA, July 28, 2013, accessed June 6, 2016, www.runningusa.org/state-of-the-sport-race-trends.

25% 32% 42% 48%

53% 55% 56%

75%

68%

58% 52%

47% 45%

44%

2,000,000

4,000,000

6,000,000

8,000,000

10,000,000

12,000,000

14,000,000

16,000,000

18,000,000

1990 1995 2000 2005 2010 2011 2012

R U N N E R S

YEAR

Female Male

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EXHIBIT 3: RUNNING MARKET COMPETITORS Nike From its early years as a running shoe manufacturer and direct competitor of Brooks in the 1980s, Nike grew to become the company many imagined Brooks would be. Nike was recognized globally as the number one shoe and apparel company, designing, developing, and selling a variety of products and services. The company targeted every age demographic, from children to the elderly, and also sold through its subsidiaries, Converse and Hurley. Nike’s sales channels were over 850 company-owned retail stores around the world, independent distributors, licensees, retail accounts, and e-commerce websites. Nike’s success stemmed from its unique worldwide marketing campaigns, sponsoring, and advertising with some of the most famous athletes, sports teams, and collegiate programs in the world. In 2014, Nike generated $28 billion in total revenues and was the top athletic brand in many countries. Adidas Following a family feud between the brothers that founded Puma, Adidas was formed in 1949, when Adolf Dassler created a company to compete with his brother’s Puma brand. Adidas was a German multinational corporation, designing and manufacturing sports shoes, clothing, and accessories. With its iconic three-stripe logo, Adidas had become the second-largest sporting-goods manufacturer in the athletic industry behind Nike and focused on football, soccer, running, training gear, and apparel. The company acquired one of its competitors, Reebok, in 2005, for $3.8 billion. Adidas generated over $19.5 billion in revenue in 2014 and sold its products in 160 countries through 2,445 stores. ASICS From the end of its partnership with Nike, ASICS had grown significantly—not only in its domestic market (Japan) but also as a globally recognized brand. In 2014, ASICS’ sales were $3.2 billion. ASICS manufactured and marketed footwear, sportswear, and uniforms for a number of different sports. Its presence in Japan was heavy due to sponsorships and partnership with athletic teams in its domestic market. The company also sold fashion-oriented items under the Onitsuka Tiger brand. ASICS operated subsidiaries in Australia, China, Europe, and the United States, selling through 317 stores. Puma SE Globally recognized by its cat logo, Puma had grown into a major German multinational company that produced athletic and casual footwear and sportswear since its founding in 1924. A family dispute led to the company splitting into two companies: Adidas and Puma. While shoes were Puma’s core competency, its apparel had begun generating a growing portion of the company’s sales. In 2014, Puma generated $3.61 billion in revenue and had extended styles of athletic clothes for golfing, motorsports, and sailing, including other denim apparel. Puma distributed and sold its products in more than 120 countries. New Balance Originally known as the New Balance Arch Support Company in the first years after its founding in 1906, New Balance had grown to be a manufacturer of sports shoes for running, tennis, basketball, hiking, and golfing. The company was best known for its walking and cross-training shoes, and it achieved sales of $3.3 billion in 2014. In contrast to many of its competitors in the athletic industry, New Balance’s products were sometimes priced higher than its competitors; however, the company claimed to differentiate with technical features in its shoes, such as gel inserts, heel counters, and a diverse range of sizes and widths.

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EXHIBIT 3 (CONTINUED) Saucony (Stride Rite) Founded in 1898, Saucony aimed to be the sole provider for athletes regardless of age. Like Brooks in the past, Saucony was a subsidiary of Wolverine World Wide, Inc. Best known for its running shoes, the company also sold shoes for walking, cross training, and hiking. Saucony became part of Stride Rite’s business in late 2005, when it was acquired for about $170 million in cash. The company sold its products through its parent company, Stride Rite’s wholesale segment; as a result, Saucony sold directly to customers in more than 80 countries around the world. Li-Ning One of the newer athletic companies, Li-Ning was founded in China in 1990 as a company that targeted athletics like running, basketball, football, tennis, and overall fitness. The company’s motto was translated to “Make the Change.” It had numerous partnerships with companies like France’s Aigle and Chicago’s Acquity Group to help expand its brand awareness and global presence. Despite the company’s quick rise in the athletic industry (with sales of over $1.1 billion in 2012), it had experienced losses in 2013. Li- Ning attempted to open retail stores in Portland, Oregon, the home of Nike, to directly compete against the established athletic giant. However, it faced strong backlash over its previous company logo, which caused it to switch in 2012. The company failed to understand the complexity of the Chinese athletic retail market. Li-Ning manufactured “affordable clothing” for lower-income Chinese customers but failed to recognize that wealthy Chinese customers also wanted higher quality. The company attempted to relaunch as a premium brand, but faced strong competition from Nike and Adidas, whose brand images were a strong purchasing point for customers in China. At the same time, Nike and Adidas had the largest market shares in China but did not enjoy the same profits and recognition as in their domestic market. Li- Ning was facing strong competition in China from local brands like Peak and 361 Degrees (361°), which sold at a low pricing point. With both the low- and high-cost segments crowded, Li-Ning had found it difficult to position itself in the Chinese athletic industry. Still, the company possessed 5,915 retail stores and continued to have a strong presence in both its domestic Chinese market and in the global market. Salomon (Amer Sports) Started by Francois Salomon and his family in 1947, the Salomon Group was a sports equipment manufacturing company from Annecy, France. In 1997, Adidas acquired Salomon; however, in 2005, the company sold the Salomon Group for $550 million to Amer Sports. Salomon manufactured products for a number of outdoor winter sports but also had a presence in the trail-running and climbing segments. The company sold through retail channels in over 40 countries on five continents. Source: Nike, Inc., 2014 Annual Report on Form 10-K, accessed August 17, 2016, http://s1.q4cdn.com/806093406/files/doc_financials/2014/docs/nike-2014-form-10K.pdf; Adidas Group, Annual Report 2014, accessed August 17, 2016, www.adidas-group.com/media/filer_public/2b/2f/2b2fd619-5444-4ee8-9c07- baa878d658c4/2014_gb_en.pdf; ASICS Corporation, Annual Report 2014, accessed August 17, 2016, http://assets.asics.com/page_types/2162/files/%E3%80%90HP%E6%8E%B2%E8%BC%89%E7%94%A8%E3%80%91asic sAR2014_140724%EF%BC%88%E9%87%8D%EF%BC%89_original.pdf?1406272299; “History,” PUMA, accessed August 17, 2016, http://about.puma.com/en/this-is-puma/history; “Sportswear/Sporting Goods Companies Ranked by Worldwide Revenue in 2015,” Statista, accessed August 17, 2016, www.statista.com/statistics/241885/sporting-goods--sportswear- companies-revenue-worldwide/; “Stride Rite Completes Saucony Purchase,” Boston Business Journal, September 16, 2005, accessed August 17, 2016, www.bizjournals.com/boston/stories/2005/09/12/daily67.html; Kathy Chu and Laurie Burkitt, “Li Ning Scaling Back After 2012 Loss,” Wall Street Journal, March 27, 2013, accessed August 17, 2016, www.wsj.com/news/articles/SB10001424127887324789504578383332158202140; CKGSB Knowledge, “Chinese Sportswear Brand Li-Ning's Long Road To Redemption,” Forbes, April 14, 2014, accessed August 17, 2016, www.forbes.com/sites/ckgsb/2014/04/14/chinese-sportswear-brand-li-nings-long-road-to-redemption/; “Amer Sports Acquires Salomon,” Amer Sports, May 2, 2005, accessed August 17, 2016, www.amersports.com/investors/stock-exchange- releases/2005/2013/11/07/amer-sports-acquires-salomon.

Page 12 9B16M150

EXHIBIT 4: RUNNING/JOGGING PARTICIPATION (MILLIONS)

Source: Adapted from “2013 State of the Sport—Part II: Running Industry Report,” Running USA, June 26, 2013, accessed June 6, 2016, www.runningusa.org/index.cfm?fuseaction=runningusawire.details&ArticleId=1755.

EXHIBIT 5: 2013 RUNNING/JOGGING PARTICIPATION BY AGE AND GENDER

Age 75+ 65–74 55–64 45–54 35–44 25–34 18–24 12–17 7–11 Female 70,000 278,000 1,056,000 1,993,000 4,066,000 5,640,000 4,391,000 2,431,000 1,829,000

Male 146,000 438,000 1,177,000 1,914,000 3,876,000 4,442,000 3,700,000 2,934,000 1,615,000 Source: Adapted from “2013 State of the Sport—Part II: Running Industry Report,” Running USA, June 26, 2013, accessed June 6, 2016, www.runningusa.org/index.cfm?fuseaction=runningusawire.details&ArticleId=1755.

2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

Total Participation 24.7 29.2 28.8 30.4 30.9 32.2 35.5 38.7 40 42

Male Participation 13.2 16.4 15 15.9 16.1 17.7 18.7 19.7 18.4 20.2

Female Participation 11.5 12.9 13.8 14.5 14.8 14.5 16.9 19 21.6 21.8

0 5

10 15 20 25 30 35 40 45

P ar

ic ip

an ts

(i n

m ill

io ns

)

Total Participation Male Participation Female Participation

1,000,000

2,000,000

3,000,000

4,000,000

5,000,000

6,000,000

75+ 65‐74 55‐64 45‐54 35‐44 25‐34 18‐24 12‐17 7‐11

P a rt ic ip a n ts ( in m

il li o n s)

Age

Female

Male

Page 13 9B16M150

EXHIBIT 6: JOGGING & RUNNING SALES IN THE UNITED STATES (2010–2013)

2010 2011 2012 2013

Running Shoe Units 37.16 million 38.02 million 44.62 million 46.25 million

Running Shoe Dollars $2.32 billion $2.46 billion $3.04 billion $3.09 billion

EXHIBIT 7: COMPETITOR TOTAL GLOBAL STORES (2014–15)

Company Asia Europe Americas Oceania Japan Total Global Stores Brooks 0 0 1 0 0 1 ASICS 87 67 25 6 132 317 Nike 858 Adidas 1,746 New Balance 200 Puma 540 Saucony 0 Li-Ning 5,915 Salomon 0

EXHIBIT 8: SALES CHANNELS OF RUNNING SHOES (%)

Year 2010 2011 2012 2013 General Sporting Goods 22.5 23.3 22.4 22.6 Discount Stores 21.4 18.5 19.8 20.4 Online/Internet 12.2 12.5 17.5 18.1 Specialty Athletic Footwear 16.2 19.6 18.0 14.1 Department Stores 8.8 7.2 7.4 7.0 Family Footwear 6.3 6.4 4.1 6.7 Factory Outlet 7.7 5.7 1.9 4.9 Specialty Sports Shops 4.7 5.2 4.4 3.9 Other Outlets - - - 1.1 Mail Orders 1.4 0.4 1.1 0.8 Pro Shops - - 0.4 0.4

Page 14 9B16M150

EXHIBIT 9: AVERAGE PRICE OF JOGGING/RUNNING SHOES, 2014 (US$)

Specialty Athletic Footwear 88.26 Mail Order 84.87 Specialty Sports 82.51 Online 73.01 Sporting Goods 70.24 Factory Outlet 66.05 Other Outlets 63.65 Family Footwear 56.10 Department Stores 57.62 Discount Stores 45.93

Page 15 9B16M150 ENDNOTES 1 This case has been written on the basis of published sources only. Consequently, the interpretation and perspectives presented in this case are not necessarily those of Brooks Sports or any of its employees. 2 Brooks Sports, Inc., “Brooks Running Company Celebrates 100th Year Hitting Major Growth Milestone,” Brooks Running, May 16, 2014, accessed June 6, 2016, www.brooksrunning.com/en_us/05-16-2014.html. 3 Brooks Sports, Inc., “Brooks Running Company Kicks Off 2014 with Strong Business Momentum and Laser Focus on Defining the Next 100 Years of the Run,” Brooks Running, January 22, 2014, accessed June 6, 2016, www.brooksrunning.com/en_us/01-22-2014.html. 4 All currency amounts are in US$ unless otherwise specified. 5 Jonathan Stempel, “Brooks CEO Says His Shoes Fit Buffett Better,” Thomson Reuters, May 2, 2014, accessed June 6, 2016, www.reuters.com/article/2014/05/02/us-berkshire-annual-brooks-idUSBREA410RD20140502. 6 “2014 State of the Sport—Part II: Running Industry Report,” Running USA, June 15, 2014, accessed August 17, 2016, www.runningusa.org/2014-running-industry-report. 7 Rachel Weingarten, “How to Keep Your Corporate Branding Strategy on the Cutting-Edge,” January 5, 2015, accessed August 16, 2016, www.forbes.com/sites/sungardas/2015/01/05/how-to-keep-your-corporate-branding-strategy-on-the- cutting-edge/#177ac2671296 8 Allison Van Dusen, “Running High,” Forbes, November 3, 2006, accessed June 6, 2016, www.forbes.com/2006/11/03/marathon-running-trends-forbeslife-avd_1104run.html. 9 Linzay Logan, “Inside the Women's Running Explosion,” Competitor.com, February 8, 2013, accessed June 6, 2016, http://running.competitor.com/2013/02/features/inside-the-womens-running-explosion_65638. 10 Brian Metzler, “10 Reasons to Shop at Running Specialty Stores,” Competitor.com, May 23, 2014, accessed June 6, 2016, http://running.competitor.com/2014/05/photos/10-reasons-to-shop-at-specialty-running-stores_78898. 11 Lara O'Reilly, “11 Things Hardly Anyone Knows about Nike,” Business Insider, November 4, 2014, accessed June 6, 2014, www.businessinsider.com/history-of-nike-facts-about-its-50th-anniversary-2014-11. 12 Donald Katz, “Triumph of the Swoosh,” SI.com, August 16, 1993, accessed June 6, 2016, www.si.com/vault/1993/08/16/129105/triumph-of-the-swoosh-with-a-keen-sense-of-the-power-of-sports-and-a-genius-for- mythologizing-athletes-to-help-sell-sneakers-nike-bestrides-the-world-of-sport-like-a-marketing-colossus. 13 Lucien Rhodes, “Winning Is a State of Mind at Nike,” Inc.com, August 1, 1981, accessed June 6, 2016, www.inc.com/magazine/19810801/6547.html. 14 Kurt Badenhausen, “Brooks Running Shoes Hit Their Stride,” Forbes, May 20, 2013, accessed June 6, 2016, www.forbes.com/sites/kurtbadenhausen/2013/05/20/brooks-running-shoes-hit-their-stride/. 15 “Wolverine World Wide, Inc. History,” Funding Universe, 2004, accessed June 6, 2016, www.fundinguniverse.com/company-histories/wolverine-world-wide-inc-history/. 16 Ibid. 17 Himanee Gupta, “Brooks Sports Finds the Shoe Now Fits Here,” The Seattle Times, February 4, 1993, accessed June 6, 2016, http://community.seattletimes.nwsource.com/archive/?date=19930204&slug=1683678. 18 Pam Balcke, “Leading Ladies,” Runner's World, October 1, 2001, accessed June 6, 2016, www.runnersworld.com/leading-ladies. 19 Helen E. Jung, “Chief Wants to Run up Shoe Profits, Reputation,” The Seattle Times, January 31, 1994, accessed, June 6, 2016, http://community.seattletimes.nwsource.com/archive/?date=19940131&slug=1892716. 20 Leigh Gallager, “Runner's World,” Forbes, February 22, 1999, accessed June 6, 2016, www.forbes.com/global/1999/0222/0204052a.html. 21 Helen E. Jung, op. cit. 22 American City Business Journals, “Bruce Pettet Named President of Brooks Sports,” Puget Sound Business Journal, March 15, 1999, accessed June 6, 2016, www.bizjournals.com/seattle/stories/1999/03/15/daily3.html. 23 Seattle Times Staff, “Brooks Sports Acquired by Venture-Capital Firm,” The Seattle Times, October 26, 1998, accessed June 6, 2016, http://community.seattletimes.nwsource.com/archive/?date=19981026&slug=2779908. 24 “Eric Dreyer Named President of Brooks Sports,” Just Style, June 22, 2000, accessed June 6, 2016, www.just- style.com/news/eric-dreyer-named-president-of-brooks-sports_id76960.aspx. 25 “Brooks Sprints to High-End Niche,” Puget Sound Business Journal, March 11, 2001, accessed June 6, 2016, www.bizjournals.com/seattle/stories/2001/03/12/story5.html. 26 Jim Weber, “Ice Skates to Running Shoes,” The New York Times, November 10, 2012, accessed June 6, 2016, www.nytimes.com/2012/11/11/jobs/jim-weber-of-brooks-sports-and-the-path-to-running-shoes.html. 27 Abigail Tracy, “How Brooks Reinvented Its Brand,” Inc.com, April 24, 2014, accessed June 6, 2016, www.inc.com/abigail- tracy/how-brooks-running-became-an-industry-leader.html. 28 Ibid. 29 Duncan Larkin, “Is Another Running Boom Under Way?” Competitor.com, July 30, 2013, accessed June 6, 2016, http://running.competitor.com/2013/07/news/is-another-running-boom-underway_79364. 30 Jere Longman, “New Running Boom Is Much More Low Key,” The New York Times, May 28, 1997, accessed June 6, 2016, www.nytimes.com/1997/05/28/sports/new-running-boom-is-much-more-low-key.html?pagewanted=all. 31 “2013 State of the Sport—Part III: U.S. Race Trends,” Running USA, July 28, 2013, accessed August 16, 2016, www.runningusa.org/state-of-the-sport-race-trends. 32 Abigail Tracy, op. cit.

Page 16 9B16M150 33 Jonathan Stempel, op. cit. 34 Russell Corporation, “Russell Announces Plans to Acquire Brooks Sports, Inc.,” US Securities and Exchange Commissions, December 14, 2004, accessed July 21, 2015, www.sec.gov/Archives/edgar/data/85812/000119312504216143/dex991.htm. 35 Dave Marino-Nachison, “Russell's a Good Sport,” The Motley Fool, December 15, 2004, accessed June 6, 2016, www.fool.com/investing/small-cap/2004/12/15/russells-a-good-sport.aspx. 36 Russell Corporation, op. cit. 37 Russell Corporation/Berkshire Hathaway, “Berkshire Hathaway to Acquire Russell Corporation,” Berkshire Hathaway Press Release, April 17, 2006, accessed June 6, 2016, www.berkshirehathaway.com/news/apr1706.pdf. 38 Dana Mattioli, Anupreeta Das, and Doug Cameron, “Warren Buffett Pins Berkshire’s Growth on Deals,” August 9, 2015, accessed August 16, 2016, www.wsj.com/articles/warren-buffett-pins-berkshires-growth-on-deals-1439167812. 39 Brooks Sports, Inc., “Brooks Running Company Celebrates 100th Year Hitting Major Growth Milestone,” op. cit. 40 Stuart Glascock, “A Light Step,” Seattle Business Magazine, January 2011, accessed June 6, 2016, http://seattlebusinessmag.com/article/light-step. 41 Ibid. 42 Mike Ozanian, “The Forbes Fab 40: The World's Most Valuable Sports Brands 2015,” Forbes, October 22, 2015, accessed August 17, 2016, www.forbes.com/sites/mikeozanian/2015/10/22/the-forbes-fab-40-the-most-valuable-brands-in- sports-2015/#3029b5de2e2a. 43 Kurt Badenhausen, “Brooks Running Shoes Hit Their Stride,” Forbes, May 20, 2013, accessed June 6, 2016, www.forbes.com/sites/kurtbadenhausen/2013/05/20/brooks-running-shoes-hit-their-stride/. 44 Brooks Sports, Inc., “Brooks Sports Brings Run Happy Spirit to World's Second Largest Running Market,” Brooks Running, February 2, 2012, accessed June 6, 2016, www.brooksrunning.com/en_us/02-02-2012.html. 45 Wash Bothell, “Brooks Sports Brings Run Happy Spirit to World’s Second Largest Running Market: Leading Running Brand Bolsters Global Presence with Japanese Subsidiary,” Brooks Running, February 2, 2012, accessed August 17, 2016, www.brooksrunning.com/en_us/02-02-2012.html. 46 Brooks Sports, Inc., “Brooks Sports Brings Run Happy Spirit to World's Second Largest Running Market,” op. cit. 47 Associated Press, “Tokyo Race Added to World Majors,” ESPN, November 2, 2012, accessed June 6, 2016, http://espn.go.com/olympics/trackandfield/story/_/id/8583403/tokyo-marathon-joins-world-marathon-majors-series. 48 Brooks Sports, Inc., “Brooks Breaks Tape on Momentous Year and Kicks Off 2015 with Clear Focus on Being No. 1 Choice for Runners Worldwide,” Brooks Running, January 20, 2015, accessed June 6, 2016, www.brooksrunning.com/en_us/01-20-2015.html. 49 Sarah Max, “Brooks Sports Moves New Home Closer to Trails,” The New York Times, July 29, 2014, accessed June 6, 2016, www.nytimes.com/2014/07/30/realestate/commercial/brooks-sports-moves-new-home-closer-to-trails.html. 50 Brooks Trailhead: Your Run Starts Here, accessed August 16, 2016, http://talk.brooksrunning.com/blog/2014/10/01/brooks-trailhead-your-run-starts-here/. 51 “2014 State of the Sport—Part II: Running Industry Report,” op. cit. 52 Brian Metzler, “Why Are There So Many Running Shoe Brands?” Competitor.com, August 12, 2015, accessed June 6, 2016, http://running.competitor.com/2015/08/shoes-and-gear/why-are-there-so-many-running-shoe-brands_133494. 53 Matt Powell, “Sneakernomics: Understanding the International Sneaker Market,” Forbes, July 29, 2014, accessed June 6, 2016, www.forbes.com/sites/mattpowell/2014/07/29/sneakernomics-understanding-the-international-sneaker-market/. 54 Ibid. 55 Abigail Tracy, op. cit. 56 Jonathan Stempel, op. cit. 57 Brooks Sports, Inc., “Brooks Breaks Tape on Momentous Year and Kicks Off 2015 with Clear Focus on Being No. 1 Choice for Runners Worldwide,” op. cit.