MINOR CASE STUDY GoGear Performance Sport Apparel The Industry The global athletic apparel and footwear industry is big business, generating huge profits and includes globally-recognised brands such as Nike, Adidas and Asics. In 2015-16, the combined sales of the industry globally were estimated to be USD 178.1bn. Australia makes up a relatively small proportion of the industry, with sales estimated to be in the order of AUD 1.2bn. Global brands dominate, with the remainder of market share contested by several smaller innovative, more specialised, manufacturers. The athletic apparel product category comprises approximately 38 per cent of the industry. Product category market shares in the Australian market are similar to those in the US. Growth is strong in the Australian market. While the US market for athletic apparel grew at a Compound Annual Growth Rate (CAGR) 1 of 0.8 per cent from 2012 to 20162, the Australian market grew at a CAGR of 8.3 per cent over the same period3. The Australian market is characterised by educated and informed consumers. It is an ideal market to test product developments, as Australia has a large proportion of consumers who are early adopters of new technologies and products, and who have high disposable incomes. A growing product segment of the athletic apparel industry is the highly specialised category of compression wear. Compression wear is designed to improve athletic performance by reducing muscle vibration and improving circulation. In Australia, compression wear represents 10.9 per cent of athletic apparel sales, and growth in compression wear sales from 2014-15 to 2015-16 was reported to be 68 per cent. Indeed, the category of compression wear has seen impressive growth in the past five years, with some US industry reports forecasting global annual sales growth of 55 per cent from 2014-15 to 2019-20. One of the newer brands in the compression wear category is GoGear, a wholly Australian-owned business created by a group of elite athletes with an entrepreneurial dream. The Organisation GoGear has been a highly successful business in Australia producing a wide range of athletic apparel, including apparel designed to improve the athletic performance of its users. The company was started by Tony Palladino and Carol Kaye in early 2007. It is an active participant in all aspects of its value chain from research and development to design, sourcing, manufacture and distribution. Sales were modest in the 2007-08 financial year (approximately $400 000), but grew strongly in 2008-09, following the 2008 Olympic Games and the establishment of a national distribution deal with a major sporting goods retailer. GoGear started by making compression wear for triathletes, before quickly diversifying into small production runs of cycling and running clothes for athletes and active Australians. GoGear has subsequently expanded into a broad range of performance, fitness and compression wear for all active people. Sales and profits over the past five years have been strong, with sales growth reaching 48 per cent year-on-year in 2015-16 and net profit before tax increasing from around eight per cent in 2011-12 to 32 per cent in 2015-16. The People GoGear operates under a centralised structure and has a well-established leadership group, with dedicated and passionate employees led by an executive management team that has remained largely unchanged since the company’s inception. A board of directors is in place to provide governance. The board was established in early 2009, and comprises seven members with a mix of notable business and sporting backgrounds. There are currently no international board members. The chair of the board is Sir Lee Levin, a distinguished Australian businessman and former Olympian. The deputy chair is Carol Kaye, co-founder of GoGear and wife of GoGear’s CEO, Tony Palladino. Carol is a former Australian national swimming champion in the 50m butterfly stroke. Carol is not involved in the operations of the business on a daily basis. However, she is an active board member and holds the largest individual shareholding in the company. Carol is committed to GoGear’s international expansion. Tony Palladino, CEO, is a former Australian marathon runner and Olympian and was co-founder of GoGear. Upon his retirement from athletics, he completed an executive MBA at a leading Australian business school. Tony leads the GoGear executive management team, and has been a prominent leader, manager and source of ideas at GoGear. He is always present at product launches and store openings, and has been very popular with GoGear employees. GoGear employees often comment on how Tony always shares his vision with them and seems to be thinking several steps ahead of everyone else. He often seems obsessed with new ideas for products or commercial opportunities for GoGear, but he doesn’t always seem to embrace ideas suggested by others in the business. His tendency to micro-manage the executive management team is causing them to feel disenchanted. Leading the organisation’s strategy development is Rhonda Smith. Rhonda became the General Manager Strategy for GoGear in May 2010, after a successful career as a management consultant, specialising in the Australian and international retail industries. Rhonda’s significant expertise in fashion in Australia is complemented by her experience in retail. Ken Entwhistle has worked with GoGear since it started business in 2007. Ken has been involved in the production process at GoGear throughout its history, and was promoted to the role of General Manager Operations in 2009. Prior to joining GoGear, Ken was a semi-professional soccer player, and also worked part-time in sales, marketing and business development roles in the sportswear and promotional merchandise industries. Ken is the primary contact for all of the company’s suppliers, and he and Tony frequently travel to meet with the company’s manufacturer in China. Ken has recently been diagnosed with a rare illness and is planning to retire from GoGear within the next six months. Phil Giblin has worked with GoGear since 2008 in the role of Chief Financial Officer (CFO). Phil is a CPA and has held a diverse range of roles throughout a career spanning more than 20 years. His roles have included Financial Controller for a large logistics and distribution business, and more recently, CFO of a multinational business that services the mining and resources sector. The executive management team leads a dedicated and passionate workforce of approximately 200 full-time equivalent staff, comprised of full-time and part-time employees, as well as casual workers who supplement the workforce to meet seasonal peak workloads. The culture at GoGear has typically been one of energy and excitement, and the company has grown from one success to the next. The core group of original employees were individuals who love sport and exercise, and often participate at an elite level. Twice per year, the company organises a half-day off-site meeting to update staff on results, award high achievers and share plans for the future. These sessions used to be held in the afternoon, allowing socialising to take place after the meeting had concluded. The last few meetings have been held in the morning and staff have been expected to return to work afterwards – something that has dampened enthusiasm for the events. GoGear was named as an Employer of Choice in the 2014 Australian Human Resources Association Employment Awards. Employers are nominated by employees, and the awards are based on selection criteria as voted by employees. The company’s use of small, self-managed workgroups with responsibility for setting and achieving targets was mentioned as a key reason for the win. In 2015 the functioning of these groups was changed and they are now required to meet targets set by Tony and the executive team. GoGear was not nominated for an Employer of Choice award in 2015 or 2016. Product Development GoGear invests a considerable amount of its financial resources in research and development of its products. It frequently tests small production runs of innovative products to establish whether there is sufficient demand to commence full production. In the financial plans of the business there is a KPI related to growth from new product lines. Currently, GoGear is contemplating a new line of compression sleeves and guards. These are compression wear items that protect selected parts of the body, such as the forearm and calves, and are designed to provide a range of benefits, including increased circulation to enhance recovery and reduce soreness, as well as offering sun protection. Based on US sales data, the protective sleeves category is the fastest-growing and most profitable category in the compression wear product segment. However, recent tests of GoGear sample sleeves have been disappointing with the prototype sleeves fraying and tearing after a short period of use. This has caused Tony to become more involved in managing the group responsible, effectively reverting to a more conventional “command and control” approach to running the business. Suppliers & Manufacturers GoGear currently has a team of in-house designers and sports scientists. The seven designers come from a variety of professional backgrounds, including fashion, sportswear, swimwear and lingerie. The three GoGear sports scientists specialise in biomechanics and exercise physiology. Using in-house resources is costly, and GoGear looks for opportunities to economise in other areas to offset some of these costs. In addition to its in-house expertise, GoGear also engages local universities and sports science institutions to conduct research and testing in order to maintain its high standards of product quality and innovation. Samples are generally created in Australia in a purpose-built facility at the GoGear head office close to Melbourne’s Tullamarine Airport. A highly experienced team cut, make and trim the sample garments prior to large- scale production. Following the company’s early success, Tony overcame Carol’s misgivings regarding work/life balance and built a luxury mansion just a short walk from GoGear’s offices. Living close by enables Tony to visit the facility whenever he pleases, to provide his input. Production occurs in China at a family-owned sportswear clothing manufacturer with whom GoGear has had a relationship for the past nine years. Until recently, GoGear has been pleased with the quality and timeliness of products from its Chinese manufacturer. However, Ken has expressed concerns to the executive management team that the existing manufacturer is unlikely to have the capacity to deliver the additional quantities required to meet anticipated demand within reasonable timeframes. This is because the owner of the Chinese factory will not acquire the new machinery required to produce additional quantities of products in a timely manner. Sales and Distribution GoGear operates its own network of 20 retail stores in Australia. Distribution also occurs through major chains of sporting goods retailers and department stores. GoGear does not currently operate any company-managed retail stores in any international markets. However, it utilises the services of international distributors and sales agents in smaller Asian markets, such as Singapore and Taiwan. These intermediaries arrange distribution of GoGear products into a small number of sporting goods retail stores. Phil Giblin has spoken to Tony on a number of occasions about the risks associated with foreign exchange transactions, and the capital cost of expanding a retail operation internationally. He is also concerned that GoGear will incur additional shipping, distribution and support costs if it chooses to export to the relevant international markets in preference to opening retail operations there. Rhonda Smith has added her concerns about the complexity involved in developing packaging that may be required to comply with foreign laws. Her experience dealing with customs and forwarding agents has not been positive in the past. Online sales are an increasingly important sales channel for GoGear, with a surge in online sales in large markets like the US and Europe during 2015-16. Online sales now account for approximately 18 per cent of all of GoGear’s global sales. While the company has considered establishing a retail presence in the US and Europe for some time, the costs associated with doing so are considered to be too significant at this stage in the company’s development. GoGear has established its international sales presence through the use of agency agreements, but this will almost certainly change as the company increases its market development activities. The exact nature of the changes will depend upon the entry mode that GoGear chooses for each market. The need for change In 2016, the board approved the company’s Strategic Plan, which included the following: • Vision: to be one of the 10 most-recognised global sports apparel brands; and • Strategy: work towards achievement of the company vision by increasing sales by 10 times over the next 10 years. Through recent product development, the company has been able to achieve close to 40 per cent market share in the Australian market for compression wear, with negligible or immaterial market share in international markets. Despite several strategic planning and information sessions conducted by the CEO and executive team for all employees, there currently appears to be a high level of inertia, confusion and uncertainty within the organisation. Deadlines have slipped and strategy announcements about the priorities of the firm are often contradictory. This is likely to be due to the scale of GoGear’s global ambitions. Many employees are finding it difficult to understand what will be involved and what this might mean for them personally. While everyone admires Tony Palladino’s energy, sometimes his comments leave staff unsure of the way ahead. Furthermore, many of GoGear’s original employees joined GoGear because it was a small, friendly, and vibrant company that was popular and well-respected in the Australian market. There is a growing perception among many employees that the company is focused purely on long-term global presence, growth and profits, and has forgotten the employees that helped it to become successful. This is despite assurances from Tony Palladino that the company is planning to introduce an employee profit share program, to be offered to full-time employees who have been employed by GoGear for more than 10 years. At a recent board meeting, the executive management team presented an explanation of the international expansion opportunities. As a result of this presentation, the board approved the commissioning of an analysis of international expansion opportunities by external management consultants. These consultants will engage with the executive management team, employees and other stakeholders in conducting their analysis. The board is expecting the management consultant’s final report in the next quarter.