Tennis Industry magazine

 

Hitting The Numbers

As costs to produce racquets continue to rise, expect to see retail prices head higher, too.

By Mitch Rustad

The tumultuous economic situation has everybody worried. But how is it affecting racquet manufacturers and equipment retailers?

“We’re trying to do more with less, and double- and triple-checking that all our expenses are absolutely necessary,” says Kevin Kempin, vice president of sales and marketing for HEAD Penn. “But there’s only so much you can do. This economy is something we’re going to be living with for a long time, but our hope is that we won’t be living with it at this level for too long.”

“From our perspective, the health of retailers is the No. 1 thing when economic times are challenging,” says Jon Muir, general manager of Wilson Racquet Sports. “We need to make sure our retailer base — the specialty dealers, the shops, the grassroots — that those people feel they can weather the storm and are in a position to maintain their vitality. If we lose retailers, that has a big impact not just for us, but for a community. If one goes down, you lose some business in the area, and you also lose a touch point for people playing the sport.”

“The bottom line is, the economy is obviously compacting all of our margins,” says Kempin. “We’re all getting squeezed this year and that squeeze comes from energy costs, a big one. But beyond that, the basic costs of raw materials have skyrocketed over the last 24 months.”

Many manufacturers echoed the fact that rising costs across the board will either cut into margins or prompt an increase in prices. But, odd as it sounds, the up side is that recent racquet sales figures are flat, not necessarily down, says John Embree, president of Prince Americas.

“Almost all the pro shops have mentioned that their participation was up, that consumers are still paying for lessons and events, but their pro shop sales were flat to down, hard goods were flat and there was a softening on apparel, which makes sense,” Embree says. “They may not be buying the next tennis outfit, but buying a new racquet might be an easier sell.”

“Business itself has been up and down, with one really good month and then a slower month,” says Chuck Vietmeier, product manager at Gamma. “But it’s also regional, especially areas that have been hit hard by the real-estate market.”

Tightening belts is the reality for now, adds Kempin. “We monitor the price of materials per pound daily, and if we notice a downward trend, we’re out trying to buy futures,” he says.

The China Syndrome

As China steps into its role a major player in the global economy, it’s also appearing to be less and less appealing to manufacturers facing a whole new business reality and burgeoning production costs.

Sourcing products and raw materials in China is the norm for many racquet manufacturers, but the devalued American dollar due to Chinese government mandates is hurting the manufacturer’s bottom line, says Kempin. “The U.S. dollar’s devaluation versus Chinese currency means we’re paying more and actually getting less.”

Besides a shrinking dollar, Chinese labor laws have changed — leading to increased wages, adding holiday pay, etc. — therefore it affects the overall costs above and beyond freight increases, Embree adds. “If China continues to escalate pricing, we have to start looking at some other countries, build factories in other countries where labor laws might be more favorable,” he says.

The rising cost of materials is not lost on the manufacturers, either. Kempin notes that in the last 24 months, essential racquet components such as carbon fiber have increased 120 percent, while material such as aluminum tubing has gone up 50 percent.

“It’s a shock,” he says, “and you’re going to see higher prices next year. We’re not passing all those costs on to our dealers, but the consumer is still going to see higher prices, that’s the end result, probably as early as the holiday season this year.”

But rising fuel prices hurt manufacturers well beyond the rising costs of importing product; any manufacturer with a sizable sales force has seen travel expense go through the roof as well, says Vietmeier.

“We have a sales rep force of 20, and they all have to travel, and with gas near $4 a gallon, it makes it more difficult to go around in person and get orders,” says Vietmeier. “That’s been the biggest problem for us all year, the rising cost of fuel. And that also may inhibit the tennis-playing consumer — if it costs $70 to fill their gas tank every week, they may not want to spend money on a new tennis racquet.

“The possibility is that everyone will raise their prices next year, depending on the price of fuel,” Vietmeier adds. We’ll probably have to raise our prices for next year.”

Passing on the Cost

The reality of rising prices is settling in industry-wide, says Embree. “All the people in the industry know that they’re getting price increases, so they’ve been expecting that from us. But the challenge for the retailer becomes, do we have to take our prices up? Some will agree to a price increase, and others won’t.”

Deborah Standifer, owner of Player’s Choice Tennis in Birmingham, Ala., says while she’s already seeing her prices rise, for now she’s standing firm on passing on those rising prices to her customers.

“It’s already started happening,” she says. “A few of the manufacturers sent us nice letters, saying we’ve been absorbing costs as long as we can, and some just raised their prices. Our prices haven’t changed yet. For now we’re just absorbing costs. Shipping costs have double and tripled, and we’re not charging more. Not yet.”

Mark Mason, owner of Mason’s Tennis Mart in New York City, cautioned manufacturers on a prospective rise in prices: “Everyone has to make their margins and I don’t think they will raise their prices,” he says. “If you start raising prices on popular racquets, that will create a real problem. In this environment, we have to maintain our price points.”

According to Embree, it’s not a matter of if prices will go up, but judiciously deciding which products can best absorb an increase. “We have to make some smart decisions about where we can raise prices and where we can’t,” he says. “If you’re traditionally selling a frame for $19.99 at Wal-Mart or Target,
who love that price line, can you go up to $21.99? Probably not. We’ve got genuine concerns because we’re getting squeezed in the middle.”

Adds Embree: “Going from $189 to $199 is not that much of a jump, but you can’t go to $209 because then it’s lost. Those are the things we’re trying to wrestle with.”

But one retailer sees the prospect of a slight bump in prices in perspective. “Nobody likes to see prices rise, and I don’t want to have to do that, but everything else in the world has gone up except tennis products,” says Chris Gaudreau, owner of Racquet Koop in New Haven, Conn. “Twenty years ago I was paying 99 cents for a gallon of gas, but I still paid $200 for a tennis racquet. “So it goes up a little bit, that’s the world right now.”

But just how high will racquet prices go? Kempin expects to see mid-single-digits to double-digit price-percentage increases, with long-established price points like $199 for a racquet or $1.99 for a can of balls a distant memory. “Those days will be gone next year,” he says.

Looking Ahead

It may be an overused term, but “cautious optimism” is the mood as the manufacturer’s look to a new year.

“I’m more optimistic than pessimistic,” says Kempin. “This is the worst subject we can talk about, because tennis as a whole is certainly bucking national trends as far as growth. We have a tremendous infrastructure with the TIA, teaching pro associations, USTA, and these grassroots programs have really paid off. We’ve had four to five years of solid growth, and this year the industry is flat, but that’s a win right now. Virtually every other industry is going in the wrong direction.”

What can racquet manufacturers do besides hunker down and wait for a brighter economic picture? “One way to help retailers is to make sure we continue to develop compelling product that will get customers into the stores,” says Wilson’s Muir.

“The retailers so often say they want us to retain our technology for longer periods of time,” Embree says, “but the consumer wants new product — 18 months is the lifecycle of new technology, so to stimulate the marketplace you need new introductions,” he says. “If we don’t create that excitement our competition will.”

Jean Louis Boyre, president of Babolat VS North America, also is looking to new technologies that could help keep bloating costs under control, which is Babolat’s focus in 2009. “We need to make sure that we contain the manufacturing price increase as much as we can,” he says. “This might help push R&D people to look at some new technologies that could be more cost-effective.”

But even as the U.S. and much of the world face historically challenging economic times, the industry can take heart in the haven millions of avid players find between the boundaries of a tennis court.

“I always thought tennis was a recession-proof sport, and people won’t ever stop playing tennis,” says Gaudreau. “In fact, they may just skip that vacation or other purchases and play even more tennis. My customers won’t stop playing tennis.”

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About the Author

Mitch Rustad has been a long-time freelance writer based in New York City.

 

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