The athletic shoe industry flew higher than Michael Jordan on the Chicago Bulls’ six-championship run between 1991 and 1998.

After a while, though, overconfidence set in. Industry insiders say the top shoe companies started throwing money at pro athletes left and right, hoping to find the next Jordan. Others eschewed their core customers in desperate attempts to grab market share. Retailers expanded their stores, cramming in hundreds of pairs of new sneakers.

Then the bubble burst.
“There was a huge glut of inventory,” said Ken Watchmaker, Reebok International Ltd.’s chief financial officer. “The basketball craze slowed down — star players weren’t treating their fans or teams the way we’d been brought up to believe they should. All of that created heavy discounting in the industry. It hit everybody by surprise, the speed at which everything slowed down.”

Throw in the Asian economic crisis of 1998, and you get an industry that suffered serious damage. Damage Assessment Nike, the Beaverton, Ore.-based industry Goliath, retained its 40%-plus market share, but its earnings plummeted by 38% a share in 1998. Sales slowed that year, then fell in 1999.

German shoe and apparel giant Adidas-Solomon AG saw earnings drop in 1998, following three straight years of accelerating profits. Reebok, which made its name selling fitness and aerobic shoes, fell hardest. After briefly passing Nike in 1987, the Stoughton, Mass.-based company tried to match Nike’s success again in the early 1990s. The bottom fell out in 1998, when sales fell 12% and earnings dived 64%.

The market value picture was even uglier. Nike shares plunged 66% from their all-time high in February 1997 to its bottom of less than 26 two weeks ago. Reebok’s fall was even more dramatic. The company clocked its all-time high in 1997, the same week as Nike. It then crashed 87% to under 7 early last month.

One problem was that, after a while, all athletic shoe stores started to look the same. Everyone had the same array of basketball shoes, runners and cross-trainers, featuring all the big brands. Shoe companies and retailers paid the price. Stores began discounting shoes, hoping to find a hook with customers. The discounting spiraled, until margins disappeared. Just For Feet Inc., one of the larger retailers, filed for Chapter 11 bankruptcy.

Solutions
So what are Nike, Reebok and the rest of the pack doing about it? The top two shoemakers will offer their marquee brands to only a handful of high-end stores. Nike recently opened its first outlet within a Nordstrom store. It also worked with Foot Locker to design its new Tuned Air line of shoes.

When the product’s design was completed, Nike agreed to sell the shoes exclusively at Foot Locker. Reebok will do the same with its new line of Black Top outdoor basketball shoes, which will debut this spring at Foot Locker.

It’s all part of the shoe industry’s effort to re-establish close ties with its retailer partners, and, more important, its customers. “Having compelling products is the bottom line,” said Nike spokesman Lee Weinstein. “Nike is very much a design company. We’ve been hard at work preparing to deliver footwear, equipment and apparel that really speak to people out there.”

New Shoes
The introduction of new lines like Air Presto could speed Nike’s rebound. Scheduled for release in June, the shoe pulls on like a sock and comes in “extra-extra small” to extra large, instead of traditional numbered sizes. Another new line, due for release in November, will be unlike anything Nike has released the last decade, promises Chairman and Chief Executive Phil Knight.

“They’re a marketing machine. They do a great job creating emotional ties with the consumer,” said Jennifer Black, president and senior analyst for Portland, Ore.-based investment boutique Black & Co.

The company hopes to become one of the world’s top five brand names, Knight said during Nike’s fiscal third-quarter earnings call March 16. Athlete endorsements and team and event sponsorships also will play a large role in the equation, though less so than in the past. The rise of several shoe companies in the mid-1990s, including Fila Holding, Converse Inc. and Adidas, forced Nike to shell out gigantic sums of cash to nab key sponsorships, including a hitherto unheard-of $230 million contract to sponsor the Brazilian national soccer team through the 1998 World Cup.

With smaller rivals trying to recover from the shoe industry’s correction, Nike could grab similar plum sponsorships for a fraction of the price. Going Outside The Ad Box Nike and Reebok launched print advertising campaigns that will appear in nontraditional publications. Readers will find more sneaker ads in Gentleman ’s Quarterly and Cosmopolitan, not just Sports Illustrated. “Reebok has really gone back and tried to focus on its core strengths,” said Bob McGee, editor of Sporting Goods Intelligence, a weekly industry newsletter. “Women are their key demographic. That’s been their core, and that’s who they’re going after.”

To nab women’s attention, Reebok is relaunching several of its most popular styles from the 1980s, including what it calls its Classic line of aerobic and fitness shoes. Reebok’s DMX technology puts movable air pockets throughout the shoe, says Watchmaker, giving it a different feel than Nike’s Air shoes, which have most of their cushioning under the heel. Reebok has held dozens of try-on sessions at malls and outlets to get people to test DMX models. “They’re some of the most comfortable shoes I’ve ever tried on,” Black said.

Hurdles Ahead
The industry still has a long way to go. Nike expects foreign sales to exceed North American revenue next year for the first time ever. But the weakness of the euro against the dollar could pose a problem for the company and its rivals abroad.

Nike bought back 3.5 million shares last year for $129.1 million to bolster its financial standing. It’s authorized another $140 million in stock buybacks.

On a larger scale, the company must avoid complacency, which has plagued Nike more than once as the industry’s top dog. A fickle public will demand exciting new products, says Black.

Reebok hopes a change at the top will help cure its ills. Paul Fireman, chairman, president and chief executive, returned to the company’s helm last year after a 12-year absence. Despite the optimism surrounding his comeback, some industry insiders are taking a show-me approach after watching countless rebound efforts by Reebok fall flat.

Title Tales
The titles of some of Black’s Reebok reports tell the tale. The company’s theme was “Facing Hurdles” in December 1997, “Rebuilding Reebok” in July 1998 and “Bouncing Back” last month.

Then there’s the bigger issue of customer acceptance. The emergence of casual shoe companies such as Skechers and Vans turned many customers’ heads away from athletic shoes the last few years. It’s up to Nike and Reebok and the rest to turn those heads back.

“We don’t view this as a sprint; we view this as a marathon,” said Nike’s Weinstein, borrowing from the legacy of recently deceased co-founder and former University of Oregon track coach Bill Bowerman. “In any marathon, there are times when it gets extremely hard, and you have to dig deep,” Weinstein said. “We know we have to go out and prove ourselves all over again.”