By Dennis J. Donovan, Principal, Wadley Donovan Gutshaw Consulting
This article addresses site selection for the outdoor recreation equipment industry. The following sectors are covered:
Additionally, we did not include athletic apparel/footwear or motor home production. Rather, the focus is on physical equipment.
The outdoor sports/recreation industry is a big business. According to the Outdoor Industry Association, spending in the U.S. approximates $646 billion annually. Roughly 20 percent is composed of gear and equipment purchases. The industry is on a growth trajectory of approximately four percent per annum.
Among reasons for heady growth are an increased emphasis on health among all socio/demographic groups (especially aging baby boomers), rise of millennials and now Generation X where outdoor recreation is a prized aspect of everyday life, and the continued increase in disposable income by U.S. consumers.
Globally, China is the largest market for outdoor recreation. But the United States is also a major force followed by Western Europe.
Manufacturing employment in the above referenced NAICS (33992, 33991, and part of 336999) totals around 70,000. Leading states as gauged by manufacturing employment (See Map A) are California, Minnesota, Georgia, Wisconsin, Utah and Texas.
As measured by location quotient (percent of industry employment greater than the U.S. average), Utah stands out (6.59 whereas the U.S.=1.00). Other states with high LQs are Minnesota, Wisconsin, Vermont, Georgia, South Carolina and Idaho (see Map B).
The states below employ at least 1,000 manufacturing workers in the industry (as defined herein) and have an LQ above 1.0.
The industry’s geographic concentration can be primarily attributed to the presence of sizeable companies that were founded and grown in the respective state (e.g., Acushnet in MA, Johnson Outdoors in WI, and Polaris in MN). Of course, these and other companies expanding elsewhere in the U.S. have helped to create the industry employment landscape we see today.
Locational Tendencies Offshore vs. Onshore
A significant portion of the industry has offshored at least part of manufacturing to reduce cost of goods sold. The trend was most pronounced in segments such as bicycles, sports balls, and fishing tackle, among others.
Many of the products offshored (either to outsourcers or captive operations) were labor intensive and price sensitive. Decreasing labor costs was a key to survival.
However, the U.S. is regaining competitiveness for a wide array of manufacturing industries including sporting goods and outdoor recreation equipment. The drivers behind this competitive revival are:
1. Rising labor costs in countries such as China
2. Investment in technology (e.g., AI, Robotics, 3D manufacturing) by U.S. corporations
3. Lowering of the labor component in cost of goods sold (mainly due to technology)
4. Risk and cost of long, global supply chains
5. Tariffs imposed on products imported from China
6. Customer preference to buy “Made in America”
What we are witnessing today is a retrenchment from China by companies that sited cost sensitive operations to serve global markets, including the U.S. An increasingly common strategy is China plus one or two and also, in some cases, reshoring. This geographic deployment model has labor intensive/cost sensitive production moving from China to one or two other countries in Asia (e.g., Vietnam, Taiwan, Philippines, India). The higher end goods are then reshored to North America (U.S. and in some cases Mexico).
This strategy is being driven by several forces including rising labor cost in China, uncertainty over import tariffs, and perhaps most importantly the regionalization of supply chains.
Supply chain regionalization was a growing trend before the COVID-19 pandemic. This crisis has accelerated adoption of the regional supply chain model.
Regionalization involves far more than simply redeploying manufacturing. It also embraces a reconfiguration of a suppliers and subcontractors. For some industries that are attempting to reshore, the paucity of qualified suppliers can present a daunting challenge.
Bottomline, we believe that there will be less offshoring strictly for cost reasons than there was in the past. U.S. companies will site a significant proportion of future manufacturing in the U.S. or near shore (e.g., Mexico). Of course, there will still be offshoring including to China. But the underlying drivers will be market driven, to serve a country or trading block. Companies might still seek a low-cost production location within the country or trading block but it will not be to serve the North American market.
Two companies (See Photographs 1 and 2) that have been successful producing goods made in the U.S. are Bison Inc. (indoor/outdoor sports equipment in Lincoln, NE) and Mervin Mfg. (outdoor equipment such as snowboards which are manufactured about 70 miles north of Seattle). A recent example of reshoring is Detroit Bike (see Photograph 3) which will begin manufacturing the Schwinn Collegiate to be sold at Wal-Mart, in part due to the company’s initiative to have suppliers manufacture in the U.S.
When siting new manufacturing facilities for sporting goods and outdoor recreation equipment, the relative importance of various criteria will differ by product mix and markets served. Among the factors that often assume prominence are (Very Important, Important, Moderately Important):
A few comments on criteria weights are in order. Customer and perhaps supplier proximity can be very important for delineating the geographic search territory (e.g., Mountain and Pacific Time Zones) within which to conduct the location analysis. Once the search region is defined, the variance among locations (on proximity) might not be stark enough to become a showstopper.
Do not be lulled by labor surplus conditions attributable to the economic outfall of COVID-19. The economy will rebound, demographic trends do not auger well for a bountiful labor situation, and national shortages will resurface. The challenge will be to find those locations that are either in equilibrium or surplus.
Taxes are often a bane for business. But in the big picture they rarely exert a profound influence over operating costs. Incentives can be important as a swing factor among communities that satisfy key operational criteria. But they should not drive the decision until a number of preliminarily qualified locations have been identified. Then incentives can be placed into balanced perspective. We advise clients to examine the relative economics among candidate locations with and without incentives. Two questions should then be addressed: (a) do incentives materially alter multi-year financials and (b) are they meaningful enough to offset any operational disadvantages (e.g., labor shortage) of one location vs. another?
The Site Selection Process
For companies planning to establish new production capacity to make sporting goods or outdoor recreation equipment, a multi-phase decision pathway should be followed. In a nutshell, these phases are:
In this Phase the first order of business is to understand the business strategy that the planned facility will support. A project team is then assembled. The team then creates a foundation for launching the location selection exercise. Inputs include:
1. Examine the company’s footprint to determine if any existing sites should be considered.
2. How would a new site fit in logistically when looking at the current footprint?
3. What should be the geographic search territory?
4. When does the new plant need to be operational?
5. Does the manufacturing footprint of competitors accord any relevant advantages or disadvantages?
6. What will be the new plant’s year one and future operating requirements, e.g.?
• Machinery & Equipment
• Raw materials
7. How important are various location criteria?
• Create major categories e.g.,
+ Qualitative (e.g., labor market)
+ Quantitative (e.g., business costs)
• Assign individual factors/weights under each category
8. Create a milestone timeline for key decision points.
9. Establish confidentiality protocols and a project code name.
Phase Two: Location Screening
The main objective in this phase is to generate a shortlist (typically three to five) most promising locations. This is accomplished in two stages.
The first step embraces desktop research. This involves a multi-round exercise to produce a group of promising locational candidates. Statistical thresholds are established for each round. Areas passing the threshold test are carried forward to the next round. This process ferquently yields a longlist of 8-10 potentially suitable locations. Statistical data bases are used to “screen areas”.
Representative screening factors might include:
1. Minimum population size (and perhaps maximum population size)
2. Distance from an Interstate or limited access four lane highway
3. Distance from a commercial airport
4. Population characteristics (e.g., age, diversity, growth)
5. Workforce educational attainment (e.g., above average proportion with 12-15 years education)
6. Industry employment/concentration
+ Sporting goods/outdoor recreation equipment
7. Occupational employment
• Machine operators
• Skilled crafts
• Blue collar underemployed
8. Industry and occupation saturation levels (signifies a balance between competitive labor demand vs. supply)
9. Preliminary scan of areas with available buildings of approximately 250,000 sqaure feet
10. Indirect labor cost indicators
• Cost of living
• Household income
11. Market level wages (e.g., machine operator)
12. Air service
13. Percent of customers reached by next day or second day delivery (truck)
14. Distance from a seaport
Stage Two: Economic Development Outreach
Stage Two drills deeper into each area’s potential fit for the project with more granular and real-time information an area’s economic development network. A Request for Information (RFI) is issued to the lead economic development agency in each of the longlisted areas to obtain intel such as:
1. Roster of major employers (i.e., labor market competitors)
2. Headcount profile of new/expanding industrial employers
3. Recent or announced downsized employers
4. Available buildings meeting basic criteria
5. Fully serviced, pre-permitted industrial sites allowing for fast track construction
6. Real estate cost
+ New construction
7. Electric power cost
8. Utility services
9. Environmental Phase One summary of sites/buildings
10. Selected tax practices/rates
11. Quality-of-life highlights
12. Possible incentives
Desktop and RFI research are combined to rank/score each area. This will produce the shortlist of the most attractive locations. The scorecard should depict overall cost and operational (e.g., labor market) rankings. Data and scores are shown for each factor grouping. A composite score is then tabulated.
Phase Three: Location Evaluation/Selection
The main objective in this phase is to select the best long-range location (community and site) for the new manufacturing plant. To arrive at this recommendation, each finalist location is subjected to a field-based due diligence evaluation.
To assess the efficacy of the finalist locations, the project team visits each respective area. Given that finding qualified labor at a moderate cost will again be a vexing challenge, field investigation should place significant emphasis on human resource considerations. Concentrate on the balance of competitive demand and availability for requisite skillsets. Market competitive wages necessary to generate a large flow of qualified applicants must be evaluated. Quality/stability should also be gauged. While in the field, assess other locational determinants ranging from real estate to taxes/incentives. During the field trip to each area, the project team should engage in the following:
1. Interviews with manufacturing companies (especially sporting goods/outdoor recreation equipment) to learn of their recent operating experiences (especially labor market), opinions on future conditions, and observations regarding how well the new plant’s key requirements match the area’s locational resources.
2. Interviews with other entities who could shed light on the business environment, e.g.,
• Staffing agency
• State labor office (career center)
• Education/training officials
• Building and site owners/representatives
• Transportation representative
• Utility officials
• Government spokespersons
3. Pre-qualified site and building tours
4. GIS mapping of candidate sites/buildings
5. Request of the lead economic development agency to provide a preliminary incentive package
After field evaluation, the project team would analyze results from the vantage point of the new facility’s overarching needs. The project team would then rank each location and specific sites/buildings within the area. Comparative factors for assessing each finalist location usually includes:
1. Business costs
• Taxes (corporate income to be supplied by client)
• Site acquisition
• Infrastructure development
• Building construction or retro fit
• Machinery & Equipment
+ Occupancy cost alternatives (e.g., lease vs. build to suit)
+ Incentives and initial valuations
• Labor market
+ Availability/applicant flow
+ Basic skills
+ Unemployment insurance
+ Workers compensation
+ HR practices (best employers)
+ Benefits (best employed)
+ Most effective recruiting sources/methods
+ Training resources
+ Unionization concerns
• Best sites/buildings
• Fast-track construction/permitting
+ Electric power
+ Water availability
+ Water/sewer treatment
+ Natural gas
+ Telecom services
+ Highway access
+ Motor carrier service
+ Air service
• State’s reputation for outdoor recreation
+ Cost of living
+ Appeal for transferees
+ Applicable programs
+ Eligibility Requirements
+ Initial estimate of value to project
2. Statistical support exhibits, e.g.,
• Demographics (metro and commute zone)
• Workforce (metro and commute zone)
• Site/building matrix comparison
3. Employer interview summaries
4. GIS maps showing
• Major employers
• Commute zones
• Labor force
A revised scorecard is generated (see chart on page 65) to compare finalist locations. The project team now recommends the preferred location and back-up to executive management. Once approved, final due diligence is conducted.
Phase Four: Final Due Diligence
In this phase, the project team (which might be expanded to include additional expertise) nails down the ultimate locational choice. Among due diligence tasks are:
1. Site/building acquisition
2. Environmental compliance
4. Utility commitments
5. Incentives package
9. Transportation commitments
10. Training commitments
11. Construction/GC selection
12. Project manager (to oversee the process)
Once due diligence is complete and top management approves, a formal announcement is made to all key stakeholders is made. Immediately thereafter, a press release is issued. Communications should stress how the new location supports attainment of strategic business objectives.
The sporting goods/outdoor recreation equipment industry will continue to record impressive growth. This will require the addition of new manufacturing capacity.
Finding a location that will optimize the new plant’s operational performance and hence achievement of strategic business objectives is not without peril. A successful outcome requires prudent/pragmatic upfront planning, a structured analytical process, and judgment/insights that go beyond the stats or numbers. This is especially true in ascertaining the future viability of any contending location.
The hey day of offshoring, for cost reduction purposes, is likely in the rear-view mirror. There will be increased plant location activity in the U.S. due to multiple factors including technology/innovation, supply chain resiliency/risks, narrowing of cost differentials, production flexibility, and the Made In America syndrome (which strongly resonates with consumers of sporting goods and outdoor recreation equipment).
About the Author
Dennis J. Donovan is a founder and Principal of Wadley Donovan Gutshaw Consulting, LLC based in Bridgewater, NJ. The firm has been advising companies of the geographic deployment of manufacturing plants and other corporate facilities for four decades.