Deal focus: VIG sees stability in shoes

Original equipment manufacturers (OEMs) were not a priority for VIG Partners when raising its third Korea fund. Yet two of the four investments closed to date involve companies of this nature. Having already acquired facial masks manufacturer Press & Converting, the GP recently bought Youyoung, a supplier of materials used in running shoes, for an enterprise valuation of KRW220 billion ($207 million). 

"Our problem with OEMs has always been industry instability. Industries like automobiles and smart phone are changing fast – the number one brand may become number three within two years. OEMs working with these market leaders could suddenly lose their largest clients," says Jason Shin, a managing partner at VIG. "However, the sports shoe industry is very stable in terms of market leaders and the relationship between the leading brands and their suppliers." 

The global sports footwear industry generated $84 billion in revenue last year and is expected to reach $93 billion by 2021. Few doubt that Nike and Adidas – which currently have market shares of 25% and 15% – will maintain their dominance over the next decade. Although these companies have consolidated their OEM relationships – Nike has gone from 700 to 500 in the last 10 years – they prefer to have long-term ties with key suppliers without trimming costs.   

Youyoung is Korea's second-largest manufacturer of knitted fabric materials that feature in the upper section of athletic footwear. It is expected to generate KRW84 billion in revenue (80% of it from Nike) and KRW20 billion in operating profit in 2017. Revenue has grown at a compound annual rate of 32% since 2012, largely driven by the introduction of seamless materials. In 2015, developed its own seamless technology – the circular knit jacquard (CKJ) – in collaboration with Nike.

"Ten years ago, it would take 30 processes to produce a sports shoe, which was labor-intensive and time-consuming. If one material hadn't arrived, it was difficult to assemble the shoe," says Younggi Han, a director at VIG. "With seamless upper technology like CKJ, the manufacturing process is much shorter and costs are reduced." 

Seamless materials are therefore likely to account for an even larger portion of upper fabrics for athletic footwear in years to come, and Youyoung's long-term objective is to utilize CKJ technology in other product categories such as hats and backpacks. Nike will remain a key partner, but there is also a desire to broaden the customer base, working more closely with the emerging number three player – whether it is New Balance, Under Armour, Puma or Sketchers – and reaching out to others in the industry. 

"The sports shoe market is still quite fragmented. While we think Nike and Adidas are everywhere, there are many brands that you have never heard of. The market will become increasingly consolidated. Apart from Nike and Adidas, it's important for Youyoung to strengthen relationships with other key players," says Han.   

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• Topics
• North Asia
• Buyouts
• Industrials
• South Korea
• VIG Partners
• manufacturing