Nike Digs in a Firm Market Foothold

"This is really the first time there has been a significant No. 2 player up against Nike for a long time," he said. "Adidas is well-financed. It's the leader in the European soccer market and it recently took over the No. 1 in Japan -- the most significant Asian market for athletic footwear. But the U.S., where Nike is still a clear winner, represents over half the world's sneaker market."

Currently, Nike holds about 44% of the U.S. market share for athletic shoes. A combined Adidas-Reebok would have less than half that amount, with about 11% share going to Reebok and 10% going to Adidas. The market is largely saturated, growing in concert with GDP, but Nike has achieved growth by acquiring successful brands such as Converse and Cole Haan. Last year, it entered the low-priced sneaker business by introducing Starter-branded footwear into Wal-Mart (WMT Quote).

"Given that roughly half of the domestic footwear market is priced below $50 per pair, we believe Nike's foray into the mass channel provides significant growth opportunity without diluting the premium Nike brand," said Morningstar analyst Brady Lemos in a recent research report. "Nike intends to dominate the low-priced market like the premium market, and we wouldn't bet against them."

Meanwhile, Nike holds 37% of the world's market share, while Adidas-Reebok will carry a combined 30%. Moreover, Nike's international business now accounts for more than half of its total revenue, up from 44% in 2000. The diversification in its business alleviates the economic risks posed by globalization and a consumer spending slowdown in the U.S. The company is the market leader in China, an athletic shoe market that's expected to double in size every year until 2008, when it will host the Summer Olympic Games.

"Nike remains the strongest and most dominant player in the U.S. and global footwear business, and it's going through a cycle that is still looking pretty strong to me," says Zu Cowperthwaite, a retail analyst at Evergreen Investments. "Also, we see Nike taking share from Reebok and Adidas as they go through their merger process. The deal should create a window of opportunity for Nike."