From Allbirds to Nike, the Sneaker Segment is Running Into the Ground. Here's What Retail Investors Need to Know.

It's been a dark time for the sneaker industry. Nike (NYSE: NKE), the world's top athletic footwear and apparel maker, lost nearly 70% of its value over the past five years as its growth cooled and margins shrank. Allbirds (NASDAQ: BIRD), once hailed as the "next Nike" and valued at over $4 billion after its 2021 IPO, was recently sold for $39 million. Should retail investors avoid this entire industry, or should they just be more selective with their stocks?

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Why did the sneaker market crumble?

During the pandemic, sneaker sales surged worldwide. That acceleration was largely driven by stimulus checks, the expansion of the athleisure market, and social media buzz for limited-edition, exclusive, or celebrity-endorsed sneakers. But that growth spurt ended after the pandemic, leaving companies that produced too many sneakers with excess inventory.

To clear out those inventories, sneaker makers like Nike and Allbirds relied on markdowns, which compressed thei rmargins and diluted their premium appeal. At the same time, faster-growing competitors -- including On and a resurgent New Balance -- fragmented the shrinking market. Nike and many of its premium industry peers struggled to keep up with those smaller competitors as they pulled away their consumers with better aesthetics and more comfortable designs.

In China, once considered a major growth market for U.S. sneaker makers, companies like Nike and Allbirds faced stiff competition from local athletic footwear leaders like Anta Sports and Li-Ning. Inflation, rising interest rates, and other macro headwinds also throttled consumer spending on higher-end shoes worldwide. Many of those shoes also lasted for years -- so higher-end footwear makers struggled to secure return shoppers.

As they faced those formidable challenges, Nike and Allbirds made some major mistakes. Nike alienated its wholesale retail partners and shoppers by shifting too many of its products to its first-party stores and e-commerce platform. Allbirds overexpanded, lost its product identity by launching too many shoe styles, and quickly fell out of fashion.

Should investors go bargain hunting in the sneaker market?

Some of these sneaker makers are faring better than their peers. Still, they ultimately face many of the same challenges: market saturation, soft growth in China, disinterested consumers, and fierce macro headwinds. Some sneaker companies that are growing rapidly today -- like On and Japan's ASICS -- could sputter out just as Nike and Allbirds did.

I might be interested in investing in sneaker makers in a stronger market, but the recent macro headwinds are driving me to avoid the entire industry. I'll stick with stocks in more predictable sectors than try to guess which sneaker maker will outlast its myriad competitors.

Leo Sun has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Nike and On Holding. The Motley Fool has a disclosure policy.