One of the hottest sneakers right now has holes in it.
With a standout footwear design that has caught the attention of runners and office workers, On has successfully grown its business over the past few years to compete with giants in the athletics market.
On sells a variety of sneakers ranging from road running to hiking to tennis, all in the $100 to $200 range. The brand also sells a number of lifestyle sneakers that still incorporate performance elements, even releasing a limited-edition style with fashion powerhouse brand Loewe.
On’s distinctive look has helped it stand out in a crowded field, and the proof is in the numbers.
On’s latest earnings report in August showed its second quarter broke records again, with net sales up 52.3% year over year to 444.3 million Swiss francs ($506.5 million at the time). Its net income dropped 93.3% to 3.3 million Swiss francs, but its gross profit margin jumped to 59.5% from 55.1%.
Its annual fiscal year 2022 also brought the company back into profitability, swinging to a net income of 57.7 million Swiss francs from a net loss in 2021 of about 170.2 million Swiss francs. For the full year, On reported net revenue surpassed a billion Swiss francs.
The brand is expecting to double its net sales by 2026 to at least 3.55 billion Swiss francs, On announced during its investor day earlier this month. As a more long-term target, the company is aiming to grow net sales by 20% to 25% per year.
The Swiss brand isn’t exactly new to the industry, though, as On officially came into existence in 2010 thanks to co-founders Olivier Bernhard, David Allemann and Caspar Coppetti.
There are plenty of other sneaker brands out there sharing the shelves with On, but lately the brand's been on a tear. So what’s contributed to its meteoric rise?
A major component of that success is the Swiss brand’s innovation, particularly its easily recognizable CloudTec footwear technology.
CloudTec is a cushioning system on the bottom of sneakers that’s integrated across On’s footwear portfolio. The technology, creating noticeable holes, is meant to absorb impact and reduce strain on runs — all contributing to what On describes as “running on clouds.”
“In everything we create, performance always comes first, whether it’s for an everyday athlete or an Olympian,” Britt Olsen, On’s general manager of the Americas and head of global commercial strategy, told Retail Dive via email. “That focus has helped us continue to build credibility with our fanbase.”
Such features have contributed to the company’s popularity, according to analysts.
“It comes down to innovation and with On, it’s visible innovation,” Abbie Zvejnieks, senior equity research analyst at Piper Sandler, told Retail Dive.
Plenty of other performance brands hype up the technology in their shoes, though some of it might be slightly less obvious to the average consumer’s eyes. Depending on the sneaker style, Hoka touts its foot frame, which intends to keep heels in place; Brooks points out its carbon fiber plates; and Nike has created its Flyknit fabric to make more breathable running shoes.
“Where [On was] originally able to take a lot of share was the specialty running channel, which is very important for gaining share with runners,” Zvejnieks added. “Nike and Adidas don't compete as much in that channel as they've tried to go more direct with their businesses. And so that was a clear place for both On and Hoka to gain a lot of share.”
The brand’s balancing act between performance and aesthetics hits the right note with many consumers, according to Cristina Fernández, managing director and senior research analyst at Telsey Advisory Group.
“They've been able to play in the unique case where they are a performance brand, but the consumer has really liked the style of the shoe,” Fernández told Retail Dive. “So it's worked as a lifestyle brand shoe as well.”
With the COVID-19 pandemic, the adoption of more casual footwear grew as people spent less time in office and social environments. However, the trend toward mixing style and comfort has actually been growing over the last 20 years or so, according to Zvejnieks.
“There's that more affluent consumer who's now demanding technical performance capabilities from their everyday shoes, their everyday clothes,” Zvejnieks added.
And the brand’s famous sneaker innovation isn’t just for runners anymore, as the company officially expanded into tennis in August and is soon to launch its first training sneaker.
But On’s visible innovation is only well-known thanks in part to its distribution approach, and the company hopes to fuel its growth with various expansion plans.
Heavy on the wholesale
Historically, On has focused on its wholesale distribution channels.
“Back in 2015, 2016, 2017 — we got so many questions on why we’re doing wholesale,” co-CEO Marc Maurer told Retail Dive in January. “We always said, you know, we’re doing wholesale because it allows us to acquire new consumers in a cheaper way and to scale the brand quite efficiently.”
The foundation that wholesale has built for the brand is enabling the company to grow its direct-to-consumer channel.
During its second quarter, On grew its DTC channel faster than its wholesale business, though DTC only represented a 36.8% share of the business. DTC sales increased 54.7% year over year to 163.5 million Swiss francs while wholesale jumped 51% to 280.8 million Swiss francs.
“They did a very unique thing with the way they thought about distribution,” Fernández said. “Obviously, they did DTC … but they went into wholesale very early and they were very strategic with whom they did wholesale with. Some of the partners entered were probably not your typical partners for performance brands. … I think just winning online is just not enough to get that kind of growth.”
While On does work with specialty running retailers for its wholesale business, it also entered into more fashion-focused doors such as Bloomingdale’s and Nordstrom, Fernández added.
Historically, the brand has entered about 400 to 500 new wholesale doors per quarter, but it expects this rate to drop looking forward, executives said on a call with analysts in August.
Looking ahead, On is trying to continue scaling through wholesale while growing at least two areas of the business: product categories and owned distribution.
On said in its investor day presentation that it is “significantly increasing the pace” of owned store growth, expecting to add 20 to 25 stores per year in the mid-term (with roughly half in China and half outside).
“We want to reach a wider audience of athletes and fans worldwide, so we are expanding our premium multi-channel distribution, growing our own retail presence globally, and increasing our footprint in China,” Olsen said.
Currently, On operates 23 stores worldwide — four of which are in the U.S. — and it has more planned for cities such as Paris, London, Chicago, Austin and more, according to Olsen.
The brand is also working to expand its apparel offerings and grow into new athletics categories, such as training — a plan that will help fill in space at its growing retail footprint. On intends to expand into the category with full head-to-toe looks, according to Olsen.
As a long-term target, On hopes to reach an apparel share of 10% or more. Its Williamsburg neighborhood store in New York City has an apparel share of 16%, whereas its Yitian Shenzhen store has a 26% apparel share.
“Where apparel does help some of the brands is that apparel is a more frequent purchase,” Fernández said. “On — it's still very early on in apparel and to be honest, it's not where it needs to be.”
Specifically in some of its stores, On’s apparel showcasing hasn’t been very strong, according to Fernández.
For fiscal 2022, net sales from apparel for On increased 30.2% year over year to 47.3 million Swiss francs — representing just under 4% of its overall net sales that year.
“While we were founded in running and that will always be core to who we are, we want to inspire people to move, whatever that means to them,” Olsen said. “One way this really comes to life is in our retail stores. In our Brooklyn store, which we opened in June, we group our footwear and apparel together in three areas: running, outdoor and movement.”
The On executive added that this approach shakes up the traditional store model where footwear and apparel are typically displayed separately. Olsen said the approach allows for a more tailored shopping experience for athletes.
“The next step of that will be expanding the assortment to cater to a broader market and part of that is creating price points that are more in line with that of competitors like Lululemon," Zvejnieks said. "So still premium, but at least you're not going to the shelf and seeing a $140 pair of leggings when you know that Lululemon is $90."