A look at how the business of running is changing through running store consolidation.

For the past three years, the running store business has been undergoing a corporate land grab of sorts as bigger companies try to scale what had previously been dominated by passionate, independent mom-and-pop operations. Finish Line Inc. (NASDAQ: FINL) is an Indianapolis-based athletic shoe retailer with approximately 650 Finish Line mall stores, 200 concept stores inside Macy’s department stores and 66 running specialty shops it has purchased or started under its Denver-based Running Specialty Group (RSG) since 2012. Its foray into the $1 billion running specialty channel has made small, independently owned retailers both very nervous and very annoyed. RSG officials have said they would like to grow to 200 stores in the next few years, a figure that would represent about a quarter of the running specialty market.

In the meantime, Fleet Feet Inc., a private company, has also converted stores to franchises and bought others that it operates from its corporate offices in Carrboro, N.C. (There are 138 Fleet Feet stores, of which 113 are independently owned franchises.) Amid all of that consolidation, other national running store chains like Road Runner Sports and Endurance House are continuing to grow and expand across the U.S., while bigger sporting good stores like Dick’s Sporting Goods and Sports Authority are trying to get a stronger foothold within the ever-growing population of recreational runners, both in their “big box” stores and in their new smaller, quasi-specialty concept shops. (Dick’s began opening True Runner shops in 2012, a little after Sports Authority Elite stores began popping up.)

RELATED: RSG To Re-Brand Stores Under JackRabbit Name

On Dec. 3 at The Running Event Trade show in Austin, Texas, Mark Sullivan, editor of the running industry trade magazine Running Insight, conducted a Q&A session called “Why We Think Buying Your Store Can Help Grow the Running Market” with Glenn Lyon, chairman and CEO of Finish Line Inc., and Bill Kirkendall, president of Running Specialty Group (RSG), in front of a packed-house ballroom audience comprised of retail store owners and managers, running shoe manufacturers, sales reps and other industry officials. The executives were open and candid about their plans for the business and, as a result, there was growing tension in the room and the executives became a bit defensive. (Read the complete 8,000-word transcript of the 60-minute session. It’s worth a read if you’re in the industry.) Here are some key points and highlights about what Finish Line and RSG executives spoke about in Austin.

What is Finish Line’s intent with its group of running specialty stores?

Running is a business and RSG really wants to be in the running specialty channel because it believes it will be growing and profitable for years to come. It’s hoping to increase profitability and grow the average sales from its specialty stores from $1 million on average to about $2 million in the next three to five years, and it believes it can also help double the entire running specialty channel in the process. Lyon said he believes many running stores aren’t running as effectively or efficiently as possible because of inventory and buying constraints, which is why he believes most are capable of much greater profitability. He said one of the main goals of RSG’s retail approach is to increase the inventory turnover rate while also maximizing efficiency with RSG’s centralized buying and warehousing. Lyon and Kirkendall said that customer service and connection to the community are their two highest priorities for each of their shops. “We want to be the heartbeat of our local communities,” Kirkendall said. “We want to inspire, we want to connect. To me, that’s the secret sauce.” While there is no apparent interest from the corporate brands to link the two stores on the consumer-facing side (Finish Line, based in Indianapolis, and RSG, based in Denver, are operated as separate businesses), Lyon said the brands benefit from their other universal systems like finance, human resources and a legal department.

Why is this happening now?

1. All aspects of running are red-hot right now: shoes, apparel and accessories, races, training and related lifestyle items. Running and related health and fitness pursuits have all continued to grow and the common denominator is that people wear running shoes and running/fitness apparel many days every week and identify with running, even if they’re not hardcore or traditional runners. There are an estimated 10-20 million active runners in the U.S., but the number is probably much higher than that when you consider walking, yoga, fun runs, obstacle racing and gym-based fitness.

2. Even with running shoes and gear being sold at 800 or more running specialty stores (including those owned by RSG), at lower-level mall stores (Foot Locker, Finish Line, department stores, etc.), at big box sporting goods retailers (Dick’s Sporting Goods, The Sports Authority, etc.) and at numerous online stores (Amazon, Zappos, Running Warehouse, Nike.com, etc.), industry observers believe the running market is still underserved from a retail point of view. It’s why there are many other new independent stores popping up across the country in addition to new stores being started by RSG.

3. Many running specialty retailers who have operated shops for 15 to 30 years are ready to retire. Those “legacy” shops are some of the best and most profitable shops in the country, despite not always being exceptionally modern or well-merchandised. RSG believes it can update those stores and increase the profitability while also centralizing buying, warehousing and other key systems.

4. Runners love going to running shops for many reasons: to buy gear, to get expert running and health advice and to feel connected to their local running community with group runs and training programs. For that reason, the running specialty shop model works very well, especially with stores that understand what good merchandising is, have great employees and have efficient back shop systems. Some of the better independent running stores in the U.S. include the Naperville Running Company in suburban Chicago and the Columbus Running Company in Central Ohio.

What stores are included in the RSG group?

There are 76 stores in the group now. Most of the shops were purchased in the past three years, but a handful of them were started by RSG under The Running Company banner. Of the stores that were purchased, many have been around for 20 to 30 years and have been considered among the best (and most profitable) running stores in the U.S. Most notable among the group are the three stores of the Boulder Running Company, which were purchased in 2013 in a reported $7.4 million deal. Also included are several Texas Running Company stores (formerly Run On!), several New York Running Company and four Bob Roncker’s Running Spot stores in Cincinnati, among others. One of the most recent acquisitions was the purchase of Garry Gribble Sports in Kansas City. Boulder Running Company was named the 2006 Running Store of the Year, while Bob Roncker’s Running Spot won the award in 2008. Many of the RSG stores were perennially on the list of America’s 50 Best Running Stores. (But the RSG stores are no longer eligible for either award because they’re no longer part of the Independent Running Retailers Association.)

RELATED: Boulder Running Company Joins Running Specialty Group

What does it mean for runners in communities where those stores are?

On one hand, it might not mean too much to casual running consumers if RSG is able to maintain the high level of customer service, authentic assortment of products, community outreach and connection to the core runners in those stores. But that “if” is the $1 billion question. Given that one of RSG’s stated points is to speed up the pace of business (or the speed in which it sells through its entire inventory), skeptics believe customer service and community engagement are a big red flag. Without local ownership, critics say, the stores and the employees will be beholden to the constructs of the corporate owner like a chain store operation, likely with diminished passion and motivation to go the extra mile for customers. But executives from the Finish Line and RSG said that’s the exact opposite of what they want the stores to become. While they admitted losing some longtime employees has been an inevitable challenge, they said the company is investing in the local employees to maintain the level of customer service, camaraderie and morale in each store. The real question will be whether or not the RSG stores maintain some of the things that are not profitable or less profitable—at least from a bottom-line accounting perspective—such as fun runs, discounts to local schools, community races, training programs and other programs that often require store employees to work extra hours or keep the store open later without additional compensation. Will local runners be serviced by passionate local runners committed to the store and its patrons, or will they be serviced by hourly retail employees who might also happen to be runners?

Will the RSG stores be rebranded under one name to create a national brand of running specialty stores?

“It’s a possibility,” Lyon said. “And we’ve seen some initial research on it and it all makes sense to us.” But that’s not an indication of what RSG is working on, just that it has considered that option. Lyon said they’ll determine that in the next four to six months. Already, the group has rebranded some of its acquired stores under The Running Company name (New York Running Company and Texas Running Company, for example) and also started new stores in some of its metro markets under that name concept. One brand name would seem to make sense from some levels, but Lyon and Kirkendall both said they weren’t concerned about losing local identity by removing the original name of a store or the city or region in a store’s name. Instead, they said, it’s about what happens inside the store that is important to maintaining the local customer base. “Whether the name on the outside of the store is individual to that particular community or we identify the name of the town in which it exists, part of the initial findings are that’s not necessarily what motivates the customer,” Lyon said. “They will know that you are locally connected the minute a customer walks into the store. And if we lose that, we will have lost.”

Have there been any side effects of the RSG buying up all these stores?

Yes, several new stores have emerged after employees of stores have either left or were terminated newly acquired RSG stores. A few examples include new stores near Ann Arbor, Mich., Princeton, N.J., and Boulder, Colo. On the flip side, the continued growth and expansion of RSG’s running specialty business could put the crimp on small shops. To date, RSG has mostly purchased great existing stores, but in a few cases (including the Dallas-Fort Worth market) they’ve added several shops under their new Texas Running Company branding. However, Lyon said RSG will likely try to “fill in” key markets by starting up additional stores as it has done in Dallas-Fort Worth. That might be the scariest point for small, independent retailers.

“We actually do like the acquisition model because we do inherit profitable businesses and we are capitalized in a way that we’re happy to pay for that profitability,” Lyon said. “But we recognize that adding 50 to 75 doors over time to fill in the markets that we end up participating in is probably where we’ll end up.”

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Will RSG expand outside of pure running within these stores?

Yes, it’s very likely it will. Look, running has been changing for a long time and many running shops have stuck to the core—perhaps too long—but some of the best running stores in the country have had success in selling casual shoes, yoga apparel and lifestyle clothes. It’s one of the things that helped the Boulder Running Company’s original store (after its third and final expansion in about 2003) become one of the highest-volume stores in the country. “There are more people who want to buy running shoes and all for the same reason—to perform—but I think there is some elasticity to having the right kinds of shoes and apparel that can be bought in our stores,” Lyon said. The question will be whether RSG stores add more yoga, lifestyle and casual products at the expense of core running products or simply find a way to make room for it..

How is what RSG doing different to what Fleet Feet is doing or what other groupings of specialty stores?

Of the 138 Fleet Feet Sports stores in the U.S., 113 are independent franchises and 25 are owned by the privately held Carrboro, N.C.-based company and are where the company does a lot of its training and product testing. Although their flagship stores will remain company-owned, most of those 25 stores are run by operators who are working toward buying a store and becoming franchisees as part of the company’s unique operating partner program. Franchisees and operating partners receive direct assistance from the Fleet Feet Sports corporate team in several areas including merchandising, finance, inventory management, staff development and marketing and customer acquisition.

Also, there are many other independent retailers in the U.S. that own multiple running specialty stores. Two of the most prominent retail groupings include Marathon Sports (12 locations in Massachusetts) and Potomac River Running (eight stores in Virginia and Washington D.C.), but those companies haven’t expressed any interest in national expansion.

How does RSG believe it can compete in a local market without local ownership?

It doesn’t appear RSG will be offering any skin in the game to the managers of its stores around the country. But Lyon and Kirkendall said RSG puts a premium on having great managers and employees in each of its stores. They said RSG stores pay competitive salaries, offer great benefits and foster an environment and systems for them to be successful. “In any successful business, it’s all about people,” Kirkendall said. “We’re going to do what we have to do to have the best things for our people. There are lot more things than just money. In any successful business it’s all about the people, and ours will be no different or we won’t be successful.” And Lyon said one of the biggest things they have learned is that the running specialty environment needs to be fun and full of passion. “The truth is the thing we admire most about what we see as we go around to these stores of ours is the camaraderie and respect that goes on in the stores,” Lyon said “There is another word that we use a lot and that’s fun. People have a lot of fun in these stores and they’re passionate about running and they’re passionate about their customers and they want to do the right things for their customers and give them the right products that satisfy their needs.”

RELATED: Can Running Specialty Shops Survive?

What are product manufacturers concerned about?

This is interesting because the manufacturers are involved at several levels, including selling with independent running specialty retailers, at RSG stores and big box sporting goods retailers, as well as selling direct from their own websites. Still, the three biggest concerns seem to be that, if it grows to 200 stores as it has said it intends to, RSG could have enormous power in the industry. It could start offering discounts on key products that are found at many other running specialty stores, thus creating an unfair advantage in the marketplace or forcing other stores to react. (The company hasn’t suggested it will go down the road of retail discounting.) There is also a fear that RSG could create a “Wal-Mart effect” within the running specialty part of the industry in which RSG will dictate prices and net/120 terms to manufacturers. And, lastly: “They could create a ‘pay-to-play’ scenario and squeeze everybody,” the marketing director for one prominent running accessory brand said under the condition he would remain anonymous.

Aren’t online sales the biggest threat to run specialty shops?

Perhaps. The biggest fear of local retailers is that their customers can come to their store to try on shoes and then search online for a cheaper price and free shipping. RSG is in heavily invested in the online sales game, too, but it has not offered discounted prices online. The group purchased the Run.com URL in 2012 and created a national online retail site. It has since re-directed that site to point to BoulderRunningCompany.com for its online sales and it redesigns Run.com. RSG has used its relationship with brands to get a few exclusive deals, including the new Hoka Constant road running shoe that debuted this fall.

However, Lyon said, studies have shown that, while running specialty customers use the Internet for research and some purchases, it hasn’t reduced the desire to walk into a “brick-and-mortar” running shop. The key for any retailer is engaging those customers and making a sale when they’re there. “For the most part—and we’ve done all kinds of tests on this—people do research on the web and still choose to come into the stores to buy,” Lyon said. “Today at the Finish Line, it’s no secret, we do 85 percent of our business in the stores, and our conversions are getting better because people have done their research and are coming to the store more purposely to buy. In fact, through available information they know what sizes and colors are in the store before they get there. Those are all things technology is enabling us to make the customer’s experience better.” 

Is there a bigger concern?

Yes, most definitely. Some industry insiders are very concerned that Finish Line’s RSG endeavor might fail entirely. As moderator Mark Sullivan pointed out in the industry Q&A, Finish Line failed on two other occasions to create smaller specialty store concepts, once with the purchase of several Man Alive stores and a women’s concept store it started called Paiva. If the RSG initiative fails, the simple result would either be the need for a new corporate buyer or some kind of piecemeal fire sale. As one retailer said: “I’m not sure whether to root for them or root against them.”

Is there any precedent for something like this?

Yes, it happens all the time in other business sectors, but there is a relevant example in the sports world. In fact, Ken Gart, of Denver-based Gart Capital Partners, which partnered with Finish Line to get RSG off the ground in 2012, pulled off a similar retail roll-up in the ski industry with an organization called Specialty Sports Venture. In that scenario over a 12-year period, Gart’s company, in a joint venture with Vail Resorts, purchased more than 100 U.S. ski and snowboard shops and eventually sold them to Vail Resorts, a company that owns and operates numerous ski resorts. While there is no record of any of the stores failing, Vail Resorts continues to operate the retail business to its advantage, offering both equipment rental and purchases to Vail Resorts customers and non-Vail Resorts customers, as well as using the retail operation to market its 11 North American ski resorts. (Gart’s company actually helped managed that brand before selling the final 30 percent stake in 2010.) Gart Capital Partners is still involved in RSG, but to a much lesser extent since the Finish Line took a larger percentage of ownership in April 2014.