By: William J. O’Flaherty, Managing Director & Matt C. Oldhouser, CPA, Vice President
­Consumer & Industrial Investment Banking Group

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The growth in the Outdoor Recreation & Marine (“OR&M”) market from early 2020 to today has been exceptional, far surpassing nearly all industry participants’ expectations. Many rightly point to the COVID-19 pandemic as the catalyst for this growth. Additionally, one of the more unexpected and interesting outcomes of the pandemic was the increased interest by many to spend more time outdoors.

Since 2019, both the number of total participants and the percentage of the U.S. population experiencing outdoor recreation have grown tremendously.

The growth realized was not concentrated in one or two markets but was rather widespread, with approximately 80.0% of all outdoor activity categories experiencing growth in their total participation count in 2022. Among the largest outdoor categories, hiking, fishing, and biking all increased participation by over 20.0%.

Higher participation has resulted in record sales across many of the segments comprising the OR&M marketplace. As represented by sporting goods retailers in the United States, sales grew at a 13.2% CAGR from April 2020 to April 2023 [2].

 

But now that the U.S. has largely returned to normalcy, does that mean OR&M participation and growth will return to pre-pandemic levels as well? In this Capital Markets Perspective, we examine the factors supporting sustained growth in the industry as a whole as well as those that would indicate an upcoming regression and give our assessment as to which factors may outweigh the others.

Factors Supporting Growth
We believe demand dynamics support a favorable long-term picture for the growth of the OR&M market. In examining the influences below, of particular interest were those factors that manifested prior to the COVID-19 pandemic. It’s our belief that these longer-term trends create more substance to the argument for sustained OR&M growth, particularly if factors associated with the pandemic accelerated or magnified these long-term currents.

Demographic Shifts
One of the more exciting developments over the past few years has been the diversity of the new participant base in outdoor activities. During 2022, minority participants (both in aggregate and in several individual races/ethnicities) accelerated their involvement in the OR&M market. This continues a long-term trend of increased participation by these individuals, the origination of which took place prior to the COVID-19 pandemic.

Despite the positive trends illustrated in Exhibit 3 above, as a whole, diverse ethnic/racial groups are still underrepresented in the outdoor participant base, leaving the possibility of years of additional growth. It is also notable that these trends in diversity participation rates tend to be strongest among the market’s youngest participants. This further leads us to believe this is indicative of a longer-term shift as these new participants (and the generations that follow) have a longer participation runway.

In addition to increasing minority participation, we’ve seen a significantly higher percentage of senior interest in outdoor recreation over the last several years. Seniors (defined as those ages 55+) accounted for over one million of the total new participants in OR&M activities in 2022 [3].

Still, today, seniors only represent one out of every five outdoor participants, leading one to believe there’s ample opportunity remaining for further growth. Moreover, these older participants generally possess higher levels of disposable income which can support (on average) higher expenditures in the marketplace.
It’s clear from the long-term trends outlined above that outdoor activities are becoming increasingly appealing to previously underrepresented portions of the population. We believe this trend will advance in the near- and medium-term, continuing to create a larger addressable market.

Interest in Personal Health and Wellness
The definition of health and wellness has evolved over the past decade. No longer is wellness limited to fitness and nutrition, but now encompasses overall physical and mental health and appearance. In a whitepaper published by McKinsey & Company, Inc., consumers broke “wellness” down into six categories:

While the pandemic initially acted as an inhibitor of health and wellness activities, in the wake of the COVID-19 crisis, consumers’ awareness of the importance of these activities has skyrocketed. 68.0% of the survey participants in the McKinsey & Company, Inc. whitepaper noted they now have a higher level of prioritization to their health than they did at the onset of the pandemic. As a result, the authors expect the global wellness market, currently estimated at $1.5 billion, to experience 5.0% – 10.0% annual growth [4].

We begin to tie these wellness trends to OR&M markets by deepening our understanding and interpretation of each of the categories within the marketplace.

 

We note direct and meaningful ties between OR&M and wellness in health, fitness, mindfulness, and appearance. We are encouraged by the diversity of the constituents these wellness trends relate to, and more importantly, the ability for outdoor activities to support betterment.

 

Through Google search traffic, we can see the accelerated interest into health and a related increase in exercise, physical activity, and (by extension) outdoor marketplaces. We believe consumers recognize that there is a direct correlation between health (both mental and physical) and outdoor activity, as represented in the Google search term trends we’ve identified. With the widespread interest and focus on personal health, it is logical to conclude that OR&M marketplaces will receive additional and long-term interest from these parties.

Population Migration
Outdoor activities often (but not always) occur in more remote areas, likely far removed from a metropolitan city center. As such, we thought it would be prudent to explore how U.S. society as a whole has approached the dynamic of where to live. To the extent that population trends pointed to shifts outside of larger cities to more suburban and rural communities, it would likely support long-term growth in OR&M markets.

For centuries, proximity to cities has yielded numerous benefits for those residing in its limits. These include, but are not limited to, accessibility to attractions, services, and workplace opportunities. However, as transportation and technology have evolved, it has allowed for individuals to move to suburban and rural areas, while also realizing many of the benefits previously only provided in urban markets.

Prior to the COVID pandemic, data illustrated reduced interest in major metropolitan living relative to other geographies. From 2015-2019, population growth rates for urban core areas fell by 86.0%. In contrast, during that same period, the growth rates for exurbs (regions outside of urban cores and their surrounding suburbs) nearly doubled. Undoubtedly, individuals and families were already leaving major cities in favor of smaller cities and towns, even before the pandemic began.

These dynamics have been magnified post-COVID, with large urban counties realizing large population outflows in 2020, 2021 and (to a lesser extent) 2022. As stated by the Economic Innovation Group, “county-level population changes continue to suggest that the pandemic is having profound and lasting impacts on economic geography.” The broader acceptance of remote work by employers has seemingly been one of the more influential factors in geographic shifts. No longer are individuals required to live in or near major urban centers to obtain the most desirable and highest paying jobs.

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This creates a dynamic where the major urban centers are not as meaningful of a draw as with prior generations and allows employees to more readily work from a location that may have personal appeal.

We will undoubtedly see a minor rebound of people migrating back to cities that departed during the pandemic (to the extent it hasn’t already occurred). However, we believe this rebound will be outweighed by the macro factors that have persuaded broad migration out of urban areas for over a decade. As with the demographic shifts identified earlier, the longer-term (pre-pandemic) nature of population migration provides us with comfort that these are likely to be sustained in the medium-term.

Factors Supporting Slow Down
Despite the many areas supporting growth in the OR&M market, we’d be remiss if we didn’t acknowledge the obstacles that could inhibit expansion in the near- and medium-terms. In our assessment, there are two primary macroeconomic factors that could impact the affordability of products within OR&M and, somewhat related, the ability for consumers to purchase or pursue goods in this marketplace.

Rising Interest Rates
In early 2020, in response to the pandemic and in order to support the economy, the Federal Reserve lowered the federal funds rate to a range of 0.00% – 0.25%. Moreover, it signaled the future path of interest rates, noting rates would be kept near zero “until [the Federal Reserve] is confident that the economy has weathered recent events and is on track to achieve its maximum employment and price stability goals.” As a byproduct of these measures, there began an exceptional period for businesses and consumers to borrow capital. And that they did. From Q1 2020 to Q4 2022, total household debt skyrocketed from $14.3 trillion to $16.9 trillion, representing 18.2% growth. While the vast majority of the total amount is represented by housing debt, over $4.5 trillion is non-household debt [5]. The low interest rate environment, along with other factors, caused consumers to buy and finance at exceptional levels. As with many markets, the OR&M industry was undoubtedly a beneficiary of this situation.

As we all know, in the past several quarters, the Federal Reserve has since reversed course on the federal funds rate to combat inflation. Both higher inflation and the higher cost of borrowing are natural concerns for those contemplating the affordability of outdoor recreation products.

While higher costs of borrowing are a consideration for many, given the nature of the goods and services in the OR&M marketplace, we believe the impact is somewhat muted. Logically, we believe this will have the greatest impact on larger ticket items that typically need to be financed (such as new boats and RV’s). And while it would take many pairs of hiking shoes to replace the revenues generated from the sale of a single new boat, in totality, the OR&M market tends to skew towards manageably priced items more so than higher cost goods and services. So, without limiting the obvious impacts on more sizeable expenditures, we are confident that growth will continue broadly across the market.

Less Disposable Income
Pandemic period federal and economic policies undoubtedly created circumstances where consumers had meaningfully more disposable income than comparable prior periods. Some of the many factors that influenced this were: (i) the CARES Act’s provision providing a $600.00 weekly boost to unemployed worker’s benefit; (ii) a 3.5 year pause on student loan payments; (iii) numerous direct payments to citizens meeting certain economic criteria; and (iv) a moratorium on evictions, which lasted until Q3 2022. This unique confluence of circumstances caused individual disposable income to soar, creating, among other things, a boom in durable good sales as well as other discretionary spending. As with the favorable interest rate environment, the growth in disposable income undoubtedly supported OR&M spending.

As time passed, and as economic and employment normalcy returned, the stimulus provisions that created so much excess income were rolled back. Consumers are now confronted with a high-inflation environment, resumption of traditional personal gross income levels, and possibly accelerated financing costs, as described above. Needless to say, consumers have less to spend today than they did 12-18 months ago.

Despite the possibility of lower average consumer discretionary spending, we believe several of the factors listed above outweigh those limitations. In particular, we note that expanding demographics create a meaningfully larger addressable market, which should accelerate opportunity at a greater pace than losses in individual disposable income.

We feel losses may most meaningfully be felt in recreational activities that require travel and lodging, as those “non-core” expenditures naturally increase the overall cost of an excursion/activity. Again, we believe these impacts will be mitigated by the population migration to areas where OR&M markets are more readily available (and therefore requiring less travel and related costs).

Conclusion
The skepticism around the continued near-term success of the OR&M market and its participants is understandable. In many ways, the COVID-19 pandemic created the perfect storm for consumers to actively pursue interests outdoors, both socially and financially.

Still, while many of those individual incentives have eroded, we strongly believe the fundamental trends continue to support the argument for sustainability and even further growth. The total addressable market for OR&M products has undoubtedly increased since the onset of the pandemic. An already diverse and underserved audience was exploring the marketplace, and millions of other Americans were incentivized to pursue outdoor activities who previously had little to no interest in the market. Certainly, some of those individuals are one-time or fairly non-recurring participants, but the trends leading up to the pandemic remain illustrative of the longer-term trajectory realized.

We are also confident behavioral changes, whether centered on health and wellness or geographic migration, are sustained societal improvements. The direct correlation between the benefits of outdoor activity and health and wellness are strong and supported academically. Continued geographic migration and remote work create exceptional opportunities for growth with both current industry participants and new individuals alike.

Leaders in the marketplace are thrilled by the performance of the OR&M industry over the past several years and year-to-date 2023. Despite the reestablishment of pre-pandemic norms across society, our belief is that the marketplace has engaged a widespread community that will continue to support growth higher than pre-pandemic rates.

About Matrix Capital Markets Group, Inc.
Founded in 1988, Matrix Capital Markets Group, Inc. is an independent, advisory focused, privately-held investment bank headquartered in Richmond, VA, with additional offices in Baltimore, MD and New York, NY. Matrix provides merger & acquisition and financial advisory services for privately-held, private-equity owned, not-for-profit and publicly traded companies. Matrix’s advisory services include company sales, recapitalizations, capital raises of debt & equity, corporate carve outs, special situations, management buyouts, corporate valuations, and fairness opinions. Matrix serves clients in a wide range of industries, including automotive aftermarket, building products, car washes, consumer products, convenience retail, downstream energy, healthcare and industrial products. For additional information or to contact our team members, please visit www.matrixcmg.com.

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The contents of this publication are presented for informational purposes only by Matrix Capital Markets Group, Inc. and MCMG Capital Advisors, Inc. (“Matrix”), and nothing contained herein is an offer to sell or a solicitation to purchase any of the securities discussed. While Matrix believes the information presented in this publication is accurate, this publication is provided “AS IS” and without warranty of any kind, either expressed or implied, including, but not limited to, the implied warranty of merchantability, fitness for a particular purpose, or non‐infringement. Matrix assumes no responsibility for errors or omissions in this presentation or other documents which may be contained in, referenced, or linked to this publication. Any recipient of this publication is expressly responsible to seek out its own professional advice with respect to the information contained herein.

[1] Outdoor Industry Association.
[2] Statista GmbH.
[3] Outdoor Industry Association.
[4] McKinsey & Company, Inc.
[5] Board of Governors of the Federal Reserve System.

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