Garmin has been in the wearable business since at least 2003, but the company has only been in the highly competitive consumer fitness tracker market -- with its VivoSmart and VivoFit lines -- for a little under a year. And in that time, the company has only managed to capture between 10 and 15 percent of the market, according to their own estimates. Their fitness segment posted a sluggish 5 percent year over year growth.
On a second quarter earnings call, CEO and president Cliff Pemble talked to investors about this slow growth and, though he didn't mention it by name, about the steps Garmin is taking to compete with the elephant in the room: Fitbit, which raised $732 million earlier this year in a record-breaking IPO.
Pemble said in his prepared remarks that slow growth in the second quarter was due to a number of factors including unfavorable currency markets, competitive pricing dynamics, and a lack of new products released this quarter. And margins were lower because the company has chosen to make significant advertising and R&D investments in order to set itself up for longer term growth.
"The operating margin decline reflects the significant investment in advertising and research and development to support our long-term goals in the segment," the company said in a statement. "We believe these investments are appropriate and timely given the sizeable opportunity that exists in the global fitness and wellness industries."
During the Q&A, Pemble took a barrage of questions from investors, some of whom obliquely referenced Fitbit. One, worrying that the tracker space was shaping up to be a winner-takes-all market, said "in fitness, your nearest competitor is growing at 120 percent. You grew 5 percent." Another asked Pemble how long Garmin would invest in the mass market tracker space before he would “consider curtailing it” because there is a “well-established leader”.
"You asked how long we would continue to invest in R&D and our mode of increasing investment right now," Pemble answered. "The market is growing rapidly and so consequently the opportunity is there and we feel it’s the right time to invest in these things. Historically we’ve always scaled our investments according to the market opportunity and we feel it’s the right time to do that in this market as well."
Another investor asked if Garmin would put more of a push into online communities, social networks, and apps in order to compete with other trackers and apps.
"We’ve been focused on that area for a long time," Pemble said. "We haven’t talked a lot about our online community but Garmin Connect is very strong and we have millions of users associated with that. We are increasing our investment on top of what we’ve already done and we’re continuing to roll out updates and new features in Garmin Connect and Garmin Connect mobile."
In addition to Garmin Connect, Pemble also highlighted some other competitive advantages Garmin has, including a global reach and the ability to integrate mass market fitness devices with the wider Garmin product line, including marine products, aviation products, and cameras (a recent Garmin sportswatch was able to act as a remote for the Garmin VIRB Action Camera).
"In terms of where we stand with our product line, we feel that one of the key areas where we’re focusing is increasing the number of sensors that are in our product, that’s an area where we still feel we have some work to do," he added. "I feel once we get there our product line will be well-positioned to compete. In terms of whether or not we have a brand issue, that’s why we’re choosing to invest in more advertising. We’re new to the category, so we’re letting people know we have solutions in the category and we do see movement based on what we’ve been doing so far."
