When it comes to what Herbert Hainer and Mark Parker are most concerned about at work your average sneakerhead will probably say they are “picking which retros to release”. Realistically, they are concerned about a few things including: currency fluctuations, Russia and the Ukraine, and China. In 2014, these points have the biggest potential for volatility with both Nike and adidas’ top lines.
Forget about the billion plus people in China, forget about the underdeveloped sportswear industry, forget about the limited reach of domestic competitors, and forget about Chinese culture adopting more western trends every day. The war comes down to growth. In the realm of sportswear there are a few geographic areas that really represent serious growth for the major competitors, and at the forefront on this topic is China.
With a seemingly ever-increasing GDP and average income the Chinese people are transitioning from the workers in factories for Nike and adidas to the newest target market for the sportswear giants. The impressive industry growth rate, the massive population, the relatively immature market, and the impressionable Chinese consumer base are ingredients for an all-out war between the superpowers of the athletic wear world. In a few years we will know whether China is “all in” or if they “just do it”.
China’s Current Market in a Nutshell
(Photo from http://www.sneakernews.com)
In 2011, Nike predicted that they would double their revenue in China in just 4 years. This lofty goal wasn’t as ridiculous as it may seem now since the CAGR (combined annual growth rate) of the Chinese Sportswear market had been about 30% over the last seven years. The market is still growing however the growth rate looks to be declining. Analysts are expecting a CAGR of 17.2% from 2013-2017 which should leave the industry at 32 billion USD in 2017.
Before the latest quarter’s earnings, Nike had reported five straight quarters of slumping sales in greater China (including Hong Kong, Macau, and Taiwan). Forbes has listed reasons like a lack of iconic sports stars to sponsor, a lack of large-scale leagues to partner with, and a lack of consumer need for workout clothes (due to the perceived idea of needing to be wealthy to work out in a health club) as reasons for the slumping sales. NASDAQ blamed the simple economic reason of having supply that drastically outweighed demand. This lack of demand forced Nike to discount goods to make room for new products, and even deeper discounts when those products weren’t moving in 2013.
Euromonitor reported in late 2012 that Nike was beating adidas in the race for dominating China with 12.1 % of the potential 30+ billion USD market. The race however, was close in 2012 with adidas nipping at the heels of Nike with 11.2% of the market. adidas also reported a 15% growth in sales in 2013 to add some oil to their machine and bump their share of the Chinese market. Now after posting 5 straight quarters of sales slumps in China and a recent sales bump of 4% it’s safe to say that Nike’s latest calendar year in China didn’t go as they planned although 2014 is looking up. That said, the world’s largest online market, and as Mark Parker suggests “the number two country for Nike in the world” is still very much in its infancy. The next few years will determine if one of the international sportswear mega brands or a local competitor will lay claim to the lucrative Chinese marketplace.
With such incredible growth rate and such an amazingly open competitive landscape (relative to the rest of the world) China really is the main concern for sportswear manufacturers. The successful firms are doing a few things to set them apart and try to take a lead in market share. These actions include:
- Not approaching China with a broad brush – Second and third tier cities do not necessarily act in line with Shanghai and Beijing. That said, these cities are key for long-term growth. These other cities are appreciating the discount and outlet stores as they are an easier way for more lower-income individuals to be a part of the brand.
- Aggressive expansion – Again, this comes back to the strategy for the second and third tier cities. adidas opened 800 stores in China in 2013.
- Great value for products – adidas has done this well according to Bloomberg, whereas Nike has been considered too expensive for the average consumer). Chinese consumers don’t have the same average discretionary income to spend on sportswear as most developed nations.
- Attracting both athletes and fashionable individuals with a wide range of products – Nike, adidas, and the local brands have cornered the athletic market. In the teen fashion industry, successful multi-national brands like Uni Qlo, Zara, and the Gap have aggressively expanded, and begun to dominate this category according to the Wall Street Journal. All that in mind, adidas seems to be really dominating where these two markets meet with the incredible success of their NEO label in China. The NEO label calls China “[it’s] biggest market” and with a 22% sales increase in the fourth quarter it is clear that they have a winning strategy.
Where the Market is Going
The market is growing and if the big players were to simply open stores and put in advertising dollars they would likely continue with steady growth. Of course, this isn’t the plan that Nike and adidas are going for as they both are hoping to cash in on the growth of the Chinese discretionary income. There are however, some things I could see as incredibly successful moves for either company. These potential moves include:
- Building relationships with young Chinese trendsetters – Justin Bieber has blown up the success of the adidas NEO label, so finding a Chinese equivalent to back a brand is key. The learning is that they don’t necessarily need to be an athlete.
- Attracting the market of Chinese women that aren’t exercising regularly – The adidas #allin for my girls campaign led to a direct 40% increase in sales according to NASDAQ, and Nike’s rollout of opening practice times etc. for all women had a minor effect on the population. As the Wall Street Journal puts it, “the culture of working out has also been slow to catch on, and athletic-gear makers have struggled to sell higher-margin apparel and exercise equipment”.
- Releasing items that are limited to a small release in China – Nike’s “Shanghai Shens” created an extreme level of international and domestic demand. In the case of the “Shanghai Shens” there were buyers all over the world looking for the coveted shoes. This builds the hype around both the shoe and the brand.
- Creating a bigger draw in local sports teams and leagues – As mentioned earlier, Forbes has noted that there isn’t a large-scale league in China that the brands can leverage like they have with La Liga and the NBA. Instead, the firms are working with popular icons like Jeremy Lin, Lebron James, and Kobe Bryant as their pull extends to China. If adidas or Nike were to put a serious amount resources into growing the Chinese Basketball Association especially in the second tier cities they could create a massive draw among local consumers. If they were behind an aggressive expansion for the league and/or creating fan bases for teams in second tier cities through partnering with the league they could grow serious brand loyalty especially in cities with no real current allegiances.
All in all, there are a plethora of ways that the top brands can win the Chinese market, and although 361° and Li-Ning are in the mix now it seems like adidas and Nike will pull way in the coming years.
In my opinion, it seems like adidas has figured out the market a bit better and will win 2014 in terms of market share. This is largely in part thanks to its higher perceived value, lower prices that cater to most lower-income Chinese consumers, and very successful NEO label. They also have signed Pharrell and Nigo who have strong pulls in Asia and especially in comparatively mature markets within China like Hong Kong, Macau, and Taiwan.
Nike has had a few setbacks, but it’s not as if Mark Parker would let that stop him from decorating China with the swoosh. You can expect some continuous growth and serious marketing dollars in the People’s Republic from the Oregon based sports firm. They also seemed to have begun to figure out the Chinese market again by posting a growth in sales after 5 bad quarters.
Either way, the Chinese market won’t be won or lost in one year. Both firms are not new entrants and have been in the Chinese market for a few decades. They need to be looking at both their short-term and long-term goals in China because their current actions will have serious long-term effects. I envision 2014 to be a big year for the sportswear giants in China, and potentially one of the biggest wars for consumers since China opened it’s doors. As Lao-Tzu said, “a journey of a thousand miles begins with a single step”. Will that journey begin in Roshes or ZX Fluxes?