Nike Faces Tough Competition In Europe and China

Sports giant Nike (NYSE:NKE) recorded a 2013, with its stock price rising nearly 60% over the year. The surge in stock price was driven by strong performances across all divisions, product types and geographies. In Q2 2014, revenues from North America grew by 9%, while Central & Eastern Europe and Western Europe saw revenue growth by 14% each. We expect the strong growth to continue in 2014, on the back of strong future orders growth and the presence of big sporting events such as the upcoming FIFA World Cup. Future orders growth at 26% in Western Europe was especially strong during the period. ^[1] However, the region has traditionally been a strong hold of competitors such as Adidas ( ADDYY ) and Puma ( PMMAF ). After losing market share in the region to Nike, these companies have amplified their marketing and demand creation activities to recover lost ground. In this article, we highlight how competition for Nike is shaping up in Europe and China.

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North American results continued to outperform in 2013

North America is the biggest contributor to Nike’s revenues, with a share in excess of 40%. Strong growth in basketball, men’s training sportswear and running are driving high sales in this geography. Nike’s strong run in this market continues to be fueled by its category offense (focusing on discrete categories), superior innovation, strong marketing and premium distribution. With a reported futures orders growth of 11% in the region, it seems that category offense remains a powerful strategy for driving growth and profitability in North America.

Competition With Adidas Heating Up in Europe

Nike has been gaining market share in Europe. According to data from Euromonitor, Adidas had 13.2% share of the western European sporting goods market in 2012, while Nike’s share stood at 12.4 percent. Nike reported an 11% rise in sales in western Europe in the first half of fiscal 2014, while Adidas posted a fall of 6 percent at constant currencies in its third quarter. ^[2]

Following these results, Adidas has responded with a series of product launches that will compete directly with Nike’s products. In anticipation of the FIFA World Cup being held in Brazil in the summer of 2014, Adidas shipped out increased levels of kits and match balls in November. Following the release of Nike’s new soccer shoe, the Hypervenom, Adidas will also launch more soccer shoes with the help of FC Barcelona star Lionel Messi. ^[3] The company also rolled out two new running shoes this year – Boost and Springblade, the first with cushioning in the sole, the second with futuristic-looking blades on the sole. Additionally, in an attempt to compete with Nike’s popular Fuelband fitness monitor, Adidas also announced a new running watch that tracks the wearer’s run, heartbeat, offers coaching tips and plays music. ^[4] Both companies also released a new line of knitted soccer boots. Adidas’ new knitted shoe will be on display as soon as next week as it will be worn by Liverpool FC’s Uruguayan star Luis Suarez in their game the coming weekend.  ^[5]

Despite Adidas’ evident efforts in the soccer category, Nike’s sales from the region should not suffer, since the latter’s footwear sales in Europe are primarily driven by training and running shoes. On the back of strong sales in both these categories, the revenues of the footwear division from Western Europe grew by 21% over the first half of fiscal year 2014. Furthermore, a 26% reported future orders growth means that this trend is likely to continue. One caveat here is that the currency situation in Europe is not improving. Low inflation rates in southern Europe point towards signals that the European debt crisis is far from over. If this situation persists, low overall consumer spending can affect Nike’s sales in the region. ^[6]

High Concept Store Launches Threaten Recovery in China

Previously hamstrung by excessive inventory buildup and weak sales in China, the company’s efforts to reposition itself in the region began to reap fruit in late 2013. Nike brand revenues in Greater China saw 5% annual growth on a currency neutral basis in Q2 as compared to a 3% decline in the previous quarter. The company had been aggressively taking steps to return to growth in this region by reducing its inventory, enhancing its marketing activities, creating a differentiated product portfolio, and improving the productivity of its store base in China. The results for Q2 and a reported future orders growth of 4% in the region show that these efforts are bringing in progress and putting the company on the path to sustainable growth in China.

According to a report by research firm Research and Markets, China Athletic Footwear Market Outlook 2018, the athletic footwear market is anticipated to grow at a CAGR of around 9.5% during 2013-2018. The report also revealed that only 20% of the market revenue in China is contributed by international players such as Nike and Adidas. ^[7] Considering that China is the largest market for footwear in the world, it offers a huge upside potential for Nike and its competitors. Comparatively, Nike enjoys a 44.7% market share in the athletic footwear market in the U.S. (Nike’s total share is about 60% when including its Jordan and Converse brands). ^[8] If the company can apply the same strategies it employed to grab the biggest share in the U.S. to China, but tweak them to be suitable to the tastes and preferences of Chinese consumers, it can pick a huge share of the cash that the Chinese athletic footwear market brings to the table.

The company nonetheless is going to face strong competition here as well. Adidas announced its plans for a high concept, interactive retail store in China. The store resembles an arena that customers can walk up to in a tunnel cheered on by spectators, much like athletes do before a sporting occasion. ^[9] In 2013, Under Armour ( UA ) debuted its own high concept store in China. The “experience store”, as it is called by the company, opened in Shanghai, and offers a striking simulation of the experience of training for an athletic team. Both these stores are likely to excite customers and boost sales for each company.

Our price estimate for Nike stands at ~$67, implying a discount of around 12% to the market price.

1. Nike Investor Relations [↩]
2. Nike Takes Market Share From Adidas From Europe, Arab News, November 2013 [↩]
3. Neymar Is A New Breed of Attacker in Nike’s Hypervenom [↩]
4. Adidas Says Running, Soccer To Help It Beat Nike in Europe, Reuters, November 2013 [↩]
5. Grandmothers Rejoice As Adidas, Nike Release New Knitted Boots, Yahoo, February 2014 [↩]
6. Why Euro Area Deflation Matters, Investors Chronicle, February 2014 [↩]
7. Chinese Athletic Footwear Market Report, CNBC, February 2014 [↩]
8. Under Armour Has A Long Way To Go To Catch Up To Nike, Market Watch, October 2013 [↩]
9. Adidas Goes High Concept In China, Brand Channel, February 2014 [↩]