Nike’s China Problem

by Trefis Team
-29.09%
Downside
96.79
Market
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Trefis
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The share price of Nike (NYSE:NKE) was up 1.5% following the announcement of quarterly results by American sportswear and footwear retailer, Foot Locker. A strong performance by Foot Locker over the quarter demonstrates Nike’s strength, as nearly two-thirds of the shoes sold at the retailer are Nike’s. The latter’s stock price has gone up by nearly 10% over the past month, as it continues to record strong growth despite problems in emerging markets. However, the sportswear giant is still struggling in one of the world’s most important apparel markets – China. [1]

Sportswear has been increasingly popular in China, driven by a booming economy and rising disposable incomes. Over the last seven years, the market has grown at a compounded annual rate of nearly 30% . [2] Yet Nike’s sales in “Greater China” (i.e., including Hong Kong, Macau and Taiwan) fell for five consecutive quarters, before recording a paltry growth of 4% in the second quarter of Fiscal 2014. Over this period, revenues for Nike brand products rose everywhere except China and Japan.

Poor performance in Japan, an economy riddled with an aging population, slumping economy and weak currency-is not surprising, but failure to capture the growth in the Chinese athletic apparel and footwear market is a sign of worry for the company. In this article, we discuss the reasons behind Nike’s poor performance in China. [1]

See our complete analysis for Nike

Cultural Barriers

In 2012, Nike was so confident about China that it predicted sales would double to $4 billion in four years. The company’s expectations of a compounded revenue growth of 18% in China have proven to be wildly over-optimistic. Sales in China fell for five straight quarters before this slump was arrested in the Q2 FY’14, in which Nike posted a 4% growth. The company’s inventory levels at stores were well beyond the demand for its products. This necessitated heavy discounts in order to clear the inventory, which affected the company’s top line. Even post-discounting, the clear out process was slow. The company’s management blamed the poor performance on sluggish GDP growth and changing customer preferences.

We believe that Nike’s strategy for the region was wrong for the reasons listed below:

  • Nike is a running and basketball shoe company from the U.S.. Its expansion into Europe was based on the strategy of targeting key players for sponsorships and leveraging those sponsorships to forge relationships with large-scale commercially organized leagues like the Barclays Premier League in England and La Liga in Spain. A similar strategy isn’t possible in China for two reasons: no opportunities similar in scale to those in Europe exist and the more popular sports in China, i.e. Football and baseball, have limited appeal in urban areas.
  • Nike’s training and running categories haven’t received much traction in China because health clubs are traditionally seen as activities for rich people in the region. On the other hand, a culture of biking to work exists in China but people do so mostly in street clothes, instead of spandex.
  • Nike’s branding is based on encouraging strong identification with iconic sports-stars it uses to endorse its products. In  a culture where parents are excessively focused on academic achievement, such a strategy has limited appeal. [3]

Nike has tried other means of increasing its visibility in China. It opened a store in Shanghai to sell skateboarding and snowboarding equipment. The company also organized events to popularize the store. Nike also has plans to increase partnerships with government to develop school athletic programs and expand rubbing clubs at universities beyond the running clubs it helped open at 11 universities in 6 cities in 2009. To attract women, Nike holds special training classes targeting female consumers in gyms in seven cities. [4] However, these strategies haven’t been entirely successful. Nike’s expansion into second and third tier cities in China will help boost its sales in the long run, but the company still remains short of arriving at a strategy that can springboard it into a position similar to the one it has in the U.S. and Europe.

Strong Competition

Historically, Nike has led the Chinese sportswear market with a 12.1% market share, according to the research firm Euromonitor International, with Adidas a close second at 11.2%. But Adidas appears to be gaining on Nike by positioning itself as a more youthful and fashionable brand. In recent years, Adidas’ message has shifted from a hard core sports image to one focused on fashion and lifestyle. Adidas has used its sub-brands like NEO to sell skinny fit jeans while also stocking its stores with fashion ponchos and gingham button down shirts. [5] The company grew its women’s business by 40% following its “All in for My Girls” campaign launched in March 2013. This mix of a fashion and sports image is a good fit for a market where working out is seen as a fun activity rather than as a lifestyle choice. [6]

Recently, 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. [7] 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 14% to the market price.

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Notes:
  1. Nike Stock Rises on Foot Locker’s Earnings, Bidness, March 2014 [] []
  2. China Athletic Apparel and Footwear Industry To Reach US $32 billion by 2017, PR-Insider.com, March 2013 []
  3. Nike Just Doesn’t Do It With Lost Sales Year in China, Bloomberg, July 2013 []
  4. In China, Nike Sets Out to Alter Sports Mindset, Wall Street Journal, July 2011 []
  5. Adidas Is Hot on Nike’s Heels in China, Wall Street Journal, March 2013 []
  6. Adidas Balances Performance, Fashion in China, Ad Age, August 2013 []
  7. Adidas Goes High Concept In China, Brand Channel, February 2014 []
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