Brand Operation: Sports Brands Compete In Chinese Market

Adidas admitted to having made a mistake in China.

On August 4, Adidas released the second quarter financial report of 2022. Coincidentally, the first and second quarter revenue of Greater China decreased by 35% year on year. This is the fifth consecutive quarter of decline for the brand in Greater China.

In sharp contrast, sales and net profits of Chinese brands such as Li Ning, Anta and Tebu remained slightly higher. The revenue of li'an'ning increased to 2.356 billion yuan from 2028.7 billion yuan in the first half of the year, even though the revenue increased to 2.356 billion yuan in the first half of the year, even though the revenue of Li Anta increased to 2.356 billion yuan in the first half of the year.

The change goes far beyond that. In 2021, Anta's revenue reached 49.3 billion yuan, surpassing Adidas Greater China's revenue of 4.597 billion euros (equivalent to about 31.7 billion yuan) and approaching the revenue of Nike's Greater China region of 8.29 billion US dollars (equivalent to about 56.2 billion yuan), ranking the second in China's sports shoes and clothing market share.

Against this background, Kasper Rosted, CEO of Adidas, said in an interview recently that in the Chinese market, in addition to the impact of the new crown epidemic, Adidas itself has "made mistakes". Adidas made mistakes, and a number of domestic brands were placed high hopes, Anta, Li Ning, etc. were on top of the trend.

On August 23, Anta released its financial report, with revenue of 25.965 billion yuan in the first half of the year, a record high, and exceeding the total performance of Nike China in the third and fourth quarter of fiscal year 2022 (from December 1, 2021 to May 31, 2022). Anta's share price rose, but then fell back, closing at HK $92, up more than 4%. Since its listing, Anta's share price has retreated 60% from its peak of HK $190 to about HK $90. The current financial performance of Anta is "roughly in line with expectations".

The question now is, what did Adidas do wrong? How does Anta overtake on a curve? With the consumption enthusiasm of Chinese people, can Anta and other domestic brands rest assured?

　　01

ADI made a mistake and hasn't found the "feeling of China"

In 2020, Adidas will usher in a "reversal of destiny" in Greater China.

By the end of 2019, adidas has achieved 23 consecutive quarters of double-digit growth in Greater China. In 2017, it was 3.912 billion euro, which increased to 5.278 billion euro in 2019, and the corresponding revenue proportion increased from 17.97% to 22.33%.

By the end of 2019, the Chinese market has surpassed the United States and Europe as the largest contributor to Adidas sales.

The situation quickly turned straight down. In 2020, the revenue was 4.428 billion euro, and in 2021, the revenue was 4.597 billion euro, and the performance continued to be weak. The mid-term results of 2022 show that the performance of Adidas in China has declined by about 35% year-on-year for two consecutive quarters to 1.723 billion euro.

Over the past two years, it has not only been affected by the new crown epidemic, closed stores, affected performance, but also deeply trapped in the "Xinjiang cotton" crisis. (in March 2021, H & M, a fast fashion brand, announced that the group would refuse to use Xinjiang cotton. Subsequently, international brands such as Nike and Adidas followed suit.)

Adidas didn't feel the crisis, though. After admitting his mistakes, rother said he was still optimistic about China. Adidas is taking a series of actions such as expanding e-commerce sales to strengthen its influence on the Chinese market.

The crisis goes far beyond that. In addition to the above reasons, internal inventory backlog, insufficient product innovation and supply chain problems have been dragging it down. In the second quarter of 2022, Adidas inventory increased by 35% year-on-year to 5.483 billion euros, due to longer delivery times due to supply chain and global logistics instability, and sluggish consumption in the Chinese market.

Many products of Adidas are produced by OEM in Asia, transported to all parts of the world by sea containers, and then sold on shelves. It's too slow. The slow supply chain has kept it from keeping pace with market changes. According to the financial report, due to the impact of the epidemic, Vietnam's supply chain has been temporarily shut down, bringing about 200 million euro losses to Adidas.

According to media reports, it takes 18 months, or even longer, for a pair of sneakers to go from the first design sketch to making and testing prototypes, ordering materials, sending samples back and forth, revamping the production line, and finally shipping the finished product to the store. After coming into the market, about 3 / 4 of the sports shoes will not be sold for more than a year, except for the classic ones; Even if replenishment is made for products already on the market, it will take 2-3 months.

High inventory and low cash flow forced Adidas to make changes. From the consumer market can be clearly perceived, Adidas began to discount, there are always one or two ultra low price adidas shoes in the live room as drainage. In the second quarter of 2022, Adidas said it expected a significant increase in discount promotion activities in Greater China in the second half of the year, which is a necessary measure to clear inventory.

In terms of products, rother also admitted in an interview that "we don't know enough about consumers, so we have left space for Chinese competitors who do better." today's Chinese consumers like (products) to have a "Chinese feeling.".

As for what the "feeling of China" is, Roth did not say clearly. However, from Adidas's recent series of actions, perhaps we can get a glimpse.

In March 2022, Adidas will replace the person in charge of China, and Xiao Jiale, the former executive president of metropolitan beauty, will replace Jason Thomas; Adidas reflects on the proportion of brand advertising and effect advertising, and attaches importance to brand building in the Chinese market (Simon peel, global media director of Adidas, once said that 77% of the group's marketing budget is invested in effect advertising, only 23% in brand advertising); Adidas settled in shuoyin. Su Yiming, the Winter Olympic champion in June this year, made a live broadcast of the "new appreciation of the shaking tone e-commerce". In July, he signed a contract with Chinese football player Zhang Yuning.

This series of actions may be understood as "localization of product and brand marketing". Unfortunately, reform came later than the problem.

Adidas lost its business this time. Affected by the lower than expected performance in Greater China, Adidas expects the company's operating profit margin to be around 9.4% this year, up from 10.5% to 11.0%.

Adidas once listed Greater China as one of its three strategic key markets in the new five-year (2020-2025) strategy. Together with North America and Europe, Central Africa, Adidas will contribute about 90% of sales growth to the company in 2025. Now it seems that there are many challenges in achieving this goal.

　　02

Anta is on the top, with the market share ranking second

Adidas "let" out of the share, by Chinese sports brands, especially Anta.

Euromonitor data shows that in 2021, the market share of Nike and Adidas in China will fall to 25.2% and 14.8% respectively, while Anta Group will increase to 16.2%, surpassing Adidas and rising to the second place; Li Ning, who ranked fourth, also had a market share of 8.2%.

Business data since 2022 also continues this trend. According to the performance report just released by Anta, in the first half of 2022, its operating revenue reached 25.965 billion yuan, far exceeding the business income of 1.723 billion euro (about 11.785 billion yuan) in Adidas Greater China. Among them, the revenue of Anta's main brands was 13.36 billion yuan, up 26.3% year-on-year; that of FILA was 10.777 billion yuan; that of other brands such as Descente and Kolon sport was 1.828 billion yuan, up 29.9% year-on-year.

At the same time, Li Ning and Tebu also received good news: Li Ning's revenue in the first half of the year increased by 21.7% to 12.409 billion yuan, and that of Tebu increased by 37.5% to 5.684 billion yuan.

In the Chinese market, international giants have been defeated one after another, and domestic brands are gradually finding their home court.

Taking Anta as an example, looking at the performance of sports shoes and clothing brand market in the first half of 2022, Anta has been in the forefront in terms of core financial indicators such as revenue, gross profit rate and cash flow, even catching up with Adidas.

In terms of gross profit, Anta Group's gross profit was 16.109 billion yuan in the first half of the year, with a year-on-year increase of 11.8%, and the gross profit margin remained at about 62%. Among them, Anta's gross profit increased by 31.7% to 7.358 billion yuan, and its gross profit margin rose to 55.1%. Over the same period, the gross profit margin of Adidas in the first half of the year was about 50%, that of Nike was 46.09%, and that of Li Ning and Anta was 50% and 42%, respectively.

In terms of inventory and cash flow, Anta remained in a benign range. In the first half of this year, affected by epidemic prevention and control in first and second tier cities and transformation of DTC channels, Anta's inventory slightly increased by 7% to 8.192 billion yuan, inventory turnover days increased to 145 days, and free cash flow was 4.108 billion yuan. However, Anta's average turnover days of accounts receivable decreased from 6 to 22 days on a year-on-year basis, and the speed of capital flow was accelerated.

Over the same period, Adidas had more serious inventory and cash flow problems. Adidas's free cash flow decreased from EUR 2.2375 billion to EUR 2.354 billion in the same quarter to EUR 2.354 billion in the same period of the same period. As of May 31, Nike's inventory increased by 23% to $8.4 billion, with free cash flow of $909 million.

Looking back on the past, the benign control of inventory and the increase of revenue and profit are the performance boosting effect of Anta's DTC strategy in 2020. Although Nike and Adidas have proposed similar business adjustments, the effect is not as obvious as Anta because of the "difficult turnaround" and the lack of reform determination.

In 2021, Anta DTC's revenue will reach 8.55 billion yuan, a year-on-year increase of 4.8 times. In the first half of this year, it will increase again by 79.3% to 6.64 billion yuan. In 2021, Adidas DTC's revenue remained stable compared with the previous year, with an increase of 14% compared with that in 2019. Nike's results for the fiscal year 2022 (as of May 31) showed that its self operating revenue for the year ended May 31 was $18.7 billion, up 14% year-on-year.

From the perspective of Anta's business actions, its DTC strategy can be divided into three directions:

First, product DTC design, launch a variety of products to meet market demand; Second, channel DTC adopts the mode of "direct marketing + e-commerce + a small number of high-quality distributors" to strengthen channel control; Third, integrate online and offline, create a new retail platform around Anta app.

Anta's products have developed from a pair of sports shoes to the whole field of sports shoes and clothing. Its products cover men, women, children and other age groups. In addition, it tries IP co branding in design, and tries to attract young consumers by using such popular platforms as dubbing and xiaohongshu in marketing.

One example is that in the tremolo platform alone, more than 80 Anta related blue V accounts have been certified, which are opened by Anta Group headquarters and dealers according to different groups (adults and children), or different brands (Anta, FILA, etc.), and different scenes (outdoor, basketball, running, fashion sports, etc.).

In terms of the new retail platform, Anta guided users to register members through offline stores to Anta app, built customer groups in different regions, radiated surrounding communities with offline stores, and launched instant delivery service.

In terms of channels, Anta has previously focused on distribution, with three levels of "provincial agent local city agent county city agent", the first level distributors are directly operated stores, and the second and third level distributors are franchise stores. After the reform of DTC, a large number of stores have been incorporated into direct sales, and attention has been paid to the direct marketing channels of e-commerce, so as to improve the turnover efficiency of goods and the consumer experience.

Anta insiders commented on the group's DTC strategy progress, saying that although affected by the epidemic situation, Anta is still continuing to recruit franchise stores into direct sales and close down large stores with poor efficiency, and the benefits of single store have been greatly improved.

　 　03

FILA growth decline, main brand contribution is still a worry

The short-term transcendence is exciting, but the long-term lead is still uncertain.

On the market performance of Chinese sports brands, Some industry insiders said: "only relying on national emotion to improve the sense of belonging and appeal of brand, so as to bring about the performance growth of enterprises is very limited. Moreover, in Anta and Li Ning, there is a psychological paradox between national brands and high brand premium. Since you are a national brand, why do you sell to Chinese people so expensive?"

After all, in the eyes of this person, Chinese brands also need to use technological innovation to enhance their own brand value.

From the point of view of the high price, the technology of flyear is still the core of the industry.

For Chinese brands, whether Anta, Li Ning or Tebu, what are their core technologies? Is there any product that will last forever? What are the sources of the company's growth momentum and brand premium?

Taking Anta as an example, Anta's brands are divided into three brand matrices, namely professional sports groups represented by Anta and Anta children, fashion sports groups represented by FILA, filafusion and filakids, and outdoor sports groups represented by Descente desant, Kolon sport Kelong sports and Arc'teryx Archaeopteryx.

According to the above classification, the three brand groups have different "driving growth wheels". Professional sports groups rely on technological innovation, fashion sports groups rely on high quality, and outdoor sports groups have high potential.

Looking back over the past two or three years, the revenue of fashion and sports brand groups represented by FILA has exceeded 20 billion yuan, and the growth rate has dropped from over 50% at high time to negative growth of 0.5% in the first half of this year. Whether from the perspective of growth ceiling or brand growth law, the era of "rapid development" brought by FILA to Anta is over, and the future growth rate is likely to maintain a stable growth trend.

Next, the pressure will be passed on to Anta's main brand "Anta".

"Single focus, multi brand and globalization" is Anta's strategic slogan as early as 2021, focusing on the field of sports shoes and clothing, creating multiple brands and going to the global market. "Multi brand" is very similar to Nike and Adidas.

In 1988, Nike acquired Cole Haan (fashion footwear brand), and successively acquired Bauer (hockey shoe brand), Hurley (sports and youth footwear), converse (casual shoe brand), starter (American sports fashion brand) and Umbro (football brand). Adidas's development experience is similar to this, after the acquisition of poor benefits, and then sell at a discount, Reebok Reebok is one of them.

But different from Nike, Anta's main brand accounts for a large proportion of revenue. According to the financial report data over the years, Nike's main brand and Adidas's main brand Adidas account for about 80% and 70% of the group's total performance respectively. However, since 2020, Anta's main brand sales contribution has been reversed by FILA. In 2020, FILA brand sales contribution accounted for 49.14%, Anta's main brand sales contribution accounted for 44.35%. In the first half of 2022, the main brand revenue began to rebound, Sales contribution increased to 51.5%.

On the one hand, the revenue share of main brands needs to be improved; on the other hand, Anta's innovative scientific and technological achievements need to be verified by the market.

Since last year, Anta has held an annual innovation and technology conference, at which the latest innovative scientific and technological achievements and product applications of Anta Group are released. Following the release of nitrogen technology last year, Anta released the latest technology "nitrogen technology technology platform and carbon tube suspension system" (the core technology of the same Olympic model, the products are lighter, softer and more flexible) and the series of new products of "champion running shoes". In addition, Anta also announced the strategic cooperation with Huawei sports health.

"Nitrogen technology" is a new technology path found by Anta. It is a kind of shock absorption technology for insole. It has launched Chuang series, Mach series and C202 series running shoes for the market. In addition, Anta comprehensive training category of clothing from the national team equipment to extract professional technology, a large number of use in fast drying, moisture absorption and perspiration, ice feeling, environmental protection and other technology fabrics, so as to market.

Sales of specific products still need to wait for the next fiscal quarter data release. Since 2007, Anta Group has invested 5.6 billion yuan in R & D. In 2021, Anta invested 1.13 billion yuan in R & D, accounting for 2.3% of the total revenue; In the first half of 2022, Anta's R & D investment accounted for 2.3% of its revenue.

Although Anta's R & D investment is still insufficient compared with 5% - 10% of Nike and Adidas, Anta's R & D investment is slightly higher than that of Puma (1.6%), Li Ning (1.92%) and Tebu (1.9%). Anta officials have said that Anta's R & D investment is expected to exceed 20 billion yuan by 2030.

In the mid-term performance of 2022, Anta Group expects the professional sports group led by Anta brand to "strengthen the old and expand the new". On the one hand, it will continue to produce and optimize differentiated and cost-effective products, on the other hand, it will strengthen the layout of high-end market and rely on innovative scientific and technological research and development achievements to explore growth opportunities. Overall, innovation is on the way, and it will take time for the strength of domestic brands to rise.