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Published on July 24th, 2013 | by admin


Nike Just Do it not in China


PORTLAND, United States — Not long ago, Nike Inc. could simply open stores in China and wait for newly minted middle-class shoppers to show up.

No longer. Though it has been in China for 30 years, the world’s largest sporting-goods maker is losing customers to Adidas AG’s more fashionable street wear and Hennes & Mauritz AB’s H&M cheap, hip clothing. Making matters worse, Nike is knee-deep in unsold merchandise after a projected post-Olympics sales bump didn’t materialise.

Eighteen months ago, Nike was so bullish on China it predicted sales there would double to $4 billion in four years. Now it says China sales will probably fall for the next two quarters, which would make it five in a row.

“You have to be a smarter retailer now,” said Camilo Lyon, an analyst for Canaccord Financial Inc. in New York who recommends holding the shares. “Now the consumer has become more educated and global and sold to a lot more. Everybody is forced to become sharper.”

So far, Nike’s challenges in China haven’t spooked investors because sales growth in North America remains robust. In the past year, revenue in company’s largest market surged 18 percent. Through yesterday, Beaverton, Oregon-based Nike had advanced 22 percent this year to $62.70, compared with an 18 percent gain for the Standard & Poor’s 500 Index. Analysts expect the shares to rise to $66.03 in the next 12 months, according to the average of 29 estimates compiled by Bloomberg.

Sluggish Economy

Nike executives have blamed the reversal in China on a sluggish economy and changing consumer tastes. The company continues to believe it has the right strategy to capitalize on the country’s tremendous growth potential, Mary Remuzzi, a spokeswoman for Nike, said in an e-mail. Nike declined to make an executive available for this story.

Nike entered China in 1982. It became the nation’s best- selling sportswear brand by building basketball courts, organizing grassroots competitions and provided funding to sporting leagues such as the Chinese Basketball Association and the Chinese Super League soccer.

It sponsored Chinese athletes ranging from national 110- meter hurdler Liu Xiang to former French Open winner Li Na. The 2008 Olympics in Beijing helped goose sales, which doubled to $2 billion by 2011. While China made up 9.6 percent of Nike’s revenue last fiscal year, the company generated 25 percent of its profits there before interest and taxes.

Inventory Pileup

Then the momentum stopped and inventories started piling up. The same thing happened to Adidas yet it started discounting earlier than Nike to clean out unsold merchandise. Last summer, it became clear that Nike inventories were growing faster than sales. Revenue from China, excluding the effect of currency exchange-rate fluctuations, declined 5 percent to $2.45 billion in the fiscal year ended May 31. These results came as China’s retail sales grew more than 10 percent.

Nike has said the sizing of its apparel hasn’t kept up with changing consumer demands for a tighter fit. Not having a precise fit mattered less when the power of the Nike brand was enough to move products, says Faye Landes, an analyst for Cowen & Co. in New York, who recommends buying the shares.

“The demand was so strong and the business was going so well” that fit didn’t matter, she said in an interview. “Now they’ve realized there’s room for improvement.”

Middle Ground

Adidas, based in Herzogenaurach, Germany, has sought a middle ground between sportswear and fast fashion with NEO, a youth-oriented brand it is pushing aggressively in China, which has become NEO’s biggest market.

“Adidas has done the best job of staying ahead of the pack with their understanding of the Chinese consumer,” said Terry Rhoads, managing director a Zou Marketing, a sports consulting firm in Shanghai. “Understanding how they wanted to have fashion and sport together.”

Eric Yang, a 20-year-old student at Shanghai’s Industrial and Commercial Foreign language school, was recently sporting a pair of retro black Adidas Originals sneakers with green and orange stripes. Yang prefers Adidas to Nike because he says the German brand provides better value for money.

“There are Nike and Adidas discount outlets just next to each other outside our school,” he said. “The Adidas outlet is always packed, and the Nike one is never crowded.”

Fast Fashion

Many Chinese youths are gravitating to less pricey fast fashion. Sally Wang, an 18-year-old from Zhejiang province, used to wear Nike and Adidas when she was younger and hardly ever dons sportswear anymore.

“When you are younger, you don’t really care and wear whatever your parents buy you,” she said. “But when you’re older and can chose, Nike and Adidas are rather pricey to me.”

Nike’s marketing also faces hurdles in a changing society. The company continues to use athletes to convey the message that anyone can aspire to greatness — a harder sell these days in a nation where Chinese parents, long focused on academic achievement, are putting ever more emphasis on hitting the books than the basketball or tennis court. Adidas, by contrast, has shifted from a hard-core sports message to one focused on fashion and lifestyle, said Jimmy Qin, a vice president at sports consulting firm Octagon.

“The boys complain,” Wang said. “They say: ‘My parents are making me stay home and now I can’t play basketball.’”

As it struggles to recover lost ground in China, Nike is culling inventory, introducing revamped products and upgrading merchandising. In May, it replaced the top China executive. In an encouraging sign, sales are growing at Nike’s largest retail partners there, Chief Financial Officer Donald Blair said on a conference call with analysts on June 27.

“Nevertheless, we still have a lot of work to do,” Blair said.

By: Matt Townsend, Liza Lin; Editors: Robin Ajello, Kevin Orland,  Stephanie Wong

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