With some in the Biden Administration hoping to stabilize U.S. relations with China in talks between the country’s leaders at the G20 Summit in Bali today, footwear companies are considering a multitude of hard options for the coming year with respect to their operations in the globe’s second-largest economy.
Business and consumer activity has reportedly weakened in China since it generated a 3.9 percent growth rate in the quarter ended Sept. 30, after a 2.2 percent expansion in the first half, and some economists have slashed the country’s annual growth rate to as low as 3 percent. The country’s growth has tumbled under strict anti-virus regulations that have disrupted trade and supply chain. Late last week in Guangzhou, Covid-19 cases began surging again. Now, market observers are suggesting the country’s “zero Covid policy” is unlikely to be lifted before mid-2023.
Covid-related restrictions and lockdowns have already weighed heavily on consumers in China, resulting in slowed demand and order cancelations in the footwear sector. Those factors have contributed to double-digit, year-over-year sales declines, lower profitability, and inventory gluts for some brands. Given the persistent, adverse conditions in the market, some companies are being forced to adopt more surgical approaches to their respective businesses in China to avoid further sales and profit erosion and rely more heavily on their respective omnichannel approaches in the market.
Making trade matters worse, the U.S. has declined to roll back tariffs on Chinese imports that were implemented during the Trump Administration, and relations between the two trading partners are said to have deteriorated over the last two years under President Biden. While Secretary Yellen is expected to address macroeconomic issues in her session with China’s central bank governor today, last week she was imploring India and other allied nations to diversify their respective supply chains away from China, according to the New York Times.
Yue Yuen, the globe’s largest manufacturer of footwear, has experienced a 17.3 percent decline in nine-month, brick-and-mortar sales within its Pou Sheng retail business, where it operates 4,271 mono-brand and 25 multi-brand stores in China. Pou Sheng’s omnichannel sales have sunk 10.8 percent over the same period, and the segment’s same-store sales have fallen by double-digits for six consecutive quarters, including a 10.3 percent falloff in the third quarter.
For the second quarter of 2022, Nike, Adidas and Puma each reported double-digit declines in Greater China sales and profit. For its FY fourth quarter ended May 31, Nike told analysts that its Ebit in the region was down 55 percent on a reported basis, as sales slipped 19 percent to $1,561 million. Adidas, meanwhile, suffered a 57 percent constant-currency drop in its second-quarter operating profit for China to $325 million from $758 million in the year-ago period, as the region’s constant-currency revenues fell 35 percent to €1,723 million from €2,405 million. Puma was able to keep its year-over-year inventory level in China essentially flat, but still experienced a 65 percent decline in Ebit to €35.8 million, as the market’s sales declined 34 percent to €268.0 million for the period ended June 30.
Not all footwear brands have been impacted in China as much as the Big Three (Nike, Adidas and Puma). Deckers Brands told analysts recently that its Hoka and UGG performed well in the Asian market for the period ended Sept. 30, despite the market’s challenges. Hoka owns and operates a dozen stores in China. And Asics, although it achieved only 0.9 percent constant-currency growth and 1.0 percent profit improvement in the third quarter in China, saw sales in its performance running business grow more than 30 percent in the market, where the segment’s sales are up 51.4 percent through nine months.
Photo: Hanny Naibaho, Unsplash
