The issues faced by Chinese sports retailers have been at the center of the strategies deployed by major sports brands in the last months: The international market leaders have launched far-reaching plans to improve their sell-through, while some Chinese brands have nearly halted their expansion plans as they tackle cumbersome inventories.
The market went through two years of cleaning up after the Beijing Olympics, when piles of unsold inventories had to be taken out of store shelves. Nike has dealt with this conundrum more efficiently than Adidas and moved far ahead of the German brand in terms of sales. Yet both brands have been impacted by the tensions that have resurfaced in Chinese retailing and in the sports market at large.
As one Chinese sports executive put it, the times of “quick and dirty” are entirely over in the Chinese market, and the brands have to come forward with sharper strategies to compete with the fashion apparel brands. In the words of another executive, sports brand management in China has switched from art to science. Or perhaps more concretely, the leading brands have been moving from a sell-in to a sell-through model.
Nike grabbed the lead in this respect three years ago. It started by offering terms to its retailers that were meant to stimulate more efficient inventory management, and opening many factory outlet stores, which helped to keep inventories clean. Then again, the last months have shown that the brand was not immune to inventory hiccups.
As reported in our previous issue, Nike saw its Chinese sales increase by 21 percent in yuan for the quarter until the end of February. However, the growth chiefly came from footwear, while apparel sales increased by just 6 percent for the quarter. Nike managers admitted that their profit margins in China had been affected by apparel inventories, which are proving costly to address.
It took a little longer for Adidas to reshape its Chinese strategy. It had to take about RMB 700 million (€83.2m-$110.8m) worth of Adidas products in retail prices out of the market in 2010.
But the retailers interviewed for this article in China invariably applauded the German brand for the consistent efforts it has been making to improve sell-through under the leadership of Colin Currie, general manager since the start of 2011, after another year in charge of Chinese sales and marketing.
And the moves have paid off: Sell-through of Adidas products at the recommended price within three months increased to nearly 60 percent last year, up by 10 percentage points compared with 2010. In the company's own stores, this rate of sell-through even reached a level of about 70 percent.
The two market leaders are juggling these issues as they continue to implement their huge expansion plans. Nike's Chinese sales doubled to $2,060 million in the full financial year until the end of May 2011 compared with four years earlier. With 7,000 stores in the country, the brand wants to double sales again by its fiscal year 2015 – compared with the fiscal year ended in Mayt 2010, when Nike's sales in China reached $1,742 million.
As for Adidas, its multi-year plan calls for the brand to vastly expand in smaller towns. In 2010, the company had 5,400 stores in 550 urban areas from Tier 1 to Tier 6, while more than 1,100 towns were left entirely unexplored, including the entire Tier 7. By 2015 Adidas wants to open another 2,500 stores and to cover 1,400 towns, including hundreds of Tier 7 cities, with a variety of formats.
By the end of 2011, Adidas had more than 6,800 stores, but only about 65 percent of them were regular Adidas sports stores, while it had another 1,000 Neo stores and 800 Adidas children's stores. The tally further included 220 Originals stores, 280 hardware stores (selling bags and luggage) and 38 factory outlets. The company has also opened four dedicated outdoor stores in the north of China.
As it continues to implement its five-year plan, Adidas has seen its growth rates decline in China in the last two quarters, down to just over 13 percent in the last quarter of 2011. However, this is chiefly due to the fact that the brand started to enjoy a return to robust growth rates in the second half of 2010.
This swing has been partly achieved with increased segmentation, to respond more adequately to the consumer demand in different regional markets. For this purpose, Adidas started by opening three more regional offices: Along with its office in Shanghai, it has others in Beijing, Guangzhou and Chengdu. No longer just representative offices, they are full-fledged regional head offices with their own general managers.
Then, Adidas China started making more intense use of the information at its disposal. The company has direct links to 3,000 of its stores, which provide feedback on a daily basis, for each article. The brand's ranges and their pricing are built largely on the basis of this information.
Adjustments in the offering apply to the product ranges themselves, with variations of about 20 percent from one region to the next. At the same time they apply to price categories, with a much wider offering of cheaper products in the lower-tier cities – although Adidas still strives to leave a gap of about 50 percent in prices between its own brand and the Chinese brands in lower-tier cities.
But just as importantly, Adidas China has altered its relationship with the retailers, for example offering new incentives that are no longer based entirely on sales volume, but also on performance indicators relating to sell-through.
Adidas China has also raised its say with regard to the ranges due to be taken up by retailers, imposing mandatory ranges with more depth and breadth. This even applies to the locations of the stores to be opened by franchise partners, not only in terms of specific urban areas but also the malls or streets where they ought to be situated. As part of its investments in footprint planning, the company has teamed up with a consultant who advises on store locations, based on the layout of the urban area, the different types of shopping traffic, the location of schools and so forth.
The specter of the inventories that haunted Adidas after the Beijing Olympics has also encouraged the company to adjust its internal performance indicators, so that they are now partly based on inventory management. The impact of all these measures is beginning to build up, explaining the insights from various parties, from retailers to sports marketing executives, that the brand currently has wind in its sails in China.
When it comes to brand perception, most sources indicate that most Chinese consumers still regard Nike as the more exciting sports brand. Then again, Adidas research shows that the brand has closed the gap in terms of purchase intent compared with “international competitors” and that it ranks the same as or above Nike for nearly all factors of brand perception by consumers.
As reported last month, Adidas reached sales of about €1,229 million in China last year, up by 23.4 percent in constant currencies. Adding up Nike's Chinese sales in the four fiscal quarters covering almost the same period, until the end of November, the American brand chalked up Chinese sales equivalent to €1,648 million, about 34 percent more than Adidas. This provides an indication of the distance that Adidas has to cover to catch up with Nike in China by 2015, which was part of the aims stated by Herbert Hainer, the Adidas Group's chief executive.
