Just three years into a recovery that required store closures and a large-scale cleanup, the Chinese sports retail market is rumbling again, as increasing costs and weak sell-through are putting heavy pressure on the country's sports retailers and leading to unprecedented concentration.
The situation was portrayed in a series of interviews with leading sports brands and retailers in China last month. While all remained upbeat about the prospects of the Chinese sports market and the spread of sports brands in smaller cities, they still pointed to the worrisome repercussions of squeezed retail margins.
We already reported in the last issue on the rise of multi-brand retailing in China as a potentially more profitable alternative to single-brand stores and to the growing concentration of the market in the hands of two retail groups, Belle International and Pou Sheng, which have come to represent up to 60 percent of the major international brands' sales in China (not 60 percent of the entire sports market as the article erronously indicated).
As part of the cleanup of the Chinese sports market after the Beijing Olympics, an estimated 4,000 sport stores have been closed down. Thousands were opened again in the last two years, to reach an estimated 50,000 stores by the end of last year. However, some of the secondary international brands and Chinese brands have seen dozens of their stores closing in the last months, and some predict that many more will shut down in three to four months.
Among the two huge players that have been tightening their grip on the sports retail market, Belle International warned that the performance of its sports stores was under pressure, and that structural changes were required to improve the entire sports retail market. These changes would have to be driven by the market leaders, and they would cause added pressure and disruption in the short term.
Belle reported last month that sales of its sports stores jumped by 15.0 percent to 10,412 million renminbi (€1,246m-$1,645m) last year. The rise included a comparable sales increase at mid-single-digit level for the year, but that shrank to about 3.5 percent in the last quarter.
Belle's sports unit has been expanding mostly through store openings and acquisitions: It lifted the number of its sports stores by 28.0 percent to 4,680 sports, an increase of 1,025 doors, with more than 30 cities and 200 department stores added. The network includes 3,602 stores for Nike and Adidas, delivering much stronger sell-through than the group's 1,073 stores for secondary brands such as Kappa, Puma, Converse and Mizuno.
The other leading player in Chinese sports retailing, Pou Sheng, runs about 4,700 sports stores. Most of them are mono-brand stores for the international brands, operated either by the company itself or by its joint venture partners. Pou Sheng reached a turnover equivalent to $1,380.5 million from its retail unit for the year ended in September 2011, which was an increase of 20 percent.
Then again, the company said that the rise chiefly came from its full takeover of Zhejiang Yichuan the previous year, while Pou Sheng itself struggled to lift its comparable sales, and the performance of its sub-distributors weakened. The company indicated that its comparable sales would barely increase this year, if at all.
The situation has led other sports retailers to vastly scale back their expansion plans, or even to freeze openings altogether. This applies for Really Sport, the third-largest sports retailer in China, albeit far behind the two market leaders, with roughly 1,000 stores around the country. The group's owner said its profit margin had contracted to such a paltry level that it may not expand this year.
Part of the problem stems from increased competition from other categories of apparel: Only a few years ago, fashion retailers such as Zara and Uniqlo were still almost absent from the market, so that sports brands formed a large part of the Chinese fashion market. It was estimated at the time that sports brands amounted to about one-third of all spending on clothing.
While the total spending on clothing has increased, the rate attributed to sports apparel has shrunk to an estimated 20 percent as fashion brands suddenly scrambled into China. This factor particularly affects sportswear, while sports footwear is less impacted.
Furthermore, some of the most affluent consumers have been moving away from sports brands and adopting outdoor fashion instead – upgrading to more expensive products and turning away from the all too pervasive sports brands. The shift is immediately visible in the streets of affluent cities such as Shanghai, where fashion consists of down jackets and parkas by the likes of The North Face and Jack Wolfskin.
This trend is confirmed by the figures that were released earlier this year by the Chinese Outdoor Commerce Alliance (Coca): as previously reported in our Outdoor Industry Compass, the figures indicate that the Chinese outdoor market soared by about 51 percent to RMB 10.76 billion (€1,287m-$1,708m) at retail level last year.
Meanwhile, the World Federation of the Sporting Goods Industry (WFSGI) estimated, partly on the back of research made by NPD and GfK, that the entire Chinese sporting goods retail market had expanded by a much lower 18.1 percent in 2011, and that the growth rate would decline to 15.5 percent this year, less than the overall retail sector. The Chinese sporting goods market would then reach about $23.0 billion.
This decreased enthusiasm for sports brands has sometimes encouraged department stores to alter the allocation of their retail space: As Belle reported, many of them have shifted the sports stores to less attractive floors. Some of the spots previously allocated to secondary sports brands in Chinese shopping malls have switched to outdoor brands instead.
The sports brands are extremely vulnerable to shifts in fashion in China, because retailers estimate that more than 80 percent of their sales are derived from products that are not intended for active sports, and are therefore interchangeable with any casual or outdoor lifestyle brand. Belle said it had been pleading with suppliers such as Adidas and Nike to invest more in differentiating their product offering, particularly putting more emphasis on technology.
The leading retailers have reacted with wide-ranging investments to improve their sell-through, with adjusted ranges for diverging categories of stores, more regular and detailed feedback from the stores on sell-through, and many other measures. The international brands have been focusing on the same issues and provided support that has contributed to very significant improvements in sell-through for some of them – with particular praise going to Adidas, as detailed further down.
Such efforts contributed to an increase of 0.7 percentage points for Belle's gross profit margin to 36.6 percent in its sports business last year. Still, the retailers added that leaps in performance with some brands could only partly offset worsening sell-through for others, particularly the Chinese brands.
Furthermore, the implementation of such measures is partly held back by the shortage of retail competency in the lower-tier cities, where the largest sports retailers have been opening most of their stores last year. Several companies described the issue of management capacity in China as their most significant challenge in the coming years, particularly in the inland provinces.
Meanwhile, retail margins have also been directly impacted by sharply rising operating costs. The Chinese government has ordered minimum wage increases of 13 percent per year for the lowest retail staff, and these rises are often surpassed in towns where the competition for retail staff has become fierce. Belle reported that wages for its front-line workers and sales associates had increased by 15 percent per year for each of the last two years. Just as hurtful in terms of costs, rental prices have continued to increase as well.
While they are already high in the top-tier cities, they are now increasing more in the lower-tier cities, which are targeted by both of the leading international brands, Nike and Adidas, for their development in the coming years.
Another motive for complaint by retailers is the multiplication of factory outlets, some of them opened by the sports brands themselves. This has helped the market to some extent, particularly since some of the sports brands started to take back some of the unsold inventories of their retail partners (often in exchange for fresh products) and to sell them in their factory outlets – thereby helping to clean up inventories in standard stores. However, increasing numbers of consumers have found their way to these factory outlets, which is putting pressure on selling prices.
The same could be said for the internet, where sales of sports products have been rocketing in the last two years. This has been partly triggered by the online sales made by the brands themselves, with official stores on such platforms as Taobao, the big Chinese online shopping portal.
At the same time, the internet is used by retailers to flog products at cheap prices on platforms equivalent to eBay, where small traders sell their wares directly to consumers.
