As the competition has been heating up in the Korean sporting goods market, with outdoor brands snatching market share from their rivals in the rest of the market, the most active brands have been focusing on improving the sell-through in their hundreds of franchised and own stores.
The Korean sports apparel and footwear market is estimated at about 2.6 trillion won (nearly $2.4 billion) excluding outdoor brands, golf, cycling and other equipment, with a mixture of retail and wholesale sales: Most estimates adopt this measure, because only a few of the leading brands function as wholesalers selling firmly to retailers, while the others sell on consignment, mostly to mono-brand franchisees and department stores. Another characteristic is that the business is led by footwear.
Remarkably, the rest of the Korean sporting goods market is much bigger. The outdoor market alone has been estimated to have reached about W4.0 trillion (nearly $3.7 billion) at retail level in 2011 (excluding cycling), after five years of unbridled expansion. By contrast, the rest of the sporting goods market has been expanding at an average annual rate of between 5 and 7 percent for the last few years: Given an inflation rate at an average of more than 3.5 percent per year in the last five years, this is hardly impressive.
However, many market players said that the surge was coming to an end and predicted that the outdoor market would be under pressure next year (more details in The Outdoor Industry Compass). Several retailers and brand executives think that the expected softening of the outdoor market will in fact benefit the sports brands. They are already capitalizing on the new trend for lightweight running shoes, recording good sales of items such as the Nike Lunar and the Adizero range.
Meanwhile, the leading sports brands in Korea have been focusing on upgrading their operations to become more efficient and to react more quickly to market trends. Their ability to do so has long been hampered by the structure of the market, in which sales go through hundreds of mono-brand franchisees. Unlike the situation in China, for example, the Korean market does not include huge retailers operating hundreds of stores for a variety of brands. Most of the franchisees have only one or two stores, making the sales structures of the brands relatively inefficient.
Nike, the Korean market leader, has been actively supporting the expansion of its largest franchise partners. Its distribution is still fragmented but at least one of the Nike franchisees was encouraged to open a chain of stores. Such moves reduce the number of salespeople required to cover the territory and help to map out more elaborate distribution tactics, including special make-ups. Nike has also opened more of its own stores in Korea.
Furthermore, Nike has markedly tightened its relationship with the retail franchisees to make sure that their orders are adequate and that they will take advantage of the group's marketing plans. This has enabled Nike to avoid ordering fiascos that were hurtful for retail franchisees, and to improve sell-through. The company was also the first to come up with a strategy of offering distinct ranges to different stores.
The Nike stores in Korea do have distinct merchandising and a clear focus on categories, led by football, sportswear and running. The company's Korean subsidiary regards this as the key to the brand's double-digit sales expansion in the last six years.
Adidas has started to move into the same direction more recently but arguably more decisively, which has had a significant impact on its business: Nike has an estimated share of about 23 percent this year in the relevant sports apparel and footwear market (excluding outdoor brands), ahead of Adidas with 21.5 percent. But only two years ago Nike still had 25 percent against 19 percent for Adidas. While these figures were provided by Adidas, the trend is confirmed by several competitors and retailers.
Zion Armstrong, a New Zealander who started at the Adidas Group by packing footwear and became its managing director in Korea two years ago, attributes much of the impetus to new technology that enables him to find out every day what about 75 percent of the franchisees have sold out. That is no small feat, given the fact that the Adidas brand is sold in more than 500 mono-brand stores and shop-in-shops, only 25 percent of them owned by the company (mostly in department stores). Similar technology has since been adopted by Adidas in other countries, but Koreans were apparently the first to come up with such a system, ahead of its global development.
The information garnered by the system enables Adidas Korea's managers to react more quickly to the sell-out and to improve their stock turns. At the same time, it also enables them to spend their marketing budget more judiciously, and to make better decisions when they are putting their range together. The strategy is particularly useful to manage Originals, which are in avid demand.
Adidas' mono-brand stores expanded their comparable sales at a single-digit rate in 2010, before the system was implemented, but since then comparable sales have jumped at double-digit rates, both for last year and for this year so far. The sell-through rate for the Adidas brand in its own stores has increased from about 65 percent last year to nearly 70 percent this year, and the company said the rates appeared to be similar for franchised stores.
Buyers at ABC Mart, the leading multi-brand footwear retailer, said that Adidas had clearly grabbed market share at its stores in the last months, as it used its information to make faster and smarter marketing decisions. Others said that Nike previously had a tighter grip on its franchisees, but that the measures taken at Adidas had led to significant improvements in the last year.
Another move adopted first in Korea is the opening of an Adidas women's store in Seoul. Unlike the regular Adidas stores, which are mostly black, the women's store is gray and has an entirely different design. So far it has achieved higher conversion rates than any other Adidas store in Korea, which justified the opening of a second store in October, and further developments are in store.
While the competition is getting tougher at the top, some Korean brands have managed to hold on to their own market share, particularly Prospecs. The leading home-grown brand is owned by LS Networks, which was spun off from the huge LG conglomerate to handle brands such as Prospecs, Skechers, Jack Wolfskin and Peak Performance, among others.
The brand is sold to about 450 mono-brand franchises and it should reach retail sales estimated at about $350 million this year. With average prices about 20 percent below the leading international brands, the brand has found its spot in the market and is continuing to expand.
The same could not be said for Lecaf, a cheaper Korean brand that once rivaled Prospecs. Owned by Hwaseung, the licensee for K-Swiss and Merrell, among others, Lecaf should just about reach retail sales in the range of $200 million this year. The company said that this represented a decrease of about 15 percent compared with last year, when the brand saw its sales dwindle by about 10 percent.
Meanwhile, several other international brands have been gaining ground in the Korean market. New Balance remained among the most popular sports brands this year. Sold in Korea by E-Land, which distributes a gaggle of fashion brands and previously built up Puma in the country, New Balance reaches retail sales estimated at $200 million in the country.
Puma is starting to hit its stride in Korea as well. The brand had lost some of its impetus in the last four years, since Puma took over its own distribution in the country from E-Land. The brand then lost the advantage of a creative and fast-moving Korean partner, which applied its recipe for New Balance instead.
Olivier Lorans, former general manager of Puma France, moved to Korea in January to try to clarify the brand's strategy and restructure its offering. He wants to focus on a smaller number of concepts that encapsulate the brand and invest more in marketing to support them. Puma is sold in about 200 mono-brand stores, only five of them owned by the company.
However, the brand's return to shape in Korea is to be supported by wider investments in Puma's Asian expansion. Since the appointment of Ludovic Manzon at the helm of Puma Asia-Pacific in April, the company has been particularly working on a product offering adjusted to the regional market.
The Korean sporting goods market is still driven by colorful products that are meant to be worn for leisure and are efficiently marketed with K-pop and other stars. This phenomenon itself has been fueling consumer appetite for international sports brands among Korea's increasingly outward-looking and hugely connected youth. Still, the market's development has also been influenced by the rise of active participation in sports ranging from running to cycling.
Asics Korea, which became a subsidiary of the Japanese company in 2008, estimates that there are about 100,000 Koreans who regularly run marathons and more than 1 million who run for leisure. The numbers are no longer surging as they did three to four years ago, but they are continuing to rise, particularly when it comes to more leisurely runners.
Running was further stimulated by the athletics world championships held in Daegu last year. The Adidas brand lifted its sales in the running category by about 50 percent last year. Nike has also stepped up investments in the sport by supporting several shorter Korean runs.
The rise has helped the Asics brand to lift its own sales to about $230 million at retail level this year, although this is a small decline compared with last year. Asics sponsors two out of the three most important marathons held in Korea, and it said that about 40 percent of the runners wore Asics footwear at these runs, compared with 10 percent for Mizuno and just over 7 percent for Adidas. The share of Adidas and Nike is much larger among leisure runners.
Unlike the situation in most other markets, about 40 percent of Asics' sales in Korea consist of apparel. The subsidiary has adjusted its range to the market, even offering outdoor apparel. This has to do with the fact that the brand is sold through about 350 mono-brand franchised stores, and only 20 other accounts. These include wholesalers and retailers such as Runner's Club, which had more than two dozen stores when the number of runners surged.
Reebok is another brand that has been on the rise in the Korean market, attaining a market share estimated at 5 percent so far this year. Korea is one of the countries where the American brand has been most successful, partly due to the fact that Korean consumers eagerly sample new technologies such as ZigTech and RealFlex. As in other countries, Reebok Korea is now adopting the new positioning focused almost entirely on fitness, involving partnerships with 10 CrossFit gyms.
However, the Adidas Group confirmed that Reebok and several other brands were now confronted with an investigation by Korea's Federal Trade Commission (FTC). Unlike EU authorities, the KFTC does not provide the same kind of information on this type of investigations, but Korean newspapers have reported that the case involved allegations of false or exaggerated advertising claims around walking shoes. The brands listed by the local media included Reebok as well as Lecaf, Prospecs, Asics and New Balance. The KFTC's investigation is apparently in its final stages, so a statement is expected to be issued in a couple of months.
It was pointed out that the KFTC has been particularly active ahead of this week's presidential elections, which were won by a 60-year-old conservative woman, Park Guen-hye, who wants to atone for the tortures committed under the rule of her father, who seized power in a military coup 51 years ago.
It appears that the FTC has been studying issues relating to toning footwear, an area in which Korean companies have been particularly active, but no further details could be learned at this time on the scope or schedule of the inquiry.
Last year, the government warned sporting bodies that funding might be cut for sports that were not delivering against their targets. It also announced that Sport England was to adjust its focus and put more energies on strengthening the link between schools and clubs, to tackle the ongoing decline in the number of 16- to 25-year-olds playing sports. The upcoming investments in individual sports are expected to focus strongly on getting more people in this age range involved in sports activities.
