China sportswear giant feels burn

Following a period of huge expansion one of the country's biggest retailers has started to run out of puff after trying and largely failing to emulate market leader Nike and rivals adidas and Puma.

Chinese sportswear brands Anta and Li-Ning are trying to break into the global market and compete with more established brands such as adidas. Adam Dean / Bloomberg News

When a dramatic closing ceremony heralded the end of the 2008 Beijing Olympics, the Chinese sportswear brand Li-Ning was looking to the future with supreme confidence.
The company was on a roll with its founder, the retired gymnast and six-times Olympic medal winner Li Ning, having been high-profile during the Games. By the end of 2008 the company's profits had jumped by 57.4 per cent.
At that point, Li-Ning was attempting to break the stranglehold of Nike, adidas and Puma in its home market, as well as expanding into Europe and North America after opening stores in the Netherlands, Belgium and Luxembourg.
Fast-forward four years, with another Olympic Games having just wrapped up, this time in London, and the company's fortunes look very different.
Overseas expansion has been put on ice with the United States operation, launched amid fanfare in 2009, now targeting online sales instead of store openings. Overseas sales comprise just 1.9 per cent of the company's business.
Perhaps more seriously, Li-Ning is finding life tough at home. Last month the company's chief executive, Zhang Zhiyong, stepped down after a 65.2 per cent drop in net profits last year to 386 million yuan (Dh222m), with revenue falling 12 per cent to 8.93 billion yuan. That was even though China's sportswear market grew 16.3 per cent last year on 2010 to 124.7bn yuan.
Anta, Li-Ning's closest competitor among the domestic brands, recorded a profit of 1.73bn yuan last year – more than four times that of its primary rival.
As yet there is little light at the end of the tunnel. Li-Ning's shares fell by one fifth in the first half of this year and recently the company warned trade orders this year would drop more than 10 per cent.
Meanwhile, China sales for its foreign rivals Nike, the market leader in the country, and adidas have risen by 21 per cent and 26 per cent, respectively. The German giant adidas is opening up to 600 extra stores in China by the end of this year.
So what has gone wrong for Li-Ning?
"What they've tried to do, unlike other Chinese brands, is compete more directly with adidas and Nike and move themselves up the range in pricing and start to position themselves at the same level. They've had a very difficult time getting Chinese consumers to accept [this]," says James Roy, a senior analyst at the China Market Research Group, based in Shanghai.
Li-Ning now finds itself "stuck in the middle" between the premium western brands and cheaper Chinese rivals.
The quality of the company's sports shoes, shirts and other goods is not the issue, as experts and consumers typically say Li-Ning gear is well made.
"In terms of its quality, probably there's not so much difference ... some people say they have the same factory [as western brands] to produce," says Liu Jiaquan, 20, a design student in Beijing who has bought Li-Ning products.
Instead, the issue is "the brand premium" for Chinese sportswear companies is "really low", according to Ivy Zhao, an analyst at China Merchants Securities in Hong Kong.
"The only factor to make customers buy their product is price," she says. "[When] customers buy these domestic brands, it's not because they have attractive design for the footwear, it's because of the price. For Nike and adidas, it's totally different."
This has also been a key hurdle overseas. With Chinese companies saddled with the image of the country as a producer of cheap, low-quality products, it can be difficult to persuade sceptical shoppers to open their wallets for high-end goods.
"I think for Chinese brands as a whole, they have to be perceived better and I think there's still some way to go before they can reach that stage," says Kineta Hung, an associate professor and brand specialist at the department of communication studies at Hong Kong Baptist University.
Another concern is Li-Ning's rapid expansion since it was founded in 1990 – the store tally in China stood at 8,063 outlets last year – has come at the expense of efficiency.
"They've had to close a number of stores and transfer control from smaller franchisees to people running a larger network of stores," Mr Roy says.
Also, profits have been dented by huge inventory levels, an issue the company aims to deal with this year.
The real issue for Li-Ning, however, is its market position and whether it can give its image the much-needed shot in the arm.
"Li-Ning has made studies in improving the design and research and development in the United States and has hired people from Nike. But they've not been able to successfully show they've been as original or stylish in the designs as the brands they've been trying to compete with," Mr Roy says.
Ms Zhao echoes that view. "Li-Ning must improve their product design to increase their brand premium," she says.
A new tie-up with the Chinese Basketball Association league may improve the group's image at home.
For all Li-Ning's recent difficulties, it retains second place in China's sportswear market and, in the past, companies have transformed their fortunes in the face of far tougher odds.
The head of adidas, Herbert Hainer, once said that for a period after he joined the German company, in 1987, it was "really in big trouble". "At the end of 1992 we were close to bankruptcy," he said.
Now, adidas is second only to Nike in the global sportswear market and last year its profits worldwide rose 18 per cent to €671m (Dh3.02bn).
So, with the German firm still enjoying the afterglow from being a key sponsor of the London Olympics, its Chinese competitor, which enjoyed such a high profile at the 2008 games, can at least take solace in the knowledge that a turnaround is possible.