Li Ning, founder of the Li-Ning sportswear brand, took home six medals in the 1984 Summer Olympics in Los Angeles – three of them gold. But he is facing one of his biggest challenges yet as his namesake company, Li Ning (2331.HK) tackles narrowing margins, falling book orders, and a sliding share price.
Once a domestic consumer darling, Li Ning must also now contend with increasing competition from a growing number of local players, as well as international brands like Nike (NKE.NYSE) and Adidas (ADS.FWB). All are competing for dominance in China’s sportswear market, which was worth an estimated US$10 billion last year, and is set to grow 10-20% in 2011.
Li Ning’s position is strengthening, having edged past Adidas for the first time in 2009 with a market share of 12% against the German giant’s 11%. However, a recently launched marketing strategy has revealed pitfalls in the company’s ploy to gather up greater market share. As Li Ning struggles to pinpoint its customer base, marketing its sportswear is becoming a headache for management and investors alike: The company’s stock has fallen about 40% in the past year.
False re-start
In June 2010, Li Ning touted a new a new logo and slogan as a “revitalization” of what was already the biggest name in domestic sportswear. The new slogan – “Make the Change” – was a shift away from “Anything is Possible.” The new logo was an updated version of the old interpretation of the Nike swoosh.
The revitalization was deemed a necessary move by management as orders continued to fall while the company expanded its 7,900-strong store footprint. It was also meant to take 12 months, but senior management now say the exercise will take more than two years to execute. So far, customers are not convinced.
“The new logo is like a bad imitation of the old one,” said Ye Feng, a consumer brand expert and professor at Beijing Jiaotong University.
“Moreover, the slogan ‘Make the Change’ is clearly an attempt to go after teenagers from the 1990s generation, which is fine, but it may mean losing customers born in the 70s and 80s.”
Li Ning has openly said that it wants to diversify from its core base of 35-40 year-old customers and reach out to a younger cash-rich audience, particularly in first-tier and larger second-tier cities. To that end, it launched a new line of trendy clothing and footwear alongside its rebranding.
This was matched by an increase in average selling prices by up to 20% as the company looked to move away from its middle-of-the-road mass-market position. Its target, increasingly, is higher-priced territory that has traditionally belonged to the likes of Nike and Adidas.
Chasing cachet
To do this, Li Ning is taking a broad approach. While Nike and Adidas concentrate on catering to the top-end of the sector, Li Ning has licensed a variety of brands to sell alongside its flagship Li-Ning brand, including France’s Aigle outdoor clothing and Italy’s Lotto sports fashion wear. It also sells lower-end Z-Do, Double Happiness and Kason sports gear. However, the Li-Ning brand still made up 91% of total sales last year.
The Li-Ning brand is worn by several Chinese national sports teams, and the company has struck sponsorship deals with international athletes following store openings in Portland, Oregon – Nike’s hometown. The move into US territory was designed to give weight to Li Ning’s global aspirations.
More importantly, together with the sponsorships, it gave the Li-Ning brand a higher profile back home. But the company appears to be stuck with a brand identity problem that can be traced straight back to the changes in pricing strategy.
“There are plenty of youngst
ers [in China] willing to spend a lot on Nike and Adidas,” said Jian Jun, chief consultant at GuDe Marketing.
“For others, if they compare Li-Ning shoes and apparel to Anta (2020.HK) or 361 Degrees (1361.HK), then Li-Ning simply can not compete in terms of price.”
Li-Ning athletic shoes, for example, typically sell for around US$45 a pair, compared with chief domestic mass-market competitor Anta’s average selling price of US$30. Entry-level footwear in a Nike or Adidas store costs US$50-60.
“We believe some consumers that currently buy high-end domestic sports footwear might question their reasons for buying domestic brands if it is possible to buy Nike footwear at just a RMB50 (US$8) a pair premium,” noted UBS analyst Spencer Leung in a recent report.
Li Ning faces the two-fold problem of becoming too expensive for customers in high-growth second- and third-tier cities, and too cheap to be considered a top-end brand in first-tier cities.
Second-tier surge
An indication of the difficulty can be seen in Li Ning’s same store sales (SSS), which increased just 3.9% year-on-year in 2010. The company’s pre-orders for the second quarter of 2011 were flat, compared with 20% growth last year. Anta, which has fixed its sights firmly on the mass market in lower-tier cities, has seen SSS growth of 10% and pre-order increases of up to 20% for the same period.
Peak Sports (1968.HK) and Xtep (1368.HK), which target lower-end customers than Anta, have fared even better. Second-quarter SSS growth at Peak Sports was 24%, while Xtep’s sales grew 25%, helped by a strong performance in second- and third-tier cities.
All eyes – foreign and domestic – are turning to those inland cities to keep sales growth high. Nike and Adidas have both promised to introduce lower-priced products to reach growing numbers of mid-income earners. Adidas, which saw sales stutter through 2009 and early 2010, has said it will open stores in towns with populations as low as 50,000.
The focus on lower-tier growth is coming just as Li Ning attempts to move its main brand upmarket – a contradiction that has raised investor doubts. Still, some industry observers say that the company’s efforts to compete with big global brands – as well as chief mid-market competitor Anta – should not be totally discredited.
“In the long run, we believe Li Ning will be able to maintain a leading position, given it has the largest marketing budget of sportswear brands in China,” said UBS’s Leung. He added that the company is in the process of “redefining its corporate strategy and brand image to better align itself with changing consumer preferences.”
Li Ning insists that its long-term strategy has not changed. But in a statement to the Hong Kong Stock Exchange, it said that, “implementation details are subject to fine-tuning to accommodate changes in the market environment.”
Faced with the growing presence of Adidas and Nike in smaller cities, and robust domestic competitors like Anta in the mid-range, fine tuning may not be enough to keep Li Ning from being locked out of a market it once controlled – and faltering domestic sales could hurt its global ambitions. If the company cannot convey the essence of its brand to target consumers, it will find itself making a change, and for the worse.