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Nike’s Chinese Wall

Why high-tech sports brand Nike is now stalling in China

 

In much of the world, Nike represents the cutting edge in sports innovation and high-tech manufacturing, but the world’s biggest new market, China, has had other ideas. Chris Middleton reports.

This is the latest instalment in our weekly ‘The Decoder’ series, exploring how companies’ stated strategies stand up in the real world.

ORGANISATIONS SHORTTHE DECODER: “For a company that does business in more than 190 countries, volatility is a fact of life,” says Mark Parker, president and CEO of Nike.

The truth of Parker’s words was evident in March 2014, when the global sports brand reported third quarter numbers that beat analyst expectations, with the promise of a further uptick in business as the World Cup draws nearer. Nike reported total Q3 revenues up 12.7 per cent to nearly $7 billion, beating analysts’ expectations of just under $6.7 billion.

Nike president and CEO Mark Parker

Nike president and CEO Mark Parker

But despite the positive numbers, shares tumbled by five per cent, largely due to continuing worries over Nike’s performance in China: a predicted flat Q4. No Western company wants a fall-off in business from a potential market of one billion people, many of whom are young, ambitious urbanites – Nike’s core demographic. China’s performance in China throughout fiscal 2013 was poor (see below).

Parker says that innovation is the key to steering Nike through what he sees as short-term turbulence, which includes declining revenues in Japan (down by nine per cent on a reported basis). “While the Nike portfolio is diverse, there’s a common theme: it’s powered by innovation,” he says.

“We don’t innovate just for the sake of change. We do it with a clear purpose and that’s to help athletes reach their full potential. When it comes to innovation, we pride ourselves on being the pacesetter, we get out in front and we stay on the offence.”

The i-word

But behind the well-played sporting metaphors, the word ‘innovation’ has become so commonplace in 21st century business presentations that it has almost lost its meaning; it’s a standard-issue response from a CEO who is keen to keep investors onside. So is there any substance behind the claims?

Parker admits to being what he calls an “innovation geek”, and he needs to be in the sportswear and sporting goods market, where advanced materials and designs adorn top athletes one day and become street wear the next. Like other manufacturers of sporting goods, Nike ‘road tests’ its technologies on the world sporting stage, then passes that know-how down to the consumer.

According to Parker, Nike has no intention of relinquishing its role as a sportswear innovator. New materials and manufacturing methods, including 3D printing technologies, are moving to the top of Nike’s strategic agenda, he says, “processes that allow us to do things that conventional shoemaking or product manufacturing processes won’t allow us to do”.

Nike Vapor Carbon 2014 cleat

Nike Vapor Carbon 2014 football cleat.

“We’re very discriminating when it comes to making sure that we’re focused on things that can really affect the bottom line, like the product cost,” he explains. “So we are prioritising our investments. We need to make choices, but we’re making choices about things that can help us innovate the product, as well as reduce our product cost and improve our speed to market.”

But Parker accepts that ambition and delivery are not always the same thing. “The opportunities are truly unlimited, but our resources are not. As a result we’re relentless editors, because innovation isn’t about just doing more, it’s about doing things better, it’s about staying sharply focused on the opportunities that have the highest potential for growth. That’s how we unlock our true potential.”

For Nike, global sporting events are the perfect opportunity to showcase its innovations. It has debuted new products and materials at the Super Bowl New York and the 2014 Winter Olympic and Paralympic Games, and next on the agenda is this summer’s World Cup in Brazil. But while the world sportswear market benefits from both seasonal spikes and peaks in customer demand from these international events, the ‘China problem’ remains a challenge.

Nike’s Chinese challenge

In 2012, Nike predicted that its annual revenue from China would grow 18 per cent to reach $4 billion in sales by 2016. However, Nike’s sales in Greater China – including Taiwan, Hong Kong, and Macau – actually fell throughout fiscal 2013, for five consecutive quarters, before recording a modest upswing of four per cent in Q2 2014. Q3 revenues were up by seven per cent, said the company.

However, any hopes that Nike’s ‘China Reset’ programme is leading to a long-term return to growth in the region were undermined by predictions of a flat to negative Q4: worrying in the wake of global sporting events and with another, the World Cup, to follow.

Zou Kai (鄒凱)

Multi-gold-medal-winning Chinese gymnast Zou Kai (鄒凱) exemplifies China’s approach to sport.

Nike is facing stiff competition in China from arch-rival, Adidas. According to 2013 figures published by Euromonitor, Nike remains China’s leading sportswear maker, with 12.1 per cent of a growing $24 billion market, against Adidas’ 11.2 per cent share. But a comparison of the companies’ recent results suggest that the gap is narrowing and the torch is being passed to Adidas.

During fiscal 2013, while Nike’s Chinese figures were in decline, Adidas reported a 15 per cent year-on-year increase in sales, including a 12 per cent upswing in Q4 alone. The conclusion is inescapable: Nike’s loss, in revenue growth terms, has been Adidas’ gain. So why is this happening?

Part of the challenge for Nike in China is a cultural one. In the West, and in some other parts of the world, the cult of personality and personal achievement dominates, and that suits high-tech, superstar-endorsed Nike. But in China things are different. There, despite the success of a handful of stars on the world stage – in gymnastics, for example – sporting achievement is seen more in collective, national terms, and so Nike needs to build on its national programmes in partnership with schools and universities.

Also, Nike’s strengths in sports such as basketball and soccer do not transfer so easily into China, which does not share those passions to the same degree. This means that Nike can’t always rely on international sporting events to have a truly global impact on sales figures. It needs a new story in China, one that capitalises on young people’s desire to succeed, rather than to emulate wealthy superstars.

Easy, Yeezy?

Neither does the co-branding of Western musicians such as Kanye West in premium-priced Nike shoe lines automatically boost sales in the region.

Kanye West

Kanye West has criticised Mark Parker in a dispute over the Air Yeezy shoes, which West wanted to be made more widely available.

The musician recently slammed Parker in a dispute over the much sought-after Air Yeezy 2 shoes, designed by West, which he claims he wanted to be made more widely available. He has recently signed a footwear and apparel deal with Adidas, whose iconic three-stripe designs have long had an association with the music scene – not just rappers and hip-hop artists, but also indie bands. All appreciate authenticity and designs that bubble up from the street. In this sense, Nike’s ‘top down’ approach may be risky.

China’s young people are just as fashion conscious and aspirational as their Western counterparts, especially those that are flooding out of rural poverty and into China’s burgeoning cities. But for them, sport is about fun, good health and national excellence, rather than cutting-edge technology and premium-priced celebrity endorsements.

In some ways, Adidas is better placed in China, therefore, as it has long positioned itself as a pure sports brand. But it is playing a clever game. Recently, Adidas has aimed new, affordable product lines and retail experiences directly at fashion-conscious teens in China’s cities, while retaining and complementing its sporting heritage. In this regard, Nike’s Converse brand may be the right shot to play.

Although China remains a significant challenge for Nike – it’s a market in which the world’s dominant sports manufacturer needs to win to retain its crown – the company still has much to cheer. In June, the 2014 Brazil World Cup kicks off, and Nike has already seen a 12 per cent rise in orders for shipping between now and July. In Western Europe alone, orders have risen by over 30 per cent.

“The World Cup is now just a few months away and you can expect even more excitement leading up to the opening match in Sao Paulo,” says Parker. “Products we’ve launched so far take the game of football to a new level, and before the first whistle in Brazil we will have more amazing products to come.

“Football is the biggest sport in the world and Nike is the leader in innovation for athletes. That’s a combination that drives us to deliver bolder innovation for the World Cup than we’ve ever done before … so stay tuned.” TS

The Strategist says

Nike’s China problem demonstrates that what works in the West does not automatically translate into China, where sports and fashion mean slightly different things to the country’s ambitious young people. Nike’s focus on high-tech materials and manufacturing innovation has long served it well, but its focus on developing premium products risks making it look exclusive and arrogant at a time when many young people want products that are chic, authentic, functional and affordable. In a sense, Nike is rolling out the sportswear equivalent of a Bugatti at a time when many people want an affordable, fun city car. Superstar partnerships and celebrity endorsements have also served Nike well, but carry an implicit risk: what happens if a star signs with the opposition? Non-sports-based partnerships confuse the core brand.
Additional reporting and research by Stuart Lauchlan.

 

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