Chinese sportswear brands eye Olympic growth
China's home-grown sportswear brands will have their biggest opportunity yet to raise international visibility this year. But even as they vie for the best routes to Beijing's Olympic Games coverage, most brands still remain closely focused on soaring domestic sales, as Dominique Patton reports.
Brands like Li Ning, Anta and Erke, the new faces of Chinese sportswear, are already seeing meteoric growth. All reported sales hikes in the region of 40% last year. Profit increased at a similar rate, or in Li Ning's case, even faster.
But this is just the beginning, say the brands. Similar growth can be sustained for several years yet before they need to look for overseas expansion.
"The Olympics are only the starting point for Chinese sportswear," says Ling Sheng Ping, chief financial officer at Anta, the country's largest sports shoe producer.
Sportswear firms are riding on the back of strong momentum in Chinese consumer goods spend, which rose 21% in the first quarter.
Sportswear sales grew even faster, partly thanks to the upcoming Olympics which is said to be increasing awareness of a healthy lifestyle. Strong sales are also coming from the growth in leisure time among more affluent Chinese.
That has already given international heavyweights like Nike and Adidas a leading share in top-tier cities like Beijing and Shanghai. But even faster rising incomes in other parts of the country suggest there is huge potential for growth of less expensive brands.
"Chinese sportswear sales are growing between 20-30% each year. Much of that growth is being driven by second or third tier cities," says Tim Chuah, a consultant at research firm Frost & Sullivan.
While foreign sportswear leaders like Nike and Adidas have some 45% of the sector's $6bn annual sales, according to Chuah, domestic brands are building their names in cities that their international peers may never reach.
Singapore-listed Erke, one of China's newest sports brands, currently has 3,500 stores around the country and plans to add a further 600 annually for the next few years.
"About 700m people can't afford Erke products now but in the future they will. More and more low income families are moving up to become middle class," says chief executive Denis Wu.
Those families cannot afford Nike shoes, retailing at CNY600 to CNY1000 (US$87-145). But they can more easily aspire to a pair of Erke trainers for around CNY270 or Anta's CNY200-400 shoes.
Even at those prices, the Chinese brands are making substantial profits. Anta's Ling says "our gross profit margin will increase by 5% this year".
Analysts at Daiwa expect Li Ning, which reported net profits of CNY473.6bn last year, to see a 45% growth in profit this year, despite rising raw material costs.
As the brands have grown in scale, they have gained bargaining power with their suppliers.
Most are headquartered in Fujian province, which already produces around a fifth of the world's sports shoes.
Competition among the 1,000 or so suppliers there is tough. "If raw materials increase by, say 8-10%, I think we could keep it to 5%," says Wu.
New sales wins
Still, the domestic market is highly competitive for brands too, and the pressure is on to win new sales from the Olympic Games.
Chinese firms were squarely outbid for official Olympic sponsorship but they have found their own ways to boost visibility during the event.
Li Ning has cut a deal with state sports broadcaster CCTV5 to dress its presenters during Games coverage. It is also sponsoring several teams for specific events including the US table tennis team and Sudan's track athletes.
Erke claims to be the first Chinese company to sponsor a whole foreign team - North Korea.
None of these would be considered prestigious sponsorships by international standards. But for the domestic brands, it marks a foray into the more competitive global sports market. And in any case, the sponsorships are still targeted at consumers at home.
"What Adidas paid for Olympic sponsorship is way beyond our budget," says Wu. "Yet it's still a very big chance for us to build up our brand.
"We tried to find a team with high visibility and good performance. The North Koreans are quite good at some sports that Chinese people are interested in like gymnastics, table tennis and taekwondo."
Domestic brands need to improve their image to differentiate themselves from hundreds of smaller players.
Li Ning started out ahead of the field, through its association with its namesake founder, one of the country's most famous gymnasts. It remains the Chinese brand with highest equity, partly by retailing at a higher price than other Chinese brands, and market share, at about 10%.
But while trying to compete directly with Nike by launching more expensive products, analysts doubt whether it can ever share the same territory. The big gap is in design.
"In first tier cities, where spending power is stronger, design is more important," says James Chen, a consultant with Euromonitor.
Some firms are investing more in R&D and Li Ning recently opened a design office in the US.
But there remains a question over whether their brands can convey an image of superior technology. Chinese consumers tend to believe international brands have the edge in this area, says Chuah.
Anta wants to acquire an international brand to help it leap this barrier. The company, which started out as a footwear maker in 1991, has increased its market share to 4%, and raised funds for expansion in a public offering in Hong Kong last year.
"Consumers will not accept a local brand as a high-value product. So we're looking at acquiring the ownership of an international brand with some awareness already in China. We can then build it up to become high-end here," says Ling.
Post-Olympics, Chuah expects more brands to expand overseas, benefiting from new awareness of their brands from Games-related marketing.
Erke is already seeing strong sales in the Middle East and South America and recently entered some European markets.
But for the moment, the Chinese market holds more growth opportunities than any other.
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