Sports brand Li Ning, China's answer to Nike, is busy shifting gears with a new strategic plan and that could be a good thing as analysts claim the company has lost its way.
For Li Ning, one of China’s biggest sportswear brands, the 2008 Olympics in Beijing was the pinnacle. The brand’s chairman and namesake, Li Ning, who won six medals in the 1984 Olympics in Los Angeles, was selected to be the final torchbearer for one of the greatest opening ceremonies the world had ever seen. In front of a global audience of billions, Li flew around the Bird’s Nest in Beijing with torch in hand, solidifying the brand’s spot as a symbol of national pride in the hearts of Chinese.
For a while, its strategy of offering cheaper products than its international counterparts via an extremely lucrative, low-cost distribution model with thousands of points of sale across China worked. The brand had a strong hold on its position as the number one Chinese sportswear player in the market. But then the market became floodedwith dozens of other sports brands that also offered cheaper products via thousands of points of sale. Li Ning realized it had no choice but to differentiate itself, and thus decided to try to compete directly with Nike, Adidas and other foreign players, according to market observers.
The brand upped its prices and changed its styles, and, in the process, started to lose customers who, according to analysts, would simply opt for a foreign brand or resort to a cheaper Chinese brand rather than pay for pricier products from Li Ning.
“Their positioning has become sort of caught somewhere in the middle,” said Torsten Stocker, Greater China partner at consulting firm Monitor Group. “They tried to catch up with Nike and Adidas, and they thought they could raise prices, but at the same time, they did not invest behind the brand in the way that Nike and Adidas have, which allows them to charge a premium price.”
Matthew Marsden, an independent equity analyst in Hong Kong, put it in even more blunt terms: “Li Ning has been a disaster." The analyst said Li Ning's moves just haven't worked. “It has been a very dramatic story. It was this amazing all-conquering Chinese brand. Then they tried to go international and move upmarket, and it has completely failed," he observed.
On Thursday, Beijing-based Li Ning announced the resignation of its chief executive officer Thursday along with a new “go-forward plan” aimed at improving the brand’s positioning and profitability. Executives from Li Ning declined further comment for this story.
In 2011, the company’s revenue fell 5.8 percent to 8.93 billion renminbi, or $1.38 billion at average exchange rates for the period. Last month, the company warned that net profit for 2012 was likely to decline substantially from the 385.8 million renminbi, or 59.61 million, posted last year.
The three-stage blueprint unveiled last week will improve channel inventory, focus on core products in the Chinese market, the consumer experience and streamline execution capabilities amongother initiatives, the company said. Earlier this year, Li Ning brought in the private equity firm TPG Capital as a substantial shareholder to help with restructuring efforts. Li Ning appointed Kim Jin-goon, a TPG partner, as the brand’s new executive vice chairman.
Analysts say that streamlining operations, particularly when it comes to a glut of unsold inventory and poorly managedfranchise stores, could initially help Li Ning recover.
“Solving a lot of their operational issues is a key thing in the near term,” James Roy, a senior analyst with the Shanghai-based China Market Research Group, said. “If they can be more efficient than their domestic competitors, that will help them from a profit and loss perspective.”
Yet there are far deeper challenges ahead for Li Ning, and some say there are no clear answers as to how the brand will find solutions. Part of the problem simply stems from the fact that China’s sportswear market continues to be flooded with too many players. Marsden, the private equity analyst, says consolidation will inevitably occur, but until it does, the competitive landscape will be extremely arduous.
“In terms of a turnaround, the competitive situation is as bad as ever,” Marsden said. “We are not seeing consolidation in the industry. All of the industry participants, especially the Chinese brands, are discounting deeply to shift unsold inventory, and that will hurt profit margins this year. I can’t see a way out. I can’t see a recovery in this particular sector anytime soon.”
The bigger question for Li Ning is the identity that it will create for its brand moving forward. Nike and Adidas have strong market shares in China, and some Chinese brands are quickly catching up to Li Ning by offering stylish, yet more affordable apparel. In 2011, homegrown Anta Sports Products Ltd. is Li Ning's closest homegrown rival. Meanwhile, other sports brands, like 361 Degrees, are beginning to gain major footholds in third-, fourth- and fifth-tier cities.
“The issue for Li Ning is that consumers don’t really know who they are and why the brand matters more than others,” said Mary Bergstrom, founder of the Bergstrom Group, a Shanghai-based consumer trends consultancy. “Aside from showcasing a national Olympic hero, the brand has not really done anything beyond that. What has made the brandresonate and relevant recently? That is the problem for the company. What is its proposition in China and why would that resonate with different consumers?”