With the opening of its largest store worldwide in Beijing on Saturday, plus the biggest ad campaign ever for a single market for the city's Summer Olympics, Adidas is stepping up the pace in its race to overtake Nike and become China's leading activewear player.
"The Beijing Olympic Games will serve as a platform for Adidas to become the leading sports brand in China in 2008," declared Adidas China's managing director, Wolfgang Bentheimer, noting that first-quarter sales in the country soared more than 70 percent year-on-year.
And the Adidas Group overall expects China to become its number-one profit driver this year. The Olympics, for which Adidas paid an estimated $80 million to become a sponsor and for which it will bring all of its China-based staff to Beijing, are key to underscoring the company's commitment to the country.
"The campaign concept is about rallying the nation and showing how the entire Chinese nation is supporting their athletes and the Games themselves," Bentheimer continued. "You have to see this as a huge p.r. campaign," said Erwan Rambourg, luxury and sporting goods analyst for HSBC, noting that there are very few Olympic products. "It's more of a long-term investment."
That investment includes two or more Adidas store openings a day, or around 1,000 doors this year alone, bringing the brand's worldwide store network to 5,000 stores by yearend.
The highlight is Adidas' giant Beijing flagship, which, at 34,000 square feet, dethrones the brand's 19,000-square-foot Champs-Elysées unit to become the biggest Adidas store in the world. With four floors, the flagship is like a department store in itself. The store offers the entire gamut of Adidas products, including Performance, Originals and Y-3, with the first floor and second floor devoted to men's and children's, while the third offers women's and the fourth showcases collections such as Originals.
Interactivity with consumers is a key feature. "It will take the Adidas retail experience for consumers to a new level," Bentheimer said, "and serve as a role model for our retail activities around the world."
A further 1,000 stores are planned by yearend 2010, when the Adidas Group expects its total sales in China, including Adidas, Reebok and TaylorMade-Adidas Golf, to top 1 billion euros, or $1.57 billion at current exchange.The company's retail expansion rate isn't overly ambitious, Adidas Group chief executive officer Herbert Hainer assured analysts in March. "I always get the question, 'Don't you think there are too many stores in China?' We continue to see extremely good sell-throughs in the stores selling our products. And I just spoke to our Chinese country manager two weeks ago. He said they just can't open new stores fast enough. And please keep in mind we are talking about a market of 1.3 billion people. If 10 percent of them can afford our products — and our products are more easily accessible than luxury goods — then we are talking about 130 million consumers."
To demonstrate China's potential, Adidas organized an investor trip to Beijing and Shanghai last month, a first for the company. There, analysts received a breakdown of retail strategy. While Adidas generates 15 percent of its China sales in the three first-tier cities of Beijing, Shanghai and Guangzhou and 60 percent in first- to third-tier cities, it has begun moving into tier-six cities, which have an average population of 600,000 each, and plans to start targeting the 700 tier-seven cities with on average 400,000 inhabitants. That gives the group a reach across some 1,300 cities there, noted HSBC's Rambourg in his post-trip analysis.
Expanding and optimizing the distribution network fast enough for the Adidas brand, already present in 500 cities, is a major challenge, admitted Bentheimer.
"In order to make our brand available and accessible to the relevant brand consumer all over China, we need to continuously focus our energy on further expansions," he said.
In China, Adidas is positioned as a premium brand in the sports and sports lifestyle sectors with products there priced broadly on a par with Europe, around 20 percent higher than in the U.S.
Owning a pair of the brand's three-striped sneakers is a status symbol for many, observers said. "Adidas is a luxury brand over here, in my opinion," said Thomas Rosenke, equity analyst at Westlb AG bank. Noting that Shanghai's minimum wage is 800 yuan, or $116.74, a month, Rambourg added: "If you look at the average pair of sneakers, it's around 600, 700, up to 800 yuan. That's the equivalent of a month's salary."However, China's middle classes are expected to continue to swell. Households able to buy sports brands, with an income above $5,000 a year, are forecast to grow from 52 million in 2006 to 87 million in 2010 and 134 million by 2015.
A predicted rise in sports participation provides further optimism.
"Lots of sports are still spectator sports in China," said Rambourg.
As sports participation and household incomes rise, and retail openings target smaller cities, the Adidas group expects continued double-digit growth in China sales through at least 2012.
But in its quest for Chinese domination, Adidas faces increased competition from both sports brands and leisure or casualwear labels. "The growth and size of this market makes it increasingly attractive for new players," said Bentheimer.
In China, Adidas is head-to-head with its main international competitor, Nike, whose China sales topped $1 billion last year. Nike likewise is expanding at breakneck speed, with two to three stores opening every day, according to Mark Parker, Nike Inc.'s president and ceo. And the U.S. activewear giant will have high visibility at the Games, too — while it isn't a main Games sponsor like Adidas, Nike is sponsoring 22 of the 28 Olympic Federation sports in China.
Adidas is targeting a 22 percent market share of China's activewear market this year, versus the 21 percent it predicts for Nike. But at group level, Nike would still be ahead, as Adidas-owned Reebok's 2 percent share pales in comparison with the 4 percent of Nike's Converse, noted HSBC's Rambourg. Meanwhile, local competitors such as Li Ning, whose market share is estimated at around 14 percent, and Anta, which boasts an estimated 12 percent, are accelerating their development.
Li Ning, founded by Olympic gold medal-winning gymnast Li Ning, plans to open almost 900 outlets by yearend, bringing its store count to 6,100 with plans for 10,000 units by 2013. Its major competitor, Anta, meanwhile, intends to open around 1,000 stores this year, bringing its door count to 5,300 by yearend.
While priced 30 to 40 percent lower than Adidas and Nike, local brands share similarities. "I saw Anta shoes that look the same, the quality looks the same, there's only a price difference," said Rosenke."Li Ning's logo looks a bit like Nike's swoosh, and its tag line is 'Anything Is Possible,' while Adidas's is 'Impossible is Nothing,'" said Rambourg. "It's a bit of a me-too brand, except it's doing really well."
Indeed, Li Ning's ambition is to become one of the world's top five sporting goods brands by 2018.
Adidas disregards the threat of local competition. "They are considerably smaller in size than the Adidas brand is," said Bentheimer. "Also, their growth is slower than our growth."
Not that Adidas is taking the local competition too lightly. Later this year, the brand will introduce Adidas Essentials, a collection created specifically for the Chinese market. While the company declined to give details, the line is thought to be a lower-priced collection to help consumers trade up from the local brands.
However, other factors could interrupt Adidas' Chinese dream.
"Though CPI [Consumer Price Index] growth has slightly eased recently," wrote Rambourg, "we feel inflation will inevitably hit the sports brands as traffic may slow and pricing power is probably not huge. Should oil and food prices continue to pressure, tier-seven cities' expansion plans could soften."
Political pressures over China's role in Tibet, meanwhile, haven't eased. Adidas' steadfast apolitical stance seemed to waver when ceo Hainer took a pro-China position, telling the German daily newspaper Spiegel in May that protesters who try to destroy the Olympic ideal as symbolized by the flame should be condemned. Other criticisms have been voiced by workers' rights organization PlayFair 2008 in its April report, "Clearing the Hurdles: Steps to Improving Wages and Working Conditions in the Global Sportswear Industry." Around 300 interviews with factory employees found tough conditions for workers making Olympic merchandise.
"A worker making Adidas shoes in China would have to work over four months to buy a ticket to the opening ceremonies of the Beijing Olympics," stated the report, which also criticized Nike, Puma, Asics and Li Ning, and was hand-delivered to company executives.
However, as Adidas is the only official Olympic sponsor in the sports-fashion world, analysts are confident that the firm will reap the benefits within China itself long after the Games have closed."You could buy a set of Adidas clothes just to identify with the Games, to show national pride," said Rosenke. "This is definitely the right way to approach the Chinese market, in my opinion. If Adidas is successful at establishing Adidas as a brand that's pro-China, part of this new national pride, then I think it's possible that Adidas will be successful in the long run."
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