For active apparel companies, there's a new playing field where the competition is just beginning to mount — with perhaps the biggest prize of all.
Although the Asian region now contributes from one-tenth to one-third of sales for most active companies, industry experts expect growth there will outpace the more mature European and Americas markets.
"Right now there is enough business for everybody," said Matt Powell, an analyst for SportsONESource Inc., a consulting firm. "I don't know how important it is right now to be number one, as long as you are growing. I think they are all making money there. China's market is still much smaller than the U.S. or Japan, but the potential is much larger."
With more than 1.3 billion people, China is the biggest target, and some active giants are opening a store a day there. Japan, which has long been the second biggest country for most active companies, is still important, as is South Korea. And as many active executives put it, "India is the next China."
With huge, young populations and growing discretionary incomes, the Asian region has growth potential that dwarfs the more mature Europe and U.S., where most active companies are still expanding but at a more measured pace. Business of all kinds is flocking to Asia, particularly China, but active companies may have a special opportunity there.
"These are countries that are very much focused on all things American, and the Chinese teen thinks of sport as a quintessential American thing," Powell said. "There is a great desire to have things exactly like it is in the U.S., and being an authentic American brand is vitally important."
That doesn't mean, though, that Beaverton, Ore.-based Nike necessarily has an edge over the German Adidas. Powell said active apparel, including Adidas, is equated with the American lifestyle, and according to Adidas, it is "seen as a global brand, not a German brand" there.
Adidas is confident about its position in Asia. The region now makes up about 20 percent of the company's business, and it has experienced double-digit sales growth for the last few years. Last year Adidas overtook Nike as the market leader in Japan. As it builds a store a day in China, with plans to go from 2,600 units to 5,000 there by 2010, Adidas aims to be number one in the country by 2008."If just 10 percent of Chinese [people] have the purchasing power to buy international brands, it's the same as half of all American consumers," said Jan Runau, chief corporate communication officer of Adidas.
Adidas attributes some of its growth to its corporate strategy to reclaim subsidiaries and take full control of key global markets. Last month it bought back its South Korean partner's share. The purchase was similar to what Adidas did in Japan in 1999, a move it credits with going from "a distant number two there to overtaking Nike last year." The company also has bought back Reebok distribution rights for China, and is adding a Reebok store every day and a half next year in China, to add to the 500 already there.
"Our strategy is to be wherever we can take the business into our own hands and take over our own subsidiaries," Runau said. "A partner might be a good way to enter the market, but if you want to capitalize on the full potential of the market, you need to control your full distribution."
Though also a giant, Nike uses partners in Asia. Coming off double-digit sales growth in the first quarter of fiscal 2007, it promoted three longtime employees to vice presidents in the Asian region. China is Nike's fastest-growing market, with sales that doubled in the past two years to more than $600 million. In the next two years, it expects revenues there will exceed $1 billion, positioning China second only to the U.S.
Fila, for which Asia, Europe and the Americas contribute near-equal thirds, uses local partners in Asia, which it does not do in Europe or the U.S., and the firm expects significant growth in Japan after recently aligning with Itochu there. Yoga-inspired apparel company Lululemon Athletica also recently forged a joint venture in Japan, partnering with Descente Ltd. to form Lululemon Japan Inc. The Vancouver-based Lululemon plans to open 20 stores in Japan in the next five years, and is now looking for partners in Hong Kong, Singapore, South Korea and China.
"I think local management is the key to succeeding in the Asian markets," said Robert Meers, chief executive officer of Lululemon Athletica. "You need someone with local market knowledge."Powell couldn't agree more. "The tough thing is you have to do it with a Chinese partner. No one has been successful going it on their own," he said. "The local laws are certainly not like the retail laws here, so you are best to have a partner who understands the customs and regulations. A local partner can also help a lot on size scales and popular colors."
The Asian market is indeed different. Sizing is perhaps the biggest one. More than a third of Lululemon's Asian sales are in XXS, XS and S, while those contribute only a tiny fraction to North American sales. Lululemon customizes 20 percent of its styles "in local design and color to take advantage of trends that may be different, but we centrally merchandise the entire line." Although some consumer preferences are unique to the Asian market, for the most part, Asian consumers demand "exactly what is sold in America," according to Powell.
Retail stores play a more important role in Asia than they do elsewhere, according to active executives, because Asian consumers prefer to shop in that manner. "A store is the best way to communicate with that customer," said Mark Westerman, global marketing director at Fila, which does no wholesale business in South Korea, but has had retail stores there since the Seventies.
As far as sports categories, basketball and soccer are key. And in India, cricket is huge. For women, general wellness, including yoga, running and walking, is more important than an elite athlete approach.
"Exercise, in general, has always been a deep part of the Asian lifeline," said Meers at Lululemon. "Today both the Asian and expat market is very much involved in yoga, exercise, diet, well-being and stress reduction."
But Asia is a huge and diverse region, and generalizations can be dangerous. The area is very complex, with significant discrepancies between nations regarding climate, wealth and fashion and sport preferences. Even sizing is different, and Reebok gives each key country its own fit model and design team.
Of course, one of the biggest differences is the level of development. While Japan is the world's second-largest economy and has a per capita income of about $30,000, China's average income is only about $5,000, according to the CIA World Factbook. Although China clearly has the numbers and growth level to project future growth, some question whether companies are actually making money there, or whether the surge of growth there is more of an investment in the future — so that when the Chinese have discretionary income, each active firm will have established its credentials as an aspirational brand."We're investing to get ahead of the curve," said John Chapel, senior vice president and general manager for Asia Pacific at Reebok. "We need an emotional connection with the consumer. In developing countries, it is about an investment in consumer mind space."