China Consumer

A case of athlete’s foot?

Top Chinese sportswear maker Li Ning stumbles and sees stock drop 28%

A case of athlete’s foot?

Fictional US customs officers start a trade war

Li Ning recently posted an ad on YouTube as part of its low-budget (but “edgy”) advertising campaign to sell more of its sportswear to US consumers.

The video features a Chinese import agent trying to convince US customs officials to let Li Ning’s new F2 basketball shoe into the country. It is a spoof on real events involving a shipment of F2s that got stuck in customs. The import agent protests: “They’re shoes! Li Ning!” prompting an officer to snarl: “I’m Li Ning (‘leaning’) toward kicking your a**!”

Ho, ho. But laughs are not at a premium at Li Ning’s HQ right now. That’s because after a period of phenomenal growth between 2002 and 2009, the Chinese firm is showing signs of slowing down – fast.

Apparel orders for the upcoming second-quarter have declined more than 7% and footwear orders dropped 8% from a year earlier. The company also forecasts its 2011 gross profit margin will be 1% lower than the previous year, says Hong Kong Economic Journal. Li Ning’s stock, which is traded in Hong Kong, has dropped 28% over the past month.

So what happened? With 7,748 outlets in China, Li Ning has surpassed Adidas to become the number two sportswear company. But only 474 stores were managed directly by Li Ning; the bulk were run by about 2,000 less experienced retailers. They were reluctant to cut prices to shift old inventory, leaving little room for new, higher-priced products. As a result, turnover has been slow while inventory continues to build up.

The response? Li Ning is merging 500-600 of its more inefficient sub-distributors, which is one step short of closing stores, says Beijing Youth Daily. Currently the company has more than 2,000 sub-distributors, over 1,700 of which operate just one store. The company now plans to consolidate the smallest sub-distributors with larger ones in hope of improving their performance.

Another problem, say analysts, is that Li Ning’s strategy of targeting both high-income and low-income consumers has confused shoppers. Yue Sanfeng, a partner at Hejun Consulting, told the China Daily that Li Ning needs to decide if it wants to be a high-end brand, which will put it head-to-head against mega brands like Adidas and Nike, or more of a mass market label. Aiming for both risks being stuck in the middle, with no clear branding position.

And there’s the image problem. The Li Ning brand, whose namesake and founder is a Chinese sports legend from the 1980s (see WiC17), does not seem to have the “cool factor” with young consumers. Even though Li Ning was founded in 1990, “they see us as their parents’ brand,” says Jay Li, general manager of Li Ning’s international division. Global Entrepreneur says the company now wants to distance itself from its silver-haired founder, relying on basketball stars like Evan Turner and Shaquille O’Neal for marketing star power.

Despite the problems at home, Li Ning is pushing ahead with its plans to take on the US market. The company told the Wall Street Journal last week that it is planning to invest $10 million in its US business this year, primarily to open warehouses to extend its distribution.

Ambitious? “Our founder Li Ning has always said his vision was never about building China’s Nike, it’s about building the world’s Li Ning,” says Jay Li. “You can’t be global without having a legitimate claim of market share in the most mature sporting goods market.”

Keeping track:In WiC93 we talked about the challenges sportswear maker Li Ning is facing in the domestic market, where order volume is declining and production costs are rising. But it turns out its trouble doesn’t stop there. Early this week, three senior executives all “resigned from their respective positions with the group to pursue their personal interests”according to a company statement to the Hong Kong Stock Exchange. Despite protestations from the  company that their departures would have no impact on operations, analysts say they are further evidence of  problems and the stock declined 8.4%, reports Bloomberg. (27 May 2011)

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