China: It’s Time For Strategic Action

If probably flew under most radars that Li Ning (3rd largest footwear brand in China) struck an agreement with Lotto (#1 in Italy) to distribute the Lotto brand to Chinese consumers. While not a huge standalone event, it is yet another reminder of the number of brands that are flocking to China for a leg up in growth. This brings to my mind a couple of random China-related issues…
  • 1) Brands are flocking to China. Unfortunately, many of these brands have no reason to exist in the first place. Brown Shoe (BWS) attacking the Chinese middle-tier footwear opportunity? C’mon…first get the opportunity right in the US. ANY preexisting brand that cannot work in a developed market certainly can’t hack it in China.
  • 2) I like the Lotto deal. It is a premium Italian brand that clearly has a place on the feet of Chinese consumers. Without knowing financial terms, I’ll say at least that the strategic move was a sound one for Li Ning.
  • 3) There is definitely too much product being shipped in for the Olympics. Period. And it will take a lot to convince me otherwise. Think about it. Are the big brands growing aggressively in China to sell product around a 2-week sporting event? No. They want to be front and center in the eyes of consumers attending the event. Unfortunately, this means building a massive number of stores filled with a whole lot of product. China is a black hole where even the best brands have no clue how much product is in the market. There will be excess inventory in the wake of August.
  • 4) On a less doomsday-ish note, any inventory glut will pass. This is not like Atlanta, which took years to recover from the overbuilding around the 1996 Summer Games. I can’t imagine that any PM owning this stock would look at ‘post-Olympic market stress’ and subsequently deem the market broken. But still, an important growth driver will be frozen for a few quarters.
  • 5) I think we’re going to see a content transition in China. Yes this is purely my opinion, and I cannot quantify it. But Chinese consumers want US brands such as Nike, and European brands like Adidas to show the world that they’ve arrived – even if it means spending a week’s worth of income on a pair of kicks. But we’re seeing local brands gain some steam, like Warrior and Feiyue – not to mention Li Ning. Not only will these brands accelerate in China, but my bet is that they’ll become more prominent in Western markets.
  • 6) If Nike and Adidas are smart, they’re looking at deploying cash to add Chinese brands to their portfolios before they are playing defense and spending more marketing dollars to combat them. If I’m a Chinese brand with any history of relevance whatsoever, I’m scrounging every last Yuan I can find to build my brand image. I’ll get it back many times over when I’m acquired.
50-year old Warrior brand that is making a comeback in China. Orlando Bloom sporting Feiyues.

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