“Discovering the enemy's dispositions and remaining invisible ourselves, we can keep our forces concentrated, while the enemy's must be divided.” – Sun Tzu
If U.S. based athletic footwear and apparel branded companies aren’t familiar with the ancient Chinese military general and author of The Art of War quoted above, we suggest they pick up a copy – perhaps then Li-Ning’s strategy wouldn’t be such a mystery. Since opening its design office in Nike’s back yard back in January 2008, China’s largest athletic footwear company has taken a methodical and understated approach to entering the U.S. athletic footwear/apparel market – this week’s launch of the company’s first lightweight running shoe is no different. Likely positive for retailers like FL, FINL, DKS and HIBB in the intermediate-term, potentially more competitive for NKE and UA long-term.
Given Li-Ning’s more public efforts over the past 2-months, we’ve taken a step back to put its development in context – consider the following:
- Consistent with prior launches, partnerships, and corporate developments, Li-Ning officially launched the lightweight Freemont running shoe yesterday unbeknownst to just about everyone. While not the first foray into running (the F2 Runner launched in August), the Freemont confirms Li-Ning is both serious about entering the category and a legitimate innovator of technical footwear. The Freemont weighs ~7 ounces (nearly 15% lighter than Nike’s Free) and the F2 Runner features molded foam construction (think Crocs-like material, not look). We expect future launches to be similarly covert.
- Li-Ning is no longer just a foreign-based basketball brand. With the addition of running, the company is quickly building out its product portfolio. There is talk of a lifestyle collaboration with NBA’er Baron Davis and along with other ‘off-the-court’ offerings. Recall that Baron Davis is one of the higher profile endorsers of the brand beginning this season, along with rookie Evan Turner. Similar to its approach in basketball, we anticipate additional high profile athlete endorsements in the coming months to promote new category extensions – stay tuned.
- With an inherent low-cost structural advantage stemming from manufacturing assets and a low cost of capital, Li-Ning may actually have cost advantage on its domestic competition. So far, product has been introduced at low-to-moderate price points. With basketball shoes selling from $65-$100 and the F2 Runner at $59.99, we wonder what happens if the company ups the ante with premium/technical offering at prices well below the current $100-$160 premium price point norms? This point becomes more relevant as the brand does.
- Few appreciate the size of Li-Ning and therefore, the backing behind these initiatives – the company reported sales of $1.3Bn USD in FY09 growing at a 2-year CAGR of ~40%. With roughly a 50/50 split between footwear and apparel revenues, the company’s footwear business is nearly 5x that of Under Armour by comparison. More importantly, besides having an R&D budget likely exceeding UA’s, the brand’s footwear heritage, team, and existing China infrastructure should enable it to test and adjust to underperforming initiatives rapidly.
- Lastly, new product extensions are positive for domestic athletic footwear retailers. Given its existing exclusive relationship with FL’s Champ’s division in basketball (the Baron Davis line is exclusive), we expect Foot Locker to be a primary beneficiary of future develpments. It’s important to note, that the company is currently targeting specialty run shops for its new lightweight shoe. The key here remains how the brand ultimately decides to tier product by channel, with a clear differentiation between price points, technical features, and design. With it’s first foray into the market at sub-premium price points, we suspect price is being used a way to entice consumer trials. Over time however, the jury is still out as to where the brand may sit on the shoe wall at any given retailer.
After studying its competition for more than 2-years now, Li-Ning is taking precise steps to enter select markets, which so far include basketball, running footwear, and compression apparel (they just acquired a high-end UA like compression company based in Australia) – for now. While the company has done a commendable job in staying largely ‘invisible’ to its competition, the accelerating product/event timeline below suggests the competitive threat on domestic soil is mounting.
Li-Ning: F2 Runner