China’s smaller sportswear players seen losing market share in face of foreign competition

PUBLISHED : Monday, 06 June, 2016, 6:17pm
UPDATED : Monday, 06 June, 2016, 6:17pm

The Chinese sportswear industry can expect fierce competition over the next five years because existing foreign-market leaders and new entrants are aggressively expanding their business, Fitch Ratings said.

Fitch said the fierce competition will likely see smaller domestic players in the sportswear industry suffer market-share erosion due to weak brand recognition and lack of product differentiation.

Yi Zhang, an analyst at Fitch Ratings, said leading foreign sportswear makers will accelerate their penetration into lower-tier cities in China to tap new consumers.

“They will be supported by their strong brand recognition and product offerings across different price tiers,” said Zhang. “For instance, nearly half of the new stores opened by Adidas in the past five years were located in lower-tier cities.”

Kalai Pillay, senior director at Fitch Ratings, said he estimated that third-tier cities and below account for about 50 per cent of gross revenues in the sportswear market in China.

The Chinese sportswear industry is expanding rapidly, with Pillay estimating it will grow to revenues of about 300 billion yuan (HK$354.6 billion) by 2020 compared with 100 billion yuan in 2015, based on the General Administration of Sports’ five-year plan (2016-2020) that was released in early May.

However, markets in third-tier and lower tier cities have expandedin a more healthy fashion, he said.

Consumers in lower-tier cities may seek more value in brand identity and product differentiation, which are weaknesses of domestic brands
Kalai Pillay, Fitch Ratings

“Markets in these cities have many domestic brands participating, and they compete mainly on price,” Pillay said in a report. “With rising disposable income and a shift towards more healthy lifestyles, consumers in lower-tier cities may seek more value in brand identity and product differentiation, which are weaknesses of domestic brands.”

Foreign leaders in the sportswear industry, with strong brand identity and product differentiation, will be more attractive to new consumers in China’s lower-tier cities.

The big foreign sportswear makers have seen strong growth in their mainland China top lines in the first quarter of 2016.

Adidas recorded a 28 per cent increase in its net sales in mainland China for the first three months of 2016 over the same period last year, whereas its full year growth in 2015 was only 18 per cent year-on-year.

Similarly, Nike reported a 27 per cent year-on-year growth in its sales for the Greater China region in the three months ended February 2016.

As a result, leading foreign sportswear makers are allocating more capital expenditure in China in 2016. For example, Adidas has budgeted 750 million (HK$6.48 billion) in global capital expenditure for 2016, compared with 513 million last year. Pillay expects China to account for a large share of this capex expansion.

For Chinese sportswear makers, the increased competition from foreign brands is already starting to drag down their order growth from the high double-digit pace seen in late 2015 to low-to-mid double digits in early 2016.

Pillay said he expects smaller domestic manufacturers’ margins to come under pressure in the next five years due to increasing competition.

Domestic manufacturers may lose out to the competition because their pricing flexibility with distributors is lower than leading foreign makers. In addition, rising labour costs in China are also putting Chinese domestic manufactures under greater pressure.

Fitch analyst Zhang said in a report that foreign players are expected to continue to lead the sportswear market in mainland China’s top-tier cities during the next five years. However, new entrants such as Under Armor and larger domestic brands that are retooling their brand image with higher-end products are also likely to reshape the market structure, Zhang added.

Domestic market leader Anta formed a joint venture with Japan’s Descente and Itochu in 2016 to provide high-end, professional sportswear.

Similarly, 361 Degrees teamed up with One Way, a Finland brand specialising in winter and outdoor sports, to diversify its product portfolio and grab more market share in the high-end winter sports sector.