China No Longer a Slam-Dunk Growth Market for Nike

Nike is the latest in a string of prestige global consumer brands to report weaker demand in China. This is not simply the result of deceleration in China’s economy, but has as much to do with market saturation and an increasingly discerning, price savvy shopping culture.

Inventory pile up and aggressive pricing

China has been the fastest growing consumer market in the world over the past decade, and regarded as a comparative safe haven of opportunity for iconic Western brands. Nike entered China 30 years ago, and has ridden much of the growth upside. But, its latest report shows that scheduled new orders for the period September 2012 through January 2013 are down 6%.

The problem is that Nike has a glut of unsold inventory in China, which has stifled demand for new merchandise. This in turn is the result of an increasingly competitive sportswear market, with high profile local players, such as Li-Ning, Anta Sports Products and Peak Sports Products, pursuing aggressive discount strategies to grab market share and to shift their own pile-up of inventory.

There is evidence too that the aspiration-fuelled consumption culture that has helped Nike grow in China is getting diluted. Chinese consumers are still hungry for prestige Western brands, but they are more discerning and price conscious than a year ago, above all in the major coastal consumption bases where Western brands are most visible.

Western manufacturers of apparel are finding more and more that their products need to be tailored to Chinese tastes. The best-selling Nike shoe in New York, for example, will not necessarily meet consumer expectations in Shanghai. And this is a shift from five years ago, when status consumption was mostly about the brand and much less about the product per se.

Last year, China accounted for 7% of Nike’s global retail sales, up from 4% in 2006, according to Euromonitor International. To keep that share moving upwards, Nike will need to increase the participation of China-specific merchandise in its portfolio mix. It is a design trend we will see across Western brands in China.

Expansion in China risks diluting the status of prestige brands

Nike will also need to be mindful of its expansion in China. There are signs that the growing retail ubiquity of some luxury goods brands has dampened its appeal among China’s upwardly mobile urban classes. In particular, brands that have been rolled out in the interior regions have lost some of their cachet in the major coastal cities.

This is not to say Western brands should not expand into China’s interior. On the contrary, it is arguably the next big growth frontier in emerging Asia. Rather, the challenge for prestige brands, such as Nike, is to expand into the interior without prejudicing brand equity in Shanghai and Beijing. This might require new regional segmentation strategies, or even regionally focussed secondary lines.

Crucially, Nike’s latest results expose a need for more effective management of inventory in China. And going forward that might require new investment in production and the route to market. Nike needs to be able to respond quicker to changes in fashion and consumer purchasing patterns in China.

Its latest shoe, the LeBron X “China Jade”, comes on stream this month at a price point of around US$180. This is high for a middle-income consumer base that has become more price conscious. The new shoe could end up applying further discount pressure on existing inventory, squeezing already tight margins.

The timing of new product launches is also an issue, therefore, but is tied up with the wider problem of unsold inventory. Given the negative impact on the company’s share price of slower growth in China, one has to think that Nike will sort out these issues, sooner rather than later.