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"Adidas failed to fully understand Chinese consumers, which is a mistake." Adidas CEO Kasper Rorsted made a reflection in a recent interview.

This remark is directly related to Adidas' weak performance in Greater China. Earlier this month, Adidas released its performance report for the second quarter of 2022 and the first half of 2022. The data shows:

In the second quarter of 2022, Adidas sales were 5.596 billion euros, up 10.2% year-on-year; but sales in Greater China were 719 million euros, down 35.1% year-on-year;

In the first half of 2022, Adidas sales were 10.897 billion euros, up 5.3% year-on-year; but sales in Greater China were 1.723 billion euros, down 34.8% year-on-year;

Overall, in the second quarter of 2022, net profit was 309 million euros, down 24.2% year-on-year.

For such a high decline, Harm Ohlmeyer, senior vice president of Adidas Group Finance, bluntly said that the 35% sales decline was in line with its expectations for this quarter, but it was far from the plan at the beginning of the year. Encountered Waterloo in the Chinese market, what happened to Adidas?

01. Adidas Waterloo

Greater China refers to the four places on both sides of the Taiwan Strait dominated by Chinese or Han culture, including mainland China, Hong Kong, Macau and Taiwan. This is the fifth consecutive quarter of negative growth for Adidas in Greater China.

In the first quarter of 2021, the performance of Greater China was amazing. It was the region with the fastest revenue growth for Adidas in the quarter. The revenue of 1.402 billion euros increased by 155.9% year-on-year. In this quarter, the revenue of Greater China was second only to Europe, The Middle East and Africa region (EMEA), ranked second among all regions.

However, starting from the second quarter of 2021, Greater China has entered a long "recession". From the second quarter to the fourth quarter of 2021, Adidas Greater China sales were 1.003 billion euros, 1.155 billion euros, and 1.037 billion euros, down 15.9%, 14.6% and 24.3% year-on-year. Entering 2022, the situation of Adidas in Greater China is even more difficult, and the sales decline in the first quarter is as high as 34.6%.

Amid the weakness in Greater China, the German sports giant's overall revenue situation has also been affected. In the first quarter of this year, Adidas' global total sales only achieved a year-on-year growth of 0.6%, and the year-on-year growth rate in the second quarter was only 10.2%. The drag from Greater China is evident in a situation where Western markets are mostly maintaining growth.

Adidas sales by region in the second quarter of 2022

Adidas' gross profit margin also declined. In the second quarter of this year, the company's gross profit margin fell by 1.5 percentage points to 50.3%. In 2021, this data will be 51.8%. In the financial report, Adidas attributed the reason to a sharp drop in sales in Greater China and an increase in supply chain costs.

Indeed, Adidas' various expenses are showing an upward trend. In the second quarter of this year, Adidas' operating expenses rose 17.8% to 2.501 billion euros, and marketing and point-of-sale expenses rose 7.6% to 663 million euros.

And Adidas attributed the main reasons for the poor performance to the impact of the macroeconomic environment and the epidemic.

The financial report mentioned that the supply chain restriction in Vietnam caused a loss of about 200 million euros under the influence of the epidemic, and the suspension of the Russian business also reduced the revenue of the quarter by about 100 million euros. As for the Greater China region, the reason for the challenge is also attributed to the epidemic.

But not all companies have been overwhelmed by the epidemic, and many sports brands have grown despite the adverse trend.

The most typical is lululemon. In the first quarter of this year, lululemon achieved revenue of $1.613 billion, a year-on-year increase of 32%. In Greater China, although one-third of the 71 stores in mainland China experienced closures from the first quarter to the second quarter, lululemon still maintained a double-digit year-on-year growth rate, with a compound annual growth rate of more than 60%.

With this change, the ranking of global sports brands has also changed. For a long time, the pattern of Nike first and Adidas second has been broken. In July of this year, lululemon surpassed Adidas for the first time with a market value of 37.4 billion US dollars, becoming the second largest sports brand in the world after Nike.

In addition, Chinese local sports brands are still growing. The 2022 interim report released by Li Ning shows that in the first half of the year, revenue increased by 21.7% year-on-year to 12.409 billion yuan, and net profit increased by 11.6% year-on-year to 2.189 billion yuan. However, the decline in gross profit margin and net profit margin also revealed some hidden concerns. In this regard, Li Ning said that this was caused by the repeated epidemics and rising raw material costs. Regarding the situation in the second half of the year, Qian Wei, co-CEO of Li Ning, also expressed a very good performance. careful.

Another brand, Anta, has not yet released its interim report, but according to a market share survey conducted by research firm Euromonitor, Anta has replaced Adidas as the second largest sports brand in the Chinese market, second only to Nike in market share.

Overall, emerging brands and domestic brands in the segment are still sought after by Chinese consumers, but established overseas sports giants have suffered varying degrees of blows in the Chinese market.

02. Where did Adidas go wrong?

Greater China was once one of Adidas' most reliant revenue sources. Before 2020, Adidas achieved 23 consecutive quarters of double-digit sales growth in Greater China. In the new five-year strategy (2020-2025), Adidas has previously listed Greater China as one of its three strategic key markets. It is expected that by 2025, Greater China and EMEA will join the North American market as the company Contributed to about 90% of sales growth.

But before the five-year strategy was halfway through, Adidas encountered Waterloo in China. Where is the problem?

The first headache for Adidas is the inventory problem. In the second quarter 2022 financial report, Adidas revealed that the company's inventory increased by 35% to 5.483 billion euros.

In fact, Adidas has a long history of inventory problems. Before the epidemic, Adidas was already in a state of low cash flow and high inventory. According to the financial report, as of December 2019, Adidas’ inventory reached 4.85 billion euros, and its cash flow was only 873 million euros. At that time, Anta’s cash flow was about three times that of Adidas.

The backlog of inventory has also allowed Adidas to run discounts over the past few years. As early as the beginning of 2020, Adidas has carried out great discount activities, and the discounts are often 30% off or 50% off. In the second quarter 2022 earnings conference call, Adidas said it expected a significant increase in discount promotions in the second half of the year, especially in Greater China, a necessary move to clear excess inventory.

Boosting sales through discounts is an effective move, but this may further damage Adidas' already declining gross margin and revenue levels.

It is also mentioned in the financial report that Adidas will increase discounts in Greater China, especially on 9.9 (annual promotion on the Shopee platform, targeting Southeast Asia and Taiwan markets) and shopping festivals such as Double 11. This move is expected to bring about in the short term. 400 million euros in losses. The only way to get a discount is to drink poison to quench thirst, but the helpless Adidas has been using it for many years.

The long delivery time and poor sales are a deeper reflection of Adidas' supply chain problems.

According to media reports, it takes at least 18 months for a pair of sneakers to take at least 18 months from the first design sketch to the final delivery of the finished product to the store. After the listing, about 75% of the sports shoes have been released for less than one year, and it takes 2 to 3 months to make up for the listed products.

Nike CFO Matthew Friend once complained about the current supply chain. He said that the transportation time of goods to the North American market was about 2 weeks longer than before the epidemic, which had a significant impact on the company's in-transit inventory and the arrival of goods in the market.

Compared with Adi and Nike, which have their factories in Southeast Asia, the supply chain advantages of domestic brands are reflected. Shi Songyuan, vice president of Taihe Capital, said when he served as a financial consultant for the Chinese streetwear brand BEASTER: "China has built the world's most leading clothing supply chain, efficient product and supply chain organization, and achieved efficiency and cost-effective leadership. "

Over the years, the influx of overseas brands has built a mature supply chain system in China. China has a complete clothing and textile value chain, not only a large number of clothing manufacturers and a huge terminal retail market, but also a large number of raw materials and semi-finished products. supplier.

The advantage of China's supply chain lies not only in the soundness of the chain, but also in "fastness", which not only adapts well to the changes of "fast fashion", but also drives the model innovation of new consumer brands. The efficient C2M model supports an increasingly fast-paced market, allowing brands to continue trial-and-error iteration on a large number of new high-frequency and cost-effective products on the front end, and after accumulating user needs accurately, organize the supply chain to achieve precision with a small order and quick response model. Scheduling and rapid production, many products only need a shortest 7-day cycle from design to shelf sales.

In addition, the technical and marketing aspects of Adidas products are gradually falling behind.

Many consumers said in an interview with Caijing Daily Weekly that Adidas now has nothing to buy except Yeezy, "After 2016, Adidas seems to have stagnated in technology development and iteration. Everyone is right. Its impression always stays on Boost technology and Yeezy."

Guoyuan Securities mentioned in the report that domestic brands such as Li Ning, Anta, and Xtep have completed the initial pursuit of international brands in the cutting-edge technology of the midsole, while Adidas's current main technology is still the Boost platform launched in 2013. Its latest technology The market acceptance of 4D midsole and Lightstrike midsole is still weak.

At the marketing level, Adidas officials have admitted that they have gone through a detour. Adidas global media director Simon Peel once admitted in an interview that the group has over-invested in digital marketing channels to the point of sacrificing brand building: "77% of the company's marketing spending budget is on performance advertising, and only 23% is invested in brand advertising."

Adidas, whose products were stagnant and made directional mistakes in decision-making, happened to meet the wave of the rise of Chinese brands again, with a sharp contrast between rising and falling.

Of course, Adidas will not lie down. After the release of the first quarter earnings report this year, they replaced the head of the brand business in China, and Adrian Siu replaced Jason Thomas as the managing director of Adidas Greater China.

Cheng Weixiong, an independent analyst in the footwear and apparel industry, believes that although this move is helpless, it is better to change it than not to change it. This means that Adi needs to use new thinking, new ideas and new strategies.

At the specific business level, Adidas has set its sights on the DTC model. Anta has benefited a lot from adopting the DTC model. In 2021, this model will bring 35.6% of its main brand revenue, a year-on-year increase of 485%. In Adidas' plan, by 2025, the DTC business will account for about 50% of the company's revenue and contribute more than 80% of revenue growth.

As of the second quarter of 2022, Adidas' DTC business accounted for 20% of the overall business, maintaining a double-digit growth rate.

Adidas remains cautious about the medium and long-term judgment of the Chinese market: "China is gradually becoming a more competitive market, we will not maintain the profit margin of 35% in 2018 and 2019, but we believe there is still a chance to recover to 30%. about."

At the bottom of the valley, if Adidas wants to make a comeback, the first thing to do is to solve the current problems, otherwise the current predicament is far from the bottom.