Nike loses market share to Chinese brands in domestic markets

The total addressable market is an interesting concept. It’s what financiers and capital allocators use to describe the potential size of a market they enter, and an approximation of the “size” of their investments.

That’s why China has been an incredibly attractive target market for brands over the past decade. With a population of just over 1.4 billion, there are few markets more “addressable” than the Chinese market. But size isn’t the only thing that matters.

Chinese consumers love to spend, and the numbers prove it. According to a Morgan Stanley report, Chinese consumer spending is expected to double to $12.7 trillion per year by 2030 – equaling US consumer spending

The Swoosh has relied on China to drive much of its growth in recent years, and it has paid off. Nike saw year-over-year growth of around 302% in the region, which is undeniably great news for the company’s bottom line.

Changing tides

The narrative, however, changes. According to a Bloomberg report on Chinese consumers, since 2018 American brands like Nike have shifted to a nationalist focus on local consumer goods.

Let’s not get this twisted – Nike still has a huge presence in the region and continues to grow. CEO John Donahue even said on a call with analysts in June 2021 that Nike is a “brand of China and for China.”

But despite its best efforts, the Swoosh can’t get past a new reality where brands like Anta and Li-Ning are forcing overseas brands to rethink their strategies.

Let’s take a look at the data.

sneaker wars

On Tuesday, Bloomberg published another detailed analysis report sales data of various shoe brands in China via the e-commerce data tracking platform.

The data tells a fascinating story.

  • In 2018, Nike was at the top of the rankings in terms of market share, holding around 30% of sneaker sales on the Tmall e-commerce platform.
  • From 2018 to 2020, the top spot would swing between Nike or Adidas as foreign brands saw their combined sneaker sales market share reach nearly 50%.

During the same period, domestic brands such as Anta, Li-Ning and Xtep have lagged considerably behind. In 2020, even Converse has surpassed them.

At the end of 2020, amid difficulties with Covid-19 and supply chain issues, Nike’s sales in China were the company’s fastest growing – up 24% year-on-year and topped $2 billion for the first time ever.

Then came the Xinjiang cotton controversy.

The Xianjing moment

In March 2021, Nike and other foreign brands made public statements denouncing the use of cotton produced in China’s western Xinjiang region due to human rights abuses. The result? Backlash from the Chinese population.

This is when the data changes. After brand protests in Xinjiang, Bloomberg reported that Anta, Li-Ning and Xtep quickly took the top three spots in terms of sales.

Since that time, the “Fugian Tigers” (a nickname for Chinese sportswear companies) have entrenched themselves at the top of the sales list – earning additional benefits from events like the Beijing Winter Olympics.

At the end of January 2022, Anta and Li Ning accounted for 28% of sneaker sales, up 12 percentage points from before the Xinjiang outcry. During the 12-month period ending January 31, Chinese national brands saw their sales increase by 17% while foreign brands saw their sales fall by 24%.

Benefits of Nike

Nike released its latest earnings in December 2021. Domestically, results were outstanding with sales up 12% in the company’s largest market: North America. The latecomer? You guessed it: China.

Nike’s sales in China were down 20% over the one-year period and although many cited Covid-19 and factory closures as a driving force, changing Chinese consumer preferences do not could be ignored.

Prior to the Xinjiang controversy, Chinese revenue accounted for 22% of Nike’s total revenue, a figure that had fallen from 10% just a decade earlier. In the quarter following the controversy, the percentage of Chinese sales fell to 16%, erasing half of the growth of the last decade.

New markets

The Chinese market and opportunities are far too vast for Nike to slow down its investment in the region, but banking on the growth of the past decade may no longer be a viable option. The company will likely have to look to new regional markets to grow.

Another potential lead: the metaverse.

While many physical geographic markets are mature or lack consumers with the disposable income to match Nike products, the metaverse could present an attractive growth vector.

Nike has been no stranger to space so far.

  • In May 2019, Nike’s Jordan brand teamed up with “Fortnite” to produce character skins.
  • Nike deposit a patent for “CryptoKicks” in December 2019, which would link the physical shoes to an NFT to verify ownership.
  • In December 2021, Nike acquired RTFKT, which produces NFTs that are sometimes associated with a physical collectible like sneakers.
  • In November 2021, he created virtual real estate within Roblox with Nikeland, an environment where users can play games and browse digital products.

In its latest earnings report, Nike reported a 12% increase in digital sales while cutting ties with various physical retailers.

Even as China’s growth chapter draws to a close, Nike bulls can rest easy knowing that the sportswear giant almost certainly has an increasingly strong digital presence in its future.

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