How Adidas lost China 📉🇨🇳
Plus, Nick Kyrgios is mad about Marijuana and the highlights of the transfer window.
Welcome to Athletic Interest.
A month ago, Adidas released a statement with this rather confident headline:
“Adidas with Strong Growth in Western Markets.”
And a few days later they released another statement:
“Adidas CEO to step down in 2023.”
What happened?
Adidas is one of the most influential players in sports, pulling the strings in the background of organizations like FIFA, UEFA, Real Madrid, Man Utd, and Bayern Munich.
The dismissal of Kasper Rørsted is therefore of interest not only to Adidas employees but all sports fans, especially sports business nerds like us (and probably you.)
So let’s break it down.
When you look at the performance of the Adidas stock price over the last few years, the departure of Rørsted seems almost inevitable.
Rørsted took control of the German sportswear giant in 2016. His predecessor Herbert Hainer, now president of Bayern Munich, had managed to more than double Adidas’s market cap in the five years before.
In Rørsted’s six-year tenure as CEO, the Adidas stock price increased by just 2%.
While the company experienced some growth in that time, the past year has been a complete disaster, with the stock losing around half of it’s value.
So, why has Adidas been struggling so much?
To find the answer, we have to go east…
If you’ve ever ordered on Wish, you know the meaning of ‘Made in China’.
The term was often used in a pejorative manner to refer to any low-quality products regardless of origin.
But ‘Made in China’ isn’t what it used to be anymore! That’s thanks to a trend called Guochao that is flooding China. Guo what?
Guochao (国朝), meaning ‘national wave,’ refers to the fact that young Chinese consumers are increasingly interested in the integration of traditional Chinese culture and style with domestic brands and products.
It all started at New York Fashion Week in 2018, where Chinese sportswear giant Li Ning made its debut. The brand showcased streetwear collections imprinted with colour palettes and slogans popular in China in the early 20th century. Li Ning’s catwalk made Chinese nationalism a trendy fashion statement, tapping into a rising sense of cultural confidence among Gen Z Chinese.
Many brands like KFC, L’Oreal and Oreo followed and tried to tap into the guochao trend by showcasing designs and collaborations inspired by Chinese culture.
But Adidas didn’t. They simply tried selling the same products to Chinese consumers as they were trying to sell to Western consumers. With some serious consequences.
Just take a look at these two graphs.
This shows Adidas’s net sales by region over the last few years. Notice the huge amount of blue which represents Asia.
And this graph show’s the supplier by region. Yet again, Asia dominates.
What these two graphs show pretty conclusively is that Asia is probably the most important market for Adidas, both in terms of supply and demand. Not to mention that China specifically has long been the most profitable market per item for Adidas.
Messing up your marketing by missing a trend like Guochao in your most important market is not a good idea. But it got even worse.
Many Chinese consumers have been boycotting Adidas after the company agreed to stop sourcing cotton from Xinjiang after reports of human rights abuses against Uyghur Muslims.
And we didn’t even mention the pandemic yet.
With lockdowns sweeping across Asia, demand for sports gear has fallen dramatically.
The full impact of these unfortunate circumstances can be seen in Adidas’s recent financial results:
Sales in China dropped 35% in Q2 of 2022.
Sales in the rest of Asia dropped 16%
While this is not ideal, these losses were somewhat offset by impressive growth across the western world.
North American sales increased by 21%
Sales in Latin America went up by 37%.
Still, in the figure that matters most - net profits - the company has seen a 28% decrease year on year and there are no signs of improvement.
It’s a consequence of neglecting a market that the company once looked upon fondly.
Adidas had always been able to rely on China. As early as 2008, Adidas opened its then world's largest flagship store in Beijing and became one of the most popular western brands in China.
But with demand in the company’s most profitable region falling, and supply issues raising costs dramatically, it was just a matter of time for profits to start decreasing.
While other western competitors, mainly Nike, were also hit by Chinese consumers switching to local brands Anta and Li Ning, Adidas takes the biggest hit.
While Nike could offset most of its losses in China by a booming eCommerce business, Adidas had relied too heavily on physical stores in China, and its online presence was rather low.
Adidas has now recognized this weakness itself and announced billion-euro investments in its eCommerce business.
The next sneaker wars will be fought on two battlefields: online and in China.
🍎 Sports Business Bites
📈 📊 The summer football transfer market has just closed and the top five leagues spent just over €4.5 billion on players. Here are some interesting facts from the last few months:
Most expensive player - Anthony 🇧🇷 (Ajax → Man United €95m.)
Best Deal - Erling Haaland 🇳🇴 → Man City (Price €60m - Value €150m.)
Top spending league - Premier League 🏴 (€2.24B)
Top earning league - Premier League 🏴 (€884m)
Most profit - Liga Portugal 🇵🇹 (€260m)
Highest spending club - Chelsea 🏴 (€282m)
Highest earning club - Ajax 🇳🇱 (€216m)
Most profitable club - Ajax 🇳🇱 (€111m.)
This window has not produced any surprises. As always, the Premier League has used its superior TV money to spend almost as much as the other four leagues combined. The Portuguese clubs and Ajax have provided the top clubs with expensive talent and Chelsea’s new owners tried to make a statement by emptying their bank account. Surprisingly, this isn’t the record summer window, that accolade belongs to 2019 (€5.85B.)
🏀 ⚽️ Lebron James and Drake are set to become investors in AC Milan Football Club. The duo are members of the investment group Main Street Advisors that will take a small stake in the $1.2 billion deal that is being led by U.S. firm RedBird Capital.
Although Lebron James will be a passive investor in the club, this will be his second large football investment. James purchased a stake in Liverpool FC in 2011 and converted that into a smaller stake in Liverpool’s parent company Fenway Sports Group in 2021.
🎾 It’s the US Open again and there is only one thing everyone is talking about…Marijuana! Well, that’s true if your name is Nick Kyrgios. In one of his now famous (and customary) mid-match rants, Kyrgios has accused a fan of smoking Marijuana while sitting in the stands.
This comes after Kyrgios has been taken to court for accusing a fan of being drunk and disruptive during the Wimbledon final.
Perhaps if Kyrgios had watched our video on Marijuana in sport he wouldn’t be so quick to have the fan removed!
To wrap up this week, here are some fun social media moments we have found…
And this incredible billboard from Nike!