Though brands like Nike may be starting to bounce back from last month’s boycott calls, others may face longer, tougher roads forward.
Stifel, an American brokerage and investment firm, talked with Shanghai-based analysts Thursday about how athletic brands have fared in China following a backlash against companies that had issued statements expressing concern over reports of forced labor and allegations of “genocide” in the Xinjiang Uyghur Autonomous Region of northwest China.
The call with China Market Research (CMR) analysts Kerstin Brolsma and David Liu led Stifel to issue an update Friday concluding the situation will have a “non-trivial impact” to Nike’s revenue. This is despite earlier theorizing by others that the boycott calls could backfire and act as a “bullish catalyst” for Nike.
Stifel downgraded its revenue and earnings per share estimates for both Nike’s 2021 and 2022 fiscal years, defined by the company as concluding at the end of May. The adjustments were slight—it decreased its revenue forecast from $43.5 billion to $43.4 billion for 2021 and from $48.5 billion to $48.4 billion for 2022—and weighted toward the current year—the earnings per share estimate went from $3.28 to $3.23 for 2021 and from $4.20 to $4.18 for 2022. Stifel maintained its 2023 estimates—revenue of $52.7 billion and earnings per share of $4.79.
In the call, Brolsma said store checks the firm had conducted in China had shown traffic down 20 percent to 50 percent at Nike and Adidas stores.
“There are many loyal Chinese customers who still are purchasing Nike shoes,” Brolsma said. “But where are they purchasing them? They’re purchasing them at the flagship store in downtown Shanghai from the specialist third floor that’s dedicated to basketball. They’re not purchasing it from a franchise store. Franchise stores are seeing significant downward growth, they’re in poor locations, they’re in older malls, they attract few consumers and they don’t really get a lot of the key products that would be something that a loyal Nike customer would be interested in purchasing.”
Brolsma noted that CMR has already observed a bounce back in traffic at Nike stores over the past few weeks. Given what the firm has seen, she estimated the company would be back to where it was in March in two to four months.
Adidas, however, may have a harder path forward. But, according to Brolsma, the issues it faces now originate from before last month’s backlash.
“This incident has illuminated some of the other problems Adidas was already facing in the China market and so I think because Adidas right now does not have a good grasp of who their target customer is, nor, after all of their spokespeople have cut their contracts, they don’t have a good way to easily shift their advertising model,” Brolsma said. “So, I think Adidas is up for a much harder road ahead than Nike.”
Smaller brands, meanwhile, seem to be doing better. “When you think of sports apparel and then you add ‘Western,’ Nike and Adidas are what come up again and again, and Skechers, Puma and Under Armour do not have that cachet with Chinese consumers,” Brolsma said. Skechers, in particular, recovered well, she added, identifying it as the only brand of the five to issue a statement that Chinese consumers have been receptive of.
In its statement, Skechers notes it immediately contacted Dongguan Lu Zhou Shoes, one of its factory partners, after it was identified in the Australian Strategic Policy Institute’s “Uyghurs For Sale: ‘Re-education’, Forced Labour and Surveillance Beyond Xinjiang” report. After speaking with senior management, Skechers said it conducted an unannounced audit last June specifically directed at investigating the allegations. In November, it audited the factory again. Neither of these audits, the company said, revealed indications of the use of forced labor or any other concerns about labor conditions. Most recently, it added, the factory provided Skechers with a “Social Responsibility Statement” guaranteeing the equal, fair and transparent treatment of all minority groups, including Uyghurs.
“Based on these facts, Skechers has no reason to believe that [Dongguan] Lu Zhou is using any forced labor; nonetheless, Skechers will continue to closely monitor and audit Lu Zhou and all factories and suppliers globally,” the statement read.
Skechers also said that it was “deeply concerned by reports of forced labor and the treatment of the members of the Uyghur ethnic minority” and other ethnic minority workers in Xinjiang. It added that it fully supports “the proposal by industry trade associations to find a solution through state-to-state engagements and collaborative partnerships across governments, industries, labor associations and non-governmental organizations.”
Meanwhile, based on CMR’s store checks, traffic at Under Armour has only fallen 10 percent to 30 percent. Though Brolsma said Puma also has not been hit as hard, she said the company had been pushing product promotions “much more visibly” than others.
While store traffic may have dropped at some locations, online sales appear to be performing slightly better. “Chinese consumers who might be scared to be seen in stores are purchasing online,” Brolsma said. However, this has not stopped a decline in e-commerce. According to CMR, e-commerce has taken a 10 percent to 30 percent hit, depending on the brand.
Digital’s slightly better performance, Brolsma noted, plays into the divide between Nike and Adidas’s current prospects. “Over the past 10 years, e-commerce has become the dominant and preferred way of shopping for young consumers,” she said. “It’s now accounting for 50 percent of the market and so, prior to this incident in March, this meant Nike was doing really well.” That company’s past focus on direct-to-consumer business and building brand loyalty, she claimed, contrasts with Adidas’ recent strategy of opening new stores while focusing less on online.
H&M, the brand at the center of the recent controversy, may face the toughest path ahead. While Nike and Adidas hail from two countries China may see as important geopolitically, H&M does not have this luxury. Its home country Sweden, Brolsma said, has had very poor relations with China for years.
“The Chinese government’s response to H&M can almost be seen as the government sending a signal to countries like Australia, to Mongolia, that really heavily rely on their relationships and partnerships with China, but are not necessarily as important to China,” Brolsma said.
Chinese brands, however, have flourished amid the recent controversy. Long ago seen as inferior to Western brands, Chinese companies like Li Ning and Anta have recently experienced traffic increases of 10 percent to 20 percent, according to Brolsma. Liu tied this to a broader trend from the past five years that he said has placed the brands on the same level as Nike and Adidas in the eyes of Chinese consumers.
“We have seen that Chinese consumers are more open to domestic brands,” Liu said. “They even have better value for money because they are cheaper in China and also, due to the patriotism among Chinese consumers, I see Chinese people as more likely to accept and purchase domestic brands like Li Ning and Anta.”
Though Chinese people have always been patriotic, Liu said they are increasingly acting on their national fervor.
“Chinese consumers are proud of the economic developments over the past 40 years and now Chinese people think it is okay for China to take a stronger position on the global stage,” Liu said. “If some countries are making bad comments, negative comments about China, Chinese people think now it is okay, that we’re strong enough to speak up for ourselves.”