Business

Chinese Market’s Promise Turns to Threat for Adidas

The sportswear company, along with other Western apparel brands, continues to suffer from a Chinese consumer boycott

In March, Adidas AG called China its biggest growth engine, with the German sportswear company aiming to win over Gen Z consumers there and use the Beijing 2022 Winter Olympics to showcase its brand.

Now China has become a liability.

On Wednesday, the company reported that its revenue in mainland China, Taiwan and Hong Kong fell 15% in the third quarter after dropping by 16% in the second. Adidas was hit by a consumer boycott that began earlier this year after the company, along with other Western brands, raised concerns about forced-labor allegations in China’s Xinjiang region.

Adidas shares were down around 5% in early trade.

Adidas’s China problem highlights a dilemma facing Western companies in the country, as Beijing toughens rules for businesses and geopolitical tensions rise. Businesses are grappling with how to stand firm on human-rights issues, something that consumers in the West demand, while continuing to profit from the world’s second-largest economy.

“It’s kind of a lose-lose situation,” said Ingo Speich, head of sustainability and corporate governance at German fund manager Deka Investment, which holds 0.8% of Adidas. “The options are limited.”

China remains one of its strategic growth markets, Adidas said Wednesday. The company is working on an action plan to mitigate the current downturn, it said, including brand campaigns, developing products for the local market, and expanding its stores network.

Addressing the consumer boycott, Adidas’s Chief Executive Kasper Rorsted told reporters that “the key will be to show consumers our appreciation and respect, to earn their loyalty and complement our global brand strength with a strong local angle and understanding.”

“There are good reasons to remain excited about the opportunity in China as outlined in our strategy, but it’s clearly also still quite some work ahead of us,” he said.

Apparel companies such as Nike Inc., H&M Hennes and Mauritz AB and Puma SE have also felt the heat. Puma’s Chief Executive Bjørn Gulden said last month that the company still couldn’t use Chinese influencers to burnish its brand, and shopper traffic in stores was down as it reported a 16% fall in Greater China revenues for the third quarter. The challenge is coming just as new, more competitive homegrown Chinese brands are emerging as powerful competitors.

“We have to accept that China will be more difficult than we had hoped for as we started the year,” Mr. Gulden said. “I think we are in a politically tense situation that we need to work through.”

Besides the consumer boycott, supply chain disruptions and factory closures have also affected sportswear demand in China. Adidas on Wednesday pared its full-year outlook, saying it now expects its top and bottom lines to be at the lower end of its previous guidance.

The company is more exposed than its competitors, analysts say. Mainland China accounts for close to a quarter of its revenues, compared with 17% for Nike and 5.2% for H&M, according to FactSet. Adidas’s share price has lagged behind both Nike and Puma in recent months.

“The China dependency is an issue for Adidas,” Mr. Speich said. “For Nike, the U.S.market is far more important. For Adidas, the European market is too small. They have to look to China for growth.”

To be sure, outside of China, Adidas and other sportswear companies are benefiting from factors such as a pandemic-induced boom of athletic wear. On Wednesday, Adidas said its revenues in North America, Latin America and Europe, Middle East and Africa grew strongly last quarter.

But China is now the largest apparel and footwear market in the world valued at $376 billion in 2021, followed by the U.S. at $330 billion, according to market researcher Euromonitor International.

Source
wsj

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