As it seeks to become China's top-selling sportswear brand, Li Ning Sport Goods Co Ltd looks to Nike for inspiration. The company has adopted Nike's massively successful marketing strategy of enlisting celebrity spokespersons, and imitates Nike's sales and operational strategies. Thus far, Li Ning has enjoyed high net profitability, and an asset return rate that enables expansion. The number of sales outlets is expected to reach 5000 by 2008, enabling Li Ning to maintain its status as the fashion and shoe manufacturer with the most extensive distribution network in China.
However, Li Ning's comparatively slow growth in sales revenues may not be keeping pace with its high promotional and marketing costs. How can Li Ning position itself against increased competition from Adidas, and its roll model, Nike?
Past competition between Reebok and Nike might provide an answer. Reebok achieved higher net profit and net asset return rates than Nike, yet the gap in sales revenues between the two ultimately contributed to Nike's victory over Reebok. Despite high marketing and promotional costs, Reebok failed to significantly increase sales volume. Nike, on the other hand, focused on continuously expanding existing product lines, which proved the key to its success.
Listed in Hong Kong, Li Ning’s total market value is HK$11.6 billion (US$1.506 billion). It has obvious financial advantages compared with many sportswear makers in the Mainland. Li Ning utilizes a light-asset based operational mode similar to Nike’s, which is also an important factor driving the support of the capital market.
This light-asset based operational model, first adopted by Nike in the1980s, has become the main business model for the sportswear industry, and is recommended by international consulting firms such as McKinsey & Company. Basically, while the model entails outsourcing product manufacturing and retail and distribution businesses, it allows the company to concentrate efforts on design, research and development, as well as a sales and marketing strategy dominated by spokespersons and advertising. This generates higher rates of investment return with lowered investment input.
Unlike other Mainland fashion or shoe makers, such as Prime Success International Group Limited and Ports International, which own their own manufacturing entities, Li Ning enjoys higher asset flexibility and a lower debt ratio, which were 92.44% and 26.65% respectively by the end of 2005. Its cash is concentrated on business operations. The model also relies on building an extensive and exclusive distribution network. Li Ning now has 4000 outlets in 550 Mainland cities, among which exclusive distributors account for 89%, contributing 77% of total sales volume. The company invested 421 million yuan (US$52.625 million) in product research and development and marketing in 2005, accounting for 17% of total sales revenues, among which 15.4% was allocated for marketing and promotions. This ratio is similar to Adidas’ 17% and Nike’s 12% but much higher than 4% of Prime Success and Ports.
Li Ning’s market positioning and marketing strategies have become more and more like Nikes'. During the second half of 2003, Li Ning extended its brand to penetrate the high-end market dominated by Nike and Adidas. In early 2004, the company laid out professionalized strategies to develop basketball products, particularly shoes. The company systematically put forth sponsorships at international sporting events and employed celebrity spokespersons, entering direct competition with Nike. It has inked partnerships with the NBA and ATP, and signed NBA stars Shaquille O’Neal and Damon Jones, as well as various athletes from the French and Spanish Olympic teams, as spokespersons.
Benefits and Setbacks
In the period between 2001 and 2005, Li Ning’s fiscal reports show a compound growth of annual sales revenues at a rate of 38%; its compound growth rate in net profit reached 42%, with an average net profit rate at 47%. In 2005, Li Ning’s net asset profit rate wasAlthough these statistics point to some of the successes of Li Ning's business model, sales income growth remains unsatisfactory. The natural expansion of China's sportswear and apparel market, rather than the capture of its competitors' market shares, accounts for Li Ning's sales growth. Over the past three years, Li Ning's compound growth rate has been 39%, below Nike's 41% and Adidas' 66%. The gap in market shares between Li Ning and its two largest competitors has grown larger.
Although Li Ning hopes to compete with Nike and Adidas in first-tier cities, where consumers wield the highest purchasing power, its fiscal report showed that the Shanghai and Beijing markets' contribution to the corporation's income structure fell from 10% in 2004 to 7% in 2005. Li Ning has already shifted its focus to driving sales in second- and third-tier cities. On the other hand, the company's internationalization is progressing slowly, with the international market contributing only 1.3% of total annual revenues in 2005. To improve product functionality, Li Ning has invested 2% of its total sales volume in research and development, compared with Adidas' 1%.
Risk and opportunities
Judging from the past example of the competition between Reebok and Nike, it seems that imitating Nike's commercial model carries high risks. The sportswear market is a fashion market in which consumer behavior and tastes can change drastically, quickly. Contracts and popularity can be unstable, and this instability in turn generates fluctuations in profitability.
Nike and Adidas both look on China as the most important market for business development. While Nike plans to expand its number of outlets from 2300 to 3400 by 2008, Adidas plans to double its current number of 2500 to 5000 outlets by 2010. After acquiring Reebok China's outlets in 2005, Adidas will increase its outlets by 200 to 250 annually, hitting a compound growth rate in sales of 27.16% by 2010. Adidas caught up with Nike during the 1990s, and its example demonstrates for Li Ning the necessity of market initiatives and product diversification.
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