In an earlier article, I wrote about Nike’s bid to reach $50 billion in sales by 2020. I covered the main growth drivers that will get them there. In this piece, will cover China in a little more detail because I think that is where the future for Nike really lies. With high penetration in mature markets and a fragmented sports footwear industry, Nike’s market share has pretty much peaked except for that one big market currently sitting outside its revenue bucket.
When you’re earning revenues in millions of dollars, it is easy to project a 10% CAGR. But when you are at $30 billion, people turn skeptical about such a revenue growth projection, especially when you say you are going to sustain it for the next five years.
Where does Nike’s confidence come from, then? To answer that question, we need to look at its current revenue distribution.
Nike is still the king in footwear, with nearly 64% of sales coming from that segment; obviously, it will be the crucial player in the company’s ambition to add nearly $20 billion to its topline over the next five fiscals.
In addition, with nearly 48% of revenues coming from North America and another 25% coming from Europe, these two developed markets account for more than two-thirds of its current revenue streams.
Considering the competition and the maturity of the these geographies, howeverm achieving double-digit growth — which they have managed to pull off in the last five years — is a bit of a stretch, though not completely impossible. As you can clearly see, the have nearly doubled sales in North America and made some solid gains in Western Europe, but doing an encore of that feat is going to take some time.
The China Bet
China is possibly the second largest country for Nike in terms of sales after the U.S., with 2015 revenues in the Greater China region netting $3.07 billion. After a brief slowdown during the 2012-2013 period, revenues started growing despite the sputtering Chinese economy.
This is one key market where the company can look for the continued double-digit growth rate that it is yearning for, and China holds the key to Nike’s growth trajectory over the next five years.
Mirroring the global trend, the Chinese footwear market is highly fragmented, with plenty of regional players. Euromonitor estimates the market to be worth Rmb370 billion or $55.24 billion, and Nike has not even captured 10 percent of that yet.
“According to the projection made by Euromonitor, in the next few years China’s footwear market will continue to grow at an average rate of 7%. A market survey conducted by Euromonitor estimates that sales in China’s footwear market in 2016 amounted to Rmb370 billion.”
“Nike (China) Inc. led footwear sales in China with a retail value share of 7% in 2015. The dynamic growth in 2015 was mainly driven by a series of effective measures. Firstly, Nike collaborated with the China Football Association (CFA) to equip the country’s national football team with Nike professional sports footwear. This helped Nike further strengthen brand equity and recognition in the Chinese market. Secondly, Nike launched new products combining high-tech design and characteristic Chinese elements. For example, new products such as Hyperdunk Low and Air Force 1 High Nai Ke added the China Red element in their design. NikeID also launched the China Red theme in customised designs in September 2015. These activities further deepened consumers’ association with the brands and their products.”
In terms of the sheer population size alone, the Chinese market is irresistible to any major company that is hitting growth plateaus in mature, developed markets. But the one mistake everyone makes is to assume that what works in the West will work anywhere else. That might work for technology companies, but certainly not for consumer products.
All you need to do is look at Wal-Mart (WMT, Financial) coming in strong in Germany with its “we sell for less” philosophy, only to turn and run with its tail between its legs after realizing that model does not work in that market. It experienced the same thing in Japan and a few other markets before its learned its lesson.
Nike, however, has worked this angle in a very smart way, incorporating the China Red into their design and really trying to understand the market before going gung ho.
But in order to tap the largest consumer market in the world, pricing is critical. With its shoes priced easily above the $50 mark, it only has the middle class as its real target segment. That might have posed a real problem for Nike had it not been for the Chinese middle class growing at a rapid pace on the back of a prosperous — perhaps temporarily a little shaken — economy that is currently growing its GDP at 7.7%. Compared to 2.2% in the U.S. and 5% in India, you can see why this would indeed be an important market for Nike to focus on, to say the least.
According to ANZ research, 93% of China’s urban population will be middle class by 2030, and 326 million new middle class citizens will emerge in China’s urban areas from 2014 to 2030, leading to a total population of 854 million Chinese urban middle class. This is more than double the current total U.S. population. The consumption share in GDP is also expected to increase from 36% in 2014 to 50% by 2030.
- Forbes
So the growth itself will not be a problem as long as it continues to pursue its strategy of localizing products to the tastes of the market. The one problem they do have, however, is counterfeit products. This is something that several companies continue to struggle with, including China’s own Alibaba.
One of the reasons for Michael Jordan’s visit to China last year and the more recent trip by Kobe Bryant is to hit home the fact that Nike wants to have their Jordan and Kobe brands to remain connected to basketball, which was the origin of the Nike craze in China in the first place. What Nike doesn’t want is for its shoes to become a lifestyle fad rather than a basketball accessory.
According to Nike Spokeswoman Jeanne Huang: “We don’t want the brand as a lifestyle brand.”
The Investment Angle
Nike has a clear runway for growth in China on the back of basketball success. The country is undoubtedly the largest in the world where basketball is concerned, and the current 7% market share they have will give them a lot of room for growth. Even if they do double their revenues in China to $6.5 billion by 2020, it will still only be less than 10% of the growing market.
From an investor’s perspective, Nike is still trading at a high valuation, but the growth path is clear, and China is one opportunity that Nike is perfectly positioned to take care of. As I have said in my previous article on Nike, the best way to buy into a high-valuation stock is to either buy on stock dips caused by earnings shocks or soft guidance, or do a dollar-cost average approach over a two-to-three year time frame.
This is a strong company that will keep growing well past 2020, but to invest profitably in such a company, you will need to use a disciplined method instead of putting all your eggs into one basket.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
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