Top 15: Nike — Without Liu Xiang and Li Na, What Keeps Nike Growing in China?

To build a big business in China, Nike needs events, retail, advertising, brand and a sports culture. It cannot do without any of them.

In September 2014, Li Na announced her retirement. In April 2015, Liu Xiang said farewell to his sporting career on Weibo. Nike sent off these two enormously valuable endorsers in style, Li Na with its "Be a Standout" campaign and Liu Xiang with nine tribute posters. Afterwards, the number of celebrities endorsing Nike in China fell to its lowest in years.

In other words, Nike lost two ambassadors with enormous pull. In 2003, it signed Liu Xiang for 500,000 yuan a year, when he was still a rising star whose biggest title was the 110-meter hurdles at the East Asian Games. Yet the most memorable thing Liu Xiang did for Nike was not winning gold in Athens. It was the "Greatness" campaign Nike produced with astonishing speed after he pulled out of the 2012 Olympics. The goodwill it earned the brand is hard to measure. According to one survey, 34% of consumers wrongly believed Nike was a partner of the London Olympics. The company actually paying was Adidas.

Li Na, a two-time Grand Slam champion, opened a window for Nike into two markets: tennis and women's sports. After she won her first French Open in 2011, her endorsement fee rose to about 20 million yuan. To keep her, Nike even let other sponsors' logos appear on her kit, something it very rarely allows its athletes.

An athlete's relationship with a sports brand can outlast his ties to any club, and the money binds them just as tightly. Adidas paid a staggering 750 million pounds to win the Manchester United kit back from Nike and put its own label on it. Another telling example is Under Armour. The challenger has climbed to second place among American sports brands, and on this year's second-quarter earnings call its CEO, Kevin Plank, credited UA's soaring revenue to the three athletes it had signed.

"Our products are very innovative, but what matters most is how we serve athletes," Steve Tsoi, Nike's Vice President of Marketing for Greater China, told QDaily. The names of Liu Xiang and Li Na are engraved for good on a plaque at Nike's Shanghai headquarters, but with its Chinese endorsers retired, the brand has far fewer chances to be seen.

Nike never sponsors anyone who is not an athlete, and losing two names will not change that. But it can still keep itself in view through big sporting events and marketing campaigns.

This year, 37-year-old Los Angeles Lakers star Kobe Bryant came to China for the 10th time. On the night of August 4, at the Black Mamba court in Shanghai, Nike staged the second knockout round of its basketball reality show Rise (《打出名堂》), and Bryant spent a full week coaching the young players. Twenty thousand people applied this year by submitting videos online; 17% of them, more than 3,000, were girls.

Besides a weekly 15-minute video tracking the contestants' progress, the Nike Basketball WeChat account pushes out tutorials on basketball fundamentals during and after the show, teaching ideas about training, teamwork and tactics.

Nike puts a great deal more into basketball, with programs for everyone from professionals to ordinary fans: the All-Asia Camp, high school leagues, a partnership with the CBA... With no homegrown basketball star to lean on, Nike's answer is these grassroots events, which educate the market slowly, one step at a time.

In fact, for lack of a sports culture, Nike's basketball and football businesses in China have long struggled to make headway. In the United States, Nike's full marketing formula combines product, athletes, events, retail and promotion, and the chain runs smoothly because the country has a sports culture in its bones. The athlete sits at the center: muse for product design, star of the commercials, draw for the events, and the face given pride of place in store displays.

Take "King James," LeBron James, whom Nike also brought in for Rise. He was the NBA's Rookie of the Year in 2003, and that same year Nike signed him to a 90-million-dollar endorsement deal. Within months of his NBA debut, Nike released his first signature shoe, the Nike Air Zoom Generation. It has made him a new signature shoe every year since and is now on the 12th generation. In the year James won a championship for Team USA, the Nike Zoom LeBron 10 also became the best-selling shoe in the NBA.

Beyond the NBA, this mature market has a Super Bowl that rakes in 780 million in one night, Major League Baseball, golf's majors... and countless men, women and children running in New York's Central Park. In China, sport leans toward competition and schooling. Nike is trying to rebuild here the formula that made it, but with these handicaps from the start, the process will be long. It organizes night runs, holds basketball tournaments, and even hangs Nike billboards in niche baseball bars. Huang Xiangyan, Nike's Senior Communications Director for Greater China, calls this kind of market-building "an investment whose return you can't see, but one you have to make."

It is also why running was the first Nike line to take off in China. After the 2008 Olympics, every brand assumed a wave of mass participation in sport was coming. It never came, and many companies, stuck with unsold stock, pulled out of the market. Nike was one of the many that had bet on it.

Qingnianzhi, a consultancy that advises businesses on young people, explains running's popularity this way: one Olympics does not suddenly unleash demand; what is happening is that consumers are becoming individuals. As this group grows, they use what they buy to express themselves and to find like-minded people. They want control over their bodies, which means they want control over their lives. Put the two together, and running, the sport with the lowest barrier to entry, is the obvious first choice.

Nike tried to start a running craze as early as 2009, but in the end it looks more as if it simply caught the wave. The Color Run, half marathons and full marathons all came to China. Nike was clearly not the only brand to profit, but it may have been the best prepared.

Thanks to its Nike+ digital sports strategy, Nike not only knows the best running routes in most cities but also discovered that its users mostly exercise at night. That led its product designers straight to adding more reflective material. This was not only about safety: it also made young people feel that running could be cool.

On the marketing side, Nike has several times steered its mass-media advertising campaigns toward running on purpose and backed them with regular offline events such as city night runs. Inside Nike, the core target group is called "Young & Fast" (a young generation hungry for anything new): ages 19 to 22, or up to 25 for women. Anything "Young & Fast" consumers find cool and can afford is a Nike competitor. And the competition here is fierce. Besides Adidas, it may come from Uniqlo or Apple; as for fashion items, even Valentino is making sneakers. Most young people can't afford those yet, but that doesn't stop them from following them. Consumers' attention is scattered in every direction, and persuading them to choose one brand is complicated.

Against brands that trade on fashion, being a serious sports brand is still Nike's greatest strength. On social media it rarely chases trending topics. Instead it keeps teaching its target audience how to exercise properly and helps one enthusiast find another. As Zhang Anding, founder of Qingnianzhi, puts it: "Most fans watch football rather than play it. Why? Because watching games helps you socialize."

This chart shows what else users search for when they search "Nike" and "Adidas"

In China, Adidas and Nike have taken the two biggest slices of the sporting goods market, but their strategies could hardly be more different. Besides refusing to sponsor non-athletes, Nike has little to do with Converse, the mid-priced brand in its own group. Adidas owns the sub-brands Adidas Originals and NEO, and also signs entertainers such as Eason Chan as endorsers.

For profits, though, the biggest difference lies in retail. Nike now has 7 flagship stores, more than 300 retail stores and over 6,000 department-store counters in China. In fiscal 2015, Nike's 18% revenue growth in Greater China was driven mainly by a strong surge in direct-to-consumer (DTC) sales, which made up 27% of total revenue. Yet in China, DTC, the very business behind that surge, is close to negligible. As Nike itself admits, "our share of distributors is the highest."

Walk around Shanghai's Huaihai Road shopping district and you will find several sports brands within a few hundred meters. Adidas's flagship store covers all three of its brands and sorts products the traditional way, by men, women and sport. A little farther on, New Balance, under its latest slogan "New Street-ism," still puts retro running shoes in the most prominent spot by the door. Nike, for its part, has opened no fewer than four experience stores, none more than half an hour's walk from the others.

Each of the four does a different job. Two are in the iapm mall: one built around a "shoe wall" that showcases technical innovation, the other China's first Nike women's experience store. Nike Lab on Xinle Road stocks designer collaborations you can't buy elsewhere, along with a high-end line that suits the neighborhood. The four-story flagship on Huaihai Road displays nearly 1,000 products from the full range each season; its windows currently show Zoom running shoes made with Flyknit technology.

In its 2015 annual report, Nike cited higher operating costs to support its DTC business and greater investment in its Shanghai headquarters. "Our philosophy is that a store should invite customers to take part in sport. We explain these ideas to our distributors so they understand them, and we invest heavily in improving store environments to give customers a good experience," Steve Tsoi said. Nike, he added, holds stores run by distributors to the same standards as its own.

Nike wants control over every link in its marketing, e-commerce included, but distributors often don't see the point of good display. In many lower-tier cities you can still find Nike stores laid out nothing like the flagships: goods crammed onto shelves and sorted only by function.

"Today's consumers need you to think for them about what they want, and to create a place to shop," Huang Xiangyan said, "not to stuff everything into one store and expect them to gasp at having walked into a sports playground."

Take the Sanlitun store in Beijing. It used to carry the full range across two floors; now it has one floor selling only the running line, because it sits near the embassy district, where many office workers work out and run. The store built around basketball is in Zhongguancun, where the university campuses are.

"A customer like that walks into the store and knows at once that the atmosphere and lifestyle he belongs to are here."

To protect the brand, this makes sense. It means Nike asks every store to be as precise as possible: within a standard framework, each kind of shopping district gets a store aimed at its own kind of customer. In cities where distributors can't yet match Nike's own stores, Nike is counting on its website, Nike.com, which sells online, to fill the gap.

Rival Adidas has grown rapidly over the past three years

For three years running, Nike's share of China's sports market has grown by only a fraction of a percentage point, and Adidas is close behind. Adidas had the same inventory problem that has lingered since the 2008 Beijing Olympics. What rescued its Greater China results was a reform plan called "Route 2015," built around expanding from 550 retail stores by adding 2,500 more. That pulled Adidas quickly out of its inventory mire, and its market share now trails Nike's by just 0.1%.

Distributors may be both the opportunity and the problem for every sports brand. With huge stocks piling up, opening stores fast and widely is the best fix, but it can hurt the customer experience and the brand. And how the brands adjust the stores already open, and how they train their existing distribution networks, will decide their next stage of growth.

Uniqlo offers a useful comparison (Nike's annual report long ago named fast-fashion brands such as Uniqlo among its competitors). Uniqlo, too, has highly standardized stores and strong e-commerce, thanks to Tmall, and none of that kept it from expanding into second- and third-tier cities. When QDaily interviewed Uniqlo, Wu Pinhui, its Chief Marketing Officer for Greater China, said that stores are an indispensable part of everything it offers, and that Uniqlo will keep opening stores in China.

Among Nike's current priorities in China, besides offering better, more innovative services to "Chinese consumers spoiled by e-commerce," its work on building a sports culture will focus on children aged 6 to 12. The challenge it faces is to balance a wider audience against a consistently high-quality experience, and to do it faster and better.

About Top 15

Every era has companies that gather the most capital and the best talent and shape how society develops. QDaily believes that the companies shaping how we live are at the heart of business today.

So we have picked the 15 most important lifestyle companies in the world and in China: Apple, Google, Baidu, Alibaba, Tencent, Amazon, Disney, McDonald's, Starbucks, Nike, Xiaomi, IKEA, Uniqlo, Wanda and Vanke. The list will change as the companies, their markets and the trends around them change. We will follow them, along with their competitors and partners.