From Third- and Fourth-Tier Cities to Buying Arc'teryx: How Anta Upgraded Its Brand Through Two Rounds of Acquisitions

Buy or build — in the apparel industry, one of the two upgrade paths open to Chinese brands has won

Anta's push abroad has begun, and it is built on brands it bought.

On September 23, the Italian brand FILA staged a show at Milan Fashion Week, with 21 products available for "see now, buy now" purchase on Tmall. Yao Weixiong, president of FILA China, told QDaily that the China division drove the show.

Sportswear brands showing at the four big fashion weeks is no longer news — Puma and Li-Ning got there first. But for Anta, FILA China's parent company, making FILA "the first sportswear brand to walk the runway at Milan Fashion Week" carries another meaning: Anta is going international.

Besides FILA, Anta already holds a set of overseas brands. It runs joint ventures with the parent companies of the Japanese brand Descente and the Korean outdoor brand Kolonsport to operate their China businesses. It has also bought Sprandi, known for walking shoes, and the Hong Kong children's clothing brand Kingkow.

A bigger acquisition is under way.

On September 12, Anta and FountainVest Partners launched a €4.6 billion bid for Amer, the Finland-headquartered sporting goods company. Amer's brands include the outdoor apparel label Arc'teryx, the tennis brand Wilson, and the trail and mountaineering brand Salomon.

Anta's offer is 40% above Amer's market value. A year and a half before the bid, it had already issued 3.7 billion yuan of bonds on the Shanghai Stock Exchange to pay for acquisitions.

Unlike its earlier deals for the China sales rights to FILA and Descente, this time Anta wants to buy Amer's entire global business.

For a company that started out in third- and fourth-tier cities, buying the parent of the high-end outdoor brand Arc'teryx is, at the least, surprising.

In fact, ever since it passed Li-Ning in 2012, Anta has held the third-largest share of China's sporting goods market, behind only Nike and Adidas. From 2014 on, its revenue has grown by more than 20% every year.

Ten years ago, people might have assumed the first Chinese sportswear brand to go global would be Li-Ning. It started earlier, and its founder's aura gave the brand its own pull; for a long time it was the top domestic sports brand in China. In 2008 it even briefly passed Adidas to become the second-largest sportswear and footwear brand in China by market share, behind Nike.

Today Anta is the fourth-largest sporting goods company in the world by market capitalization, after Nike, Adidas, and Lululemon. Its market cap now exceeds Li-Ning, Xtep, and 361 Degrees combined.

Buying FILA Was Anta's Turning Point

In the 1990s, Anta was one of many sneaker contract factories in Jinjiang, Fujian. Ding Shizhong (Anta's founder), who at 17 went to Beijing alone to sell shoes, realized that the premium came from the brand. Around 2000, Anta signed the table tennis champion Kong Linghui as its spokesperson and spent 10 million yuan on CCTV advertising during the Olympics (Ding later recalled that sales were then only 100 million yuan, with profit of a few million). Kong won, orders rose, and the brand acquired some recognition.

Around its 2007 listing, Anta turned itself from a family business into a professionally managed one, bringing in Zhang Tao (a former executive at Wanda and Lenovo), Zheng Jie (former general manager of Reebok China), and Yao Weixiong (former CEO of Lacoste China).

"Anta has known who its target consumers are from the very start. We can't compare ourselves with international brands, but Anta serves China's largest group of consumers... what mass-market consumers want is value for money," said Ding Shizhong, Anta's founder, chairman, and CEO.

The Anta brand itself has always been a mass-market product, not far from Xtep, 361 Degrees, or Guirenniao. Only in 2009, when it took the China operating rights to FILA, did Anta seize a new opening.

With capital accumulated in the mass market, Anta bought FILA's business in mainland China, Hong Kong, and Macau from Belle in 2009 for HK$650 million.

FILA was not well known then, and it was still losing money in China. Beyond doubts about the brand's potential, people questioned whether Anta could run a mid-to-high-end brand with such different DNA. In hindsight, it may be one of Anta's most successful moves.

According to what FILA China president Yao Weixiong disclosed in Anta's 2017 interim report, FILA then accounted for about 30% of Anta's sales. FILA's sales in Greater China may have already passed 5 billion yuan.

Before it took over FILA in 2009, Anta the company had worked only the low- and mid-end market.

Li-Ning, which started earlier, meanwhile planned to upgrade its own brand and fight Nike and Adidas for the mid-to-high-end market.

But from 2011 to 2013, sportswear brands in China ran into an inventory glut together. When Nike and Adidas cut prices, the brand positioned closest to them — Li-Ning — took the first blow. In 2012 Li-Ning lost 2 billion yuan, mostly from buying back distributors' unsold stock.

Li-Ning also made more mistakes of its own.

Around 2010, Li-Ning changed its logo and its slogan, shifting its target consumers from people born in the 1970s and '80s to those born in the '90s. "Li-Ning for the post-90s generation" was a bold move, and it became a textbook failure. It dropped the brand's core consumers outright while finding no effective way to reach younger ones — this generation, after all, had not grown up watching the "Prince of Gymnastics" compete.

Anta's positioning, by contrast, stayed clear and steady throughout: good value for money, aimed at consumers in lower-tier cities. During China's sporting goods inventory crisis around 2011-2013, Anta was the quickest to turn itself from a wholesale-brand company into a retail-brand company.

By running FILA's China business, Anta also caught the consumption upgrade in first- and second-tier cities and the athleisure trend, and grew fast on both. FILA copied part of Kappa's winning formula: position yourself as a fashion sportswear brand rather than a performance one, and avoid meeting Adidas and Nike head-on.

Kappa may have been the first brand to take the fashion-sportswear route successfully in China. With effective entertainment marketing and prices more competitive than Puma's and Adidas Originals (Trefoil), its Chinese licensee China Dongxiang came close to doubling revenue almost every year from 2005 to 2008 — from under 150 million yuan to 3.3 billion.

Unlike Kappa's asset-light wholesale model, 80% of FILA's stores are run directly by Anta.

FILA's stores sit mainly in shopping malls and department stores in first- and second-tier cities, not in the street-front locations the Anta brand takes in second-, third-, and fourth-tier cities. On Shanghai's Middle Huaihai Road, a street lined with flagships, FILA's stores stand not far from Under Armour, Adidas, Nike, and Puma.

Directly operated stores let a company see the point of sale and control the experience. In China — in apparel, cosmetics, or general goods alike — running mostly direct stores is almost an iron rule for any brand that wants to keep a mid-to-high-end image. Nike and Adidas have been raising their share of direct stores worldwide too.

Next to FILA at the time, both Kappa and Li-Ning grew in a cruder way. At its peak Kappa had more than 4,000 stores, not one of them directly operated. When Kappa had to discount to clear inventory, FILA took its chance.

The Baidu Index, which tracks what consumers search for, marks 2014 as the turning point: searches for Kappa began to fall while searches for FILA jumped. FILA probably drew off some of the people who had been wearing Kappa.

Anta poached Yao Weixiong, CEO of the French brand Lacoste's China business, to run FILA Greater China, and he built an entirely new team. FILA keeps some independence from Anta in operations, while sharing Anta's channels for procurement and supply chain.

Yao put a lot of effort into designer collaborations.

From 2011, FILA started releasing designer capsules. Ginny Hilfiger (Tommy Hilfiger's sister) has worked with FILA longest, from a 2011 collection sold only in Hong Kong to the Ginny H Modern Heritage line still on sale today. Jason Wu's collaboration with FILA has run for two years.

In 2014, FILA signed Lee Min-ho as its spokesperson, dressed CCTV Sports' World Cup broadcast team, and launched a collection with Anna Sui. That year the brand turned profitable, and its share of Anta's sales approached 20%.

In the five years before that, of course, Anta had already poured enormous resources into FILA — signing Shu Qi as a spokesperson, sponsoring Hong Kong's delegation at the 2012 London Olympics, and opening stores fast.

FILA's part in making Anta China's third-largest sportswear company was indispensable.

FILA lifted Anta's overall sales growth. Its sales grew by more than 50% between 2010 and 2015. In the fourth quarter of 2017, FILA's growth hit 85% to 90%. Whether 50% or 85%, both far outrun Anta's overall rate of about 20%.

FILA's average unit price is nearly three to five times the Anta brand's. Add the fact that most FILA stores are directly operated — selling to consumers at retail price rather than shipping to wholesalers at a deep discount — and its gross margin is much higher. China Galaxy Securities puts FILA's gross margin at around 65%, against about 40% for the Anta brand.

Anta's overall gross margin has risen accordingly, from 41.7% in 2013 to 49.4% last year.

After Steadying FILA, Anta Bought the China Rights to Four More Brands

FILA has made more moves this year than usual: in June it launched the younger sub-brand FILA Fusion with Wang Yuan (Roy Wang) as spokesperson; in August it launched FILA ATHLETICS, a sub-brand built around "performance sport." The thinking behind both is the same — widen the consumer base to young people and to more hardcore sports fans.

Yao Weixiong said FILA Fusion came about because "a lot of consumers said they wanted to buy clothes for their kids — they thought FILA's fabric was good and the designs weren't over the top. If young people can already wear FILA, why not make [more] products to meet their needs?" FILA clearly needs to get younger, and fast.

Put another way, the athleisure crowd alone is no longer enough. The market FILA faces has also become more crowded than ever.

With a performance line, FILA will compete directly with Adidas and Nike, and it still trails both by a visible margin in product development, store displays, and in-store experience.

"Adidas and Nike are able to connect their brands with different [sports] communities," said Tom Doctoroff, chief culture insights officer and senior partner at the brand consultancy Prophet. He thinks Anta has not done enough on this front.

FILA is in fact still walking Anta's old road: sign celebrities, sponsor teams — traditional marketing, in short.

And these are exactly the things Adidas and Nike do better.

Brands positioned close to FILA are also spending more on China: the American streetwear label Champion began opening stores in first- and second-tier Chinese cities this year. You see it on the street constantly, and with its bold logo and red, blue, and white palette it looks somewhat like FILA.

Don't forget Tommy Hilfiger, which, like FILA, has used Ginny Hilfiger as a designer; in early September it brought its runway show to China for the first time, a clear measure of how much the market matters to it. Its parent company PVH has said China is one of its fastest-growing markets.

Puma, which has tasted the rewards of an athleisure position, has signed a string of Chinese spokespeople: Liu Wen, Yang Yang, Gulnazar, Liu Haoran, and Li Xian (each on a different tier and region). All of those deals were struck in the past two years — again, a measure of how much China matters. Puma China did well in the first quarter this year, contributing a good share of the company's profit.

Then there is the batch of sport and streetwear brands that have entered China in recent years, such as Superdry and Lululemon. Fast-fashion chains like Uniqlo, Zara, H&M, and Gap are making athletic wear too.

Four years ago, when FILA was climbing fast, you may not have had many athleisure brands to choose from. Now there are so many that choosing is dizzying.

From here, FILA's stores will no longer stay inside first- and second-tier cities. Once it moves down into third- and fourth-tier cities, will the brand's pull be diluted? The external winds could shift too. If athleisure clothing stops being fashionable, can FILA adapt? None of it is easy to say.

Over the past two years, Anta has brought in Descente, Kolonsport, and other brands to round out its portfolio and follow the trend toward market segmentation. The first is a high-end brand built around skiing; the second is a Korean outdoor sportswear label. Both match what Ding Shizhong called, in an earlier interview, "running each brand with a differentiated strategy."

Anta began signaling as early as the end of 2016 that it meant to buy in international markets — through the bond issue, and through its target of 100 billion yuan in turnover (the total retail-tag value of all goods sold) by 2025. Nobody knew which company it would buy; earlier there had been rumors it would buy Puma.

At the earnings briefing for the first half of 2018, Anta executive director Zheng Jie said Descente had "found its footing." "Store image and turnover have both hit the overall targets we set," he said.

Descente's stores have opened in Beijing's and Shanghai's main shopping districts, and in June this year it signed Daniel Wu as spokesperson — a path much like FILA's.

The difference is that Anta is pinning Descente's growth on winter sports.

Anta's plan is for Descente to become one of China's most successful sporting goods brands before the 2022 Beijing Winter Olympics.

What Can Buying Arc'teryx's Parent Company, Amer, Bring Anta?

Choosing Amer as its target shows how committed Anta is to outdoor sports. Outdoor apparel and accessories, especially winter sports products, account for 62% of Amer's revenue.

Arc'teryx is Amer's most important brand asset. Anta already runs the China business of the Korean mid-to-high-end outdoor brand Kolonsport, but the two sit in different price tiers — Arc'teryx is far more expensive and far better known.

Taken together, reports from the Outdoor Products Branch of the China Textile Commerce Association (COCA) and the China Outdoor Brand Alliance (COA) show China's outdoor industry slowing after 2013, with growth of only about 3% to 4% over the past two years. Some industry analysts believe outdoor products will rebound to around 10% growth after 2018.

And the 2022 Beijing Winter Olympics are not far off. In 2017, Anta renewed its deal with the Chinese Olympic Committee and became an official sportswear partner of the Beijing Winter Olympics, one of the top-tier sponsors.

Amer would also help Anta keep differentiating its business: 24% of Amer's revenue comes from sports such as tennis, golf, and squash, and 14% from fitness equipment. Amer's assets — Salomon's outdoor and mountaineering gear, Wilson's tennis accessories and apparel, and fitness machines — are all areas Anta has barely touched.

Amer's revenue is slightly smaller than Anta's, and it makes less money.

In the first half of 2018, Amer's total revenue was €1.107 billion (about 8.83 billion yuan) and its profit, excluding currency effects, was €108 million (about 860 million yuan). Over the same period, Anta's revenue was 10.55 billion yuan and its net profit 1.94 billion yuan.

Amer would also cut Anta's dependence on the Chinese market. Less than 20% of Amer's revenue comes from Asia-Pacific and less than 6% from China. There is risk in that too: if the deal goes through, operating across regions will test the company's management far more severely.

The other side of risk is opportunity. Amer has been in China for only eight years and still has plenty of room.

At an investor conference, Amer CEO Heikki Takala named China, the United States, direct sales, and softgoods (mainly apparel) as the four forces behind the company's performance over the past five years. "Over the past five years, China has shown very strong growth, with a compound annual growth rate as high as 29%. Its contribution to our company is already large," Takala said.

Buying, Not Building, Is Becoming the Main Route for Chinese Brands to Move Upmarket

Guirenniao and 361 Degrees, both from Jinjiang, Fujian, plan to go multi-brand too. In 2016 the first paid $26 million for the rights to operate the American sportswear brand AND1's trademark in China. The second set up a joint venture with the Finnish company One Way Sport, holding 70% to One Way's 30%, to sell the outdoor brand One Way's products in Greater China.

But few of these brands have worked out the way FILA has.

Li-Ning also runs the Italian sportswear brand Lotto, the French outdoor brand Aigle, and the American dance and yoga wear brand Danskin, plus the domestic brands Double Happiness in table tennis and Kason in badminton. Together they contribute only 0.6% of Li-Ning's sales, about 530 million yuan. With the main Li-Ning brand struggling, the company may simply have had no resources left for the others.

For a foreign brand, a joint venture with a Chinese company or a China agent means a local guide who knows retail and distribution better, which can be a faster way to adapt than setting up its own subsidiary.

There is no shortage of examples in apparel: Trendy International Group, the parent company of Ochirly; Semir; Peacebird.

Closer to Anta's Amer deal are some of Shandong Ruyi's moves: a controlling stake in SMCP, the parent of the French affordable-luxury womenswear brands Maje, Sandro, and Claudie Pierlot, and the purchase of the Swiss luxury brand Bally. Unlike a joint venture to run the China business, or a regional general agency, buying an overseas company is a step into the global market.

Chinese brands usually find it very hard to break into international markets on their own. JNBY, the main brand of JNBY Group, has been trying to expand abroad since 2009. Poor fit and the lack of local teams meant it entered and then withdrew from the U.S. market and from Britain's Selfridges. In fiscal 2018 it had only 80 overseas stores (including Hong Kong and Macau) and 27.82 million yuan of revenue — 1% of its total.

Li-Ning has kept spending abroad — it has sponsored the Olympic delegations of Sweden, Spain, and India, and even opened a store in Portland, Nike's home ground — but international business still brings in only 2.7% of its sales.

Becoming a world-class apparel or sportswear brand takes years of steady investment to build a distinctive core strength and a brand culture.

Consider Inditex's supply chain, Uniqlo's fabric technology and marketing, or Nike's and Adidas's research and their reading of the spirit of sport.

Having bought its way into the global market, Anta still has a great deal to do.

Graphics: Wang Kaiman, Zheng Shuya, Feng Xiuxia

Cover image: Anta, Li-Ning