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A business announcement that the growth rate of retail turnover was lower than expected caused Li Ning's share price to plummet by nearly 20% in a single day.
Why is this announcement so lethal?Is the stalling of flowing water a phenomenon unique to Li Ning or a common phenomenon in the industry?Is Li Ning ushering in an inflection point?The increment of Li Ning is in **?
Why is the turnover less than expected?
As 2023 comes to an end, one of the most discussed questions about the business world around the public is: "Is consumption downgrading or grading?".”。
According to a round of polls conducted by Nanfang *** on this year's "618", more than sixty percent of the respondents said that they value cost performance the most, and more than seventy percent of the respondents pay attention to tens of billions of subsidized products.
On the other hand, the Wenjie series of cars with a unit price of about 300,000 yuan continued to sell well, and the monthly sales of the Wenjie M7 continued to hit new highs in the second half of the year.
Perhaps the wealthy will not lower their spending standards because of the slowing pace of recovery, but most ordinary people are not so lucky. When their money bags become deflated, they prioritize downgrading their snack options – switching from well-packaged snacks such as BESTORE to bulk snacks in discount stores.
The same phenomenon is happening in the field of sportswear consumption.
According to data from the China Department Store Commerce Association, the sales of outlets in the first half of this year were 130 billion yuan, which has exceeded the 100 billion yuan in 2021 and is only 80 billion yuan short of the 210 billion yuan in 2022. Perhaps, the current people who want big names and quality, but don't want to spend too much money, have become the truest portrayal of the consumer industry in 2023.
Consumers' preference for affordable goods has forced brands that have been emphasizing consumption upgrading (price increases) to increase discounts in recent years, which may be one of the important reasons for Li Ning's "increase in revenue but not profit" in the first half of the year.
In the first half of this year, Li Ning handed over a revenue increase of 1298%, and the net profit attributable to the parent company increased by -3 year-on-year11% of the interim report card, this interim report not only continued the trend of Li Ning's revenue slowing down in 2022, but also made the company the only brand among the four major sports brands with negative net profit growth.
In the same business environment, why did Li Ning become the first player to enter the recession?The answer is likely to lie in Li-Ning's continued price increases.
Catalyzed by the "national tide fever" and the "Xinjiang cotton" incidents, Li Ning has not only earned enough traffic in recent years, but also used the traffic to raise prices one after another.
Taking the company's running shoes as an example, the initial price of Li Ning's "Ultralight 15" in 2018 was 499 yuan, and the initial price of "Ultralight 18" in 2021 became 599 yuan;In 2019, the initial price of Li Ning's "Liejun 4" was 699 yuan, and the price of "Liejun 7Pro" released by Li Ning this year came to ...... 1099 yuan
The rising ** is obviously not suitable for the current tight consumption trend, and the sportswear industry has been facing huge inventory clearance pressure since 2022.
In the first half of the year, in addition to increasing the discount of outlet channels, Li Ning also increased its efforts to regular-priced stores and e-commerce channels, which also led to the overall gross profit margin of Li Ning in the first half of the year decreased by 1 compared with the same period last year2 percentage points.
During the Double 11 period, when Node Finance visited Li Ning's stores in shopping malls, it was found that the discounts of Li Ning's products were mostly "5-7 discounts".
However, the more serious problem is that "the price reduction ** still can't stop the slowdown in the growth rate of Li Ning's flow". According to the Q3 operating data disclosed by Li Ning, the retail turnover of the entire platform of Li Ning's main brand (excluding Li Ning Young) in the third quarter increased by a mid-single digit (4%-6%).
This growth rate is not only significantly slower than the company's "10%-20% mid-range growth" in the same period of 2022, but also significantly inferior to its peers. In the third quarter, the retail turnover of Anta's main brand increased by a high single digit (7%-9%) year-on-year, the main brand of Xtep achieved a high-double-digit (17%-19%) year-on-year growth, the offline turnover of the main brand of 361 Degrees increased by 15% year-on-year, and the e-commerce business increased by 30% year-on-year.
Judging from historical data, the overall retail turnover growth rate of Li Ning's main brand is very consistent with the company's revenue growth rate, which also indicates that the revenue growth rate of Li Ning in Q3 will most likely fall in the range of 4%-6%. Affected by this, at the end of October, at an internal meeting for investors, the management of Li Ning lowered the company's full-year revenue growth forecast for 2023 from 15% to less than 10%.
The growth rate of 10% is less than 14 in 20223%, which is clearly unacceptable in the context of the recovery in 2023.
Channels and marketing need to be changed again
In addition to the above-mentioned price increases, another factor is the drag of "wholesale channels".
According to Li Ning's 2023 interim report, the company's wholesale channel turnover growth rate in the first half of the year was "low single digits", lagging behind the "mid-single digit" of the retail channel and the "low 10%-20% low" of the e-commerce channel. If we go back further, the growth rate of Li Ning's wholesale channels is almost always at the bottom, but the wholesale channel has always been the core channel of Li Ning.
Li Ning, of course, noticed such a "slow-moving behemoth", and the company hired co-CEO Qian Wei in 2019 to solve this problem. Prior to joining Li Ning, Qian Wei was the CEO of Uniqlo Korea and had 23 years of experience at Uniqlo.
Qian Wei's entry also marks that Li Ning took the lead in opening the road of "retail reform". In a conversation at the beginning of 2021, Qian Wei said that in the year and a half since he came to Li Ning, he has mainly done the transformation from wholesale to retail thinking.
In fact, before the emergence of e-commerce, the wholesale model was the most mainstream sales model for sports brands, that is, brands sold ** shoes and clothing to dealers through two order fairs a year, and these dealers then connected consumers through offline franchise stores, such as Taobo Sports, which is responsible for selling goods for Nike.
With the advent of e-commerce, sports brands took the lead in converting the channel to direct sales, which slowly increased the opportunities for brands to directly face the consumer (DTC). As Qian Wei concluded, the wholesale channel follows the supply thinking, that is, the closed loop of selling goods to dealers is over, while the retail follows the demand thinking, that is, facing consumers directly, by studying the needs of consumers, providing products that they are satisfied with to operate the brand.
A senior executive of chain management told "Node Finance" that the benefits of brand direct sales are obvious, first of all, the intermediate links of dealers are removed, the gross profit margin of direct business will be higher, and at the same time, consumers will pay lowerSecondly, the direct sales model can reflect the changes in consumer demand more quickly, so as to facilitate the management of inventory, which can effectively avoid the long-term "inventory cycle robbery" of sportswear brands.
But he also added that the challenge of direct sales for sportswear brands is also very large. On the one hand, the direct sales model makes the assets of the sportswear company heavier, and when the store becomes a direct store, "rent, staff salaries, and inventory" are all classified as the brand side, and the capital expenditure increasesOn the other hand, it is a huge workload to transform the large number of franchisees that have been formed in the history of franchisees and have different levels.
In fact, judging from the proportion distribution of Li Ning stores, Qian Wei has served as the co-CEO of Li Ning for nearly four years, and the proportion of revenue from Li Ning's direct channels has decreased instead of rising.
According to Li Ning's financial report data, from 2018 to 2022, the company's revenue from direct channels accounted for 298% to 207%, and the proportion of revenue from e-commerce channels in the same period increased from 2110% rose to 29%, the direct channel and the e-commerce channel almost went to the same tune, and the franchise channel decreased slightly, but the proportion was still as high as 45%.
As of the first half of this year, Li Ning had a total of 1,423 directly-operated stores, accounting for only 23% of its total number of stores. Compared with Anta, which only started DTC reform in 2020, the number of directly operated stores has reached nearly half. According to ANTA's 2023 interim report, 43% of the company's 5,500 stores as of the end of June 2023 were directly operated by the brand, and these directly operated stores contributed 57 percent to ANTA1% of income.
Node Finance believes that "the lack of the proportion of directly operated stores is also an important factor that dragged Li Ning's overall turnover to mid-single digits".
The increment is in **?
With Li Ning's revenue surpassing Adidas China in 2022, the current pattern of domestic sportswear brands has been rewritten to Anta, Nike and Li Ning ranking among the top three.
However, although Li Ning is in the top three, it still has a big gap with Anta and Nike. In 2022, the revenue of Anta and Nike (Greater China) will be 536500 million yuan with 514200 million yuan, and Li Ning's revenue was 25.8 billion yuan.
One of the obvious reasons why Anta's revenue volume can more than double that of Li Ning is the success of FILA, which will have part of its revenue of 215 in 2022200 million yuan, accounting for 40% of ANTA's total revenue. However, even if FILA and outdoor sports income including Descente and Cologne are discarded, Li Ning's income has not been able to outperform Anta's main brand for a long time.
What's the problem?
By analyzing the changes in Li Ning's business flow over the years, "Node Finance" found that "the decline of the sports fashion sector" may be the key.
In 2018, Li Ning successfully built "China Li Ning" into a mid-to-high-end sports fashion category by integrating national fashion elements into clothing and participating in the first launch of the fashion week. Driven by "China Li Ning", the proportion of Li Ning's sports fashion business rose rapidly from 25% in 2018 to 43% in 2021.
But in the past year and a half, the share of Li-Ning's "sports fashion" sector has slipped to 34%, only two percentage points more than the 32% in the early days of China's Li-Ning outbreak in 2019. On a net basis, the turnover of the Li Ning sports and fashion sector will decline by 6% in 2022 and 2% in the first half of 2023, respectively.
However, the national tide came and went quickly, and as the novelty of consumers faded, China's Li Ning soon fell into a lack of innovation. For example, in 2022, a new autumn and winter product of China's Li Ning series was labeled as a "pseudo-day", which consumed the goodwill of consumers.
Fashion itself is not sustainable, and the owner of Uniqlo once bluntly said that "companies that want to stand on the front end of fashion will be a risk". He said that when the epidemic changes, their performance will be more bumpy and the cost will be higher.
In the view of "Node Finance", Li Ning's fashion sports version is experiencing this kind of challenge.
In addition to the sports and fashion sector, the "basketball" sector, the second core position of Li Ning, has also been tested. In the first half of this year, the growth rate of Li Ning's basketball sector was 6%, lagging behind the growth rate of overall revenue by 10%.
A basketball shoe review blogger told "Node Finance" that many fans reported to him that some of Li Ning's basketball shoes look good in design, but they feel really bad on the feet, such as "the right upper of the Blitz 8 series basketball shoes has obvious toe pinching". Perhaps this is only a part of the sound feedback, not enough to represent the whole picture, but the occurrence of this phenomenon is enough to reflect a certain problem.
In addition, he also said that Li Ning's progress in signing basketball stars is still not obvious. Dwyane Wade, the star behind the current basketball shoe series with the best reputation of Li Ning - Wade's Way, has long since retired, and Jimmy Butler, the biggest NBA star currently signed by Li Ning, is far less influential than Anta's recently signed Mavericks star Kyrie Irving, and many basketball fans are rushing to buy shoes for the stars.
In the view of "Node Finance", Li Ning's future increment mainly comes from two aspects, one is endogenous, the company not only has to recover the decline of the sports fashion sector, but also to make up for the product problems of the basketball sector and the lack of influence of celebrity spokespersons. The second is extension, how to let the wind of China's Li Ning's fashion sports blow to overseas markets, which is also an important homework for Li Ning.
Conclusion
Since Qian Wei became the co-CEO of Li Ning in 2019, although he has not made much moves in the expansion of directly operated stores, he has given Li Ning a new look in terms of reducing costs and increasing efficiency.
According to the statistics of "Node Finance", from 2019 to 2022, Li Ning increased its net profit margin from about 10% to 15% on the basis of maintaining a stable gross profit margin. The company's average inventory cycle then dropped from 68 days to 58 days, and the average accounts receivable dropped from 21 days to 14 days.
Previously, Qian Wei said in an interview that "we pay more attention to establishing a high-profit and replicable operation model for a single store". In other words, for the retail reform in the direction of DTC, Li Ning has changed the way of solving the problem-No longer pay too much attention to the proportion of directly operated stores, but care more about copying the experience of benchmark profit stores to other stores, regardless of franchise and direct operation.
Qian Wei evaluated the value of the store from the perspective of ROE (return on investment), which really raised the profitability of Li Ning. However, there is another problem behind the current stall of Li Ning's flow - Li Ning's sales model based on wholesale channels has narrowed the distance between the brand and consumers. To solve this problem, Qian Wei had to make up for the shortcomings of Li Ning's DTC retail.
Node Finance Statement: The content of the article is for reference only, the information in the article or the opinions expressed do not constitute any investment advice, and Node Finance does not assume any responsibility for any actions taken as a result of the use of this article.