Adidas: Declining market share in China reflects growing strength of local brands

Cancellations loom for Adidas. He has a pile of €1.2 billion worth of unsold Yeezy merchandise after ending his partnership with disgraced rapper Ye, formerly known as Kanye West. But China is set to be a much more lasting problem for the German sportswear company.

First-quarter sales in the Greater China market decreased by nearly a tenth in neutral currency terms, Adidas said on Friday. This followed a decline of more than a third in the last fiscal year. Some of last year’s weakness can be attributed to lockdowns. But the downward trend in Adidas’ market share started well before the pandemic. It has been hit with a consumer boycott against global brands that have shunned Xinjiang cotton over allegations of forced labor.

Those boycotts have left a big void for two major local rivals Anta Sports and Li Ning, who have pledged to continue using Xinjiang cotton. Last year, Anta’s sales in China surpassed those of Nike for the first time. It also reported strong sales outside of China from its growing portfolio of global sportswear brands including Fila, Salomon, Wilson and Peak Performance. It is now the third largest sporting goods company in the world, just behind Nike and Adidas.

The local duo’s shares are trading at a steep discount to Adidas based on trailing earnings. For Anta, much of that reflects a $1.5 billion stock placement at a discount to market price last month.

It also reflects the reluctance of foreign investors, especially US institutions, to invest in the name. This is due to geopolitical risks stemming from US-China tensions, as well as allegations over Xinjiang. The company’s financial practices were scrutinized by Western short sellers, including Muddy Waters, in 2019, although the attacks proved ineffective.

At home, in the world’s second-largest sportswear market, little stands in the way of Anta’s ambitions to increase its market share. More revenue cuts from foreign rivals should be expected.