NIKE, Inc. (NKE) In China?

NIKE, Inc. (NYSE:NKE) is a world sportswear champion. The brand has become legendary through endorsements and ad campaigns featuring superstars and controversial athletes to spice things up now and then. One thing is for sure: whenever people think of sports, somewhere in their minds they visualize the famous NIKE, Inc. (NYSE:NKE) “swoosh.”

The company isn’t just popular with sports fans, either; investors also love NIKE, Inc. (NYSE:NKE). Over the last 2 years, the company’s stock has grown nearly 55% and has also paid a good dividend. NIKE, Inc. (NYSE:NKE) is doing very well in most of its markets and is nicely growing its revenue and earnings.

In the recent past, however, there have been concerns regarding the ongoing weakness in China. Let us see what the Middle Kingdom has to offer NIKE, Inc. (NYSE:NKE).

Nike’s position in China
NIKE, Inc. (NYSE:NKE) is the largest international sportswear company in China, holding a market share of 12.1%. In the 2012 fiscal year, the company derived around 12% of its Nike-brand revenue and around 26% of its profits (earnings before interest and taxes) from Greater China (which also includes Taiwan and Hong Kong.)

Unfortunately, the company has recently run into a rough patch in China due to excess inventory buildup. Sales have been falling as products failed to strike a chord with the new-age Chinese buyers. The numerous local producers who are steadily flooding the markets with counterfeits at dirt cheap prices are not helping either. Adding to this is also the economic slowdown.

Taking all of that into consideration, it’s no wonder that sales slipped 9% in the Greater China region in the third quarter. But does this mean that Nike’s dominance in China is coming to an end? Most certainly not!

The China strategy
Currently, the company is in an inventory-clearing phase. It is rapidly opening up factory outlets where it is selling products at heavy discounts. It is also voluntarily cancelling orders in order to rationalize the flow of new products into the market. This will get Nike close to a demand-supply equilibrium over the coming period.

While seeking that equilibrium, Nike is following a three-pronged strategy to position its brand for long-term growth. This strategy places a focus on products, distribution, and brand building.