It’s shaping up to be a tough year for Adidas. The German sportswear giant is facing the prospect of its first unprofitable year in over three decades. Globally, it has been saddled with the fallout of the Yeezy deal and, in China, its problems have multiplied since the Uighur forced labour controversy and ‘zero-Covid’ lockdowns of recent years.

At one point, China figured as its most profitable market. Last year though, the company’s sales in the country plummeted 36 percent to $3.5 billion and over the pandemic, it shrunk its footprint there by around 2,000 stores. In the first quarter of this year, revenue in greater China declined 9 percent, although it did see some improvement in sales.

Adidas chief executive Bjorn Gulden recently assured investors that the brand could be expected to make a comeback in China in the midterm, but he told them to not count on it for 2023. “I’m not saying that it will turn around this year,” Gulden conceded.

It’s a very different picture to what Adidas’ rival Nike is seeing in the market.

Nike too had its performance hampered by China’s strict lockdowns last year, but its most recent quarterly topline for the market rose 1 percent, with the company noting an upturn in sales around Lunar New Year. On the American sportswear giant’s March earnings briefing, remarks by chief executive John Donahoe about China were upbeat. “We’re the number one cool and favourite brand. That gap widened in Q3 in Beijing… [and our China team] are very optimistic and excited about our future,” he said.

Analysts believe Nike’s quicker rebound reflects a fundamental advantage it has over Adidas in China. “Though the Xinjiang cotton dispute had a severe impact on both Nike and Adidas, it has had a more lasting impact on the Adidas brand than Nike as Nike had stronger underlying brand equity,” Bernstein sportswear analyst Melinda Hu, said in a March note.

“Distributor and retailer perceptions tend to be that Adidas products are lagging other leading brands in terms of design and functionality, generating less pull demand,” Hu added. “As a result, the brand is losing traction in consumers’ minds, with some consumers no longer considering Adidas as a first-tier brand. In particular, Adidas’ market share is facing threats from local premium brands such as the China Li Ning line of Li Ning and international brands of Anta.”

In 2021, an uproar in China over foreign brands’ stance against using cotton sourced from the Xinjiang region hit both Adidas and Nike. China has been accused of severe human rights violations against the largely Muslim Uighur population in the region but Beijing has repeatedly rejected any claims of abuse including those in last year’s United Nations report.

The conflict led to Chinese consumer backlash against international brands involved in the controversy including not only Adidas and Nike but also Puma, Converse, Burberry, H&M, Calvin Klein and others. More than 50 Chinese celebrities called for a boycott or ended their brand ambassadorships and the issue spilled over into other markets. Just last week, it was revealed that Nike and Adidas were sent letters from the US Congress to ensure their supply chains are complying with a 2022 US ban on imports of products that could be linked to Xinjiang.

“Consumers don’t pay the same [amount of] attention [to international brands as they once did],” said Peter Zhong, founder of Nowre, a local media platform focused on China’s sneaker and streetwear market. “There’s a lot of political incidents with Xinjiang cotton, tensions between east and west…For foreign brands to [make a] comeback in China they also need to pick up after three years of lockdowns [which] disrupted a lot of [their plans].”

Despite these challenges, the fundamentals of the sportswear market in China are robust. For years, the government has invested in initiatives to motivate the population to increase exercise and lead healthier lifestyles. Last year’s Beijing Winter Olympics saw big campaigns for sports translate into higher awareness and Covid-19 pushed health and wellness to the forefront of people’s minds. A Chinese government estimate forecasts the outdoor sports industry will surpass 3 trillion yuan ($433 billion) by 2025.

With the stakes so high, it’s not only Nike and Adidas that are working toward a comeback. Under Armour reversed its revenue decline in Asia with the most recent quarter surging 24 percent, driven by a pickup China. The market also boosted profits at Puma even as North America sagged for that brand, and it is a priority for the likes of Reebok, New Balance, Asics and On Running. For its part, Lululemon is pursuing an aggressive expansion across China where it plans to go from 96 stores to 220 stores by 2026.

But China’s sportswear market is no longer an exclusively international contest. By 2022, brands such as Fila, Kolon Sport, Descente and Amer Sports, a group holding Salomon, Wilson, Atomic, Arc’teryx and Peak Performance among others, had come under the control of Ding Shizhong’s Anta Sports. Today, Anta Sports’ eponymous brand Anta and Li Ning are both domestic heavyweights.

Once the second largest sportswear brand behind only Nike, Adidas’ market cap now stands at $32.5 billion, overtaken last year by Anta Sports which is at $33.2 billion.

Li Ning tends to price more closely to Nike and Adidas, with shoes costing anywhere from 450 to 650 yuan ($65 to $94), while Anta is usually more affordable with shoes typically around 350 to 500 yuan ($50 to $72). Meanwhile, the design gap between domestic and international sportswear brands has been gradually closing in recent years.

The long-running ‘guochao’ or nationalistic pride trend has also been a factor. But the boycott over Xinjiang cotton prompting Chinese to buy more local created an entry point for customers to realise that the difference in product quality and comfort was not as big as they had expected. Some have since stayed loyal to Chinese sportswear brands while others started supplementing their international brand wardrobes with local brands.

However, there are signs that consumer sentiment may have turned a corner, leaving room for global brands to make bigger marketing push. Jefferies equity analyst James Grzinic pointed out that Puma was recently able to sign the Chinese singer Cheng Xiao as brand ambassador last month.

“This represents the first time in two years that a national KOL (‘key opinion leader’, as influencers are called in China) can be recruited [by foreign brands affected by the Xinjiang controversy]. This, combined with the restart of sporting events, coupled with the opportunity to locally leverage global brand ambassadors, should provide a healthier ground for a Chinese recovery at a time when Western brands are starting to show better traction with local consumers,” Grzinic said.

Knowing this, both Nike and Adidas have responded with huge investments in localisation. “The key to winning in this market is, simply put, having great innovation and connecting with Chinese consumers in a locally relevant way. And so that’s what we’re doing,” said Nike’s Donahue. “We’re going to continue to invest in China for China,” he added. “We’re building…hyper-local product and [rapid] storytelling ability…[through] locally driven apps.”

Adidas, meanwhile, is investing more in Chinese athletes like rising tennis star Wu Yibing who in February became the first Chinese man to win an ATP tournament, and has put in place an 80-person strong design team in Shanghai to create products with a decidedly more local and patriotic slant. The goal is to have at least 30 percent of all Adidas products sold in China designed by the new team, up from a figure in the low single digits.

For both brands, however, there are potential pitfalls to such strategies. China market experts have warned foreign brands to tread carefully with guochao activations as national pride marketing is high-risk high-reward. Even with localisation, foreign brands walk a fine line. Failed attempts at tapping local cultural references for local audiences risk looking inauthentic or causing offense.

Local players are of course making their own moves to counter those made by international competitors looking to make a comeback. Li Ning has been revamping its store network, opening larger, higher quality flagship stores. It also rolled out international luxury collaborations with Pierre Hardy and Moose Knuckles in the last year to reinforce its premium positioning.

Anta is making changes to its retail distribution. It too is expanding direct-to-consumer channels and, in particular, has rapidly built up its livestreaming sales thanks to the rise of e-commerce on Douyin.

Niche sports are featuring more in both firms’ strategies as the sportswear market matures and Chinese consumer interest grows in new leisure pursuits. This has the added benefit of being a more open space.

Whereas in sports like basketball or football, it’s hard to unseat player sponsorships and the cultural power that Western brands hold, Li Ning has focused on its badminton line, a sport in which China regularly dominates global competitions. Anta similarly has focused on high performance trail running shoes including its “Champion” model. Meanwhile Fila, a brand under the Anta Sports group, has leaned on golf, opening stores on the ranges of Mission Hills, a prominent golf course operator.

“Of course, all the Chinese brands have exploited the last 2.5 years and in a very smart way,” Adidas chief executive Gulden conceded. “But I do also…feel that is being saturated so that the growth that they got almost for free is starting to slow down, and that you will see Western brands, again, starting to take back some market share. And I, of course, hope that we will take most of it back again.”

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