MARKET INTELLIGENCE
SHORT READ
PART 2
2023 JANUARY ISSUE
Written by : Andrew Sia
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Contents:
Sneakers Are Looking To Achieve Sustainability
Primark Met Its Waterloo in Germany
Adidas New CEO, Bjorn Gulden, Will Join to Reinvigorate the Brand
Gap Bails Out of Business in China
More Unfavorable News for Nike
Shoppers Tend to Trade Down in This Holiday Season
U.S. Retailers Are Facing Uncertainties
Reincarnation of JC Penney
Estée Lauder Bought Tom Ford
Luxury Brands Are Raising Prices
Adidas with the Kanye West Line Going Forward
Delivery on Scheduled Dates is More Important Than Fast Speed
More on Reselling Sneakers
Sneakers Are Looking To Achieve Sustainability
Brands are more focused than ever on achievable sustainability initiatives that can offset the inherent waste generated with the sneakers. It is now an ongoing race in eco-friendliness with the lowest amount of life cycle CO2 emissions. We are seeing players teaming together to achieve the lowest emissions.
Earlier on, we have Adidas and Allbirds teamed up and called themselves as Allbirds x Adidas ADIZERO 2.94kg CO2e. However, Asics has announced its GEL-LYET III CM 1.95 which measures at 1.95kg of CO2e emissions. This is exactly a kilo less than the former leader.
Asics has spent over 10 years of research and development in partnership with the Massachusetts Institute of Technology, and their GEL-LYET III CM 1.95 is the result of making this progress and the brand is looking for a net-zero emissions by 2050. Using of a new carbon negative foam, recycled and solution dyed polyester and new structure backed by tape.
Its ASICS GEL-LYTT III CM 1.95 is set for availability during Fall/Winter 2023. There are two videos that are available on YouTube:
ASICS Sustainability | GEL-LYTE™ III CM 1.95
Courtesy of : YouTube | Sept 15, 2022 | 1:35
At ASICS, we are on a mission to reach net-zero emissions by 2050. We’re excited to reveal an important milestone on this journey:
The GEL-LYTE™ III CM 1.95 sneaker.
Emitting just 1.95kg of CO2e, the GEL-LYTE™ III CM 1.95 model has the lowest carbon footprint ever achieved in a sneaker*, pairing new levels of sustainability with comfort and quality.
To achieve a sound mind in a sound body, you need a sound Earth.
#ASICSSustainability
*Based on available industry data for life cycle CO2e emissions as of Sep. 2022.
Primark Met Its Waterloo in Germany – FT, November 9, 2022
When Primark opened its first German store in 2009, people surrounded it said that it could become Aldi of the country’s fashion sector. Its cheap, practical styles seemed very suitable for a country that would dress in jean and a sweatshirt on a Friday night. It didn’t turn out that way.
Now, Primark’s parent company, Associated British Foods took a £206 million impairment against its German operation. It will further downsize as its profitability is simply not feasible. It found out that they have underestimated its culture and the distrustful customers thought that the low prices meant unethical supply policies. Also its effort in building up the sustainable fashion was too little and too late.
Primark is not alone in this scenario, take Walmart for example, it lost $1 billion when it pulled out in 2006 after fighting with its labor union.
But H&M has the success in Germany as its largest market. It accounted for 14% of sales of this Swedish fashion chain.
Adidas New CEO, Bjorn Gulden, Will Join to Reinvigorate the Brand – FT, November 9, 2022
Bjorn Gulden of Puma on January 1, 2023 will join as member of the Executive Board and CEO of Adidas. During his nine years at the helm of Puma, he saved the company in both its sales and profit.
This time, Adidas issued three profit warnings in the past five months and ended a contract with the U.S. rapper and fashion designer Kanye West.
Shares in Adidas lost 60% over the past 12 months and had fallen to its lowest level in six years. The market reported positively after announcing about Bjorn Gulden.
Adidas and Puma both located outside of Frankfurt, have long been competitors. Adidas is three times larger than Puma and they started as the shoe factory founded by the two brothers, Adolf and Rudolf Dassler in 1924 as the pioneer in developing track shoes. It was after the Second World War the two brothers fell out and Adolf founded Adidas and Rudolf founded Puma.
Gap Bails Out of Business in China – WSJ, November 9, 2022
After twelve years, Gap Inc. will sell its business in China to China e-commerce services provider Baozun for $50 million. Baozun is listed both on Nasdaq and in Hong Kong, is offering an all-cash transaction with a primary consideration of $40 million subject to the adjustments within a limit of $50 million. The deal is expected to complete in the first half of 2023.
Gap said that Baozun will operate its stores in the Greater China region under a franchise agreement. It would give Gap a more asset-light, cost-effective model and to tap on to the local and technology expertise of Baozun.
Gap has been struggling with years of slumping sales at its flagship brand, and recently with its Old Navy chain which accounts for half of its revenue. It also has plans to cut 500 corporate jobs in the U.S. and Asia to reduce expenses.
Gap entered into China in 2010 with four stores in Shanghai and Beijing. By 2014, it expanded to 100 stores across China and Taiwan.
Like many Western retailers, Gap got hit by politically correctness, such as a T-shirt of China without the island of Taiwan. And under the recent China’s zero-Covid policy, unpredictable lockdowns hit the business badly. Consumer spending in the world’s second largest economy has become more difficult to fathom.
More Unfavorable News for Nike – New York Times, November 7, 2022
A superstar athlete, actually s basketball star Kyrie Irving, with whom Nike partnered with, was suspended by Nets for his link to an anti-Semitic film on social media. And a day later, Nike announced that they would not release Kyrie Irving’s new shoes, the Kyrie 8, which was supposed to hit the market. This line has been produced since 2014, although no revenue has been disclosed.
This has added to the financial implications as earlier on we have reported the stock of sneakers and sports clothing has built up in recent months and this will lead the heavily markdown on prices if Nike wants to sell them through the competitive holiday season. This has already taken the toll on its stock which has fallen 41% in the past year.
Nike is known for the ties to Michael Jordan’s Jordan brand which has brought $5 billion in the Nike’s $44.5 billion in total revenue. Nike has been developing ties with numerous basketball stars like the Los Angeles Lakers superstar LeBron James and Kyrie Irving’s teammate Kevin Durant.
Michael Jordan signed his Nike contract on October 26, 1984
For athletic giants like Nike, Adidas and Under Armour to sign up with athletes and celebrities to promote their products have proved to be very successful for both parties.
But on occasions for such misconducts would cause damage to the brands and bring the adverse result that can be beyond repair even if the person send out an apologize.
Shoppers Tend to Trade Down in This Holiday Season – WSJ, November 7, 2022
Shoppers are buying less expensive clothes, instead of Lululemon’s leggings, they would settle now for Uniqlo. For lingerie, they would settle for Target. And it is already mentioned that 72% of those consumers plan to look for less expensive alternatives in this holiday season as the result of inflation.
What was used for more extravagant purchases as gifts to the loved ones would now be compromised.
With inflation at a four-decade high, consumers have already been trading down for less-expensive groceries and other necessities. With the increase of the interest rates and the volatile stock market, it is not helping the sentiment of the consumers.
The luxury brands conglomerates like LVMH and Kering said that the customers are shifting their spending in Europe to take advantage of the stronger U.S. dollar.
U.S. Retailers Are Facing Uncertainties – WSJ, October 6, 2022
We remember that in the past two years retailers didn’t have enough merchandise for the holiday season because of the factory shutdowns and shipment delays that delayed the arrival of winter goods. Some of those goods made their way to the stores but the majority ended up in the warehouse and waited for next year.
This year, Macy’s is rolling out its new dresses, suits, boots and other fall fashion items. With its inventory up 7% at the most recent quarter from a year earlier, it has avoided the worst of the glut of goods that happened to so many other retailers.
This is very much in contrast to other retailers like a 48% drop at Kohl’s, 44% at Nike and 37% at Gap for instance. We can understand Kohl’s who missed out $250 million sales in 2021 due to the lack of merchandise. And for Nike and Gap, we learned earlier on that their businesses have shrunk this year.
Macy’s began their strategic meetings since the beginning of the year with their finance department, supply chain, merchandiser and planning department. They came up with their forecast for the demand and instead of focusing on the past two years’ comfy clothes and home items, they predicted more clothes for wearing outside of the house to work and to attend parties and special occasions like wedding for instance.
One thing that they adjusted accordingly is to keep the private-label items at less than 20%. They rely more on the brands who are carrying inventory for them instead.
This is unlike Kohl’s, and other specialty chains where nearly everything they sell are from their own labels. And due to the private-label products are made exclusively for these specialty chains, their ownership begin as soon as they are loaded on the vessels. There is the difference in reading the inventory between the business model with Macy’s for instance.
This also resulted the warehouse space near the major ports like Los Angeles and Long Beach, New York and New Jersey, and Savannah in Georgia. Once when the inventory started to stockpile, they would fill up the storage space. That would leave the smaller companies to be driven out and they would need to find other storage solutions.
The vacancy rate for the warehouse in 2020 was 5% for the third quarter. Last year it was 3.8% and it is now at 3.2%. Because of this tightness in supply, the rental also goes up.
I can only say that it is extremely difficult to operate in these days.
Reincarnation of JC Penney – WSJ, April 2, 2022
I would like to refer this piece of article as the case study for a retailer who was known for the essentials. At one time, I was also doing business with them in their heydays.
JC Penney was known for a shopping destination for people who wanted affordable curtains, mattresses and silverware. They went for clothes for work and for leisure. It’s typical customers have a median income of $50,000 to $75,000 and one-third are Black, indigenous and people of color.
Over the past two years, up to February of 2022, foot traffic was down by 31%. This was due to the fact that it reduced 200 stores. It is estimated that its current revenue will be $9 billion, up by 10% from 2021 but down 16% from 2019.
Mr. James Cash Penney founded the company in Kemmerer, Wyoming in 1902 and it was known as Golden Rule that sold textiles and sundries. It became J.C. Penney Co. in 1913. It became known for selling quality apparel at affordable prices and survived the Great Depression. It expanded into hundreds of newly built suburban malls after World War II. In the 1970s, it operated more than 1,600 department stores.
In 2014, JC Penney tried to catch the attention of the millennials. It cut back popular private label brands, brought back appliances in 2016, which was a category it exited in 1983, in a bid to bring back shoppers from Sears. Later it even added fitness studios, videogame lounges to some stores. It also added online retail and started to change consumer tastes.
With all these new strategies, sales dropped and started to accumulate losses. In May, 2020 it filed for Chapter 11 bankruptcy protection after being in business for nearly 120 years.
During that time the stores were forced to close because of the pandemic and the revenue also stopped. It emerged after seven months with new owners. They are companies who invested in shopping malls—Simon Property Group Inc. and Brookfield Property Partners LP—and together they closed nearly a quarter of its 850 stores. It has now roughly 650 stores in operation.
They picked Marc Rosen as its new CEO who was working for Walmart and Levi Strauss & Co.
Mr. Rosen is 53 years old and grew up in a family in retail business as well. It started with two locations, one in Minnesota and another in Iowa. It was founded by his great-grandfather and his great-granduncle who took over later on. His grandfather sold the business.
His first job after graduation was with Ernst & Young LLP, a business consulting firm. He became senior vice president of global e-commerce and left in 2014 to help Levi Strasse & Co. to build their e-commerce business.
After he joined JC Penney, he and his team launched new private apparel brands and added national labels like Forever 21 owned by a minority investor in Penney.
The beauty retailer Sephora defected to Kohl’s Corp after having their shops in Penney for 15 years. Now they are planning for adding 40 new beauty brands and a new beauty department by 2023.
Mr. Rosen has a very big fish to fry with all these new changes.
Estée Lauder Bought Tom Ford – BOF, November 16, 2022
Estée Lauder spent $2.8 billion to buy Tom Ford. Tom Ford has been a major source of revenue for Estée Lauder’s beauty line and fragrance.
Estée Lauder has been in competition with the French fashion group Kering, who owns Gucci, Yves Saint Laurent and Balenciaga.
Since 2006, Estée Lauder has been manufacturing Tom Ford’s beauty line and it is one of its most lucrative businesses.
Ermenegildo Zegna Group will continue to manufacture the brand’s menswear, womenswear accessories and underwear. Same for Marcolin, who will continue to produce the eyewear.
Luxury Brands Are Raising Prices – WSJ, November 11, 2022
We read about the increases are: Tapestry, owner of Coach, reported their revenue grew by 5%; Ralph Lauren reported their revenue went up by 13% and Capri Holdings, owner of Michael Kors and Versace, reported 17.5% increase.
The demand in Europe is particularly strong, and Tapestry said that it was because of the higher international tourist traffic that they grew in that region by 24%. This is followed by Ralph Lauren for 15% and Capri for 20%.
Disregarding to the increased prices, the demand for these brands stayed robust.
The market is holding its breathe and wait to see if this can still continue.
Adidas with the Kanye West Line Going Forward – WSJ, November 10, 2022
Adidas said that it would start to sell shoes based on Yeezy designs as they are the owner of all the designs, in the versions and colors and it is their IP.
Adidas ended the business venture with Kanye West followed by the controversy of the recent anti-Semitic outburst by the artist. Although the market mentioned about the reputation risks the Yeezy line can remain high.
The ending of the result would hit the sales for $500 million and the net income would drop as much as $250 million in the fourth quarter.
Adidas will have to deal with an array of problems around the world, including the falling market share in China, suspended of the operations in Russia and the supply-chain problem.
With Kanye West, the collaboration started in 2015 and it had grown into the revenue represented 8% of the group’s total revenue, or more than $1.7 billion in sales last year.
This time as the group it is expecting an operating margin of 2.5% for the year, now from the previous projection of 4%.
The selling of the existing inventory of Yeezy are still being worked out.
Delivery on Scheduled Date in More Important Than Fast Speed – WSJ, November 10, 2022
Retailers at this time of the year, the holiday season, are focusing on delivering packages to customers on specific dates rather than competing on speed of delivery for a change. They are beginning to look at their profit margin on sales now.
With the high inflation, consumers are scaling back their online shopping and retailers are focusing on the high costs of order fulfilment and last-mile delivery.
Amazon.com started the same-day or next-day delivery in 2019. It also gave its Prime membership the option to pick a specific delivery date in 2019 and it is now beginning as a norm for other retailers.
Shopify Inc. is offering its customers the anticipated delivery time, whether it is two days or three days.
Saks Off Fifth, the discount version of the luxury merchant Saks Fifth Avenue, is showing shoppers what day they can expect any given item to arrive based on the shopper’s ZIP code.
Chinese online apparel retailer Shein, known for the low price is offering superfast delivery previously. Its website says it takes 10 to 15 days for American customers to receive their orders. Its standard shipping time for the U.S. is seven to eight days on average. It plans for opening three distribution centers in the U.S. to offer delivery of three to four days.
It is making more sense now as the customers are not expecting the fast delivery and everything was the tactic used by the e-commerce operators and perhaps they have learned something now. If the customers are not asking for it, don’t offer it.
More On Reselling Sneakers
We heard about the self-proclaimed sneakerheads are bidding up prices for limited-edition sneakers. This business has created sneaker celebrities and they become the large buyers and sellers of exceptional sneakers . Many of those sneakers are available through them even before they hit the retail stores. It also happened that they are offered at the price lower than the retail price.
We read that for Nike’s Air Jordan II Cool Grey sneakers, this speculator placed order for 600,000 pairs months before they hit the store, for the total of $70 million. They were priced between $115 and $200, cheaper than their expected retail price of around $225 per pair. In the end he received 6,000 pairs. The problem would start if he collected pre-order payments from customers and knowingly that he wouldn’t be able to receive the full order, then the fraud would start.
Resale markets for sneakers have started since the 1990s. It started with sneaker-sellers trying to look for inside information about inventories and secured pairs through connections at retail stores.
Today these resellers are using computer software to push ahead of other online buyers and place orders with quantities that are not allowed. We reported about this in this month’s Market Intelligence Short Read Part 1 – “Nike is Trying to Control the Practice by Its Enthusiasts With Special Purpose.” They are using the bots to secure the order which is the behavior that is a commercial practice and it is illegal.
StockX is a legitimate business founded in 2015. It is an online business for clothing reselling, it is primarily known for sneakers. In 2019, it secured a private market valuation of more than $1 billion after raising $110 million.
Buying online ahead of the official launching of a sneaker keeps the customers from waiting in line at the retail stores. And images of fashion designers and models in limited-edition sneakers flooded the social media, pushing the sneakers to the market of wealth and prestige. The secondary market are using this in the full extend.
