FILA’s Korea’s development stages and performance in Korean and Chinese market

I. Major events:

1. Prior to Fila’s Korea MBO of the whole FILA brand, FILA was managed by SBI (Sport Brands
International). SBI manages FILA with a massive cost-cutting restructuring as follow

 Close all 14 US retail’s location/outlets and axing of 550 employees, along several
dispositions of non-core assets
 Shifting core focus on to Asia instead other US

2. The abovementioned 2003 restructuring was not a success for the following reasons:

 Shutting down traditional retailers while they are still relevant is a bad idea. Sales became
sluggish, and the business started to go down. Relationship with wholesalers in the US are also
badly damaged.
 Shutting down major tradition retails, especially at a time when people are not yet familiar with
online shopping or modern retail was devastating for FILA before 2003
 Divesting from a proven core market like the US without an immediate was painful and
damaging to the long term

After the sales of Fila from SBI to Fila Korea: Fila Korea has reinstated relationships with wholesalers in
the US
 3. Acushnet acquisition: Fila Korea acquired Acushnet, a premier golf equipment company for
$1.2bn

Reasons: Desire to enter the golf market in Asian market and more particularly, China:

 The healthily growing emerging market of China, with higher disposable income and people are
looking forward to premium and expensive sports like golf and tennis
 Similar success stories in Tennis development: the recent success of many Chinese golfers (i.e.
Feng Shan Shan) are great catalysts for this transaction. Tennis, which was associated with the
emergence of star players (Li Na, 2014 Australian Open Winner) was growing exponentially in
China recently, despite being not so popular in the past. The Wuhan Open, for example,
commenced in 2014 attracted $225m investment from local governments, as well as
sponsorship participation from 18 companies. I expects golf to flourish in a similar fashion, given
the recent emergence of Feng Shanshan as world’s ranked 1st golfer in 2017.
 Synergy with Fila: Fila has been making shoes and apparel that were perceived to be higher mid-
end status in China and Fila has also been making golf equipment/clothing (the popular FILA’s
polo shirt) with FILA GOLF department.

II. On FILA’s business

1. Fila domestic Korea business: Declining trend but showing signs of revival as restructuring
happens

Fila’s Korea business has been making up less and less of the business’s sale mix
Its Operating profit has been negative for recent years

FILA Korea’s Operating Profit and margin 2013-2017)

Fila Korea 2013 2014 2015 2016 2017

OP (Wbn) 25 12 -4 -37 -1
OP Growth -24% -51% -14% -63% 77%
OPM 6% 3% -1% -12% 0%

Why is FILA’s Korean business performance is bad:

 South Korean’s low growth/matured market: South Korea’s sportswear market has seen low
growth (~3%) for the period 2011-2016 and is a sector where Nike and Adidas lead without
much disruption

 Low-margin distribution channels (outlets and home shopping) instead of modern mega
stores/department stores (such as Shoesmarker). For these distribution channels, any
commission asked for impairs operating margin and inventory burden is more pressed

Why is FILA’s Korean business still have potential to turnaround:

 Reimagining FILA as a brand in Korea: Instead of targeting old-fashioned customers in their 40s
and 50s with FILA’s traditional famous image back in the days, FILA in Korea are targeting a
much younger customer body. Court Deluxe (imaged below) was the star among FILA’s portfolio
last year with one million units sold 15 months post launch. FILA Korea’s movement towards
fashion sneakers is very promising

 Changing distribution channels: FILA realized its mistakes in aggressive expansion through retail
stores with high commissions, and are shifting its products to large department stores such as
ABC Mart and Shoesmarker. Its margin is still negative, but much less so than in 2016 and I guess
this is a result of reduced sales commissions
2. FILA and ANTA’s joint venture: huge success
The deal is structure: FILA’s Korea has 15% stake in ANTA- FILA’s partnership in China (which will earn
dividends), and FILA Korea will collect 3% of annual sales as commissions. FILA Korea also can recognize
gain/loss from equity method on the income statement

This has been a great deal for both side, as ANTA was able to position FILA’s product very well in its
portfolio and realise huge growth. The venture is also expanding rapidly, with FILA stores opening at a
very fast rate in China

This project shows how in lower-but-rising income like China, a prestigious mid-high end product like
FILA can establish a very strong position above typical cheap, unbranded, domestic brands