Case study 1: Xtep

General Information
Business Overview: Xtep International Holdings Limited is principally engaged in the design,
development, manufacturing, sales, marketing and brand management of sportswear,
including footwear, apparel and accessories. Its main revenue contributor product is
Xtep, a low to mid-end shoes for customers in 2nd and 3rd tier cities.
Target market: for sport lovers (with a huge focus on runners) in 2nd and 3rd tiers cities with a medium-low
budget.

Products Portfolio
Running shoes Casual sneakers Basketball Sneakers

The core products for Xtep are running shoes. Xtep running shoes are well-regarded among Chinese runners

Competitive advantages
- Widespread distribution channel: Their distribution channel is large and efficient, and they are moving to
convert their wholesalers into own’s retailers. This move will cut off middleman and increases control over sales
data (processed through their ERP system) so guidance for inventories could be precise. This model is being
conducted by others (ANTA, Lining, 361 Degrees) and has already been successful for Zara.

This strategy was created as a response to the crisis around 2011, when overstocking and forced cheap offload
as a consequent were major issues that impaired profitability among all players. Before this time, wholesales
model was the best means to rapidly expand through the large untapped population in China, but when reach is
achieved, inventory control and efficiency become bigger issue

- Dominates the running sneakers area: as they are most active in promoting running, through countless
events/competitions and sponsorships revolved around running, now Xtep is the most popular in the runner
shoes market. However this market is not most prominent in 3rd/4th cities (most big marathons and events are
ran near bigger and coastal cities) but increasing urbanisation will catalyse this trend in the future). For years,
Xtep has been conducting these runner-focused contents:
 Running events/marathon
 Sponsoring professional runners(national teams, Olympic medalists…)
 Opening Runner Clubs (organization of people who supports Xtep and running as a lifestyle)
 - Differentiated market strategies: Unlike other who focuses greatly on improving their sports’ images, Xtep also
enhanced its brands through installation of celebrity as spokepersons and entertainments events (concerts,
gameshows…). These entertainment events have lower cost compared to national/international sport events,
and could capture young customers
-

Key successful drivers

-Rising middle class consumption and associated social factors: Xtep primary customers in 3rd/4th tiers cities can
potentially witness huge growth because of rising urbanization and income in these areas (meanwhile in 1st tiers cities
sales are maturing and customers are switching from value-to-money to differentiated niche).

Other social factors that drives the growth of sports’ consumption include government’s policies supporting sports’
development

13th 5 years plan: points related to sports development:

 Develop the physical activity field by strengthening venues and facilities for popular fitness activities and
ensuring that public sports facilities are open either free of charge or at low cost to the public.
 Promote sports among young people, help them cultivate their sporting abilities and an interest in sports,
popularize soccer, basketball, volleyball, and winter sports, and improve monitoring of the health of young
people.
 Develop popular fitness and recreational activities, encourage the implementation of work-break fitness
programs, and help guide people toward exercising in a scientific way.
 Promote the comprehensive and coordinated development of recreational and competitive sports.
 Encourage nongovernmental initiatives to develop the sports industry.

National Fitness Program 16-20 supports

 Construction of public sport facilities that are convenient for public use at all level (national center, community-
level center…

-Transformation of distribution channel is completed (earliest to do so), and success in Ecommerce: The company has
finished consolidating its distribution network to gain control over its distribution, and its benefits as mentioned above
will kick in in near future. Meanwhile, online sales (Taobao, Alibaba…) for Xtep has seen high growth. Growth rate for
Xtep’s online platform is 21%, highest among ANTA, Lining, and 361Degrees

Online sales will correct several problems that shoes retailers have seen in the past:
 No hours constraints, no geographical limits, no weather influence, no visitor traffic limits (server crash is
unlikely)
 Tier 3rd/4th cities dwellers prefers online channel more than 1st tier cities (40% more online shoppers are from
Tier 3rd/4th than from tier 1st/2nd, ,however growth are slower) – Mckinsey).
Key Risks

Competition intensifies as most domestic players are in this segment of serving middle-income customers, and
international players like Nike/Adidas (while occupying the premium segment) are aiming to penetrate this segment as
well

No Multi-branding portfolio yet: ANTA was the harbinger in bringing the concept of brand portfolio into China, and as
customers are seeking differentiation and value, not just low price anymore, acquired brands by ANTA are growing very
quickly, especially FILA. ANTA continues to go into niche branding by acquiring skiing apparel brand Descente from
Japan, and Kingkow, a premium kids’ apparel. Xtep is slow in this aspect, and only have Xtep Kid as an additional brand

Xtep’s kid eroding margin due to competition and product’s nature: the kid’s wear market is a perfectly competitive
and fragmented market. As kids’ products do not have a strong focus on function (unlike adults who cares), there’s little
room to improve margin in an already competitive market.

Key Financials

Store Concepts:
Case study 2: ANTA – China
General Information
 Business overview:

Anta Sports is the largest Chinese sportswear company, engaging in the design, manufacturing, and marketing of
sportswear. Brands under Anta’smanagement include the Anta core brand, Fila, Descente, Sprandi, Kolon, and
KingKow. As of the end of 2017, the company had 10,983 stores in China, of which 9,467 were Anta stores and 1,086
were Fila stores.

 Product range: ANTA products ranges across brands, with major brands being ANTA and FILA. ANTA and ANTA Kids
have been 70% of source of sales, while FILA and other premium lines have seen great growth and high profit margin

FILA and FILA NBA Descente Kingkow Kolon

ANTA and ANTA
Kids
Kids

Mid-high Mid-high Mid-high High-end Mid-high

Middle-market
General/Foreign Licensed Ski-specialist Kids-only Climbing- -specialist
General

 Distribution network: the company had 10,983 stores in China, of which 9,467 were Anta stores and 1,086 were Fila
stores. Core brands such as ANTA are sold through wholesaling, while mid-high, premium brands are sold through
direct-to-customers and logistic centers (this system involves dropping retailer altogether and its access to customers’
data helps FILA and similar brands changes their products very quickly to react to consumer. The most successful
example is ZARA
 Target segments: middle-market segments for core Anta brands, and mid-high segments for internationally acquired
brands
 Target group customers: kids, students, workers, mid-income population in 2nd, 3rd-tier cities, and high-income
population inside major cities (for acquired global brands)
 Store concept:

Key financial data

Analysis of data

Key Financial Summary

Observation on data:
Very strong growth in “Other brands” (Fila): Since its acquisition in 2009, growth in sales for Fila has been phenomenal.
This is a good indicator of how a second-tier brand that targets middle market consumers can go to first tier consumers
with higher willingness to pay. Fila both enjoys a higher status (on that level of Nike and Adidas) and commands higher
margin and helps ANTA build its brand equity to escape the image of cheap manufacturer

Key successful drivers

- FILA’s success allows improvement in margin:FILA has been a success and are contributing to 30% of sales and
40% of operating profit, with a CAGR of 50% from 2014-17. High growth of a high margin product will be key
behind FILA’s continued strong growth
- Good cost control and can even be managed better with incoming logistic centers: both operating and non-
operating expenses are very stable through the years, and incoming logistic centers promised to further cut
SG&A
- Strong management with wise M&A decision: Fila’s acquisition in 2009 was very successful, and other recently
acquired brands (Kingkow, Kolon, Descente) can be expected to succeed as well and bring higher return on
capital. The management team has also been able to secure records amount of advertising deals and
sponsorships with major sports association such as NBA and COC. This is the part of multi-brand portfolio
strategy that ANTA is the leader in. A cash-rich balance sheet will also pave way for more appropriate vertical
M&A so that ANTA can add more specialty to its portfolios.
- Sportwear apparel is still in early-growth stage in China: Chinese have only allocated 9% of their apparel
spending on sportwear items, very much lower than average of other Asian countries (19%)
Case study 3: K-Star - China
General Information
 Business overview: K-Star was founded in 2008. The company engaged in the design, manufacture and distribution
of sports footwear under our own Proprietary Brands ("Dixing" and "K-Star" brands, collectively). In addition, the
company is also an OEM and ODM for international sports brands including Umbro, Diadora, Kappa, Le Coq Sportif,
Canguro, Die Wilden Kerle, Cosby and Bridgestone as well as Chinese footwear brand, Double Star.
 Product range: K-Star products range comprises athletic footwear designed for specific sporting activities (such as
running, tennis, basketball and mountain climbing) as well as leisure footwear.

Category Running Skateboard Tennis Leisure

Male

Female

 Distribution network: The company distributes products across 18 provinces and 3 municipalities in the China at over
870 retail locations and other overseas market (Russia, Ukraine, Belarus, the Czech Republic, Poland, Finland, Romania
and Hungary).
 Target segments: Mid to low-end segments.
 Target group customers: Secondary and university students, working class (factory workers and farmers).
Competitive advantages
- Building its proprietary brand (“Dixing” & “K-star”) at affordable prices that suit budgets of the majority of Chinese
consumers.
- Large distribution network through authorized distributors with 870 retail locations in China.
- OEM/ODM for international brands (such as Umbro, Kappa, Le Coq Sportif, Canguro, Diadora) which help the
company diversify its revenue stream and stay update with the latest international fashion trends.
- Strategically located in Fujian - the largest shoes producing province in China which provide the company with close
proximity and easy access to labor and raw material suppliers, which in allow K-star to lower its production costs.
Key financial data
Unit: USD million 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017
Revenue 24.5 46.9 78.2 89.2 104.7 101.9 77.7 51.4 47.0 47.1 47.0 47.4
Gross profit 5.3 11.4 19.8 21.7 27.7 24.4 16.2 4.9 3.6 3.2 3.1 5.0
EBITDA 4.2 9.6 16.6 19.1 20.1 11.0 (1.0) (11.0) (4.3) (9.4) (13.5) (3.5)
Operating profit 3.9 9.2 16.1 18.6 19.3 10.0 (2.4) (12.8) (6.4) (11.7) (15.8) (4.8)
Net profit 2.9 6.6 12.1 13.8 13.8 6.9 (4.2) (12.9) (6.5) (12.0) (14.4) (5.9)

Rev growth rate (%) - 91.7% 66.7% 14.0% 17.5% -2.7% -23.7% -33.9% -8.6% 0.2% 0.0% 0.7%
Gross margin (%) 21.6% 24.3% 25.3% 24.4% 26.4% 23.9% 20.8% 9.6% 7.7% 6.9% 6.6% 10.5%
EBITDA margin (%) 17.1% 20.4% 21.2% 21.5% 19.2% 10.8% -1.3% -21.4% -9.2% -19.9% -28.8% -7.4%
Operating margin (%) 15.8% 19.6% 20.6% 20.9% 18.5% 9.8% -3.1% -24.8% -13.5% -24.9% -33.7% -10.2%
Net margin (%) 11.8% 14.2% 15.4% 15.5% 13.2% 6.8% -5.3% -25.1% -13.9% -25.5% -30.6% -12.5%

Analysis of data
Decline of revenue: Because the sport footwear and apparel market in China experienced a certain level of maturity after
a rapid expansion with double digit growth rate from 2008 to 2010, there was a decline of revenue from 2010 to 2015. In
this period, the company faced intense industry rivalry. After 2015, the company believed that it would have a good
prospect due to an easing situation of the industry.
Increasing selling expenses: Overall, selling expenses followed an increasing trend from 2011 to 2016, except for a decline
in 2014. This trend showed that the company continued investing in research and department, product patents,
advertising and marketing activities to enhance the company’s distribution networks so it can maintain competitive edge
in the sportwear industry. In addition, the company increased sales rebates provided to the distributors. Selling expenses
declined from 2013 to 2014 due to a decrease of provided sales rebates to the distributors. In the future, the company
will explore alternative incentive packages to support the distributors.

Key successful drivers

- Reputable brand name: by applying extensive marketing efforts in building Proprietary Dixing Brand and Tian
Liang as brand ambassador, continuous effort in marketing and research, the company has become well-known
sport footwear player
- Strong product design and new technology: The company can come up with 700 to 800 designs specifications of
products annually and it has OEM and ODM for international sport brands. Production facilities are dispersed
across overseas market, allowing to reduce cost of producing shoes easily
- Strategical location: The company has strategic location in Jinjang City, Fujian, providing proximity and convenient
access to customers, labor and raw material supplies